<PAGE>
________________________________________________________
AMERICAN FORERUNNER SERIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
Offered by New England Life Insurance Company
501 Boylston Street, Boston, Massachusetts 02116-3700
Prospectuses
October 15, 1996
<PAGE>
AMERICAN FORERUNNER SERIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
NEW ENGLAND LIFE INSURANCE COMPANY
501 BOYLSTON STREET
BOSTON, MASSACHUSETTS 02116
(617) 578-2000
This prospectus offers individual flexible and single purchase payment
variable annuity contracts (the "Contracts") that are currently intended for
use with certain retirement plans that qualify for tax benefited treatment
under the Internal Revenue Code (the "Code"), for individual use, and for use
with plans and trusts not qualifying under the Code for tax benefited
treatment. The Contracts are not intended for use with Section 401(k) plans or
Section 403(b) plans subject to ERISA. See "Retirement Plans Offering Federal
Tax Benefits" for more information. All purchase payments made under the
Contracts may be allocated to New England Variable Annuity Separate Account
(the "Variable Account"), a separate investment account of New England Life
Insurance Company ("NELICO" or the "Company"). Assets of the Variable Account
are invested in shares of certain Series of the New England Zenith Fund
(collectively, the "Eligible Funds"). See "Investments of the Variable
Account." The owner of a Contract chooses the Eligible Funds in which the
purchase payments are invested and may change the Eligible Fund or Funds
selected from time to time. Any one or a combination of the following Eligible
Funds may be selected, within limits:
<TABLE>
<S> <C>
Loomis Sayles Small Cap Series Loomis Sayles Balanced Series
Draycott International Equity Series Salomon Brothers Strategic Bond Opportunities Series
Alger Equity Growth Series Back Bay Advisors Bond Income Series
Loomis Sayles Avanti Growth Series Salomon Brothers U.S. Government Series
Davis Venture Value Series Back Bay Advisors Money Market Series
Westpeak Growth and Income Series
</TABLE>
A Fixed Account option is also available in states that have approved this
option. (See "The Fixed Account" for more information.) Special limits apply
to transfers of Contract Value to and from the Fixed Account.
This prospectus sets forth concisely the information about the Contracts
that a prospective investor ought to know before investing. The prospectus
should be read carefully and retained for future reference.
Certain additional information about the Contracts is contained in a
Statement of Additional Information dated October 15, 1996, as it may be
supplemented from time to time, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Table of
Contents of the Statement of Additional Information appears on page A-46 of
this prospectus. The Statement of Additional Information is available without
charge and may be obtained by writing to New England Securities Corporation
("New England Securities"), 399 Boylston St., Boston, Massachusetts 02116.
New England Securities serves as principal underwriter for the Variable
Account. New England Securities is a subsidiary of NELICO.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 15, 1996.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
THE NEW ENGLAND ZENITH FUND AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A-1
<PAGE>
TABLE OF CONTENTS
OF
THE PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS......................... A-4
HIGHLIGHTS................................................................ A-5
EXPENSE TABLE............................................................. A-8
HOW THE CONTRACT WORKS.................................................... A-13
THE COMPANY............................................................... A-14
THE VARIABLE ACCOUNT...................................................... A-14
INVESTMENTS OF THE VARIABLE ACCOUNT....................................... A-14
Investment Advice..................................................... A-16
Substitution of Investments........................................... A-16
GUARANTEED OPTION......................................................... A-16
THE CONTRACTS............................................................. A-16
Purchase Payments..................................................... A-16
Allocation of Purchase Payments....................................... A-17
Contract Value and Accumulation Unit Value............................ A-17
Payment on Death Prior to Annuitization............................... A-18
Transfer Privilege.................................................... A-20
Dollar Cost Averaging................................................. A-21
Surrenders............................................................ A-22
Systematic Withdrawals................................................ A-22
Loan Provision for Certain Tax Benefited Retirement Plans............. A-23
Suspension of Payments................................................ A-25
Ownership Rights...................................................... A-25
Requests and Elections................................................ A-25
Ten Day Right to Review............................................... A-26
ADMINISTRATION CHARGES, CONTINGENT DEFERRED SALES CHARGE AND OTHER DEDUC-
TIONS.................................................................... A-26
Administration Charges................................................ A-26
Mortality and Expense Risk Charge..................................... A-26
Contingent Deferred Sales Charge...................................... A-27
Premium Tax Charge.................................................... A-29
Other Expenses........................................................ A-29
ANNUITY PAYMENTS.......................................................... A-30
Election of Annuity................................................... A-30
Annuity Options....................................................... A-30
AMOUNT OF VARIABLE ANNUITY PAYMENTS....................................... A-31
RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS............................ A-32
FEDERAL INCOME TAX STATUS................................................. A-33
Introduction.......................................................... A-33
Taxation of the Company............................................... A-33
Tax Status of the Contract............................................ A-34
Taxation of Annuities................................................. A-34
Qualified Contracts................................................... A-36
Withholding........................................................... A-38
Possible Changes in Taxation.......................................... A-38
Other Tax Consequences................................................ A-38
General............................................................... A-39
VOTING RIGHTS............................................................. A-39
DISTRIBUTION OF CONTRACTS................................................. A-39
</TABLE>
A-2
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
THE FIXED ACCOUNT.......................................................... A-40
General Description of the Fixed Account............................... A-40
Contract Value and Fixed Account Transactions.......................... A-40
FINANCIAL STATEMENTS....................................................... A-41
INVESTMENT EXPERIENCE INFORMATION.......................................... A-41
APPENDIX A: Consumer Tips.................................................. A-44
APPENDIX B: Contingent Deferred Sales Charge............................... A-45
</TABLE>
A-3
<PAGE>
GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS
ACCOUNT--A sub-account of the Variable Account or the Fixed Account.
ACCUMULATION UNIT--An accounting device used to calculate the Contract Value
prior to annuitization.
ACCUMULATION UNIT VALUE--The value of an Accumulation Unit, determined as of
the close of regular trading on the New York Stock Exchange on each day the
Exchange is open. The Accumulation Unit Value of a sub-account reflects the
net investment experience of the underlying Eligible Fund and daily deductions
for the Mortality and Expense Risk Charge.
ADMINISTRATION CONTRACT CHARGE--A charge deducted annually from the Contract
Value in the Variable Account to cover the Company's cost of providing certain
administrative services relating to the Contracts and the Variable Account.
The charge is the lesser of 2% of the total Contract Value or $30.
ANNUITANT--The person on whose life the Contract is issued.
ANNUITIZATION--Application of proceeds under the Contract to an annuity
option on the Maturity Date or upon an earlier surrender of the Contract.
ANNUITY UNIT--An accounting device used to calculate the dollar amount of
annuity payments.
BENEFICIARY--The person designated to receive Death Proceeds under a
Contract if a Contract Owner (or Annuitant, if the Contract Owner is not a
natural person) dies before annuitization of the Contract.
CONTINGENT ANNUITANT--If designated in the application, the person who
becomes the Annuitant under the Contract if the Annuitant dies prior to
annuitization. A Contingent Annuitant must be designated for individually
owned Contracts where the Contract Owner and Annuitant are not the same. The
Contingent Annuitant must be a Contract Owner. The Contingent Annuitant cannot
be changed after the death of the Annuitant.
CONTINGENT DEFERRED SALES CHARGE--A charge deducted upon certain full and
partial surrenders and applications of proceeds to certain annuity payment
options, or, in certain circumstances, upon withdrawal of amounts that were
applied to an annuity payment option. In addition, in states where the maximum
maturity age permitted by law is less than 95, a Contingent Deferred Sales
Charge may apply at the Maturity Date.
CONTRACT DATE--The date shown as the Contract Date in the Contract.
CONTRACT OWNER--The person so designated in the application or as
subsequently changed.
CONTRACT VALUE--On or before annuitization, the value obtained by
multiplying the number of Accumulation Units credited to the Contract by the
appropriate current Accumulation Unit Value. Under Contracts that permit
Contract loans, the Contract Value also includes the amount of Contract Value
transferred to the Company's general account as a result of a loan and any
interest credited on that amount. Under Contracts with the Fixed Account
option, the Contract Value also includes the amount of Contract Value
allocated to the Fixed Account.
CONTRACT YEAR--A twelve month period commencing with the Contract Date and
with each Contract anniversary thereafter.
DEATH PROCEEDS (prior to annuitization)--The amount payable by the Company
upon receipt of due proof of the death of the Contract Owner (or of the death
of the first Contract Owner to die under a jointly owned Contract) and
election of payment prior to annuitization. For a Contract that is not owned
by an individual, the Death Proceeds are payable upon receipt of due proof of
the death of the Annuitant (and election of payment) prior to annuitization.
The Death Proceeds are guaranteed to be no less than the purchase payments
made, adjusted for any previous surrenders. However, after the first seven
Contract Years, a higher (but never a lower) guarantee may apply, depending on
your Contract Value. In certain states, the Death Proceeds will be reduced by
the applicable premium tax charge.
ELIGIBLE FUNDS--The mutual fund portfolios in which the Variable Account
invests. Eligible Funds currently available consist of 11 Series of the New
England Zenith Fund. Purchase payments allocated to the Variable Account may
be invested in shares of one or more of these Series, as described in
"Investments of the Variable Account."
A-4
<PAGE>
FIXED ACCOUNT--A part of the Company's general account to which net purchase
payments may be allocated under certain Contracts. The Fixed Account provides
guarantees of principal and interest. Special limits apply to transfers of
Contract Value to and from the Fixed Account. See "Contract Value and Fixed
Account Transactions."
MATURITY DATE--The date on which annuity payments are to commence, unless
the Contract Owner applies the Contract Value to an annuity payment option at
an earlier date. The Maturity Date will be the date when the older of the
Contract Owner(s) and the Annuitant at his or her nearest birthday would be
age 95 (or the maximum age permitted by state law, if less).
MORTALITY AND EXPENSE RISK CHARGE--A charge deducted daily from the assets
of each sub-account of the Variable Account to compensate the Company for
assuming certain mortality and expense risks under the Contracts. On an
annualized basis, the charge equals 1.00% of daily net assets.
PAYEE--Any person or entity entitled to receive payment in one sum or under
an annuity payment option. The term includes (i) an Annuitant, (ii) a
Beneficiary or contingent Beneficiary who becomes entitled to payments upon
death of the Contract Owner (or Annuitant, if the Contract is not owned in an
individual capacity), and (iii) in the event of surrender or partial surrender
of the Contract, the Contract Owner.
PREMIUM TAX CHARGE--A charge to recover premium taxes which the Company pays
to certain states.
PURCHASE PAYMENTS--Amounts paid to the Company for investment in the
Contract.
SYSTEMATIC WITHDRAWALS--A method of distributing your Contract Value which
involves a series of partial surrenders.
TEN DAY RIGHT TO REVIEW--Within 10 days (or more if required by law) of your
receipt of an issued Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value (or, if required by state law, all purchase payments
made).
VARIABLE ACCOUNT--A separate investment account of the Company designated as
the New England Variable Annuity Separate Account. The Variable Account is
divided into sub-accounts, each of which invests in shares of one of the
Eligible Funds.
VARIABLE ANNUITY--An annuity providing for payments varying in amount in
accordance with the investment experience of the assets of a separate
investment account.
HIGHLIGHTS
This prospectus describes Contracts under which purchase payments are
allocated to the Variable Account. If the Fixed Account is available under
your Contract, you may allocate all or part of your purchase payments or
transfer all or part of your Contract Value to that account. For a description
of the Fixed Account, the rules regarding transactions which involve the Fixed
Account (such as special restrictions on transfers of Contract Value to and
from the Fixed Account), and the way in which the Fixed Account affects the
Contract Value, see "The Fixed Account." You should review "The Fixed Account"
carefully before allocating purchase payments or Contract Value to that
account.
TAX DEFERRED VARIABLE ANNUITIES:
Taxation of earnings under variable annuities is generally deferred until
amounts are withdrawn or distributions made. The deferral of taxes on earnings
under variable annuities is designed to encourage long-term personal savings
and supplemental retirement plans.
THE CONTRACT:
The American Forerunner Series is a variable annuity issued by the Company.
The variable annuity provides for variable payments to commence at the
Maturity Date. The Contract Owner may, however, surrender the Contract and
apply the proceeds to an annuity payment option at an earlier date. Annuity
payments generally are made on a monthly basis and will vary in amount
according to the annuity payment option selected and the investment results of
the underlying Eligible Fund(s). (See "Annuity Payments.")
A-5
<PAGE>
PURCHASE PAYMENTS:
Under current rules, the minimum initial purchase payment is $10,000. The
maximum purchase payment permitted is $1,000,000, unless the Company consents
to a higher amount. Any subsequent purchase payments must be at least $250.
The Company reserves the right to limit purchase payments made in any Contract
Year or in total under a Contract. No purchase payment may be made (1) within
four years prior to the Contract's Maturity Date (except under Contracts
issued in Pennsylvania or New York), unless the initial purchase payment is
$1,000,000 or more, or (2) after a Contract Owner (or after the Annuitant, if
the Contract is not owned in an individual capacity) reaches age 86. (See
"Purchase Payments.")
OWNERSHIP:
The Contracts may be purchased and owned by an individual, an employer, a
trust, a corporation, a partnership, a custodian or any entity specified in an
eligible employee benefit plan. The Contracts are intended for use with the
following retirement plans which offer Federal tax benefits: plans qualified
under Section 401(a) (but not under Section 401(k)) or 403(a) of the Code
("Qualified Plans"), certain annuity plans under Section 403(b) of the Code
("TSA Plans"), individual retirement accounts under Section 408(a) of the Code
and individual retirement annuities under Section 408(b) of the Code (both
referred to as "IRAs"), simplified employee pension plans and salary reduction
simplified employee pension plans under Section 408(k) of the Code ("SEPs" and
"SARSEPs"), eligible deferred compensation plans under Section 457 of the Code
("Section 457 Plans"), and governmental plans within the meaning of Section
414(d) of the Code ("Governmental Plans"). See "Retirement Plans Offering
Federal Tax Benefits." The Contracts may not yet be available to all of the
foregoing types of plans pending appropriate state approvals. The Contracts
are not currently available to other plans, such as 401(k) plans or TSA plans
subject to ERISA, that qualify for tax benefits under the Code.
A Contract may have joint owners. If the Annuitant is not the Contract Owner
and the Contract Owner is an individual, then the Contract Owner must be the
Contingent Annuitant. Under a jointly owned Contract, if the Annuitant is not
one of the Contract Owners, then one Contract Owner must be the Contingent
Annuitant. Where a Contract is used to fund an IRA, the Contract Owner must be
the Annuitant, and no Contingent Annuitant will be allowed.
The Company relies on instructions from trustees and custodians, as Contract
Owners, who may exercise certain rights under the Contracts on behalf of plan
participants. In any event, references to "you" in this prospectus refer to
the Contract Owner(s) or to plan participants who may be entitled to instruct
their trustee or custodian with regard to the exercise of these rights. (See
"Ownership Rights.")
INVESTMENT OPTIONS:
You may allocate purchase payments to the Eligible Funds or to the Fixed
Account (if available under your Contract). Your Contract Value may be
distributed among no more than 10 accounts (including the Fixed Account) at
any time.
You may change your allocation of future purchase payments. It is the
Company's position that, under current tax law, you may also transfer Contract
Value between Eligible Funds without incurring federal income tax
consequences. The Company reserves the right to limit the number and amount of
transfers and charge a transfer fee. Currently the Company does not charge a
transfer fee or limit the number of transfers prior to annuitization. However,
special limits apply in situations which the Company determines involve
"market-timing." (See "Transfer Privilege" for more information.) After
variable annuity payments begin, the Company currently allows one transfer per
year in total. Special limits apply to transfers of Contract Value to and from
the Fixed Account. (See "The Fixed Account.") Currently, the Company's rules
for transfers prior to annuitization generally require that the amount
transferred to or from any sub-account must be at least $100. The maximum
amount which can be transferred is $500,000 per transaction.
CHARGES:
No sales charges are deducted from purchase payments before they are
invested in the Contract. The Company currently imposes a premium tax charge
under Contracts on the lives of Annuitants residing in states imposing premium
taxes. Generally, the Company deducts any applicable premium tax charge from
the Contract Value on the date when annuity payments begin. In South Dakota
the Company deducts the premium tax charge at the earliest of: a full or
partial surrender,
A-6
<PAGE>
annuitization or payment of the Death Proceeds (including application of the
Death Proceeds to the Beneficiary Continuation provision) due to the death of
a Contract Owner (or Annuitant under a Contract not owned in an individual
capacity). (See "Premium Tax Charge.") For assuming mortality and expense
risks under the Contract, the Company deducts an amount equal to an annual
rate of 1.00% of the daily net assets of the Variable Account. (See "Mortality
and Expense Risk Charge.") The Company also imposes an annual administration
charge against your Contract Value in the Variable Account, equal to the
lesser of 2% of the total Contract Value (including any Contract Value in the
Fixed Account) and $30. (The annual administration charge will be waived for
any Contract Year in which the Contract Value reaches certain amounts
established by the Company. In addition, the charge will not apply if the
entire Contract Value is allocated to the Fixed Account. See "Administration
Charges.")
A Contingent Deferred Sales Charge will be imposed on certain full and
partial surrenders and applications of proceeds to certain annuity payment
options, or, in certain circumstances, on withdrawal of amounts that were
applied to an annuity payment option. (See "Contingent Deferred Sales
Charge.") In addition, a Contingent Deferred Sales Charge may apply at the
Maturity Date under Contracts issued in Pennsylvania or New York, if at that
time a purchase payment has been invested less than four years. The Contingent
Deferred Sales Charge is a maximum of 4% of each purchase payment made. No
Contingent Deferred Sales Charge will be imposed if the initial purchase
payment is $1,000,000 or more.
TEN DAY RIGHT TO REVIEW:
Within 10 days (or more where required by state insurance law) after you
receive the Contract you may return it to the Company or the Company's agent
for cancellation. The Company will return to you the Contract Value (or, if
required by state law or regulation, all purchase payments made). (See "Ten
Day Right to Review.")
PAYMENT ON DEATH:
The Contract provides for a payment to the Beneficiary if the Contract Owner
dies (or, if a Contract Owner under a jointly owned Contract dies) prior to
annuitization. (In the case of a Contract not owned in an individual capacity,
the Death Proceeds will be paid if the Annuitant dies prior to annuitization.)
The Death Proceeds are guaranteed not to be less than purchase payments made
under the Contract, adjusted for any previous surrenders or outstanding loans
and, in certain states, reduced by a premium tax charge. However, on the
seventh Contract Anniversary, and at seven year intervals thereafter until the
Contract Owner's 76th birthday, the guaranteed minimum Death Proceeds payable
are recalculated to determine whether a higher (but never a lower) guarantee
will apply. (Under a jointly owned Contract, the recalculation of the minimum
Death Proceeds will be made at seven year intervals until the 71st birthday of
the older Contract Owner.) The Death Proceeds payable will be the greater of
the guaranteed minimum Death Proceeds amount applicable to the Contract and
the current Contract Value, reduced in either case by the amount of any
outstanding loan plus accrued interest. (See "Payment on Death Prior to
Annuitization.")
SURRENDERS:
Generally, you may surrender the Contract for all or a portion of the
Contract Value by written request at any time prior to annuitization so long
as, after a partial surrender, the remaining Contract Value is at least
$2,500. Under the Company's current rules, a partial surrender must be at
least $100. (See "Surrenders." Special rules apply if the Contract is subject
to a loan.) The Federal tax laws impose penalties upon, and in some cases
prohibit, certain premature distributions from the Contracts before or after
the date on which the annuity payments are to begin. (See "Federal Income Tax
Status.") A Contingent Deferred Sales Charge will be imposed in connection
with certain Contract surrenders and applications of proceeds to certain
annuity payment options, or, in certain circumstances, upon subsequent
withdrawal of amounts applied to an annuity payment option. Upon a full
surrender, a pro rata portion of the annual $30 administration charge and, in
certain states, a premium tax charge will also be deducted. In any Contract
Year, an amount equal to the greater of (1) 10% of the Contract Value at the
beginning of the Contract Year and (2) the excess of the Contract Value over
purchase payments subject to the Contingent Deferred Sales Charge on the date
of the surrender may be surrendered without sales charge. (See "Contingent
Deferred Sales Charge" for more information.)
- -------------------------------------------------------------------------------
A-7
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EXPENSE TABLE
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES(1)
Sales Charge Imposed on Purchase Payments (as a percentage of pur-
chase payments)..................................................... 0%
Maximum Contingent Deferred Sales Charge(2) (as a percentage of each
purchase payment)................................................... 4%
Transfer Fee(3)...................................................... $ 0
ANNUAL CONTRACT FEE
Administration Contract Charge (per Contract)(4)..................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES(5)
(as percentage of average net assets)
Mortality and Expense Risk Charge.................................... 1.00%
-----
Total Separate Account Annual Expenses........................... 1.00%
</TABLE>
A-8
<PAGE>
NEW ENGLAND ZENITH FUND
ANNUAL OPERATING EXPENSES FOR THE YEAR ENDED 12/31/95
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER CURRENT EXPENSE CAP OR EXPENSE
DEFERRAL)(6)
<TABLE>
<CAPTION>
LOOMIS LOOMIS
SAYLES DRAYCOTT SAYLES DAVIS WESTPEAK
SMALL INTERNATIONAL ALGER EQUITY AVANTI VENTURE GROWTH
CAP EQUITY GROWTH GROWTH VALUE AND INCOME
SERIES SERIES SERIES SERIES SERIES SERIES
------ ------------- ------------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fee.......... 1.00% .90% .75% .70% .75% .70%
Other Expenses.......... -- .40% .15% .15% .15% .15%
----- ----- ---- ---- ---- ----
Total Series Operating
Expenses............. 1.00% 1.30% .90% .85% .90% .85%
</TABLE>
<TABLE>
<CAPTION>
SALOMON BACK BAY SALOMON BACK BAY
LOOMIS BROTHERS ADVISORS BROTHERS ADVISORS
SAYLES STRATEGIC BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
SERIES SERIES SERIES SERIES SERIES
-------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Management Fee............ .70% .65% .40% .55% .35%
Other Expenses............ .15% .20% .15% .15% .15%
---- ---- ---- ---- ----
Total Series Operating
Expenses............... .85% .85% .55% .70% .50%
</TABLE>
EXAMPLE (NOTE: The examples shown below are entirely hypothetical. Although
they are based on the expenses shown in the expense tables above, the examples
are not representations of past or future performance or expenses. Actual
performance and/or expenses may be more or less than shown.(7)) For purchase
payments allocated to each of the Series indicated:
You would pay the following expenses on a
$1,000 purchase payment assuming
1) 5% annual return on the underlying New
England Zenith Fund Series and 2) that
you surrender your Contract or that you
elect to annuitize under a period certain
option for a specified period of less
than 15 years, at the end of each time
period (a contingent deferred sales
charge will apply at the end of 1 year
and 3 years):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Loomis Sayles Small Cap................. $58.10 $84.34 $110.95 $238.65
Draycott International Equity........... 60.99 93.20 126.08 269.04
Alger Equity Growth..................... 57.13 81.36 105.85 228.29
Loomis Sayles Avanti Growth............. 56.65 79.87 103.29 223.07
Davis Venture Value..................... 57.13 81.36 105.85 228.29
Westpeak Growth and Income.............. 56.65 79.87 103.29 223.07
Loomis Sayles Balanced.................. 56.65 79.87 103.29 223.07
Salomon Brothers Strategic Bond Opportu-
nities................................. 56.65 79.87 103.29 223.07
Back Bay Advisors Bond Income........... 53.76 70.87 87.79 191.15
Salomon Brothers U.S. Government........ 55.20 75.38 95.57 207.24
Back Bay Advisors Money Market.......... 53.28 69.36 85.19 185.72
</TABLE>
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<PAGE>
You would pay the following expenses on a
$1,000 purchase payment assuming
1) 5% annual return on the underlying New
England Zenith Fund Series and 2) that
you do not surrender your Contract or
that you elect to annuitize under a life
contingency option, or under a period
certain option for a minimum specified
period of 15 years, at the end of each
time period (no contingent deferred sales
charge will apply)(8):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Loomis Sayles Small Cap................. $20.96 $64.69 $110.95 $238.65
Draycott International Equity........... 23.97 73.74 126.08 269.04
Alger Equity Growth..................... 19.95 61.65 105.85 228.29
Loomis Sayles Avanti Growth............. 19.45 60.13 103.29 223.07
Davis Venture Value..................... 19.95 61.65 105.85 228.29
Westpeak Growth and Income.............. 19.45 60.13 103.29 223.07
Loomis Sayles Balanced.................. 19.45 60.13 103.29 223.07
Salomon Brothers Strategic Bond Opportu-
nities................................. 19.45 60.13 103.29 223.07
Back Bay Advisors Bond Income........... 16.43 50.95 87.79 191.15
Salomon Brothers U.S. Government........ 17.94 55.55 95.57 207.24
Back Bay Advisors Money Market.......... 15.93 49.41 85.19 185.72
</TABLE>
A-10
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- --------
NOTES:
(1) Premium tax charges are not shown. They range from 0% (in most states) to
3.5% of Contract Value. The amount of the premium tax charge, if any, is
generally deducted from the Contract Value on the date selected by the
Contract Owner for the commencement of annuity benefits, but in certain
states is deducted at the earliest of: a full or partial surrender,
annuitization, or payment of the Death Proceeds due to the death of the
Contract Owner (or Annuitant if the Contract is not owned in an individual
capacity). (See "Premium Tax Charge.")
(2) The Contingent Deferred Sales Charge applies to each purchase payment
except that no Contingent Deferred Sales Charge will apply if the initial
purchase payment is $1,000,000 or more. The Contingent Deferred Sales
Charge declines by 1% annually over the first four year period the
purchase payment is invested in the Contract until it reaches 0% for that
purchase payment at the end of four years. Amounts subject to the
Contingent Deferred Sales Charge will be determined by assuming that
purchase payments are withdrawn (whether for a surrender or annuitization)
on a "first in-first out" basis. An amount equal to the greater of (1) 10%
of the Contract Value at the beginning of the Contract Year and (2) the
excess of the Contract Value over purchase payments that are subject to
the Contingent Deferred Sales Charge at the time of surrender may be
surrendered without sales charge in any one Contract Year.
(3) The Company reserves the right to limit the number and amount of transfers
and charge a transfer fee.
(4) This charge is not imposed after annuitization. As a percentage of the
estimated average Contract Value in the Variable Account, this fee equals
.07%, based on an estimated average Contract Value of approximately
$45,000.
(5) These charges are not imposed after annuitization if annuity payments are
made on a fixed basis.
(6) Total Series Operating Expenses are based on the amount of such expenses
applied against assets at December 31, 1995, after giving effect to a
voluntary expense cap or expense deferral in effect for 1996. For the
Loomis Sayles Small Cap Series, Total Series Operating Expenses take into
account a voluntary cap on expenses by TNE Advisers, Inc. ("TNE
Advisers"), the Series' investment adviser, which will bear all expenses
that exceed 1.00% of average daily net assets. In the absence of this cap
or any other expense reimbursement arrangement, Total Series Operating
Expenses for the Loomis Sayles Small Cap Series for the year ended
December 31, 1995 would have been 1.91%. Total Series Operating Expenses
for the Loomis Sayles Avanti Growth, Westpeak Growth and Income, Back Bay
Advisors Bond Income and Back Bay Advisors Money Market Series are after
giving effect to a voluntary expense cap. For each of these Series, TNE
Advisers will bear those expenses (other than the management fee) that
exceed 0.15% of average daily net assets. Without this cap or any other
expense reimbursement arrangement, Total Series Operating Expenses for the
Loomis Sayles Avanti Growth, Westpeak Growth and Income and Back Bay
Advisors Money Market Series for the year ending December 31, 1995 would
have been 1.06%, 1.06% and .51%, respectively. For the six other Series
shown, the Total Series Operating Expenses are after giving effect to a
voluntary expense deferral. Under the deferral, expenses which exceed a
certain limit are paid by TNE Advisers in the year in which they are
incurred and transferred to the Series in a future year when actual
expenses of the Series are below the limit. The limit on expenses for each
of these Series is: 1.30% of average daily net assets for the Draycott
International Equity Series; .90% of average daily net assets for the
Alger Equity Growth and Davis Venture Value Series; .85% of average daily
net assets for the Loomis Sayles Balanced and Salomon Brothers Strategic
Bond Opportunities Series; and .70% of average daily net assets for the
Salomon Brothers U.S. Government Series. Absent the expense deferral,
Total Series Operating Expenses for these Series for the year ended
December 31, 1995 would have been: 3.12% for the Draycott International
Equity Series, 2.45% for Alger Equity Growth Series, 1.51% for Davis
Venture Value Series, 1.85% for Loomis Sayles Balanced Series, 2.44% for
Salomon Brothers Strategic Bond Opportunities Series and 2.90% for Salomon
Brothers U.S. Government Series. The expense cap and deferral arrangements
are voluntary and may be terminated at any time. (See attached prospectus
of New England Zenith Fund for more complete information.)
(7) In these examples, the average Administration Contract Charge of .07% has
been used. (See (4), above.)
(8) If you subsequently withdraw the commuted value of amounts placed under
any of these options, the Company will deduct from the amount you receive
a portion of the Contingent Deferred Sales Charge amount that would have
been deducted when you originally applied the Contract proceeds to the
option. The applicable portion of the Contingent Deferred Sales Charge
will be based on the ratio of (1) the number of whole months remaining at
the time of withdrawal until the date when the Contingent Deferred Sales
Charge would expire, to (2) the number of whole months that were
remaining, when the proceeds were applied to the option, until the date
when the Contingent Deferred Sales Charge would expire.
- -------------------------------------------------------------------------------
A-11
<PAGE>
The preceding table lists the charges and expenses incurred with respect to
purchase payments invested under the Contracts. The items listed include
charges deducted from purchase payments, charges assessed against Variable
Account assets, and charges deducted from the assets of each of the Eligible
Funds. The examples assume that the entire purchase payment was allocated
initially to a single sub-account without any subsequent transfers. The
purpose of the table is to assist you in understanding the various costs and
expenses you will bear, directly and indirectly, as a Contract Owner.
A-12
<PAGE>
HOW THE CONTRACT WORKS
<TABLE>
<S> <C> <C>
- ---------------------- ------------------------ --------------------------
PURCHASE PAYMENT CONTRACT VALUE DAILY DEDUCTION FROM
ASSETS
. You can make a . Payments are
one-time allocated to your . Mortality and
investment or choice, within expense risk
establish an limits, of charge of 1.00% on
ongoing Eligible Funds an annualized
investment and/or the Fixed basis is deducted
program, Account. from the Contract
subject to the Value daily.
Company's . The Contract Value
minimum and reflects purchase . Investment
maximum payments, advisory fees are
purchase investment deducted from the
payment experience, Eligible Fund
guidelines. interest credited assets daily.
- ---------------------- on Fixed Account --------------------------
allocations,
- ---------------------- partial --------------------------
ADDITIONAL PAYMENTS surrenders, and ANNUAL CONTRACT FEE
Contract charges.
. Generally may . $30 Administration
be made at any . The Contract Value Contract Charge is
time, (subject invested in the deducted from the
to Company Eligible Funds is Contract Value in
limits), but not guaranteed. the Variable
no purchase Account on each
payments . Earnings are anniversary while
allowed (1) accumulated free the Contract is
during the of any current in-force, other
four years income taxes (see than under a
immediately pages A-34 to A- Payment Option.
preceding the 35). (May be waived for
Maturity Date certain large
(except under . You may change the Contracts.) A pro
Contracts allocation of rata portion is
issued in future payments, deducted on full
Pennsylvania within limits, at surrender and at
or New York), any time. annuitization.
unless the --------------------------
initial . Prior to
purchase annuitization, you --------------------------
payment is may transfer SURRENDER CHARGE
$1,000,000 or Contract Value
more, or (2) among accounts, . Consists of
after a currently free of Contingent
Contract Owner charge. (Special Deferred Sales
(or the limits apply to Charge based on
Annuitant, if the Fixed Account purchase payments
not owned in and to situations made (see pages A-
an individual that involve 27 to A-29).
capacity) "market timing.") --------------------------
reaches age
86. . Allocations of --------------------------
. Minimum $250. payments and PREMIUM TAX CHARGE
- ---------------------- transfers of
Contract Value are . Where applicable,
- ---------------------- limited in that is deducted from
LOANS Contract Value may the Contract Value
not be allocated when annuity
. The Company among more than benefits commence
intends to ten accounts (or, in certain
make loans (including the states, at the
available to Fixed Account) at earliest of: full
participants any time. or partial
of certain tax ------------------------ surrender;
qualified annuitization; or
pension plans ------------------------ payment of the
(see page A- RETIREMENT BENEFITS Death Proceeds due
23). to the death of a
- ---------------------- . Lifetime income Contract Owner or,
options. if applicable, of
- ---------------------- the Annuitant).
SURRENDERS . Fixed and/or --------------------------
variable payout
. Up to the options. --------------------------
greater of: ADDITIONAL BENEFITS
10% of the . Retirement
Contract Value benefits may be . You pay no taxes
at the taxable. on your investment
beginning of as long as it
the Contract . Premium tax charge remains in the
Year, and the may apply. Contract.
excess of the ------------------------
Contract Value . Contract may be
over purchase surrendered at any
payments that time for its
are subject to Contract Value,
the Contingent less any
Deferred Sales applicable
Charge on the Contingent
date of Deferred Sales
surrender can Charge, subject to
be withdrawn any applicable tax
each year law restrictions.
without
incurring a . Contingent
Contingent Deferred Sales
Deferred Sales Charge may be
Charge, waived upon
subject to any evidence of
applicable tax terminal illness,
law confinement to a
restrictions. nursing home, or
permanent and
. Surrenders may total disability,
be taxable. if this benefit is
available in your
. Prior to age state.
59 1/2 a 10% --------------------------
penalty tax
may apply.
. Premium tax
charge may
apply.
- ----------------------
- ----------------------
DEATH PROCEEDS
. Guaranteed not
to be less
than your
total purchase
payments
adjusted for
any prior
surrenders or
outstanding
loans (and,
where
applicable,
net of premium
tax charges).
. Death proceeds
pass to the
beneficiary
without
probate.
. Death proceeds
may be
taxable.
. Premium tax
charge may
apply.
- ----------------------
</TABLE>
A-13
<PAGE>
THE COMPANY
The Company was organized as a stock life insurance company in Delaware in
1980 and is authorized to operate in all states, the District of Columbia and
Puerto Rico. Prior to August 30, 1996, the Company was a wholly-owned
subsidiary of New England Mutual Life Insurance Company ("The New England").
Effective August 30, 1996, The New England merged with and into Metropolitan
Life Insurance Company ("MetLife"), a mutual life insurance company whose
principal office is at One Madison Avenue, New York, N.Y. 10010. Upon
consummation of the merger, The New England's separate corporate existence
ceased by operation of law, and MetLife became the parent of the Company. Also
in connection with the merger, the Company changed its name from "New England
Variable Life Insurance Company" to "New England Life Insurance Company," and
changed its domicile from the State of Delaware to the Commonwealth of
Massachusetts. As a result, both the Company's Home Office and its
Administrative Office are at 501 Boylston Street, Boston, Massachusetts 02116.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company as a separate investment
account under Delaware law on July 1, 1994, and became subject to
Massachusetts law when the Company changed its domicile to Massachusetts on
August 30, 1996. The Variable Account is registered as a unit investment trust
under the Investment Company Act of 1940, and meets the definition of a
"separate account" under Federal securities laws. The Variable Account
supports other variable annuity contracts besides the Contracts.
Applicable law provides that the assets in the Variable Account equal to the
reserves and other contract liabilities of the Variable Account shall not be
chargeable with liabilities arising out of any other business the Company may
conduct. The Company believes this means that the assets of the Variable
Account equal to its reserves and other contract liabilities are not available
to meet the claims of the Company's general creditors and may only be used to
support the Contract Values under the Contracts and the other variable annuity
contracts supported by the Variable Account. The income and realized and
unrealized capital gains or losses of the Variable Account are, in accordance
with the Contracts, credited to or charged against the Variable Account
without regard to other income, gains or losses of the Company. All
obligations arising under the Contracts are, however, general corporate
obligations of the Company.
Purchase payments are allocated to the sub-accounts of the Variable Account
that you elect. The value of Accumulation Units credited to your Contract and
the amount of the variable annuity payments depend on the investment
experience of the Eligible Fund in which each of your selected sub-accounts
invests. The Company does not guarantee the investment performance of the
Variable Account. Thus, you bear the full investment risk for all amounts
contributed to the Variable Account.
INVESTMENTS OF THE VARIABLE ACCOUNT
Purchase payments applied to the Variable Account will be invested in one or
more of the Eligible Funds listed below, at net asset value without deduction
of any sales charge, according to the selection you make in your application.
You may change your selection of Eligible Funds for future purchase payments
at any time without charge. (See "Requests and Elections.") You also may
transfer your Contract Value among the Eligible Funds, subject to certain
conditions. (See "Transfer Privilege.") Your Contract Value may be distributed
among no more than 10 accounts (including the Fixed Account) at any time. The
Company reserves the right to add or remove Eligible Funds from time to time
as investments for the Variable Account. See "Substitution of Investments."
LOOMIS SAYLES SMALL CAP SERIES
The Loomis Sayles Small Cap Series seeks long-term capital growth from
investments in common stocks or their equivalent. The Series invests primarily
in stocks of small capitalization companies with good earnings growth
potential that its subadviser believes are undervalued by the market.
Typically, such companies have market capitalization of less than $1 billion,
have better than average growth rates at below average price/earnings ratios,
and have strong balance sheets and cash flow.
A-14
<PAGE>
DRAYCOTT INTERNATIONAL EQUITY SERIES
The Draycott International Equity Series seeks total return from long-term
growth of capital and dividend income, primarily through investment in
international equity securities.
ALGER EQUITY GROWTH SERIES
The Alger Equity Growth Series seeks long-term capital appreciation. The
Series' assets will be invested primarily in a diversified, actively managed
portfolio of equity securities, primarily of companies having a total market
capitalization of $1 billion or greater.
LOOMIS SAYLES AVANTI GROWTH SERIES
The Loomis Sayles Avanti Growth Series seeks long-term growth of capital.
The Series normally will invest primarily in equity securities of companies
with medium and large capitalization (capitalization of $1 billion to $5
billion and over $5 billion, respectively), but will also invest a portion of
its assets in equity securities of companies with relatively small market
capitalization (under $1 billion).
DAVIS VENTURE VALUE SERIES
The Davis Venture Value Series seeks growth of capital. The Series will
primarily invest in domestic common stocks that its subadviser believes have
capital growth potential due to factors such as undervalued assets or earnings
potential, product development and demand, favorable operating ratios,
resources for expansion, management abilities, reasonableness of market price,
and favorable overall business prospects. The Series will generally invest
predominantly in equity securities of companies with market capitalizations of
at least $250 million.
WESTPEAK GROWTH AND INCOME SERIES
The Westpeak Growth and Income Series seeks long-term total return (capital
appreciation and dividend income) through investment primarily in equity
securities. Emphasis will be given to both undervalued securities ("value"
style) and securities of companies with growth potential ("growth" style).
LOOMIS SAYLES BALANCED SERIES
The Loomis Sayles Balanced Series seeks a reasonable long-term investment
return from a combination of long-term capital appreciation and moderate
current income. The Series is "flexibly managed" in that sometimes it invests
more heavily in equity securities and at other times it invests more heavily
in fixed-income securities, depending on its subadviser's view of the economic
and investment outlook.
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
The Salomon Brothers Strategic Bond Opportunities Series seeks a high level
of total return consistent with preservation of capital. Assets will be
allocated among U.S. Government obligations, mortgage backed securities,
domestic and foreign corporate debt and sovereign debt securities rated
investment grade (BBB or higher by S&P or Baa or higher by Moody's) (or
unrated but deemed to be of equivalent quality in the subadviser's judgement)
and domestic and foreign corporate debt and sovereign debt securities rated
below investment grade. Depending on market conditions, the Series may invest
without limit in below investment grade fixed-income securities. Securities of
below investment grade quality are considered high yield, high risk securities
and are commonly known as "junk bonds."
BACK BAY ADVISORS BOND INCOME SERIES
The Back Bay Advisors Bond Income Series seeks to provide a high level of
current income consistent with protection of capital and moderate investment
risk through investment primarily in U.S. Government and corporate bonds.
A-15
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
The Salomon Brothers U.S. Government Series seeks to provide a high level of
current income consistent with preservation of capital and maintenance of
liquidity. The Series invests primarily in debt obligations (including
mortgage-backed securities) issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or derivative securities (such as collateralized
mortgage obligations) backed by such securities.
BACK BAY ADVISORS MONEY MARKET SERIES
The Back Bay Advisors Money Market Series seeks the highest possible level
of current income consistent with preservation of capital. The Series invests
in a variety of high quality money market instruments.
INVESTMENT ADVICE
TNE Advisers, Inc. ("TNE Advisers"), a subsidiary of NELICO, serves as
investment adviser for the Eligible Funds. Each of the Eligible Funds also has
a subadviser. The Back Bay Advisors Money Market Series and Back Bay Advisors
Bond Income Series receive investment subadvisory services from Back Bay
Advisors, L.P., an indirect subsidiary of MetLife. The Westpeak Growth and
Income Series receives investment subadvisory services from Westpeak
Investment Advisors, L.P., an indirect subsidiary of MetLife. The Loomis
Sayles Avanti Growth Series, Loomis Sayles Small Cap Series and Loomis Sayles
Balanced Series receive investment subadvisory services from Loomis Sayles &
Company, L.P., an indirect subsidiary of MetLife. The Draycott International
Equity Series receives investment subadvisory services from Draycott Partners,
Ltd. The Alger Equity Growth Series receives investment subadvisory services
from Fred Alger Management, Inc. The Davis Venture Value Series receives
investment subadvisory services from Davis Selected Advisers, L.P. The Salomon
Brothers U.S. Government Series and Salomon Brothers Strategic Bond
Opportunities Series receive investment subadvisory services from Salomon
Brothers Asset Management Inc. Each of the Eligible Funds is a Series of the
New England Zenith Fund (the "Zenith Fund"). More complete information on each
Series of the Zenith Fund is contained in the attached Zenith Fund prospectus,
which you should read carefully before investing, as well as in the Zenith
Fund's Statement of Additional Information, which may be obtained free of
charge by writing to New England Securities, 399 Boylston St., Boston,
Massachusetts, 02116.
SUBSTITUTION OF INVESTMENTS
If investment in the Eligible Funds or a particular Series is no longer
possible or in the judgment of the Company becomes inappropriate for the
purposes of the Contract, the Company may substitute another Eligible Fund or
Funds without your consent. Substitution may be made with respect to both
existing investments and the investment of future purchase payments. However,
no such substitution will be made without any necessary approval of the
Securities and Exchange Commission.
GUARANTEED OPTION
Purchase payments may also be allocated to the Fixed Account in states that
have approved the Fixed Account option. The Fixed Account is a part of the
Company's general account and provides guarantees of principal and interest.
(See "The Fixed Account" for more information.)
THE CONTRACTS
The Contracts provide that your purchase payments will be invested by the
Company in the Eligible Fund(s) you select and that, after annuitization, the
Company will make variable annuity payments on a monthly basis unless you
elect otherwise. You assume the risk of investment gain or loss because the
value of your Contract before annuitization and, in the case of a variable
payment option, the annuity payments after annuitization, will vary with the
investment performance of the Eligible Fund(s) in which your Contract is
invested.
PURCHASE PAYMENTS
The minimum initial purchase payment currently required is $10,000. Any
subsequent purchase payments must be at least $250. The Company reserves the
right to limit purchase payments made under a Contract. The Company currently
A-16
<PAGE>
reserves the right not to accept any purchase payment that, when combined with
the Contract Value under all Contracts owned by a single Contract Owner, would
exceed $1,000,000. Under its current rules, in no event will the Company
accept a purchase payment that, when combined with the Contract Value under
all Contracts owned by a single Contract Owner, would exceed $2,000,000. If a
Contract Owner selects a single purchase payment Contract in the application,
the Company reserves the right not to accept any additional purchase payments.
If a Contract Owner selects a flexible purchase payment Contract in the
application, the Company reserves the right to limit purchase payments in any
Contract Year to three times the amount shown in the application.
NO PURCHASE PAYMENTS MAY BE MADE (1) WITHIN FOUR YEARS PRIOR TO THE
CONTRACT'S MATURITY DATE (EXCEPT UNDER CONTRACTS ISSUED IN PENNSYLVANIA OR NEW
YORK), UNLESS THE INITIAL PURCHASE PAYMENT IS $1,000,000 OR MORE, OR (2) AFTER
A CONTRACT OWNER (OR THE ANNUITANT, IF THE CONTRACT IS NOT OWNED IN AN
INDIVIDUAL CAPACITY) REACHES AGE 86.
The Company will determine whether to approve applications for new
Contracts, and will apply initial purchase payments under new Contracts, not
later than two business days after a completed application (including the
initial purchase payment and any documentation the Company requires to effect
an exchange from another annuity) is received at the Company's Administrative
Office. A new Contract will not be issued until the Company has received the
cash proceeds of another annuity that is used to purchase the new Contract. If
an application is not complete upon receipt, the Company will apply the
initial purchase payment not later than two business days after it is
completed. If an incomplete application is not completed within five days
after the Company receives it, however, the Company will inform the applicant
of the reasons for the delay and will refund any purchase payment unless the
applicant agrees to have the Company retain the purchase payment until the
application is completed. The Company reserves the right to reject any
application.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are converted into Accumulation Units of the sub-accounts
you select (subject to the limitation that the Contract Value may be allocated
among no more than ten accounts, including the Fixed Account, at any time).
The number of Accumulation Units of each sub-account to be credited to the
Contract is determined by dividing the net purchase payment by the
Accumulation Unit Value for the selected sub-accounts next determined
following receipt of the purchase payment at the Company's Administrative
Office (or, in the case of the initial purchase payment, next determined
following approval of the Contract application.
CONTRACT VALUE AND ACCUMULATION UNIT VALUE
The value of a Contract is determined by multiplying the number of
Accumulation Units credited to the Contract by the appropriate Accumulation
Unit Values. As described below, the Accumulation Unit Value of each sub-
account depends on the net investment experience of its corresponding Eligible
Fund and reflects fees and expenses borne by the Eligible Fund as well as
charges assessed against sub-account assets. The Accumulation Unit Value of
each sub-account was set at $1.00 on or about the date on which shares of the
corresponding Eligible Fund were first publicly available. The Accumulation
Unit Value is determined as of the close of regular trading on the New York
Stock Exchange on each day the Exchange is open for trading by multiplying the
most recent Accumulation Unit Value by the net investment factor for that day.
The net investment factor for any sub-account reflects the change in net asset
value per share of the corresponding Eligible Fund as of the close of regular
trading on the Exchange from the net asset value most recently determined, the
amount of dividends or other distributions made by that Eligible Fund since
the previous determination of net asset value per share, and daily deductions
for the Mortality and Expense Risk Charge, equal, on an annual basis, to 1.00%
of the average daily net asset value of the sub-account. The net investment
factor may be greater or less than one. The formula for determining the net
investment factor is described under the caption "Net Investment Factor" in
the Statement of Additional Information.
Under a Contract with the Fixed Account option, the total Contract Value
includes the amount of Contract Value held in the Fixed Account. (See "The
Fixed Account.") Under a Contract that permits Contract loans, the Contract
Value also includes the amount of Contract Value transferred to the Company's
general account (but outside of the Fixed Account) as a result of a loan and
any interest credited on that amount. Interest earned on the amount held in
the general account as a result of a loan will be credited to the Contract's
sub-accounts at least annually in accordance with the allocation instructions
in effect for purchase payments under your Contract on the date of the
crediting. (See "Loan Provision for Certain Tax Benefited Retirement Plans.")
A-17
<PAGE>
PAYMENT ON DEATH PRIOR TO ANNUITIZATION
The Contract's Death Proceeds are payable to the Beneficiary if the Company
receives due proof of the death, prior to annuitization, of: (1) the Contract
Owner; (2) the first Contract Owner to die, in the case of a Contract with
joint owners; or (3) the Annuitant, in the case of a Contract that is not
owned in an individual capacity. (In situation (2) above, if there is no named
Beneficiary, the Death Proceeds will be paid to the surviving Contract Owner.)
The Contract's Death Proceeds at any time are the greater of the current
Contract Value and the guaranteed minimum Death Proceeds. For this purpose,
the current Contract Value is the value next determined after the later of the
date when the Company receives at the Administrative Office: (1) due proof of
death; or (2) an election of continuation of the Contract or of payment in one
sum or under an annuity payment option. Death proceeds will be reduced by the
amount of any outstanding loan plus accrued interest (see "Loan Provision for
Certain Tax Benefited Retirement Plans") and, in certain states, by the
applicable premium tax charge.
At the inception of the Contract, the guaranteed minimum Death Proceeds is
equal to your initial purchase payment. Thereafter, until the seventh Contract
Anniversary, any subsequent purchase payment will immediately increase your
guaranteed minimum Death Proceeds by the amount of the purchase payment. Any
partial surrender will immediately decrease your guaranteed minimum Death
Proceeds by the percentage of the Contract Value being withdrawn.
On the seventh Contract Anniversary, and every seventh year anniversary
thereafter until the Contract Owner's (or, if applicable, the Annuitant's)
76th birthday, the guaranteed minimum Death Proceeds under the Contract is
recalculated to determine whether a higher (but never a lower) guarantee will
apply. (For a jointly owned Contract, this recalculation is made every seven
years until the 71st birthday of the older Contract Owner.) The purpose of the
recalculation is to give you the benefit of any positive investment experience
under your Contract. Your Contract's previous investment experience can cause
the guaranteed minimum Death Proceeds to increase on the recalculation date,
but cannot cause it to decrease. The guaranteed minimum Death Proceeds
determined on a recalculation date is the larger of:
(a) the guaranteed minimum Death Proceeds that applied to your Contract
just before the recalculation; and
(b) the Contract Value on the date of the recalculation.
The new guaranteed minimum Death Proceeds applies to your Contract until the
next recalculation date, or until you make a purchase payment or surrender. In
that case, the same adjustment will be made to the guaranteed minimum Death
Proceeds as is made during the first seven years.
Example: Assume that a Contract is issued with a $10,000 purchase payment on
5/1/95. No further purchase payments are made and, during the first
seven Contract Years, no partial surrenders are made. During the
first seven Contract Years, the guaranteed minimum Death Proceeds
is $10,000. Assume that on the Contract Anniversary on 5/1/02, the
Contract Value is $25,000. The minimum guaranteed Death Proceeds is
reset on that date to $25,000.
Assume that the Contract Value increases to $27,000 by 1/1/03, and
that you request a partial surrender of 20% of your Contract Value,
or $5,400, on that date. The guaranteed minimum Death Proceeds
immediately following the partial surrender is $20,000 [$25,000 -
.20($25,000)].
Assume that on 6/15/03 the Contract Value has decreased to $18,000.
The guaranteed minimum Death Proceeds remains at $20,000 and the
Death Proceeds payable on 6/15/03 is $20,000.
Options for Death Proceeds. The Death Proceeds, reduced by the amount of any
---------------------------
outstanding loan plus accrued interest and by any applicable premium tax
charge, will be paid in a lump sum or will be applied to provide one or more
of the fixed or variable methods of payment available (see "Annuity Options").
(Certain annuity payment options under the Contract are not available for the
Death Proceeds.) The Contract Owner may elect the form of payment during his
or her lifetime (or during the Annuitant's lifetime, if the Contract is not
owned in an individual capacity). Such an election, particularly in the case
of Contracts issued in connection with retirement plans qualifying for tax
benefited treatment, is subject to any applicable requirements of Federal tax
law. If the Contract Owner has not elected a form of payment, the Beneficiary
has 90 days after the Company receives due proof of death to make an election.
Whether and when such an election is made could affect when the Death Proceeds
are deemed to be received under the tax laws. The Beneficiary has a
A-18
<PAGE>
choice of: (1) receiving payment in a single sum; (2) receiving payment in the
form of certain annuity payment options that begin within one year of the date
of death; or (3) if eligible, continuing the Contract under the Beneficiary
Continuation provision or the Spousal Continuation provision, as further
described below. IF THE BENEFICIARY DOES NOT MAKE AN ELECTION WITHIN 90 DAYS
AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH, AND THE BENEFICIARY IS ELIGIBLE
FOR EITHER THE BENEFICIARY CONTINUATION OR THE SPOUSAL CONTINUATION PROVISION,
THE CONTRACT WILL BE CONTINUED UNDER THE APPLICABLE CONTINUATION PROVISION.
For non-tax qualified plans, the Code requires that if the Contract Owner
(or, if applicable, the Annuitant) dies prior to annuitization, the Death
Proceeds must be either: (1) distributed within five years after the date of
death; or (2) applied to a payment option payable over the life (or over a
period not exceeding the life expectancy) of the Beneficiary, provided further
that payments under the payment option must begin within one year of the date
of death. There are comparable rules for distributions on the death of the
Annuitant under tax qualified plans; however, if the Beneficiary under a tax
qualified Contract is the Annuitant's spouse, the Code generally allows
distributions to begin by the year in which the Annuitant would have reached
age 70 1/2 (which may be more or less than five years after the Annuitant's
death). See "Qualified Contracts--Distributions from the Contract."
If a Contract Owner (or, if applicable, the Annuitant) dies on or after
annuitization, the remaining interest in the Contract must be distributed at
least as quickly as under the method of distribution in effect on the date of
death.
--BENEFICIARY CONTINUATION
In keeping with the Code's general requirement that Death Proceeds must be
distributed within five years after the death of the Contract Owner (or, if
applicable, the Annuitant), the Beneficiary Continuation provision permits a
Beneficiary to hold his or her share of the Death Proceeds (as determined
after the Death Proceeds have been reduced by the amount of any outstanding
loan plus accrued interest and by any applicable premium tax charge) in the
Contract and to continue the Contract for a period ending five years after the
date of death, provided that the Beneficiary's share of the Death Proceeds
meets the Company's published minimum (currently $10,000). THE CONTRACT CANNOT
BE CONTINUED FOR ANY BENEFICIARY WHOSE SHARE OF THE DEATH PROCEEDS DOES NOT
MEET THE MINIMUM.
The Beneficiary has 90 days after the date the Company receives due proof of
death to make an election with respect to his or her share of the Death
Proceeds. The Beneficiary may elect either: (1) payment in a single sum; (2)
application to a permitted annuity payment option with payments to begin
within one year of the date of death; or (3) Beneficiary Continuation,
provided that the Beneficiary's share of the Death Proceeds meets the
Company's published minimum. IF THE BENEFICIARY DOES NOT MAKE AN ELECTION
WITHIN 90 DAYS AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH, THE CONTRACT
WILL BE CONTINUED UNDER THE BENEFICIARY CONTINUATION PROVISION FOR A PERIOD
ENDING FIVE YEARS AFTER THE DATE OF DEATH. IF BENEFICIARY CONTINUATION IS NOT
AVAILABLE BECAUSE THE BENEFICIARY'S SHARE OF THE DEATH PROCEEDS DOES NOT MEET
THE COMPANY'S PUBLISHED MINIMUM, HOWEVER, THE DEATH PROCEEDS WILL BE PAID IN A
SINGLE SUM UNLESS THE BENEFICIARY ELECTS AN ANNUITY PAYMENT OPTION WITHIN 90
DAYS AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH.
If the Contract is continued under the Beneficiary Continuation provision,
the Death Proceeds (reduced by the amount of any outstanding loan plus accrued
interest and any applicable premium tax charge) become the Contract Value on
the date the continuation is effected, and will be allocated among the
accounts in the same proportion as they had been prior to the continuation. In
addition, the Beneficiary will have the right to make transfers and fully or
partially surrender his or her portion of the Contract Value, but may not make
further purchase payments, take loans, or exercise the dollar cost averaging
feature. No guaranteed minimum Death Proceeds amount or Contingent Deferred
Sales Charge will apply. Five years from the date of death of the Contract
Owner (or, if applicable, the Annuitant), the Company will pay the
Beneficiary's Contract Value to the Beneficiary. If the Beneficiary dies
during that five year period, the Beneficiary's death benefit will be the
Beneficiary's Contract Value on the date when the Company receives due proof
of the Beneficiary's death.
--SPECIAL OPTIONS FOR SPOUSES.
Under the Spousal Continuation provision, the Contract may be continued
after the death of a Contract Owner (or the Annuitant, if the Contract is not
owned in an individual capacity) prior to annuitization in certain spousal
arrangements. First, if a Contract has spousal joint owners who are also the
only Beneficiaries under the Contract, then upon the death of one Contract
Owner, the other may elect to continue the Contract under the Spousal
Continuation provision rather than
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receive the Death Proceeds. In addition, if only one spouse is the Contract
Owner (or, if applicable, the Annuitant) and the other spouse is the primary
Beneficiary, the surviving spouse can elect to continue the Contract in the
event of the Contract Owner's (or Annuitant's) death. In either of these
situations, the surviving spouse may elect one of the following three options
within 90 days after the Company receives due proof of death of the Contract
Owner (or, if applicable, the Annuitant). The surviving spouse may elect: (1)
to receive the Death Proceeds (reduced by the amount of any outstanding loan
plus accrued interest and by any applicable premium tax charge) either in one
sum or under a permitted payment option; (2) to continue the Contract under
the Beneficiary Continuation provision; or (3) to continue the Contract under
the Spousal Continuation provision with the surviving spouse as the Contract
Owner (or, if applicable, the Annuitant). IF THE SURVIVING SPOUSE DOES NOT
MAKE AN ELECTION WITHIN 90 DAYS AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH,
THE CONTRACT WILL AUTOMATICALLY BE CONTINUED UNDER THE SPOUSAL CONTINUATION
PROVISION, WITH THE RESULT THAT THE SURVIVING SPOUSE WILL FOREGO THE RIGHT TO
RECEIVE THE DEATH PROCEEDS AT THAT TIME.
A surviving spouse who elects Beneficiary Continuation under a Contract that
is qualified for tax-benefited treatment under the Code must begin to receive
distributions from the Contract by the earlier of: (1) five years from the
date of death; and (2) the year in which the Contract Owner (or, if
applicable, the Annuitant) would have reached age 70 1/2.
Under the Spousal Continuation provision, all terms and conditions of the
Contract that applied prior to the death will continue to apply, regardless of
whether or not the Contract is qualified for tax benefited treatment under the
Code, except that:
a. The surviving spouse will not be permitted to make additional purchase
payments or take loans under Contracts issued in connection with a
retirement plan qualifying for tax benefited treatment under Sections 401
or 403 of the Internal Revenue Code; and
b. The Maturity Date will be reset, if necessary, based on the age of the
surviving spouse.
Except under Contracts issued in New York or Pennsylvania, if the reset
Maturity Date would be less than four years after the date of the most recent
purchase payment made, no Contingent Deferred Sales Charge will apply under
the Contract.
Spousal Continuation will not be available if the reset Maturity Date would
be greater than the Company's permitted maximum, or if, at the time of the
Contract Owner's death, the surviving spouse is older than the maximum
maturity age under applicable state law. In addition, the Spousal Continuation
provision will not be available if, at the original Maturity Date, the
surviving spouse would be older than the maximum maturity age under applicable
state law. In most states, the maximum maturity age is 95, but the maximum age
is 85 in New York and Pennsylvania.
If a Contract is subject to a loan at the time the Contract Owner (or, if
applicable, the Annuitant) dies, and the Contract is continued under the
Spousal Continuation provision, the amount of the outstanding loan plus
accrued interest will be treated as a taxable distribution from the Contract
to the deceased Contract Owner, and the Contract Value will be reduced
accordingly.
TRANSFER PRIVILEGE
It is the position of the Company that you may transfer your Contract Value
among sub-accounts and/or the Fixed Account without incurring federal income
tax consequences. It is not clear, however, whether the Internal Revenue
Service will limit the number of transfers between sub-accounts and/or the
Fixed Account in an attempt to limit the Contract Owner's incidents of
ownership in the assets used to support the Contract. See "Tax Status of the
Contract--Diversification."
The Company currently does not charge a transfer free or limit the number of
transfers prior to annuitization. The Company reserves the right to limit
transfers and to charge a transfer fee. Currently all transfers prior to
annuitization are subject to a maximum of $500,000 per transfer. The Company's
current rules for transfers prior to annuitization require that the amount
transferred to or from any sub-account must be at least $100. (If the full
amount of Contract Value in a sub-account is less than $100, net of any
transfer fee, the amount may be transferred to a sub-account in which Contract
Value is already invested, or it may be transferred to any sub-account if it
is transferred in combination with Contract Value from another sub-account so
that the total transferred to the new sub-account is at least $100.) After
variable annuity payments begin, the Company currently allows one transfer per
Contract year, and the Fixed Account is not available under variable payment
options. In applying the $500,000 limit, the Company will treat as one
transfer all transfers requested by a Contract
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Owner on the same day for all Contracts he or she owns. If the $500,000
limitation is exceeded for multiple transfers requested on the same day that
are treated as a single transfer, no amount of the transfer will be executed
by the Company. Transfers will be made at the Accumulation Unit Values next
determined after the request is received. However, Contract Owners should be
aware that because transfer limitations may prevent you from making a transfer
on the date you want to, your future Contract Value may be lower than it would
have been had the transfer been made on the desired date.
For transfers that the Company determines to be based on "market-timing"
(e.g., transfers under different Contracts that are being requested under
Powers of Attorney with a common attorney-in-fact or that are, in the
Company's determination, based on the recommendation of a common investment
adviser or broker/dealer), the current transfer limitation prior to
annuitization is one transfer every 30 days, each transfer subject to a
maximum of $500,000. In applying the limitation of one $500,000 transfer every
30 days, the Company will treat as one transfer all transfers requested under
different Contracts that are being requested under Powers of Attorney with a
common attorney-in-fact or that are, in the Company's determination, based on
the recommendation of a common investment adviser or broker/dealer. If the
$500,000 limitation is exceeded for multiple transfers requested on the same
day that are treated as a single transfer, no amount of the transfer will be
executed by the Company. If a transfer is executed under one Contract and,
within the next 30 days, a transfer request for another Contract is determined
by the Company to be related to the executed transfer under this paragraph's
rules, the transfer request will not be executed by the Company. (In order for
it to be executed, it would need to be requested again after the 30-day period
and it, along with any other transfer requests that are collectively treated
as a single transfer, would need to total no more than $500,000).
The Company's interest in applying these limitations on the maximum number
and size of transfers is to protect the interests of both Contract Owners who
are not engaging in significant transfer activity and Contract Owners who are
engaging in such activity. The Company has determined that the actions of
Contract Owners engaging in significant transfer activity among sub-accounts
may cause an adverse effect on the performance of the underlying Eligible
Funds. The movement of significant sub-account values from one sub-account to
another may prevent the appropriate Eligible Fund from taking advantage of
investment opportunities because it must maintain a significant cash position
in order to handle redemptions. Such movement may also cause a substantial
increase in Eligible Fund transaction costs which must be indirectly borne by
Contract Owners.
The foregoing limitations on transfers that the Company determines to be
based on market-timing do not apply to Contracts issued in New York. In New
York as in all other states, however, transfers can be made under Powers of
Attorney only with the Company's consent.
Contract Owners will be notified, in advance, if a transfer fee or limits on
the number of transfers will be imposed, or of any change in any transfer fee
or limitation on the number or amount of transfers.
See "Requests and Elections" for information regarding transfers made by
written request and by telephone.
For special rules regarding transfers involving the Fixed Account, see "The
Fixed Account". Transfers out of the Fixed Account are limited as to amount.
------------------------------------------------------------
Your Contract Value may be distributed among no more than 10 accounts
(including the Fixed Account) at any time. Transfer requests not complying
with this rule will not be processed.
DOLLAR COST AVERAGING
The Company offers an automated transfer privilege referred to here as
dollar cost averaging. Under this feature you may request that an amount of
your Contract Value be transferred on the same day each month, prior to
annuitization, from any one account of your choice (including the Fixed
Account, subject to the limitations on transfers out of the Fixed Account) to
one or more of the other accounts (including the Fixed Account, subject to the
limitations on transfers into the Fixed Account), subject to the limitation
that Contract Value may not be allocated to more than 10 accounts, including
the Fixed Account, at any time. Currently, a minimum of $100 must be
transferred to each account that you select under this feature. If a transfer
fee is imposed, transfers made under the dollar cost averaging program will be
counted against the number of transfers per year permitted free of charge. You
may cancel your use of the dollar cost averaging program at any time prior to
the monthly transfer date. (See Appendix A for more information about Dollar
Cost Averaging.)
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SURRENDERS
Prior to annuitization, you may surrender your Contract for all or part of
the Contract Value. You may receive the proceeds in cash or apply them to a
payment option. The proceeds you receive will be the Contract Value reduced by
the following amounts:
. any applicable Contingent Deferred Sales Charge;
. a pro rata portion of the Administration Contract Charge (on a full
surrender only);
. a premium tax charge (in certain states only); and
. any outstanding loan plus accrued interest (on a full surrender only).
See "Administration Charges, Contingent Deferred Sales Charge and Other
Deductions" and "Loan Provision for Certain Tax Benefited Retirement Plans"
for a description of these reductions and when they apply.
Federal tax laws, laws relating to employee benefit plans, or the terms of
benefit plans for which the Contracts may be purchased may restrict your right
to surrender the Contract. No surrender is permitted in connection with a
Contract issued pursuant to the Optional Retirement Program of the University
of Texas System prior to the plan participant's death, retirement, or
termination of employment in all Texas public institutions of higher
education. In addition, Federal tax laws impose penalties on certain premature
distributions from the Contracts. Full and partial surrenders and systematic
withdrawals prior to age 59 1/2 may be subject to a 10% penalty tax. (See
"Federal Income Tax Status.") Because a surrender may result in adverse tax
consequences, you should consult a qualified tax advisor before taking a
distribution from the Contract.
To surrender, you must submit a request in proper form to the Company's
Administrative Office. (See "Requests and Elections.") If you are seeking a
waiver of the Contingent Deferred Sales Charge due to terminal illness,
confinement to a nursing home or permanent and total disability, the request
must include satisfactory evidence of one of these conditions. (See
"Administration Charges, Contingent Deferred Sales Charge and Other
Deductions.") IF YOU WISH TO APPLY THE PROCEEDS TO A PAYMENT OPTION, YOU MUST
SO INDICATE IN YOUR SURRENDER REQUEST; OTHERWISE YOU WILL RECEIVE THE PROCEEDS
IN A LUMP SUM AND MAY BE TAXED ON THEM AS A FULL DISTRIBUTION. The surrender
request must be received at the Administrative Office before the earlier of
the Maturity Date and a Contract Owner's death (or, for Contracts not owned in
an individual capacity, before the Annuitant's death). Surrender proceeds will
normally be paid within seven days after receipt of a request in proper form
at the Administrative Office, but payment may, by law, be delayed under
certain circumstances. (See "Suspension of Payments.")
The amount of the surrender proceeds will be based on the Accumulation Unit
Values that are next determined after the complete surrender request is
received at the Administrative Office; however, if you choose to apply the
surrender proceeds to a payment option, the surrender proceeds will be based
on Accumulation Unit Values determined on a later date if you so specify in
your request. Company consent is required if the amount of a partial surrender
is less than the Company's published minimum, which is currently $100. After a
partial surrender, the remaining Contract Value must be at least $2,500,
unless the Company consents to a lower amount or, if the Contract is subject
to an outstanding loan, the remaining unloaned Contract Value must be at least
10% of the total Contract Value after the partial surrender or $2,500,
whichever is greater (unless the Company consents to a lesser amount).
Otherwise, at your option, either the amount of the partial surrender will be
reduced or the transaction will be treated as a full surrender that is subject
to the full amount of any applicable Contingent Deferred Sales Charge. A
partial surrender will reduce your Contract Value in the sub-accounts in
proportion to the amount of your Contract Value in each sub-account, unless
you request otherwise.
SYSTEMATIC WITHDRAWALS
The Systematic Withdrawal feature available in connection with the Contract
allows you to have a portion of the Contract Value withdrawn automatically on
a monthly basis prior to annuitization. You can elect to withdraw each month
either a fixed dollar amount (which you can change periodically) or the
investment gain in the Contract. Currently a withdrawal must be a minimum of
$100; if you choose to have the investment gain withdrawn and it is less than
$100 for a month, no withdrawal will be made that month. The Company reserves
the right to change the required minimum monthly withdrawal amount. If the New
York Stock Exchange is closed on the day when the withdrawal is to be made,
the withdrawal will be processed on the next business day. The Contingent
Deferred Sales Charge will apply to amounts received under the Systematic
Withdrawal program in the same manner as it applies to other partial
surrenders and surrenders of Contract Value. (See "Contingent Deferred Sales
Charge.") If you make a partial surrender or a purchase payment at the same
time
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that you are having the investment gain withdrawn under the Systematic
Withdrawal feature, the Systematic Withdrawal will be canceled effective as of
the next monthly withdrawal date; however, at your option, the Company will
resume Systematic Withdrawals on the following monthly withdrawal date (that
is, the second monthly withdrawal date after the purchase payment or partial
surrender). The amount of the Systematic Withdrawals will be adjusted to
reflect the purchase payment or partial surrender. Continuing to make purchase
payments under the Contract while you are making Systematic Withdrawals means
that you could incur any applicable Contingent Deferred Sales Charge on the
withdrawals at the same time that you are making the new purchase payments;
however, no Contingent Deferred Sales Charge will apply if you are having the
investment gain (rather than a fixed dollar amount) withdrawn. The Federal tax
laws may include systematic withdrawals in the Contract Owner's gross income
in the year in which the withdrawal occurs and will impose a penalty tax of
10% on certain systematic withdrawals which are premature distributions.
Additional terms and conditions for the systematic withdrawal program are set
forth in the application for the program.
LOAN PROVISION FOR CERTAIN TAX BENEFITED RETIREMENT PLANS
The Company intends to make Contract loans available to participants under
TSA Plans that are not subject to ERISA and to trustees of Qualified Plans.
Availability of Contract loans will be subject to state insurance department
approval.
The Department of Labor has issued regulations (the "ERISA regulations")
governing plan participant loans under retirement plans subject to ERISA.
Generally, the ERISA regulations will apply to retirement plans that qualify
under Section 401(a) or 403(a). YOU AND YOUR EMPLOYER ARE RESPONSIBLE FOR
DETERMINING WHETHER YOUR PLAN IS SUBJECT TO AND COMPLIES WITH THE ERISA
REGULATIONS ON PARTICIPANT PLAN LOANS.
It is the responsibility of the trustee of a Qualified Plan subject to ERISA
to ensure that the proceeds of a Contract loan are made available to a
participant under a separate plan loan agreement, the terms of which comply
with all the plan qualification requirements including the requirements of the
ERISA regulations on plan loans. Therefore, the plan loan agreement may differ
from the Contract loan provisions and, if you are a participant in a Qualified
Plan subject to ERISA, you should consult with the fiduciary administering the
plan loan program to determine your rights and obligations with respect to
plan loans.
The ERISA regulations contain requirements for plan loans relating to their
maximum amount, availability, and other matters. Among the rules are the
requirements that the loan bear a reasonable rate of interest, be adequately
secured, provide a reasonable repayment schedule, and be made available on a
basis that does not discriminate in favor of employees who are officers or
shareholders or who are highly compensated. These regulations may change from
time to time. Failure to comply with these requirements may result in tax
penalties under the Code and under ERISA.
One of the current requirements of the ERISA regulations is that the plan
must charge a "commercially reasonable" rate of interest for plan loans. The
Contract loan interest rate may not be considered "commercially reasonable"
within the meaning of the ERISA regulations, and it is the responsibility of
the plan fiduciary to charge the participant any additional interest under the
plan loan agreement which may be necessary to make the overall rate charged
comply with the regulation. The ERISA regulations also currently require that
a loan be adequately secured, but provide that not more than 50% of the
participant's vested account balance under the plan may be used as security
for the loan. A Contract loan is secured by the portion of the Contract Value
which is held in the Company's general account as a result of the loan. The
plan fiduciary must ensure that the Contract Value held as security under the
Contract, plus any additional portion of the participant's vested account
balance which is used as security under the plan loan agreement, does not
exceed 50% of the participant's total vested account balance under the plan.
The amount of any loan may not exceed the maximum loan amount as determined
under the Company's maximum loan formula. The effect of a loan on your
Contract is that a portion of the Contract Value equal to the amount of the
loan will be transferred to the Company's general account and will earn
interest (which is credited to the Contract), currently at the effective rate
of 4 1/2% per year. This earned interest will be credited to the Contract's
sub-accounts (and, if available under your Contract, to the Fixed Account)
annually in accordance with the allocation instructions in effect for purchase
payments under your Contract on the date of the crediting. Under current
rules, interest charged on the loan will be 6 1/2% per year. Depending on the
Company's interpretation of applicable law and on the Company's administrative
procedures, the interest rates charged and earned on loaned amounts may be
changed (for example, to provide for a variable interest rate) with respect to
new loans made. The Company may also establish a minimum loan amount. Because
the amount
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moved to the general account as a result of the loan does not participate in
the Variable Account's investment experience, a Contract loan can have a
permanent effect on the Contract Value and Death Proceeds.
The Company will not permit more than one loan at a time on any Contract
except where state regulators require otherwise. In addition, the Code
provides that the total amount of loans under all your retirement plans may
not at any one time exceed $50,000 less the highest outstanding loan balance
in the preceding 12 months, subject, however, to a smaller maximum, if
applicable, of the greater of: (1) $10,000; or (2) 50% of the value of your
nonforfeitable, accrued benefits. Loans must be repaid within 5 years except
for certain loans used for the purchase of a principal residence, which must
be repaid within 20 years. Repayment of the principal amount and interest on
the loan will be required in equal monthly installments by means of repayment
procedures established by the Company. Contract loans are subject to
applicable retirement program laws and their taxation is determined under the
Code. Under current practice, if a Contract loan installment repayment is not
made, the Company may (unless restricted by law) make a full or partial
surrender of the Contract in the amount of the unpaid installment repayment on
the Contract loan or, if there is a default on the Contract loan, in an amount
equal to the outstanding loan balance (plus any applicable Contingent Deferred
Sales Charge and Administration Contract Charge in each case). (A default on
the loan is defined in the loan application and includes, among other things,
nonpayment of three consecutive or a total of five installment repayments, or
surrender of the Contract.) An installment repayment of less than the amount
billed will not be accepted. A full or partial surrender of the Contract to
repay all or part of the loan may result in serious adverse tax consequences
for the plan participant (including penalty taxes) and may adversely affect
the qualification of the plan or Contract. The trustee of a Qualified Plan
subject to ERISA will be responsible for reporting to the IRS and advising the
participant of any tax consequences resulting from the reduction in the
Contract Value caused by the surrender and for determining whether the
surrender adversely affects the qualification of the plan. In the case of a
TSA Plan not subject to ERISA, the Company will report the surrender to the
IRS as a taxable distribution under the Contract.
The Internal Revenue Service issued proposed regulations in December of
1995, which, if finalized in their present form, would require that if the
repayment terms of a loan are not satisfied after the loan has been made due
to a failure to make a loan repayment as scheduled, including any applicable
grace period, the balance of the loan would be deemed to be distributed. If
the loan is treated as a distribution under Code Section 72(p), the proposed
regulations state that the amount so distributed is to be treated as a taxable
distribution subject to the normal rules of Code Section 72, if the
participant's interest in the plan includes after-tax contributions (or other
tax basis). A deemed distribution would also be a distribution for purposes of
the 10 percent tax in Code Section 72(t) and the excise tax on excess
distributions under Section 4980A. However, a deemed distribution under
Section 72(p) would not be treated as an actual distribution for purposes of
Code Section 401, the rollover and income averaging provisions of Section 402
and the distribution restrictions of Section 403(b).
Partial surrenders will be restricted by the existence of a loan and, after
any partial surrender, the remaining unloaned Contract Value must be at least
10% of the total Contract Value after the partial surrender or $1,000,
whichever is greater (unless the Company consents to a lesser amount). If a
partial surrender by the Company to enforce the loan repayment schedule would
reduce the unloaned Contract Value below this amount, the Company reserves the
right to surrender the entire Contract and apply the Contract Value to the
Contingent Deferred Sales Charge, the Administration Contract Charge and the
amount owed to the Company under the loan. If at any time an excess Contract
loan exists (that is, the Contract loan balance exceeds the Contract Value),
the Company has the right to terminate the Contract.
Unless you request otherwise, Contract loans will reduce the amount of the
Contract Value in the accounts in proportion to the Contract Value then in
each account. If any portion of the Contract loan was attributable to Contract
Value in the Fixed Account, then an equal portion of each loan repayment will
have to be allocated to the Fixed Account. (For example, if 50% of the loan
was attributable to your Fixed Account Contract Value, then 50% of each loan
repayment will be allocated to the Fixed Account). Unless you request
otherwise, a repayment will be allocated to the sub-accounts in the same
proportions to which the loan was attributable to the sub-accounts.
The amount of the death proceeds, the amount payable upon surrender of the
Contract and the amount applied on the Maturity Date to provide annuity
payments will be reduced by the amount of any outstanding Contract loan plus
accrued interest. In these circumstances, the amount of the outstanding
Contract loan plus accrued interest generally will be taxed as a taxable
distribution.
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The tax and ERISA rules relating to participant loans under tax benefited
retirement plans are complex and in some cases unclear, and they may vary
depending on the individual circumstances of each loan. The Company strongly
recommends that you, your employer and your plan fiduciary consult a qualified
tax advisor regarding the currently applicable tax and ERISA rules before
taking any action with respect to loans.
The Company will provide further information regarding loans upon request.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the payment of any
amounts due under the Contract or transfers of Contract Values between sub-
accounts or to the Fixed Account when permitted under applicable Federal laws,
rules and regulations. Current Federal law permits such suspension or
postponement if: (a) the New York Stock Exchange is closed (other than for
customary weekend and holiday closings); (b) trading on the Exchange is
restricted; (c) an emergency exists such that it is not reasonably practicable
to dispose of securities held in the Variable Account or to determine the
value of its assets; or (d) the Securities and Exchange Commission by order so
permits for the protection of securities holders.
OWNERSHIP RIGHTS
During the Annuitant's lifetime, all rights under the Contract belong solely
to the Contract Owner unless otherwise provided. These rights include the
right to change the Beneficiary, to change the payment option, to assign the
Contract (subject to the restrictions referred to below), and to exercise all
other rights, benefits, options and privileges conferred by the Contract or
allowed by the Company. Transfer of ownership of the Contract under an ERISA
"Pension Plan" to a non-spousal beneficiary may require spousal consent.
Qualified Plans and certain TSA Plans and IRAs with sufficient employer
involvement are deemed to be "Pension Plans" under ERISA and are, therefore,
subject to rules under the Retirement Equity Act of 1984. These rules require
that benefits from annuity contracts purchased by a Pension Plan and
distributed to or owned by a participant be provided in accordance with
certain spousal consent, present value and other requirements which are not
enumerated in the Contract. Thus, the tax consequences of the purchase of the
Contracts by Pension Plans should be considered carefully.
Those Contracts offered by the prospectus which are designed to qualify for
the favorable tax treatment described below under "Federal Income Tax Status"
contain restrictions on transfer or assignment, reflecting requirements of the
Code which must be satisfied in order to assure continued eligibility for such
tax treatment. In accordance with such requirements, ownership of such a
Contract may not be changed and the Contract may not be sold, assigned or
pledged as collateral for a loan or for any other purpose except under certain
limited circumstances. A Contract Owner contemplating a sale, assignment or
pledge of the Contract should carefully review its provisions and consult a
qualified tax advisor.
If Contracts offered by this prospectus are used in connection with deferred
compensation plans or retirement plans not qualifying for favorable Federal
tax treatment, such plans may also restrict the exercise of rights by the
Contract Owner. A Contract Owner should review the provisions of any such
plan.
REQUESTS AND ELECTIONS
Requests for sub-account transfers or reallocation of future purchase
payments may be made by telephone or written request (which may be telecopied)
to the Company at its Home Office. Written requests for such transfers or
changes of allocation must be in a form acceptable to the Company. Such
written requests may be telecopied to 617-578-5412. To request a transfer or
change of allocation by telephone, please contact your registered
representative, or contact the Company's Home Office at 1-800-777-5897 between
the hours of 9:00 a.m. and 4:00 p.m., Eastern Time. Requests for transfer
(that are within the Company's current limits applicable to transfers) or
reallocation by telephone will be automatically permitted. The Company will
use reasonable procedures such as requiring certain identifying information
from the caller, tape recording the telephone instructions, and providing
written confirmation of the transaction, in order to confirm that instructions
communicated by telephone are genuine. Any telephone instructions reasonably
believed by the Company to be genuine will be your responsibility, including
losses arising from any errors in the communication of instructions. As a
result of this policy, you will bear the risk of loss. If the Company does not
employ reasonable procedures
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to confirm that instructions communicated by telephone are genuine, the
Company may be liable for any losses due to unauthorized or fraudulent
transactions. All other requests and elections under a Contract must be in
writing signed by the proper party, must include any necessary documentation
and must be received at the Company's Home Office to be effective. If
acceptable to the Company, requests or elections relating to Beneficiaries and
ownership will take effect as of the date signed unless the Company has
already acted in reliance on the prior status. The Company is not responsible
for the validity of any written request or election.
TEN DAY RIGHT TO REVIEW
Within 10 days (or more where required by applicable state insurance law)
after you receive your Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value. If required by the insurance law or regulations of
the state in which your Contract is issued, however, the Company will refund
all purchase payments made.
ADMINISTRATION CHARGES, CONTINGENT DEFERRED SALES CHARGE AND OTHER DEDUCTIONS
ADMINISTRATION CHARGES
The Company's administrative services include issuing Contracts, maintaining
Contract Owner records and accounting, valuation, regulatory and reporting
services. To help cover the cost of these services, the Company receives an
Administration Contract Charge generally equal to the lesser of: 2% of the
total Contract Value (including any Contract Value in the Fixed Account) and
$30. In addition, the Company may (but does not currently) charge a transfer
fee for certain transfers of Contract Value among the sub-accounts and/or the
Fixed Account, as described below.
The annual Administration Contract Charge is deducted from the Contract
Value on each Contract anniversary for the prior Contract Year and will be
deducted on a pro rata basis at annuitization or at the time of a full
surrender if it is not on a Contract anniversary. If two Contracts are issued
to permit the funding of a spousal IRA, the Administration Contract Charge
will be imposed only on the Contract to which the larger purchase payments
have been allocated in the Contract application. The charge is deducted
entirely from the Contract Value in the Variable Account, and not from the
Contract Value in the Fixed Account. The charge will be waived for a Contract
Year if (1) the Contract Value at the end of the year was at least $50,000, OR
--
(2) you made at least $1,000 in net deposits (purchase payments minus partial
surrenders) during that Contract Year and the Contract Value at the end of the
previous Contract Year was at least $25,000. (A pro rata charge will always be
made on a full surrender and at annuitization, however, regardless of the
amount of your Contract Value.) The Administration Contract Charge will be
deducted from each sub-account in the ratio of your interest therein to your
total Contract Value in the Variable Account. The Company does not expect the
Administration Contract Charge to exceed the actual costs (including overhead
costs) of administering the Contracts.
The Company reserves the right to charge a transfer fee for transfers of
Contract Value among sub-accounts and/or the Fixed Account, but will notify
Contract Owners in advance of imposing any such fee. (See "Transfer
Privilege.") The Company expects that the amount of any transfer fee will not
exceed the actual costs (including overhead costs) of administering transfers.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from the Variable
Account as compensation for assuming the mortality and expense risks under the
Contract. By assuming the expense risk under the Contract, the Company
guarantees that the dollar amount of the Administration Contract Charge will
not increase over the life of a Contract, regardless of the actual expenses.
By assuming the mortality risk, the Company guarantees that, although annuity
payments will vary according to the performance of the investments you select,
annuity payments will not be affected by the mortality experience (death rate)
of persons receiving such payments or of the general population. The Company
assumes this mortality risk by virtue of annuity rates in the Contract that
cannot be changed. The Company also assumes the risk of making a minimum death
benefit payment if the Contract Owner (or, if applicable, the Annuitant) dies
prior to annuitization. (See "Payment on Death Prior to Annuitization.")
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<PAGE>
The Mortality and Expense Risk Charge is computed and deducted on a daily
basis from the assets in each sub-account attributable to the Contracts. The
charge is at an annual rate of 1.00% of the daily net assets of each such sub-
account, of which .70% represents a mortality risk charge and .30% represents
an expense risk charge. The Mortality and Expense Risk Charge as a percentage
of Contract Value will not increase over the life of a Contract. The Mortality
and Expense Risk Charge will continue to be assessed if annuity payments are
made on a variable basis after annuitization. (See "Annuity Payments.")
CONTINGENT DEFERRED SALES CHARGE
No charge for sales expenses is deducted from purchase payments when they
are made. However, a Contingent Deferred Sales Charge may apply on certain
events ("CDSC events"), except that no Contingent Deferred Sales Charge will
apply if the initial purchase payment is $1,000,000 or more. The Contingent
Deferred Sales Charge is intended to assist in covering sales expenses related
to the Contracts, including commissions, preparation of sales literature and
other promotional activity. The Contingent Deferred Sales Charge may not cover
the full amount of sales expenses, and the excess will be recovered from the
Company's general account, including any income from the Mortality and Expense
Risk Charge.
CDSC events are: (a) a full or partial surrender of your Contract (including
surrenders where you apply the proceeds to certain payment options); (b) in
certain circumstances, a withdrawal of the commuted value of amounts that you
applied to an annuity payment option; or (c) under Contracts issued in
Pennsylvania or New York, the Maturity Date if at that date a purchase payment
has been invested for less than four years.
The Contingent Deferred Sales Charge is taken into account in calculating
the proceeds payable on a full surrender. On a partial surrender, the
Contingent Deferred Sales Charge is deducted from the Contract Value remaining
after deduction of the surrender amount requested and is taken from the
Contract Value in the sub-accounts and the Fixed Account in the same
proportion as the Contract Value surrendered.
The Contingent Deferred Sales Charge equals a percentage of each purchase
payment. Each purchase payment is subject to the charge for four years (12
month periods) from the date it is received by the Company, as follows:
<TABLE>
<CAPTION>
IF WITHDRAWN DURING YEAR CHARGE
------------------------ ------
<S> <C>
1................................... 4%
2................................... 3%
3................................... 2%
4................................... 1%
Thereafter............................ 0%
</TABLE>
Whether amounts surrendered, withdrawn or applied to an annuity payment
option are considered to include purchase payments subject to the Contingent
Deferred Sales Charge depends on the following rules.
In any Contract Year you may surrender a portion of your Contract Value (the
"free withdrawal amount") without incurring the Contingent Deferred Sales
Charge. The free withdrawal amount for each Contract Year is equal to the
greater of: (1) 10% of the Contract Value at the beginning of the Contract
Year; and (2) the excess of the Contract Value over purchase payments subject
to the Contingent Deferred Sales Charge on the date of surrender. If not used,
the free withdrawal amount does not carry over to the next Contract Year.
In the event that tax law requires you to take distributions of Contract
Value prior to the Maturity Date, they may be subject to the Contingent
Deferred Sales Charge to the extent they exceed the free withdrawal amount, as
described above, in any Contract Year. See "Federal Income Tax Status--Tax
Status of the Contract" and "--Qualified Plans."
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<PAGE>
EXAMPLE: Assume that a single purchase payment of $10,000 is made into the
Contract. The following illustrates the free withdrawal amount
available under two hypothetical situations.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1:............ $12,500 $14,000 $4,000 $1,250 $4,000
Situation 2:............ $11,000 $10,000 $ 0 $1,100 $1,100
</TABLE>
EXAMPLE: Assume that a $10,000 purchase payment is made into the Contract on
6/1/95 and another $10,000 purchase payment is made on 2/1/96. The
following illustrates the Contingent Deferred Sales Charge that
would apply on partial surrenders in two hypothetical situations.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1: $7,000
partial surrender on
12/1/96............... $22,000 $25,000 $5,000 $2,200 $5,000
</TABLE>
The first $5,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $2,000 of the withdrawal would be made from the oldest
purchase payment (i.e. the 6/1/95 purchase payment). A 3% Contingent
Deferred Sales Charge would apply to the $2,000, because the withdrawal
would be taking place in the second year following the date of the purchase
payment.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 2: $25,000
surrender on 12/1/98... $30,000 $33,000 $13,000 $3,000 $13,000
</TABLE>
The first $13,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $12,000 of the withdrawal would be made by withdrawing
the $10,000 purchase payment made on 6/1/95 and $2,000 of the $10,000
purchase payment that was made on 2/1/96. The Contingent Deferred Sales
Charge that would apply is: 1% X $10,000 + 2% X $2,000, or $140. The
remaining amount of purchase payments that could be subject to the
Contingent Deferred Sales Charge (assuming no further purchase payments were
made) would be $8,000.
Amounts surrendered under the free withdrawal provision do not reduce the
total purchase payments that are potentially subject to the Contingent
Deferred Sales Charge under your Contract.
If your Contract Value is less than your total purchase payments due to a
free withdrawal, negative investment performance or deduction of the
Administration Contract Charge, the following rules apply for calculating the
Contingent Deferred Sales Charge: the deficiency will be attributed to your
most recent purchase payment first, and subsequent earnings will be credited
to that deficiency (and not treated as earnings) until Contract Value exceeds
purchase payments.
Waiver of Contingent Deferred Sales Charge. No Contingent Deferred Sales
-------------------------------------------
Charge will apply:
. After 30 days from issue of the Contract if you apply the proceeds to a
variable or fixed payment option involving a life contingency (described
under "Annuity Options"), or, for a minimum specified period of 15 years,
to either the Variable Income for a Specified Number of Years Option or
the Variable Income Payments to Age 100 Option (described under "Annuity
Options"), or a comparable fixed option. However, if you subsequently
withdraw the commuted value of amounts placed under any of those options,
the Company will deduct from the amount you receive a portion of the
Contingent Deferred Sales Charge amount that would have been deducted
when you originally applied the Contract proceeds to the option, taking
into account the lapse of time from annuitization to surrender. The
applicable portion of the Contingent Deferred Sales Charge will be based
on the ratio of (1) the
A-28
<PAGE>
number of whole months remaining, on the date of the withdrawal, until the
date when the Contingent Deferred Sales Charge would expire, to (2) the
number of whole months that were remaining, when the proceeds were applied
to the option, until the date when the Contingent Deferred Sales Charge
would expire. (See example in Appendix B.)
. On full or partial surrenders if the Contract Owner submits satisfactory
evidence to the Company that the Contract Owner (or one Contract Owner
under a jointly owned Contract, or the Annuitant, if the Contract is not
owned in an individual capacity) is terminally ill (as defined in the
Contract), has been confined to a nursing home for more than 90
continuous days, or is permanently and totally disabled (as defined in
the Contract). This benefit is only available to an original owner of the
Contract who was not over age 65 at issue of the Contract, and may not be
available in every state.
. If under the Spousal Continuation provision the Contract's Maturity Date
is reset to a date that is less than four years after the most recent
purchase payment made under the Contract. The Contingent Deferred Sales
Charge will not apply to the Contract in these circumstances. This waiver
of the Contingent Deferred Sales Charge will not apply, however, to
---
Contracts issued in New York or Pennsylvania.
. If the initial purchase payment is $1,000,000 or more.
The Contracts may be sold directly, without compensation, to a registered
representative, to employees, officers, directors, and trustees of the Company
and its affiliated companies, and spouses and immediate family members (i.e.
children, siblings and parents (including siblings and parents of spouses) and
grandparents) of the foregoing, and to employees, officers, directors,
trustees and registered representatives of any broker-dealer authorized to
sell the Contracts and of any sub-adviser to the Eligible Funds, and spouses
and immediate family members of the foregoing. If consistent with applicable
state insurance law, the Contracts may also be sold, without compensation, to
the Company or MetLife for use with deferred compensation plans for agents,
employees, officers, directors, and trustees of the Company and its affiliated
companies, subject to any restrictions imposed by the terms of such plans, or
to persons who obtain their Contracts through a bank, adviser or consultant to
whom they pay a fee for investment or planning advice. If sold under these
circumstances, the Contracts will be credited with an additional percentage of
premium to reflect in part or in whole any cost savings associated with the
direct sale, but only if such credit will not be unfairly discriminatory to
any person. No additional premium will be credited to Contracts purchased by
persons described above in exchange for another variable annuity contract
issued by the Company or its affiliated companies.
PREMIUM TAX CHARGE
Certain states impose a premium tax on annuity purchase payments received by
insurance companies. The Company pays this tax when incurred, and recovers
this tax by imposing a premium tax charge on affected Contracts in accordance
with the following rules. Generally, the Company incurs a state premium tax
liability on the date when annuity benefits commence. In those states, the
Company deducts the premium tax charge from the Contract Value on that date.
However, for Contracts subject to the premium tax law of states which impose a
premium tax on purchase payments when they are made (currently South Dakota),
the Company deducts the applicable premium tax charge at the earliest of: a
full or partial surrender of the Contract, the date when annuity benefits
commence, or payment of the Death Proceeds (including application of the Death
Proceeds to the Beneficiary Continuation provision) upon the death of a
Contract Owner (or of the Annuitant, if the Contract is not owned in an
individual capacity). To determine whether and when a premium tax charge will
be imposed on a Contract, the Company looks to the state of residence of the
Annuitant when a surrender is made, annuity benefits commence or Death
Proceeds are paid. The Company reserves the right to impose a premium tax
charge when a premium tax is incurred or at a later date.
Deductions for state premium tax charges currently range from 1/2% to 2.00%
of the Contract Value (or, if applicable, Death Proceeds) for Contracts used
with retirement plans qualifying for tax benefited treatment under the Code
and from 1% to 3.5% of the Contract Value (or, if applicable, Death Proceeds)
for all other Contracts. Premium tax rates are subject to being changed by
law, administrative interpretations or court decisions.
OTHER EXPENSES
A deduction for an investment advisory fee is made from, and certain other
expenses are paid out of, the assets of each Eligible Fund. (See "Expense
Table.") The prospectus and Statement of Additional Information of the
Eligible Funds describe these deductions and expenses.
A-29
<PAGE>
ANNUITY PAYMENTS
ELECTION OF ANNUITY
The Maturity Date of the Contract is based on the older of the Contract
Owner(s) and the Annuitant and is the date when that person, at his or her
nearest birthday, would be age 95 (or the maximum age allowed by state law).
The Contract Owner may not change the Maturity Date to an earlier date.
However, the Contract Owner may surrender the Contract at any time before the
Maturity Date and apply the surrender proceeds to an annuity payment option.
If the Contract Owner and Annuitant are not the same and the Annuitant dies
prior to the Maturity Date, the Contract will continue for the benefit of the
Contingent Annuitant. The Maturity Date will be reset, if necessary, based on
the age of the older Contract Owner.
Ownership of the Contract may not be changed without Company consent. If
ownership is changed, a change in the Maturity Date may be required, based on
the new Contract Owner's age. The new Maturity Date will be based on the older
of the new Contract Owner and the Annuitant and will be the date when that
person, at his or her nearest birthday, would be age 95 (or the maximum age
allowed by state law).
The Contract that is issued to you will provide for variable annuity
payments to begin at the Maturity Date for the life of the Payee, but for at
least ten years. If you wish to change this annuity payment option you may do
so at any time prior to the Maturity Date. You may elect to have annuity
payments under a Contract made on a variable basis or on a fixed basis, or you
may designate a portion to be paid on a variable basis and a portion on a
fixed basis. If you select payments on a fixed basis, the amount of Contract
Value applied to the fixed payment option (net of any applicable charges
described under "Administration Charges, Contingent Deferred Sales Charge and
Other Deductions") will be transferred to the general account of the Company,
and the annuity payments will be fixed in amount and duration by the annuity
payment option selected, the age of the Payee and, for Contracts issued in New
York or Oregon for use in situations not involving an employer-sponsored plan,
by the sex of the Payee. (See "Amount of Variable Annuity Payments.")
Contracts acquired by retirement plans qualifying for tax benefited
treatment may be subject to various requirements concerning the time by which
benefit payments must commence, the period over which such payments may be
made, the annuity payment options that may be selected, and the minimum annual
amounts of such payments. Penalty taxes or other adverse tax consequences may
occur upon failure to meet such requirements.
ANNUITY OPTIONS
The Contract provides several annuity payment options. Prior to the Maturity
Date you may elect to have the Contract Value applied to one of these payment
options at maturity. If you make a full or partial surrender of the Contract,
you may elect in your surrender request to apply the surrender proceeds to an
annuity payment option. You may also elect to have the Contract's Death
Proceeds applied to an annuity payment option, or, if the Death Proceeds
become payable and you have not previously elected a payment option, the
Beneficiary can elect to apply the Death Proceeds to an annuity payment
option; however, the Variable Income Payments to Age 100 Option and the
Variable Life Income for Two Lives Option, described below, and comparable
fixed options, are not available for this purpose.
The selection of an annuity payment option must be made by written request
to the Company and is subject to any applicable Federal tax law restrictions.
The amount of the Death Proceeds or of the Contract Value at the Maturity Date
that is applied to an annuity payment option will be reduced by any applicable
premium tax charge. The Contract Value at the Maturity Date is also reduced by
a pro rata portion of the Administration Contract Charge and by any applicable
Contingent Deferred Sales Charge. The amount of Contract Value applied to an
annuity payment option at a full or partial surrender will be reduced by any
applicable Contingent Deferred Sales Charge and premium tax charge, and, on a
full surrender, by a pro rata portion of the Administration Contract Charge.
For Contracts with an outstanding loan, the amount of Contract Value or Death
Proceeds applied to an annuity payment option will be reduced by the amount of
the loan outstanding plus accrued interest.
The Contract offers the variable annuity payment options listed below.
Variable Income for a Specified Number of Years. The Company will make
variable monthly payments for the number of years elected, which may not be
more than 30 except with the consent of the Company.
A-30
<PAGE>
Variable Life Income. The Company will make variable monthly payments
which will continue: while the Payee is living* ; while the Payee is living
but for at least ten years; or while the Payee is living but for at least
twenty years. (The latter two alternatives are referred to as Variable Life
Income with Period Certain Option.)
Variable Income Payments to Age 100. The Company will make variable
monthly payments for the number of whole years until the Payee is age 100.
THIS OPTION CANNOT BE SELECTED FOR DEATH PROCEEDS.
Variable Life Income for Two Lives. The Company will make variable
monthly payments which will continue: while either of two Payees is living
(Joint and Survivor Variable Life Income)*, while either of two Payees is
living but for at least 10 years (Joint and Survivor Variable Life Income,
10 Years Certain); while two Payees are living, and, after the death of one
while the other is still living, two-thirds to the survivor (Joint and 2/3
to Survivor Variable Life Income).* THIS OPTION CANNOT BE SELECTED FOR
DEATH PROCEEDS.
- --------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE VARIABLE ANNUITY
PAYMENT IF THE PAYEE DIES (OR PAYEES DIE) BEFORE THE DUE DATE OF THE SECOND
PAYMENT OR TO RECEIVE ONLY TWO VARIABLE ANNUITY PAYMENTS IF THE PAYEE DIES
(OR PAYEES DIE) BEFORE THE DUE DATE OF THE THIRD PAYMENT, AND SO ON.
Comparable fixed payment options are also available for all of the options
described above. In addition, other annuity payment options (including other
periods certain) may be available from time to time, and you should consult
the Company as to their availability. If you do not elect an annuity payment
option by the Maturity Date, variable payments under the Contract will be made
while the Payee is living but for at least ten years. (This is the Variable
Life Income with Period Certain Option.) If installments under an annuity
payment option would be less than the Company's published minimum, then the
Contract proceeds can be applied to an annuity payment option only with the
consent of the Company.
The Payee under the Variable Income for a Specified Number of Years Option
or the Variable Income Payments to Age 100 Option may withdraw the commuted
value of the remaining payments. The Payee (or Payees) under the Variable Life
Income with Period Certain Option or the Joint and Survivor Variable Life
Income, 10 Years Certain Option may withdraw the commuted value of the
remaining period certain portion of the payment option. The commuted value of
such payments is calculated based on the assumed interest rate under the
Contract. The life income portion of the payment portion cannot be commuted,
and variable annuity payments based on that portion will resume at the
expiration of the period certain if the Annuitant is alive at that time. (See
"Amount of Variable Annuity Payments.") Amounts applied to a fixed payment
option may not be withdrawn.
The section of the prospectus entitled "Administration Charges, Contingent
Deferred Sales Charge and Other Deductions" describes whether a Contingent
Deferred Sales Charge will be deducted upon application of the Contract's
proceeds to a particular annuity payment option or upon withdrawal of the
commuted value of any payments certain under a variable payment option.
Payees under the Variable Income for a Specified Number of Years Option or
the Variable Income Payments to Age 100 Option may convert to a variable
annuity payment option involving a life contingency.
The availability of certain annuity payment options may be restricted on
account of Company policy and Federal tax law, which among other things, may
restrict payment to the life expectancy of the payee.
The Company continues to assess the Mortality and Expense Risk Charge if
annuity payments are made under any variable annuity payment option (either
before or after the Maturity Date), including an option not involving a life
contingency and under which the Company bears no mortality risk.
AMOUNT OF VARIABLE ANNUITY PAYMENTS
At the Maturity Date (or any other application of proceeds to a payment
option), the Contract Value (reduced by any applicable charges and by any
outstanding loan plus accrued interest) is applied toward the purchase of
monthly annuity payments. The amount of monthly variable annuity payments will
be determined on the basis of (i) annuity purchase rates not lower than the
rates set forth in the Life Income Tables contained in the Contract that
reflect the Payee's age, (ii) the assumed interest rate selected, (iii) the
type of payment option selected, and (iv) the investment performance of the
Eligible Funds selected. The Fixed Account is not available under variable
payment options.
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<PAGE>
The annuity purchase rates are used to calculate the basic payment level
purchased by the Contract Value. These rates vary according to the age of the
Payee. The higher the Payee's age at annuitization, the greater the basic
payment level under options involving life contingencies, because the Payee's
life expectancy and thus the period of anticipated income payments will be
shorter. With respect to Contracts issued in New York or Oregon for use in
situations not involving an employer-sponsored plan, purchase rates used to
calculate the basic payment level will also reflect the sex of the Payee.
Under such Contracts, a given Contract Value will produce a higher basic
payment level for a male Payee than for a female Payee, reflecting the longer
life expectancy of the female Payee. If the Contract Owner has selected an
annuity payment option that guarantees that payments will be made for a
certain number of years regardless of whether the Payee remains alive, the
Contract Value will purchase lower monthly benefits than under a life
contingent option.
The dollar amount of the initial variable annuity payment will be at the
basic payment level. The assumed interest rate under the Contract will affect
both this basic payment level and the amount by which subsequent payments
increase or decrease. Each payment after the first will vary with the
difference between the net investment performance of the sub-accounts selected
and the assumed interest rate under the Contract. If the actual net investment
rate exceeds the assumed interest rate, the dollar amount of the annuity
payments will increase. Conversely, if the actual rate is less than the
assumed interest rate, the dollar amount of the annuity payments will
decrease. If actual investment performance is equal to the assumed interest
rate, the monthly payments will remain level.
Unless otherwise provided, the assumed interest rate will be at an annual
effective rate of 3.5%. You may select as an alternative an assumed interest
rate equal to an annual effective rate of 0% or, if allowed by applicable law
or regulation, 5%. A higher assumed interest rate will produce a higher first
payment, a more slowly rising series of subsequent payments when the actual
net investment performance exceeds the assumed interest rate, and a more rapid
drop in subsequent payments when the actual net investment performance is less
than the assumed interest rate. A lower assumed interest rate will produce a
lower first payment, a more rapidly rising series of subsequent payments when
the actual net investment performance exceeds the assumed interest rate, and a
less rapid drop in subsequent payments when the actual net investment
performance is less than the assumed interest rate.
You may, even after variable annuity payments have commenced, direct that
all or a portion of your investment in one sub-account be transferred to
another sub-account of the Variable Account in the manner provided under
"Transfer Privilege."
The Company may require proof of age, sex (if applicable) and survival of
any person upon the continuation of whose life annuity payments depend.
For more information regarding annuity payment options, you should refer to
the Statement of Additional Information and also to the Contract, which
contains detailed information about the various forms of annuity payment
options available, and other matters also of importance.
RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS
The Federal tax laws provide for a variety of retirement plans offering tax
benefits. These plans, which may be funded through the purchase of the
individual variable annuity contracts offered in this prospectus, include:
1. Plans qualified under Section 401(a) or 403(a) of the Code ("Qualified
Plans") but not plans qualified under Section 401(k);
2. Annuity purchase plans adopted by public school systems and certain
tax-exempt organizations pursuant to Section 403(b) of the Code ("TSA
Plans") which are funded solely by salary reduction contributions and which
are not otherwise subject to ERISA;
3. Individual retirement accounts adopted by or on behalf of individuals
pursuant to Section 408(a) of the Code and individual retirement annuities
purchased pursuant to Section 408(b) of the Code (both of which may be
referred to as "IRAs"), including simplified employee pension plans and
salary reduction simplified employee pension plans, which are specialized
IRAs that meet the requirements of Section 408(k) of the Code ("SEPs" and
SARSEPs");
4. Eligible deferred compensation plans (within the meaning of Section
457 of the Code) for employees of state and local governments and tax-
exempt organizations ("Section 457 Plans"); and
5. Governmental plans (within the meaning of Section 414(d) of the Code)
for governmental employees, including Federal employees ("Governmental
Plans").
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<PAGE>
An investor should consult a qualified tax or other advisor as to the
suitability of a Contract as a funding vehicle for retirement plans qualifying
for tax benefited treatment, as to the rules underlying such plans and as to
the state and Federal tax aspects of such plans. In particular, the Contract
is not intended for use with plans qualified under Section 401(k) of the Code
or with TSA Plans that are subject to ERISA. The Company will not provide all
the administrative support appropriate for such plans. Accordingly, the
Contract should NOT be purchased for use with such plans.
A summary of the Federal tax laws regarding contributions to, and
distributions from, the above tax benefited retirement plans may be found
below under "Federal Income Tax Status-Qualified Contracts." It should be
understood that should a tax benefited retirement plan lose its qualification
for tax-exempt status, employees will lose some of the tax benefits described
herein.
In the case of certain TSA Plans under Section 403(b)(1) of the Code and
IRAs purchased under Section 408(b) of the Code, the individual variable
annuity contracts offered in this prospectus comprise the retirement "plan"
itself. These Contracts will be endorsed, if necessary, to comply with Federal
and state legislation governing such plans, and such endorsements may alter
certain Contract provisions described in this prospectus. Refer to the
Contracts and any endorsements for more complete information.
FEDERAL INCOME TAX STATUS
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 the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax advisor before initiating any
transaction. This discussion is based upon NELICO's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue service ("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 Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with certain plans entitled to
special income tax treatment ("Qualified Contracts") under Sections 401, 403,
408 and 457 of the Internal Revenue Code of 1986, as amended (the "Code"). For
purposes of this prospectus, Qualified Contracts are Contracts that fund
Qualified Plans, TSA Plans, SEPs and SARSEPs, Section 457 Plans, and
Governmental Plans, as defined above under "Retirement Plans Offering Federal
Tax Benefits." 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. The following discussion
assumes that a Qualified Contract is purchased with proceeds from and/or
contributions under retirement plans that qualify for the intended special
federal income tax treatment.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Variable Account is not an entity separate from the
Company, and its operations form a part of the Company, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the Code.
Investment income and realized capital gains arising from the operation of the
Variable Account are automatically applied to increase reserves under the
Contracts. Under existing federal income tax law, the Company believes that
the Variable Account's 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, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Variable Account and, therefore, the
Company does not intend to make provisions for any such taxes. However, if
changes
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in the federal tax laws or interpretations thereof result in the Company being
taxed on income or gains attributable to the Variable Account, then the
Company may impose a charge against the Variable Account (with respect to some
or all Contracts) in order to set aside amounts to pay such taxes.
TAX STATUS OF THE CONTRACT
Diversification. Section 817(h) of the Code requires that with respect to
----------------
Non-Qualified Contracts, the investments of the Funds must be "adequately
diversified" in accordance with Treasury regulations in order for the
Contracts to qualify as annuity contracts under federal tax law. The Variable
Account, through the Eligible Funds, intends to comply with the
diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5,
which affect how the Eligible Funds' 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 includible 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 Sub-Accounts
without being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but also 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 Variable Account. In addition, the Company 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. The Company 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
Variable 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 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 owner's death; and (b) if any Owner dies prior to the annuity date,
the entire interest in the Contract will be distributed within five years
after the date of such Owner's death. These requirements will be considered
satisfied as to any portion of an 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 owner's death. The "designated beneficiary"
refers to a natural person designated by the owner as a Beneficiary and to
whom ownership of the contract passes by reason of death. However, if the
"designated beneficiary" is the surviving spouse of a deceased owner, the
contract may be continued with the surviving spouse as the new 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. The Company intends to
review such provisions when they are issued and modify the contracts in
question if necessary to assure that they comply with the requirements of Code
Section 72(s). 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.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general.
-----------
The Company 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
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<PAGE>
withdrawing all or part of the Contract Value (e.g., 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.
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 advisor.
The following discussion generally applies to a Contract owned by a natural
person.
Surrenders. In the case of a surrender under a Qualified Contract, including
-----------
Systematic Withdrawals, 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 surrenders, including
Systematic Withdrawals, are generally treated as taxable income to the extent
that the Contract Value immediately before the surrender 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 payment 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 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 Annuitant if the
Contract Owner is not an individual). Generally, such amounts are includible
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. For these purposes, the investment in
the Contract is not affected by the Owner's (or Annuitant's) death. That is,
the investment in the Contract remains the amount of any purchase payments
paid which were not excluded from gross income.
Transfers, Assignments, Exchanges and Maturity Dates. A transfer of
-----------------------------------------------------
ownership of a Contract, the designation of an Annuitant, Payee or other
Beneficiary who is not also an Owner, the selection of certain Maturity Dates,
the exchange of a Contract, or the receipt of a Contract in an exchange 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 advisor with respect to the potential
tax effects of such a transaction.
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<PAGE>
Multiple Contracts. All deferred non-qualified annuity contracts that are
-------------------
issued by the Company (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includible 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.
QUALIFIED CONTRACTS
The Contract is designed for use with certain retirement plans that qualify
for Federal tax benefits. Such plans are defined above under the heading
"Retirement Plans Offering Federal Tax Benefits." The tax rules applicable to
participants and beneficiaries in these 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.
The Company makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Contract
Owners and participants under retirement plans as well as Annuitants and
Beneficiaries are cautioned that the rights of any person to any benefits
under these 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. Adverse tax or other legal consequences to the plan, to the
participant or to both may result if the Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits prior to
transfer of the Contract. 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 advisor regarding
the suitability of the Contract under applicable federal and state tax laws
and ERISA.
The sale of a Contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of a
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within seven days of
the earlier of the establishment of the IRA or their purchase. A 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.
(i) Plan Contribution Limits
QUALIFIED PLANS, SEPS, SARSEPS AND GOVERNMENTAL PLANS
Statutory limitations on contributions to Qualified Plans, SEPs, SARSEPs and
Governmental Plans may limit the amount of money that may be contributed to
the Contract in any Contract Year. Any purchase payments attributable to such
contributions are tax deductible to the employer and are not currently taxable
to the Annuitants for whom the Contracts are purchased. The contributions to
the Contract and any increase in Contract Value attributable to such
contributions are not subject to taxation until payments from the Contract are
made to the Annuitant or his/her Beneficiaries.
TSA PLANS
Purchase payments attributable to TSA Plans are not includible within the
Annuitant's income to the extent such purchase payments do not exceed certain
statutory limitations, including the "exclusion allowance." The exclusion
allowance is a calculation which takes into consideration the Annuitant's
includible compensation, number of years of service, and prior years of
contributions. For more information about all the applicable limitations, the
Annuitant should obtain a copy of IRS Publication 571 on TSA Programs for
Employees of Public Schools and Certain Tax Exempt Organizations which will
better assist the Annuitant in calculating the exclusion allowance and other
limitations to which he or she may be subject
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<PAGE>
for any given tax year. Any purchase payments attributable to permissible
contributions under Code Section 403(b) (and earnings thereon) are not taxable
to the Annuitant until amounts are distributed from the Contract. However,
these payments may be subject to FICA (Social Security) taxes.
IRAS, SEPS, SARSEPS
The maximum tax deductible purchase payment which may be contributed each
year to an IRA is the lesser of $2,000 or 100 percent of includible
compensation if the taxpayer is not covered under an employer plan. A spousal
IRA is available if the taxpayer and spouse file a joint return and the spouse
earns no compensation (or elects to be treated as earning no compensation) and
is not yet age 70 1/2. The maximum tax deductible purchase payment which a
taxpayer may make to his or her own IRA and a spousal IRA, combined, is the
lesser of $2,250 or 100 percent of compensation of the working spouse. If
covered under an employer plan, taxpayers are permitted to make deductible
purchase payments; however, the deductions are phased out and eventually
eliminated, on a pro rata basis, for adjusted gross income between $25,000 and
$35,000 for an individual, between $40,000 and $50,000 for a married couple
filing jointly and between $0 and $10,000 for a married person filing
separately. A taxpayer may also make nondeductible purchase payments. However,
the total of deductible and nondeductible purchase payments may not exceed the
limits described above for deductible payments. An IRA is also the vehicle
that receives contributions to SEPs and SARSEPs. Maximum contributions
(including elective deferrals) to SEPs and SARSEPs are currently limited to
the lesser of 15% of compensation (generally up to $150,000 for 1996) or
$30,000. For more information concerning the contributions to IRAs, SEPs and
SARSEPs, you should obtain a copy of IRS Publication 590 on Individual
Retirement Accounts. In addition to the above, an individual may make a
"rollover" contribution into an IRA with the proceeds of a "lump sum"
distribution (as defined in the Code) from a Qualified Plan.
SECTION 457 PLANS
Generally, under a Section 457 Plan, an employee or executive may defer
income under a written agreement in an amount equal to the lesser of 33 1/3%
of includible compensation or $7,500. The amounts so deferred (including
earnings thereon) by an employee or executive electing to contribute to a
Section 457 Plan are includible in gross income only in the tax year in which
such amounts are paid or made available to that employee or executive or
his/her Beneficiary. Once contributed to the plan, any Contracts purchased
with employee contributions remain the sole property of the employer and may
be subject to the general creditors of the employer. The employer retains all
ownership rights to the Contract including voting and redemption rights which
may accrue to the Contract(s) issued under the plan. The plans may permit
participants to specify the form of investment for their deferred compensation
account. Depending on the terms of the particular plan, the employer may be
entitled to draw on deferred amounts for purposes unrelated to its Section 457
Plan obligations.
(ii) Distributions from the Contract
MANDATORY WITHHOLDING ON CERTAIN DISTRIBUTIONS
After January 1, 1993, many distributions called "eligible rollover
distributions" from Qualified Plans and from many TSA Plans will be subject to
automatic withholding by the plan or payor at the rate of 20%. Withholding can
be avoided by arranging a direct transfer of the eligible rollover
distribution to a Qualified Plan, TSA or IRA.
QUALIFIED PLANS, TSA PLANS, IRAS, SEPS, SARSEPS AND GOVERNMENTAL PLANS
Payments made from the Contracts held under a Qualified Plan, TSA Plan, IRA,
SEP, SARSEP or Governmental Plan are taxable under Section 72 of the Code as
ordinary income, in the year of receipt. Any amount received in surrender of
all or part of the Contract Value prior to annuitization will, subject to
restrictions and penalties discussed below, also be included in income in the
year of receipt. If there is any "investment" in the Contract, a portion of
each amount received is excluded from gross income as a return of such
investment. Distributions or withdrawals prior to age 59 1/2 may be subject to
a penalty tax of 10% of the amount includible in income. This penalty tax does
not apply: (i) to distributions of excess contributions or deferrals; (ii) to
distributions made on account of the Annuitant's death, retirement, disability
or early retirement at or after age 55; (iii) when distribution from the
Contract is in the form of an annuity over the life or life expectancy of the
Annuitant (or joint lives or life expectancies of the Annuitant and his or her
Beneficiary); or (iv) when distribution is made pursuant to a divorce (in the
case of IRAs) or a qualified domestic relations order. In the case of IRAs,
SEPs and SARSEPs, the exceptions for distributions on account of early
retirement at or after age 55 or made pursuant to a qualified domestic
relations order do not apply. A tax-free rollover may be made once each year
among individual retirement arrangements subject to the conditions and
limitations described in the Code.
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<PAGE>
If the Annuitant dies before distributions begin, distributions must be
completed within five years after death, unless payments begin within one year
after death and are made over the life (or life expectancy) of the
Beneficiary. If the Annuitant's spouse is the Beneficiary, distributions need
not begin until the Annuitant would have reached age 70 1/2. If the Annuitant
dies after annuity payments have begun, payments must continue to be made at
least as rapidly as payments made before death.
With respect to TSA Plans, elective contributions to the Contract made after
December 31, 1988 and any increases in Contract Value after that date may not
be distributed prior to attaining age 59 1/2, termination of employment, death
or disability. Contributions (but not earnings) made after December 31, 1988
may also be distributed by reason of financial hardship. These restrictions on
withdrawal will not apply to the Contract Value as of December 31, 1988. These
restrictions are not expected to change the circumstances under which
transfers to other investments which qualify for tax free treatment under
Section 403(b) of the Code may be made.
Annuity payments, periodic payments or annual distributions generally must
commence by April 1 of the calendar year following the year in which the
Annuitant attains age 70 1/2. In the case of a Governmental Plan, these
distributions must begin by the later of the date determined by the preceding
sentence or April 1 of the calendar year following the year in which the
Annuitant retires. Each annual distribution must equal or exceed a "minimum
distribution amount" which is determined by minimum distribution rules under
the plan. A penalty tax of up to 50% of the amount which should have been
distributed may be imposed by the IRS for failure to distribute the required
minimum distribution amount. Other tax penalties may apply to aggregate annual
distributions in excess of $150,000.
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under the Contracts or under the terms of
the Qualified Plans in respect of which the Contracts are issued.
SECTION 457 PLANS
When a distribution under a Contract held under a Section 457 Plan is made
to the Annuitant, such amounts are taxed as ordinary income in the year in
which received. The plan must not permit distributions prior to the
Annuitant's separation from service (except in the case of unforeseen
emergency).
Generally, annuity payments, periodic payments or annual distributions must
commence by April 1 of the calendar year following the year in which the
Annuitant attains age 70 1/2 and meet other distribution requirements. Minimum
distributions under a Section 457 Plan may be further deferred if the
Annuitant remains employed with the sponsoring employer. Each annual
distribution must equal or exceed a "minimum distribution amount" which is
determined by distribution rules under the plan. If the Annuitant dies before
distributions begin, the same special distribution rules apply in the case of
Section 457 Plans as apply in the case of Qualified Plans, TSA Plans, IRAs,
SEPs, SARSEPs and Governmental Plans. These rules are discussed above in the
immediately preceding section of this prospectus.
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. The Company is required to withhold taxes from certain
distributions under qualified contracts.
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
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consequences discussed herein reflect the Company'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 advisor should be consulted for further
information.
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 premium is derived from an exchange or
surrender of another annuity contract, the Company may require that the
prospective purchaser provide the information with regard to the federal
income tax status of the previous annuity contract. The Company 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; the Company 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.
VOTING RIGHTS
The Company is the legal owner of the Eligible Fund shares held in the
Variable Account and has the right to vote those shares at meetings of the
Eligible Fund shareholders. However, to the extent required by Federal
securities law, the Company will give you, as Contract Owner, the right to
instruct the Company how to vote the shares that are attributable to your
Contract.
Prior to annuitization, the number of votes as to which you have a right of
instruction is determined by applying your percentage interest in a sub-
account to the total number of votes attributable to the sub-account. After
annuitization, the number of votes attributable to your Contract is determined
by applying the percentage interest reflected by the reserve for your Contract
to the total number of votes attributable to the sub-account. After
annuitization the votes attributable to your Contract decrease as reserves
underlying the Contract decrease.
Contract Owners who are entitled to give voting instructions and the number
of shares as to which they have a right of instruction will be determined as
of the record date for the meeting. All Eligible Fund shares held in any sub-
account of the Variable Account or any other registered (or to the extent
voting privileges are granted by the issuing insurance company, unregistered)
separate accounts of the Company or any affiliate for which no timely
instructions are received will be voted for, against, or withheld from voting
on any proposition in the same proportion as the shares held in that sub-
account for all policies or contracts for which voting instructions are
received.
All Eligible Fund shares held by the general investment account (or any
unregistered separate account for which voting privileges are not extended) of
the Company or its affiliates will be voted in the same proportion as the
aggregate of (i) the shares for which voting instructions are received and
(ii) the shares that are voted in proportion to such voting instructions.
The SEC requires the Eligible Funds' Board of Trustees to monitor events to
identify conflicts that may arise from the sale of shares to variable life and
variable annuity separate accounts of affiliated and, if applicable,
unaffiliated insurance companies. Conflicts could arise as a result of changes
in state insurance law or Federal income tax law, changes in investment
management of any portfolio of the Eligible Funds, or differences between
voting instructions given by variable life and variable annuity contract
owners, for example. If there is a material conflict, the Boards of Trustees
will have an obligation to determine what action should be taken, including
the removal of the affected sub-account(s) from the Eligible Fund(s), if
necessary. If the Company believes any Eligible Fund action is insufficient,
the Company will consider taking other action to protect Contract Owners.
There could, however, be unavoidable delays or interruptions of operations of
the Variable Account that the Company may be unable to remedy.
DISTRIBUTION OF CONTRACTS
New England Securities, the principal underwriter of the Contracts, is a
broker-dealer registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of the National Association of Securities
Dealers, Inc. New England Securities may enter into selling agreements with
other broker-dealers registered under the Exchange Act whose
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registered representatives are authorized under applicable law to sell
variable annuity contracts. The Company will pay compensation to the New
England Securities registered representatives or other broker-dealers involved
in the sale of a Contract. Such compensation generally will have a present
value that does not exceed 4% of purchase payments under the Contract
(although a lower amount may be paid in certain limited circumstances (such as
sales of the Contracts to persons over age 75)), and such compensation may be
paid either as a percentage of purchase payments at the time the Company
receives them, as a percentage of Contract Value on an ongoing basis, or in
some combination of both. The Company will generally pay compensation with a
lower present value as a percentage of purchase payments for Contracts
purchased with an initial purchase payment of $1,000,000 or more.
THE FIXED ACCOUNT
A Fixed Account option is included under Contracts issued in those states
where it has been approved by the state insurance department. In these states,
you may allocate net purchase payments and may transfer Contract Value in the
Variable Account to the Fixed Account, which is part of the Company's general
account. The Fixed Account offers diversification to a Variable Account
contract, allowing the Contract Owner to protect principal and earn, at least,
a guaranteed rate of interest.
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933, and neither
the Fixed Account nor the general account has been registered as an investment
company under the Investment Company Act of 1940. Therefore, neither the
general account, the Fixed Account nor any interests therein are generally
subject to the provisions of these Acts, and the Company has been advised that
the staff of the Securities and Exchange Commission does not review
disclosures relating to the general account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the Federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION OF THE FIXED ACCOUNT
The Company's general account consists of all assets owned by the Company
other than those in the Variable Account and the Company's other separate
accounts. The Company has sole discretion over the investment of assets in the
general account, including those in the Fixed Account. Contract Owners do not
share in the actual investment experience of the assets in the Fixed Account.
Instead, the Company guarantees that Contract Values in the Fixed Account will
be credited with interest at an effective annual rate of at least 3%. The
Company is not obligated to credit interest at a rate higher than 3%, although
in its sole discretion it may do so. Contract Values in the Fixed Account will
be credited with interest daily.
Any purchase payment or portion of Contract Value ("deposit") allocated to
the Fixed Account will earn interest at an annual rate determined by the
Company for that deposit for a 12 month period. At the end of each succeeding
12 month period, the Company will determine the interest rate that will apply
to that deposit plus accrued interest for the next 12 months. This renewal
rate may differ from the interest rate that is applied to new deposits made to
the Fixed Account on that same day. (See "Contract Value and Fixed Account
Transactions" below for a description of the interest rate that will be
applied to Contract loan repayments allocated to the Fixed Account.)
CONTRACT VALUE AND FIXED ACCOUNT TRANSACTIONS
A Contract's total Contract Value will include its Contract Value in the
Variable Account, in the Fixed Account, and, for Contracts under which
Contract loans are available, any of its Contract Value held in the Company's
general account (but outside the Fixed Account) as a result of a Contract loan.
Unless you request otherwise, a partial surrender will reduce the Contract
Value in the sub-accounts of the Variable Account and the Fixed Account
proportionately. The annual Administration Contract Charge will be deducted
entirely from the Contract Value in the Variable Account, and not from the
Contract Value in the Fixed Account. (However, that charge is limited to the
lesser of $30 and 2% of the total Contract Value, including Contract Value in
the Fixed Account.) Except as described below, amounts in the Fixed Account
are subject to the same rights and limitations as are amounts in the Variable
Account with respect to transfers, surrenders and partial surrenders. The
following special rules apply to transfers involving the Fixed Account.
A-40
<PAGE>
The amount of Contract Value which may be transferred from the Fixed Account
----------------------------------------------------------------------------
is limited to the greater of: 25% of the Contract Value in the Fixed Account
- ----------------------------------------------------------------------------
at the end of the first day of the Contract Year, and the amount of Contract
- ----------------------------------------------------------------------------
Value that was transferred from the Fixed Account in the previous Contract
- --------------------------------------------------------------------------
Year, except with the consent of the Company. (Also, after the transfer is
- --------------------------------------------------------------------------
made, the Contract Value may not be allocated among more than ten of the sub-
- -----------------------------------------------------------------------------
accounts and/or the Fixed Account.) The Company intends to restrict purchase
- -----------------------------------
payments and transfers of Contract Value into the Fixed Account: (1) if the
interest rate which would be credited to the deposit would be equivalent to an
annual effective rate of 3%; or (2) if the total Contract Value in the Fixed
Account equals or exceeds a maximum amount published by the Company (currently
$500,000). (For Contracts issued in Maryland this maximum amount will not be
less than $500,000). In addition, the Company intends to restrict transfers of
Contract Value into the Fixed Account, and reserves the right to restrict
purchase payments and loan prepayments into the Fixed Account, for 180 days
following a transfer or loan out of the Fixed Account.
Amounts transferred to the sub-accounts from the Fixed Account will be on a
"last-in, first-out" basis; that is, they will be made in the reverse order in
which the deposits into the Fixed Account were made. Amounts surrendered from
the Fixed Account will be on a "first-in, first-out" basis.
If any portion of a Contract loan was attributable to Contract Value in the
Fixed Account, then an equal portion of each loan repayment must be allocated
to the Fixed Account. (For example, if 50% of the loan was attributable to
your Fixed Account Contract Value, then 50% of each loan repayment will be
allocated to the Fixed Account.) Similarly, unless you request otherwise, the
balance of the loan repayment will be allocated to the sub-accounts in the
same proportions in which the loan was attributable to the sub-accounts. See
"Loan Provision for Certain Tax Benefited Retirement Plans." The rate of
interest for each loan repayment applied to the Fixed Account will be the
lesser of: (1) the effective interest rate for your Contract on the date the
loan repayment is applied to the Fixed Account; and (2) the current Fixed
Account interest rate set by the Company in advance for that date. If the loan
is being prepaid, however, and prepayments into the Fixed Account are
restricted as described above, the portion of the loan prepayment that would
have been allocated to the Fixed Account will be allocated to the Zenith Back
Bay Advisors Money Market Sub-account instead.
The Company reserves the right to delay transfers, surrenders, partial
surrenders and Contract loans from the Fixed Account for up to six months.
FINANCIAL STATEMENTS
The financial statements of the Company and the Variable Account may be
found in the Statement of Additional Information. Please note that the
financial statements of the Variable Account are dated prior to the time the
Contracts described in this prospectus became available. Accordingly, the
financial statements of the Variable Account do not reflect the expenses or
unit information applicable to the Contracts described herein. The financial
statements also refer to the Company by its former name, "New England Variable
Life Insurance Company," refer to the sub-accounts investing in the Westpeak
Growth and Income Series and Davis Venture Value Series as the "Value Growth
Sub-Account" and "Venture Value Sub-Account," respectively, and refer to the
Davis Venture Value Series by its former name, the "Venture Value Series," and
the Westpeak Growth and Income Series by its former name, the "Westpeak Value
Growth Series."
INVESTMENT EXPERIENCE INFORMATION
The Company may advertise performance by illustrating hypothetical average
annual total returns for each sub-account of the Variable Account, based on
the actual investment experience of the Eligible Funds since their inception
and for the one, five, and ten year periods ending with the date of the
illustration. Calculations of average annual total return are based on the
assumption that a single investment of $1,000 was made at the beginning of
each period illustrated. Average annual total return calculations reflect
changes in the net asset values of the Eligible Funds plus the reinvestment of
dividends from net investment income and of distributions from net realized
gains, if any. The calculations also reflect the deduction of the Mortality
and Expense Risk Charge and the Administration Asset Charge. They also reflect
annual deductions for the Administration Contract Charge, and the deduction of
any Contingent Deferred Sales Charge applicable at the end of the period
illustrated. The calculations do not reflect the effect of any premium tax
charge, which applies in certain states, and which would reduce the results
shown. The average annual total return is the annual compounded rate of return
which would produce the surrender value at the end of the period illustrated.
See "Calculation of Performance Data" in the
A-41
<PAGE>
Statement of Additional Information for average annual total returns as of
December 31, 1995 and more information about how they are calculated.
The Company may also illustrate how the average annual total return for a
five year period was determined by illustrating the average annual total
return for each year in the five year period ending with the date of the
illustration. Such illustrations are based on the same assumptions and reflect
the same expenses and deductions described in the preceding paragraph. See
"Calculation of Performance Data" in the Statement of Additional Information
for an example of this type of illustration and more information about how
average annual total returns are calculated.
The Company may illustrate what would have been the growth and value of a
single $10,000 purchase payment for the Contract if it had been invested in
each of the Eligible Funds on the first day of the first month after those
Eligible Funds commenced operations. These illustrations show Contract Value
and surrender value, calculated in the same manner as when they are used to
arrive at average annual total return, as of the end of each year, ending with
the date of the illustration. The surrender values reflect the deduction of
any applicable Contingent Deferred Sales Charge, but do not reflect the
deduction of any premium tax charge. These illustrations may also show annual
percentage changes in Contract Value and surrender value, cumulative returns,
and annual effective rates of return. The difference between the Contract
Value or surrender value at the beginning and at the end of each year is
divided by the beginning Contract Value or surrender value to arrive at the
annual percentage change. The cumulative return is determined by taking the
difference between the $10,000 investment and the ending Contract Value or
surrender value and dividing it by $10,000. The annual effective rate of
return is calculated in the same manner as average annual total return. See
"Calculation of Performance Data" in the Statement of Additional Information
for examples of these illustrations and more information about how they are
calculated.
The Variable Account may update the performance history of one or more of
its sub-accounts on a quarterly basis by illustrating the one, five, and ten
year values (or since inception, if less) of a single $10,000 purchase payment
invested at the beginning of such periods using the same method of calculation
described in the preceding paragraph, but using the periods ending with the
date of the quarterly illustration. Such illustrations will show the Contract
Value at the end of the period and the cumulative return and annual effective
rate of return for the period. The illustration may also include the
cumulative return and annual effective rate of return of an appropriate
securities index and the Consumer Price Index for the same period.
The Company may illustrate what would have been the change in value of a
$250 monthly purchase payment plan if the monthly payments had been invested
in each of the Eligible Funds on the first day of each month starting with the
first day of the first month after those Eligible Funds commenced operations.
These illustrations show cumulative payments, Contract Value and surrender
value as of the end of each year, ending with the date of the illustration.
Surrender values reflect the deduction of any applicable Contingent Deferred
Sales Charge. The illustrations also show annual effective rates of return,
which represent the compounded annual rates that the hypothetical purchase
payments would have had to earn in order to produce the Contract Value and
surrender value as of the date of the illustration. See "Calculation of
Performance Data" in the Statement of Additional Information for examples of
these illustrations and more information about how they are calculated.
The Variable Account may make available illustrations showing historical
Contract Values and the annual effective rate of return, based upon
hypothetical purchase payment amounts and frequencies, which can be selected
by the client. The method of calculation described in the preceding paragraph
will be used, but the illustration will reflect the effect of any premium tax
charge applicable in the state where the illustration is delivered. The
beginning date of the illustration can be selected by the client. Contract
Values will be shown as of the end of each calendar year in the period and as
of the end of the most recent calendar quarter.
Historical investment performance may also be illustrated by showing the
percentage change in the Accumulation Unit Value and annual effective rate of
return of a sub-account without reflecting the deduction of any Contingent
Deferred Sales Charge, premium tax charge, or the annual $30 Administration
Contract Charge, all of which have the effect of reducing historical
performance. The percentage change in unit value and annual effective rate of
return of each sub-account may be shown from inception of the Eligible Fund to
the date of the report and for the year-to-date, one, five, and ten year
periods ending with the date of the report. The percentage change in unit
value and annual effective rate of return also may be compared with the
percentage change and annual effective rate for the Dow Jones Industrial
Average and S&P 500 Stock Index, as well as other unmanaged indices of stock
and bond performance described in the Statement of Additional Information in
the Notes to the illustration of Annual Percentage Change in Contract Value
and Annual Percentage Change
A-42
<PAGE>
in Surrender Value for a $10,000 Single Purchase Payment Contract. The
percentage change is calculated by dividing the difference in unit or index
values at the beginning and end of the period by the beginning unit or index
value. See the Statement of Additional Information for a description of the
method for calculating the annual effective rate of return in this
illustration.
From time to time the Company may advertise (in sales literature or
advertising material) performance rankings of the sub-accounts of the Variable
Account assigned by independent services, such as Variable Annuity Research
and Data Services ("VARDS"). VARDS monitors and ranks the performance of
variable annuity accounts on an industry-wide basis in each of the major
categories of investment objectives. The performance analysis prepared by
VARDS ranks accounts on the
basis of total return calculated using Accumulation Unit Values. Thus, the
effect of the Contingent Deferred Sales Charge and Administration Contract
Charge assessed under the Contracts is not taken into consideration.
From time to time, articles discussing the Variable Account's investment
experience, performance rankings and other characteristics may appear in
national publications. Some or all of these publishers or ranking services
(including, but not limited to, Lipper Analytical Services, Inc. and
Morningstar) may publish their own rankings or performance reviews of variable
contract separate accounts, including the Variable Account. References to,
reprints or portions of reprints of such articles or rankings may be used by
the Company as sales literature or advertising material and may include
rankings that indicate the names of other variable contract separate accounts
and their investment experience.
A-43
<PAGE>
APPENDIX A
CONSUMER TIPS
DOLLAR COST AVERAGING
Dollar cost averaging allows a person to take advantage of the historical
long-term stock market results, assuming that they continue, although it does
not guarantee a profit or protect against a loss. If an investor follows a
program of dollar cost averaging on a long-term basis and the stock fund
selected performs at least as well as the S&P 500 has historically, it is
likely although not guaranteed that the price at which shares are surrendered,
for whatever reason, will be higher than the average cost per share.
An investor using dollar cost averaging invests the same amount of money in
the same professionally managed fund at regular intervals over a long period
of time. Dollar cost averaging keeps an investor from investing too much when
the price of shares is high and too little when the price is low. When the
price of shares is low, the money invested buys more shares. When it is high,
the money invested buys fewer shares. If the investor has the ability and
desire to maintain this program over a long period of time (for example, 20
years), and the stock fund chosen follows the historical upward market trends,
the price at which the shares are sold should be higher than their average
cost. The price could be lower, however, if the fund chosen does not follow
these historical trends.
Investors contemplating the use of dollar cost averaging should consider
their ability to continue the on-going purchases so that they can take
advantage of periods of low price levels.
DIVERSIFICATION
Diversifying investment choices can enhance returns, by providing a wider
opportunity for safe returns, and reduce risks, by spreading the chance of
loss. Holding a single investment requires of that investment a safe return
because a loss may risk the entire investment. By diversifying, on the other
hand, an investor can more safely take a chance that some investments will
under-perform and that others will over-perform. Thus an investor can
potentially earn a better-than-average rate of return on a diversified
portfolio than on a single safe investment. This is because, although portions
of a diversified investment may be totally lost, other portions may perform at
above-average rates that more than compensate for the loss.
MISCELLANEOUS
<TABLE>
<C> <S>
Toll-free telephone service: --A recording of daily unit values is available
by calling 1-800-333-2501.
--Fund transfers and changes of future purchase
payment allocations can be made by calling 1-
800-777-5897.
Written Communications: --All communications and inquiries regarding
address changes, premium payments, billing,
fund transfers, surrenders, maturities and any
other processing matters relating to your
Contract should be directed to:
New England Annuities
P.O. Box 642
Boston, Mass 02117
</TABLE>
A-44
<PAGE>
APPENDIX B
CONTINGENT DEFERRED SALES CHARGE
The following example illustrates how the Contingent Deferred Sales Charge
would apply if the commuted value of amounts that have been placed under
certain payment options is later withdrawn. As described in the prospectus in
the section "Contingent Deferred Sales Charge," no Contingent Deferred Sales
Charge will apply if at any time more than 30 days from issue of the Contract
you apply the proceeds to a variable or fixed payment option involving a life
contingency or, for a minimum specified period of 15 years, to either the
Variable Income for a Specified Number of Years Option or the Variable Income
Payments to Age 100 Option, or a comparable fixed option. However, if you
subsequently withdraw the commuted value of amounts placed under any of those
options, the Company will deduct from the amount you receive a portion of the
Contingent Deferred Sales Charge that was waived, based on the ratio of: (1)
the number of whole months remaining on the date of withdrawal until the date
when the Contingent Deferred Sales Charge would expire, to (2) the number of
whole months that were remaining when the proceeds were applied to the option,
until the date when the Contingent Deferred Sales Charge would expire.
As an example, assume that $100,000 of Contract Value (net of any premium
tax charge and Administration Contract Charge) is applied to the Variable
Income for a Specified Number of Years Option for a 20 year period. Assume
further that the proceeds are derived from a $30,000 purchase payment made ten
years ago, a $30,000 purchase payment made exactly two years ago, and
investment earnings, and that the Contingent Deferred Sales Charge waived on
application of the proceeds to the payment option was $600. If the Payee
surrenders the commuted value of the proceeds under option six months later,
the Contingent Deferred Sales Charge would be $450 (representing the $600
waived at annuitization multiplied by 18/24, where 18 is the number of whole
months currently remaining until the Contingent Deferred Sales Charge would
expire, and 24 is the number of whole months that remained at the time of
annuitization until the Contingent Deferred Sales Charge would expire).
A-45
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Company............................................................... II-3
Services to the Variable Account.......................................... II-3
Performance Comparisons................................................... II-3
Calculation of Performance Data........................................... II-4
Net Investment Factor..................................................... II-17
Annuity Payments.......................................................... II-17
Hypothetical Illustrations of Annuity Income Payouts...................... II-18
Historical Illustrations of Annuity Income Payouts........................ II-22
Experts................................................................... II-25
Legal Matters............................................................. II-25
Financial Statements...................................................... II-26
</TABLE>
If you would like to obtain a copy of the Statement of Additional
Information, please complete the request form below and mail to:
New England Securities Corporation
399 Boylston Street
Boston, Massachusetts 02116
Please send a copy of the Statement of Additional
Information of New England Variable Annuity Separate
Account (American Forerunner Series) to:
_______________________________________________________
Name
_______________________________________________________
Street
_______________________________________________________
City State Zip
A-46
<PAGE>
501 Boylston Street
Boston, MA 02116-3700
e-mail: [email protected]
________________________________________________________________________________
Equal Opportunity Employer
/c/ 1996 New England Life Insurance Company
AFP-17-96
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
AMERICAN FORERUNNER SERIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
(PART B)
OCTOBER 15, 1996
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated October 15, 1996 and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained by writing to New England Securities Corporation ("New England
Securities") 399 Boylston Street, Boston, Massachusetts 02116.
II-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Company............................................................... II-3
Services to the Variable Account.......................................... II-3
Performance Comparisons................................................... II-3
Calculation of Performance Data........................................... II-4
Net Investment Factor..................................................... II-17
Annuity Payments.......................................................... II-17
Hypothetical Illustrations of Annuity Income Payouts...................... II-18
Historical Illustrations of Annuity Income Payouts........................ II-22
Experts................................................................... II-25
Legal Matters............................................................. II-25
Financial Statements...................................................... II-26
</TABLE>
II-2
<PAGE>
THE COMPANY
New England Life Insurance Company ("The Company") is an indirect, wholly-
owned subsidiary of Metropolitan Life Insurance Company ("MetLife").
SERVICES TO THE VARIABLE ACCOUNT
The Company maintains the books and records of the Variable Account and
provides issuance and other administrative services for the Contracts.
Deloitte & Touche LLP, located at 125 Summer Street, Boston, Massachusetts
02110, conducts an annual audit of the Variable Account's financial
statements. Deloitte & Touche LLP performs this function as one of its
services as independent accountant for the Company.
Principal Underwriter. New England Securities Corporation ("New England
Securities"), a subsidiary of the Company, serves as principal underwriter for
the Variable Account pursuant to a distribution agreement between the Company
and New England Securities. The Contracts are offered continuously and may be
sold by registered representatives of broker-dealers that have selling
agreements with New England Securities as well as by the Company's life
insurance agents and insurance brokers who are registered representatives of
New England Securities. The Company pays commissions, none of which are
retained by New England Securities, in connection with sales of the Contracts.
PERFORMANCE COMPARISONS
Articles and releases, developed by the Company, the Eligible Funds (as
defined in the Prospectus) and other parties, about the Account or the
Eligible Funds regarding performance, rankings, statistics and analyses of the
Account's, the individual Eligible Funds' and fund groups' asset levels and
sales volumes, statistics and analyses of industry sales volumes and asset
levels, and other characteristics may appear in publications, including, but
not limited to, those publications listed in Appendix A to this Statement. In
particular, some or all of these publications may publish their own rankings
or performance reviews including the Account or the Eligible Funds. References
to or reprints of such articles may be used in the Company's promotional
literature. Such literature may refer to personnel of the advisers, who have
portfolio management responsibility, and their investment style. The
references may allude to or include excerpts from articles appearing in the
media.
The advertising and sales literature of the Contract and the Account may
refer to historical, current and prospective economic trends and may include
historical and current performance and total returns of investment
alternatives.
In addition, sales literature may be published concerning topics of general
investor interest for the benefit of registered representatives and
prospective Contractholders. These materials may include, but are not limited
to, discussions of college planning, retirement planning, reasons for
investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
II-3
<PAGE>
CALCULATION OF PERFORMANCE DATA
The tables below illustrate hypothetical average annual total returns for
each sub-account for the periods shown, based on the actual investment
experience of the New England Zenith Fund (the "Zenith Fund") during those
periods. The tables do not represent what may happen in the future.
The Variable Account was not established until July, 1994. The Contracts
were not available before October, 1996. The Back Bay Advisors Bond Income and
Back Bay Advisors Money Market Series commenced operations on August 26, 1983.
The Westpeak Growth and Income and Loomis Sayles Avanti Growth Series
commenced operations on April 30, 1993. The Loomis Sayles Small Cap Series
commenced operations on May 2, 1994. The six other Eligible Funds did not
commence operations until October 31, 1994.
Calculations of average annual total return are based on the assumption that
a single investment of $1,000 was made at the beginning of each period shown.
The figures do not reflect the effect of any premium tax charge, which applies
in certain states, and which would reduce the results shown.
The average annual total return is related to surrender value and is
calculated as follows. The amount of the assumed $1,000 purchase payment for a
Contract issued at the beginning of the period is divided by the Accumulation
Unit Value of each sub-account at the beginning of the period shown to arrive
at the number of Accumulation Units purchased. The number of Accumulation
Units is reduced on each Contract anniversary to reflect deduction of the
annual $30 Administration Contract Charge from the Contract Value. For
purposes of this calculation, the maximum Administration Contract Charge of
$30 is deducted, although the actual charge will be the lesser of 2% of
Contract Value and $30 (and may be waived for certain large Contracts). Each
such $30 deduction reduces the number of units held under the Contract by an
amount equal to $30 divided by the Accumulation Unit Value on the date of the
deduction. The total number of units held under the Contract at the beginning
of the last Contract Year covered by the period shown is multiplied by the
Accumulation Unit Value on December 31, 1995 to arrive at the Contract Value
on that date.* This Contract Value is then reduced by the applicable
Contingent Deferred Sales Charge and the portion of the $30 Administration
Contract Charge which would be deducted upon surrender on December 31, 1995 to
arrive at the surrender value. The average annual total return is the annual
compounded rate of return which would produce the surrender value on December
31, 1995. In other words, the average annual total return is the rate which,
when added to 1, raised to a power reflecting the number of years in the
period shown, and multiplied by the initial $1,000 investment, yields the
surrender value at the end of the period. The average annual total returns
assume that no premium tax charge has been deducted.
- --------
* In the illustrations that follow, the calculations are based on the
Accumulation Unit Values for the next business day following December 31,
1995, which was a Sunday.
AVERAGE ANNUAL TOTAL RETURN
For purchase payment allocated to the Loomis Sayles Small Cap Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year........................................................... 22.62%
Since Inception.................................................. 8.20%
For purchase payment allocated to the Draycott International Equity Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year........................................................... .29%
Since Inception.................................................. 1.46%
For purchase payment allocated to the Alger Equity Growth Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year........................................................... 43.47%
Since Inception.................................................. 28.95%
</TABLE>
II-4
<PAGE>
For purchase payment allocated to the Loomis Sayles Avanti Growth Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 24.80%
Since Inception................................................. 11.59%
For purchase payment allocated to the Davis Venture Value Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 32.31%
Since Inception................................................. 22.73%
For purchase payment allocated to the Westpeak Growth and Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 29.74%
Since Inception................................................. 12.94%
For purchase payment allocated to the Loomis Sayles Balanced Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 18.20%
Since Inception................................................. 14.48%
For purchase payment allocated to the Salomon Brothers Strategic Bond
Opportunities Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 12.66%
Since Inception................................................. 8.48%
For purchase payment allocated to the Back Bay Advisors Bond Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 14.26%
5 Years......................................................... 7.28%
10 years........................................................ 6.58%
Since Inception................................................. 7.78%
For purchase payment allocated to the Salomon Brothers U.S. Government
Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... 7.89%
Since Inception................................................. 6.56%
For purchase payment allocated to the Back Bay Advisors Money Market Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1995
-------------------------------
<S> <C>
1 Year.......................................................... -1.11%
5 Years......................................................... .52%
10 years........................................................ 2.39%
Since Inception................................................. 3.26%
</TABLE>
Information is available illustrating the impact of fund performance on
annuity payouts. For examples, see "Historical Illustrations of Annuity Income
Payments" and "Hypothetical Illustrations of Annuity Income Payments" in this
Statement of Additional Information.
II-5
<PAGE>
The following chart illustrates how the average annual total return was
determined for the five year period ending December 31, 1995 for the sub-
account investing in the Back Bay Advisors Bond Income Series based on the
assumptions used in the above table. The units column below shows the number
of accumulation units hypothetically purchased by the $1000 investment in the
Series in the first year. The units are reduced on each Contract anniversary
to reflect the deduction of the $30 Administration Contract Charge. The
example assumes no premium tax charge is deducted.
The unit values of the sub-accounts reflect the change in the net asset
value of the underlying Eligible Funds plus the reinvestment of dividends from
net investment income and of distributions from net realized gains, if any.
The unit values also reflect the deduction of the Mortality and Expense Risk
Charge as well as the Administration Asset Charge.
<TABLE>
<CAPTION>
AVERAGE
UNIT CONTRACT SURRENDER ANNUAL TOTAL
DATE UNITS VALUE VALUE VALUE RETURN
- ---- -------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1990............ 504.8684 1.980714 $1,000.00 $ -- --
December 31, 1991............ 491.8994 2.313192 1,137.86 1,107.86 10.79%
December 31, 1992............ 479.7901 2.477440 1,188.65 1,168.65 8.09%
December 31, 1993............ 468.9288 2.762110 1,295.23 1,285.23 8.72%
December 31, 1994............ 457.5506 2.636622 1,206.39 1,206.39 4.80%
December 31, 1995............ 448.0893 3.170803 1,420.80 1,420.80 7.27%
</TABLE>
The following charts illustrate what would have been the growth and value of
a $10,000 purchase payment if it had been invested in each of the Eligible
Funds on the first day of the first month after those Eligible Funds became
available: September 1, 1983 for the Back Bay Advisors Money Market and Back
Bay Advisors Bond Income Series; May 1, 1993 for the Westpeak Growth and
Income and Loomis Sayles Avanti Growth Series; May 2, 1994 for the Loomis
Sayles Small Cap Series; and November 1, 1994 for the other series of the
Zenith Fund. The figures shown do not reflect the deduction of any premium tax
charge on surrender. During the period when the Contingent Deferred Sales
Charge applies, the percentage return on surrender value from year to year
(after the 1st year) will be greater than the percentage return on Contract
Value for the same years. This is because the percentage return on surrender
value reflects not only investment experience but also the annual reduction in
the applicable Contingent Deferred Sales Charge. In the first chart, the
Contract Value and surrender value on each date shown are calculated in the
manner described in the preceding illustrations of average annual total
return, assuming that no premium tax charge is deducted on surrender.
In the second and third charts, the difference between the Contract Value or
surrender value at the beginning and at the end of each year is divided by the
beginning Contract Value or surrender value to arrive at the annual percentage
change. The cumulative return information set forth in these charts is
determined by taking the difference between the $10,000 investment and the
ending Contract Value or surrender value and dividing it by $10,000. The
annual effective rate of return in this illustration is calculated in the same
manner as the average annual total return described in the preceding
illustration, assuming that no premium tax charge is deducted on surrender.
II-6
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT
BACK BAY ADVISORS BOND INCOME AND BACK BAY ADVISORS MONEY MARKET SERIES ISSUED
SEPTEMBER 1, 1983
WESTPEAK GROWTH AND INCOME AND LOOMIS SAYLES AVANTI GROWTH SERIES ISSUED MAY 1,
1993
LOOMIS SAYLES SMALL CAP SERIES ISSUED MAY 2, 1994
OTHER ZENITH FUND SERIES ISSUED NOVEMBER 1, 1994
INVESTMENT RESULTS
<TABLE>
<CAPTION>
CONTRACT VALUE
---------------------------------------------------------------------------------------------------------
SALOMON
LOOMIS LOOMIS BROTHERS BACK BAY
SAYLES DRAYCOTT ALGER SAYLES DAVIS WESTPEAK LOOMIS STRATEGIC ADVISORS
SMALL INTERNATIONAL EQUITY AVANTI VENTURE GROWTH AND SAYLES BOND BOND
CAP EQUITY GROWTH GROWTH VALUE INCOME BALANCED OPPORTUNITIES INCOME
---------- ------------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983............ $10,335.09
1984............ 11,507.30
1985............ 13,498.14
1986............ 15,315.59
1987............ 15,476.37
1988............ 16,559.30
1989............ 18,388.46
1990............ 19,653.59
1991............ 22,920.18
1992............ 24,517.52
1993............ $11,332.31 $11,383.93 27,304.63
1994............ $ 9,534.60 $10,202.44 $ 9,567.51 11,036.58 $ 9,663.39 11,068.74 $ 9,962.79 $ 9,823.14 26,034.60
1995............ 12,227.02 10,791.01 14,270.80 14,400.15 13,334.44 14,987.79 12,341.97 11,625.00 31,277.67
<CAPTION>
CONTRACT VALUE
---------------------
SALOMON BACK BAY
BROTHERS ADVISORS
U.S. MONEY
GOVERNMENT MARKET
---------- ----------
<S> <C> <C>
As of December 31:
1983............ $10,279.75
1984............ 11,227.77
1985............ 12,003.87
1986............ 12,662.53
1987............ 13,324.24
1988............ 14,160.95
1989............ 15,283.42
1990............ 16,334.26
1991............ 17,146.12
1992............ 17,589.57
1993............ 17,901.94
1994............ $10,032.56 18,403.66
1995............ 11,395.59 19,226.26
</TABLE>
<TABLE>
<CAPTION>
SURRENDER VALUE(1)
---------------------------------------------------------------------------------------------------------
SALOMON
LOOMIS LOOMIS BROTHERS BACK BAY
SAYLES DRAYCOTT ALGER SAYLES DAVIS WESTPEAK LOOMIS STRATEGIC ADVISORS
SMALL INTERNATIONAL EQUITY AVANTI VENTURE GROWTH AND SAYLES BOND BOND
CAP EQUITY GROWTH GROWTH VALUE INCOME BALANCED OPPORTUNITIES INCOME
---------- ------------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983............ $ 9,952.08
1984............ 11,197.30
1985............ 13,288.13
1986............ 15,205.58
1987............ 15,466.36
1988............ 16,549.30
1989............ 18,378.45
1990............ 19,643.58
1991............ 22,910.17
1992............ 24,507.50
1993............ $10,912.31 $10,963.93 27,294.62
1994............ $ 9,174.02 $ 9,829.54 $ 9,220.01 10,718.53 $ 9,312.06 10,750.22 $ 9,599.48 $ 9,465.41 26,024.58
1995............ 11,907.02 10,492.81 13,965.80 14,180.15 13,029.44 14,767.79 12,036.97 11,320.00 31,267.66
<CAPTION>
SURRENDER VALUE(1)
---------------------
SALOMON BACK BAY
BROTHERS ADVISORS
U.S. MONEY
GOVERNMENT MARKET
---------- ----------
<S> <C> <C>
As of December 31:
1983............ $ 9,898.96
1984............ 10,917.77
1985............ 11,793.88
1986............ 12,552.54
1987............ 13,314.24
1988............ 14,150.95
1989............ 15,273.42
1990............ 16,324.26
1991............ 17,136.13
1992............ 17,579.57
1993............ 17,891.94
1994............ $ 9,666.46 18,393.66
1995............ 11,090.59 19,216.26
</TABLE>
II-7
<PAGE>
ANNUAL PERCENTAGE CHANGE IN CONTRACT VALUE(1)
<TABLE>
<CAPTION>
SALOMON
LOOMIS BROTHERS
SAYLES DRAYCOTT ALGER LOOMIS DAVIS WESTPEAK LOOMIS STRATEGIC
SMALL INTERNATIONAL EQUITY SAYLES AVANTI VENTURE GROWTH SAYLES BOND
CAP EQUITY GROWTH GROWTH VALUE AND INCOME BALANCED OPPORTUNITIES
------ ------------- ------ ------------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983...................
1984...................
1985...................
1986...................
1987...................
1988...................
1989...................
1990...................
1991...................
1992...................
1993................... 13.32% 13.84%
1994................... -4.65% 2.02% -4.32% -2.61 -3.37% -2.77 -.37% -1.77%
1995................... 28.24 5.77 49.16 30.48 37.99 35.41 23.88 18.34
Cumulative Return....... 22.27 7.91 42.71 44.00 33.34 49.88 23.42 16.25
Annual Effective Rate of
Return................. 12.83 6.76 35.72 14.64 28.04 16.37 19.81 13.80
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY SALOMON BACK BAY GOVERNMENT/
ADVISORS BROTHERS ADVISORS DOW JONES S&P 500 CORPORATE CONSUMER
BOND U.S. MONEY INDUSTRIAL STOCK BOND PRICE
INCOME GOVERNMENT MARKET AVERAGE(2) INDEX(3) INDEX(4) INDEX(5)
-------- ---------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... 3.35% 2.80% 5.89% 1.71% 4.50% 1.07%
1984................... 11.34 9.22 1.30 6.22 14.38 3.95
1985................... 17.30 6.91 33.55 31.64 18.05 3.80
1986................... 13.46 5.49 27.10 18.62 13.12 1.10
1987................... 1.05 5.23 5.48 5.21 3.67 4.43
1988................... 7.00 6.28 16.14 16.50 6.78 4.42
1989................... 11.05 7.93 32.19 31.59 12.76 4.65
1990................... 6.88 6.88 -1.00 -3.12 9.17 6.11
1991................... 16.62 4.97 24.19 30.34 14.63 3.06
1992................... 6.97 2.59 7.39 7.61 7.17 2.90
1993................... 11.37 1.78 16.97 10.06 8.79 2.75
1994................... -4.65 .33% 2.80 5.06 1.31 -1.95 2.78
1995................... 20.14 13.59 4.47 36.83 37.45 15.31 2.54
Cumulative Return....... 212.78 13.96 92.26 557.53 471.03 230.41 53.19
Annual Effective Rate of
Return................. 9.68 11.87 5.44 16.50 15.17 10.18 3.52
</TABLE>
ANNUAL PERCENTAGE CHANGE IN SURRENDER VALUE(1)
<TABLE>
<CAPTION>
SALOMON
LOOMIS BROTHERS
SAYLES DRAYCOTT ALGER LOOMIS DAVIS WESTPEAK LOOMIS STRATEGIC
SMALL INTERNATIONAL EQUITY SAYLES AVANTI VENTURE GROWTH SAYLES BOND
CAP EQUITY GROWTH GROWTH VALUE AND INCOME BALANCED OPPORTUNITIES
------ ------------- ------ ------------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983...................
1984...................
1985...................
1986...................
1987...................
1988...................
1989...................
1990...................
1991...................
1992...................
1993................... 9.12% 9.64%
1994................... -8.26% -1.70% -7.80% -1.78 -6.88% -1.95 -4.01% -5.35%
1995................... 29.79 6.75 51.47 32.30 39.92 37.37 25.39 19.59
Cumulative Return....... 19.07 4.93 39.66 41.80 30.29 47.68 20.37 13.20
Annual Effective Rate of
Return................. 11.05 4.22 33.23 13.98 25.52 15.73 17.26 11.24
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY SALOMON BACK BAY GOVERNMENT/
ADVISORS BROTHERS ADVISORS DOW JONES S&P 500 CORPORATE CONSUMER
BOND U.S. MONEY INDUSTRIAL STOCK BOND PRICE
INCOME GOVERNMENT MARKET AVERAGE(2) INDEX(3) INDEX(4) INDEX(5)
-------- ---------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... -.48% -1.01% 5.89% 1.71% 4.50% 1.07%
1984................... 12.51 10.29 1.30 6.22 14.38 3.95
1985................... 18.67 8.02 33.55 31.64 18.05 3.80
1986................... 14.43 6.43 27.10 18.62 13.12 1.10
1987................... 1.72 6.07 5.48 5.21 3.67 4.43
1988................... 7.00 6.28 16.14 16.50 6.78 4.42
1989................... 11.05 7.93 32.19 31.59 12.76 4.65
1990................... 6.88 6.88 -1.00 -3.12 9.17 6.11
1991................... 16.63 4.97 24.19 30.34 14.63 3.06
1992................... 6.97 2.59 7.39 7.61 7.17 2.90
1993................... 11.37 1.78 16.97 10.06 8.79 2.75
1994................... -4.65 -3.34% 2.80 5.06 1.31 -1.95 2.78
1995................... 20.15 14.73 4.47 36.83 37.45 15.31 2.54
Cumulative Return....... 212.68 10.91 92.16 557.53 471.03 230.41 53.19
Annual Effective Rate of
Return................. 9.68 9.30 5.44 16.50 15.17 10.18 3.52
</TABLE>
- --------
NOTES:
(1) The Contract Values, surrender values, and annual percentage change
figures assume reinvestment of dividends and capital gain distributions.
The Contract Values are net of all deductions and expenses other than any
applicable Contingent Deferred Sales Charge or premium tax charge. Each
surrender value equals the Contract Value less any applicable Contingent
Deferred Sales Charge and a pro rata portion of the annual $30
Administration Contract Charge, but does not reflect a deduction for the
premium tax charge. (See "Administration Charges, Contingent Deferred
Sales Charge and Other Deductions."). 1983 figures for the Back Bay
Advisors Bond Income and Back Bay Advisors Money Market Series are from
September 1 through December 31, 1983. 1993 figures for the Westpeak
Growth and Income and Loomis Sayles Avanti Growth Series are from May 1
through December 31, 1993. 1994 figures for the Loomis Sayles Small Cap
Series are from May 2 through December 31, 1994. 1994 figures for all
other series of the Zenith Fund are from November 1 through December 31,
1994.
(2) The Dow Jones Industrial Average is a market value-weighted and unmanaged
index of 30 large industrial stocks traded on the New York Stock Exchange.
The annual percentage change figures have been adjusted to reflect
reinvestment of dividends. 1983 figures are from September 1 through
December 31, 1983.
(3) The S&P 500 Stock Index is an unmanaged weighted index of the stock
performance of 500 industrial, transportation, utility and financial
companies. The annual percentage change figures have been adjusted to
reflect reinvestment of dividends. 1983 figures are from September 1
through December 31, 1983.
(4) The Lehman Intermediate Government/Corporate Bond Index is a subset of the
Lehman Government/Corporate Bond Index covering all issues with maturities
between 1 and 10 years which is composed of taxable, publicly-issued, non-
convertible debt obligations issued or guaranteed by the U.S. Government
or its agencies and another Lehman index that is composed of taxable,
fixed rate publicly-issued, investment grade non-convertible corporate
debt obligations. 1983 figures are from September 1 through December 31,
1983.
(5) The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices
of goods and services. 1983 figures are from September 1 through December
31, 1983.
II-9
<PAGE>
The chart below illustrates what would have been the change in value of a
$250 monthly investment under a Contract in each of the Eligible Funds if
purchase payments had been made on the first day of each month starting with
September 1, 1983 for the Back Bay Advisors Bond Income and Back Bay Advisors
Money Market Series, May 1, 1993 for the Westpeak Growth and Income and Loomis
Sayles Avanti Growth Series, May 2, 1994 for the Loomis Sayles Small Cap
Series and November 1, 1994 for the other series of the Zenith Fund. The
figures shown do not reflect the deduction of any premium tax charge on
surrender, and only surrender values, not Contract Values, reflect the
deduction of any applicable Contingent Deferred Sales Charge. Each purchase
payment is divided by the Accumulation Unit Value of each sub-account on the
date of the investment to calculate the number of Accumulation Units
purchased. The total number of units under the Contract is reduced on each
Contract anniversary to reflect the $30 Administration Contract Charge, in the
same manner as described in the illustrations of average annual total return.
The Contract Value and the surrender value are calculated according to the
methods described in the preceding examples. The annual effective rate of
return in this illustration represents the compounded annual rate that the
hypothetical purchase payments shown would have had to earn in order to
produce the Contract Value and surrender value illustrated on December 31,
1995. The annual effective rate of return is the rate which, when added to 1
and raised to a power equal to the number of months for which the payment is
invested divided by twelve, and multiplied by the payment amount, for all
monthly payments, would yield the Contract Value or surrender value on the
ending date of the illustration.
INVESTMENT RESULTS
SEPTEMBER 1, 1983--DECEMBER 31, 1995
FOR BACK BAY ADVISORS BOND INCOME AND BACK BAY ADVISORS MONEY MARKET SERIES
MAY 1, 1993--DECEMBER 31, 1995 FOR WESTPEAK GROWTH AND INCOME AND LOOMIS
SAYLES AVANTI GROWTH SERIES
MAY 2, 1994--DECEMBER 31, 1995 FOR LOOMIS SAYLES SMALL CAP SERIES
NOVEMBER 1, 1994--DECEMBER 31, 1995 FOR OTHER ZENITH FUND SERIES
<TABLE>
<CAPTION>
CONTRACT VALUE
--------------------------------------------------------
LOOMIS LOOMIS
SAYLES DRAYCOTT ALGER SAYLES DAVIS
CUMULATIVE SMALL INTERNATIONAL EQUITY AVANTI VENTURE
PAYMENTS* CAP EQUITY GROWTH GROWTH VALUE
---------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000
1984................... 4,000
1985................... 7,000
1986................... 10,000
1987................... 13,000
1988................... 16,000
1989................... 19,000
1990................... 22,000
1991................... 25,000
1992................... 28,000
1993................... 31,000 $2,121.89
1994................... 34,000 $1,943.34 $ 509.57 $ 491.09 5,063.03 $ 496.63
1995................... 37,000 5,922.01 3,668.15 4,245.02 9,964.39 4,160.35
Annual Effective Rate of
Return................. 20.77% 7.74% 35.07% 16.71% 30.99%
</TABLE>
- --------
NOTE: *For the Westpeak Growth and Income and Loomis Sayles Avanti Growth
Series, cumulative payments as of December 31, 1993 would be $2,000, as
of December 31, 1994 would be $5,000 and as of December 31, 1995 would
be $8,000. For the Loomis Sayles Small Cap Series, cumulative payments
as of December 31, 1994 would be $2,000 and as of December 31, 1995
would be $5,000. For the other Zenith Fund Series, cumulative payments
as of December 31, 1994 would be $500 and as of December 31, 1995 would
be $3,500.
II-10
<PAGE>
<TABLE>
<CAPTION>
CONTRACT VALUE
-----------------------------------------------------------------------
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
CUMULATIVE GROWTH SAYLES BOND BOND U.S. MONEY
PAYMENTS* AND INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ---------- --------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000 $ 1,012.03 $ 1,017.59
1984................... 4,000 4,360.51 4,239.80
1985................... 7,000 8,401.75 7,625.85
1986................... 10,000 12,700.61 11,118.79
1987................... 13,000 15,862.10 14,788.13
1988................... 16,000 20,047.76 18,829.51
1989................... 19,000 25,435.27 23,461.68
1990................... 22,000 30,366.25 28,204.12
1991................... 25,000 38,758.67 32,704.80
1992................... 28,000 44,623.92 36,618.09
1993................... 31,000 $ 2,124.18 52,839.37 40,312.15
1994................... 34,000 5,055.94 $ 502.09 $ 491.36 53,372.75 $ 501.88 44,555.41
1995................... 37,000 10,340.32 3,739.69 3,830.24 67,440.23 3,930.81 49,664.54
Annual Effective Rate of
Return................. 19.68% 11.07% 15.31% 9.28% 20.05% 4.64%
</TABLE>
<TABLE>
<CAPTION>
SURRENDER VALUE
--------------------------------------------------------
LOOMIS
LOOMIS DRAYCOTT ALGER SAYLES DAVIS
CUMULATIVE SAYLES INTERNATIONAL EQUITY AVANTI VENTURE
PAYMENTS* SMALL CAP EQUITY GROWTH GROWTH VALUE
---------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000
1984................... 4,000
1985................... 7,000
1986................... 10,000
1987................... 13,000
1988................... 16,000
1989................... 19,000
1990................... 22,000
1991................... 25,000
1992................... 28,000
1993................... 31,000 $2,021.89
1994................... 34,000 $1,847.41 $ 485.39 $ 467.65 4,874.18 $ 472.97
1995................... 37,000 5,722.01 3,534.43 4,105.02 9,694.39 4,020.35
Annual Effective Rate of
Return................. 16.32% 1.58% 28.34% 14.54% 24.30%
</TABLE>
<TABLE>
<CAPTION>
SURRENDER VALUE
----------------------------------------------------------------------------
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
CUMULATIVE GROWTH SAYLES BOND BOND U.S. MONEY
PAYMENTS* AND INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
---------- ---------- --------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000 $ 962.95 $ 968.29
1984................... 4,000 4,200.51 4,084.10
1985................... 7,000 8,161.75 7,388.10
1986................... 10,000 12,410.61 10,828.79
1987................... 13,000 15,552.10 14,478.13
1988................... 16,000 19,737.76 18,519.51
1989................... 19,000 25,125.27 23,151.68
1990................... 22,000 30,056.25 27,894.12
1991................... 25,000 38,448.67 32,394.80
1992................... 28,000 44,313.92 36,308.09
1993................... 31,000 $ 2,024.18 52,529.37 40,022.15
1994................... 34,000 4,867.51 $ 478.01 $ 467.90 53,062.75 $ 478.20 44,245.41
1995................... 37,000 10,070.32 3,790.81 3,691.12 67,130.23 3,603.99 49,354.54
Annual Effective Rate of
Return................. 17.56% 13.46% 8.81% 9.21% 4.78% 4.54%
</TABLE>
- --------
NOTES: *For the Westpeak Growth and Income and Loomis Sayles Avanti Growth
Series, cumulative payments as of December 31, 1993 would be $2,000, as
of December 31, 1994 would be $5,000 and as of December 31, 1995 would be
$8,000. For the Loomis Sayles Small Cap Series, cumulative payments as of
December 31, 1994 would be $2,000 and as of December 31, 1995 would be
$5,000. For the other Zenith Fund Series, cumulative payments as of
December 31, 1994 would be $500 and as of December 31, 1995 would be
$3,500.
II-11
<PAGE>
As discussed in the prospectus in the third to the last paragraph of the
section entitled "Investment Experience Information," the Variable Account may
illustrate historical investment performance by showing the percentage change
in unit value and the annual effective rate of return of each sub-account of
the Variable Account for every calendar year since inception of the
corresponding Eligible Funds to the date of the illustration and for the 10, 5
and 1 year periods and the year-to-date period ending with the date of the
illustration. Examples of such illustrations follow. Such illustrations do not
reflect the impact of any Contingent Deferred Sales Charge or the annual $30
Administration Contract Charge. The method of calculating the percentage
change in unit value is described in the prospectus under "Investment
Experience Information." The annual effective rate of return in these
illustrations is calculated by dividing the unit value at the end of the
period by the unit value at the beginning of the period, raising this quantity
to the power of 1/n (where n is the number of years in the period), and then
subtracting 1.
Set forth on the following pages are illustrations of the percentage change
in unit value information and annual effective rate of return information
discussed above that may appear in the Variable Account's Annual and Semi-
Annual Reports and in other illustrations of historical investment
performance. Such illustrations do not reflect the impact of any Contingent
Deferred Sales Charge or the annual Administration Contract Charge.
LOOMIS SAYLES SMALL CAP SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
May 2, 1994........................................... 1.000000 --
December 31, 1994..................................... .953460 -4.7%
December 31, 1995..................................... 1.226299 28.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 8 months ended December 31, 1995................ 22.6% 13.0%
1 year ended December 31, 1995.......................... 28.6% 28.6%
</TABLE>
DRAYCOTT INTERNATIONAL EQUITY SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... 1.020216 2.0%
December 31, 1995..................................... 1.082268 6.1%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 8.2% 7.0%
1 year ended December 31, 1995.......................... 6.1% 6.1%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
II-12
<PAGE>
ALGER EQUITY GROWTH SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... .943331 -5.7%
December 31, 1995..................................... 1.409971 49.5%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 41.0% 34.2%
1 year ended December 31, 1995.......................... 49.5% 49.5%
</TABLE>
LOOMIS SAYLES AVANTI GROWTH SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993........................................ 1.000000 --
December 31, 1993..................................... 1.139711 14.0%
December 31, 1994..................................... 1.113047 -2.3%
December 31, 1995..................................... 1.455859 30.8%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
2 years, 8 months ended December 31, 1995............... 45.6% 15.1%
1 year ended December 31, 1995.......................... 30.8% 30.8%
</TABLE>
DAVIS VENTURE VALUE SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... .966313 -3.4%
December 31, 1995..................................... 1.336536 38.3%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 33.7% 28.2%
1 year ended December 31, 1995.......................... 38.3% 38.3%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
II-13
<PAGE>
WESTPEAK GROWTH AND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993........................................ 1.000000 --
December 31, 1993..................................... 1.134771 13.5%
December 31, 1994..................................... 1.106367 -2.5%
December 31, 1995..................................... 1.501745 35.7%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
2 years, 8 months ended December 31, 1995............... 50.2% 16.4%
1 year ended December 31, 1995.......................... 35.7% 35.7%
</TABLE>
LOOMIS SAYLES BALANCED SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... .996252 -.4%
December 31, 1995..................................... 1.237298 24.2%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 23.7% 20.0%
1 year ended December 31, 1995.......................... 24.2% 24.2%
</TABLE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... .982287 -1.8%
December 31, 1995..................................... 1.165559 18.7%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 16.6% 14.0%
1 year ended December 31, 1995.......................... 18.7% 18.7%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
II-14
<PAGE>
BACK BAY ADVISORS BOND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
August 26, 1983....................................... 1.000000 --
December 31, 1983..................................... 1.028437 2.8%
December 31, 1984..................................... 1.146514 11.5%
December 31, 1985..................................... 1.348044 17.6%
December 31, 1986..................................... 1.532610 13.7%
December 31, 1987..................................... 1.551754 1.2%
December 31, 1988..................................... 1.663406 7.2%
December 31, 1989..................................... 1.850244 11.2%
December 31, 1990..................................... 1.980714 7.1%
December 31, 1991..................................... 2.313192 16.8%
December 31, 1992..................................... 2.477440 7.1%
December 31, 1993..................................... 2.762110 11.5%
December 31, 1994..................................... 2.636622 -4.5%
December 31, 1995..................................... 3.170803 20.3%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
12 years, 4 months ended December 31, 1995.............. 217.1% 9.8%
10 years ended December 31, 1995........................ 135.2% 8.9%
5 years ended December 31, 1995......................... 60.1% 9.9%
1 year ended December 31, 1995.......................... 20.3% 20.3%
</TABLE>
SALOMON BROTHERS U.S. GOVERNMENT SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994...................................... 1.000000 --
December 31, 1994..................................... 1.003229 .3%
December 31, 1995..................................... 1.142586 13.9%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
1 year, 2 months ended December 31, 1995................ 14.3% 12.1%
1 year ended December 31, 1995.......................... 13.9% 13.9%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
II-15
<PAGE>
BACK BAY ADVISORS MONEY MARKET SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
August 26, 1983....................................... 1.000000 --
December 31, 1983..................................... 1.028407 2.8%
December 31, 1984..................................... 1.127368 9.6%
December 31, 1985..................................... 1.208374 7.2%
December 31, 1986..................................... 1.277745 5.7%
December 31, 1987..................................... 1.347602 5.5%
December 31, 1988..................................... 1.435333 6.5%
December 31, 1989..................................... 1.552222 8.1%
December 31, 1990..................................... 1.662062 7.1%
December 31, 1991..................................... 1.747768 5.2%
December 31, 1992..................................... 1.769049 2.8%
December 31, 1993..................................... 1.831027 1.9%
December 31, 1994..................................... 1.885452 3.0%
December 31, 1995..................................... 1.972846 4.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
12 years, 4 months ended December 31, 1995.............. 97.3% 5.7%
10 years ended December 31, 1995........................ 63.3% 5.0%
5 years ended December 31, 1995......................... 18.7% 3.5%
1 year ended December 31, 1995.......................... 4.6% 4.6%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
II-16
<PAGE>
NET INVESTMENT FACTOR
The Company determines the net investment factor ("Net Investment Factor")
for any sub-account on each day on which the New York Stock Exchange is open
for trading as follows:
(1) The Company takes the net asset value per share of the Eligible Fund
held in the sub-account determined as of the close of regular trading on
the New York Stock Exchange on a particular day.
(2) Next, the Company adds the per share amount of any dividend or
capital gains distribution made by the Eligible Fund since the close of
regular trading on the New York Stock Exchange on the preceding trading
day.
(3) This total amount is then divided by the net asset value per share of
the Eligible Fund as of the close of regular trading on the New York Stock
Exchange on the preceding trading day.
(4) Finally, the Company subtracts the daily charges for the Mortality
and Expense Risk Charge since the close of regular trading on the New York
Stock Exchange on the preceding trading day. (See "Administration Charges,
Contingent Deferred Sales Charge and Other Deductions" in the prospectus.)
On an annual basis, the total deduction for such charges equals 1.00% of
the daily net asset value of the Variable Account.
ANNUITY PAYMENTS
At annuitization, the Contract Value is applied toward the purchase of
monthly variable annuity payments. The amount of these payments will be
determined on the basis of (i) annuity purchase rates not lower than the rates
set forth in the Life Income Tables contained in the Contract that reflect the
age of the Payee at annuitization, (ii) the assumed interest rate selected,
(iii) the type of payment option selected, and (iv) the investment performance
of the Eligible Fund selected.
When a variable annuity payment option is selected, the Contract proceeds
will be applied at annuity purchase rates, which vary depending on the
particular option selected and the age of the Payee, to calculate the basic
payment level purchased by the Contract Value. With respect to Contracts
issued in New York or Oregon for use in situations not involving an employer-
sponsored plan, annuity purchase rates used to calculate the basic payment
level will also reflect the sex of the Payee when the annuity payment option
involves a life contingency. The impact of the choice of option and the sex
and age of the Payee on the level of annuity payments is described in the
prospectus under "Amount of Variable Annuity Payments."
The amount of the basic payment level is determined by applying the
applicable annuity purchase rate to the amount applied from each sub-account
to provide the annuity. This basic payment level is converted into annuity
units, the number of which remains constant. Each monthly annuity payment is
in an amount equal to that number of annuity units multiplied by the
applicable annuity unit value for that payment (described below). The
applicable annuity unit value for each sub-account will change from day to day
depending upon the investment performance of the sub-account, which in turn
depends upon the investment performance of the Eligible Fund in which the sub-
account invests.
The selection of an assumed interest rate ("Assumed Interest Rate") will
affect both the basic payment level and the amount by which subsequent
payments increase or decrease. The basic payment level is calculated on the
assumption that the Net Investment Factors applicable to the Contract will be
equivalent on an annual basis to a net investment return at the Assumed
Interest Rate. If this assumption is met following the date any payment is
determined, then the amount of the next payment will be exactly equal to the
amount of the preceding payment. If the actual Net Investment Factors are
equivalent to a net investment return greater than the Assumed Interest Rate,
the next payment will be larger than the preceding one; if the actual Net
Investment Factors are equivalent to a net investment return smaller than the
Assumed Interest Rate, then the next payment will be smaller than the
preceding payment. The definition of the Assumed Interest Rate, and the effect
of the level of the Assumed Interest Rate on the amount of monthly payments is
explained in the prospectus under "Amount of Variable Annuity Payments."
The number of annuity units credited under a variable payment option is
determined as follows:
(1) The proceeds under a deferred Contract, or the net purchase payment
under an immediate Contract (at such time as immediate Contracts may be
made available), are applied at the Company's annuity purchase rates for
the selected Assumed Interest Rate to determine the basic payment level.
(The amount of Contract Value or Death Proceeds
II-17
<PAGE>
applied will be reduced by any applicable Contingent Deferred Sales Charge,
Administration Contract Charge, premium tax charge and the amount of any
outstanding loan plus accrued interest.)
(2) The number of annuity units is determined by dividing the amount of
the basic payment level by the applicable annuity unit value(s) next
determined following the date of application of proceeds (in the case of a
deferred Contract) or net purchase payment (in the case of an immediate
Contract.)
The dollar amount of the initial payment will be at the basic payment level
(if the initial payment is due more than 14 days after the proceeds are
applied, the Company will add interest to that initial payment.) The dollar
amount of each subsequent payment is determined by multiplying the number of
annuity units by the applicable annuity unit value which is determined at
least 14 days before the payment is due.
The value of an annuity unit for each sub-account depends on the Assumed
Interest Rate and on the Net Investment Factors applicable at the time of
valuation. The initial annuity unit values were set at $1.00 effective on or
about the date on which shares of the corresponding Eligible Funds were first
publicly available. The Net Investment Factor and, therefore, changes in the
value of an annuity unit under a variable payment option, reflect the
deduction of the Mortality and Expense Risk Charge and Administration Asset
Charge./1/ (See "Net Investment Factor" above.)
The annuity unit value for each sub-account is equal to the corresponding
annuity unit value for the sub-account previously determined multiplied by the
applicable Net Investment Factor for that sub-account for the New York Stock
Exchange trading day then ended, and further multiplied by the assumed
interest factor ("Assumed Interest Factor") for each day of the valuation
period. The Assumed Interest Factor represents the daily equivalent of the
Contract's annual Assumed Interest Rate. In the calculation of annuity unit
values, the Assumed Interest Factor has the effect of reducing the Net
Investment Factor by an amount equal to the daily equivalent of the Contract's
Assumed Interest Rate. The result of this adjustment is that if the Net
Investment Factor for a valuation period is greater (when expressed as an
annual net investment return) than the Assumed Interest Rate, the annuity unit
value will increase. If the Net Investment Factor for the period is less (when
expressed as an annual net investment return) than the Assumed Interest Rate,
the annuity unit value will decrease. At an Assumed Interest Rate of 3.5%, the
Assumed Interest Factor is .9999058. Assumed Interest Factors for other
Assumed Interest Rates are computed on a consistent basis.
Illustrations of annuity income payments under various hypothetical and
historical rates appear below. The monthly equivalents of the hypothetical
annual net returns of 0%, 5.42%, 6%, 8% and 10% shown in the tables at pages
II-20 and II-21 are 0%, .45%, .50%, .67% and .83%.
HYPOTHETICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. The tables illustrate how monthly annuity income
payments would vary over time if the return on assets in the selected
portfolios were a uniform gross annual rate of 0%, 5.42%, 6%, 8% or 10%. The
values would be different from those shown if the returns averaged 0%, 5.42%,
6%, 8% or 10%, but fluctuated over and under those averages throughout the
years.
The tables reflect the daily charge to the sub-accounts for assuming
mortality and expense risks, which is equivalent to an annual charge of 1.00%.
The amounts shown in the tables also take into account the portfolios'
management fees and operating expenses which are assumed to be at an annual
rate of 0.84% of the average daily net assets of the Eligible Funds. Actual
fees and expenses of the portfolios associated with your Contract may be more
or less than 0.84%, will vary from year to year, and will depend on how you
allocate your Contract Value. See the section in your current prospectus
entitled "Expense Table" for more complete details. The monthly annuity income
payments illustrated are on a pre-tax basis. The federal income tax treatment
of annuity income considerations is generally described in the section of your
current prospectus entitled "Federal Income Tax Status."
- --------
/1/ The Company and Variable Account represent that the amount of the Mortality
and Expense Risk Charge is within the range of industry practice for
comparable annuity contracts. The Company believes there is a reasonable
likelihood that the distribution financing arrangements for the Contracts
will benefit the Variable Account and Contract Owners. The Company
represents that if the Account invests in Eligible Funds that adopt a Rule
12b-1 plan to finance distribution expenses, it will invest in such funds
only if the 12b-1 plan is approved by a board of trustees a majority of whom
are not interested persons of the funds.
II-18
<PAGE>
The tables show both the gross rate and the net rate. The difference between
gross and net rates represents the 1.00% for mortality and expense risk
charges and the assumed 0.84% for investment management and operating
expenses. Since these charges are deducted daily from assets, the difference
between the gross and net rate is not exactly 1.84%.
Two tables follow. The first table assumes that 100% of the Contract Value
is allocated to a variable annuity income option, the second assumes that 50%
of the Contract Value is placed under a fixed annuity income option, using the
fixed crediting rate the Company offered on the fixed annuity income option at
the date of the illustration. Both illustrations assume that the final value
of the accumulation account is $100,000 and is applied at age 65 to purchase a
life annuity for a guaranteed period of 10 years certain and life thereafter.
When part of the Contract Value has been allocated to the fixed annuity
income option, the guaranteed minimum annuity income payment resulting from
this allocation is also shown. The illustrated variable annuity income
payments are determined through the use of standard mortality tables and an
assumed interest rate of 3.5% per year. Thus, actual performance greater than
3.5% per year will result in increasing annuity income payments and actual
performance less than 3.5% per year will result in decreasing annuity income
payments. We offer alternative Assumed Interest Rates from which you may
select. Fixed annuity income payments remain constant. Initial monthly annuity
income payments under a fixed annuity income payout are generally higher than
initial payments under a variable income payout option.
These tables show the monthly income payments for several hypothetical
constant assumed interest rates. Of course, actual investment performance will
not be constant and may be volatile. Actual monthly income amounts would
differ from those shown if the actual rate of return averaged the rate shown
over a period of years, but also fluctuated above or below those averages for
individual contract years. Upon request, and when you are considering an
annuity income option, we will furnish a comparable illustration based on your
individual circumstances.
II-19
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(100% VARIABLE PAYOUT)
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 1/1/96
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAY- Monthly
MENTS:
FIXED MONTHLY ANNUITY INCOME PAYMENT FOR AGE 65 BASED ON CURRENT RATES, IF
100% FIXED ANNUITY OPTION SELECTED FOR AGE 65: $661.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT.
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
VARIABLE MONTHLY ANNUITY INCOME PAYMENT ON THE DATE OF THE
ILLUSTRATION: $581.00
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
---------------------------------------------
GROSS 0% 5.42% 6% 8% 10%
PAYMENT CALENDAR ----- -------- -------- -------- -------- ---------
YEAR YEAR AGE NET** -1.82% 3.50% 4.07% 6.03% 7.99%
- ------- -------- --- ----- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1996 65 $ 581.00 $ 581.00 $ 581.00 $ 581.00 $ 581.00
2 1997 66 551.12 581.00 584.19 595.21 606.23
3 1998 67 522.77 581.00 587.39 609.77 632.56
4 1999 68 495.89 581.00 590.61 624.68 660.03
5 2000 69 470.38 581.00 593.85 639.96 688.70
10 2005 74 361.24 581.00 610.32 722.14 851.81
15 2010 79 277.42 581.00 627.24 814.87 1,053.56
20 2015 84 213.05 581.00 644.63 919.52 1,303.10
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
** The illustrated Net Assumed Rates of Return reflect the deduction of
average fund expenses and the 1.00% Mortality and Expense Risk Charge from
the Gross Rates of Return.
II-20
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(50% VARIABLE--50% FIXED PAYOUT)
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 1/1/96
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAY- Monthly
MENTS:
FIXED MONTHLY ANNUITY INCOME PAYMENT FOR AGE 65 BASED ON CURRENT RATES, IF
100% FIXED ANNUITY OPTION SELECTED FOR AGE 65: $661.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 50% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT AND 50% TO FIXED PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE, BUT WILL NEVER
BE LESS THAN: $330.50 THE MONTHLY GUARANTEED PAYMENT OF $330.50 IS BEING
PROVIDED BY THE $50,000 APPLIED UNDER THE FIXED ANNUITY OPTION.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
-------------------------------------------------
GROSS 0% 5.42% 6% 8% 10%
PAYMENT CALENDAR ----- --------- --------- --------- --------- ---------
YEAR YEAR AGE NET** -1.82% 3.50% 4.07% 6.03% 7.99%
- ------- -------- --- ----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1996 65 $621.00 $621.00 $621.00 $621.00 $621.00
2 1997 66 606.06 621.00 622.59 628.10 633.62
3 1998 67 591.89 621.00 624.20 635.38 646.78
4 1999 68 578.44 621.00 625.81 642.84 660.52
5 2000 69 565.69 621.00 627.43 650.48 674.85
10 2005 74 511.12 621.00 635.66 691.57 756.41
15 2010 79 469.21 621.00 644.12 737.94 857.28
20 2015 84 437.02 621.00 652.82 790.26 982.05
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
** The illustrated Net Assumed Rates of Return apply only to the variable
portion of the monthly payment and reflect the deduction of average fund
expenses and the 1.00% Mortality and Expense Risk Charge from the Gross
Rate of Return.
II-21
<PAGE>
HISTORICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. In comparison with hypothetical illustrations based
on a uniform annual rate of return, the table uses historical annual returns
to illustrate that monthly annuity income payments vary over time based on
fluctuations in annual returns.
The tables reflect the daily charge to the sub-accounts for assuming
mortality and expense risks, which is equivalent to an annual charge of 1.00%.
The amounts shown in the tables also take into account the actual portfolios'
management fees and operating expenses. Actual fees and expenses of the
portfolios associated with your Contract may be more or less than the
historical fees, will vary from year to year, and will depend on how you
allocate your Contract Value. See the section in your current prospectus
entitled "Expense Table" for more complete details. The monthly annuity income
payments illustrated are on a pre-tax basis. The federal income tax treatment
of annuity income considerations is generally described in the section of your
current prospectus entitled "Federal Income Tax Status."
The following tables assume that 100% of the Contract Value is allocated to
a variable annuity income option, that the final value of the accumulation
account is $100,000 and is applied at age 65 to purchase a life annuity for a
guaranteed period of 10 years certain and life thereafter. The table assumes
that the Annuitant was age 65 in 1983, the year of inception for the Bond
Income and Money Market portfolios, and that the Annuitant's age had increased
by the time the other portfolios became available. The historical variable
annuity income payments are based on an assumed interest rate of 3.5% per
year. Thus, actual performance greater than 3.5% per year resulted in an
increased annuity income payment and actual performance less than 3.5% per
year resulted in a decreased annuity income payment. We offer alternative
Assumed Interest Rates (AIR) from which you may select: 0% and 5%. An AIR of
0% will result in a lower initial payment than a 3.5% or 5% AIR. Similarly, an
AIR of 5% will result in a higher initial premium than a 0% or 3.5% AIR.
The table illustrates the amount of the first monthly payment for each year
shown. During each year, the monthly payments would vary to reflect
fluctuations in the actual rate of return on the portfolios. Upon request, and
when you are considering an annuity income option, we will furnish a
comparable illustration based on your individual circumstances.
II-22
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<S> <C> <C> <C>
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 1/1/96
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAY- Monthly
MENTS:
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 65: $661.00; FOR AGE 75: $806.00; AND FOR AGE
76: $823.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH 100% OF THE CONTRACT VALUE
INVESTED IN:
<TABLE>
<CAPTION>
LOOMIS
LOOMIS DRAYCOTT ALGER SAYLES DAVIS
PAYMENT CALENDAR SAYLES INTERNATIONAL EQUITY AVANTI VENTURE
YEAR YEAR AGE SMALL CAP EQUITY GROWTH GROWTH VALUE
- ------- -------- --- --------- ------------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1983 65
2 1984 66
3 1985 67
4 1986 68
5 1987 69
6 1988 70
7 1989 71
8 1990 72
9 1991 73
10 1992 74
11 1993 75 $747.00
12 1994 76 $765.00 $765.00 $ 765.00 831.93 $765.00
13 1995 77 735.22 779.14 737.83 793.67 732.81
14 1996 78 906.18 791.78 1,049.51 989.65 976.38
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGES (1.00%), MANAGEMENT FEES AND OTHER EXPENSES (These may
vary from year to year. The following expenses are for the year ended December
31, 1995, after giving effect to expense caps or deferrals in effect for 1996:
0.55% Back Bay Bond Income, 0.50% Back Bay Money Market, 0.85% Loomis Sayles
Avanti Growth, 0.85% Westpeak Growth and Income, 1.00% Loomis Sayles Small
Cap, 0.85% Loomis Sayles Balanced, 1.30% Draycott International Equity, 0.70%
Salomon US Government, 0.85% Salomon Strategic Bond Opportunities, 0.90% Davis
Venture Value, 0.90% Alger Equity Growth.)
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
II-23
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT VALUE: $100,000
SEX: Unisex DATE OF ILLUSTRATION: 1/1/96
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAY- Monthly
MENTS:
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 76: $823.00.
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH
100% OF THE CONTRACT VALUE INVESTED IN:
<TABLE>
<CAPTION>
SALOMON
WESTPEAK LOOMIS STRATEGIC BACK BAY SALOMON BACK BAY
PAYMENT CALENDAR GROWTH SAYLES BOND BOND U.S. MONEY
YEAR YEAR AGE AND INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
- ------- -------- --- ---------- -------- ------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1983 65 $ 581.00 $581.00
2 1984 66 594.53 589.89
3 1985 67 640.32 624.72
4 1986 68 727.41 646.97
5 1987 69 799.04 660.98
6 1988 70 781.66 673.54
7 1989 71 810.19 692.66
8 1990 72 870.33 723.92
9 1991 73 899.82 749.18
10 1992 74 1,015.33 761.17
11 1993 75 $ 747.00 1,050.55 755.68
12 1994 76 828.32 $765.00 $765.00 1,131.65 $765.00 744.34
13 1995 77 782.81 758.63 748.78 1,046.12 763.94 740.31
14 1996 78 1,021.90 905.62 855.10 1,212.85 840.56 748.54
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGES (1.00%),MANAGEMENT FEES AND OTHER EXPENSES (These may
vary from year to year. The following expenses are for the year ended December
31, 1995, after giving effect to expense caps or deferrals in effect for 1996:
0.55% Back Bay Bond Income, 0.50% Back Bay Money Market, 0.85% Loomis Sayles
Avanti Growth, 0.85% Westpeak Growth and Income, 1.00% Loomis Sayles Small
Cap, 0.85% Loomis Sayles Balanced, 1.30% Draycott International Equity, 0.70%
Salomon US Government, 0.85% Salomon Strategic Bond Opportunities, 0.90% Davis
Venture Value, 0.90% Alger Equity Growth.)
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
II-24
<PAGE>
EXPERTS
The financial statements of New England Variable Annuity Separate Account
and of the Company included in this Statement of Additional Information have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters in connection with the Contracts described in this
registration statement have been passed on by H. James Wilson, General Counsel
of the Company. Sutherland, Asbill & Brennan, Washington, D.C., have acted as
special counsel on certain matters relating to the Federal securities laws.
II-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of the New England Variable
Annuity Separate Account of New England Variable
Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
New England Variable Annuity Separate Account (comprised of Bond Income Sub-
Account, Money Market Sub-Account, Avanti Growth Sub-Account, Value Growth
Sub-Account, Small Cap Sub-Account, U.S. Government Sub-Account, Balanced Sub-
Account, Equity Growth Sub-Account, International Equity Sub-Account, Venture
Value Sub-Account and Strategic Bond Opportunities Sub-Account) of New England
Variable Life Insurance Company as of December 31, 1995, and the related
statement of operations and changes in net assets for the period April 19,
1995 (commencement of operations) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 respective
aforementioned sub-accounts comprising the New England Variable Annuity
Separate Account of New England Variable Life Insurance Company as of December
31, 1995, and the results of their operations and changes in their net assets
for the period April 19, 1995 (commencement of operations) to December 31,
1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 6, 1996
II-26
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
BOND MONEY AVANTI VALUE SMALL U.S. EQUITY
INCOME MARKET GROWTH GROWTH CAP GOVERNMENT BALANCED GROWTH
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in New England Zenith
Fund, at value..................... $3,959,570 $5,099,918 $2,833,600 $4,274,260 $2,950,820 $2,407,213 $4,698,510 $5,456,949
<CAPTION>
SHARES COST
------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Back Bay
Advisors Bond
Income Series... 36,437 4,015,808
Back Bay
Advisors Money
Market Series... 50,999 5,099,918
Loomis Sayles
Avanti Growth
Series.......... 19,893 2,854,404
Westpeak Value
Growth Series... 30,247 4,191,054
Loomis Sayles
Small Cap
Series.......... 24,843 2,858,059
Salomon Brothers
U.S. Government
Series.......... 218,045 2,400,357
Loomis Sayles
Balanced Series. 393,181 4,613,309
Alger Equity
Growth Series... 395,429 5,436,490
Draycott
International
Equity Series... 294,625 3,103,065
Venture Value
Series.......... 382,090 4,825,951
Salomon Brothers
Strategic Bond
Opportunities
Series.......... 210,673 2,342,030
Amount due and accrued (payable)
from contract-related transactions,
net................................ (10,683) 95,147 60,384 17,048 10,790 12,364 27,935 32,239
Dividends receivable............... -- 23,176 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Assets...................... 3,948,887 5,218,241 2,893,984 4,291,308 2,961,610 2,419,577 4,726,445 5,489,188
LIABILITIES
Due New England Variable Life
Insurance Company.................. 3,342 6,815 2,388 4,416 2,956 2,813 3,613 8,373
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities................. 3,342 6,815 2,388 4,416 2,956 2,813 3,613 8,373
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS.......................... $3,945,545 $5,211,426 $2,891,596 $4,286,892 $2,958,654 $2,416,764 $4,722,832 $5,480,815
========== ========== ========== ========== ========== ========== ========== ==========
Net Assets consist of:
Net Assets attributable to Variable
Annuity Contracts.................. $3,941,803 $5,211,426 $2,891,596 $4,284,982 $2,956,794 $2,416,764 $4,719,088 $5,479,050
Annuity Reserves................... 3,742 -- -- 1,910 1,860 -- 3,744 1,765
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL NET ASSETS.................. $3,945,545 $5,211,426 $2,891,596 $4,286,892 $2,958,654 $2,416,764 $4,722,832 $5,480,815
========== ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
STRATEGIC
INTERNATIONAL VENTURE BOND
EQUITY VALUE OPPORTUNITIES
SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT TOTAL
------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in New England Zenith
Fund, at value..................... $3,167,224 $5,005,375 $2,285,801 $42,139,240
Back Bay
Advisors Bond
Income Series...
Back Bay
Advisors Money
Market Series...
Loomis Sayles
Avanti Growth
Series..........
Westpeak Value
Growth Series...
Loomis Sayles
Small Cap
Series..........
Salomon Brothers
U.S. Government
Series..........
Loomis Sayles
Balanced Series.
Alger Equity
Growth Series...
Draycott
International
Equity Series...
Venture Value
Series..........
Salomon Brothers
Strategic Bond
Opportunities
Series..........
Amount due and accrued (payable)
from contract-related transactions,
net................................ 26,438 25,547 5,609 302,818
Dividends receivable............... -- -- -- 23,176
------------- ---------- ------------- -----------
Total Assets...................... 3,193,662 5,030,922 2,291,410 42,465,234
LIABILITIES
Due New England Variable Life
Insurance Company.................. 3,115 5,017 2,163 45,011
------------- ---------- ------------- -----------
Total Liabilities................. 3,115 5,017 2,163 45,011
------------- ---------- ------------- -----------
NET ASSETS.......................... $3,190,547 $5,025,905 $2,289,247 $42,420,223
============= ========== ============= ===========
Net Assets consist of:
Net Assets attributable to Variable
Annuity Contracts.................. $3,188,720 $5,025,905 $2,285,536 $42,401,664
Annuity Reserves................... 1,827 -- 3,711 18,559
------------- ---------- ------------- -----------
TOTAL NET ASSETS.................. $3,190,547 $5,025,905 $2,289,247 $42,420,223
============= ========== ============= ===========
</TABLE>
See Notes to Financial Statements
II-27
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 19, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER
31, 1995
<TABLE>
<CAPTION>
BOND MONEY AVANTI VALUE SMALL U.S. EQUITY INTERNATIONAL VENTURE
INCOME MARKET GROWTH GROWTH CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- -------- -------- -------- ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends....... $234,534 $106,464 $ 84,980 $208,739 $129,385 $84,803 $167,655 $157,204 $33,056 $107,503
EXPENSES
Mortality and
expense risk and
administrative
charges......... 14,321 25,668 10,383 16,718 10,463 10,204 20,240 20,957 11,324 18,852
-------- -------- -------- -------- -------- ------- -------- -------- ------- --------
Net investment
income.......... 220,213 80,796 74,597 192,021 118,922 74,599 147,415 136,247 21,732 88,651
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation)
on investments:
Beginning of
period.......... -- -- -- -- -- -- -- -- -- --
End of period... (56,238) -- (20,804) 83,206 92,761 6,856 85,201 20,459 64,159 179,424
-------- -------- -------- -------- -------- ------- -------- -------- ------- --------
Net change in
unrealized
appreciation
(depreciation).. (56,238) -- (20,804) 83,206 92,761 6,856 85,201 20,459 64,159 179,424
Net realized
gain (loss) on
investments..... 210 -- 8 188 (8) 131 6 12 2 113
-------- -------- -------- -------- -------- ------- -------- -------- ------- --------
Net realized and
unrealized gain
(loss) on
investments..... (56,028) -- (20,796) 83,394 92,753 6,987 85,207 20,471 64,161 179,537
-------- -------- -------- -------- -------- ------- -------- -------- ------- --------
NET INCREASE IN
NET ASSETS
RESULTING FROM
OPERATIONS....... $164,185 $ 80,796 $ 53,801 $275,415 $211,675 $81,586 $232,622 $156,718 $85,893 $268,188
======== ======== ======== ======== ======== ======= ======== ======== ======= ========
<CAPTION>
STRATEGIC
BOND
OPPORTUNITIES
SUB-
ACCOUNT TOTAL
------------- ----------
<S> <C> <C>
INCOME
Dividends....... $146,583 $1,460,906
EXPENSES
Mortality and
expense risk and
administrative
charges......... 8,218 167,348
------------- ----------
Net investment
income.......... 138,365 1,293,558
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation)
on investments:
Beginning of
period.......... -- --
End of period... (56,229) 398,795
------------- ----------
Net change in
unrealized
appreciation
(depreciation).. (56,229) 398,795
Net realized
gain (loss) on
investments..... 293 955
------------- ----------
Net realized and
unrealized gain
(loss) on
investments..... (55,936) 399,750
------------- ----------
NET INCREASE IN
NET ASSETS
RESULTING FROM
OPERATIONS....... $ 82,429 $1,693,308
============= ==========
</TABLE>
See Notes to Financial Statements
II-28
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD APRIL 19, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER
31, 1995
<TABLE>
<CAPTION>
BOND MONEY AVANTI VALUE SMALL U.S. EQUITY INTERNATIONAL
INCOME MARKET GROWTH GROWTH CAP GOVERNMENT BALANCED GROWTH EQUITY
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES
Net investment
income.......... $ 220,213 $ 80,796 $ 74,597 $ 192,021 $ 118,922 $ 74,599 $ 147,415 $ 136,247 $ 21,732
Net realized and
unrealized gain
(loss) on
investments..... (56,028) -- (20,796) 83,394 92,753 6,987 85,207 20,471 64,161
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase in net
assets derived
from investment
activities...... 164,185 80,796 53,801 275,415 211,675 81,586 232,622 156,718 85,893
FROM CONTRACT-
RELATED
TRANSACTIONS
Net premiums
transferred from
New England
Variable Life
Insurance
Company......... 3,512,772 8,774,833 2,697,244 2,346,443 2,581,472 2,209,207 4,350,428 5,139,557 2,959,953
Net transfers
(to) from other
sub-accounts.... 288,578 (3,490,074) 151,126 1,658,049 175,700 161,291 247,728 230,721 169,830
Net transfers
(to) from New
England Variable
Life Insurance
Company......... (19,990) (154,129) (10,575) 6,985 (10,193) (35,320) (107,946) (46,181) (25,129)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase in net
assets derived
from contract-
related
transactions.... 3,781,360 5,130,630 2,837,795 4,011,477 2,746,979 2,335,178 4,490,210 5,324,097 3,104,654
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE IN
NET ASSETS....... 3,945,545 5,211,426 2,891,596 4,286,892 2,958,654 2,416,764 4,722,832 5,480,815 3,190,547
NET ASSETS, AT
BEGINNING OF THE
PERIOD........... -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS, AT
END OF THE
PERIOD........... $3,945,545 $5,211,426 $2,891,596 $4,286,892 $2,958,654 $2,416,764 $4,722,832 $5,480,815 $3,190,547
========== ========== ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
STRATEGIC
VENTURE BOND
VALUE OPPORTUNITIES
SUB- SUB-
ACCOUNT ACCOUNT TOTAL
----------- ------------- ------------
<S> <C> <C> <C>
FROM INVESTMENT
ACTIVITIES
Net investment
income.......... $ 88,651 $ 138,365 $ 1,293,558
Net realized and
unrealized gain
(loss) on
investments..... 179,537 (55,936) 399,750
----------- ------------- ------------
Increase in net
assets derived
from investment
activities...... 268,188 82,429 1,693,308
FROM CONTRACT-
RELATED
TRANSACTIONS
Net premiums
transferred from
New England
Variable Life
Insurance
Company......... 4,408,888 2,229,504 41,210,301
Net transfers
(to) from other
sub-accounts.... 353,605 53,446 --
Net transfers
(to) from New
England Variable
Life Insurance
Company......... (4,776) (76,132) (483,386)
----------- ------------- ------------
Increase in net
assets derived
from contract-
related
transactions.... 4,757,717 2,206,818 40,726,915
----------- ------------- ------------
NET INCREASE IN
NET ASSETS....... 5,025,905 2,289,247 42,420,223
NET ASSETS, AT
BEGINNING OF THE
PERIOD........... -- -- --
----------- ------------- ------------
NET ASSETS, AT
END OF THE
PERIOD........... $5,025,905 $2,289,247 $42,420,223
=========== ============= ============
</TABLE>
See Notes to Financial Statements
II-29
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. New England Variable Annuity Separate Account (the "Account") of New
England Variable Life Insurance Company ("NEVLICO"), was established by
NEVLICO's Board of Directors on July 1, 1994 in accordance with the
regulations of the Delaware Insurance Department. NEVLICO is a wholly-owned
subsidiary of New England Mutual Life Insurance Company ("The New England").
The Account is registered as a unit investment trust under the Investment
Company Act of 1940. The assets of the Account are owned by NEVLICO. However,
that portion of the Account assets equal to the reserves and other liabilities
of the Account may not be charged with liabilities that arise out of any other
business NEVLICO may conduct.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. The Account has eleven investment sub-accounts each of which invests in
the shares of one series of the New England Zenith Fund ("Zenith Fund"). The
series of the Zenith Fund in which the sub-accounts invest are referred to
herein as the "Eligible Funds". The Zenith Fund is a diversified, open-end
management investment company. The values of the shares of the Eligible Funds
are determined as of the close of the New York Stock Exchange (normally 4:00
p.m. EST) on each day the Exchange is open for trading. Realized gains and
losses on the sale of the Eligible Funds' shares are computed on the basis of
identified cost on the trade date. Income from dividends is recorded on the
ex-dividend date.
3. Certain deductions for risk and administrative charges are taken from the
contract values, to compensate NEVLICO for administrative expenses and for the
assumption of mortality and expense risks. Currently, the charges are made
daily at an annual rate of 1.35% of the net assets of the Account. NEVLICO
also imposes an annual administration charge of $30 (not to exceed 2% of the
total contract value) against contract value in the Account, but this charge
is waived for any contract year in which the contract value reaches certain
amounts. A premium tax charge applies to the contracts in certain states.
Additionally, a contingent deferred sales charge may be imposed in the event
of a partial or full surrender or application of proceeds to certain payment
options, or, in certain circumstances, upon subsequent withdrawal of amounts
applied to a payment option. Charges for investment advisory fees and other
expenses are deducted from the assets of the Eligible funds.
4. For federal income tax purposes the Account's operations are included
with those of NEVLICO. NEVLICO intends to make appropriate charges against the
Account in the future if and when tax liabilities arise.
II-30
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. The adviser and sub-adviser for each Eligible Fund are listed in the
chart below. TNE Advisers, Inc. which is a wholly-owned subsidiary of The New
England, and each of the sub-advisers are registered with the SEC as
investment advisers under the Investment Advisers Act of 1940.
<TABLE>
<CAPTION>
ELIGIBLE FUND ADVISER SUB-ADVISER
------------- ------- -----------
<S> <C> <C>
Back Bay Advisors Bond
Income TNE Advisers, Inc. Back Bay Advisors, L.P.*
Back Bay Advisors Money
Market TNE Advisers, Inc. Back Bay Advisors, L.P.*
Westpeak Value Growth TNE Advisers, Inc. Westpeak Investment Advisors, L.P.*
Loomis Sayles Avanti
Growth TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Loomis Sayles Small Cap TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Loomis Sayles Balanced TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Draycott International
Equity TNE Advisers, Inc. Draycott Partners, Ltd.
Venture Value TNE Advisers, Inc. Davis Selected Advisers, L.P.
Alger Equity Growth TNE Advisers, Inc. Fred Alger Management, Inc.
Salomon Brothers U.S.
Government TNE Advisers, Inc. Salomon Brothers Asset Management, Inc.
Salomon Brothers
Strategic Bond
Opportunities TNE Advisers, Inc. Salomon Brothers Asset Management, Inc.
</TABLE>
- --------
* An indirect subsidiary of The New England
6. The following table shows the aggregate cost of Eligible Fund shares
purchased and proceeds from sales of Eligible Fund shares for each
corresponding sub-account for the period April 19, 1995 (commencement of
operations) through December 31, 1995:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
Back Bay Advisors Bond Income Series..................... $ 4,498,696 $ 482,889
Back Bay Advisors Money Market Series.................... 10,396,246 5,296,328
Loomis Sayles Avanti Growth Series....................... 3,113,183 258,779
Westpeak Value Growth Series............................. 4,559,122 368,067
Loomis Sayles Small Cap Series........................... 3,270,485 412,426
Salomon Brothers U.S. Government Series.................. 2,864,874 464,517
Loomis Sayles Balanced Series............................ 5,258,232 644,923
Alger Equity Growth Series............................... 6,124,635 688,145
Draycott International Equity Series..................... 3,541,171 438,107
Venture Value Series..................................... 5,230,929 404,978
Salomon Brothers Strategic Bond Opportunities Series..... 2,735,519 393,489
</TABLE>
7. Annuity reserves are computed for currently payable contracts according
to the 1983-a Mortality Tables. The assumed interest rate may be 0%, 3.5% or
5% as elected by the annuitant and as regulated by laws of the respective
states. Adjustments to annuity reserves are reimbursed to or from NEVLICO.
II-31
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT OF
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. A summary of units outstanding for variable annuity contracts for the
period April 19, 1995 (commencement of operations) to December 31, 1995:
<TABLE>
<CAPTION>
SMALL U.S.
BOND INCOME MONEY MARKET AVANTI GROWTH VALUE GROWTH CAP GOVERNMENT
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Units Outstanding
4/19/95................ -- -- -- -- -- --
Units Purchased......... 1,388,273.8460 4,880,871.6501 2,064,257.2902 2,950,143.4465 2,495,595.4909 2,343,474.2683
Units Redeemed.......... 89,131.9180 2,122,139.2819 54,620.8846 64,828.4141 68,930.3068 221,847.5497
-------------- -------------- -------------- -------------- -------------- --------------
Units Outstanding
12/31/95............... 1,299,141.9280 2,758,732.3682 2,009,636.4056 2,885,315.0324 2,426,665.1841 2,121,626.7186
============== ============== ============== ============== ============== ==============
Unit Value 12/31/95... $3.037039 $1.889065 $1.438865 $1.485762 $1.219226 $1.139109
============== ============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL BOND
BALANCED EQUITY GROWTH EQUITY VENTURE VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Units Outstanding
4/19/95................ -- -- -- -- --
Units Purchased......... 4,131,044.4174 4,088,668.8820 3,130,883.0353 3,878,075.8874 2,137,842.5933
Units Redeemed.......... 282,835.9517 180,432.3120 157,414.2725 79,730.5090 162,349.7665
-------------- -------------- -------------- -------------- --------------
Units Outstanding
12/31/95............... 3,848,208.4657 3,908,236.5700 2,973,468.7628 3,798,345.3784 1,975,492.8268
============== ============== ============== ============== ==============
Unit Value 12/31/95... $1.227281 $1.402375 $1.073005 $1.323183 $1.158823
============== ============== ============== ============== ==============
</TABLE>
II-32
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of New England Variable Life
Insurance Company:
We have audited the accompanying balance sheets of New England Variable Life
Insurance Company (a wholly-owned subsidiary of New England Mutual Life
Insurance Company) as of December 31, 1995 and 1994, and the related
statements of operations, surplus, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New England Variable Life
Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with the
accounting practices prescribed or permitted by the Insurance Department of
the State of Delaware, which are considered generally accepted accounting
principles for wholly-owned stock life insurance subsidiaries of mutual life
insurance companies.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 8, 1996
II-33
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
Bonds............................................ $ 60,779,522 $ 7,828,833
Mortgage loan.................................... 2,210,153 2,221,942
Policy loans..................................... 58,210,498 43,967,343
Cash and short-term investments.................. 32,416,437 10,669,045
Accrued investment income........................ 3,102,970 1,377,286
Premiums deferred and uncollected................ 8,897,630 6,892,888
Due from separate account, net................... 95,638,637 79,549,258
Due from New England Mutual Life Insurance
Company......................................... 4,706,831 1,889,855
Other assets..................................... 554,844 814,991
Separate account assets.......................... 748,184,716 445,040,547
-------------- ------------
Total assets................................. $1,014,702,238 $600,251,988
============== ============
LIABILITIES AND SURPLUS
Policy reserves.................................. $ 79,511,870 $ 44,648,304
Due to New England Mutual Life Insurance Company. 6,239,406 3,219,350
Borrowed money and accrued interest.............. 25,137,373 --
Income taxes payable............................. 5,487,501 4,611,653
Accrued expenses................................. 6,663,644 4,746,096
Asset valuation reserve.......................... 372,954 137,202
Other liabilities................................ 4,767,424 1,120,620
Separate account liabilities..................... 748,184,716 445,040,547
-------------- ------------
Total liabilities............................ 876,364,888 503,523,772
Surplus:
Common stock (shares authorized: 50,000; issued
and outstanding:
20,000; par value $125)....................... 2,500,000 2,500,000
Paid-in capital in excess of par value........... 171,738,031 117,709,808
Unassigned surplus............................... (35,900,681) (23,481,592)
-------------- ------------
Total surplus................................ 138,337,350 96,728,216
-------------- ------------
Total liabilities and surplus.............. $1,014,702,238 $600,251,988
============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
II-34
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Income:
Premiums......................................... $279,517,998 $201,732,909
Net investment income............................ 3,250,606 3,093,033
Considerations for supplementary contracts....... 2,243,426 --
------------ ------------
285,012,030 204,825,942
Expenses:
Death and other benefits......................... 41,689,601 23,345,664
Increase in policy reserves...................... 34,863,564 17,743,158
Commissions...................................... 40,691,028 37,220,361
Net transfers to separate account................ 120,149,836 87,853,704
General and administrative....................... 54,105,390 43,395,223
------------ ------------
291,499,419 209,558,110
------------ ------------
Loss from operations before provision for income
taxes............................................. (6,487,389) (4,732,168)
Provision for income taxes......................... 5,516,062 2,968,375
------------ ------------
Net loss........................................... $(12,003,451) $ (7,700,543)
============ ============
</TABLE>
STATEMENTS OF SURPLUS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Surplus, beginning of year.......................... $ 96,728,216 $94,378,654
Net loss............................................ (12,003,451) (7,700,543)
Change in non-admitted assets....................... (179,886) (19,141)
Change in asset valuation reserve................... (235,752) 69,246
Capital contribution from New England Mutual Life
Insurance Company.................................. 54,028,223 10,000,000
------------ -----------
Surplus, end of year................................ $138,337,350 $96,728,216
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
II-35
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Premiums and other considerations.............. $ 277,077,189 $ 199,670,506
Net investment income.......................... 1,719,860 2,773,220
Benefits....................................... (39,541,592) (23,510,882)
Expenses and taxes............................. (95,265,433) (80,900,670)
Net transfers to separate account.............. (136,239,215) (103,547,077)
Net increase in policy loans................... (14,243,155) (13,293,625)
Other income and disbursements, net............ 2,191,111 (1,972,032)
------------- -------------
Net cash flows used in operating activities.. (4,301,235) (20,780,560)
Cash flows from investing activities:
Proceeds from investments sold, matured or
repaid........................................ 715,484 166,942
Cost of investments acquired................... 333,143 (11)
------------- -------------
Net cash flows from investing activities..... 1,048,627 166,931
Cash flows from financing activities:
Capital contribution from New England Mutual
Life Insurance Company........................ -- 10,000,000
Borrowed money................................. 25,000,000 --
------------- -------------
Net cash flows from financing activities..... 25,000,000 10,000,000
Net cash flows................................... 21,747,392 (10,613,629)
Cash and short-term investments, beginning of
year............................................ 10,669,045 21,282,674
------------- -------------
Cash and short-term investments, end of year..... $ 32,416,437 $ 10,669,045
============= =============
Non-cash financing activities:
Capital contribution from New England Mutual
Life Insurance Company........................ $ 54,028,223 $ --
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
II-36
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
New England Variable Life Insurance Company (the "Company") is a wholly-
owned stock life insurance subsidiary of New England Mutual Life Insurance
Company (The New England). The Company sells variable life insurance and
variable annuity products through a network of general agencies located
throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The Company prepares its statutory financial statements, except as to form,
in accordance with accounting practices prescribed or permitted by the
Insurance Department of the State of Delaware. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as state laws, regulations, and
general administrative rules. Permitted accounting practices encompass all
accounting practices not so prescribed. Permitted and prescribed statutory
accounting practices are currently considered generally accepted accounting
principles (GAAP) for wholly-owned stock life insurance subsidiaries of a
mutual life insurance company.
The Financial Accounting Standards Board issued Interpretation No. 40,
Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long-Duration
Participating Contracts. The American Institute of Certified Public
Accountants issued Statement of Position 95-1, Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises. Neither of these
groups has a role in establishing regulatory accounting practices. These
pronouncements will require stock life subsidiaries of a mutual life insurance
company parent to modify their financial statements in order for them to
continue to be in accordance with generally accepted accounting principles,
effective for the Company's 1996 financial statements. The manner in which
policy reserves, new business acquisition costs, asset valuations and the
related tax effects are recorded will change. Management has not determined
the impact of such changes on its financial statements.
Certain amounts from the 1994 financial statements have been reclassified to
conform with the 1995 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in accordance with permitted and
prescribed statutory accounting practices requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
INVESTED ASSETS
Carrying values of bonds have been determined in accordance with methods and
values adopted by the National Association of Insurance Commissioners. Bonds
are carried at amortized cost.
The Company's mortgage loan on real estate is carried at outstanding
principal balance. The estimated fair value of this loan is determined using
an internal matrix based on market rates and a credit rating system.
Policy loans are carried at the aggregate of the unpaid balances. Policy
loans are an integral part of insurance products and have no maturity dates.
Consequently, it is not practicable to value these instruments.
II-37
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Short-term investments are carried principally at cost, which approximates
fair value, and include securities with a maturity date at purchase of less
than one year.
Investment income is recognized on the accrual basis. Realized gains and
losses on the sales of investments are determined on the specific
identification method. Unrealized gains and losses are accounted for as direct
increases or decreases in surplus.
SEPARATE ACCOUNT
Separate account assets represent managed funds held for the benefit of
variable life and variable annuity policyholders and are reported at fair
value. Since the policyholders receive the full benefit and bear the full risk
of the separate account investments, the investment results are reflected in
the liabilities related to the separate account. The statements of operations
include the general account business and the net transfers to the separate
account.
VARIABLE LIFE RESERVES
Reserves for variable life insurance policies are developed using the 1958
and 1980 Commissioners' Standard Ordinary Mortality Table on the Net Level
Premium Method, the Net Single Premium Method, or the Modified Full
Preliminary Term Method with assumed interest rates ranging from 4% to 5%.
DUE FROM SEPARATE ACCOUNT, NET
The Company records as a receivable amounts that are due from the separate
account for policy charges (including cost of insurance charges,
administrative charges and minimum death benefit charges), and amounts held
for policy account values in excess of the statutory reserve.
Amounts held in excess of the reserve cannot be transferred unless the
policy is terminated or the policy account value is withdrawn.
Actual transfers from the separate account to the general account for the
policy charges are made on a periodic basis to reduce this receivable. The
components of the amount due from the separate account, net as of December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Account values in excess of reserves................ $93,318,010 $75,718,686
Policy charges...................................... 2,320,627 3,830,572
----------- -----------
Total............................................. $95,638,637 $79,549,258
=========== ===========
</TABLE>
II-38
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES
Variable life premium revenue is recognized during the premium paying
period. Annuity considerations and deposits are recognized as revenue when
received. Commissions and other expenses in connection with acquiring new
business are charged to current operations as incurred.
FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with The New
England. The method of allocation between the companies is subject to a tax
sharing agreement, and allocation is based upon separate return calculations
with current credit for net losses. Net operating loss carryforwards to the
extent not previously reimbursed will be utilized as a deduction before
determining the tax liability to The New England.
3. INVESTMENT RESERVES AND INTEREST MAINTENANCE RESERVE:
The Asset Valuation Reserve (AVR) is designed to mitigate the effect of
valuation and credit-related losses on unassigned surplus. The AVR covers all
invested asset classes with risk of loss, including bonds and mortgage loans.
The Interest Maintenance Reserve (IMR) accumulates realized capital gains
and losses on the sale of all types of fixed income securities which result
from changes in the overall level of interest rates. These gains are amortized
into operating income over the remaining life of each investment sold. The IMR
amounted to $74,707 and $75,451 as of December 31, 1995 and 1994,
respectively. The amortization of the IMR into net income net of federal
income tax for 1995 and 1994 was $3,117 and $2,702, respectively.
4. INVESTMENTS:
The carrying value and estimated fair values of debt securities excluding
separate account assets are as follows:
<TABLE>
<CAPTION>
1995
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies................................ $ 3,847 $ 61 $ -- $ 3,908
Corporate securities..................... 56,393 1,353 (355) 57,391
Mortgage-backed securities............... 70 1 -- 71
Other.................................... 470 61 -- 531
------- -------- ------- -------
Totals................................... $60,780 $ 1,476 $ (355) $61,901
======= ======== ======= =======
<CAPTION>
1994
GROSS UNREALIZED
CARRYING ----------------- ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies................................ $ 4,191 $ 62 $ (60) $ 4,193
Corporate securities..................... 3,546 125 (7) 3,664
Mortgage-backed securities............... 92 -- (3) 89
------- -------- ------- -------
Totals................................... $ 7,829 $ 187 $ (70) $ 7,946
======= ======== ======= =======
</TABLE>
II-39
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Publicly traded debt securities are valued based upon quoted market prices.
The fair values of private placement obligations are determined using an
internal matrix based on market interest rates, the credit rating of the
specific security, and public prices of similar securities.
The carrying value and estimated fair value of debt securities at December
31, 1995, by contractual maturity, are shown below. Stated maturities may
differ from contractual maturities because some borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in 1 year or less....................................... $ 4,775 $ 4,826
Due after 1 year through 5 years............................ 27,217 27,911
Due after 5 years through 10 years.......................... 27,119 27,267
Due after 10 years.......................................... 1,599 1,826
Mortgage-backed securities.................................. 70 71
------- -------
Totals...................................................... $60,780 $61,901
======= =======
</TABLE>
Gross realized gains from sale of debt securities were $3,651 and $3,817 in
1995 and 1994, respectively. There were no gross realized losses in 1995 and
1994. Net realized gains of $2,373 and $2,481 in 1995 and 1994, respectively,
were transferred to the IMR.
There are no significant concentrations of bonds by issuer or by industry.
The estimated fair value of the Company's mortgage loan was $2,210,000 and
$2,241,000 at December 31, 1995 and 1994, respectively.
Components of Net Investment Income are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
1995 1994
------ ------
(IN
THOUSANDS)
<S> <C> <C>
Debt securities.................................................. $ 897 $ 619
Short-term investments........................................... 1,140 597
Mortgage loans................................................... 234 235
Policy loans..................................................... 2,832 1,996
------ ------
Total investment income........................................ 5,103 3,447
Investment expenses including interest of $1,160,000 on borrowed
money (see Note 5).............................................. 1,852 354
------ ------
Net investment income............................................ $3,251 $3,093
====== ======
</TABLE>
5. BORROWED MONEY:
In 1995, the Company borrowed $25,000,000 from a bank, bearing interest at a
variable rate, equal to the greater of the bank's base rate or money market
rates plus .6% per annum payable monthly (5.8% at December 31, 1995). The loan
is collateralized by sales loads and surrender charges collected on a defined
block of variable life insurance policies issued by the Company. Repayment is
structured in a manner to result in repayment over a term of five years. The
carrying value of the loan approximates its fair value.
6. RELATED PARTY TRANSACTIONS:
Under the terms of a service agreement, The New England furnishes all
executive, legal, clerical, and other personnel services to the Company. The
fees for such services amounted to $50,875,006 and $40,071,822 in 1995 and
1994, respectively.
II-40
<PAGE>
NEW ENGLAND VARIABLE LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF NEW ENGLAND MUTUAL LIFE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS--CONTINUED
All of the officers and directors of the Company are officers of The New
England.
In 1995, The New England made a noncash capital contribution to the Company
of publicly traded debt securities and private placement obligations with an
estimated fair value of $54,028,223. In 1994, The New England made a cash
capital contribution of $10,000,000.
The Company also reinsures certain risks with The New England. (See Note 8).
7. FEDERAL INCOME TAXES:
Federal income taxes are provided on the basis of amounts estimated to be
payable under the Internal Revenue Code. The Company files a consolidated
federal income tax return with The New England.
Below is a reconciliation of income before federal income taxes to taxable
gain from operations.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Operating loss before federal income taxes................... $(6,487) $(4,732)
Deferred acquisition costs................................... 13,451 11,035
Expense related differences.................................. 11,030 3,816
Other income related differences............................. (2,234) (1,639)
------- -------
Taxable gain from operations................................. 15,760 8,480
------- -------
Federal income taxes @ 35%................................... $ 5,516 $ 2,968
======= =======
</TABLE>
The Internal Revenue Service has completed its examination of the Company's
income tax returns through 1991 and is currently examining the income tax
returns for 1992 to 1993. The New England is contesting certain issues since
1976. The outcome of these proceedings is not currently determinable but, in
the opinion of management, would not have a materially adverse effect on the
financial statements.
8. REINSURANCE:
The Company's practice on individual products is to retain not more than
$250,000 of risk on any person, excluding accidental death benefits. Prior to
January 1, 1995, this retention limit had been $75,000 of risk on any person
excluding accidental death benefits. Total individual life premiums ceded were
$6.3 million and $13.8 million at December 31, 1995 and 1994, respectively. In
1995, $1.3 million of the $6.3 million premiums ceded were ceded to The New
England, and in 1994, $9.5 million of the $13.8 million premiums ceded were
ceded to The New England.
The individual life insurance inforce ceded was $4.0 billion and $9.7
billion at December 31, 1995 and 1994, respectively.
The Company is contingently liable with respect to ceded insurance should
any reinsurer be unable to meet the obligations assumed by it.
9. SUBSEQUENT EVENTS:
The New England and Metropolitan Life Insurance Company (MetLife) have
entered into a definitive agreement, effective as of August 16, 1995, pursuant
to which The New England would be merged with and into MetLife. The closing of
the merger is subject to various conditions, including but not limited to the
obtaining of various regulatory approvals and the necessary approvals of the
policyholders of both companies. It is currently anticipated that the merger
will be consummated no later than the third quarter of 1996.
II-41
<PAGE>
APPENDIX A
ABC and affiliates Fortune Public Broadcasting
Atlanta Constitution Fox Newtwork and Service
Atlanta Journal affiliates Quinn, Jane Bryant
Austin American Fund Action (syndicated column)
Statesman Hartford Courant Registered
Baltimore Sun Houston Chronicle Representative
Barron's INC Research Magazine
Bond Buyer Indianapolis Star Resource
Boston Business Journal Institutional Investor Reuters
Boston Globe Investment Dealers Rukeyser's Business
Boston Herald Digest (syndicated column)
Broker World Investment Vision Sacramento Bee
Business Radio Network Investor's Daily San Francisco Chronicle
Business Week Journal of Commerce San Francisco Examiner
CBS and affiliates Kansas City Star San Jose Mercury
CFO LA Times Seattle Post-
Changing Times Leckey, Andrew Intelligencer
Chicago Sun Times (syndicated column) Seattle Times
Chicago Tribune Life Association News Smart Money
Christian Science Miami Herald St. Louis Post Dispatch
Monitor Milwaukee Sentinel St. Petersburg Times
Christian Science Money Standard & Poor's
Monitor News Service Money Maker Outlook
Cincinnati Enquirer Money Management Letter Standard & Poor's Stock
Cincinnati Post Morningstar Guide
CNBC National Public Radio Stanger's Investment
CNN National Underwriter Advisor
Columbus Dispatch NBC and affiliates Stockbroker's Register
Dallas Morning News New England Business Strategic Insight
Dallas Times-Herald New England Cable News Tampa Tribune
Denver Post New Orleans Times- Time
Des Moines Register Picayune Tobias, Andrew
Detroit Free Press New York Daily News (syndicated column)
Donoghues Money Fund New York Times UPI
Report Newark Star Ledger US News and World Report
Dorfman, Dan (syndicated Newsday USA Today
column) Newsweek Value Line
Dow Jones News Service Nightly Business Report Wall St. Journal
Economist Orange County Register Wall Street Letter
FACS of the Week Orlando Sentinel Wall Street Week
Financial News Network Pension World Washington Post
Financial Planning Pensions and Investments WBZ
Financial Services Week Personal Investor WBZ-TV
Financial World Philadelphia Inquirer WCVB-TV
Forbes Porter, Sylvia WEEI
Fort Worth Star-Telegram (syndicated column) WHDH
Portland Oregonian Worcester Telegram
Worth Magazine
WRKO
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