As filed with the Securities and Exchange Commission on June 23, 1998
Registration File Nos. 33-86696/811-8878
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
PRE-EFFECTIVE AMENDMENT NO. 3
FORM S-6
---------------------------------
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
---------------------------------
AUSA SERIES LIFE ACCOUNT
(Exact Name of Trust)
AUSA LIFE INSURANCE COMPANY, INC.
(Name of Depositor)
4 Manhattanville Road
Purchase, New York 10577
(Complete Address of Depositor's Principal Executive Offices)
Thomas E. Pierpan, Esq.
Assistant Secretary
AUSA Life Insurance Company, Inc.
P.O. Box 9054
Clearwater, Florida 34618-9054
(Name and Complete Address of Agent for Service)
Copies to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
---------------------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------
1 Cover Page; The Series Account
2 Cover Page; AUSA Life Insurance Company, Inc.
3 Not Applicable
4 Distribution of the Policies
5 The Series Account
6 The Series Account
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Introduction; Policy Benefits; Payment and Allocation of
Premiums; Investments of the Series Account; Policy
Rights
11 The Series Account; WRL Series Fund, Inc.
12 The Series Account; WRL Series Fund, Inc.
13 Charges and Deductions; The Series Account; Investments
of the Series Account
14 Introduction; Allocation of Premiums and Cash Values
15 Allocation of Premiums and Cash Value
16 The Series Account
17 Cash Value; The Series Account; Policy Rights
18 Payment and Allocation of Premiums; Cash Value
19 Voting Rights of the Series Account; Reports and Records
20 Not Applicable
i
<PAGE>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------
21 Loan Privileges
22 Not Applicable
23 Safekeeping of the Series Account's Assets
24 Policy Rights
25 AUSA Life Insurance Company, Inc.
26 Not Applicable
27 AUSA Life Insurance Company, Inc.; The Series Account;
WRL Series Fund, Inc.
28 AUSA Life Insurance Company, Inc.; Executive Officers
and Directors of AUSA Life
29 AUSA Life Insurance Company, Inc.
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 AUSA Life Insurance Company, Inc.
36 Not Applicable
37 Not Applicable
38 Distribution of the Policies
39 Distribution of the Policies
40 Not Applicable
41 Distribution of the Policies; AUSA Life Insurance
Company, Inc.
42 Not Applicable
43 Not Applicable
ii
<PAGE>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------- ---------------------
44 Cash Value
45 Not Applicable
46 Cash Value
47 Introduction; Allocation of Premiums and Cash Values
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Introduction; AUSA Life Insurance Company, Inc.; Policy
Benefits; Charges and Deductions
52 The Series Account; WRL Series Fund, Inc.
53 Federal Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Not Applicable
iii
<PAGE>
AUSA FREEDOM WEALTH PROTECTORSM
JOINT SURVIVORSHIP FLEXIBLE
PREMIUM VARIABLE LIFE
INSURANCE POLICY
Issued by
AUSA LIFE INSURANCE COMPANY, INC.
4 Manhattanville Road
Purchase, New York 10577
1-800-322-7160
The joint survivorship flexible premium variable life insurance policy
("Policy") issued by AUSA Life Insurance Company, Inc. ("AUSA Life") and
described in this Prospectus is designed to provide lifetime insurance
protection and maximum flexibility in connection with premium payments and
death benefits. A Policyowner may, subject to certain restrictions, vary the
timing and amount of premium payments and increase or decrease the level of
life insurance benefits payable under the Policy. This flexibility allows a
Policyowner to provide for changing insurance needs under a single life
insurance policy. The minimum Specified Amount for a Policy at issue is
generally $100,000.
The Policy provides a death benefit payable upon the death of the
Surviving Insured, and a Net Surrender Value that can be obtained by completely
or partially surrendering the Policy. Net premiums are allocated according to
the Policyowner's directions among the Sub-Accounts of the AUSA Series Life
Account ("Series Account"), or to a fixed interest account ("Fixed Account") or
a combination of both. With respect to amounts allocated to Sub-Accounts of the
Series Account, the amount of the death benefit may, and the Cash Value will,
vary to reflect both the investment experience of the Sub-Accounts and the
timing and amount of additional premium payments. However, as long as the
Policy remains In Force, AUSA Life guarantees that the death benefit will never
be less than the Specified Amount of the Policy. While additional premium
payments are not required under the Policy, additional premium payments may be
necessary to prevent Lapse if there is insufficient Net Surrender Value.
The Policy provides a free-look period. The Policyowner may cancel the
Policy within 10 days after the Policyowner receives it, or 10 days after AUSA
Life mails or delivers a written notice of withdrawal right to the Policyowner,
or within 45 days after signing the application, whichever is latest.
The assets of each Sub-Account of the Series Account will be invested
solely in a corresponding Portfolio of the WRL Series Fund, Inc. (the "Fund").
The Prospectus for the Fund describes the investment objectives and the risks
of investing in the Portfolios of the Fund corresponding to the Sub-Accounts
currently available under the Policy. The Policyowner bears the entire
investment risk for all amounts allocated to the Series Account; there is no
guaranteed minimum Cash Value.
It may not be to your advantage to replace existing insurance or
supplement an existing flexible premium variable life insurance policy with a
policy described in this Prospectus.
Please read this Prospectus and the Prospectus for the Fund carefully and
retain for future reference.
The Policy is not a deposit or obligation of, or guaranteed or endorsed
by, any bank or depository institution, and the Policy is not Federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency, and involves investment risk, including possible loss of
principal amount invested.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus does not constitute an offering in any jurisdiction in
which such offering may not lawfully be made. No dealer, salesperson or other
person is authorized to give any information or make any representations in
connection with this offering other than those contained in this Prospectus,
and, if given or made, such other information or representations must not be
relied upon.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUS
FOR THE WRL SERIES FUND, INC. CERTAIN PORTFOLIOS MAY NOT BE AVAILABLE IN ALL
STATES. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
Prospectus Dated July , 1998
<PAGE>
TABLE OF CONTENTS
PAGE
-----
DEFINITIONS ........................................ 1
INTRODUCTION ....................................... 3
INVESTMENT EXPERIENCE INFORMATION .................. 7
Rates of Return ................................... 7
Death Benefit, Cash Value and Net Surrender
Value Illustrations ........................... 8
Other Performance Data ............................ 13
AUSA LIFE AND THE
SERIES ACCOUNT ..................................... 14
AUSA Life Insurance Company, Inc. ................. 14
The Series Account ................................ 14
POLICY BENEFITS .................................... 14
Death Benefit ..................................... 14
When Insurance Coverage Takes Effect .............. 16
Terminal Illness Accelerated Death
Benefit Rider ................................. 17
Cash Value ........................................ 17
INVESTMENTS OF THE SERIES ACCOUNT .................. 18
WRL Series Fund, Inc. ............................. 18
Addition, Deletion, or Substitution
of Investments ................................ 21
PAYMENT AND ALLOCATION OF PREMIUMS ................. 21
Issuance of a Policy .............................. 21
Premiums .......................................... 21
Allocation of Premiums and Cash Value ............. 22
Dollar Cost Averaging ............................. 24
Asset Rebalancing Program ......................... 24
Policy Lapse and Reinstatement .................... 25
CHARGES AND DEDUCTIONS ............................. 26
Premium Expense Charge ............................ 26
Contingent Surrender Charges ...................... 26
Cash Value Charges ................................ 27
Optional Cash Value Charges ....................... 28
Charges Against the Series Account ................ 28
Expenses of the Fund .............................. 28
Group or Sponsored Policies ....................... 29
Associate Policies ................................ 29
POLICY RIGHTS ...................................... 29
Loan Privileges ................................... 29
Surrender Privileges .............................. 30
Examination of Policy Privilege ("Free-Look") ..... 31
Conversion Rights ................................. 31
Policy Split Option ............................... 31
Benefits at Maturity .............................. 32
Payment of Policy Benefits ........................ 32
PAGE
-----
GENERAL PROVISIONS ................................. 32
Postponement of Payments .......................... 32
The Contract ...................................... 32
Suicide ........................................... 33
Incontestability .................................. 33
Change of Owner or Beneficiary .................... 33
Assignment ........................................ 33
Misstatement of Age or Sex ........................ 33
Reports and Records ............................... 33
Optional Insurance Benefits ....................... 33
THE FIXED ACCOUNT .................................. 33
Fixed Account Value ............................... 34
Minimum Guaranteed and Current
Interest Rates ................................ 34
Allocations, Transfers and Withdrawals ............ 34
DISTRIBUTION OF THE POLICIES ....................... 34
FEDERAL TAX MATTERS ................................ 35
Introduction ...................................... 35
Tax Charges ....................................... 35
Tax Status of the Policy .......................... 35
Tax Treatment of Policy Benefits .................. 36
Possible Tax Law Changes .......................... 38
Employment-Related Benefit Plans .................. 38
SAFEKEEPING OF THE SERIES
ACCOUNT'S ASSETS ................................... 38
VOTING RIGHTS OF THE SERIES ACCOUNT ................ 38
STATE REGULATION OF AUSA LIFE ...................... 39
REINSURANCE ........................................ 39
EXECUTIVE OFFICERS AND DIRECTORS
OF AUSA LIFE ....................................... 39
LEGAL MATTERS ...................................... 40
LEGAL PROCEEDINGS .................................. 40
EXPERTS ............................................ 40
ADDITIONAL INFORMATION ............................. 40
YEAR 2000 MATTERS .................................. 40
INFORMATION ABOUT
AUSA LIFE'S
FINANCIAL STATEMENTS ............................... 40
APPENDIX A - ILLUSTRATION
OF BENEFITS ........................................ 41
APPENDIX B - WEALTH INDICES OF
INVESTMENTS IN THE U.S. CAPITAL
MARKETS ............................................ 44
INDEX TO FINANCIAL
STATEMENTS ......................................... 46
The Policy is available only in the State of New York.
i
<PAGE>
DEFINITIONS
ACCOUNTS -- Allocation options including the Fixed Account and
Sub-Accounts of the Series Account.
ADMINISTRATIVE OFFICE -- The administrative office of AUSA Life whose
mailing address is P. O. Box 9054, Clearwater, Florida 33758-9054.
ATTAINED AGE -- For each Joint Insured, the Issue Age plus the number of
completed Policy years.
ANNIVERSARY -- The same day and month as the Policy Date for each
succeeding year the Policy remains In Force.
BENEFICIARY -- The person or persons specified by the Owner as entitled
to receive the death benefit proceeds under the Policy.
CASH VALUE -- The sum of the values in each Sub-Account plus the Policy's value
in the Fixed Account.
FIXED ACCOUNT -- An allocation option other than the Series Account. Part
of AUSA Life's General Account.
FUND -- WRL Series Fund, Inc., a registered management investment company
in which the assets of the Series Account are invested.
GENERAL ACCOUNT -- The assets of AUSA Life other than those allocated to
the Series Account or any other separate account.
GUIDELINE PREMIUM -- The level annual premium payment necessary to
provide the benefits selected by the Policyowner under the Policy through its
Maturity Date, based on the particular facts relating to the Insureds and
certain assumptions allowed by law. The dollar amount of the Guideline Premium
is shown on the Policy's Schedule Page.
IN FORCE -- Condition under which the coverage is active and both
Insureds' lives remain insured.
INITIAL PREMIUM -- The amount which must be paid before coverage begins.
ISSUE AGE -- For each Joint Insured, issue age refers to the age on the
Insured's birthday nearest the Policy Date.
JOINT INSUREDS -- The persons whose lives are insured under the Policy.
LAPSE -- Termination of the Policy at the end of the grace period.
LOAN RESERVE -- A part of the Fixed Account to which amounts are
transferred as collateral for Policy loans.
MATURITY DATE -- The date when coverage under the Policy will terminate
if either of the Insureds is living and the Policy is In Force.
MONTHLY ANNIVERSARY OR MONTHIVERSARY -- The same date in each succeeding
month as the Policy Date. For purposes of the Series Account, whenever the
Monthly Anniversary falls on a date other than a Valuation Date, the Monthly
Anniversary will be deemed to be the next Valuation Date.
NET PREMIUM -- The portion of the premium available for allocation to
either the Fixed Account or the Sub-Accounts of the Series Account equal to the
premium paid by the Policyowner less the applicable premium expense charges.
NET SURRENDER VALUE -- The amount payable upon surrender of the Policy
equal to the Cash Value as of the date of surrender, less any surrender charge,
and less any outstanding Policy loan, plus any unearned loan interest.
NO LAPSE DATE -- Either, (1) the later of attained target premium age 65
or five Policy years, or (2) the later of attained target premium age 75 or
five Policy years, as selected by the Policyowner at time of application for
the Policy.
NO LAPSE PERIOD -- The period of time between the Policy Date and the No
Lapse Date, during which the Policy will not Lapse if certain conditions are
met, even though Net Surrender Value is insufficient to meet the monthly
deduction.
PLANNED PERIODIC PREMIUM -- A scheduled premium of a level amount at a
fixed interval over a specified period of time.
POLICY -- The joint survivorship flexible premium variable life insurance
policy offered by AUSA Life and described in this Prospectus.
POLICY DATE -- The date set forth in the Policy when insurance coverage
is effective and monthly deductions commence under the Policy. The Policy Date
is used to determine Policy years and Policy Months. Policy Anniversaries are
measured from the Policy Date.
POLICY MONTH -- A month beginning on the Monthly Anniversary.
POLICYOWNER(S) ("OWNER(S)") -- The person(s) who owns the Policy, and who
may exercise all rights under the Policy while either or both Joint Insureds
are living. If two Owners are named, the Policy will be owned jointly and the
consent of each Owner will be required to exercise ownership rights.
PORTFOLIO -- A separate investment portfolio of the Fund.
RECORD DATE -- The date the Policy is recorded on the books of AUSA Life
as an In Force Policy.
1
<PAGE>
SERIES ACCOUNT -- AUSA Series Life Account, a separate investment account
established by AUSA Life to receive and invest Net Premiums allocated under the
Policy.
SPECIFIED AMOUNT -- The minimum death benefit payable under the Policy as
long as the Policy remains In Force. The death benefit proceeds will be reduced
by any outstanding indebtedness and any due and unpaid charges.
SUB-ACCOUNT -- A sub-division of the Series Account. Each Sub-Account
invests exclusively in the shares of a specified Portfolio of the Fund.
SURVIVING INSURED -- The Joint Insured who remains alive after the other
Joint Insured has died.
TERMINATION -- Condition when either of the Joint Insured's lives is no
longer insured under the coverage provided.
VALUATION DATE -- Each day on which the New York Stock Exchange is open
for business.
VALUATION PERIOD -- The period commencing at the end of one Valuation
Date and continuing to the end of the next succeeding Valuation Date.
2
<PAGE>
INTRODUCTION
1. WHAT IS THE DIFFERENCE BETWEEN THE POLICY AND A CONVENTIONAL FIXED-BENEFIT
POLICY PRIOR TO THE DEATH OF AN INSURED?
Like conventional fixed-benefit life insurance, as long as the Policy
remains In Force, the Policy can provide: (1) the accumulation of
Cash Value; and (2) surrender rights and Policy loan privileges.
The Policy differs from conventional fixed-benefit life insurance by
allowing Policyowners to allocate Net Premiums to one or more
Sub-Accounts of the Series Account, or to the Fixed Account, or to
a combination of both. Each Sub-Account invests in a designated
Portfolio of the Fund. The amount and/or duration of the life
insurance coverage and the Cash Value of the Policy are not
guaranteed and may increase or decrease depending upon the
investment experience of the Series Account. Accordingly, the
Policyowner bears the investment risk of any depreciation in value
of the underlying assets of the Series Account but reaps the
benefits of any appreciation in value. (See Allocation of Premiums
and Cash Value - Allocation of Net Premiums, p. 22.) Unlike
conventional fixed-benefit life insurance, a Policyowner also has
the flexibility, subject to certain restrictions (see Premiums -
Premium Limitations, p. 22), to vary the frequency and amount of
premium payments and to decrease the Specified Amount. Thus, unlike
conventional fixed-benefit life insurance, the Policy does not
require a Policyowner to adhere to a fixed premium schedule.
Moreover, the failure to pay a scheduled premium ("Planned Periodic
Premium") will not itself cause the Policy to lapse, although
additional premium payments may be necessary to prevent lapse if
Net Surrender Value is insufficient to pay certain monthly charges,
and a grace period expires without a sufficient payment. (See
Policy Lapse and Reinstatement - Lapse, p. 25.)
2. WHAT IS THE DIFFERENCE BETWEEN THE POLICY AND A CONVENTIONAL FIXED-BENEFIT
POLICY UPON THE DEATH OF AN INSURED?
Under a conventional fixed-benefit life insurance Policy, only one person
is insured. Upon the insured's death, the Policy terminates and the
death benefit is paid to the beneficiary. Under a joint
survivorship Policy, two people are insured. When one of the two
insureds dies with the other insured still living, no death benefit
is paid, and the Policy continues without any change in the Policy
provisions, charges or cash value accumulation. The Owner(s) may
continue to pay premiums, as necessary or desired, and exercise all
rights as Owner(s) under the Policy.
3. WHAT DEATH BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides the payment of benefits upon the death of the
Surviving Insured. The Policy contains two death benefit options.
Under Death Benefit Option A, the death benefit is the greater of
the Specified Amount of the Policy or a specified percentage times
the Cash Value of the Policy on the date of death of the Surviving
Insured. Under Death Benefit Option B, the death benefit is the
greater of the Specified Amount of the Policy plus the Cash Value
of the Policy on the date of death of the Surviving Insured or a
specified percentage times the Cash Value of the Policy on the date
of death of the Surviving Insured. As long as the Policy remains In
Force, the minimum death benefit payable under either option will
be the current Specified Amount. The amount of death benefit will
be reduced by any outstanding indebtedness and any due and unpaid
charges, and increased by any additional insurance benefits added
by rider and any unearned loan interest. Under AUSA Life's current
rules, the minimum Specified Amount for a Policy at issue is
generally $100,000. The minimum Specified Amount will be set forth
in the Policyowner's Policy. (See Policy Benefits - Death Benefit,
p. 14.)
Optional insurance benefits offered under the Policy include a Joint
Insured Term Rider; an Individual Insured Rider; and a Wealth
Protector Rider. (See Optional Cash Value Charges - Optional
Insurance Benefits, p. 28.) The cost of these optional insurance
benefits will be deducted from Cash Value as part of the monthly
deduction. (See Charges and Deductions - Cash Value Charges, p.
27.)
A Terminal Illness Accelerated Death Benefit Rider is automatically
included with every Policy at no additional charge. This rider
makes a "Single Sum Benefit" available prior to an Insured's death
if the Insured has incurred a condition resulting from illness
which, as determined by a Physician, has reduced the Insured's life
expectancy as defined in the rider. (See Policy Benefits - Terminal
Illness Accelerated Death Benefit Rider, p. 17.)
Benefits under the Policy may be paid in a lump sum or under one of the
settlement options set forth in the Policy. (See Payment of Policy
Benefits - Settlement Options, p. 32.)
4. HOW MAY THE AMOUNT OF THE DEATH BENEFIT AND CASH VALUE VARY?
Under either death benefit option, as long as the Policy remains In Force,
the death benefit will not be less than the current Specified
Amount of the Policy. The amount of death benefit will be reduced
by any outstanding policy loan, plus any unearned loan interest,
and any due and unpaid charges. The death benefit may, however,
exceed the Specified Amount under certain circumstances. The amount
by which the death benefit exceeds the Specified Amount depends
upon the option chosen and the Cash Value of the Policy. (See
Policy Benefits - Death Benefit, p. 14.)
The Policy's Cash Value in the Series Account will reflect the amount and
frequency of premium payments,
3
<PAGE>
the investment experience of the chosen Sub-Accounts of the Series
Account, any partial surrenders, and any charges imposed in connection
with the Policy. The entire investment risk for amounts allocated to the
Sub-Accounts of the Series Account is borne by the Policyowner; AUSA
Life does not guarantee a minimum Cash Value. (See Policy Benefits -
Cash Value, p. 17.)
5. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE TO ADJUST THE AMOUNT OF THE DEATH
BENEFIT?
The Policyowner has the flexibility to adjust the death benefit payable by
changing the Death Benefit Option type, by decreasing the Specified
Amount of the Policy or by adding riders to increase the total
death benefit payable. No such change or decrease may be requested
during the first three Policy years. The Policyowner may either
change the death benefit option or decrease the Specified Amount,
but not both, only once each Policy year after the third Policy
year. (See Death Benefit - Change in Death Benefit Option, p. 15.)
6. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE IN CONNECTION WITH PREMIUM
PAYMENTS?
A Policyowner has considerable flexibility concerning the amount and
frequency of premium payments. An Initial Premium at least equal to
a minimum monthly first year premium as set forth in the Policy
must be paid before insurance coverage is In Force. (See Policy
Benefits - When Insurance Coverage Takes Effect, p. 16.)
Thereafter, a Policyowner may, subject to certain restrictions,
make premium payments in any amount and at any frequency. (See
Payment and Allocation of Premiums - Premiums, p. 21.) Each
Policyowner will also determine a Planned Periodic Premium
schedule. The schedule will provide Planned Periodic Premium
payments of a level amount at a fixed interval over a specified
period of time. The amount and frequency of planned premium
payments will be set forth in the Policy. The amount and frequency
of Planned Periodic Premium payments may be changed upon written
request. (See Premiums - Planned Periodic Premiums, p. 22.)
7. HOW LONG WILL THE POLICY REMAIN IN FORCE?
The Policy will Lapse only when Net Surrender Value is insufficient to pay
the monthly deduction (see Charges and Deductions - Cash Value
Charges, p. 27), providing excess indebtedness does not exceed the
Policy's Cash Value, and a grace period expires without a
sufficient payment by the Policyowner. (See Loan Privileges -
Indebtedness, p. 30.) However, until the No Lapse Date as provided
in the Policy, the Policy will remain In Force and no grace period
will begin provided the total premiums received (minus any
withdrawals and minus any outstanding loans) equal or exceed the
minimum monthly guarantee premium shown in the Policy times the
number of months since the Policy Date, including the current
month. The Policy, therefore, differs in two important respects
from a conventional life insurance policy. First, the failure to
pay a Planned Periodic Premium will not automatically cause the
Policy to Lapse. Second, after the No Lapse Date, the Policy can
Lapse even if Planned Periodic Premiums or premiums in other
amounts have been paid, if Net Surrender Value is insufficient to
pay the monthly deduction, and a grace period expires without a
sufficient payment. Such a Lapse could happen if the investment
experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Surrender Value, or the Net Surrender Value has
decreased because not enough premiums have been paid to offset the
monthly deduction. If either Insured is alive and the Policy is In
Force on the Maturity Date, which is the younger Insured's 100th
birthday, the Policy will then terminate and no longer be In Force.
Upon request, AUSA Life will extend the Maturity Date as long as
there appears to be no unfavorable tax consequences. The Net
Surrender Value as of the Maturity Date will be paid to the
Policyowner. (See Policy Rights - Benefits at Maturity, p. 31.)
8. HOW ARE NET PREMIUMS ALLOCATED?
The portion of the premium available for allocation ("Net Premium") equals
the premium paid less the Premium Expense Charge. (See Charges and
Deductions - Premium Expense Charge, p. 26.) The Policyowner
initially determines the allocation of the Net Premium among the
Sub-Accounts of the Series Account, each of which invests in shares
of a designated Portfolio of the Fund, or to the Fixed Account, or
a combination. Each Portfolio has a different investment objective.
(See Investments of the Series Account - WRL Series Fund, Inc., p.
18.) The allocation of future Net Premiums may be changed without
charge at any time by providing AUSA Life with written notification
from the Policyowner, or by calling AUSA Life's toll-free number,
1-800-322-7160.
9. IS THERE A "FREE-LOOK" PERIOD?
Yes, the Policy provides a free-look period. The Policyowner may cancel
the Policy within 10 days after the Policyowner receives it, or 10
days after AUSA Life mails or delivers a written notice of
withdrawal right to the Policyowner. The refund will equal the sum
of: (i) the difference between the premiums paid and the amounts
allocated to any Accounts under the Policy; (ii) the total amount
of monthly deductions made and any other charges imposed on amounts
allocated to the Accounts; and (iii) the value of amounts allocated
to the Accounts on the date AUSA Life or its agent receives the
returned Policy. (See Policy Rights - Examination of Policy
Privilege, p. 31.)
10. MAY THE POLICY BE SURRENDERED?
Yes, the Policyowner may totally surrender the Policy at any time and
receive the Net Surrender Value of the Policy. Subject to certain
limitations, the Policyowner may also make cash withdrawals from
the Policy at any time after the first Policy year and prior to
4
<PAGE>
the Maturity Date. (See Policy Rights - Surrender Privileges, p. 30.) If
Death Benefit Option A is in effect, cash withdrawals will reduce the
Policy's Specified Amount by the amount of the cash withdrawal.
11. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, a Policyowner may obtain a Policy loan
in any amount which is not greater than 90% of the Cash Value less
any surrender charge and any already outstanding loan. AUSA Life
reserves the right to permit a Policy loan prior to the first
Policy Anniversary for Policies issued pursuant to a transfer of
cash values from another life insurance policy, under Section
1035(a) of the Internal Revenue Code of 1986, as amended. It should
be noted, however, that a loan taken from, or secured by, a Policy
may be treated as a taxable distribution, and also may be subject
to a Federal income tax penalty. (See Federal Tax Matters, p. 35.)
The interest rate on a loan is 5.66% payable annually in advance. The
requested loan amount, plus interest in advance, will be
transferred from the Accounts to the Loan Reserve and credited at
the end of each Policy year with guaranteed interest at a rate of
4% per year. AUSA Life may from time to time, and in its sole
discretion, credit the Loan Reserve with additional interest at a
rate higher than 4% per year. The Loan Reserve is currently being
credited with a rate higher than 4% per year. The minimum loan
amount is generally $500. (See Policy Rights - Loan Privileges, p.
29.) Upon repayment of a loan, amounts in the Loan Reserve in
excess of the outstanding value of the loan are currently
transferred to the Accounts in the same manner as Net Premium
allocations; however, AUSA Life may in the future require these
amounts to be transferred to the Fixed Account. (See The Fixed
Account, p. 34.)
There are risks involved in taking a Policy loan, including the potential
for a Policy to lapse if projected earnings, taking into account
any outstanding loans, are not achieved, as well as adverse tax
consequences which occur if a Policy lapses with loans outstanding.
(See Federal Tax Matters - Tax Treatment of Policy Benefits, p.
36.)
12. WHAT CHARGES ARE ASSESSED IN CONNECTION WITH THE POLICY?
Certain charges are deducted from each premium. A Premium Expense Charge
equal to 6.00% of the premiums paid through the end of the tenth
Policy year is deducted to compensate AUSA Life for distribution
expenses incurred in connection with the Policy and for state
premium taxes. After the tenth Policy year, the Premium Expense
Charge reduces to 2.5%. (See Charges and Deductions - Premium
Expense Charge, p. 26.)
A "surrender charge" (part of which is a contingent deferred sales charge)
is deducted if the Policy is surrendered during the first 15 Policy
years. The surrender charge consists of a deferred issue charge of
$5.00 per $1,000 of Specified Amount; the surrender charge also
consists of a deferred sales charge equal to 26.5% of one Guideline
Premium and not more than 4.2% of premiums above that amount. A
declining percentage of the surrender charge is assessed after the
tenth year. (See Charges and Deductions - Contingent Surrender
Charges, p. 26.)
A cost of insurance charge and a $5.00 monthly administration charge are
deducted monthly from the Cash Value of each Policy to compensate
AUSA Life for the cost of insurance and the cost of administering
the Policy. Cost of insurance charges will vary with the Policy's
Specified Amount, the death benefit option chosen and the
investment experiences of the Portfolios in which the Policy is
invested. (See Charges and Deductions - Cash Value Charges, p. 27.)
A Death Benefit Guarantee Charge is deducted up until the No Lapse
Date selected by the Policyowner on the application. The amount of
this charge is set forth on the Policy Schedule Page and will be
$0.04 per $1,000 of Specified Amount for all classes of Policies.
On and after the No Lapse Date selected, this charge will be zero.
(See Charges and Deductions - Cash Value Charges, p. 27.)
Optional Cash Value charges are deducted from the Policy as a result of
Policyowner changes or elections made to the Policy. Optional Cash
Value charges include charges for: optional insurance benefits,
certain Cash Value transfers and cash withdrawals. (See Charges and
Deductions - Optional Cash Value Charges, p. 28.)
AUSA Life charges the Sub-Accounts of the Series Account for the mortality
and expense risks AUSA Life assumes. The charge is made daily at an
effective annual rate of 0.90% of the average daily net assets of
each Sub-Account of the Series Account. (See Charges and Deductions
- Charges Against the Series Account, p. 28.)
Each Sub-Account invests in a corresponding Portfolio of the Fund. Each
Portfolio pays investment management fees based on a percentage of
the Portfolio's average daily net assets. The annual management
fees and other Fund expenses for the Portfolios are provided on p.
6, under the heading Fund Annual Expenses. Effective January 1,
1997, the Fund adopted a Plan of Distribution pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act") ("Distribution Plan") and pursuant to the Plan, entered
into a Distribution Agreement with InterSecurities, Inc. ("ISI"),
principal underwriter for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment
for expenses incurred in connection with the distribution of a
Portfolio's shares, amounts equal to actual expenses associated
with distributing a Portfolio's shares, up to a maximum rate of
0.15% (fifteen one-hundreths of one percent) on an
5
<PAGE>
annualized basis of the average daily net assets. This fee is measured
and accrued daily and paid monthly. ISI has determined that it will not
seek payment by the Fund of distribution expenses with respect to any
Portfolio during the fiscal year ending December 31, 1998. Prior to
ISI's seeking reimbursement, Policyowners will be notified in advance.
In addition, the Portfolios incur certain operating expenses. (See
Investments of the Series Account - WRL Series Fund, Inc., p. 18.)
No charges are currently made from the Series Account for Federal or state
income taxes. Should AUSA Life determine that such taxes may be
imposed by Federal or state agencies, AUSA Life may make deductions
from the Series Account to pay these taxes. (See Federal Tax
Matters, p. 35.)
13. ARE TRANSFERS PERMITTED AMONG THE ACCOUNTS?
Yes. Twelve Cash Value transfers are permitted among the Sub-Accounts of
the Series Account or from the Sub-Accounts to the Fixed Account
without charge in a Policy year. AUSA Life will impose a $10 charge
for each subsequent transfer. (See Payment and Allocation of
Premiums - Allocation of Premiums and Cash Value, p. 22.) Transfers
may also be made from the Fixed Account to the Sub-Accounts subject
to certain restrictions. (See The Fixed Account - Allocations,
Transfers and Withdrawals, p. 34.)
14. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
Under current Federal tax law, life insurance policies receive tax-favored
treatment. The death benefit is generally excludable from the
beneficiary's gross income for Federal income tax purposes,
according to Section 101(a)(1) of the Internal Revenue Code. Owners
of a life insurance policy are not taxed on any increase in the
cash value while the policy remains In Force.
If a second-to-die life insurance policy is a modified endowment contract
under Federal tax law, certain distributions made during either
insured's lifetime, such as loans and partial withdrawals from, and
collateral assignments of, the policy are includable in gross
income on an income-first basis. A 10% Federal income tax penalty
may also be imposed on distributions made before the policyowner
attains age 591/2. Life insurance policies that are not modified
endowment contracts under Federal tax law receive preferential tax
treatment with respect to certain distributions.
For a discussion of tax issues associated with this Policy, see "Federal
Tax Matters" on p. 35.
FUND ANNUAL EXPENSES* (AS A % OF FUND AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
Aggressive Emerging
Growth Growth Growth Global
Portfolio Portfolio Portfolio Portfolio
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management Fees .......................... 0.80% 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ..... 0.16% 0.13% 0.07% 0.20%
Total Fund Annual Expenses ............... 0.96% 0.93% 0.87% 1.00%
<CAPTION>
C.A.S.E. Third Avenue
Balanced Value Equity Growth Value
Portfolio Portfolio Portfolio Portfolio**
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Management Fees .......................... 0.80% 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ..... 0.14% 0.09% 0.20% 0.20%
Total Fund Annual Expenses ............... 0.94% 0.89% 1.00% 1.00%
</TABLE>
<TABLE>
<CAPTION>
Strategic Growth &
Bond Total Return Income
Portfolio*** Portfolio Portfolio
-------------- -------------- -----------
<S> <C> <C> <C>
Management Fees .............................. 0.45% 0.80% 0.75%
Other Expenses (after reimbursement) ......... 0.14% 0.08% 0.21%
Total Fund Annual Expenses ................... 0.59% 0.88% 0.96%
<CAPTION>
Tactical
Money Asset International
Market Allocation Equity U.S. Equity
Portfolio Portfolio Portfolio Portfolio
----------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Management Fees .............................. 0.40% 0.80% 1.00% 0.80%
Other Expenses (after reimbursement) ......... 0.08% 0.07% 0.50% 0.50%
Total Fund Annual Expenses ................... 0.48% 0.87% 1.50% 1.30%
</TABLE>
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, entered into a Distribution Agreement with ISI, principal underwriter
for the Fund. Under the Distribution Plan, the Fund, on behalf of the
Portfolios, is authorized to pay to various service providers, as direct
payment for expenses incurred in connection with the distribution of a
Portfolio's shares, amounts equal to actual expenses associated with
distributing a Portfolio's shares, up to a maximum rate of 0.15% (fifteen
one-hundredths of one percent) on an annualized basis of the average daily
net assets. This fee is measured and accrued daily and paid monthly. ISI
has determined that it will not seek payment by the Fund of distribution
expenses incurred with respect to any Portfolio during the fiscal year
ending December 31, 1998. Prior to ISI seeking reimbursement, Policyowners
will be notified in advance.
** Because the Third Avenue Value Portfolio commenced operations on January 2,
1998, the percentages set forth as "Other Expenses" and "Total Fund Annual
Expenses" reflect estimates of "Other Expenses" for the first year of
operation.
*** Effective January 1, 1998, the management fees for the Bond Portfolio were
reduced from 0.50% to 0.45% of the Portfolio's average daily net assets.
The purpose of the preceding Table is to assist the Policyowner in
understanding the various costs and expenses that a Policyowner will bear
directly and indirectly. The Table reflects charges and expenses of the
Separate Account as well as the Portfolios of the Fund for the fiscal year
ended December 31, 1997, except that the "Other Expenses" and "Total Fund
Annual Expenses" for the Third Avenue Value Portfolio are estimates. Expenses
of the Fund may be higher or lower in the future. Certain states and other
governmental entities may impose a premium tax, which the Table does not
include. For more information on the charges described in this Table, see
"Charges And Deductions" on page 26 and the Fund Prospectus which accompanies
this Prospectus.
6
<PAGE>
WRL Investment Management, Inc. ("WRL Management") has undertaken, until
at least April 30, 1999, to pay Fund expenses on behalf of the Portfolios to
the extent normal operating expenses of a Portfolio exceed a stated percentage
of each Portfolio's average daily net assets. The expense limitation for the
Aggressive Growth, Emerging Growth, Growth, Global, Balanced, Value Equity,
C.A.S.E. Growth, Third Avenue Value, Strategic Total Return, Growth & Income
and Tactical Asset Allocation Portfolios is 1.00% of the average daily net
assets; 0.70% of the average daily net assets of the Bond and Money Market
Portfolios; 1.50% of the average daily net assets of the International Equity
Portfolio; and 1.30% of the average daily net assets of the U.S. Equity
Portfolio. In 1997, WRL Management reimbursed the C.A.S.E. Growth Portfolio in
the amount of $50,000, the International Equity Portfolio in the amount of
$179,000 and the U.S. Equity Portfolio in the amount of $29,000. Without such
reimbursement, the total annual Fund expenses during 1997 for the C.A.S.E.
Growth Portfolio, the International Equity Portfolio and the U.S. Equity
Portfolio would have been 1.13%, 3.12% and 1.49%, respectively.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Fund and hypothetical illustrations of the Policy based on
the historical investment experience of the Fund. It does not represent or
project future investment performance.
The Policies became available for sale in 1998. The Series Account was
established on October 24, 1994 and commenced operations , 1998. The
Fund commenced operations on October 2, 1986. The rates of return shown below
depict the historic investment experience of each Portfolio of the Fund for the
periods shown and assumes that the rate of return for each Portfolio in each
calendar year was uniformly earned throughout the year. The actual performance
of the Portfolios, however, has and will vary throughout the year, and will
result in variable monthly deductions from Cash Value that could affect
performance. The illustrations of death benefits, Cash Values and Net Surrender
Values shown below depict these Policy features for a hypothetical Policy as if
it had been purchased on January 1, of the year following a Portfolio's
inception, for Insureds in the age and risk classes indicated, based on the
historical investment experience of the Portfolio indicated since January 1,
1987. The actual rate of return for each Portfolio in each calendar year was
assumed to be uniformly earned throughout that year. The actual performance of
the Portfolios, however, has and will vary throughout the year.
RATES OF RETURN
The rates of return shown below are based on the investment performance,
as described above, after the deduction of investment management fees and
direct Fund expenses, of the Portfolios of the Fund. The rates are average
annual compounded rates of return for the periods ended on December 31, 1997.
(See Investments of the Series Account - WRL Series Fund, Inc., p. 18.)
These rates of return do not reflect the annual charge against the assets
of the Series Account of 0.90% for mortality and expense risks. These rates of
return also do not reflect the charges deducted from premiums, monthly
deductions from Cash Value, or surrender charges. (See Charges and Deductions -
Premium Expense Charge, p. 26; Contingent Surrender Charges, p. 26; and Cash
Value Charges, p. 27.) Accordingly, these rates of return do not illustrate how
actual investment performance will affect benefits under the Policies. (See,
however, Death Benefit, Cash Value and Net Surrender Value Illustrations,
below.) Moreover, these rates of return are not an estimate, projection or
guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard & Poor's
Index of 500 Common Stocks, a widely used measure of stock market performance.
As an unmanaged index, the Standard & Poor's Index of 500 Common Stocks (S&P
500) does not reflect any deductions for the expense of operating and managing
an investment portfolio. As an unmanaged index, the S&P 500 does not reflect
any deduction for the expenses of operating and managing an investment
Portfolio.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1997
<TABLE>
<CAPTION>
Fund Portfolio Inception* 10 Years 5 Years 3 Years 1 Year
- ---------------------- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Growth 17.65% 18.66% 14.23% 26.83% 17.54%
Global 20.41% N/A 20.38% 23.13% 18.75%
Bond 7.77% 8.98% 7.24% 10.37% 9.16%
Money Market 5.00% 5.06% 4.31% 5.22% 5.24%
Emerging Growth 20.33% N/A N/A 28.45% 21.45%
Strategic Total
Return 15.07% N/A N/A 20.43% 21.85%
Aggressive Growth 17.72% N/A N/A 23.73% 24.25%
Balanced 10.44% N/A N/A 15.81% 17.10%
Growth & Income 14.17% N/A N/A 20.35% 24.65%
Tactical Asset
Allocation 17.04% N/A N/A 17.01% 16.59%
C.A.S.E. Growth 20.09% N/A N/A N/A 15.03%
Value Equity 23.14% N/A N/A N/A 25.04%
U.S. Equity 27.01% N/A N/A N/A 27.01%
International Equity 7.50% N/A N/A N/A 7.50%
S&P 500 16.95% 18.06% 20.27% 31.15% 33.36%
</TABLE>
* The Growth, Bond and Money Market Portfolios of the Fund commenced operations
on October 2, 1986. The Global Portfolio commenced operations on December
3, 1992. The Emerging Growth and Strategic Total Return Portfolios
commenced operations on March 1, 1993. The Aggressive Growth, Balanced and
Growth & Income Portfolios commenced operations on March 1, 1994. The
Tactical Asset Allocation Portfolio commenced operations on January 3,
1995. The C.A.S.E. Growth Portfolio commenced operations on May 1, 1995.
The Value Equity Portfolio commenced operations on May 1, 1996. The U.S.
Equity and the International Equity Portfolios commenced operations on
January 2, 1997. The Standard & Poor's Index of 500 Common Stocks returns
are based on an inception date of October 2, 1986.
Because the Third Avenue Value Portfolio had not yet commenced operations as of
December 31, 1997, the chart above does not reflect rates of return for this
Portfolio.
Additional information regarding the investment performance of the
Portfolios of the Fund appears in the attached Prospectus for the Portfolios of
the Fund.
7
<PAGE>
DEATH BENEFIT, CASH VALUE AND NET SURRENDER VALUE
ILLUSTRATIONS
In order to demonstrate how the historic investment experience of the
Portfolios could have affected the Option A death benefits, the Policy Cash
Value and Net Surrender Value, the following hypothetical illustrations are
based on the historic investment experience of each Portfolio. These
hypothetical illustrations are designed to show the performance that could have
resulted if the Policy available for purchase today had been in existence
during the period of time illustrated. The historic rate of return in each
calendar year was assumed to be uniformly earned throughout that year. The
actual performance of the Portfolios, however, has and will vary throughout the
year, and will result in variable monthly deductions from Cash Values that
could affect performance. These illustrations do not represent what may happen
in the future.
For each Portfolio, the illustrations show Option A based on the payment
of annual premiums of $4,000 at the beginning of each Policy year, and a
Specified Amount of $250,000 for a male age 55 and a female age 55. The
illustrations also assume that the Joint Insureds are placed in AUSA Life's
Select underwriting rate class. (See Cash Value Charges - Cost of Insurance, p.
27.) The illustrations also assume that the Policy's entire Cash Value is
allocated to the Sub-Account corresponding to the Portfolio shown. The
illustrated values would be different if the Policyowner had chosen Option B
death benefits.
The amounts shown for death benefits, Cash Values and Net Surrender
Values take into account all charges and deductions from the Policy, the Series
Account and the Fund (see Charges and Deductions - Premium Expense Charge, p.
26, Charges Against the Series Account, p. 28, and Investments of the Series
Account - WRL Series Fund, Inc., p. 18).
For each Portfolio of the Fund, one illustration is based on the
guaranteed cost of insurance rates, while the other illustration is based on
the current cost of insurance rates. These examples of Policy performance are
for the specific ages, sexes, rate class, premium payment pattern and Policy
set forth above. The amount and timing of premium payments would affect
individual Policy benefits as would any withdrawals or loans.
This Prospectus also contains illustrations based on hypothetical rates
of return. See Appendix A, pp. 41-43.
The following example shows how the hypothetical net return of the Growth
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that the Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
GROWTH PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------- ------------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1988 ............................... $ 3,969 $ 3,969 $ 1,659 $ 1,659
1989* .............................. 8,691 8,691 6,092 6,092
1990* .............................. 18,142 18,142 15,440 15,440
1991* .............................. 20,978 20,978 18,172 18,172
1992* .............................. 39,021 39,021 36,110 36,110
1993* .............................. 43,011 43,007 39,996 39,992
1994* .............................. 47,465 47,447 44,347 44,328
1995* .............................. 46,064 46,024 42,841 42,802
1996* .............................. 72,599 72,494 69,273 69,167
1997* .............................. 88,116 87,936 84,686 84,506
1998* .............................. 108,275 107,963 105,447 105,135
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
8
<PAGE>
The following example shows how the hypothetical net return of the Bond
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that Net Premiums and related Cash Values were in
the Sub-Account for the entire period and that the values were determined on
the first Valuation Date following January 1st of each year.
BOND PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1988 ............................... $ 3,384 $ 3,384 $ 1,074 $ 1,074
1989* .............................. 7,344 7,344 4,746 4,746
1990* .............................. 12,458 12,458 9,755 9,755
1991* .............................. 16,903 16,903 14,096 14,096
1992* .............................. 23,617 23,617 20,706 20,706
1993* .............................. 28,960 28,956 25,946 25,941
1994* .............................. 35,880 35,859 32,761 32,740
1995* .............................. 36,274 36,230 33,051 33,007
1996* .............................. 48,262 48,162 44,935 44,835
1997* .............................. 50,684 50,525 47,254 47,094
1998* .............................. 59,113 58,817 56,286 55,989
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the Money
Market Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1987. This example assumes that Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
MONEY MARKET PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1988 ............................... 3,759 $ 3,759 $ 1,449 $ 1,449
1989* .............................. 7,693 7,693 5,095 5,095
1990* .............................. 12,012 12,012 9,310 9,310
1991* .............................. 16,491 16,491 13,685 13,685
1992* .............................. 20,787 20,787 17,876 17,876
1993* .............................. 24,714 24,710 21,700 21,695
1994* .............................. 28,472 28,452 25,354 25,333
1995* .............................. 32,576 32,529 29,354 29,307
1996* .............................. 37,389 37,296 34,063 33,970
1997* .............................. 42,186 42,023 38,756 38,593
1998* .............................. 47,481 47,186 44,653 44,358
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
9
<PAGE>
The following example shows how the hypothetical net return of the Global
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1993, and if the Global Portfolio had been offered through the Policy as of
January 1, 1993. This example assumes that Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
GLOBAL PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1994 ............................... $ 4,799 $ 4,799 $ 2,489 $ 2,489
1995* .............................. 8,311 8,311 5,713 5,713
1996* .............................. 14,493 14,493 11,791 11,791
1997* .............................. 22,424 22,424 19,617 19,617
1998* .............................. 30,923 30,923 28,013 28,013
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Emerging Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1994, if the Emerging Growth Portfolio had been offered by the
Policy as of January 1, 1994. This example assumes that Net Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
EMERGING GROWTH PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1995 ............................... $ 3,283 $ 3,283 $ 973 $ 973
1996* .............................. 10,067 10,067 7,469 7,469
1997* .............................. 15,835 15,835 13,133 13,133
1998* .............................. 23,445 23,445 20,639 20,639
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Strategic Total Return Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1994, if the Strategic Total Return Portfolio had been
offered by the Policy as of January 1, 1994. This example assumes that Net
Premiums and related Cash Values were in the Sub-Account for the entire period
and that the values were determined on the first Valuation Date following
January 1st of each year.
STRATEGIC TOTAL RETURN PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1995 ............................... $ 3,536 $ 3,536 $ 1,226 $ 1,226
1996* .............................. 8,818 8,818 6,219 6,219
1997* .............................. 13,897 13,897 11,194 11,194
1998* .............................. 21,191 21,191 18,384 18,384
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
10
<PAGE>
The following example shows how the hypothetical net return of the
Aggressive Growth Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1995. This example assumes that Net Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
AGGRESSIVE GROWTH PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1996 ............................... $ 5,003 $ 5,003 $ 2,693 $ 2,693
1997* .............................. 9,268 9,268 6,669 6,669
1998* .............................. 15,890 15,890 13,186 13,186
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
Balanced Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
BALANCED PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1996 ............................... $ 4,274 $ 4,274 $ 1,964 $ 1,964
1997* .............................. 8,500 8,500 5,901 5,901
1998* .............................. 14,164 14,164 11,462 11,462
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the Growth
& Income Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
GROWTH & INCOME PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1996 ............................... $ 4,488 $ 4,488 $ 2,178 $ 2,178
1997* .............................. 8,745 8,745 6,146 6,146
1998* .............................. 15,261 15,261 12,559 12,559
</TABLE>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
11
<PAGE>
The following example shows how the hypothetical net return of the
Tactical Asset Allocation Portfolio of the Fund would have affected benefits
for a Policy dated January 1, 1995, if the Tactical Asset Allocation Portfolio
had been offered by the Policy as of January 1, 1995. This example assumes that
Net Premiums and related Cash Values were in the Sub-Account for the entire
period and that the values were determined on the first Valuation Date
following January 1st of each year.
TACTICAL ASSET ALLOCATION PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1996 ............................... $ 4,309 $ 4,309 $ 1,999 $ 1,999
1997* .............................. 8,815 8,815 6,217 6,217
1998* .............................. 14,305 14,305 11,603 11,603
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the
C.A.S.E. Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1996, if the C.A.S.E. Growth Portfolio had been offered by the
Policy as of January 1, 1996. This example assumes that Net Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
C.A.S.E. GROWTH PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1997 ............................... $4,126 $4,126 $1,816 $1,816
1998* .............................. 8,885 8,885 6,286 6,286
</TABLE>
* For the years shown, benefits and values reflect only premiums paid during
previous Policy years.
The following example shows how the hypothetical net return of the Value
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997, if the Value Equity Portfolio had been offered by the Policy
as of January 1, 1997. This example assumes that Net Premiums and related Cash
Values were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
VALUE EQUITY PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1998 ............................... $4,456 $4,456 $2,146 $2,146
</TABLE>
12
<PAGE>
The following example shows how the hypothetical net return of the
International Equity Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1997. This example assumes that Net Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
INTERNATIONAL EQUITY PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1998 ............................... $3,828 $3,828 $1,518 $1,518
</TABLE>
The following example shows how the hypothetical net return of the U.S.
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997. This example assumes that Net Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
U.S. EQUITY PORTFOLIO
Male, Issue Age 55, Female, Issue Age 55, $4,000 Annual Premium
($250,000 Specified Amount, Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
<TABLE>
<CAPTION>
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of
- ------------------------------------ Current Guaranteed Current Guaranteed
<S> <C> <C> <C> <C>
1998 ............................... $4,528 $4,528 $2,218 $2,218
</TABLE>
Because the Third Avenue Value Portfolio had not commenced operations as
of December 31, 1997, there are no hypothetical illustrations for this
Portfolio.
OTHER PERFORMANCE DATA
AUSA Life may compare the performance of each Sub-Account in advertising and
sales literature to the performance of other variable life issuers in general,
or to the performance of particular types of variable life insurance policies
investing in mutual funds, or investment series of mutual funds, with
investment objectives similar to each of the Sub-Accounts whose performance is
reported by Lipper Analytical Services, Inc. ("Lipper") and Morningstar, Inc.
("Morningstar") or reported by other services, companies, individuals or other
industry or financial publications of general interest, such as Forbes, Money,
The Wall Street Journal, Business Week, Barron's, Kiplinger's Personal Finance
and Fortune. Lipper and Morningstar are widely used independent research
services which monitor and rank the performance of variable life insurance
policies in each of the major categories of investment objectives on an
industry-wide basis.
Lipper's and Morningstar's rankings include variable annuity contracts as
well as variable life insurance policies. The performance analyses prepared by
Lipper and Morningstar rank such policies and contracts on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration.
AUSA Life may also compare the performance of each Sub-Account in
advertising and sales literature to the S&P 500, a widely used measure of stock
market performance, or other widely recognized indices. Unmanaged indices may
assume the reinvestment of dividends, but usually do not reflect any
"deduction" for the expense of operating or managing an investment portfolio.
AUSA Life is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
In addition, AUSA Life may, as appropriate, compare each Sub-Account's
performance to that of other types of investments such as certificates of
deposit, savings accounts and U.S. Treasuries, or to certain interest rate and
inflation indices, such as the Consumer Price Index, which is published by the
U.S. Department of Labor and measures the average change in prices over time of
a fixed "market basket" of certain specified goods and services. Similar
comparisons of Sub-Account performance may also be made with appropriate
indices measuring the performance of a defined
13
<PAGE>
group of securities widely recognized by investors as representing a particular
segment of the securities markets. For example, Sub-Account performance may be
compared with Donoghue Money Market Institutional Average (money market rates),
Lehman Brothers Corporate Bond Index (corporate bond interest rates) or Lehman
Brothers Government Bond Index (long-term U.S. Government obligation interest
rates).
AUSA LIFE AND THE SERIES ACCOUNT
AUSA LIFE INSURANCE COMPANY, INC.
AUSA Life is incorporated under the laws of New York. AUSA Life is a
stock life insurance company engaged in the business of writing life insurance
policies and annuity contracts. AUSA Life is admitted to do business in 39
states and the District of Columbia. AUSA Life's principal business office is
located in Purchase, New York; however, the Administrative Office and mailing
address for all Policy transactions is P.O. Box 9054, Clearwater, FL
33758-9054. AUSA Life is a wholly-owned subsidiary of First AUSA Life Insurance
Company ("First AUSA"), a stock life insurance company which is wholly-owned by
AEGON USA, Inc. ("AEGON USA"). AEGON USA is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON USA is a wholly-owned indirect subsidiary of AEGON
nv, a Netherlands corporation, which is a publicly traded international
insurance group.
PUBLISHED RATINGS OF AUSA LIFE. AUSA Life may from time to time publish
in advertisements, sales literature and reports to Policyowners, the ratings
and other information assigned to it by one or more independent rating
organizations such as A.M. Best Company ("A.M. Best"), Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Insurance Rating Services
("Standard & Poor's"), and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
A.M. Best's and Moody's ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. Standard &
Poor's and Duff & Phelps provide ratings which measure the claims-paying
ability of insurance companies. These ratings are opinions of an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. Claims-paying ability ratings do not
refer to an insurer's ability to meet non-policy obligations (i.e.,
debt/commercial paper). These ratings do not apply to the Series Account, its
Sub-Accounts, the Fund, its Portfolios, or to their performance.
THE SERIES ACCOUNT
The Series Account was established by AUSA Life as a separate account on
October 24, 1994. The Series Account meets the definition of a "separate
account" under the Federal securities laws. The Series Account will receive and
invest the Net Premiums paid under this Policy and other flexible premium
variable life insurance policies issued by AUSA Life.
Although the assets of the Series Account are the property of AUSA Life,
the New York Code, under which the Series Account was established, provides
that the assets in the Series Account attributable to the Policies are not
chargeable with liabilities arising out of any other business which AUSA Life
may conduct. The assets of the Series Account shall, however, be available to
cover the liabilities of the General Account of AUSA Life to the extent that
the Series Account's assets exceed its liabilities arising under the Policies
supported by it.
The Series Account is currently divided into fifteen Sub-Accounts. Each
Sub-Account invests exclusively in shares of a single Portfolio of the Fund.
Income and both realized and unrealized gains or losses from the assets of each
Sub-Account of the Series Account are credited to or charged against that
Sub-Account without regard to income, gains or losses from any other
Sub-Account of the Series Account or arising out of any other business AUSA
Life may conduct.
POLICY BENEFITS
DEATH BENEFIT
Policyowners designate in the initial application one of two death
benefit options offered under the Policy: Death Benefit Option A ("Option A")
or Death Benefit Option B ("Option B"). As long as the Policy remains In Force,
(see Policy Lapse and Reinstatement - Lapse, p. 25), AUSA Life will, upon
receiving due proof of the Surviving Insured's death, pay the death benefit
proceeds of a Policy to the named Beneficiary in accordance with the designated
death benefit option. The amount of the death benefit proceeds payable will be
determined at the end of the Valuation Period during which the Surviving
Insured dies. The proceeds may be paid in a lump sum or under one or more of
the settlement options set forth in the Policy. (See Payments of Policy
Benefits - Settlement Options, p. 32.) AUSA Life guarantees that as long as the
Policy remains In Force (see Policy Lapse and Reinstatement - Lapse, p. 25),
the death benefit proceeds under either option will never be less than the
Specified Amount of the Policy, but the proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. These proceeds will be
increased by any additional insurance In Force provided by rider and any
unearned loan interest.
OPTION A. The death benefit is the greater of (i) the Specified Amount
of the Policy or (ii) a specified percentage (the "limitation percentage")
times the Cash Value of the Policy on the date of death of the Surviving
Insured. The limitation percentage is a percentage based on the Attained Age of
the younger Joint Insured and is 250% for a younger Joint Insured age 40 or
below on the Policy Anniversary prior to the date of death. For a younger Joint
Insured with an Attained Age over 40 on a Policy Anniversary, the percentage
declines as shown in the following Limitation Percentage Table. Accordingly,
under Option A the death benefit will remain level unless the limitation
percentage times the Cash
14
<PAGE>
Value exceeds the Specified Amount, in which case the amount of the death
benefit will vary as the Cash Value varies.
ILLUSTRATION OF OPTION A. For purposes of this illustration, assume
that the younger Joint Insured's Attained Age is under 40 and that there is no
outstanding indebtedness. Under Option A, a Policy with a $250,000 Specified
Amount will generally pay $250,000 in death benefits. However, because the
death benefit must be equal to or be greater than 250% of Cash Value, any time
the Cash Value of the Policy exceeds $100,000, the death benefit will exceed
the $250,000 Specified Amount. Each additional dollar added to Cash Value above
$100,000 will increase the death benefit by $2.50.
Similarly, so long as Cash Value exceeds $100,000, each dollar taken out
of Cash Value will reduce the death benefit by $2.50. If at any time, however,
the Cash Value multiplied by the limitation percentage is less than the
Specified Amount, the death benefit will equal the Specified Amount of the
Policy.
LIMITATION PERCENTAGE TABLE
ATTAINED AGE
OF YOUNGER PER YEAR
JOINT INSURED LESS OVER AGE
- ---------------------- ------ ---------
40 and under ......... 250%
41 - 45 .............. 250% 7% 40
46 - 50 .............. 215% 6% 45
51 - 55 .............. 185% 7% 50
56 - 60 .............. 150% 4% 55
61 - 65 .............. 130% 2% 60
66 - 70 .............. 120% 1% 65
71 - 75 .............. 115% 2% 70
76 - 90 .............. 105% 0% 75
91 - 95 .............. 105% 1% 90
96 and older ......... 100% 0% 95
OPTION B. The death benefit is equal to (i) the greater of the
Specified Amount plus the Cash Value of the Policy on the date of death of the
Surviving Insured or (ii) the limitation percentage times the Cash Value of the
Policy on or prior to the date of death of the Surviving Insured. The
applicable percentage is 250% for the younger Joint Insured age 40 or below on
the Policy Anniversary prior to the date of death of the Surviving Insured. For
the younger Joint Insured with an Attained Age over 40 on a Policy Anniversary,
the percentage declines as shown in the Limitation Percentage Table above.
Accordingly, under Option B the amount of the death benefit will always vary as
the Cash Value varies.
ILLUSTRATION OF OPTION B. For purposes of this illustration, assume
that the younger Joint Insured is under the age of 40 and that there is no
outstanding indebtedness. Under Option B, a Policy with a Specified Amount of
$250,000 will generally pay a death benefit of $250,000 plus Cash Value. Thus,
for example, a Policy with a Cash Value of $50,000 will have a death benefit of
$300,000 ($250,000 + $50,000). The death benefit, however, must be at least
250% of Cash Value. As a result, if the Cash Value of the Policy exceeds
$166,666, the death benefit will be greater than the Specified Amount plus Cash
Value. Each additional dollar of Cash Value above $166,666 will increase the
death benefit by $2.50.
Similarly, any time Cash Value exceeds $166,666, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If at any time, however,
Cash Value multiplied by the limitation percentage is less than the Specified
Amount plus the Cash Value, then the death benefit will be the Specified Amount
plus the Cash Value of the Policy.
CHOOSING DEATH BENEFIT OPTION A OR OPTION B. Assuming the death benefit
is not determined by reference to the limitation percentage, Option A will
provide a Specified Amount of death benefit which does not vary with changes in
Cash Value. Thus, under Option A, as Cash Value increases, AUSA Life's net
amount at risk and therefore the pure insurance protection under the Policy
will decline. In contrast, Option B involves a constant net amount at risk,
assuming that the death benefit is not determined by reference to the
limitation percentage. Assuming positive investment experience, the deduction
for cost of insurance under a Policy with an Option A death benefit will be
less than under a corresponding Policy with an Option B death benefit. Because
of this, if investment performance is positive, Cash Value under Option A will
increase faster than under Option B but the total death benefit under Option B
will generally be greater. Thus, Option A could be considered more suitable for
Policyowners whose goal is increasing Cash Value based upon positive investment
experience while Option B could be considered more suitable for Policyowners
whose goal is increasing total death benefit.
CHANGE IN DEATH BENEFIT OPTION. Generally, the death benefit option in
effect may be changed by the Policyowner once each Policy year after the third
Policy year, provided that no decrease in Specified Amount is made that year. A
change in death benefit option may be made by sending AUSA Life a written
request for a change. A change in death benefit option may have Federal income
tax consequences. (See Federal Tax Matters, p. 35.) The Policyowner may either
change the death benefit option or decrease the Specified Amount, but not both,
only once each Policy year after the third Policy year.
Under AUSA Life's current rules, no change may be made if it would result
in a Specified Amount less than the minimum Specified Amount set forth in the
Policy. The effective date of any change will be the Monthly Anniversary on or
following receipt of the request. No charges will be imposed for making a
change in death benefit option.
If the death benefit option is changed from Option B to Option A, the
Specified Amount will be increased by an amount equal to the Policy's Cash
Value on the effective date of change. If the death benefit option is changed
from Option A to Option B, the Specified Amount will be
15
<PAGE>
decreased by an amount equal to the Cash Value on the effective date of the
change.
CORRIDOR PERCENTAGE. If pursuant to requirements of the Internal
Revenue Code of 1986, as amended, the death benefit under a Policy is
determined by reference to the limitation percentages discussed above, the
Policy is described as "in the corridor," and an increase in the Cash Value of
the Policy will increase the net amount at risk assumed by AUSA Life and
consequently increase the cost of insurance deducted from the Cash Value of the
Policy. (See Cash Value Charges - Cost of Insurance, p. 27.)
INSURANCE PROTECTION. A Policyowner may increase or decrease the pure
insurance protection provided by a Policy (i.e., the difference between the
death benefit and the Cash Value) in one of several ways as insurance needs
change. These ways include decreasing the Specified Amount of insurance,
changing the level of premium payments, and, to a lesser extent, making a cash
withdrawal from the Policy. Although the consequences of each of these methods
will depend upon the individual circumstances, they may be generally summarized
as follows:
(a) A decrease in the Specified Amount will, subject to the limitation
percentage (see Policy Benefits - Death Benefit, p. 14), in general
decrease the insurance protection and the charges under the Policy
without reducing the Cash Value.
(b) If Option A is elected, an increased level of premium payments will
reduce the pure insurance protection, until the limitation
percentage times the Cash Value exceeds the Specified Amount.
Increased premiums should increase the amount of Net Surrender
Value available to keep the Policy In Force.
(c) A cash withdrawal will reduce the death benefit. (See Surrender
Privileges - Cash Withdrawals, p. 30.) It has no effect on the
amount of pure insurance protection and charges under the Policy,
unless the death benefit payable is governed by the limitation
percentages. It results in a reduced amount of Net Surrender Value
available to pay the monthly deduction, thereby increasing the
possibility that the Policy will lapse.
(d) A reduced level of premium payments generally increases the amount of
pure insurance protection if Option A is elected, or maintains the
same amount of pure insurance protection if Option B is elected,
again depending on the limitation percentage. It results in a
reduced amount of Cash Value and increases the possibility that the
Policy will lapse.
HOW DEATH BENEFITS MAY VARY IN AMOUNT. As long as the Policy remains In
Force, AUSA Life guarantees that the death benefit will never be less than the
Specified Amount of the Policy. These proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. The death benefit may,
however, vary with the Policy's Cash Value. Under Option A, the death benefit
will only vary when the Cash Value multiplied by the limitation percentage
exceeds the Specified Amount of the Policy. The death benefit under Option B
will always vary with the Cash Value because the death benefit equals either
the Specified Amount plus the Cash Value or the limitation percentage times the
Cash Value.
DECREASE IN SPECIFIED AMOUNT. Subject to certain limitations, a
Policyowner may decrease the Specified Amount of a Policy. A decrease in
Specified Amount may affect the net amount at risk, which may affect a
Policyowner's cost of insurance charge. (See Cash Value Charges - Cost of
Insurance, p. 27.) A decrease in Specified Amount could also have Federal
income tax consequences. (See Federal Tax Matters, p. 35.) The Policyowner may
either change the death benefit option or decrease the Specified Amount, but
not both, only once each Policy year after the third Policy year.
No requested decrease in the Specified Amount will be permitted during
the first three Policy years. Thereafter, any decrease in the Specified Amount
will become effective on the Monthly Anniversary date on or following receipt
of a written request from the Policyowner by AUSA Life. The Specified Amount
remaining In Force after any requested decrease may not be less than the
minimum Specified Amount set forth in the Policy. AUSA Life reserves the right
to limit any decrease to no more than 20% of the Specified Amount immediately
prior to the decrease. If, following the decrease in Specified Amount, the
Policy would not comply with the maximum premium limitations required by
Federal tax law (see Premiums - Premium Limitations, p. 22), the decrease may
be limited to the extent necessary to meet these requirements.
WHEN INSURANCE COVERAGE TAKES EFFECT
No life insurance coverage shall take effect unless the proposed Joint
Insureds are alive and in the same condition of health as described in the
application when the Policy is delivered to the Policyowner and the full
Initial Premium is paid. However, if the full Initial Premium is paid as set
forth in the conditional receipt attached to the application, and the
conditional receipt is delivered to the Policyowner, the terms of the
conditional receipt shall apply.
CONDITIONAL INSURANCE COVERAGE. The proposed Joint Insureds must be
insurable and acceptable to AUSA Life under its underwriting rules for the
amount, Policy and risk classification applied for on the later of: (a) the
date of application, or (b) the date of completion of all medical tests and
examinations required by AUSA Life. Any check given for payment must be honored
on first presentation. The conditional receipt and all coverages applied for on
the application are void if a check or draft received for payment of the
Initial Premium is not honored when first presented for payment.
AMOUNT OF CONDITIONAL LIFE INSURANCE COVERAGE. If conditional insurance
coverage becomes effective under the terms of the conditional receipt, then the
amount of conditional life insurance coverage on any person proposed for
16
<PAGE>
insurance is the lesser of: (a) the amount of life insurance applied for on
such person, or (b) $300,000 reduced by the amounts payable under all other
life insurance or accidental death benefits then in force or pending with AUSA
Life.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE BEGINS. If the conditions listed
above are fulfilled, then the amount of conditional insurance coverage
specified above shall take effect on the later of: (a) the date of the
application, or (b) the date of the completion of all medical tests and
examinations required by AUSA Life. All conditional coverages for the proposed
Joint Insureds will be deemed void if the application contains material
misrepresentation or is fraudulently completed. Benefits under the conditional
receipt coverage will be denied if any proposed Joint Insured commits suicide.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE ENDS. Conditional life insurance
coverage shall terminate automatically, without notice, on the earliest of the
following dates: (a) the date AUSA Life approves the Policy as applied for, or
(b) 10 days following any counteroffer by AUSA Life to offer insurance to any
person proposed for insurance under a different policy or at an increased
premium or on a different rate class or (c) at the end of the fraction of a
year which the payment bears to the premium required to provide one month of
insurance coverage in the amount as described above, or (d) at the beginning of
the 60th day following the date of the conditional receipt.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER
In states where this rider has been approved by that state's department
of insurance, upon receipt of proof satisfactory to AUSA Life that the
Surviving Insured has incurred a condition resulting from illness which, as
determined by a Physician, has reduced life expectancy to not more than 12
months from the date of the Physician's Statement (a "Terminal Condition"),
AUSA Life will pay to the Policyowner a "Single Sum Benefit", equal to:
(a) the Death Benefit in effect on the date the Single Sum Benefit is
paid; multiplied by
(b) the Election Percentage; divided by
(c) 1 + i, where i equals the greater of (A) and (B) on the date the
Single Sum Benefit is paid. (A) equals the interest rate determined
under Internal Revenue Code section 846(c)(2), as it may be amended
from time to time; and (B) equals the Policy Loan Interest Rate;
minus
(d) indebtedness, if any, at the time the Single Sum Benefit is paid,
multiplied by the Election Percentage.
"Death Benefit" under the Rider means the amount payable at death of the
Surviving Insured under the Policy, plus the benefit payable under any In Force
Joint Insured Term Rider or Wealth Protector Rider. (See Optional Insurance
Benefits, p. 33.) "Election Percentage" means a percentage, selected by the
Policyowner, not to exceed 100% of the Policy's Death Benefit, as defined under
the Rider; however, in no event will the Election Percentage result in a Single
Sum Benefit greater than $500,000. A "Physician" may be a Doctor of Medicine or
a Doctor of Osteopathy, licensed to practice medicine and treat injury or
illness in the state in which treatment is received and who is acting within
the scope of that license, and must be someone other than the Surviving
Insured, the Policyowner, a person who lives with the Surviving Insured or
Policyowner, or a person who is part of the Surviving Insured's or
Policyowner's "Immediate Family" (spouse, child, brother, sister, parent,
grandparent or grandchild of the Surviving Insured). The "Physician's
Statement" must be a written statement signed by a Physician which provides the
Physician's diagnosis of the Surviving Insured's non-correctable medical
condition. It must state with reasonable medical certainty that the
non-correctable medical condition will result in the death of the Surviving
Insured within 12 months of the Physician's Statement, taking into
consideration the ordinary and reasonable medical care, advice and treatment
available in the same or similar communities.
The Rider will not pay benefits for a Terminal Condition resulting from
self-inflicted bodily injuries occurring within the same period specified in
the Policy's suicide provision. The Rider terminates at the earliest of (a) the
date the Policy terminates, (b) the effective date of a settlement option
elected under the Policy, (c) the date the Single Sum Benefit is paid, or (d)
the date the Policyowner elects to terminate the Rider.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, Western Reserve believes that for Federal income
tax purposes a Single Sum Benefit payment made under the Terminal Illness
Accelerated Death Benefit Rider should be fully excludable from the gross
income of the Beneficiary, as long as the Beneficiary is the Insured under the
Policy. However, a Policyowner should consult a qualified tax advisor about the
consequences of adding this Rider to a Policy or requesting a Single Sum
Benefit payment under this Rider. There is no additional charge for this
benefit. As stated above, this Rider may not be available in all states, or, if
available, the terms of the Rider may vary in accordance with each state's
insurance laws.
CASH VALUE
At the end of any Valuation Period, the Cash Value of the Policy is equal
to the sum of the Policy's value in each Sub-Account of the Series Account plus
the Fixed Account Value. There is no guaranteed minimum Cash Value.
NET SURRENDER VALUE. A Policyowner may at any time surrender the Policy
and receive the Policy's Net Surrender Value. (See Policy Rights - Surrender
Privileges, p. 30.) The Net Surrender Value as of any date is equal to:
(1) the Cash Value as of such date; minus
(2) any surrender charge as of such date (as described on p. 30); minus
(3) any outstanding Policy loan; plus
(4) any unearned loan interest.
17
<PAGE>
DETERMINATION OF VALUES IN THE SERIES ACCOUNT. On the Record Date, the
Policy's value in a Sub-Account of the Series Account will equal the portion of
any Net Premium allocated to the Sub-Account, reduced by the portion of the
first monthly deduction allocated to that Sub-Account. (See Payment and
Allocation of Premiums - Allocation of Premiums and Cash Value, p. 22.)
Thereafter, on each Valuation Date, the Policy's value in a Sub-Account of the
Series Account will equal the number of units in the Sub-Account, multiplied by
the unit value of that Sub-Account.
The number of units that the Policy has in each Sub-Account is equal to:
(1) The initial units purchased on the Policy Date; plus
(2) Units purchased at the time additional Net Premiums are allocated to
the Sub-Account; plus
(3) Units purchased through transfers from another Sub-Account or
the Fixed Account; minus
(4) Units that are redeemed to pay for monthly deductions as they are
due; minus
(5) Units that are redeemed to pay for any cash withdrawals; minus
(6) Units that are redeemed as part of any transfer to another
Sub-Account or the Fixed Account.
The Policy's total value in the Series Account equals the sum of the
Policy's value in each Sub-Account. (For a description of how the values of the
Fixed Account are calculated, see The Fixed Account - Fixed Account Value, p.
34.) Because the Cash Value is dependent upon a number of variables, including
the investment experience of the chosen Sub-Accounts of the Series Account, the
frequency and amount of premium payments, transfers and surrenders, and charges
assessed in connection with the Policy, a Policy's Cash Value cannot be
predetermined.
UNIT VALUE. The unit value of each Sub-Account was originally
established at $10 per unit. The unit value may increase or decrease from one
Valuation Period to the next. Unit values also will vary between Sub-Accounts.
The unit value of any Sub-Account at the end of a Valuation Period is the
result of:
(1) The total value of the assets held in the Sub-Account,
determined by multiplying the number of shares of the designated
Portfolio owned by the Sub-Account times the Portfolio's net asset
value per share; minus
(2) A deduction for the charge for mortality and expense risks. This
charge is used to compensate AUSA Life for its assumption of
certain mortality and expense risks. The daily amount of this
charge is equal to the net assets of the Sub-Account times the
daily pro rata portion of the annual Mortality and Expense Risk
Charge rate. This annual rate is equal to ninety one-hundredths of
one per cent (0.90%) and is multiplied times the net assets of the
Sub-Account; minus
(3) The accrued amount of reserve for any taxes or other economic burden
resulting from the application of tax laws that are determined by
AUSA Life to be properly attributable to the Sub-Account; and the
result divided by
(4) The number of outstanding units in the Sub-Account.
VALUATION DATE AND VALUATION PERIOD. The net asset value per share of
shares of the Fund is determined, once daily, as of the close of the regular
session of business on the New York Stock Exchange ("Exchange") (usually 4:00
p.m., Eastern time), on each day the Exchange is open.
INVESTMENTS OF THE SERIES ACCOUNT
WRL SERIES FUND, INC.
The Series Account invests in shares of the Fund, a series mutual fund
which is registered with the Securities and Exchange Commission ("Commission")
as an open-end diversified management investment company. Such registration
does not involve supervision of the management or investment practices or
policies of the Fund by the Commission.
Currently, the Portfolios of the Fund corresponding to the Sub-Accounts
of the Series Account are: Aggressive Growth Portfolio, Emerging Growth
Portfolio, Growth Portfolio, Global Portfolio, Balanced Portfolio, Strategic
Total Return Portfolio, Bond Portfolio, Growth & Income Portfolio, Money Market
Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E. Growth Portfolio,
Value Equity Portfolio, U.S. Equity Portfolio, International Equity Portfolio
and Third Avenue Value Portfolio. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has an
investment objective and policies which are different from those of the other
Portfolios. Thus, each Portfolio operates as a separate investment fund, and
the income or losses of one Portfolio generally have no effect on the
investment performance of any other Portfolio. Pending any prior approval by a
state insurance regulatory authority, certain Sub-Accounts and corresponding
Portfolios may not be available to residents of some states.
The investment objective and policies of each Portfolio are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE. More detailed information, including a description of risks, can be
found in the Prospectus for the Fund which should be read carefully.
AGGRESSIVE GROWTH PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities.
EMERGING GROWTH PORTFOLIO: This Portfolio seeks capital appreciation by
investing primarily in common stocks of small and medium sized companies.
18
<PAGE>
GROWTH PORTFOLIO: This Portfolio seeks growth of capital, by investing
primarily in common stocks listed on a national securities exchange or traded
on NASDAQ.
GLOBAL PORTFOLIO: This Portfolio seeks long-term growth of capital in a
manner consistent with preservation of capital, primarily through investments
in common stocks of foreign and domestic issuers.
THIRD AVENUE VALUE PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing primarily in a portfolio of equity securities of
well-financed companies believed to be priced below their private market values
and debt securities providing strong protective covenants and high, effective
rates.
BALANCED PORTFOLIO: This Portfolio seeks preservation of capital,
reduced volatility, and superior long-term risk adjusted returns by investing
primarily in common stock, convertible securities and fixed-income securities.
STRATEGIC TOTAL RETURN PORTFOLIO: This Portfolio seeks to provide
current income, long-term growth of income and capital appreciation by
investing primarily in a blend of equity and fixed-income securities, including
common stocks, income producing securities convertible into common stock, and
fixed-income securities.
BOND PORTFOLIO: This Portfolio seeks the highest possible current
income within the confines of the primary goal of insuring the protection of
capital by investing at least 65%, and usually a higher percentage, of its
assets in debt securities issued by the U.S. Government and its agencies and
instrumentalities and in other medium to high-quality debt securities.
GROWTH & INCOME PORTFOLIO: This Portfolio seeks total return by
investing in securities that have defensive characteristics. The Portfolio will
invest primarily in a diversified portfolio of equity and debt securities with
an emphasis on sector investing.
MONEY MARKET PORTFOLIO: This Portfolio seeks to obtain maximum current
income consistent with preservation of principal and maintenance of liquidity.
The Portfolio maintains a dollar-weighted average portfolio maturity of not
more than 90 days by investing in U.S. dollar-denominated securities which have
effective maturities of not more than 13 months and present minimal credit
risks.
TACTICAL ASSET ALLOCATION PORTFOLIO: This Portfolio seeks preservation
of capital and competitive investment returns by investing primarily in stocks,
United States Treasury bonds, notes and bills, and money market funds.
C.A.S.E. GROWTH PORTFOLIO: This Portfolio seeks annual growth of
capital through investment in companies whose management, financial resources
and fundamentals appear attractive on a scale measured against each company's
present value.
VALUE EQUITY PORTFOLIO: This Portfolio seeks to achieve maximum,
consistent total return with minimum risk to principal by investing primarily
in common stocks with above-average statistical value which, in the
Sub-Adviser's opinion, are in fundamentally attractive industries and are
undervalued at the time of purchase.
INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks long-term growth
of capital by investing primarily in the common stock of foreign issuers traded
on overseas exchanges and in foreign over-the-counter markets.
U.S. EQUITY PORTFOLIO: This Portfolio seeks long-term growth of capital
by investing primarily in equity securities of U.S. companies.
WRL Management, an affiliate of AUSA Life, located at 201 Highland
Avenue, Largo, FL 33770, a wholly-owned subsidiary of Western Reserve Life
Assurance Co. of Ohio ("Western Reserve"), serves as investment adviser to the
Fund and manages the Fund in accordance with policies and guidelines
established by the Board of Directors of the Fund. AUSA Life, WRL Management
and Western Reserve are affiliates.
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended.
Janus Capital Corporation ("Janus") is as sub-adviser to the Growth and
Global Portfolios of the Fund. WRL Management and Janus will divide equally
monthly compensation at the current annual rate of 0.80% of the aggregate
average daily net assets each of the Growth Portfolio and the Global Portfolio.
AEGON USA Investment Management, Inc. ("AIMI") is sub-adviser to the
Balanced Portfolio and the Bond Portfolio of the Fund. AIMI is a wholly-owned
subsidiary of AEGON USA and thus is an affiliate of AUSA Life. WRL Management
and AIMI will divide equally monthly compensation at the current annual rate of
0.80% of the aggregate average daily net assets of the Balanced Portfolio. WRL
Management will receive monthly compensation at a current annual rate of 0.45%
and AIMI will receive 0.20% of the aggregate average daily net assets of the
Bond Portfolio. AIMI's compensation will be reduced by 50% of the amount paid
by WRL Management on behalf of the Balanced and Bond Portfolios pursuant to any
expense limitation or other reimbursement.
Van Kampen American Capital Asset Management, Inc. ("Van Kampen American
Capital") is sub-adviser to the Emerging Growth Portfolio of the Fund. Van
Kampen American Capital is an indirect wholly-owned subsidiary of VK/AC
Holding, Inc., ("VK/AC Holding"). VK/AC Holding is a wholly-owned subsidiary of
MSAM Holdings II, Inc., which, in turn, is a wholly-owned subsidiary of Morgan
Stanley Group, Inc. WRL Management and Van Kampen American Capital will divide
equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Emerging Growth Portfolio. Van Kampen
American Capital's compensation will be reduced by 50% of the
19
<PAGE>
amount paid by WRL Management on behalf of the Emerging Growth Portfolio
pursuant to any expense limitation or other reimbursement.
Luther King Capital Management Corporation ("Luther King") is sub-adviser
to the Strategic Total Return Portfolio of the Fund. Ultimate control of Luther
King is exercised by J. Luther King, Jr. WRL Management and Luther King will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Strategic Total Return Portfolio.
Federated Investment Counseling ("Federated") is sub-adviser to the Growth &
Income Portfolio of the Fund. Federated is a wholly-owned subsidiary of
Federated Investors. WRL Management will receive monthly compensation at the
current annual rate of 0.75% of the aggregate average daily net assets of the
Growth & Income Portfolio. From this amount, as compensation of its services,
Federated will receive payments of fees equal to 0.50% of the first $30 million
of average daily net assets, 0.35% of the next $20 million of average daily net
assets, and 0.25% of average daily net assets in excess of $50 million of the
Growth & Income Portfolio.
Fred Alger Management, Inc. ("Fred Alger") is sub-adviser to the Aggressive
Growth Portfolio of the Fund. Fred Alger is a wholly-owned subsidiary of Fred
Alger & Company, Incorporated, which in turn is a wholly-owned subsidiary of
Alger Associates, Inc., a financial services holding company controlled by Fred
M. Alger. WRL Management and Fred Alger will divide equally monthly
compensation at the current annual rate of 0.80% of the aggregate average daily
net assets of the Aggressive Growth Portfolio.
Dean Investment Associates, a Division of C.H. Dean and Associates, Inc.
("Dean") is sub-adviser to the Tactical Asset Allocation Portfolio of the Fund.
Dean is wholly-owned by C.H. Dean and Associates, Inc. WRL Management and Dean
will divide equally monthly compensation at the current annual rate of 0.80% of
the aggregate average daily net assets of the Tactical Asset Allocation
Portfolio. Dean's compensation will be reduced by 50% of the amount paid by WRL
Management on behalf of the Tactical Asset Allocation Portfolio pursuant to any
expense limitation or other reimbursement.
J.P. Morgan Investment Management Inc. ("J.P. Morgan" is sub-adviser to
the Money Market Portfolio of the Fund. J.P. Morgan is a wholly-owned
subsidiary of J.P. Morgan & Co. Incorporated. WRL Management will receive
monthly compensation at the current annual rate of 0.40% of the aggregate
average daily net assets of the Money Market Portfolio. From this amount, as
compensation for its services, J.P. Morgan will receive 0.15% of the average
daily net assets of the Money Market Portfolio.
C.A.S.E. Management, Inc. ("C.A.S.E.") is sub-adviser to the C.A.S.E.
Growth Portfolio of the Fund. C.A.S.E. is a wholly-owned subsidiary of C.A.S.E.
Inc. C.A.S.E. Inc. is indirectly controlled by William Edward Lange, president
and chief executive officer of C.A.S.E. WRL Management and C.A.S.E. will divide
equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the C.A.S.E. Growth Portfolio.
NWQ Investment Management Company, Inc. ("NWQ Investment") is sub-adviser
to the Value Equity Portfolio of the Fund. NWQ Investment was founded in 1982
and is a wholly-owned subsidiary of United Asset Management Corporation. WRL
Management and NWQ Investment will divide equally monthly compensation at the
current annual rate of 0.80% of the aggregate average daily net assets of the
Value Equity Portfolio. NWQ Investment's compensation will be reduced by 50% of
the amount paid by AUSA Life on behalf of the Value Equity Portfolio pursuant
to any expense limitation or other reimbursement.
Scottish Equitable Investment Management Limited ("Scottish Equitable")
is a co-sub-adviser to the International Equity Portfolio. Scottish Equitable
is a wholly-owned subsidiary of Scottish Equitable plc, successor to Scottish
Equitable Life Assurance Society, which was founded in Edinburgh in 1831.
Scottish Equitable is also an indirect wholly-owned subsidiary of AEGON nv. WRL
Management receives monthly compensation at the annual rate of 1.00% of the
aggregate average daily net assets of the International Equity Portfolio. From
this amount, Scottish Equitable receives 0.50% of average daily net assets of
the Portfolio managed by Scottish Equitable.
GE Investment Management Incorporated ("GEIM") also is a co-sub-adviser
to the International Equity Portfolio and is sub-adviser to the U.S. Equity
Portfolio. GEIM is a wholly-owned subsidiary of General Electric Company
("GE"). GEIM's principal officers and directors serve in similar capacities
with respect to General Electric Investment Corporation ("GEIC," and, together
with GEIM and their predecessors, collectively referred to as "GE
Investments"), which like GEIM is a wholly-owned subsidiary of GE. WRL
Management receives monthly compensation at the annual rate of 1.00% of the
aggregate average daily net assets of the International Equity Portfolio. From
this amount, GEIM, receives 0.50% of average daily net assets of the Portfolio
managed by GEIM.
With respect to the U.S. Equity Portfolio, WRL Management and GEIM will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the U.S. Equity Portfolio.
EQSF Advisers, Inc. ("EQSF") is sub-adviser to the Third Avenue Value
Portfolio. EQSF is a New York corporation organized in 1988 and is controlled
by Martin J. Whitman. WRL Management and EQSF will divide equally monthly
compensation at the current annual rate of 0.80% of the aggregate average daily
net assets of the Third Avenue Value Portfolio. EQSF's compensation will be
reduced by 50% of the amount paid by WRL Management on behalf of
20
<PAGE>
the Third Avenue Value Portfolio pursuant to any expense limitation or other
reimbursement.
In addition to the Series Account, shares of the Fund are also sold to
the WRL Series Life Account and WRL Series Annuity Account, separate accounts
established by Western Reserve for its variable life insurance policies and
variable annuity contracts, the PFL Endeavor Variable Annuity Account, PFL
Endeavor Platinum Variable Annuity Account, and PFL Variable Annuity Account A,
separate accounts of PFL Life Insurance Company, and the AUSA Endeavor Variable
Annuity Account, a separate account of AUSA Life Insurance Company, Inc., all
affiliates of AUSA Life. Shares of the Fund may in the future be sold to other
separate accounts, including separate accounts established for variable life
insurance policies or variable annuity contracts issued by AUSA Life or its
affiliates. It is conceivable that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Fund simultaneously. Although
neither AUSA Life nor the Fund currently foresees any such disadvantages,
either to variable life insurance policyowners or to variable annuity contract
owners, the Fund's Board of Directors intends to monitor events in order to
identify any material conflicts between the interests of such variable life
insurance policyowners and variable annuity contract owners and to determine
what action, if any, it should take. Such action could include the sale of Fund
shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax laws, or (3)
differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contract owners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, AUSA Life
will bear the attendant expenses, but variable life insurance policyowners and
variable annuity contract owners would no longer have the economies of scale
resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
AUSA Life reserves the right to transfer assets of the Series Account to
another separate account which AUSA Life determines to be associated with the
class of contracts to which the Policy belongs. AUSA Life also reserves the
right, subject to compliance with applicable law, to make additions to,
deletions from, or substitutions for the investments that are held by any
Sub-Account or that any Sub-Account may purchase. Any such addition, deletion
or substitution by AUSA Life of shares of another Portfolio of the Fund or of
another open-end, registered investment company, will only be taken if the
shares of a Portfolio are no longer available for investment, or if in AUSA
Life's judgment further investment in any Portfolio should become inappropriate
in view of the purposes of the Series Account. AUSA Life will not add, delete
or substitute any shares attributable to a Policyowner's interest in a
Sub-Account of the Series Account without notice to and prior approval of the
Commission, to the extent required by the 1940 Act or other applicable law.
Nothing contained herein shall prevent the Series Account from purchasing other
securities for other Portfolios or classes of policies, or from permitting a
conversion between Portfolios or classes of policies on the basis of requests
made by Policyowners.
AUSA Life also reserves the right to establish additional Sub-Accounts of
the Series Account, each of which would invest in a new Portfolio of the Fund,
or in shares of another investment company, with a specified investment
objective. New Sub-Accounts may be established when, in the sole discretion of
AUSA Life, marketing, tax or investment conditions warrant, and any new
Sub-Accounts will be made available to existing Policyowners on a basis to be
determined by AUSA Life. AUSA Life may also eliminate one or more Sub-Accounts
if, in its sole discretion, marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, AUSA Life may by
appropriate endorsement make such changes in this and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
AUSA Life to be in the best interests of persons having voting rights under the
Policies, and when permitted by law, the Series Account may be (1) operated as
a management company under the 1940 Act, (2) deregistered under the 1940 Act
in the event such registration is no longer required, (3) managed under the
direction of a committee, or (4) combined with one or more other separate
accounts, or sub-accounts.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy must send a completed
application to AUSA Life, P.O. Box 9054, Clearwater, Florida 33758-9054. Under
AUSA Life's current rules, the minimum Specified Amount of a Policy is
generally $100,000. Policies will generally be issued only to Joint Insureds
ages 1 to 85 who supply satisfactory evidence of insurability sufficient to
AUSA Life.
The younger Joint Insured must be no older than age 80. Further, the sum
of the ages of the Joint Insureds cannot exceed the total of 160 years (see
Policy Lapse and Reinstatement - Lapse, p. 25). AUSA Life may, however, at its
sole discretion, issue a Policy with a younger Joint Insured above the age of
80. Acceptance is subject to AUSA Life's underwriting rules and Western Reserve
reserves the right to reject an application for any reason permitted by law.
PREMIUMS
Subject to certain limitations, a Policyowner has flexibility in
determining the frequency and amount of premiums.
PREMIUM FLEXIBILITY. Unlike conventional insurance policies, this
Policy frees the Policyowner from the requirement that premiums be paid in
accordance with a rigid and inflexible premium schedule. AUSA Life may require
the Policyowner to pay an Initial Premium at least equal to a
21
<PAGE>
minimum monthly guarantee premium set forth in the Policy before issuing the
Policy. (See Charges and Deductions - Premium Expense Charge, p. 26.)
Thereafter, subject to the minimum and maximum premium limitations described
below, a Policyowner may make unscheduled premium payments at any time in any
amount.
PLANNED PERIODIC PREMIUMS. Each Policyowner will determine a Planned
Periodic Premium schedule that provides for the payment of a level premium at a
fixed interval over a specified period of time. The Policyowner is not required
to pay premiums in accordance with this schedule. Furthermore, the Policyowner
has considerable flexibility to alter the amount, frequency, and the time
period over which Planned Periodic Premiums are paid.
The payment of a Planned Periodic Premium will not guarantee that the
Policy remains In Force. Instead, the duration of the Policy depends upon the
Policy's Net Surrender Value. Thus, even if Planned Periodic Premiums are paid
by the Policyowner, the Policy will nonetheless lapse any time Net Surrender
Value is insufficient to pay certain monthly charges, and a grace period
expires without a sufficient payment. However, until the No Lapse Date as
provided in the Policy, the Policy will remain In Force and no grace period
will begin provided there has been no addition of any riders and the total of
the premiums received (minus any withdrawals and any outstanding loans) is
equal to or exceeds the minimum monthly guarantee premium set forth in the
Policy times the number of months since the Policy Date, including the current
month. (See Policy Lapse and Reinstatement - Lapse, p. 25.)
PREMIUM LIMITATIONS. In no event may the total of all premiums paid,
both scheduled and unscheduled, exceed the current maximum premium limitations
which qualify the Policy as life insurance according to Federal tax laws. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, AUSA Life will only accept that portion of
the premium which will make total premiums equal the maximum. Any part of the
premium in excess of that amount will be returned and no further premiums will
be accepted until allowed by the current maximum premium limitations set forth
in the Policy. Every premium payment, whether scheduled or unscheduled, must be
at least the minimum payment amount required. Under AUSA Life's current rules,
the minimum payment amount is $100. Premium payments less than this minimum
amount may be returned to the Policyowner.
PAYMENT OF PREMIUMS. Payments made by the Policyowner will be treated
as a premium payment unless clearly marked as loan repayments. Certain charges
will be deducted from each premium payment. (See Charges and Deductions -
Premium Expense Charge, p. 26.)
As an accommodation to Policyowners, AUSA Life will accept transmittal of
Initial and subsequent Premiums of at least $1,000 by wire transfer. For an
Initial Premium, the wire transfer must be accompanied by a simultaneous
telephone facsimile transmission ("FAX") of a completed application. An Initial
Premium of $2,000 or more accepted via wire transfer with FAX will be allocated
in accordance with current procedures explained in the next section entitled
"Allocation of Premiums and Cash Value - Allocations of Net Premiums," below.
An Initial Premium made by wire transfer not accompanied by a simultaneous FAX,
or accompanied by a FAX of an incomplete application, will be retained for a
period up to five business days while AUSA Life attempts to obtain the FAX or
complete the essential information required to establish the Policy and
allocate the Initial Premium at the unit value next determined after receipt of
the FAX or information necessary to complete the application. If AUSA Life
cannot obtain the FAX or essential information within five business days, AUSA
Life will return the Initial Premium to the applicant, unless the applicant
consents to allow AUSA Life to retain the Initial Premium until the required
FAX or essential information is received.
In the event the application with original signature is received and the
allocation instructions in that application, for any reason, are inconsistent
with those previously designated on the FAX, the Initial Premium will be
reallocated on the first Valuation Date on or following the Record Date in
accordance with the allocation instructions in the application with original
signature.
Policyowners wishing to make payments via bank wire should instruct their
banks to wire Federal Funds as follows:
Barnett Bank of Pinellas County
ABA #
For credit to: AUSA Life
Account #: 1263627596
Policyowner's Name:
Policy Number:
Attention: General Accounting
Fax Number: (813) 588-1620
ALLOCATION OF PREMIUMS AND CASH VALUE
NET PREMIUMS. The Net Premium equals the premium paid less the premium
expense charges. (See Charges and Deductions - Premium Expense Charge, p. 26.)
When an Initial Premium accompanies the application, monthly deductions from
the Cash Value of the Policy commence on the Policy Date.
ALLOCATION OF NET PREMIUMS. In the application for a Policy, the
Policyowner will allocate Net Premiums to one or more of the Sub-Accounts of
the Series Account, to the Fixed Account, or to a combination of both.
Notwithstanding the allocation in the application, the Initial Premium, less
charges, will first be allocated, on the first Valuation Date on or following
the Policy Date, to the Sub-Account of the Series Account that invests
exclusively in shares of the Money Market Portfolio, and will be reallocated in
accordance with the Policyowner's directions in the application on the first
Valuation Date on or following the Record Date. The Record Date of the Policy
will be the date on which the
22
<PAGE>
Policy is recorded on AUSA Life's books as an In Force Policy. (See Payment and
Allocation of Premiums beginning on p. 21, and Policy Benefits - When
Conditional Life Insurance Coverage Begins p. 17.)
Net Premiums paid after the Record Date will be allocated in accordance
with the Policyowner's instructions in the application. AUSA Life does not
currently require that allocation of Net Premiums to an Account meet a minimum
percentage. AUSA Life does reserve the right to limit allocation of Net
Premiums to any Account to no less than 10% of each Net Premium payment. No
fractional percentages are permitted. The allocation of future Net Premiums may
be changed without charge at any time by providing AUSA Life with written
notification from the Policyowner, or by telephone by calling AUSA Life's
toll-free number, 1-800-322-7160. AUSA Life will employ the same procedures to
confirm that such telephone instructions are genuine as it employs regarding
transfers among Sub-Accounts and the Fixed Account by telephone. Upon
instructions from the Policyowner, the registered representative/agent of
record may also change the allocation of future Net Premiums. AUSA Life
reserves the right to limit the number of changes of the allocation of Net
Premiums to one per year. Investment returns from the amounts allocated to
Sub-Accounts of the Series Account will vary with the investment experience of
these Sub-Accounts and the Policyowner bears the entire investment risk.
TRANSFERS. Cash Value may be transferred among the Sub-Accounts of the
Series Account or from the Sub-Accounts to the Fixed Account. Transfers may
also be made from the Fixed Account to the Sub-Accounts, subject to certain
restrictions. (See The Fixed Account - Allocations, Transfers and Withdrawals,
p. 34.) The amount of Cash Value available for transfer from any Sub-Account,
or the Fixed Account, is determined at the end of the Valuation Period during
which the transfer request is received at AUSA Life's Administrative Office.
The net asset value for each share of the corresponding Portfolio of any
Sub-Account is determined, once daily, as of the close of the regular business
session of the New York Stock Exchange ("Exchange") (usually 4:00 p.m. Eastern
time), which coincides with the end of each Valuation Period. (See Policy
Benefits - Cash Value - Valuation Date and Valuation Period, p. 18.) Therefore,
any transfer request received after the close of the regular business session
of the Exchange, on any day the Exchange is open, will be processed on the next
day the Exchange is open for business, utilizing the net asset value for each
share of the applicable Portfolio determined as of the close of the regular
business session of the Exchange. Cash Value available for transfer from the
Fixed Account will be determined in the same manner.
Policyowners may make transfer requests in writing, or by telephone.
Written requests must be in a form acceptable to AUSA Life. The registered
representative/agent of record for the Policy may, upon instruction from the
Policyowner for each transfer, make telephone transfers upon request without
the necessity for the Policyowner to have previously authorized telephone
transfers in writing. If, for any reason, a Policyowner does not want the
ability to make transfers by telephone, the Policyowner should provide written
notice to AUSA Life at its Administrative Office. All telephone transfers
should be made by calling AUSA Life at the toll-free number: 1-800-322-7160.
AUSA Life will not be liable for complying with telephone instructions it
reasonably believes to be authentic, nor for any loss, damage, cost or expense
in acting on such telephone instructions, and Policyowners will bear the risk
of any such loss. AUSA Life will employ reasonable procedures to confirm that
telephone instructions are genuine. If AUSA Life does not employ such
procedures, it may be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, among others, requiring forms of
personal identification prior to acting upon such telephone instructions,
providing written confirmation of such transactions to Policyowners and/or tape
recording of telephone transfer request instructions received from
Policyowners. AUSA Life may, at any time, revoke or modify the transfer
privilege. Under AUSA Life's current procedures, it will effect transfers and
determine all values in connection with transfers at the end of the Valuation
Period during which the transfer request is received at AUSA Life's
Administrative Office.
Twelve Cash Value transfers are permitted without charge during any one
Policy year. AUSA Life will impose a charge of $10 for each subsequent
transfer. The transfer charge will not be increased. (See Optional Cash Value
Charges - Cash Value Transfers, p. 28.) All transfers made in any one day will
be considered a single transfer and any transfer charges will be deducted in an
equal amount from each Sub-Account from which a transfer was made. Transfers
resulting from policy loans, the exercise of conversion rights, and the
reallocation of Cash Value immediately after the Record Date, will not be
treated as a transfer for the purpose of this charge. No transfer charge will
apply to transfers from the Fixed Account to a Sub-Account or to the exercise
of the conversion rights. (See Policy Rights - Conversion Rights, p. 31.)
AUSA Life or an affiliate may provide administrative or other support
services to independent third parties authorized by Policyowners to conduct
transfers on a Policyowner's behalf, or who provide recommendations as to how
Sub-Account values should be allocated. This includes, but is not limited to,
transferring Sub-Account values among Sub-Accounts in accordance with various
investment allocation strategies such third party may employ. Such independent
third parties may or may not be appointed AUSA Life agents for the sale of
Policies. However, AUSA LIFE DOES NOT ENGAGE ANY THIRD PARTIES TO OFFER
INVESTMENT ALLOCATION SERVICES OF ANY TYPE, SO THAT PERSONS OR FIRMS OFFERING
SUCH SERVICES DO SO INDEPENDENT FROM ANY AGENCY RELATIONSHIP THEY MAY HAVE WITH
AUSA LIFE FOR THE SALE OF POLICIES. AUSA LIFE THEREFORE TAKES NO RESPONSIBILITY
FOR THE INVESTMENT ALLOCATIONS AND TRANSFERS TRANSACTED ON A
23
<PAGE>
POLICYOWNER'S BEHALF BY SUCH THIRD PARTIES OR ANY INVESTMENT ALLOCATION
RECOMMENDATIONS MADE BY SUCH PARTIES. AUSA Life does not currently charge a
Policyowner any additional fees for providing these support services.
DOLLAR COST AVERAGING
The Policyowner may direct AUSA Life to automatically transfer specified
amounts from the Money Market Sub-Account, the Bond Sub-Account, the Fixed
Account or any combination of these Accounts on a monthly basis to a Sub-
Account. This service is intended to allow the Owner to utilize "Dollar Cost
Averaging," a long-term investment strategy which provides for regular, level
investments over time. AUSA Life makes no guarantees that Dollar Cost Averaging
will result in a profit or protect against loss. To qualify for Dollar Cost
Averaging a minimum of $10,000 must be in each Account from which transfers
will be made and at least $1,000, in the aggregate, must be transferred each
month, unless AUSA Life consents to a smaller amount.
To further qualify for Dollar Cost Averaging from the Fixed Account, no
more than one-tenth (1/10) of the amount in the Fixed Account at the
commencement of Dollar Cost Averaging can be transferred each month. Other
types of transfers from the Fixed Account may also be subject to certain other
restrictions. (See The Fixed Account -- Allocations, Transfers and Withdrawals
on p. 34.)
A written election of this service, on a form provided by AUSA Life, must
be completed by the Policyowner in order to begin transfers. The first transfer
will occur during the month which follows receipt of the form, providing the
form is received by the 25th day of the month. Once elected, transfers from the
Money Market or Bond Sub-Accounts or the Fixed Account will be processed
monthly until the entire value of each Account from which transfers are made is
completely depleted or the Policyowner instructs AUSA Life in writing to cancel
the monthly transfers. For example, if $15,000 was allocated to the Money
Market Sub-Account and $10,000 was allocated to the Bond Sub-Account and
transfers of $500 are made each month from each of these Sub-Accounts to the
Growth Sub-Account, transfers of $500 per month would continue to be made from
the Money Market Sub-Account even though transfers from the Bond Sub-Account
had ceased as a result of depletion of value.
There is no charge for Dollar Cost Averaging. However, each transfer
which occurs under the Dollar Cost Averaging service will be counted towards
the twelve free transfers allowed during each Policy year. (See Allocation of
Premiums and Cash Value - Transfers on p. 23.) AUSA Life may discontinue,
modify, or suspend Dollar Cost Averaging at any time, following prior written
notice to Policyowners. Dollar Cost Averaging is not available if the Owner has
elected the Asset Rebalancing Program, or has elected an asset allocation
service provided by a third party.
ASSET REBALANCING PROGRAM
AUSA Life will offer a program under which the Policyowner may authorize
AUSA Life to transfer automatically Cash Value periodically to maintain a
particular percentage allocation among the Sub-Accounts. The Cash Value
allocated to each Sub-Account will grow or decline in value at different rates.
The Asset Rebalancing Program automatically reallocates the Cash Value in the
Sub-Accounts at the end of each period to match the Contract's currently
effective Net Premium allocation schedule. The Asset Rebalancing Program is
intended to transfer Cash Value from those Sub-Accounts that have increased in
value to those Sub-Accounts that have declined in value. Over time, this method
of investing may help an Owner buy low and sell high. This investment method
does not guarantee gains, nor does it assure that any Sub-Account will not have
losses.
To qualify for Asset Rebalancing, a minimum Cash Value of $10,000 for an
existing Policy, or a minimum Initial Premium of $10,000 for a new Policy, is
required. To participate in the Asset Rebalancing Program, a properly completed
Asset Rebalancing Request Form must be received by AUSA Life at its
Administrative Office. An Asset Rebalancing Form is available upon request.
Owners may elect rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy Date. Following receipt of the Asset
Rebalancing Request Form, AUSA Life will effect the initial rebalancing of Cash
Value on the next such anniversary, in accordance with the Policy's current Net
Premium allocation schedule. The amounts transferred will be credited at the
unit value next determined on the dates the transfers are made. If a day on
which rebalancing would ordinarily occur falls on a day on which the New York
Stock Exchange is closed, rebalancing will occur on the next day the New York
Stock Exchange is open. The Asset Rebalancing Program is available only before
the Maturity Date, and is not available if the Policyowner has elected Dollar
Cost Averaging, or has elected an asset allocation service provided by a third
party. There is no charge for the Asset Rebalancing Program. However, each
reallocation which occurs under the Asset Rebalancing Program will be counted
towards the twelve free transfers allowed during each Policy year. (See
Allocation of Premiums and Cash Value - Transfers on p. 23.)
The Policyowner may terminate participation at any time in the Asset
Rebalancing Program by oral or written request to AUSA Life. Participation in
the Asset Rebalancing Program will terminate automatically if any transfer is
made to, or from, any Sub-Account, other than on account of a scheduled
rebalancing. If the Policyowner wishes to resume the Asset Rebalancing Program
after it has been canceled, a new Asset Rebalancing Request Form must be
completed and sent to AUSA Life. The Policyowner may start and stop
participation in the Asset Rebalancing Program at any time; however, AUSA Life
reserves the right to restrict entry into the Asset Rebalancing Program to once
per Policy year. Cash Value
24
<PAGE>
allocated to the Fixed Account may not be included in the Asset Rebalancing
Program.
AUSA Life may discontinue, modify, or suspend, the Asset Rebalancing
Program at any time following prior written notice to Policyowners.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike conventional life insurance policies, the failure to make
a Planned Periodic Premium payment will not itself cause the Policy to lapse.
Conversely, paying all Planned Periodic Premium payments will not necessarily
guarantee that the Policy will not lapse. For instance, if the conditions
explained below are not met, the Policy may lapse prior to the No Lapse Date.
Lapse will only occur where Net Surrender Value is insufficient on any Monthly
Anniversary to cover the monthly deductions, and a grace period expires without
a sufficient payment by the Policyowner. If the Net Surrender Value on any
Monthly Anniversary is not sufficient to cover the monthly deductions on such
day, AUSA Life will mail a notice to the last known address of the
Policyowner(s) and any assignee of record. A grace period of 61 days after the
mailing date of the notice will be allowed for the payment of premiums. The
notice will specify the minimum payment and the final date on which such
payment must be received by AUSA Life to keep the Policy In Force. (See Charges
and Deductions, p. 26.)
However, until the No Lapse Date as provided in the Policy, the Policy
will not lapse and no grace period will begin, provided: (1) no riders have
been added since the Policy Date, and (2) the total of the premiums received
(minus any withdrawals and any outstanding loans) equal or exceed the minimum
monthly guarantee premium shown in the Policy times the number of months since
the Policy Date, including the current month and, (3) the excess indebtedness
(total of all Policy loans less any unearned loan interest on Policy loans)
does not exceed the Cash Value (see Policy Rights - Loan Privileges, p. 29).
Should the Policyowner(s) request the addition of any rider after the Policy
Date but prior to the No Lapse Date, the Policyowner(s) will be notified as to
the effect on grace period processing prior to the date the rider is effective.
Essentially, the Policy will not lapse during the period from the Policy
Date until the No Lapse Date (the "No Lapse Period"), as long as the conditions
in (1), (2) and (3) immediately above have been met, and even though Net
Surrender Value at any point during the No Lapse Period is insufficient to
cover a monthly deduction and the grace period has expired without a payment
sufficient to cover the monthly deduction. Such a Lapse could happen if the
investment experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Surrender Value, or the Net Surrender Value has decreased
because not enough premiums have been paid to offset the monthly charges.
When the conditions in (1), (2) and (3) above have not been met, or they
have been met, but the Policy is beyond the No Lapse Date, and Net Surrender
Value is insufficient to cover the monthly deduction, AUSA Life will notify the
Policyowner and any assignee of record of the minimum payment needed to keep
the Policy In Force. The Policyowner will then have a grace period of 61 days,
measured from the date notice is mailed to the Policyowner, for AUSA Life to
receive sufficient payments. If AUSA Life does not receive a sufficient payment
within the grace period, Lapse of the Policy will result. If a sufficient
payment is received during the grace period, any resulting Net Premium will be
allocated among the Accounts, and any monthly deductions due will be charged to
such Accounts, in accordance with the Policyowner's then current instructions.
(See Allocation of Premiums and Cash Value - Allocation of Net Premiums, p. 22,
and Charges and Deductions - Cash Value Charges, p. 27.) If the Surviving
Insured dies during the grace period, the death benefit proceeds will equal the
amount of the death benefit proceeds immediately prior to the commencement of
the grace period, reduced by any due and unpaid charges.
The duration of the period of time between the Policy Date and the No
Lapse Date is selected by the Policyowner at time of application for the
Policy, and may be either, (1) the later of attained target premium age 65 or
five Policy years, or (2) the later of attained target premium age 75 or five
Policy years. The amount of the minimum monthly guarantee premium will vary
according to whether (1) or (2) is chosen. Neither (1) nor (2) may exceed
target premium age 85. The target premium age equals the average of the ages of
the Joint Insureds at time of Policy issue, rounded down to the closer age, not
to exceed the younger Joint Insured's age, plus ten years. For example, if the
ages of the Joint Insureds at time of Policy issue are 46 and 48, the target
premium age is 47. If the ages at time of Policy issue are 45 and 48, the
target premium age is 46. If the ages at time of Policy issue are 50 and 80,
the target premium age is 60. The target premium attained age equals the target
premium age plus the number of completed Policy years.
REINSTATEMENT. A lapsed Policy may be reinstated any time within five
years after the date of lapse and before the Maturity Date by submitting the
following items to Western Reserve:
1. A written application for reinstatement from the Policyowner;
2. Evidence of insurability from each Joint Insured satisfactory to AUSA
Life; and
3. A premium that, after the deduction of premium expense charges, is
large enough to cover:
(a) one monthly deduction at the time of termination;
(b) the next two monthly deductions which will become due after the
time of reinstatement; and
(c) an amount sufficient to cover any surrender charge (as described
below) as of the date of reinstatement.
25
<PAGE>
AUSA Life reserves the right to decline a reinstatement request. Any
indebtedness on the date of Lapse will not be reinstated. The Cash Value of the
Loan Reserve on the date of reinstatement will be zero. The amount of Net
Surrender Value on the date of reinstatement will be equal to the Net Premiums
paid at reinstatement, less the amounts paid in accordance with (a) and (c)
above.
Upon approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Anniversary on or next following the
date AUSA Life approves the application for reinstatement.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate AUSA
Life for: (1) providing the insurance benefits set forth in the Policy and any
optional insurance benefits added by rider; (2) administering the Policy; (3)
assuming certain risks in connection with the Policy; and (4) incurring
expenses in distributing the Policy. The nature and amount of these charges are
described more fully below.
PREMIUM EXPENSE CHARGE
Prior to allocation of Net Premiums among the Accounts, premiums paid
through the end of the tenth Policy year will be reduced by a Premium Expense
Charge equal to 6.00% of premiums to compensate AUSA Life for distribution
expenses and premium taxes incurred in connection with the Policy. After the
tenth Policy year, the Premium Expense Charge reduces to 2.5%.
CONTINGENT SURRENDER CHARGES
If the Policy is totally surrendered (or the Net Surrender Value is
applied under a settlement option) prior to the end of the fifteenth (15th)
Policy year, a surrender charge for the initial Specified Amount will be
deducted from the Policy's Cash Value. The surrender charge consists of the sum
of:
(a) an administrative component (DEFERRED ISSUE CHARGE), and
(b) a sales component (DEFERRED SALES CHARGE).
The sum of (a) and (b) are multiplied by (c), the applicable SURRENDER
CHARGE PERCENTAGE.
(a) DEFERRED ISSUE CHARGE. The deferred issue charge is a level charge
of $5.00 per thousand of initial Specified Amount. This charge is to assist
AUSA Life in recovering the underwriting, processing and start-up expenses
incurred in connection with the Policy and the Series Account. These expenses
include the cost of processing applications, conducting medical examinations,
determining insurability and the Joint Insured's rate class, and establishing
Policy records.
(b) DEFERRED SALES CHARGE. The deferred sales charge is (1) 26.5% of
the sum of all premiums paid up to the Guideline Premium shown in the Policy
and, (2) for the sum of all premiums paid in excess of the first Guideline
Premium ("excess premium charge"), a percentage which varies by the Issue Age
of the younger Joint Insured as follows:
Excess Premium Issue Age Range
Charge (Younger Joint Insured)
- ---------------- ------------------------
4.2% 1-55
3.7% 56-63
3.1% 64-68
2.5% 69-73
2.0% 74-76
1.6% 77-78
1.2% 79-80
The deferred sales charge is designed to assist AUSA Life in recovering
distribution expenses incurred in connection with the Policy, including agent
sales commissions, the cost of printing prospectuses and sales literature, and
any advertising costs. The proceeds of the charge may not be sufficient to
cover these expenses. To the extent they are not, AUSA Life will cover the
shortfall from its General Account assets, which may include profits from the
mortality and expense risk charge under the Policy.
(c) SURRENDER CHARGE PERCENTAGE. As stated above, the percentage is
applied to the sum of the deferred issue charge and deferred sales charge due
upon any surrender of a Policy during the first fifteen Policy years. In Policy
years 1-10 this percentage is 100% for Joint Insureds when the age of the
younger of the Joint Insureds is between Ages 0-74, and then declines at the
rate of 20% per year until reaching zero at the end of the fifteenth (15th)
Policy year as shown below. For Joint Insureds when the age of the younger of
the Joint Insureds is between Issue Ages 75-80, this percentage is 100% until
the end of the sixth (6th) Policy year, and declines to 0% at the end of the
fifteenth (15th) Policy year. Therefore, application of the percentage to the
deferred issue charge and deferred sales charge in the event of any surrender
during the eleventh through fifteenth Policy year will result in reduced
surrender charges. If a surrender occurs after the fifteenth (15th) Policy
year, there are no deferred issue or deferred sales charges due. See Example
(2) on p. 27.
SURRENDER CHARGE PERCENTAGES
Younger Age
------------------
Less 75 or
End of Policy Year* Than 75 Above
- -------------------- --------- ------
At Issue 100% 100%
1-6 100% 100%
7 100% 97%
8 100% 88%
9 100% 80%
10 100% 73%
11 80% 66%
12 60% 60%
13 40% 40%
14 20% 20%
15+ 0% 0%
* THE CHARGE ON ANY DATE OTHER THAN AN ANNIVERSARY WILL BE INTERPOLATED BETWEEN
THE TWO END OF YEAR CHARGES.
(d) EXAMPLE (1) Assume a male non-tobacco user age 35 and a female
non-tobacco user age 35 purchase a Policy
26
<PAGE>
for $100,000 of Specified Amount, paying the Guideline Premium of $806.11, and
an additional premium amount of $193.89 in excess of the Guideline Premium, for
a total premium of $1,000 per year for four years ($4,000 total for four
years), and then surrenders the Policy. The surrender charge would be
calculated as follows:
(a) Deferred Issue Charge - [100 x $5.00]
($5.00/$1,000 of Initial Specified Amount) = $ 500.00
(b) Deferred Sales Charge:
(1) 26.5% of Guideline
Premium paid
[26.5% x $806.11], and = $ 213.62
(2) 2.6% of premiums paid in excess
of Guideline Premium
[2.6% x ( (4 x 1,000) - $806.11)] = $ 134.14
(c) Applicable Surrender Charge = 100%
[(a)$500.00 + (b)($213.62 + $134.14)]
x 100%
SURRENDER CHARGE = 847.76 x 100% = $ 847.76
========
EXAMPLE (2) - Assume the same facts as in Example (1), EXCEPT the Owner
surrenders the Policy on the 14th Policy Anniversary:
(a) Deferred Issue Charge - [100 x $5.00] = $ 500.00
(b) Deferred Sales Charge:
(1) [26.5% x $806.11], and = $ 213.62
(2) [2.6% x ( (14 x 1,000) - $806.11)] = $ 554.14
(c) Applicable Surrender Charge = 20%
[(a)$500.00 + (b)($213.62 + $554.14)]
x 20%
SURRENDER CHARGE = $1,267.76 x 20% = $ 253.55
========
If the Owner waits until the 15th Policy Anniversary or after, there will
be no surrender charge.
CASH VALUE CHARGES
Charges will be deducted monthly from the Cash Value of each Policy
("monthly deduction") to compensate AUSA Life for certain administrative costs,
the cost of insurance, the monthly death benefit guarantee charge, and optional
benefits added by rider. The monthly deduction will be deducted on each Monthly
Anniversary, and will be allocated among the Accounts on the same basis as Net
Premiums are allocated. If the value of any Account is insufficient to pay its
part of the monthly deduction, the monthly deduction will be taken on a pro
rata basis from all Accounts. Because portions of the monthly deduction, such
as the cost of insurance, can vary from month-to-month, the monthly deduction
itself will vary in amount from month-to-month.
COST OF INSURANCE. AUSA Life will determine the monthly cost of
insurance charge by multiplying the applicable cost of insurance rates by the
net amount at risk for each Policy Month. The net amount at risk for a Policy
Month is (a) the death benefit at the beginning of the Policy Month divided by
1.0032737 (which reduces the net amount at risk, solely for purposes of
computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 4%), less (b) the Cash Value at the beginning of
the Policy Month.
Cost of insurance rates will be based on the sex, Attained Age and rate
class of the Joint Insureds, and the length of time a Policy has been In Force.
The actual monthly cost of insurance rates will be based on AUSA Life's
expectations as to future experience. They will not, however, be greater than
the guaranteed cost of insurance rates set forth in the Policy. These
guaranteed rates are based on the 1980 Commissioners Standard Ordinary ("1980
C.S.O."), age nearest birthday, Mortality Tables and the sex, Attained Age and
rate class of each Joint Insured. The rate class of each Joint Insured is
either Select (non-tobacco user), or Standard (tobacco user) or a class which
reflects some substandard classification. There is no rate discount for a
preferred class. For standard rate classes, i.e., either tobacco user or
non-tobacco user classes not rated, these rates will not exceed rates contained
in the 1980 C.S.O. Tables. AUSA Life also may guarantee that actual cost of
insurance rates will not be changed for a specified period of time (e.g., one
year). Any change in the cost of insurance rates will apply to all Joint
Insureds of the same age, sex, and rate class whose Policies have been In Force
for the same length of time.
The Policies offered by this Prospectus are based on mortality tables
that distinguish between men and women. As a result, the Policy pays different
benefits to Joint Insureds who are either both men or women of the same age.
The rate class of each Joint Insured will affect the cost of insurance
rate. For this Policy, AUSA Life currently places Joint Insureds into the
following three nonsub-standard rate classes: combination of two non-tobacco
users, combination of two tobacco users and the combination of a tobacco user
and a non-tobacco user; as well as various other sub-standard rate classes
involving a higher mortality risk. In an otherwise identical Policy, the cost
of insurance rate is generally higher for tobacco use than for non-tobacco use.
AUSA Life may also issue certain Policies on a "simplified" or expedited
basis to certain categories of individuals (for example, Policies issued at a
predetermined Specified Amount or underwritten on a group basis). Policies
issued on this basis will have guaranteed cost of insurance rates no higher
than the guaranteed rates for Select or Standard categories (as appropriate);
however, due to the special underwriting criteria established for these issues,
actual rates may be higher or lower than the current cost of insurance rates
charged under otherwise identical Policies that are underwritten using standard
underwriting criteria.
27
<PAGE>
MONTHLY DEATH BENEFIT GUARANTEE CHARGE. AUSA Life will deduct a monthly
death benefit guarantee charge from each Policy to compensate AUSA Life for the
risk of guaranteeing the death benefit for the period chosen by the Owner on
the application provided a minimum level of premiums are received. The amount
of this charge is set forth on the Policy Schedule Page and will be $0.04 per
$1,000 of initial Specified Amount for all classes of Policies. This charge
will only be levied during the period between the Policy Date and the No Lapse
Date. (See Policy Lapse and Reinstatement - Lapse, p. 25.)
MONTHLY POLICY CHARGE. AUSA Life has primary responsibility for the
administration of the Policy and the Series Account. Annual administrative
expenses include recordkeeping, processing death benefit claims, Policy
changes, reporting and overhead costs. As reimbursement for administrative
expenses related to the maintenance of each Policy and the Series Account, AUSA
Life assesses a monthly administration charge from each Policy. This charge is
currently $5.00 per Policy Month. AUSA Life reserves the right to increase this
charge, but it is guaranteed not to exceed $10.00 per Policy Month. AUSA Life
reserves the right to waive the Monthly Policy Charge on additional policies
issued to existing Policyowners at the time the second policy is issued.
OPTIONAL CASH VALUE CHARGES
The following optional Cash Value charges will be deducted from the
Policy as the result of changes or elections made to the Policy and initiated
by the Policyowner.
OPTIONAL INSURANCE BENEFITS. The monthly deduction will include charges
for any optional insurance benefits added to the Policy by rider.
CASH VALUE TRANSFERS. After twelve (12) free transfers per year, AUSA
Life will impose and deduct from each amount transferred a transfer charge of
$10 to compensate AUSA Life for the costs in effectuating the transfer. The
transfer charge will not be increased in the future.
CASH WITHDRAWALS. A processing fee equal to the lesser of $25 or 2% of
the amount withdrawn will be deducted from amounts withdrawn from the Policy
and the balance will then be paid to the Policyowner. This fee will not be
increased.
CHARGES AGAINST THE SERIES ACCOUNT
Certain expenses will be deducted as a percentage of the value of the net
assets of the Series Account to compensate AUSA Life for certain risks assumed
in connection with the Policy.
MORTALITY AND EXPENSE RISK CHARGE. AUSA Life will deduct a daily charge
from the Series Account at an annual rate of 0.90% of the average daily net
assets of the Series Account. Under AUSA Life's current procedures, these
amounts are paid to the General Account monthly.
The mortality risk assumed by AUSA Life is that the Surviving Insured may
live for a shorter time than projected. The expense risk assumed is that
expenses incurred in issuing and administering the Policies will exceed the
limits on administrative charges set in the Policies. AUSA Life also assumes
risks with respect to other contingencies including the incidence of Policy
loans, which may cause AUSA Life to incur greater costs than anticipated when
designing the Policies.
TAXES. Currently no charge is made to the Series Account for Federal
income taxes that may be attributable to the Series Account. AUSA Life may,
however, make such a charge in the future. Charges for other taxes, if any,
attributable to the Series Account may also be made. (See Federal Tax Matters,
p. 35.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Portfolios of the
Fund, the net assets of the Series Account will reflect the investment
management fee and other expenses incurred by the Fund. (See p. 6 for a table
of the Fund Annual Expenses and pp. 19-21 for a discussion of the investment
management fees of each Portfolio.)
Effective January 1, 1997, the Fund adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to
the Plan, entered into a Distribution Agreement with ISI, principal underwriter
for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek
payment by the Fund of distribution expenses with respect to any Portfolio
during the fiscal year ending December 31, 1998. Prior to ISI's seeking
reimbursement, Policyowners will be notified in advance.
GROUP OR SPONSORED POLICIES
A different form of the Policy may be purchased under group or sponsored
arrangements ("Group/Sponsored Policies"). Under Group/Sponsored Policies, a
trustee, employer or similar entity purchases individual policies covering a
group of individuals on a group basis. Examples of such arrangements are
employer-sponsored benefit plans which are qualified under Section 401 of the
Internal Revenue Code and deferred compensation plans. A "sponsored
arrangement" includes a program under which an employer permits group
solicitation of its employees or an association permits group solicitation of
its members for the purchase of Policies on an individual basis.
For Group/Sponsored Policies the premium expense charges, contingent
surrender charges, minimum premium
28
<PAGE>
and minimum Specified Amount described in "Charges and Deductions" and "Payment
and Allocation of Premiums", respectively, may be reduced. AUSA Life will issue
Group/ Sponsored Policies in accordance with its rules in effect as of the
date an application for a Policy is approved. To qualify for Group/Sponsored
Policies, a group or sponsored arrangement must satisfy certain criteria as to,
for example, size and number of years in existence. Generally, the sales
contacts and effort, administrative costs and mortality cost for Group/
Sponsored Policies take into account such factors as the size of the group or
sponsored arrangement, its stability as indicated by its term of existence, the
purposes for which Group/ Sponsored Policies are purchased and certain
characteristics of its members. The Group/Sponsored Policy's amount of
reduction and the criteria for qualification will reflect the reduced sales
effort resulting from sales to qualifying groups and sponsored arrangements.
Group/Sponsored Policies may not be available in certain states.
AUSA Life may modify from time to time on a uniform basis the criteria
for qualification for Group/Sponsored Policies. In no event, however, will
group or sponsored arrangements established for the sole purpose of purchasing
Group/ Sponsored Policies, or which have been in existence for less than six
months, qualify for such Policies. Group/Sponsored Policies will not be
unfairly discriminatory against any person, including the affected Policyowners
and all other Policyowners of other forms of Policies funded by the Series
Account.
In 1983 the United States Supreme Court held that certain insurance
policies, the benefits under which vary based on sex, may not be used to fund
certain employer-sponsored benefit plans and fringe benefit programs. AUSA Life
recommends that any employer proposing to offer the Group/ Sponsored Policies
to employees under a group or sponsored arrangement consult his or her attorney
before doing so. (See Federal Tax Matters - Employment-Related Benefit Plans,
p. 38.)
ASSOCIATE POLICIES
Certain employees, field associates, directors and their relatives may
purchase a different form of the Policy ("Associate Policy") under which AUSA
Life, in addition to waiving or reducing the premium expense charges,
contingent surrender charges, minimum premium and minimum Specified Amount, may
waive or reduce the Monthly Policy Charge and the Surrender Charge. The
Associate Policy is available to (a) current and retired directors, officers,
full-time employees and agents of AUSA Life and its affiliates; (b) current and
retired directors, officers, full-time employees and registered representatives
of ISI and any broker-dealer which has a sales agreement with ISI; (c) any
Trust, pension, profit-sharing or other employee benefit plan of any of the
foregoing persons or entities; (d) current and retired directors, officers and
full-time employees of WRL Series Fund, Inc. and the IDEX Series Fund, and any
investment adviser or investment sub-adviser thereto; and (e) any member of a
family of any of the foregoing (e.g., spouse, child, sibling, parent-in-law).
AUSA Life reserves the right to modify or terminate this arrangement at any
time. The Associate Policy may not be available in certain states.
POLICY RIGHTS
LOAN PRIVILEGES
POLICY LOAN. After the first Policy year and so long as the Policy
remains In Force, the Policyowner may borrow money from AUSA Life using the
Policy as the only security for the loan. AUSA Life reserves the right to
permit a Policy loan prior to the first Policy Anniversary for Policies issued
pursuant to a transfer of cash values from another life insurance policy under
Section 1035(a) of the Internal Revenue Code of 1986, as amended. The maximum
amount that may be borrowed is 90% of the Cash Value, less any surrender charge
and any already outstanding Policy loan. AUSA Life reserves the right to limit
the amount of any Policy loan to no less than $500. Outstanding loans have
priority over the claims of any assignee or other person. The loan may be
repaid totally or in part before the Maturity Date of the Policy and while the
Policy is In Force. A loan which is taken from, or secured by, a Policy may
have Federal income tax consequences. (See Federal Tax Matters, p. 35.)
An amount equal to the loan plus interest in advance until the next
Policy Anniversary will be withdrawn from the Account or Accounts specified and
transferred to the Loan Reserve until the loan is repaid. The Loan Reserve is a
portion of the Fixed Account used as Collateral for a Policy loan. The
Sub-Accounts of the Series Account may be specified. If no Account is
specified, the loan amount will be withdrawn from each Account in the same
manner as the current allocation instructions.
The amount of the loan will normally be paid within seven days after
receipt of a proper request in a manner permitted by AUSA Life. Postponement of
loans may take place under certain conditions. (See General Provisions -
Postponement of Payments, p. 32.) Under AUSA Life's current procedures, at each
Anniversary, AUSA Life will compare the amount of the outstanding loan
(including loan interest in advance until the next Policy Anniversary, if not
paid) to the amount in the Loan Reserve (including interest credited to the
Loan Reserve during the previous Policy year). AUSA Life will also make this
comparison any time the Policyowner repays all or part of the loan or makes a
request to borrow an additional amount. At each such time, if the amount of the
outstanding loan exceeds the amount in the Loan Reserve, AUSA Life will
withdraw the difference from the Accounts and transfer it to the Loan Reserve
in the same manner as when a loan is made. If the amount in the Loan Reserve
exceeds the amount of the outstanding loan, AUSA Life will withdraw the
difference from the Loan Reserve and transfer it to the Accounts in accordance
with the Policyowner's current allocation instructions. AUSA Life reserves the
right to require the transfer of such amounts to the Fixed Account, if such
loans were originally transferred from the Fixed
29
<PAGE>
Account. (See The Fixed Account, p. 34.) No charge will be imposed for these
transfers.
INTEREST RATE CHARGED. The interest rate charged on Policy loans will
be at the rate of 5.66% payable annually in advance. If unpaid when due,
interest will be added to the amount of the loan and will become part of the
loan and bear interest at the same rate. Interest paid on a Policy loan is
generally not tax deductible.
LOAN RESERVE INTEREST RATE CREDITED. The amount transferred to the Loan
Reserve will accrue interest at a minimum effective annual rate not less than
4%. AUSA Life may credit a higher rate, but is not obligated to do so.
Currently, AUSA Life is crediting an effective annual interest rate of 4.75% on
all amounts borrowed during the first ten Policy years. On amounts borrowed,
after the tenth Policy year, that are part of the Cash Value in excess of the
cost basis (premiums less withdrawals) of the Policy the interest rate credited
is currently equal to the interest rate being charged on the total loan while
the remaining portion, if any, of the loan is credited the current rate of
4.75%.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy because the
death benefit and Net Surrender Value under the Policy are reduced by the
amount of the loan. Repayment of the loan causes the death benefit and Net
Surrender Value to increase by the amount of the repayment.
As long as a loan is outstanding, an amount equal to the loan plus
interest in advance until the next Policy Anniversary is held in the Loan
Reserve. This amount will not be affected by the Series Account's investment
performance. Amounts transferred from the Series Account to the Loan Reserve
will affect the Series Account value because such amounts will be credited with
an interest rate declared by AUSA Life rather than a rate of return reflecting
the investment performance of the Series Account. (See The Fixed Account -
Minimum Guaranteed and Current Interest Rates, p. 34.)
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved, as well as adverse tax consequences which
occur if a Policy lapses with loans outstanding. (See Federal Tax Matters - Tax
Treatment of Policy Benefits, p. 36.)
INDEBTEDNESS. Indebtedness equals the total of all Policy loans less
any unearned loan interest on the loans. If indebtedness exceeds the Cash Value
less the then applicable surrender charge, AUSA Life will notify the
Policyowner and any assignee of record. If a sufficient payment equal to excess
indebtedness is not received by AUSA Life within 61 days from the date notice
is sent, the Policy will lapse and terminate without value. The Policy,
however, may later be reinstated. (See Policy Lapse and Reinstatement, p. 25.)
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time before
the Maturity Date of the Policy and while the Policy is In Force. Payments made
by the Policyowner while there is indebtedness will be treated as premium
payments unless the Policyowner indicates that the payment should be treated as
a loan repayment. (See Policy Rights - Benefits at Maturity, p. 31.) If not
repaid, AUSA Life may deduct indebtedness from any amount payable under the
Policy. As indebtedness is repaid, the Policy's value in the Loan Reserve
securing the indebtedness repaid will be transferred from the Loan Reserve to
the Accounts in the same manner as Net Premiums are allocated. However, AUSA
Life reserves the right to require the transfer to the Fixed Account. AUSA Life
will allocate the repayment of indebtedness at the end of the Valuation Period
during which the repayment is received.
SURRENDER PRIVILEGES
At any time before the earlier of the death of the Surviving Insured or
the Maturity Date, the Policyowner may totally surrender the Policy by sending
a written request to AUSA Life. The amount available for surrender is the Net
Surrender Value at the end of the Valuation Period during which the surrender
request is received at AUSA Life's Administrative Office. The Net Surrender
Value is equal to the Cash Value as of the date of surrender, less any
surrender charge, and less any outstanding Policy loan, plus any unearned loan
interest. A Surrender Charge may apply. (See Charges and Deductions -
Contingent Surrender Charges, p. 26.) Surrenders from the Series Account will
generally be paid within seven days of receipt of the written request.
Postponement of payments may, however, occur in certain circumstances. (See
General Provisions - Postponement of Payments, p. 32.) Additional restrictions
may be applied to surrenders from the Fixed Account. (See The Fixed Account -
Allocations, Transfers and Withdrawals, p. 34.) For the protection of
Policyowners, all requests for cash withdrawals or total surrenders of more
than $100,000, or where the withdrawal or surrender proceeds are to be sent to
an address other than the address of record will require a signature guarantee.
All required guarantees of signatures must be made by a national or state bank,
a member firm of a national stock exchange or any other institution which is an
eligible guarantor institution as defined by rules and regulations of the
Commission. If the Policyowner is a corporation, partnership, trust or
fiduciary, evidence of the authority of the person seeking redemption is
required before the request for withdrawal is accepted, including withdrawals
under $100,000. For additional information, Policyowners may call AUSA Life at
1-800-322-7160. A cash withdrawal or total surrender may have Federal income
tax consequences. (See Federal Tax Matters, p. 35.)
TOTAL SURRENDERS. When the Policy is being totally surrendered, the
Policy itself must be returned to AUSA Life along with the request. A
Policyowner may elect to have the amount paid in a lump sum or under a
settlement option. (See Payment of Policy Benefits - Settlement Options, p.
32.)
CASH WITHDRAWALS. Cash withdrawals are available after the first Policy
year. Cash withdrawals are allowed only once each Policy year. For a cash
withdrawal, the amount available may be limited to no less than $500 and to no
more
30
<PAGE>
than 10% of the Net Surrender Value. The amount paid plus a processing fee
equal to the lesser of $25 or 2% of the amount withdrawn will be deducted from
the Policy's Cash Value at the end of the Valuation Period during which the
request is received. The amount will be deducted from the Accounts in the same
manner as the current allocation instructions unless the Policyowner directs
otherwise.
Cash withdrawals will affect both the Policy's Cash Value and the death
benefit payable under the Policy. The Policy's Cash Value will be reduced by
the amount of the cash withdrawal. Moreover, the death benefit proceeds payable
under a Policy will generally be reduced by at least the amount of the cash
withdrawal.
In addition, when death benefit Option A is in effect, the Specified
Amount will be reduced by the cash withdrawal. No cash withdrawal will be
permitted which would result in a Specified Amount lower than the minimum
Specified Amount set forth in the Policy or would deny the Policy status as
life insurance under the Internal Revenue Code and applicable regulations. (See
Cash Value Charges - Cost of Insurance, p. 27; Death Benefit - Insurance
Protection, p. 16; and Federal Tax Matters - Tax Treatment of Policy Benefits,
p. 36.)
EXAMINATION OF POLICY PRIVILEGE ("FREE-LOOK")
The Policyowner may cancel the Policy within 10 days after the
Policyowner receives it, or 10 days after AUSA Life mails or delivers a written
notice of withdrawal right to the Policyowner or within 45 days after signing
the application, whichever is latest. The Policyowner should mail or deliver
the Policy to either AUSA Life or the agent who sold it. If the Policy is
cancelled in a timely fashion, a refund will be made to the Policyowner. The
refund will equal the sum of: (i) the difference between the premiums paid and
the amounts allocated to any Accounts under the Policy; (ii) the total amount
of monthly deductions made and any other charges imposed on amounts allocated
to the Accounts; and (iii) the value of amounts allocated to the Accounts on
the date AUSA Life or its agent receives the returned Policy.
CONVERSION RIGHTS
At any time upon written request within 24 months of the Policy Date, the
Policyowner may elect to transfer all Sub-Account values to the Fixed Account.
No transfer charge will be assessed.
POLICY SPLIT OPTION
Subject to AUSA Life's evidence of insurability requirements, the
Policyowner may request to split the Policy, not including any riders, and
purchase two permanent individual Fixed Account life insurance policies offered
at the time of the request; one on the life of each Joint Insured. The Owner
may request this Split Option by notifying AUSA Life at its Administrative
Office in writing within 90 days following either:
1. The later of the enactment or the effective date of a change in the Federal
estate tax laws that would reduce or eliminate the unlimited marital
deduction; or
2. The date of entry of a final decree of divorce with respect to the Joint
Insureds; or
3. Written confirmation of a dissolution of a business partnership of which the
partners are the Joint Insureds.
The conditions listed above do not apply to Policies issued in the state of
Pennsylvania.
If more than one person owns this Policy, each Owner must agree to the
split. The initial specified amount for each new policy cannot be greater than
50% of the Policy's Specified Amount, not including the face amount of any
riders. The new policies will be subject to AUSA Life's minimum and maximum
specified amounts and issue ages for the plan of insurance selected. If one of
the Joint Insureds is older that the new policy's maximum issue age at the time
the Policy Split Option is requested, AUSA Life's approval must be obtained to
exercise the Policy Split Option.
Cash Value and indebtedness under the Policy will be allocated equally to
each of the new policies. If one Joint Insured does not meet AUSA Life's
insurability requirements, AUSA Life will pay the Policyowner one half of the
Policy's Net Surrender Value and issue only the policy covering that Joint
Insured who meets AUSA Life's insurability requirements; or the Policyowner may
elect to keep the Policy In Force on both Joint Insureds and no new policies
will be issued.
The premiums for the new policies will be based on each Joint Insured's
Attained Age and premium rate class as determined by current evidence of
insurability. Premiums will be payable as of the policy dates for each new
policy. The policy date for each new policy will be the Monthiversary following
notification to AUSA Life to execute the Policy Split Option. The owner and
beneficiary for the new policies will be those named in this Policy, unless
otherwise specified. Any applicable surrender charge will be deducted from the
Policy's Cash Value prior to allocation of the Cash Value to the new policies.
Premium expense charges, if any, under the new policies will not be deducted
from the Cash Value allocated to the new policies. Any new premium paid to the
new policies will be subject to the normal charges, if any, of the new policies
at the time the premium is paid.
BENEFITS AT MATURITY
If either Joint Insured is living and the Policy is In Force, AUSA Life
will pay the Net Surrender Value of the Policy on the Maturity Date. (See Cash
Value - Net Surrender Value, p. 17.) The Policy will mature on the Anniversary
nearest the younger Joint Insured's 100th birthday, if either Joint Insured is
living and the Policy is In Force. AUSA Life is willing to extend the Maturity
Date provided the Policy is still In Force on the Maturity Date and there are
no unfavorable tax consequences. A tax advisor should be consulted about the
tax consequences associated with any Maturity Date extension. Extension of the
Maturity Date will be made upon mutual agreement between AUSA Life and the
Policyowner provided the Policyowner submits a written request to AUSA
31
<PAGE>
Life between 90 and 180 days prior to the Maturity Date, and provided the
Policy may be extended with no unfavorable tax consequences to the Policyowner.
PAYMENT OF POLICY BENEFITS
Death benefits under the Policy will ordinarily be paid within seven days
after AUSA Life receives due proof of death of the Surviving Insured, and AUSA
Life receives proof that both Joint Insureds died while the Policy was In
Force, and verifies the validity of the claim. Other benefits will ordinarily
be paid within seven days of receipt of proper written request (including an
election as to tax withholding). Payments may be postponed in certain
circumstances. (See General Provisions - Postponement of Payments, below and
The Fixed Account - Allocations, Transfers and Withdrawals, p. 34.) The
Policyowner may decide the form in which the benefits will be paid. During the
lifetime of either Joint Insured, the Policyowner may arrange for the death
benefits to be paid in a lump sum or under one or more of the settlement
options described below. These choices are also available if the Policy is
surrendered or matures. If no election is made, AUSA Life will pay the benefits
in a lump sum.
When death benefits are payable in a lump sum, the Beneficiary may select
one or more of the settlement options. If death benefits become payable under a
settlement option and the Beneficiary has the right to withdraw the entire
amount, the Beneficiary may name and change contingent Beneficiaries.
SETTLEMENT OPTIONS. Policyowners and Beneficiaries, subject to a prior
election of the Policyowner, may elect to have benefits paid in a lump sum or
in accordance with a variety of settlement options offered under the Policy.
Once a settlement option is in effect, there will no longer be value in the
Series Account or the Fixed Account. AUSA Life may make other settlement
options available on the Fixed Account in the future. The effective date of a
settlement provision will be either the date of surrender or the date of death
of the Surviving Insured. For additional information concerning these options,
see the Policy itself.
OPTION A - PAYMENTS FOR A FIXED PERIOD. The proceeds plus interest will
be paid in equal monthly installments for the period chosen until paid in full.
The period chosen may not exceed 20 years.
OPTION B - LIFE INCOME. The proceeds will be paid in equal installments
for the guaranteed payment period elected and continue for the life of the
person on whose life the option is based. Such installments will be payable:
(a) during the lifetime of the payee or (b) during a fixed period certain and
for the remaining lifetime of the payee or (c) until the sum of installments
paid equals the proceeds applied and for the remaining life of the payee.
Guaranteed payment periods may be elected for 10 years, or the period in which
the total payments will equal the amount retained.
OPTION C - JOINT AND SURVIVOR LIFE INCOME. The proceeds will be paid
during the joint lifetime of two persons and continue upon the death of the
first payee for the remaining lifetime of the survivor.
GENERAL PROVISIONS
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount from the Series Account upon complete
surrender, cash withdrawal, Policy loan, or benefits payable at death or
maturity may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closing, or trading on the New York
Stock Exchange is restricted as determined by the Commission; (ii) the
Commission by order permits postponement for the protection of Policyowners; or
(iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Series Account's net
assets. Transfers may also be postponed under these circumstances. For
restrictions applicable to payments from the Fixed Account, see The Fixed
Account - Allocations, Transfers and Withdrawals, p. 34.
PAYMENT BY CHECK. Payments under the Policy of any amounts derived from
premiums paid by check or bank draft may be delayed until such time as the
check or bank draft has cleared the Policyowner's bank.
THE CONTRACT
The Policy and attached copy of the application and any supplemental
applications are the entire contract. Only statements in the application and
any supplemental applications can be used to void the Policy or defend a claim.
The statements are considered representations and not warranties. No Policy
provision can be waived or changed except by endorsement. Only the President or
Secretary of AUSA Life can agree to change or waive any provisions of the
Policy.
SUICIDE
If either Joint Insured, while sane or insane, commits suicide within two
years from the Policy Date or two years from the effective date of any
reinstatement of a Policy, the Policy will terminate, and AUSA Life's total
liability, including all riders attached to the Policy, will be limited to the
total premiums paid within such two year period, less any loan and any prior
withdrawals during such period. In that event, such proceeds will be payable to
the Policyowner, if surviving, otherwise to the Policyowner's estate. No other
death benefit will be payable.
INCONTESTABILITY
AUSA Life cannot contest the Policy as to the initial Specified Amount
after it has been In Force while both Joint Insureds are still alive, for two
years from the Policy Date. At the end of the second Policy year, AUSA Life
will send the Policyowner a notice requesting to know whether either Joint
Insured has died. Failure to notify AUSA Life that a Joint Insured has died
will not avoid a contest, if AUSA Life has a basis to contest, even if the
Policy is still In Force. If a lapsed
32
<PAGE>
Policy is reinstated, a new two year contestability period (apart from any
remaining contestability period) will apply from the date of the application
for reinstatement and will apply only to statements made in the application for
reinstatement.
CHANGE OF OWNER OR BENEFICIARY
The Beneficiary, as named in the Policy application or subsequently
changed, will receive the Policy benefits at the Surviving Insured's death. If
the named Beneficiary dies before the Surviving Insured, the contingent
Beneficiary, if named, becomes the Beneficiary. If no Beneficiary survives the
Surviving Insured, the benefits payable at the Surviving Insured's death will
be paid to the Policyowner or the Policyowner's estate. As long as the Policy
is In Force, the Policyowner or Beneficiary may be changed by written request
from the Policyowner in a form acceptable to AUSA Life. The Policy need not be
returned unless requested by AUSA Life. The change will take effect as of the
date the request is signed, regardless of whether either or both Joint Insureds
are living when the request is received by AUSA Life. AUSA Life will not,
however, be liable for any payment made or action taken before receipt of the
request.
ASSIGNMENT
The Policy may be assigned by the Policyowner. AUSA Life will not be
bound by the assignment until a written copy has been received at its Office
and will not be liable with respect to any payment made prior to receipt. AUSA
Life assumes no responsibility for determining whether an assignment is valid
or the extent of the assignee's interest.
MISSTATEMENT OF AGE OR SEX
If the age or sex of either Joint Insured has been misstated, the death
benefit will be adjusted based on what the cost of insurance charge for the
most recent monthly deduction would have purchased based on the correct age and
sex.
REPORTS AND RECORDS
AUSA Life will maintain all records relating to the Series Account and
the Fixed Account. AUSA Life will mail to each Policyowner, at the last known
address of record, reports required by applicable laws and or regulations.
AUSA Life will send Policyowners written confirmation within seven days
of the following transactions: unplanned and certain planned premium payments,
Cash Value transfers, change in death benefit option or Specified Amount, total
surrender or cash withdrawals, and Policy loans or repayments. AUSA Life will
also send each Policyowner an annual statement at the end of the Policy year
showing for the year, among other things, the month and amount of each: premium
payment made, monthly deduction, transfer, cash withdrawal and Policy loan or
repayment. The annual statement will also show Policy year-end Net Surrender
Value, death benefit and Policy loan value, as well as other Policy activity
during the year.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following optional
insurance benefits may be added to a Policy by rider. The cost of any optional
insurance benefits, including any applicable charge to provide a death benefit
guarantee, if any, for the optional insurance benefit until the No Lapse Date,
will be deducted as part of the monthly deduction. (See Charges and Deductions
- - Optional Cash Value Charges, p. 28.)
JOINT INSURED TERM RIDER: Provides the payment of the face amount of
the rider to the Beneficiary for the rider upon receipt of due proof that both
Joint Insureds died while the rider was In Force. The cost of insurance rates
for this rider increase each year. This rider terminates at the younger Joint
Insured's age 95.
INDIVIDUAL INSURED RIDER: Provides additional life insurance on the
life of either Joint Insured, and for the payment of the face amount of the
rider to the Beneficiary for the rider upon receipt by AUSA Life of written
notice that the Insured's death occurred while the rider was In Force. On any
Monthiversary while the rider is In Force, the Policyowner may exchange the
rider without evidence of insurability for a new policy on the Insured's life.
Such new policy will be issued upon written request subject to the following:
(a) the rider has not reached the Anniversary nearest the Insured's 70th
birthday; (b) the new policy is on any permanent plan of insurance then offered
by AUSA Life; (c) the amount of insurance upon conversion will equal the face
amount then In Force under the rider; and (d) the payment of the premium based
on the Insured's rate class under the rider. This rider terminates at the
Insured's age 95.
WEALTH PROTECTOR RIDER: Provides the payment of the face amount of the
rider to the Beneficiary for the rider upon receipt of due proof that both
Joint Insureds died while the rider was In Force. The rider has no conversion
or exchange privilege. The rider terminates at the earlier of (a) the date the
Policy terminates, (b) the fourth Anniversary of the Policy, or (c) the
Monthiversary on which the rider is terminated by written notice from the
Policyowner to AUSA Life. The cost of insurance rates for this rider do not
increase while the rider is In Force.
THE FIXED ACCOUNT
A Policyowner may allocate Net Premiums and transfer Cash Value to the
Fixed Account, which is part of AUSA Life's General Account. 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
1940 Act. Accordingly, neither the Fixed Account, the General Account nor any
interests therein are generally subject to the provisions of these acts and
AUSA Life has been advised that the staff of the Commission has not reviewed
the disclosures in this Prospectus relating to the Fixed Account. Disclosures
regarding the
33
<PAGE>
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.
The portion of the Cash Value allocated to the Fixed Account (the "Fixed
Account Value") will be credited with rates of interest, as described below.
Because the Fixed Account Value becomes part of AUSA Life's General Account,
AUSA Life assumes the risk of investment gain or loss on this amount. All
assets in the General Account are subject to AUSA Life's general liabilities
from business operations.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Net Premium payments allocated to the Fixed Account;
plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts charged to pay for monthly deductions as they are due;
minus
5. Any cash withdrawals or surrenders from the Fixed Account; minus
6. Any amounts transferred to a Sub-Account from the Fixed Account.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value, including the Loan Reserve, is guaranteed to
accumulate at a minimum effective annual interest rate of 4%. AUSA Life
presently credits the Fixed Account Value with current rates in excess of the
minimum guarantee but it is not obligated to do so. AUSA Life has no specific
formula for determining current interest rates. Some of the factors that AUSA
Life may consider, in its sole discretion, in determining whether to credit
interest in excess of the 4% guaranteed rate are: general economic trends,
rates of return currently available and anticipated on the company's
investments, regulatory and tax requirements, and competitive factors. The
Fixed Account Value will not share in the investment performance of the
company's general account or any portion thereof. Because AUSA Life, at its
sole discretion, anticipates changing the current interest rate from time to
time, different allocations to and from the Fixed Account Value will be
credited different current interest rates.
AUSA Life further guarantees that when a higher current interest rate is
declared on an allocation to the Fixed Account, that interest rate will be
guaranteed on such allocation for at least a one year period (the "Guarantee
Period"), unless the Cash Value associated with an allocation has been
transferred to the Loan Reserve. AUSA Life reserves the right to apply a
different current interest rate to that part of the Cash Value equal to the
Loan Reserve. At the end of the Guarantee Period, AUSA Life reserves the right
to declare a new current interest rate on such allocation and accrued interest
thereon (which may be a different current interest rate than the current
interest rate on new allocations to the Fixed Account on that date). The rate
declared on such allocation and accrued interest thereon at the end of each
Guarantee Period will be guaranteed again for another Guarantee Period. At the
end of any Guarantee Period, any interest credited on the Policy's Cash Value
in the Fixed Account in excess of the minimum guaranteed rate of 4% per year
will be determined in the sole discretion of AUSA Life. The Policyowner assumes
the risk that interest credited may not exceed the guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) cash withdrawal
amounts, b) transfers to the Series Account, or c) monthly deduction charges
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
AUSA Life reserves the right to change the method of crediting interest
from time to time, provided that such changes will not have the effect of
reducing the guaranteed rate of interest below 4% per annum or shorten the
Guarantee Period to less than one year.
ALLOCATIONS, TRANSFERS AND WITHDRAWALS
Net Premium payments and transfers to the Fixed Account will be allocated
to the Fixed Account on the first Valuation Date on or following the date AUSA
Life receives the payment or transfer request at its Office, except that any
allocation of Net Premium received prior to the Policy Date will take place on
the Policy Date (or the Record Date, if later).
For transfers from the Fixed Account to a Sub-Account, AUSA Life reserves
the right to require that transfer requests be in writing and received at AUSA
Life's Office within 30 days of a Policy Anniversary. Under the Policy, the
maximum amount that may be transferred is limited to the greater of (a) 25% of
the amount in the Fixed Account, or (b) the amount transferred in the prior
Policy year from the Fixed Account, unless AUSA Life consents otherwise.
Currently, AUSA Life allows 100% of the amount in the Fixed Account to be
transferred within 30 days after each Anniversary. The transfer will take place
on the day AUSA Life receives the request. No transfer charge will apply to
transfers from the Fixed Account to a Sub-Account. Amounts may be withdrawn
from the Fixed Account for Cash Withdrawals and Surrenders only upon written
request of the Policyowner and are subject to any applicable requirement for a
signature guarantee. (See Policy Rights - Surrender Privileges, p. 30.) AUSA
Life further reserves the right to defer payment of transfers, Cash
Withdrawals, or Surrenders from the Fixed Account for up to six months. In
addition, Policy provisions relating to transfers, Cash Withdrawals or
Surrenders from the Series Account will also apply to Fixed Account
transactions.
DISTRIBUTION OF THE POLICIES
The Policy will be sold by individuals who, in addition to being licensed
as life insurance agents for AUSA Life, are
34
<PAGE>
also registered representatives of ISI, an affiliate of AUSA Life and the
principal underwriter of the Policies, or of broker-dealers who have entered
into written sales agreements with the principal underwriter for promotion and
sales of the Policies. ISI is registered with the Commission under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. No amounts have been retained
by ISI for acting as principal underwriter for the Policies. The compensation
payable to registered representatives who are appointed agents of AUSA Life for
sales of the Policies may vary with the Sales Agreement, but it is not expected
to exceed 60% of all premiums paid during the first Policy year, and 3% of all
premium payments in years 2 through 10. An additional sales commission of up to
0.10% (ten one-hundredths of one percent) of the Policy's Cash Value is payable
on the fifth Policy Anniversary, and on each Anniversary thereafter, provided
the Policy's Cash Value at such times, minus any amounts attributable to Policy
loans, is at least $10,000. In addition, certain production, persistency and
managerial bonuses may also be paid.
FEDERAL TAX MATTERS
INTRODUCTION
The ultimate effect of Federal income taxes on the Cash Value of a Policy
and on the economic benefit to the Policyowner or Beneficiary depends on AUSA
Life's tax status and upon the tax status of the individual concerned. The
discussion contained herein is general in nature and is not intended as tax
advice. For complete information on Federal and state tax considerations, a
qualified tax adviser should be consulted. No attempt is made to consider any
applicable state or other tax laws. Because the discussion herein is based upon
AUSA Life's understanding of Federal income tax laws as they are currently
interpreted, AUSA Life cannot guarantee the tax status of any Policy. AUSA Life
makes no representations regarding the likelihood of continuation of the
current Federal income tax laws, Treasury Regulations, or of the current
interpretations by the Internal Revenue Service ("IRS"). AUSA Life reserves the
right to make changes to the Policy in order to assure that it will continue to
qualify as life insurance for tax purposes.
TAX CHARGES
At the present time, AUSA Life makes no charge for any Federal, state or
local taxes (other than premium taxes) that the Company incurs that may be
attributable to such Account or to the Policies. AUSA Life, however, reserves
the right in the future to make a charge for any such tax or other economic
burden resulting from the application of the tax laws that it determines to be
properly attributable to the Series Account or to the Policies.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal tax
purposes, a Policy must meet the definition of a life insurance contract which
is set forth in Section 7702 of the Internal Revenue Code of 1986, as amended
(the "Code"). The manner in which Section 7702 should be applied to certain
features of the Policy is not directly addressed by Section 7702. Nevertheless,
AUSA Life believes it is reasonable to conclude that the Policy will meet the
Section 7702 definition of a life insurance contract. In the absence of final
regulations or other pertinent interpretations of Section 7702, however, there
is necessarily some uncertainty as to whether a Policy will meet the statutory
life insurance contract definition, particularly if it insures substandard
risks. If a Policy were determined not to be a life insurance contract for
purposes of Section 7702, such Policy would not provide most of the tax
advantages normally provided by a life insurance contract.
If it is subsequently determined that a Policy does not satisfy Section
7702, AUSA Life will take whatever steps are appropriate and reasonable to
attempt to cause such a Policy to comply with Section 7702, including possibly
refunding any premiums paid that exceed the limitation allowable under Section
7702 (together with interest or other earnings on any such premiums refunded as
required by law). For these reasons, AUSA Life reserves the right to modify the
Policy as necessary to attempt to qualify it as a life insurance contract under
Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Series Account to be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal tax purposes. The Series Account, through the
Fund, intends to comply with the diversification requirements prescribed by the
Treasury in Reg. sec. 1.817-5, which affect how the Fund's assets may be
invested. AUSA Life believes that the Fund will be operated in compliance with
the requirements prescribed by the Treasury.
In certain circumstances, owners of variable life insurance policies may
be considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their policies. In those circumstances, income
and gains from the separate account assets would be includible in the owner's
gross income. The IRS has stated in published rulings that the owner of a
variable life insurance policy will be considered the owner of separate account
assets if the owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department 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 of the investment of a
segregated asset account may cause the investor (i.e., the policyowner), 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 subaccounts without being treated as owners of the
underlying assets."
35
<PAGE>
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Policyowner has additional flexibility in allocating premium
payments and Policy values. These differences could result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the Series
Account. In addition, AUSA Life does not know what standards will be set forth,
if any, in the regulations or rulings which the Treasury Department has stated
it expects to issue. AUSA Life therefore reserves the right to modify the
Policy as necessary to attempt to prevent a Policyowner from being considered
the owner of a pro rata share of the asset of the Series Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. AUSA Life believes that the proceeds and Cash Value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for Federal income tax purposes. Thus, the
death benefit under the Policy should be excludable from the gross income of
the Beneficiary under Section 101(a)(1) of the Code.
A change in a Policy's Specified Amount, the payment of an unscheduled
premium, the taking of a Policy loan, a cash withdrawal, a total surrender, a
change of insured, a Policy Lapse with an outstanding indebtedness, a change in
death benefit options, the exchange of a Policy, or the assignment of a Policy
may have tax consequences depending upon the circumstances. In addition,
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of Policy proceeds depend upon the
circumstances of each Policyowner or Beneficiary. A competent tax adviser
should be consulted for further information.
The Policy may also be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if a
Policyowner is contemplating the use of a Policy in any arrangement the value
of which depends in part on its tax consequences, that Policyowner should be
sure to consult a qualified tax adviser regarding the tax attributes of the
particular arrangement.
Generally, the Policyowner will not be deemed to be in constructive
receipt of the Cash Value, including increments thereof, under the Policy until
there is a distribution. The tax consequences of distributions from, and loans
taken from, or secured by, a Policy depend on whether the Policy is classified
as a "modified endowment contract" under Section 7702A. Section 7702A generally
applies to Policies entered into or materially changed after June 20, 1988.
2. MODIFIED ENDOWMENT CONTRACTS. A Policy may be treated as a modified
endowment contract depending upon the amount of premiums paid in relation to
the death benefit provided under such Policy. The premium limitation rules for
determining whether such a Policy is a modified endowment contract are
extremely complex. In general, however, a Policy will be a modified endowment
contract if the accumulated premiums paid at any time during the first seven
Policy years exceed the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven level annual premiums. In addition, if a Policy is
"materially changed," it may cause such Policy to be treated as a modified
endowment contract. The material change rules for determining whether a Policy
is a modified endowment contract are also extremely complex. In general,
however, the determination whether a Policy will be a modified endowment
contract after a material change depends upon the relationship of the death
benefit at the time of change to the Cash Value at the time of such change and
the additional premiums paid in the seven Policy years starting with the date
on which the material change occurs.
The manner in which the premium limitation and material change rules
should be applied to certain features of the Policy and its riders is unclear.
Nonetheless, under AUSA Life's current procedures, the Policyowner will be
notified at the time a Policy is issued whether, according to AUSA Life's
calculations, the Policy is or is not classified as a modified endowment
contract based on the premium then received. The Policyowner will also be
notified of the amount of the maximum annual premium which, according to, AUSA
Life's calculations, can be paid without causing a Policy to be classified as a
modified endowment contract.
Due to the Policy's flexibility, classification of a Policy as a modified
endowment contract will depend upon the circumstances of each Policy.
Accordingly, a prospective Policyowner should contact a competent tax adviser
before purchasing a Policy to determine the circumstances under which the
Policy would be a modified endowment contract. In addition, a Policyowner
should contact a competent tax adviser before making any change to, including
an exchange of, a Policy to determine whether such change would cause the
Policy (or the new policy in the case of an exchange) to be treated as a
modified endowment contract.
If a Policy becomes a modified endowment contract, distributions that
occur during the Policy year it becomes a modified endowment contract and any
subsequent Policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions from a Policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a Policy that is not a modified endowment
contract could later become taxable as a distribution from a modified endowment
contract.
36
<PAGE>
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as modified endowment contracts are subject to
the following tax rules: First, all pre-death distributions from such a Policy
(including distributions upon surrender, distributions made in anticipation of
the Policy becoming a modified endowment contract, and benefits paid at
maturity) are treated as ordinary income subject to tax up to the amount equal
to the excess (if any) of the Cash Value immediately before the distribution
over the investment in the Policy (described below) at such time. Second, loans
taken from, or secured by, such a Policy are treated as distributions from such
a Policy and taxed accordingly. (Unpaid Policy loan interest will be treated as
a loan for these purposes.) Third, a 10% Federal income tax penalty is imposed
on the portion of any distribution from, or loan taken from, or secured by,
such a Policy that is included in income except where the distribution or loan
is made on or after the Policyowner attains age 591/2, is attributable to the
Policyowner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Policyowner or the
joint lives (or joint life expectancies) of the Policyowner and the
Policyowner's Beneficiary.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not classified as a modified
endowment contract are generally treated as first recovering the investment in
the Policy (described below) and then, only after the return of all such
investment in the Policy, as distributing taxable income. An exception to this
general rule occurs in the case of a cash withdrawal, a decrease in the
Policy's death benefit, or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and results in a cash
distribution to the Policyowner in order for the Policy to continue complying
with the Section 7702 definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the extent of any gain in
the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are generally not treated as distributions. Instead, such loans are
treated as indebtedness of the Policyowner. However, the tax treatment of a
loan from a Policy that is not a modified endowment contract is uncertain to
the extent that the interest rate credited is equal to the interest rate
charged on the amount borrowed. A tax advisor should be consulted.
Finally, distributions (including distributions upon surrender or lapse)
or loans from, or secured by, a Policy that is not a modified endowment
contract are not subject to the 10% Federal income tax penalty.
5. POLICY LOAN INTEREST. Interest paid on a Policy loan generally is not
tax deductible. Therefore, a Policyowner should consult a competent tax advisor
before deducting any Policy loan interest.
6. INVESTMENT IN THE POLICY. Investment in the Policy means (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from the gross income of the Policyowner (except that the amount of any loan
from, or secured by, a Policy that is a modified endowment contract, to the
extent such amount is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Policyowner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by
AUSA Life (or its affiliates) to the same Policyowner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includable in gross income under Section 72(e) of the Code.
8. TAX TREATMENT OF POLICY SPLIT. The Policy Split Option permits a
Policy to be split into two other individual life insurance contracts upon the
occurrence of a divorce of the Joint Insureds, certain changes in Federal
estate tax law, or a dissolution of a business partnership of which the
partners are Joint Insureds. (See Policy Rights - Policy Split Option, p. 31.)
A policy split could have adverse tax consequences. For example, it is not
clear whether a policy split will be treated as a nontaxable exchange under
Sections 1031 through 1043 of the Code. If a policy split is not treated as a
nontaxable exchange, a split could result in the recognition of taxable income
in an amount up to any gain in the Policy at the time of the split. In
addition, it is not clear whether the individual policies that result from a
policy split would in all circumstances be treated as life insurance contracts
for Federal income tax purposes and, if so treated, whether the individual
policies would be classified as modified endowment contracts. Before a
Policyowner exercises rights provided by the Policy Split Option, it is
important that he or she consult with a competent tax advisor regarding the
possible consequences of a policy split.
9. TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER. Pursuant to the
recently enacted Health Insurance Portability and Accountability Act of 1996,
AUSA Life believes that for Federal income tax purposes a Single Sum Benefit
payment made under the Terminal Illness Accelerated Death Benefit Rider should
be fully excludable from the gross income of the beneficiary, as long as the
beneficiary is the Insured under the Policy. However, a Policyowner should
consult a qualified tax advisor about the consequences of adding this Rider to
a Policy or requesting a Single Sum Benefit payment under this Rider.
10. OTHER TAX CONSIDERATIONS. The transfer of the Policy or the
definition of a beneficiary may have Federal, state and/or local transfer and
inheritance tax consequences, including the imposition of gift, estate and
generation-skipping transfer taxes. For example, the transfer of the Policy to,
the designation as beneficiary of, or the payment of
37
<PAGE>
proceeds to, a person who is assigned to a generation which is two or more
generations below the generation assignment of the Policyowner, may have
generation skipping transfer tax considerations under Section 2601 of the Code.
11. BUSINESS-OWNED LIFE INSURANCE. In recent years, Congress has
adopted new rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
The individual situation of each Policyowner or beneficiary will
determine the extent, if any, to which Federal, state and local transfer taxes
may be imposed. Consult with your tax adviser for specific information in
connection with these taxes.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the Federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change.) A tax advisor
should be consulted with respect to legislative developments and their effect
on the Policy.
EMPLOYMENT-RELATED BENEFIT PLANS
On July 6, 1983, the Supreme Court held in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women on the basis of sex. The Policy described in this
Prospectus contains guaranteed cost of insurance rates and guaranteed purchase
rates for certain payment options that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of Norris, and Title VII generally,
on any employment-related insurance or benefit program for which a Policy may
be purchased.
SAFEKEEPING OF THE
SERIES ACCOUNT'S ASSETS
AUSA Life holds the assets of the Series Account. The assets are kept
physically segregated and held separate and apart from the General Account.
AUSA Life maintains records of all purchases and redemptions of Fund shares by
each of the Sub-Accounts. Additional protection for the assets of the Series
Account is provided by a blanket bond issued to AEGON U.S. Holding Corporation
("AEGON U.S.") in the amount of $5 million (subject to a $1 million
deductible), covering all of the employees of AEGON U.S. and its affiliates,
including AUSA Life. A Stockbrokers Blanket Bond, issued to AEGON U.S.A.
Securities, Inc. provides additional fidelity coverage to a limit of $12
million, subject to a $50,000 deductible.
VOTING RIGHTS OF THE SERIES ACCOUNT
To the extent required by law, AUSA Life will vote the Fund shares held
in the Series Account at shareholder meetings of the Fund in accordance with
instructions received from persons having voting interests in the corresponding
Sub-Accounts of the Series Account. Except as required by the 1940 Act, the
Fund does not hold regular or special shareholder meetings. If the 1940 Act or
any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result AUSA Life determines that it is
permitted to vote the Fund shares in its own right, it may elect to do so.
The number of votes which a Policyowner has the right to instruct will be
calculated separately for each Sub-Account. The number of votes which each
Policyowner has the right to instruct will be determined by dividing a Policy's
Cash Value in that Sub-Account by $100. Fractional shares will be counted. The
number of votes of the Portfolio which the Policyowner has the right to
instruct will be determined as of the date coincident with the date established
by that Portfolio for determining shareholders eligible to vote at the meeting
of the Fund. Voting instructions will be solicited by written communications
prior to such meeting in accordance with procedures established by the Fund.
AUSA Life will vote Fund shares as to which no timely instructions are
received and Fund shares which are not attributable to Policyowners in
proportion to the voting instructions which are received with respect to all
Policies participating in that Portfolio. Voting instructions to abstain on any
item to be voted upon will reduce the votes eligible to be cast by AUSA Life.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
DISREGARD OF VOTING INSTRUCTIONS. AUSA Life may, when required by state
insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
sub-classification or investment objective of the Fund or one or more of its
Portfolios or to approve or disapprove an investment advisory contract for a
Portfolio of the Fund. In addition, AUSA Life itself may disregard voting
instructions in favor of changes initiated by a Policyowner in the investment
policy or the investment adviser of a Portfolio of the Fund if AUSA Life
reasonably disapproves of such changes. A change would be disapproved only if
the proposed change is contrary to state law or prohibited by state regulatory
authorities or AUSA Life determined that the change would have an adverse
effect on its General Account in that the proposed investment policy for a
Portfolio may result in overly speculative or unsound investments. In the event
AUSA Life does disregard voting instructions, a summary of that action and the
reasons for such action will be included in the next annual report to
Policyowners.
38
<PAGE>
STATE REGULATION OF AUSA LIFE
As a life insurance company organized and operated under New York law,
AUSA Life is subject to provisions governing such companies and to regulation
by the New York Superintendant of Insurance.
AUSA Life's books and Accounts are subject to review and examination by
the New York Insurance Department at all times and a full examination of its
operations is conducted by the National Association of Insurance Commissioners
at least once every three years.
REINSURANCE
AUSA Life intends to reinsure a portion of the risks assumed under the
Policies.
EXECUTIVE OFFICERS AND DIRECTORS
OF AUSA LIFE
LARRY G. BROWN, CHAIRMAN OF THE BOARD, Senior Vice President, Group General
Counsel (Asset Accumulation Group) (January 1995 - present), Western
Reserve Life Assurance Co. of Ohio, 201 Highland Avenue, Largo, Florida
33770. Senior Vice President, General Counsel and Secretary (January, 1989
- January, 1995), AEGON USA, Inc., 1111 North Charles Street, Baltimore,
Maryland 21201.
WILLIAM BROWN, JR., DIRECTOR, Management Consultant (1992 - present),
Brownstone Management Consultants, Inc., 14 Windward Avenue, White Plains,
NY 10605; Vice President (1987 - 1992), Mututal of New York, Purchase, New
York.
WILLIAM L. BUSLER, DIRECTOR, President, Annuity Division (1980 - present),
AEGON USA, Inc., 4333 Edgewood Rd., N.E., Cedar Rapids, Iowa 52499.
JACK R. DYKHOUSE, DIRECTOR, Executive Vice President (April, 1996 - present),
AEGON Insurance Group, Suite 302, Brown Trail, Bedford, TX 76021; Senior
Vice President (1976 - April, 1996), AEGON USA, INC., 9151 Grapevine
Highway, North Richland Hills, TX 76180.
STEVEN E. FRUSHTICK, DIRECTOR, Partner (1961 - present) Wiener, Frushtick &
Straub, 500 Fifth Avenue New York, NY 10110.
VICE ADMIRAL CARL T. HANSON, DIRECTOR, Retired (Ocotber, 1993 - present),
Director (November, 1982 - present), President and Chief Executive Officer
(November, 1982 - October, 1993), National Multiple Sclerosis Society, 900
Birdseye Road, P. O. Box 112 Orient, NY 11957-0112.
B. LARRY JENKINS, DIRECTOR, Chairman and President (September, 1982 - present),
Monumental Life Insurance Company, 2 East Chase Street, Baltimore,
Maryland 21202.
VERA F. MIHAIC, DIRECTOR AND VICE PRESIDENT, Vice President and Director (July
1, 1996 - present), AUSA Life Insurance Company, Inc., 666 Fifth Avenue,
New York, NY 10103-0001, Vice President and Director (1987 - June 30,
1996) International Life Investors Insurance Company, New York, New York.
PETER P. POST, DIRECTOR, Owner and President (December, 1992 - present),
Emmerling Post, Inc., 415 Madison Avenue, New York, New York 10017;
President and Director (January, 1989 - December, 1992), Lintas: Marketing
Communications, New York, New York.
TOM A. SCHLOSSBERG, DIRECTOR AND PRESIDENT, President (September, 1993 -
present), Diversified Investment Advisors, Inc., 4 Manhattanville Road,
Purchase, NY 10577; Executive Vice President (1983 - September 1993),
Mutual of New York, Purchase, New York.
COLETTE F. VARGAS, DIRECTOR AND CHIEF ACTUARY, Actuary (September, 1993 -
present), Diversified Investment Advisors, 4 Manhattanville Road,
Purchase, New York 10577; Actuary (1982 - September, 1993) Mutual of New
York, Purchase, New York.
COR H. VERHAGEN, DIRECTOR, President and Director (1990 - present), CORPA
Reinsurance Co. of America, 51 JFK Parkway, Short Hills, New Jersey 07078;
President (November 1990 - June 30, 1996), International Life Investors
Insurance Company, New York, New York; Vice President (November, 1993 -
present), AEGON USA, Inc., Baltimore, Maryland; Vice President (July, 1985
- present), AEGON US Holding Company, Short Hills, New Jersey.
E. KIRBY WARREN, DIRECTOR, Professor (January, 1961 - present), Columbia
University School of Business, 725 Uris Hall, 116th Street and Broadway,
New York, New York 10025.
PATRICK S. BAIRD, VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, Senior Vice
President and Chief Financial Officer (May, 1992 - present), Vice
President and Chief Tax Officer (November, 1980 - May, 1992), AEGON USA,
Inc., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499.
BRENDA CLANCY, TREASURER, Senior Vice President and Treasurer (August, 1997 -
present), AEGON USA, Inc., 4333 Edgewood Road NE, Cedar Rapids, Iowa
52499; Vice President and Controller (April, 1992 - August, 1997), AEGON
USA, Inc., Cedar Rapids, Iowa.
PATRICK E. FALCONIO, SENIOR VICE PRESIDENT AND CHIEF INVESTMENT OFFICER, Senior
Vice President and Chief Investment Officer (February, 1989 - present),
AEGON USA, Inc. 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
CHRISTOPHER GARRETT, ACTUARY, Associate Actuary (1983 - present), AEGON USA,
Inc., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
39
<PAGE>
ROBERT J. KONTZ, CONTROLLER, Vice President and Controller (1990 - present),
AEGON USA, Inc., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499; Vice
President - Corporate Accounting (1982 - 1989), Life Investors, Inc.,
Cedar Rapids, Iowa.
CRAIG D. VERMIE, SECRETARY, Vice President and General Counsel (September, 1986
- present), AEGON USA, Inc., 4333 Edgewood Road NE, Cedar Rapids, Iowa
52499.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP, Washington, D.C., has provided advice
on certain legal matters concerning Federal securities laws in connection with
the Policies. All matters of New York law pertaining to the Policy, including
the validity of the Policy and AUSA Life's right to issue the Policy under New
York Insurance Law, have been passed upon by Robert F. Colby, Esq., Vice
President and Assistant Secretary of AUSA Life.
LEGAL PROCEEDINGS
AUSA Life, like other life insurance companies, is involved in lawsuits.
AUSA Life is not aware of any class action lawsuits naming it as a Defendant or
involving the Series Account. In some lawsuits involving other insurers,
substantial damages have been sought and/or material settlement payments have
been made. Although the outcome of any litigation cannot be predicted with
certainty, AUSA Life believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse
impact on the Series Account or AUSA Life.
EXPERTS
There are no financial statements of AUSA Series Life Account because the
Series Account has not yet commenced operations as of the date of this
Prospectus.
The financial statements of AUSA Life Life Insurance Company, Inc. at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The financial statements referred to above are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Actuarial matters included in this Prospectus and Registration Statement
have been examined by Alan Yaeger as stated in the opinion filed as an exhibit
to the registration statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policy offered hereby. This Prospectus does not contain all the information set
forth in the registration statement and the amendments and exhibits to the
registration statement, to all of which reference is made for further
information concerning the Series Account, AUSA Life and the Policy offered
hereby. Statements contained in this Prospectus as to the contents of the
Policy and other legal instruments are summaries. For a complete statement of
the terms thereof reference is made to such instruments as filed.
YEAR 2000 MATTERS
In October 1996, AUSA Life adopted and presently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications
systems, to determine if they are Year 2000 compatible. AUSA Life has also
engaged the services of a third-party provider that is specialized in Year 2000
issues to work on the Plan.
As of the date of this Prospectus, AUSA Life has identified and made
available what it believes are the appropriate resources of hardware, people,
and dollars, including the engagement of outside third parties, to ensure that
the Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that the systems or
equipment addresses Year 2000 data prior to the Year 2000). Even with the
appropriate and diligent pursuit of a well-conceived response plan, including
testing procedures, there is no certainty that any company will achieve
complete success. Further, notwithstanding its efforts or results, AUSA Life's
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond our knowledge
or control. See the Fund's prospectus for information on the Fund's preparation
for Year 2000.
INFORMATION ABOUT AUSA LIFE'S
FINANCIAL STATEMENTS
The financial statements of AUSA Life which are included in this
Prospectus (see p. 47) should be considered only as bearing on the ability of
AUSA Life to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Series Account.
Financial statements for AUSA Life for the years ended December 31, 1997,
1996 and 1995, have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
40
<PAGE>
APPENDIX A
ILLUSTRATION OF BENEFITS
The tables in Appendix A illustrate the way in which a Policy operates.
They show how the death benefit, Cash Value and Net Surrender Value of a Policy
issued to Joint Insureds of given ages and a given premium could vary over an
extended period of time assuming hypothetical gross rates of return equivalent
to constant after tax annual rates of 0%, 6% and 12%. The tables illustrate the
Policy values that would result based on the assumptions that the premium is
paid as indicated, that the Policyowner has not requested a decrease in the
Specified Amount of the Policy, that no cash withdrawals or Policy loans have
been made, and that less than twelve transfers per year have been made.
The death benefits, Cash Values and Net Surrender Values under a Policy
would be different from those shown if the actual rate of return averages 0%,
6% or 12% over a period of years, but fluctuated above and below those averages
for individual Policy years. They would also differ if any Policy loans were
made during the period of time illustrated.
The illustration on p. 42 is based on a Policy for Joint Insureds who are
a 55 year old male and a 55 year old female, both in the Select rate class,
annual premiums of $4,000, a $250,000 Specified Amount and death benefit Option
B. The illustrations on that page also assume cost of insurance charges based
on AUSA Life's CURRENT cost of insurance rates.
The illustration on p. 43 is based on the same factors as those on p. 42,
except that cost of insurance charges are based on the GUARANTEED cost of
insurance rates (based on the 1980 Commissioners Standard Ordinary Mortality
Table).
The amounts shown for the death benefits, Cash Values and Net Surrender
Values take into account (1) the daily charge for assuming mortality and
expense risks assessed against each Sub-Account which is equivalent to an
annual charge of 0.90% of the average net assets of the Sub-Accounts; (2)
estimated daily expenses equivalent to an effective average annual expense
level of 0.95% of the average daily net assets of the Portfolios of the Fund;
and (3) all applicable premium expense charges and Cash Value charges. The
0.95% average Portfolio expense level assumes an equal allocation of amounts
among the fifteen Sub-Accounts and is based on an average 0.76% investment
advisory fee and estimated 1997 average normal operating expenses of 0.19% for
each of the Portfolios in operation during 1997. Calculation of the average
annual expense level utilized annualized actual audited expenses incurred
during 1997 for the Money Market (0.48%), Bond (0.64%), Growth (0.87%),
Strategic Total Return (0.88%), Global (1.00%), Emerging Growth (0.93%),
Aggressive Growth (0.96%), Balanced (0.94%), Growth & Income (0.96%), C.A.S.E.
Growth (1.00%), and Tactical Asset Allocation (0.87%), Value Equity (0.89%),
U.S. Equity (1.30%), and International Equity (1.50%). In addition, because the
Third Avenue Value Portfolio had not commenced operations as of December 31,
1997, the estimated average annual Portfolio expense level reflects estimated
expenses for this Portfolio at 1.00%, for 1998. WRL Management has undertaken
until April 30, 1999 to pay expenses to the extent normal operating expenses of
a Portfolio exceed a stated percentage of the Portfolio's average daily net
assets. Taking into account the assumed charges of 1.85%, the gross annual
investment return rates of 0%, 6% and 12% are equivalent to net annual
investment return rates of -1.85%, 4.15%, and 10.15%.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the Series Account because AUSA Life is not
currently making such charges. In order to produce after tax returns of 0%, 6%
or 12% if such charges are made in the future, the Series Account would have to
earn a sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
(See Charges Against the Series Account - Taxes, p. 28.)
The "Premium Accumulated at 5%" column of each table shows the amount
which would accumulate if an amount equal to the premium were invested to earn
interest at 5% per year, compounded annually.
AUSA Life will furnish, upon request, a comparable illustration
reflecting each proposed Joint Insured's age, sex, risk classification and
desired plan features.
41
<PAGE>
AUSA LIFE LIFE INSURANCE COMPANY, INC.
MALE AND FEMALE BOTH ISSUE AGE 55
$4,000 ANNUAL PREMIUM FOR NON-SMOKER SELECT RATE CLASS
$250,000 SPECIFIED AMOUNT
OPTION A - LEVEL DEATH BENEFIT
THIS ILLUSTRATION IS BASED ON CURRENT COST OF INSURANCE RATES.
<TABLE>
<CAPTION>
PREMIUMS NET
ACCUMULATED DEATH BENEFIT SURRENDER VALUE CASH VALUE
END OF AT 5% ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
POLICY INTEREST GROSS ANNUAL GROSS ANNUAL GROSS ANNUAL
YEAR PER YEAR RATE OF RETURN OF RATE OF RETURN OF RATE OF RETURN OF
- -------- ------------- -------------------------------- -------------------------------- --------------------------------
0% 6% 12% 0% 6% 12% 0% 6% 12%
--------- --------- ------------ -------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 250,000 250,000 250,000 1,191 1,410 1,629 3,501 3,720 3,939
2 8,610 250,000 250,000 250,000 4,310 4,967 5,651 6,910 7,567 8,251
3 13,241 250,000 250,000 250,000 7,520 8,837 10,262 10,224 11,541 12,966
4 18,103 250,000 250,000 250,000 10,631 12,833 15,312 13,439 15,641 18,120
5 23,208 250,000 250,000 250,000 13,638 16,955 20,841 16,550 19,867 23,753
6 28,568 250,000 250,000 250,000 16,542 21,205 26,896 19,558 24,221 29,912
7 34,196 250,000 250,000 250,000 19,335 25,583 33,525 22,455 28,703 36,645
8 40,106 250,000 250,000 250,000 22,009 30,084 40,778 25,233 33,308 44,002
9 46,312 250,000 250,000 250,000 24,553 34,701 48,710 27,881 38,029 52,038
10 52,827 250,000 250,000 250,000 26,953 39,424 57,379 30,385 42,856 60,811
15 90,630 250,000 250,000 250,000 42,384 70,658 121,079 42,384 70,658 121,079
20 138,877 250,000 250,000 250,000 51,918 103,816 219,549 51,918 103,816 219,549
25 200,454 250,000 250,000 400,088 57,258 142,946 381,036 57,258 142,946 381,036
30 279,043 250,000 250,000 673,095 54,556 189,261 641,042 54,556 189,261 641,042
35 379,345 250,000 260,933 1,109,994 37,741 248,507 1,057,137 37,741 248,507 1,057,137
40 507,359 * 327,208 1,744,782 * 323,968 1,727,507 * 323,968 1,727,507
45 670,741 * 418,741 2,827,106 * 418,741 2,827,106 * 418,741 2,827,106
<CAPTION>
INTERNAL RATE OF
INTERNAL RATE OF RETURN ON NET INTERNAL RATE OF
RETURN ON CASH SURRENDER VALUE RETURN ON
VALUE ASSUMING ASSUMING DEATH BENEFIT
END OF HYPOTHETICAL HYPOTHETICAL ASSUMING HYPOTHETICAL
POLICY GROSS ANNUAL GROSS ANNUAL GROSS ANNUAL
YEAR RATE OF RETURN OF RATE OF RETURN OF RATE OF RETURN OF
- -------- --------------------------------- ----------------------------------- -----------------------------------------
0% 6% 12% 0% 6% 12% 0% 6% 12%
----------- ---------- ---------- ----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 -12.47 -7.00 -1.53 -70.23 -64.75 -59.27 6,150.00 6,150.00 6,150.00
2 -9.38 -3.65 2.08 -34.78 -27.86 -21.05 642.15 642.15 642.15
3 -7.80 -1.94 3.92 -21.61 -14.54 -7.62 258.47 258.47 258.47
4 -6.86 -0.91 5.04 -15.70 -8.63 -1.75 148.92 148.92 148.92
5 -6.25 -0.22 5.79 -12.50 -5.46 1.38 100.39 100.39 100.39
6 -5.82 0.26 6.33 -10.55 -3.53 3.26 73.77 73.77 73.77
7 -5.52 0.62 6.73 -9.27 -2.26 4.50 57.22 57.22 57.22
8 -5.31 0.89 7.05 -8.39 -1.37 5.37 46.06 46.06 46.06
9 -5.16 1.09 7.29 -7.77 -0.74 5.99 38.07 38.07 38.07
10 -5.07 1.25 7.49 -7.33 -0.26 6.47 32.11 32.11 32.11
15 -4.49 2.02 8.36 -4.49 2.02 8.36 16.46 16.46 16.46
20 -4.33 2.42 8.87 -4.33 2.42 8.87 9.93 9.93 9.93
25 -4.62 2.65 9.20 -4.62 2.65 9.20 6.48 6.48 9.51
30 -5.74 2.80 9.39 -5.74 2.80 9.39 4.39 4.39 9.63
35 -9.30 2.99 9.49 -9.30 2.99 9.49 3.02 3.23 9.70
40 * 3.18 9.57 * 3.18 9.57 * 3.22 9.61
45 * 3.34 9.65 * 3.34 9.65 * 3.34 9.65
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The Hypothetical Investment Rates of Return Shown Above and Elsewhere in this
Prospectus Are Illustrative Only and Should Not Be Deemed A Representation of
Past or Future Investment Rates of Return.
Actual Investment Rates of Return May be More or Less Than Those Shown And Will
Depend on a Number of Factors, Including the Investment Allocations By An Owner
and Different Investment Rates of Return For the Fund. The Death Benefit, Cash
Value and Net Surrender Value for a Policy Would be Different From Those Shown
if the Actual Investment Rates of Return Averaged 0%, 6%, and 12% Over a Period
of Years, But Fluctuated Above or Below that Average for Individual Policy
Years. No Representation Can Be Made by AUSA Life or the Fund that These
Hypothetical Investment Rates of Return Can Be Achieved For Any One Year or
Sustained Over Any Period of Time. This Illustration Must Be Preceded or
Accompanied By A Current Prospectus.
42
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
MALE AND FEMALE BOTH ISSUE AGE 55
$4,000 ANNUAL PREMIUM FOR NON-SMOKER SELECT RATE CLASS
$250,000 SPECIFIED AMOUNT
OPTION A - LEVEL DEATH BENEFIT
THIS ILLUSTRATION IS BASED ON GUARANTEED COST OF INSURANCE RATES.
<TABLE>
<CAPTION>
PREMIUMS NET
ACCUMULATED DEATH BENEFIT SURRENDER VALUE CASH VALUE
END OF AT 5% ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
POLICY INTEREST GROSS ANNUAL GROSS ANNUAL GROSS ANNUAL
YEAR PER YEAR RATE OF RETURN OF RATE OF RETURN OF RATE OF RETURN OF
- -------- ------------- -------------------------------- -------------------------------- --------------------------------
0% 6% 12% 0% 6% 12% 0% 6% 12%
--------- --------- ------------ -------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,200 250,000 250,000 250,000 1,191 1,410 1,629 3,501 3,720 3,939
2 8,610 250,000 250,000 250,000 4,310 4,967 5,651 6,910 7,567 8,251
3 13,241 250,000 250,000 250,000 7,520 8,837 10,262 10,224 11,541 12,966
4 18,103 250,000 250,000 250,000 10,631 12,833 15,312 13,439 15,641 18,120
5 23,208 250,000 250,000 250,000 13,638 16,955 20,841 16,550 19,867 23,753
6 28,568 250,000 250,000 250,000 16,535 21,199 26,890 19,551 24,215 29,906
7 34,196 250,000 250,000 250,000 19,313 25,561 33,503 22,433 28,681 36,623
8 40,106 250,000 250,000 250,000 21,961 30,033 40,726 25,185 33,257 43,950
9 46,312 250,000 250,000 250,000 24,461 34,604 48,610 27,789 37,932 51,938
10 52,827 250,000 250,000 250,000 26,795 39,257 57,206 30,227 42,689 60,638
15 90,630 250,000 250,000 250,000 40,392 68,608 119,128 40,392 68,608 119,128
20 138,877 250,000 250,000 250,000 41,430 93,459 212,017 41,430 93,459 212,017
25 200,454 250,000 250,000 384,530 21,137 109,679 366,219 21,137 109,679 366,219
30 279,043 * 250,000 639,306 * 101,176 608,863 * 101,176 608,863
35 379,345 * 250,000 1,028,128 * 5,481 979,169 * 5,481 979,169
40 507,359 * * 1,578,852 * * 1,563,220 * * 1,563,220
45 670,741 * * 2,560,711 * * 2,560,711 * * 2,560,711
<CAPTION>
INTERNAL RATE OF
INTERNAL RATE OF RETURN ON NET INTERNAL RATE OF
RETURN ON CASH SURRENDER VALUE RETURN ON
VALUE ASSUMING ASSUMING DEATH BENEFIT
END OF HYPOTHETICAL HYPOTHETICAL ASSUMING HYPOTHETICAL
POLICY GROSS ANNUAL GROSS ANNUAL GROSS ANNUAL
YEAR RATE OF RETURN OF RATE OF RETURN OF RATE OF RETURN OF
- -------- --------------------------------- ----------------------------------- -----------------------------------------
0% 6% 12% 0% 6% 12% 0% 6% 12%
----------- ---------- ---------- ----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 -12.47 -7.00 -1.53 -70.23 -64.75 -59.27 6,150.00 6,150.00 6,150.00
2 -9.38 -3.65 2.08 -34.78 -27.86 -21.05 642.15 642.15 642.15
3 -7.80 -1.94 3.92 -21.61 -14.54 -7.62 258.47 258.47 258.47
4 -6.86 -0.91 5.04 -15.70 -8.63 -1.75 148.92 148.92 148.92
5 -6.25 -0.22 5.79 -12.50 -5.46 1.38 100.39 100.39 100.39
6 -5.83 0.25 6.32 -10.56 -3.54 3.26 73.77 73.77 73.77
7 -5.54 0.60 6.72 -9.30 -2.28 4.49 57.22 57.22 57.22
8 -5.35 0.86 7.02 -8.44 -1.41 5.34 46.06 46.06 46.06
9 -5.23 1.04 7.26 -7.85 -0.79 5.95 38.07 38.07 38.07
10 -5.17 1.18 7.44 -7.44 -0.34 6.41 32.11 32.11 32.11
15 -5.13 1.66 8.18 -5.13 1.66 8.18 16.46 16.46 16.46
20 -6.80 1.46 8.58 -6.80 1.46 8.58 9.93 9.93 9.93
25 -15.73 0.70 8.95 -15.73 0.70 8.95 6.48 6.48 9.26
30 * -1.13 9.12 * -1.13 9.12 * 4.39 9.37
35 * -42.19 9.17 * -42.19 9.17 * 3.02 9.38
40 * 0.00 9.21 * 0.00 9.21 * 0.00 9.25
45 * 0.00 9.34 * 0.00 9.34 * 0.00 9.34
</TABLE>
* In the absence of an additional payment, the Policy would lapse.
The Hypothetical Investment Rates of Return Shown Above and Elsewhere in this
Prospectus Are Illustrative Only and Should Not Be Deemed A Representation of
Past or Future Investment Rates of Return.
Actual Investment Rates of Return May be More or Less Than Those Shown And Will
Depend on a Number of Factors, Including the Investment Allocations By An Owner
and Different Investment Rates of Return For the Fund. The Death Benefit, Cash
Value and Net Surrender Value for a Policy Would be Different From Those Shown
if the Actual Investment Rates of Return Averaged 0%, 6%, and 12% Over a Period
of Years, But Fluctuated Above or Below that Average for Individual Policy
Years. No Representation Can Be Made by AUSA Life or the Fund that These
Hypothetical Investment Rates of Return Can Be Achieved For Any One Year or
Sustained Over Any Period of Time. This Illustration Must Be Preceded or
Accompanied By A Current Prospectus.
43
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKETS
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1997. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 72-year period: investments of $1.00
in these assets would have grown to $1,828.33 and $5,519.97, respectively, by
year-end 1997. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$39.07.
The lowest-risk strategy over the past 72 years (for those with
short-term time horizons) was to buy U.S. Treasury bills. Since Treasury bills
tended to track inflation, the resulting real (inflation-adjusted) returns were
near zero for the entire 1926 - 1997 period.
[GRAPHIC OMITTED]
* Used with permission. /copyright/1998 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works
of Roger G. Ibbotson and Rex Sinquefield.]
COMPOUND
ANNUAL
RETURN
- Small Company Stocks 12.7%
Dimensional Fund Advices
Small Company Fund
- Large Company Stocks 11.0%
S&P 500
- Long-Term Government Bonds 5.2%
20-year U.S. Government Bonds
- Treasury Bills 3.8%
30-day U.S. T-Bills
- Inflation 3.1%
Consumer Price Index
44
<PAGE>
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1987-96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company ............. 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 16.6% 18.0%
Small Company ............. -4.5 1.4 2.07 16.9 15.5 11.5 15.8 16.5 16.5
Long-Term Corp. ........... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.2 10.8
Long-Term Govt. ........... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 10.7 11.3
Inter-Term Govt. .......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.0 8.3
Treasury Bills ............ 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.4
Inflation ................. -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.1 3.4
</TABLE>
------------------------------
* Based on the period 1926-1929.
** Based on the period 1990-1997.
* Used with permission. /copyright/1998 Ibbotson Associates, Inc. All rights
reserved. [Certain portions of this work were derived from copyrighted works
of Roger G. Ibbotson and Rex Sinquefield.]
THE AUSA FREEDOM WEALTH PROTECTORSM
AND THE "DOLLAR COST AVERAGING" INVESTMENT STRATEGY
As the Long Term Market Trends graph indicates, the investment
performance of many common stocks has generally been positive over certain
relatively long periods. Common stocks have, however, also been subject to
market declines, often dramatic ones, and general volatility of prices over
shorter time periods. The price fluctuations of common stocks has historically
been greater than that of high grade debt securities.
The relative volatility of common stock prices as compared with prices of
high grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can be
prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also offer
investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to continue
investing in both rising and falling markets. The dollar cost averaging
strategy of investing demonstrates this.
In this method of investing:
/bullet/ Relatively constant dollar amounts are invested at regular
intervals (monthly, quarterly, or annually),
/bullet/ Stock Market fluctuations, especially the savings on purchases
from price declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
Investments at Common Stock Shares
Regular Intervals Market Price Purchased
- ------------------- -------------- ----------
$150 $20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
----------- ----
$900 87.5
Total Value of 87.5 shares @ $15/share $1,312.50
Less Investment made (900.00)
---------
Gain/Profit $ 412.50
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more shares
at a savings and thus realize a significant gain. Obviously, the dollar cost
averaging method ONLY works if the investor continues to invest relatively
constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss
in declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of market fluctuations.
How does the dollar cost averaging method relate to the AUSA Freedom
Wealth ProtectorSM? A Policyowner may invest his or her Net Premium in a
Sub-Account, and although a Policy's value in a Sub-Account or Sub-Accounts is
affected by several factors other than investment experience (e.g., Cash Value
charges and charges against the Series Account), the dollar cost averaging
method can be generally applied to the Policy to the extent that the
Policyowner pays a Planned Periodic Premium on a regular basis and he or she
45
<PAGE>
allocates Net Premium resulting from those Planned Periodic Premiums to the
Sub-Accounts in relatively constant amounts.
INDEX TO FINANCIAL STATEMENTS
There are no financial statements for the Series Account as of the date of this
Prospectus.
AUSA Life Insurance Company, Inc.:
Statutory-basis balance sheet as of March 31, 1998 (unaudited)
Statutory-basis statement of operations as of March 31, 1998 (unaudited)
Statutory-basis statement of cash flows as of March 31, 1998 (unaudited)
Note to Statutory-basis financial statements (unaudited)
Report of Independent Auditors dated February 27, 1998
Statutory-basis balance sheets at December 31, 1997 and 1996
Statutory-basis statements of operations for the years ended December 31,
1997, 1996 and 1995
Statutory-basis statements of changes in capital and surplus for the
years ended December 31, 1997, 1996 and 1995
Statutory-basis statements of cash flows for the years ended December 31,
1997, 1996 and 1995
Notes to Statutory-basis financial statements
Statutory-basis financial statement schedules
WRL00003-07/98
46
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
BALANCE SHEET - STATUTORY BASIS
AS OF MARCH 31, 1998
(IN THOUSANDS)(UNAUDITED)
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 39,424
Bonds 3,823,668
Common stock, at market 163
Mortgage loans on real estate 467,559
Properties acquired in satisfaction of debt 45,521
Policy loans 740
Short-term note receivable from affiliate 39,400
Other invested assets 31,584
-----------
Total cash and invested assets 4,448,059
Premiums deferred and uncollected 2,862
Accrued investment income 56,510
Transfers from separate accounts 11,264
Federal income tax recoverable 159
Other assets 1,092
Separate account assets 5,811,337
-----------
Total admitted assets 10,331,283
===========
47
<PAGE>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life 72,459
Annuity 841,919
Accident and Health 9,837
Supplementary contracts 3,264
Policy and contract claim reserves:
Life 3,063
Accident and Health 8,584
Other policyholders' funds 3,195,538
Remittances and items not allocated 57,255
Asset valuation reserve 69,189
Interest maintenance reserve 14,726
Payable to affiliate 7,296
Deferred income 9,659
Payable under assumption reinsurance 16,979
agreement
Other liabilities 26,547
Separate account liabilities 5,788,997
-----------
Total liabilities 10,125,312
Capital and surplus:
Common stock, $1.00 par value, 2,500 shares
authorized, issued and outstanding 2,500
Paid-in surplus 306,694
Unassigned deficit (103,223)
-----------
Total capital and surplus 205,971
-----------
Total liabilities and capital and surplus 10,331,283
===========
48
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF OPERATIONS - STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)(UNAUDITED)
Revenues:
Premiums and other considerations, net of reinsurance
Life $ 13,056
Annuity 277,355
Net investment income 84,386
Amortization of interest maintenance reserve 2,546
Commissions and expense allowances on
reinsurance ceded 47
Other income 4,346
---------
381,736
Benefits and expenses:
Benefits paid or provided for:
Life 5,632
Surrender benefits 245,275
Other benefits 4,434
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 1,127
Annuity (1,222)
Accident and health 574
Increase in liability for premium and
other deposit type funds 17,356
Other 139
---------
273,315
Insurance expenses:
Commissions 20,698
General insurance expenses 21,203
Taxes, licenses and fees 278
Transfer to separate accounts 61,537
---------
103,716
---------
377,031
---------
Gain from operations before federal income taxes
and realized capital gains (losses) on 4,705
Federal income tax expense 0
---------
Loss from operations before realized capital gains on
investments 4,705
Net realized capital losses on investments (net of related
federal income taxes and amounts transferred to interest
maintenance reserve) (700)
---------
Net income 4,005
=========
49
<PAGE>
<TABLE>
<CAPTION>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(IN THOUSANDS)(UNAUDITED)
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
-------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 2,500 $306,694 $ (103,073) $206,121
Net income 0 0 4,005 4,005
Net unrealized gains 0 0 29 29
Increase in non-admitted assets 0 0 (654) (654)
Increase in asset valuation reserve 0 0 (4,131) (4,131)
Seed money contributed to separate
account, net of redemptions 0 0 612 612
Decrease in surplus in separate
accounts 0 0 (11) (11)
-------------------------------------------------
Balance at March 31, 1998 2,500 306,694 (103,223) 205,971
=================================================
</TABLE>
50
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF CASH FLOW - STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)(UNAUDITED)
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $ 295,336
Net investment income 93,328
Life and accident and health claims (7,222)
Surrender benefits to policyholders (245,275)
Other benefits to policyholders (4,434)
Commissions, other expenses and other taxes (82,369)
Federal income taxes 0
Net transfers to separate accounts (61,693)
Other, net 42,024
---------
Net cash provided by operating activities 29,695
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 260,815
Mortgage loans on real estate 34,947
Other 21
Gain on cash and short-term investment 2
---------
295,785
Cost of investments acquired:
Bonds and preferred stocks 301,806
Mortgage loans on real estate 5,913
Real estate 74
Policy loans 2
Other 31,769
---------
339,564
---------
Net cash used in investing activities (43,779)
---------
Decrease in cash and short-term investments (14,084
Cash and short-term investments at beginning of year 53,508
=========
Cash and short-term investments at end of year 39,424
=========
51
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
STATEMENT OF CASH FLOW - STATUTORY BASIS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited statutory basis financial statements have been
prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the accompanying statutory
basis financial statements and notes thereto for the year ended December 31,
1997.
52
<PAGE>
Report of Independent Auditors
The Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying statutory-basis balance sheets of AUSA Life
Insurance Company, Inc. as of December 31, 1997 and 1996, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the accompanying statutory-basis financial statement
schedules pursuant to Article 7 of Regulation S-X. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Department of Insurance of the State of New York, which
practices differ from generally accepted accounting principles. The variances
between such practices and generally accepted accounting principles also are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of AUSA Life Insurance Company, Inc. at December 31, 1997 and 1996, or the
results of its operations or its cash flows for each of the three years in the
period ended December 31, 1997.
53
<PAGE>
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AUSA Life Insurance Company,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of the State of New York. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
statutory-basis financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
February 27, 1998
54
<PAGE>
AUSA Life Insurance Company, Inc.
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share data)
DECEMBER 31
1997 1996
---------- ----------
ADMITTED ASSETS Cash and invested assets:
Cash and short-term investments $ 53,508 $ 25,391
Bonds 3,795,509 3,495,667
Stocks:
Preferred -- 125
Common, at market (cost: $118 in 1997 and
$13 in 1996) 144 18
Mortgage loans on real estate 495,009 618,633
Real estate acquired in satisfaction of debt, at
cost less accumulated depreciation
($1,816 in 1997 and $1,087 in 1996) 45,695 58,100
Policy loans 739 755
Other invested assets 22,309 3,393
---------- ----------
Total cash and invested assets 4,412,913 4,202,082
Short-term note receivable from affiliate 8,800 --
Premiums deferred and uncollected 3,247 3,257
Accrued investment income 66,978 62,258
Federal income taxes recoverable -- 416
Other assets 7,479 5,177
Separate account assets 5,452,208 4,755,131
---------- ----------
Total admitted assets $9,951,625 $9,028,321
========== ==========
SEE ACCOMPANYING NOTES.
55
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 71,331 $ 19,716
Annuity 843,141 768,212
Accident and health 9,264 10,180
Policy and contract claim reserves:
Life 4,187 3,826
Accident and health 9,050 11,160
Other policyholders' funds 3,181,405 3,088,016
Remittances and items not allocated 35,235 16,252
Asset valuation reserve 65,058 44,849
Interest maintenance reserve 16,115 5,494
Payable to affiliates 2,185 8,074
Short-term note payable to affiliate -- 600
Deferred income 13,421 18,023
Payable under assumption reinsurance agreement 56,952 67,217
Other liabilities 7,681 10,748
Separate account liabilities 5,430,479 4,721,974
----------- -----------
Total liabilities 9,745,504 8,794,341
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20 shares authorized,
issued and outstanding 2,500 2,500
Paid-in surplus 306,694 306,694
Unassigned surplus (deficit) (103,073) (75,214)
----------- -----------
Total capital and surplus 206,121 233,980
----------- -----------
Total liabilities and capital and surplus $ 9,951,625 $ 9,028,321
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
56
<PAGE>
<TABLE>
<CAPTION>
AUSA Life Insurance Company, Inc.
Statements of Operations - Statutory Basis
(Dollars in thousands)
YEAR ENDED DECEMBER 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations,
net of reinsurance:
Life $ 60,261 $ 9,344 $ 9,066
Annuity 1,146,805 1,060,655 1,144,423
Accident and health 34,846 47,695 53,346
Net investment income 325,181 323,828 318,004
Amortization of interest maintenance
reserve 2,941 1,903 1,931
Commissions and expense allowances on
reinsurance ceded 189 43 40
Other income 15,037 10,739 8,786
----------- ----------- -----------
1,585,260 1,454,207 1,535,596
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 28,023 39,921 40,719
Surrender benefits 1,156,619 852,745 815,882
Other benefits 12,062 9,778 7,804
Increase (decrease) in aggregate reserves
for policies and contracts:
Life 51,615 1,557 1,570
Annuity 74,929 59,090 127,403
Accident and health (916) (671) 775
Other 580 609 609
Increase in liability for premium and other
deposit type funds 92,280 93,893 229,485
----------- ----------- -----------
1,415,192 1,056,922 1,224,247
Insurance expenses:
Commissions 78,971 87,861 95,900
General insurance expenses 87,782 79,310 69,933
Taxes, licenses and fees 2,872 2,643 1,638
Net transfers to (from) separate accounts (2,304) 227,802 139,912
Other expenses 43 (19) (37)
----------- ----------- -----------
167,364 397,597 307,346
----------- ----------- -----------
1,582,556 1,454,519 1,531,593
----------- ----------- -----------
Gain (loss) from operations before federal
income taxes and net realized capital
gains (losses) on investments 2,704 (312) 4,003
Federal income tax expense 28 1,305 5,588
Gain (loss) from operations before net realized
capital gains (losses) on investments 2,676 (1,617) (1,585)
Net realized capital gains (losses) on investments
(net of related federal income taxes and amounts
transferred to interest maintenance reserve) 827 (12,097) (3,464)
----------- ----------- -----------
Net income (loss) $ 3,503 $ (13,714) $ (5,049)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
57
<PAGE>
<TABLE>
<CAPTION>
AUSA Life Insurance Company, Inc.
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS CAPITAL AND
STOCK SURPLUS (DEFICIT) SURPLUS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 2,500 $ 265,694 $ (43,044) $ 225,150
Capital contribution -- 41,000 -- 41,000
Net loss for 1995 -- -- (5,049) (5,049)
Net unrealized capital losses -- -- (501) (501)
Increase in non-admitted assets -- -- (920) (920)
Increase in asset valuation reserve -- -- (10,370) (10,370)
Surplus effect of reinsurance -- -- (70) (70)
Seed money contributed to separate
account, net of redemptions -- -- (1,000) (1,000)
Increase in liability for reinsurance in
unauthorized companies -- -- (51) (51)
Increase in surplus in separate account -- -- 3,121 3,121
--------- --------- --------- ---------
Balance at December 31, 1995 2,500 306,694 (57,884) 251,310
Net loss for 1996 -- -- (13,714) (13,714)
Net unrealized capital losses -- -- (486) (486)
Decrease in non-admitted assets -- -- 520 520
Increase in liability for reinsurance
in unauthorized companies -- -- (42) (42)
Increase in asset valuation reserve -- -- (5,891) (5,891)
Seed money contributed to separate
account, net of redemptions -- -- (12,500) (12,500)
Increase in surplus in separate account -- -- 14,783 14,783
--------- --------- --------- ---------
Balance at December 31, 1996 2,500 306,694 (75,214) 233,980
Net gain for 1997 -- -- 3,503 3,503
Net unrealized capital losses -- -- (2,629) (2,629)
Increase in non-admitted assets -- -- (8,505) (8,505)
Decrease in liability for reinsurance in
unauthorized companies -- -- 30 30
Increase in asset valuation reserve -- -- (20,209) (20,309)
Seed money withdrawn from separate
account, net of redemptions -- -- 11,700 11,700
Decrease in surplus in separate account -- -- (11,749) (11,749)
========= ========= ========= =========
Balance at December 31, 1997 $ 2,500 $ 306,694 $(103,073) $ 206,121
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
58
<PAGE>
<TABLE>
<CAPTION>
AUSA Life Insurance Company, Inc.
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
YEAR ENDED DECEMBER 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance $ 1,268,814 $ 1,128,792 $ 1,215,941
Net investment income 323,269 329,948 316,494
Life and accident and health claims (29,800) (42,143) (39,194)
Surrender benefits and other fund withdrawals (1,156,619) (852,745) (815,882)
Other benefits to policyholders (12,036) (9,776) (7,789)
Commissions, other expenses and other taxes (178,648) (187,930) (183,810)
Net transfer (to) from separate account 1,467 (229,556) (139,912)
Federal income taxes (paid) received 388 (526) (6,299)
Other, net (1,919) (14,820) 7,133
----------- ----------- -----------
Net cash provided by operating activities 214,916 121,244 346,682
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 808,738 703,936 529,363
Common stocks -- 5,288 2,957
Mortgage loans on real estate 179,810 165,460 138,243
Real estate 25,104 -- 4,953
Policy loans 16 4 --
----------- ----------- -----------
1,013,668 874,688 675,516
Cost of investments acquired:
Bonds and preferred stocks (1,112,481) (1,016,678) (1,018,097)
Common stocks (103) (589) (5,174)
Mortgage loans on real estate (60,722) (42,118) (54,140)
Real estate -- (521) --
Policy loans -- -- (40)
Other (17,761) (2,968) (993)
----------- ----------- -----------
(1,191,067) (1,062,874) (1,078,444)
----------- ----------- -----------
Net cash used in investing activities (177,399) (188,186) (402,928)
FINANCING ACTIVITIES
Issuance (payment) of intercompany notes, net (9,400) (19,200) 14,600
Capital contribution -- -- 41,000
----------- ----------- -----------
Net cash provided by (used in) financing activities (9,400) (19,200) 55,600
----------- ----------- -----------
Increase (decrease) in cash and short-term 28,117 (86,142) (646)
investments
Cash and short-term investments at beginning of year 25,391 111,533 112,179
----------- ----------- -----------
Cash and short-term investments at end of year $ 53,508 $ 25,391 $ 111,533
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
59
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis
(Dollars in thousands)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. On December 31, 1993, the Company
entered into an assumption reinsurance agreement with Mutual of New York
("MONY") to transfer certain group pension business of MONY to the Company.
In July 1996, the Company completed a merger with International Life Investors
Insurance Company ("ILI"), a wholly-owned subsidiary of Life Investors Insurance
Company of America, another wholly-owned subsidiary of First AUSA, whereby ILI
was merged directly into the Company. The Company received assets of $688,233
and liabilities of $635,189. The difference between assets and liabilities was
transferred directly to capital and surplus. In accordance with National
Association of Insurance Commissioners ("NAIC") statutory accounting principles,
all prior period financial statements presented have been restated as if the
merger took place at the beginning of such periods. Historical book values
carried over from the separate companies to the combined entity.
NATURE OF BUSINESS
The Company primarily sells group fixed and variable annuities and group life
coverages. The Company is licensed in 48 states and the District of Columbia and
is actively in the process of becoming licensed in all 50 states. Sales of the
Company's products are primarily through brokers.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and assumptions
utilized which could have a material impact on the financial statements.
60
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York, which practices differ in some respects from generally
accepted accounting principles. The more significant of these differences are as
follows: (a) bonds are generally reported at amortized cost rather than
segregating the portfolio into held-to-maturity (reported at amortized cost),
available-for-sale (reported at fair value), and trading (reported at fair
value) classifications; (b) acquisition costs of acquiring new business are
charged to current operations as incurred rather than deferred and amortized
over the life of the policies; (c) policy reserves on traditional life products
are based on statutory mortality rates and interest which may differ from
reserves based on reasonable assumptions of expected mortality, interest, and
withdrawals which include a provision for possible unfavorable deviation from
such assumptions; (d) policy reserves on certain investment products use
discounting methodologies utilizing statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) declines in the estimated realizable value of
investments are provided for through the establishment of a formula-determined
statutory investment reserve (reported as a liability), changes to which are
charged directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "non-admitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of premiums received rather than
policy charges for the cost of insurance, policy administration charges,
amortization of policy initiation fees and surrender charges assessed; (k)
pension expense is recorded as amounts are paid; (l) adjustments to federal
income taxes of prior years are charged or credited directly to unassigned
surplus, rather than reported as a component of expense in the statement of
operations; and (m) gains or losses on dispositions of business are charged or
credited directly to unassigned surplus rather than being reported in the
statement of operations. The effects of these variances have not been determined
by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company uses to
prepare its statutory-basis financial statements.
61
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased to
be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortized costs for bonds and mortgage loans on real
estate that were acquired through the reinsurance agreement, described earlier,
were initially recorded at market value, consistent with the aforementioned
agreement and as prescribed by the Department of Insurance of the State of New
York. Amortization is computed using methods which result in a level yield over
the expected life of the security. The Company reviews its prepayment
assumptions on mortgage and other asset backed securities at regular intervals
and adjusts amortization rates retrospectively when such assumptions are changed
due to experience and/or expected future patterns. Investments in preferred
stocks in good standing are reported at cost. Investments in preferred stocks
not in good standing are reported at the lower of cost or market. Common stocks,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as required
or permitted by New York Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
62
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $473, $469 and $216,
respectively, with respect to such practices.
The Company uses interest rate swaps as part of its overall interest rate risk
management strategy for certain life insurance and annuity products. The Company
entered into an interest rate swap contract to modify the interest rate
characteristics of the underlying liabilities. The net interest effect of such
swap transactions is reported as an adjustment of interest income from the
hedged items as incurred.
Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note 4)
are returned to MONY at the time of realization pursuant to the agreement.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum required by
law.
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality Tables.
The reserves are calculated using interest rates ranging from 2.50 to 6.50
percent and are computed principally on the Net Level Premium Valuation and the
Commissioners' Reserve Valuation Methods. Reserves for universal life policies
are based on account balances adjusted for the Commissioners' Reserve Valuation
Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with life contingencies are equal to the
present value of future payments assuming interest rates ranging from 3.00 to
8.25 percent and mortality rates, where appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
63
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. These estimates are subject to the effects of
trends in claim severity and frequency. The estimates are continually reviewed
and adjusted as necessary as experience develops or new information becomes
available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these assets
accrue to the benefit of the policyholders and, accordingly, the operations of
the separate accounts are not included in the accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires additional disclosures about
derivatives. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
64
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or,
in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal its carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
INTEREST RATE SWAP: Estimated fair value of the interest rate swaps are
based upon the pricing differential for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
65
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------- ------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $3,795,509 $3,880,098 $3,495,667 $3,530,250
Preferred stocks -- -- 125 120
Common stock 144 144 18 18
Mortgage loans on real estate 495,009 504,947 618,633 619,479
Interest rate swap -- 391 -- --
Policy loans 739 739 755 755
Cash and short-term investments 53,508 53,508 25,391 25,391
Separate account assets 5,452,208 5,462,501 4,755,131 4,754,781
LIABILITIES
Investment contract liabilities 4,024,004 3,947,049 3,855,787 3,731,340
Separate account annuities 5,417,036 5,400,010 4,707,568 4,677,289
</TABLE>
3. INVESTMENTS
The carrying value and estimated market value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and agencies $ 93,649 $ 499 $ 252 $ 93,896
State, municipal and other government 55,336 1,413 1,761 54,988
Public utilities 251,071 4,943 892 255,122
Industrial and miscellaneous 2,180,885 57,783 5,344 2,233,324
Mortgage-backed securities 1,214,568 31,185 2,985 1,242,768
---------- ---------- ---------- ----------
$3,795,509 $ 95,823 $ 11,234 $3,880,098
========== ========== ========== ==========
</TABLE>
66
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and agencies $ 122,355 $ 1,170 $ 1,086 $ 122,439
State, municipal and other government 25,027 519 36 25,510
Public utilities 229,732 2,086 2,977 228,841
Industrial and miscellaneous 2,031,086 33,621 14,895 2,049,812
Mortgage-backed securities 1,087,467 22,579 6,398 1,103,648
---------- ---------- ---------- ----------
3,495,667 59,975 25,392 3,530,250
Preferred stocks 125 5 10 120
---------- ---------- ---------- ----------
$3,495,792 $ 59,980 $ 25,402 $3,530,370
========== ========== ========== ==========
</TABLE>
The carrying value and estimated market value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
Due in one year or less $ 136,322 $ 136,393
Due after one year through five years 1,371,927 1,398,781
Due after five years through ten years 915,324 938,972
Due after ten years 157,368 163,184
---------- ----------
2,580,941 2,637,330
---------- ----------
Mortgage-backed securities 1,214,568 1,242,768
---------- ----------
$3,795,509 $3,880,098
========== ==========
67
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
DECEMBER 31
1997 1996 1995
-------- -------- --------
Interest on bonds and notes $269,659 $251,923 $231,206
Mortgage loans 57,659 83,511 98,653
Real estate 13,976 7,225 2,400
Dividends on equity investments 9 25 137
Interest on policy loans 39 34 40
Derivative instruments 100 -- --
Other investment gain (loss) 1,340 (5,511) (3,926)
-------- -------- --------
Gross investment income 342,782 337,207 328,510
-------- -------- --------
Investment expenses 17,601 13,379 10,506
-------- -------- --------
Net investment income $325,181 $323,828 $318,004
======== ======== ========
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
DECEMBER 31
1997 1996 1995
-------- ---------- ----------
Proceeds $808,738 $ 703,936 $ 529,363
======== ========== ==========
Gross realized gains $ 16,514 $ 9,527 $ 8,541
Gross realized losses (11,493) (11,595) (15,255)
-------- ---------- ----------
Net realized gains (losses) $ 5,021 $ (2,068) $ (6,714)
======== ========== ==========
At December 31, 1997, investments with an aggregate carrying value of $2,350
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required by
statute.
68
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
REALIZED
--------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
Debt securities $ 5,021 $ (2,068) $ (6,714)
Common stock -- 244 --
Preferred stock (7) (44) --
Short-term investments (6) (115) (24)
Mortgage loans on real estate 287 (12,415) (3,650)
Real estate 4,059 -- (628)
Other invested assets 5,035 6,872 11,109
-------- -------- --------
14,389 (7,526) 93
Tax effect -- (87) 247
Transfer to interest maintenance reserve (13,562) (4,484) (3,804)
-------- -------- --------
Total realized gains (losses) $ 827 $(12,097) $ (3,464)
======== ======== ========
CHANGE IN UNREALIZED
-----------------------------------
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
Debt securities $ 50,011 $(80,600) $265,890
Equity securities 21 (190) 74
-------- -------- --------
Change in unrealized appreciation $ 50,032 $(80,790) $265,964
======== ======== ========
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1997, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
----- ----- -----
Unrealized gains $ 38 $ 16 $ 206
Unrealized losses (12) (11) (11)
----- ----- -----
Net unrealized gains $ 26 $ 5 $ 195
===== ===== =====
69
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1997, the Company issued mortgage loans with interest rates ranging from
8.10% to 8.72%. The maximum percentage of any one loan to the value of the
underlying real estate at origination was 85%. No mortgage loans were non-income
producing for the previous twelve months and, accordingly, no accrued interest
related to these mortgage loans was excluded from investment income. During
1997, the Company refinanced the mortgage loans of one property with an
aggregate carrying value of $24,888 to reduce the interest rates, as a result of
the current interest rate environment. The Company requires all mortgage loans
to carry fire insurance equal to the value of the underlying property.
During 1997, 1996 and 1995, there were $4,427, $28,929 and $14,264,
respectively, in foreclosed mortgage loans that were transferred to real estate.
At December 31, 1997 and 1996, the Company held a mortgage loan loss reserve in
the asset valuation reserve of $20,191 and $8,368, respectively. The mortgage
loan portfolio is diversified by geographic region and specific collateral
property type as follows:
GEOGRAPHIC DISTRIBUTION PROPERTY TYPE DISTRIBUTION
------------------------------------ ----------------------------
DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
---- ---- ---- ----
Pacific 20% 2% Office 30% 42%
South Atlantic 20 37 Apartment 23 10
Mid-Atlantic 16 5 Retail 19 30
E. North Central 16 21 Other 15 17
Mountain 15 15 Industrial 13 1
New England 7 10
W. North Central 2 5
W. South Central 2 5
E. South Central 2 --
At December 31, 1997, the Company had the following investments, excluding U. S.
Government guaranteed or insured issues, which individually represented more
than ten percent of capital and surplus and the asset valuation reserve:
CARRYING
DESCRIPTION OF SECURITY VALUE
- ------------------------- ---------
Bonds:
Chase Manhattan Corp. $37,953
PSEG Capital 27,490
70
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
The Company utilizes an interest rate swap agreement as part of its efforts to
hedge and manage fluctuations in the market value of its investment portfolio
attributable to changes in general interest rate levels and to manage duration
mismatch of assets and liabilities. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of financial
instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company has delivered funds or securities under terms of the contract) that
would result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance by
a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
NOTIONAL AMOUNT
1997 1996
------- -----
Derivative securities:
Interest rate swaps:
Receive fixed - pay floating $50,800 $ --
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet
its obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance assumed and ceded amounts for
the year ended December 31:
1997 1996 1995
---------- ---------- ----------
Direct premiums $1,239,553 $1,135,315 $1,207,720
Reinsurance assumed 6,905 9,962 37,423
Reinsurance ceded (4,546) (27,583) (38,308)
========== ========== ==========
Net premiums earned $1,241,912 $1,117,694 $1,206,835
========== ========== ==========
71
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
4. REINSURANCE (CONTINUED)
The Company received reinsurance recoveries in the amounts of $1,633, $953 and
$533 during 1997, 1996 and 1995, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $153,178 and
$157,396, respectively.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
In accordance with the agreement, MONY will receive payments relating to the
performance of the assets and liabilities that exist at the date of closing for
a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will recognize
operating gains and losses on renewal premiums received after December 31, 1993
of the business in-force at December 31, 1993, and on all new business written
after that date. At the end of nine years, the Company will purchase from MONY
the remaining transferred business inforce based upon a formula described in the
agreement. At December 31, 1997 and 1996, the Company owed MONY $56,952 and
$67,217, respectively, which represents the amount earned by MONY under the gain
sharing calculation and certain fees for investment management services for the
respective years.
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. The proceeds were used to
enhance the surplus of the Company. Both the Series A and Series B notes bear a
market rate of interest and mature in nine years from the date of closing.
AEGON provides general and administrative services for the transferred business
under a related agreement with MONY. The agreement specifies prescribed rates
for expenses to administer the business up to certain levels. In addition, AEGON
also provides investment management services on the assets underlying the new
business written by the Company while MONY continues to provide investment
management services for assets supporting the remaining policy liabilities which
were transferred at December 31, 1993.
On October 1, 1995, the Company entered into a reinsurance agreement with a
non-affiliate. As a result, the Company received $4,242 of assets, including $38
of cash, and $4,312 of liabilities. The difference between the assets and the
liabilities of $70 was charged directly to unassigned surplus.
72
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
5. INCOME TAXES
The Company files a separate federal income tax return.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to loss from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Computed tax expense (benefit) at federal statutory
rate (35%) $ 946 $ (109) $ 1,402
Tax reserve adjustment (144) (211) 755
Deferred acquisition cost - tax basis 2,349 465 636
Carryforward (utilization) of operating loss (1,275) 2,611 3,351
Excess tax depreciation (16) (13) --
Dividend received deduction (1,566) (4) --
Prior year (over)/under accrual 28 114 (67)
IMR amortization (1,029) (666) (676)
Other items - net 735 (882) 187
------- ------- -------
Federal income tax expense $ 28 $ 1,305 $ 5,588
======= ======= =======
</TABLE>
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to realized gains (losses) due to
the agreement between MONY and the Company, as discussed in Note 4 to the
financial statements. In accordance with this agreement, these gains and losses
are included in the net payments MONY will receive relating to the performance
of the assets that existed at the date of closing. Accordingly, income taxes
relating to gains and losses on such assets are not provided for on the income
tax return filed by the Company.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of 1959,
a portion of statutory income was not subject to current taxation but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($797 at December 31, 1997). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $279.
At December 31, 1997 the Company had net operating loss carryforwards of
approximately $19,155 which expire through 2011.
An examination by the Internal Revenue Service is underway for years 1993 -
1995.
73
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds relate
to liabilities established on a variety of the Company's products that are not
subject to significant mortality or morbidity risk; however, there may be
certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
----------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment $ 910,528 9% $ 834,176 10%
Subject to discretionary withdrawal at book
value less surrender charge 1,032,460 11 1,583,989 18
Subject to discretionary withdrawal at market
value 2,772,795 29 2,254,074 26
Subject to discretionary withdrawal at book
value (minimal or no charges or adjustments) 2,565,002 27 1,913,542 22
Not subject to discretionary withdrawal
provision 2,314,542 24 2,136,222 24
---------- --- ---------- ---
9,595,327 100% 8,722,003 100%
========== === ========== ===
Less reinsurance ceded 152,726 157,039
Total policy reserves on annuities and
deposit fund liabilities $9,442,601 $8,564,964
========== ==========
</TABLE>
Separate and variable account assets held by the Company represent contracts
where the benefit is determined by the performance of the investments held in
the separate account. Information regarding the separate accounts of the Company
as of and for the years ended December 31, 1997, 1996 and 1995 is as follows:
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------- -------------- ----------
Premiums, deposits and other
considerations for the year ended
December 31, 1997 $ 147,638 $ 596,581 $ 744,219
=========== =========== ==========
Reserves for separate accounts with
assets as of December 31, 1997 at:
Fair value $ 2,204,931 $ 2,589,401 $ 4,794,332
Amortized cost 622,703 -- 622,703
----------- ----------- -----------
Total $ 2,827,634 $ 2,589,401 $ 5,417,035
=========== =========== ===========
74
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
-------------- ------------- -----------
Premiums, deposits and other
considerations for the year ended
December 31, 1996 $ -- $ 716,524 $ 716,524
=========== =========== ===========
Reserves for separate accounts with
assets as of December 31, 1996 at:
Fair value $ 2,022,843 $ 2,071,160 $ 4,094,003
Amortized cost 613,565 -- 613,565
=========== =========== ===========
Total $ 2,636,408 $ 2,071,160 $ 4,707,568
=========== =========== ===========
Premiums, deposits and other
considerations for the year ended
December 31, 1995 $ -- $ 536,128 $ 536,128
=========== =========== ===========
Reserves for separate accounts with
assets as of December 31, 1995 at:
Fair value $ 2,147,500 $ 1,491,225 $ 3,638,725
Amortized cost 599,254 -- 599,254
-------------- ----------- -----------
Total $ 2,746,754 $ 1,491,225 $ 4,237,979
============== =========== ===========
There may be certain restrictions placed upon the amount of funds that can be
withdrawn without penalty. The amount of separate account liabilities on these
products, by withdrawal characteristics, are summarized as follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
------------ --------------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1997
Subject to discretionary withdrawal
with market value adjustment $ 358,061 $ -- $ 358,061
Subject to discretionary withdrawal
at book value less surrender charge 264,642 -- 264,642
Subject to discretionary withdrawal
at market value 180,802 2,589,401 2,770,203
Not subject to discretionary withdrawal 2,024,129 -- 2,024,129
=========== =========== ===========
$ 2,827,634 $ 2,589,401 $ 5,417,035
=========== =========== ===========
</TABLE>
75
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
----------- -------------- -----------
<S> <C> <C> <C>
DECEMBER 31, 1996
Subject to discretionary withdrawal
with market value adjustment $ 269,991 $ -- $ 269,991
Subject to discretionary withdrawal
at book value less surrender charge 279,399 -- 279,399
Subject to discretionary withdrawal
at market value 181,158 2,071,160 2,252,318
Not subject to discretionary withdrawal 1,905,860 -- 1,905,860
=========== ============ ===========
$ 2,636,408 $ 2,071,160 $ 4,707,568
=========== ============ ===========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts $ 744,188 $ 716,525 $ 536,128
Transfers from separate accounts 760,248 502,244 404,120
--------- --------- ---------
Net transfers to (from) separate accounts (16,060) 214,281 132,008
Reconciling adjustments - HUB level fees not
paid to AUSA general account 13,756 13,520 7,904
========= ======== =========
Transfers as reported in the summary of
operations of the life, accident and health $ (2,304) $ 227,802 $ 139,912
========= ========= =========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At December 31, 1997 and 1996, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
76
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
GROSS LOADING NET
------- ------- -------
DECEMBER 31, 1997
Ordinary direct first year business $ 29 $ 21 $ 8
Ordinary direct renewal business 2,976 49 2,927
Group life direct business 125 19 106
Credit life 41 -- 41
Reinsurance ceded (14) -- (14)
------- ------- -------
3,157 89 3,068
Accident and health:
Direct 230 -- 230
Reinsurance ceded (51) -- (51)
------- ------- -------
Total accident and health 179 -- 179
======= ======= =======
$ 3,336 $ 89 $ 3,247
======= ======= =======
DECEMBER 31, 1996
Ordinary direct first year business $ 83 $ (1) $ 84
Ordinary direct renewal business 3,078 25 3,053
Group life direct business 135 22 113
Credit life 5 -- 5
Reinsurance ceded (163) -- (163)
------- ------- -------
3,138 46 3,092
Accident and health:
Direct 165 -- 165
Reinsurance ceded -- -- --
------- ------- -------
Total accident and health 165 -- 165
======= ======= =======
$ 3,303 $ 46 $ 3,257
======= ======= =======
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$597,855 and $615,025, respectively, in which the gross premiums are less than
the net premiums required by the valuation standards established by the
Department of Insurance of the State of New York. The Company established policy
reserves of $1,476 and $1,520 to cover these deficiencies at December 31, 1997
and 1996, respectively.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The Company is not entitled to pay out any dividends in 1998
without prior approval.
77
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the FASB
87 expense as a percent of salaries. The benefits are based on years of service
and the employee's compensation during the highest five consecutive years of
employment. The Company was allocated $0, $13 and $14 of pension expense for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is subject
to the reporting and disclosure requirements of the Employee Retirement Income
Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974. The Company
was allocated $12, $21 and $8 of expense for the years ended December 31, 1997,
1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued or funded as
deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $2 and $2
for the years ended December 31, 1996 and 1995, respectively. No expense related
to these plans was recorded for 1997.
78
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON will ensure
the maintenance of certain minimum tangible net worth, operating leverage and
liquidity levels of the Company, as defined in the agreement, through the
contribution of additional capital by the Company's parent as needed.
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997, 1996
and 1995, the Company paid $3,630, $3,539 and $3,961, respectively, for these
services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.60% at December 31, 1997. During 1997,
1996 and 1995, the Company paid net interest of $142, $29 and $289,
respectively, to affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business. Although
such litigation sometimes includes substantial demands for compensatory and
punitive damages, in addition to contract liability, it is management's opinion,
after consultation with counsel and a review of available facts, that damages
arising from such demands will not be material to the Company's financial
position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. In accordance with the purchase agreement,
assessments related to periods prior to the purchase of the Company will be paid
by Dreyfus. Assessments attributable to business reinsured from MONY for
premiums received prior to the date of the transaction will be paid by MONY. The
Company will be responsible for assessments, if any, attributable to premium
income after the date of purchase. Assessments are charged to operations when
received by the Company except where right of offset against other taxes paid is
allowed by law; amounts available for future offsets are recorded as an asset on
the Company's balance sheet. Potential future obligations for unknown
insolvencies are not determinable by the Company. The future obligation has been
based on the most recent information available from the National Organization of
Life and Health Insurance Guaranty Association. The guaranty fund expense was
$572, $167 and $(207) for the years ended December 31, 1997, 1996 and 1995,
respectively.
79
<PAGE>
AUSA Life Insurance Company, Inc.
Notes to Financial Statements - Statutory Basis (continued)
(Dollars in thousands)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems to
determine if they are Year 2000 compatible. The Company has begun to convert or
modify, where necessary, critical data processing systems. It is contemplated
that the plan will be substantially completed by early 1999. The Company does
not expect this project to have a significant effect on operations. However, to
mitigate the effect of outside influences upon the success of the project, the
Company has undertaken communications with its significant customers, suppliers
and other third parties to determine their Year 2000 compatibility and
readiness. Management believes that the issues associated with the Year 2000
will be resolved with no material financial impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including testing
procedures, there is no certainty that any company will achieve complete
success. Notwithstanding the efforts or results of the Company, its ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond its knowledge or control.
80
<PAGE>
AUSA Life Insurance Company, Inc.
Summary of Investments - Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1997
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and authorities $ 578,548 $ 591,837 $ 578,548
States, municipalities and political
subdivisions 69,321 71,465 69,321
Foreign governments 42,195 40,618 42,195
Public utilities 251,071 255,123 251,071
All other corporate bonds 2,854,374 2,921,055 2,854,374
---------- ---------- ----------
Total fixed maturities 3,795,509 3,880,098 3,795,509
EQUITY SECURITIES
Common stocks - industrial, miscellaneous
and all other 118 144 144
---------- ---------- ----------
Total equity securities 118 144 144
Mortgage loans on real estate 495,009 495,009
Real estate acquired in satisfaction
of debt 45,695 45,695
Policy loans 739 739
Cash and short-term investments 53,508 53,508
Other long-term investments 22,309 22,309
---------- ----------
Total investments $4,412,887 $4,412,913
========== ==========
<FN>
- -------------------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
</FN>
</TABLE>
81
<PAGE>
AUSA Life Insurance Company, Inc.
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------ -------- -----------
YEAR ENDED DECEMBER 31, 1997
Individual life $ 71,117 $ -- $ 4,187
Individual health 6,607 2,657 9,050
Group life and health 214 -- --
Annuity 843,141 -- --
-------- ------- -------
$921,079 $ 2,657 $13,237
======== ======= =======
YEAR ENDED DECEMBER 31, 1996
Individual life $ 19,493 $ -- $ 3,826
Individual health 7,687 2,493 11,160
Group life and health 223 -- --
Annuity 768,212 -- --
-------- ------- -------
$795,615 $ 2,493 $14,986
======== ======= =======
YEAR ENDED DECEMBER 31, 1995
Individual life $ 17,935 $ -- $ 3,716
Individual health 8,009 2,842 13,515
Group life and health 224 -- --
Annuity 709,122 -- --
-------- ------- -------
$735,290 $ 2,842 $17,231
======== ======= =======
82
<PAGE>
<TABLE>
<CAPTION>
NET BENEFITS, CLAIMS OTHER
PREMIUM INVESTMENT LOSSES AND SETTLEMENT OPERATING PREMIUMS
REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
- ---------- ---------- --------------------- --------- --------
<S> <C> <C> <C> <C>
$ 58,696 $ 3,949 $ 56,689 $ 3,393 --
27,836 1,130 15,615 6,914 $26,560
8,575 265 7,080 1,544 7,977
1,146,805 319,837 1,335,808 155,513 --
- ---------- -------- ---------- --------
$1,241,912 $325,181 $1,415,192 $167,364
========== ======== ========== ========
$ 8,468 $ 2,040 $ 9,087 $ 734 --
40,479 1,734 25,674 12,534 $40,098
8,092 372 6,056 3,044 10,683
1,060,655 319,682 1,016,105 381,285
- ---------- -------- ---------- --------
$1,117,694 $323,828 $1,056,922 $397,597
========== ======== ========== ========
$ 8,388 $ 1,634 $ 8,062 $ 770 --
46,975 1,438 29,657 15,204 $46,558
7,049 306 5,293 970 6,074
1,144,423 314,626 1,181,235 290,402
- ---------- -------- ---------- --------
$1,206,835 $318,004 $1,224,247 $307,346
========== ======== ========== ========
<FN>
- ----------------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
</FN>
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
AUSA Life Insurance Company, Inc.
Reinsurance
(Dollars in thousands)
SCHEDULE IV
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Life insurance in force $1,559,108 $37,433 $ 216,838 $1,738,513 12%
========== ======= ========== ========== ========
Premiums:
Individual life $ 57,604 $ 266 $ 1,358 $ 58,696 2%
Individual health 27,044 4 796 27,836 3
Group life and health 9,103 537 9 8,575 --
Annuity 1,145,802 3,739 4,742 1,146,805 --
---------- ------- ---------- ---------- --------
$1,239,553 $ 4,546 $ 6,905 $1,241,912 1%
========== ======= ========== ========== ========
YEAR ENDED DECEMBER 31, 1996
Life insurance in force $1,238,554 $68,804 $ 241,117 $1,410,867 17%
========== ======= ========== ========== ========
Premiums:
Individual life $ 7,652 $ 560 $ 1,376 $ 8,468 16%
Individual health 39,593 4 890 40,479 2
Group life and health 8,085 -- 7 8,092 --
Annuity 1,079,985 27,019 7,689 1,060,655 1
---------- ------- ---------- ---------- --------
$1,135,315 $27,583 $ 9,962 $1,117,694 1%
========== ======= ========== ========== ========
YEAR ENDED DECEMBER 31, 1995
Life insurance in force $1,497,961 $34,206 $ 266,127 $1,729,882 15%
========== ======= ========== ========== ========
Premiums:
Individual life $ 7,348 $ 359 $ 1,399 $ 8,388 17%
Individual health 46,609 5 371 46,975 1
Group life and health 7,043 -- 6 7,049 --
Annuity 1,146,720 37,944 35,647 1,144,423 3
---------- ------- ---------- ---------- --------
$1,207,720 $38,308 $ 37,423 $1,206,835 3%
========== ======= ========== ========== ========
</TABLE>
84
<PAGE>
PART II.
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
REPRESENTATION PURSUANT TO SECTION 26(E) (2) (A)
AUSA Life Insurance Company, Inc. ("AUSA Life") hereby represents that the
fees and charges deducted under the Policies, in the aggregate, are reasonable
in relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by AUSA Life.
STATEMENT WITH RESPECT TO INDEMNIFICATION
Provisions exist under the New York Law, the Articles of Incorporation of
AUSA Life and the Amended and Restated By-Laws of AUSA Life whereby AUSA Life
may indemnify certain persons against certain payments incurred by such persons.
The following excerpts contain the substance of these provisions.
NEW YORK BUSINESS CORPORATION LAW
SECTION 722. AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) A corporation may indemnify any person made, or threatened to be made, a
party to an action or proceeding (other than one by or in the right of the
corporation to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he, this testator or intestate, is or
was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director or officer of any other corporation of
any type or kind, domestic or foreign, of any partnership, joint venture, trust,
employee benefit plan or other enterprise, against amounts paid in settlement
and reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in
II-1
<PAGE>
connection with the defense or settlement of such action, or in connection with
an appeal therein, if such director or officer acted in good faith, for a
purpose which he reasonably believed to be in, or, in the case of service for
any other corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise, not opposed to, the best interests of the corporation,
except that no indemnification under this paragraph shall be made in respect of
(1) a threatened action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines upon application that,
in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnify for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
AMENDED AND RESTATED BYLAWS
ARTICLE II
DIRECTORS AND THEIR MEETINGS
SEC. 7. Any person made a party to any action, suit, or proceeding by
reason of the fact that he, his testator or intestate, is or was a director,
officer, or employee of the Company or of any Company which he served as such at
the request of the Company, shall be indemnified by the Company against the
reasonable expenses, including attorney's fees, actually and necessarily
incurred by him in connection with the defense of such action, suit or
proceeding, or in connection with appeal therein, except in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
officer, Director, or employee is liable for negligence or misconduct in the
performance of his duties. The Company may also reimburse to any Director,
officer, or employee the reasonable costs of settlement of any such action,
suit, or proceeding, if it shall be found by a majority of a committee composed
of the Directors not involved in the matter of controversy (whether or not a
quorum) that it was in the interest of the Company that such settlement be made
and that such Director, officer or employee was not guilty of negligence or
misconduct. The amount to be paid, in each instance, pursuant to action of the
Board of Directors, and the stockholders shall be given notice thereof in
accordance with applicable provisions of law. Such right of indemnification
shall not be deemed exclusive of any other rights to which such Director,
officer, or employee may be entitled.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of 78 pages
The undertaking to file reports
Representation Pursuant to Section 26(e)(2)(A)
Statement with respect to indemnification
Rule 484 undertaking
The signatures
Written consent of the following persons:
(a) Alan Yaeger
(b) Robert F. Colby, Esq.
(c) Sutherland, Asbill & Brennan LLP
(d) Ernst & Young LLP
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to the
instructions as to exhibits in Form N-8B-2
A. (1) Resolution of the Board of Directors of AUSA Life establishing
the Series Account (1)
(2) Not Applicable
(3) Distribution of Policies:
(a) Form of Participation Agreement Among AUSA Life Insurance
Company, Inc., Western Reserve Life Assurance Co. of Ohio
and WRL Series Fund, Inc.
(b) (i) Form of Master Service and Distribution Compliance
Agreement (1)
(ii) Form of Broker/Dealer Supervisory and Service Agreement
(1)
(c) See Exhibit 1.A.(3)(c)(ii)
(4) Not Applicable
(5) (a) Specimen Flexible Premium Variable Life Insurance Policy
(b) Joint Insured Term Rider
(c) Individual Insured Rider
(d) Wealth Protector Rider
(6) (a) Certificate of Incorporation of AUSA Life (1)
(b) Amended and Restated By-Laws of AUSA Life (1)
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10) Application for Flexible Premium Variable Life Insurance Policy (1)
(11) Memorandum describing issuance, transfer and redemption procedures
2. See Exhibit 1.A.4.
3. Opinion of Counsel as to the legality of the securities being registered (1)
4. No financial statement will be omitted from the Prospectus pursuant to
Instruction 1(b) or (c) of Part I
5. Not Applicable
6. Opinion and consent of Alan Yaeger as to actuarial matters pertaining to the
securities being registered
7. Consent of Robert F. Colby, Esq.
II-3
<PAGE>
8. Consent of Sutherland, Asbill & Brennan LLP
9. Consent of Ernst & Young LLP
10. Power(s) of Attorney (1)
- ----------------------------------------
(1) This exhibit was previously filed on Pre-Effective Amendment No 2 to Form
S-6 Registration Statement dated October 20, 1997 (File No. 33-86696) and is
incorporated herein by reference.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
AUSA Series Life Account, has duly caused this Pre-Effective Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Largo, County of Pinellas, Florida on the 22nd day of June, 1998.
(SEAL) AUSA SERIES LIFE ACCOUNT
------------------------
Registrant
AUSA LIFE INSURANCE COMPANY, INC.
--------------------------------
Depositor
ATTEST:
/s/ THOMAS E. PIERPAN By: /s/ LARRY G. BROWN
- --------------------- --------------------
Thomas E. Pierpan Larry G. Brown
Assistant Secretary Chairman of the Board
(SEAL) (SEAL)
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ LARRY G. BROWN June 22, 1998
- -----------------------------
Larry G. Brown, Chairman of the
Board and Secretary
/s/ WILLIAM BROWN, JR. June 22, 1998
- -----------------------------
William Brown, Jr., Director*
/s/ PATRICK S. BAIRD June 22, 1998
- -----------------------------
Patrick S. Baird, Vice President
and Chief Financial Officer*
/s/ WILLIAM L. BUSLER June 22, 1998
- -----------------------------
William L. Busler, Director*
/s/ JACK R. DYKHOUSE June 22, 1998
- ----------------------------
Jack R. Dykhouse, Director*
<PAGE>
/s/ STEVEN E. FRUSHTICK June 22, 1998
- ----------------------------
Steven E. Frushtick, Director*
/s/ C. THOR HANSON June 22, 1998
- ----------------------------
C. Thor Hanson, Director*
/s/ B. LARRY JENKINS June 22, 1998
- ----------------------------
B. Larry Jenkins, Director*
/s/ PETER P. POST June 22, 1998
- ----------------------------
Peter P. Post, Director*
/s/ COR H. VERHAGEN June 22, 1998
- ----------------------------
Cor H. Verhagen, Director*
/s/ E. KIRBY WARREN June 22, 1998
- ----------------------------
E. Kirby Warren, Director*
/s/ TOM A. SCHLOSSBERG June 22, 1998
- -----------------------------
Tom A. Schlossberg, Director
and President*
/s/ COLETTE F. VARGAS June 22, 1998
- -----------------------------
Colette F. Vargas, Director
and Chief Actuary*
/s/ VERA F. MIHAIC June 22, 1998
- -----------------------------
Vera F. Mihaic, Director
and Vice President*
/s/ BRENDA CLANCY June 22, 1998
- -----------------------------
Brenda Clancy, Treasurer*
/s/ PATRICK E. FALCONIO June 22, 1998
- -----------------------------
Patrick E. Flaconio, Senior
Vice President and Chief
Investment Officer*
* /s/ THOMAS E. PIERPAN
- ----------------------------
Signed by Thomas E. Pierpan
as Attorney-in-Fact
<PAGE>
Exhibit Index
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
1.A.(3)(a) Form of Participation Agreement Among AUSA Life Insurance
Company, Inc., Western Reserve Life Assurance Co. of Ohio
and WRL Series Fund, Inc.
1.A.(5)(a) Specimen Flexible Premium Variable Life Insurance Policy
(b) Joint Insured Term Rider
(c) Individual Insured Rider
(d) Wealth Protector Rider
1.A.(11) Memorandum describing issuance, transfer and redemption
procedures
6. Opinion and Consent of Alan Yaeger as to actuarial
matters pertaining to the securities being registered
7. Consent of Robert F. Colby, Esq.
8. Consent of Sutherland, Asbill & Brennan LLP
9. Consent of Ernst & Young LLP
EXHIBIT 99.A4
EXHIBIT 1A(3)(a)
Form of Participation Agreement
<PAGE>
PARTICIPATION AGREEMENT
Among
WRL SERIES FUND, INC.,
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO,
and
AUSA LIFE INSURANCE COMPANY, INC.
THIS AGREEMENT, made and entered into this ___ day of ____, 1998 by and
among AUSA LIFE INSURANCE COMPANY, INC., a New York corporation (hereinafter the
"Company") on its own behalf and on behalf of the AUSA Series Annuity Account A
and AUSA Series Life Account, and other segregated asset accounts of the Company
(hereinafter the "Account(s)"), and WRL SERIES FUND, INC., a Maryland
corporation (hereinafter the "Fund"), and WESTERN RESERVE LIFE ASSURANCE CO. OF
OHIO, an Ohio corporation and an affiliate of the Company (hereinafter "WRL").
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for the Account(s),
and other separate accounts established for variable life insurance policies and
variable annuity contracts of WRL and its affiliates; and
WHEREAS, shares of common stock of the Fund are divided into several
series of shares each designated a "Portfolio" or collectively, "Portfolios",
and each representing the interests in a particular managed pool of securities
and other assets; and
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and its shares are registered under the Securities Act of 1933, as amended
(hereinafter the "1933 Act"); and
WHEREAS, WRL Investment Management, Inc. ("WRL Management") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law, and is the Fund's investment
adviser; and
WHEREAS, the Company has registered or will register certain variable
annuity contracts and/or life insurance policies under the 1933 Act
(hereinafter, both "contracts" and "policies" referred to individually as the
"Policy", or, collectively, the "Policies"); and
WHEREAS, the Account(s) are duly organized, validly existing segregated
asset account(s), established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid Policies
that are allocated to the Account(s) (the
<PAGE>
Policies and the Account(s) covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Account(s) invest(s), is
specified in Schedule A attached hereto as may be modified from time to time);
and
WHEREAS, the Company has registered or will register the Account(s) as
unit investment trust(s) under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Account(s) to fund the Policies, and the Fund intends to sell such Shares to
the Account(s) at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Fund, WRL
and the Company agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Fund agrees to sell to the Company those Shares which the
Account(s) orders and which are available for purchase by such Account,
executing such orders on a daily basis at the net asset value next computed
after receipt by the Fund or its designee of the order for the Shares. For
purposes of this Section 1.1, the Company shall be the designee of the Fund for
receipt of such orders from owners of the Policies ("Policyowners") and receipt
by such designee shall constitute receipt by the Fund; PROVIDED that the Fund
receives notice of such order by 9:30 a.m. New York time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission (the
"SEC").
1.2 The Fund agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Account(s) on those days on which the Fund calculates its net asset value
pursuant to rules of the SEC and the Fund shall use reasonable efforts to
calculate such net asset value on each day which the New York Stock Exchange is
open for trading. Notwithstanding the foregoing, the Board of Directors of the
Fund (hereinafter the "Board") may refuse to sell any Shares to the Company and
the Account(s), or suspend or terminate the offering of the Shares if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Board acting in
2
<PAGE>
good faith and in light of its fiduciary duties under federal and any applicable
state laws, necessary in the best interests of the shareholders of such
Portfolio.
1.3 The Fund agrees that the Shares will be sold only to the Company
and the Account(s) and/or WRL and its separate accounts. In addition, the Shares
may be sold to other insurance companies affiliated with the Company and WRL or
their separate accounts only with the express written consent of WRL. The Shares
will not be sold to the general public or to other investors. Nothing herein
shall prohibit the Company from establishing separate accounts or sub-accounts
of separate accounts which purchase shares from investment companies other than
the Fund.
1.4 The Fund agrees to redeem for cash, at the Company's request,
any full or fractional Shares held by the Company, executing such requests on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the request for redemption. For purposes of this Section 1.4,
the Company shall be the designee of the Fund for receipt of requests for
redemption from Policyowners and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such request for
redemption by 9:30 a.m. New York time on the next following Business Day.
1.5 The Company shall pay for the Shares by 2:00 p.m. New York time
on the next Business Day after an order to purchase the Shares is made in
accordance with the provisions of Section 1.1 hereof. Payment shall be in
federal funds transmitted by wire or by a credit for any Shares redeemed. For
purpose of Section 2.9, upon receipt by the Fund of the federal funds so wired,
such funds shall cease to be the responsibility of the Company and shall become
the responsibility of the Fund.
1.6 Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Account(s). The
Shares ordered from the Fund will be recorded in an appropriate title for the
Account(s) or the appropriate sub-account of the Account(s).
1.7 The Fund shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any income, dividends or
capital gains distributions payable on the Shares. The Company hereby elects to
receive all such dividends and distributions as are payable on a Portfolio's
Shares in additional Shares of that Portfolio. The
3
<PAGE>
Fund shall notify the Company of the number of Shares so issued as payment of
such dividends and distributions.
1.8 The Fund or its custodian shall make the net asset per share for
each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:30
p.m. New York time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Policies are or
will be registered under the 1933 Act, and that the Policies will be issued,
sold, and distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act.
The Company further represents and warrants that it is an insurance company duly
organized and in good standing under applicable laws and that it has legally and
validly established the Accounts as a segregated asset accounts under New York
law and has registered or, prior to any issuance or sale of the Policies, will
register the Account(s) as unit investment trust(s) in accordance with the
provisions of the 1940 Act (unless exempt therefrom) to serve as a segregated
investment account(s) for the Policies, and that it will maintain such
registration(s) for so long as any Policies are outstanding. The Company shall
amend the registration statement(s) under the 1933 Act for the Policies and the
registration statement(s) under the 1940 Act for the Account(s) from time to
time as required in order to effect the continuous offering of the Policies or
as may otherwise be required by applicable law. The Company shall register and
qualify the Policies for sale in accordance with the securities laws of the
various states only if and to the extent deemed necessary by the Company.
2.2 The Company represents that it believes, in good faith, that the
Policies are currently and at the time of issuance will be treated as life
insurance, endowment or annuity contracts under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), that it will make every
effort to maintain such treatment and that it will notify the Fund and WRL
immediately upon having reasonable basis for believing that the Policies have
ceased to be so treated or that they might not be so treated in the future.
2.3 The Fund and WRL each separately represents and warrants that
the Shares sold pursuant to this Agreement shall be registered under the 1933
Act, duly authorized
4
<PAGE>
for issuance and sold in compliance with the laws of Maryland and all applicable
federal and state securities laws and that the Fund is and shall remain
registered under the 1940 Act. The Fund shall amend the registration statement
for its Shares under the 1933 Act and the 1940 Act from time to time as required
in order to effect the continuous offering of its Shares. The Fund shall
register and qualify the Shares for sale in accordance with the laws of the
various states only if and to the extent deemed necessary by the Fund, with the
concurrence of WRL.
2.4 The Fund and WRL each separately represents that each Portfolio
of the Fund is currently qualified or will be qualified as a Regulated
Investment Company under Subchapter M of the Code and that every effort will be
made to maintain such qualification (under Subchapter M or any successor or
similar provision) and that the Fund or WRL, as appropriate, will notify the
Company orally (followed by written notice) or by wire immediately upon having a
reasonable basis for believing that any Portfolio of the Fund has ceased to so
qualify or that any Portfolio might not so qualify in the future.
2.5 The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although to the extent permitted and in conformity with the
requirements under the 1940 Act it may make such payments in the future.
2.6 The Fund represents that it will sell and distribute the Shares
in accordance in all material respects with all applicable state and federal
securities laws, including without limitation the 1933 Act, the 1934 Act, and
the 1940 Act.
2.7 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8 WRL Management represents and warrants that it is and shall
remain duly registered under all applicable federal and state securities laws
and that it shall perform its obligations for the Fund in compliance in all
material respects with any applicable state and federal securities laws.
2.9 The Fund and WRL each separately represents and warrants that,
to the extent required by Section 17(g) and Rule 17g-1 of the 1940 Act, or
related provisions as may be promulgated from time to time, all of its
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and
5
<PAGE>
shall continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund in an amount not less than the minimal
coverage as required currently by Section 17(g) and Rule 17g-1 of the 1940 Act
or related provisions as may be promulgated from time to time. The aforesaid
bond shall include coverage for larceny and embezzlement and shall be issued by
a reputable bonding company.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1 At least annually, the Fund or WRL, as appropriate, shall
provide the Company, free of charge, with as many copies of the current
prospectus for the Shares as the Company may reasonably request for distribution
to existing Policyowners whose Policies are funded by such Shares. The Fund or
WRL, as appropriate, shall provide the Company, at the Company's expense, with
as many copies of the current prospectus for the Shares as the Company
reasonably requests for distribution to prospective purchasers of Policies. If
requested by the Company in lieu thereof, the Fund or WRL, as appropriate, shall
provide such documentation (including a final "camera-ready" copy of the new
prospectus as set in type at the expense of the Fund or WRL, as the case may be)
and other assistance as is reasonably necessary in order for the parties hereto
once each year (or more frequently if the prospectus for the Shares is
supplemented or amended) to have the prospectus for the Policies and the
prospectus for the Shares printed together in one document; the expense of such
printing to be apportioned between (a) the Company, and (b) the Fund or WRL, as
the case may be, in proportion to the number of pages of the Policy's and
Shares' prospectuses, taking account of other relevant factors affecting the
expense of printing, such as columns, charts, etc.; the Fund or WRL, as the case
may be, to bear the cost of printing the Shares' prospectus portion of such
document for distribution to owners of existing Policies funded by the Shares,
and the Company to bear the expenses of printing the portion of such document
relating to the Account(s); PROVIDED, however, that the Company shall bear all
printing expenses of such combined documents where used for distribution to
prospective purchasers or to owners of existing Policies not funded by the
Shares.
3.2 The prospectus for the Shares shall state that the Statement of
Additional Information for the Shares is available from the Fund (or WRL). The
Fund or WRL, at its expense, as appropriate, shall print and provide such
Statement to the Company (or a master of such Statement suitable for duplication
by the Company) for distribution to any owner of a
6
<PAGE>
Policy funded by the Shares. WRL, at the Company's expense, shall print and
provide such Statement to the Company (or a master of such Statement suitable
for duplication by the Company) for distribution to a prospective purchaser who
requests such Statement or to an owner of a Policy not funded by the Shares.
3.3 The Fund shall provide the Company, free of charge, copies, if
and to the extent applicable to the Shares, of the Fund's proxy material,
reports to Shareholders and other communications to Shareholders in such
quantity as the Company shall reasonably require for distributing to
Policyowners.
3.4 Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3
above, or of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but are not
limited to, the printing of the Shares' prospectus for distribution to
prospective purchasers or to owners of existing Policies not funded by such
Shares.
3.5 If and to the extent required by law, the Company shall:
(i) solicit voting instructions from Policyowners;
(ii) vote the Shares in accordance with instructions received
from Policyowners; and
(iii) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received;
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require passthrough voting privileges for variable contract owners. The Company
reserves the right to vote the Shares held in the Account(s) in its own right,
to the extent permitted by law.
3.6 The process of soliciting Policyowners' voting instructions,
tabulating votes, etc. shall be conducted in accordance with Schedule B attached
hereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Fund's advisers are named, at least ten
Business Days prior to its use. No such material shall be used if the Fund or
its designee object to such use within ten Business Days after receipt of such
material.
7
<PAGE>
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or its advisers concerning
the Fund or its advisers in connection with the sale of the Policies other than
the information or representations contained in the registration statement or
prospectus for the Fund shares, as such registration statement or prospectus may
be amended or supplemented from time to time, or in reports or proxy statements
for the Fund, or in sales literature or other promotional material approved by
the Fund or its designee, except with the permission of the Fund. The Fund or
its designee agrees to respond to any request for approval on a prompt and
timely basis.
4.3 WRL shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company and/or the Account(s) is named, at least ten
Business Days prior to its use. No such material shall be used if the Company or
its designee object to such use within ten Business Days after receipt of such
material.
4.4 The Fund and WRL each separately agrees not to give any
information or make any representations on behalf of the Company or concerning
the Company, the Account(s), or the Policies other than information or
representations contained in a registration statement or prospectus for the
Policies, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports for the Account(s) which are in
the public domain or approved by the Company for distribution to Policyowners,
or in sales literature or other promotional material approved by the Company or
its designee, except with the permission of the Company. The Company or its
designee agrees to respond to any request for approval on a prompt and timely
basis.
4.5 The Company and Fund (or WRL in lieu of the Fund, as
appropriate) will each provide to the other at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Policies, or to the Fund or its Shares,
prior to or contemporaneously with the filing of such document with the SEC or
other regulatory authorities. The Company or Fund shall also each promptly
inform the other of the results of any examination by the SEC (or other
regulatory authorities) that relates to the Policies, the Fund or its Shares,
and the party that was subject of the examination shall provide the other
8
<PAGE>
party with a copy of any "deficiency letter" or other correspondence or written
report regarding any such examination.
4.6 For purposes of this Article IV, the phrase "sales literature or
other promotional material" means advertisements (such as material published, or
designed for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboard),
and sales literature (such as brochure, circulars, market letters and form
letters), distributed or made generally available to customers or the public,
educational or training materials or communications distributed or made
generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1 Neither the Fund nor WRL shall pay any fee or other compensation
to the Company under this Agreement, and the Company shall pay no fee or other
compensation to the Fund or WRL, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, then, subject to obtaining any required exemptive orders
or regulatory approvals, the Fund may make payments to the Company or to the
underwriter for the Policies if and in amounts agreed to by the Fund in writing
(currently no such payments are contemplated). Each party, however, shall, in
accordance with the allocation of expenses specified in Articles III and V
hereof, reimburse other parties for expenses initially paid by one party but
allocated to another party.
5.2 The Fund or WRL, as appropriate, shall bear the expenses for the
cost of registration and qualification of the Shares under all applicable
federal and state laws, including preparation and filing of the Fund's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Fund's proxy materials and reports to
Shareholders; setting in type and printing its prospectus (to the extent
provided by and as determined in accordance with Article III above); setting in
type and printing the proxy materials and reports to Shareholders (to the extent
provided by and as determined in accordance with Article III above); the
preparation of all statements and notices required of the Fund by any federal or
state law with respect to its Shares; all taxes on the issuance or transfer of
the Shares; and the costs of distributing the Fund's prospectuses and proxy
materials to owners of Policies funded by the Shares and any expenses permitted
to be paid or assumed by the Fund
9
<PAGE>
pursuant to a plan, if any, under Rule 12b-1 of the 1940 Act. The Fund shall not
bear any expenses of marketing the Policies.
5.3 The Company shall bear the expenses of distributing the Shares'
prospectus in connection with new sales of the Policies and of distributing the
Fund's shareholder reports to Policyowners. The Company shall bear all expenses
associated with the registration, qualification, and filing of the Policies
under applicable federal securities and state insurance laws; the cost of
printing the Policy prospectus; and the cost of preparing and printing annual
individual account statements for Policyowners as required by state insurance
laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1 The Fund and WRL each separately represents and warrants that
the Fund will at all times invest its assets in such a manner as to ensure that
the Policies will be treated as annuity, endowment, or life insurance contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treas. Reg. ' 1.817-5, as amended from time to time, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts and any amendments or
other modifications to such Section or Regulations.
6.2 The Shares will not be sold to any person or entity that
would result in the Policies not being treated as annuity, endowment, or life
insurance contracts, in accordance with the statutes and regulations referred
to in the preceding paragraph (Section 6.1 hereof).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1 The Fund agrees that the Board, constituted with a majority of
disinterested directors, will monitor each Portfolio for the existence of any
material irreconcilable conflict between the interests of the variable annuity
contract owners and the variable life insurance policyowners of the Company
and/or affiliated companies investing in the Fund. The Board shall have the sole
authority to determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the form of a
resolution by a majority of the Board, or a majority of the disinterested
directors of the Board. The Board will give prompt notice of any such
determination to the Company.
7.2 The Company and WRL each separately agrees that it will be
responsible for promptly reporting any potential or existing conflicts of which
it is aware to the Board. The
10
<PAGE>
Company also agrees that, if a material irreconcilable conflict arises, it will
at its own cost remedy such conflict up to and including (a) withdrawing the
assets allocable to some or all of the Accounts from any Portfolio and
reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Fund, or submitting to a vote of all
affected Policyowners whether to withdraw assets from any Portfolio and
reinvesting such assets in a different investment medium and, as appropriate,
segregating the assets attributable to any appropriate group of Policyowners
that votes in favor of such segregation, or offering to any of the affected
Policyowners the option of segregating the assets attributable to their
contracts or policies, and (b) establishing a new registered management
investment company and segregating the assets underlying the Policies, unless a
majority of Policyowners materially adversely affected by the conflict have
voted to decline the offer to establish a new registered management investment
company.
7.3 A majority of the disinterested directors of the Board shall
determine whether any proposed action by the Company adequately remedies any
material irreconcilable conflict. in the event that the Board determines that
any proposed action does not adequately remedy any material irreconcilable
conflict, the Company will withdraw from investment in the Fund each of the
Account(s) designated by the disinterested directors and terminate this
Agreement within six (6) months after the Board informs the Company in writing
of the foregoing determination; PROVIDED, HOWEVER, that such withdrawal and
termination shall be limited to the extent required to remedy any such material
irreconcilable conflict as determined by a majority of the disinterested
directors of the Board.
7.4 The Fund agrees that it will not enter into any agreement with a
life insurance company affiliated with the Company unless such agreement
includes a section substantially identical to this Article VII.
ARTICLE VIII. INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund,
WRL, and each of their respective directors and officers and each person, if
any, who controls the Fund or WRL within the meaning of Section 15 of the 1933
Act, and any agents or employees of the foregoing (each an "Indemnified Party",
or collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages or liabilities (including
11
<PAGE>
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which an Indemnified Party
may become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Shares or the Policies and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement or prospectus for the Policies or
contained in the Policies or sales literature for the Policies
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, PROVIDED that this agreement to indemnify shall
not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in
reasonable and good faith reliance upon and in conformity with
information furnished the Company by or on behalf of the Fund
or WRL for use in the registration statement or prospectus for
the Policies or in the Policies or sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature of the
Fund not supplied by the Company, or persons under its control
and on which the Company has reasonably relied in good faith)
or wrongful conduct of the Company or persons under its
control, with respect to the sale or distribution of the
Policies or Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance
upon information furnished to the Fund or WRL by or on behalf
of the Company; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company;
except to the extent provided in Sections 8.1(b) and 8.1(c) hereof.
12
<PAGE>
8.1(b) The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Fund,
whichever is applicable.
8.1(c) The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that failure to
notify results in failure of actual notice to the Company and the Company is
damaged solely as a result of failure to give notice. In case any such action is
brought against one or more of the Indemnified Parties, the Company shall be
entitled to participate, at its own expense, in the defense of such action. The
Company also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. Each Indemnified Party shall
fully cooperate with the Company in defense of the action, regardless of whether
the Company assumes or only participates in the defense. After notice from the
Company to such party of the Company's election to assume the defense thereof,
the Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Company will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation, unless (i) the Company and the Indemnified Party shall have
mutually agreed on the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the Indemnified Party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. The Company shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent
13
<PAGE>
or if there be a final judgement for the plaintiff, the Company agrees to
indemnify the Indemnified Party from all and against any loss or liability by
reason of such settlement or judgment.
8.1(d) Each Indemnified Party will promptly notify the Company of
the commencement of any litigation or proceedings against it in connection with
the issuance or sale of the Shares or the Policies or the operation of the Fund
and each Indemnified Party will provide the Company with all relevant
information and documents in its possession or in the possession of a person
within its control requested by the Company. For purposes of this Section
8.1(d), the "commencement" of proceedings shall include any informal or formal
communications from the SEC or its staff (or the receipt of information from any
other persons or entities) indicating that enforcement action by the SEC or its
staff may be contemplated or forthcoming, to include any information to the
effect that any matter(s) has been referred to the SEC's Division of
Enforcement, or that any matter(s) is being discussed with that Division.
8.2 INDEMNIFICATION BY WRL
8.2(a) WRL agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an Indemnified Party", collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of WRL) or litigation (including legal and other expenses)
to which an Indemnified Party may become subject under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Shares or the Policies and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of
the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, PROVIDED that this agreement
to indemnify shall not apply as to any Indemnified Party if
such statement or omission was made in reasonable and good
faith reliance upon and in conformity with information
furnished to WRL by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales
literature for the Fund (or any amendment or supplement) or
otherwise for use in connection with the sale of the Policies
or Shares; or
14
<PAGE>
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Policies not supplied by WRL, or persons under its control and
on which WRL has reasonably relied in good faith) or wrongful
conduct of WRL or persons under its control, with respect to
the sale or distribution of the Policies or Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature covering the Policies, or any
amendment thereof or supplement thereto, or omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of WRL; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by WRL in this Agreement
or arise out of or result from any other material breach of
this Agreement by WRL (including a failure, whether
unintentional or in good faith or otherwise, to comply with
the requirements specified in Article VI of this Agreement);
except to the extent provided in Sections 8.2(b) and 8.2(c) hereof.
8.2(b) WRL shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company or the Account(s).
8.2(c) WRL shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified WRL in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify WRL of any such claim shall not relieve WRL from
any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision,
except to the extent that failure to notify results in the failure of actual
notice to WRL and WRL is damaged solely as a result of
15
<PAGE>
failure to give such notice. In case any such action is brought against one or
more of the Indemnified Parties, WRL will be entitled to participate, at its own
expense, in the defense thereof. WRL also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
Each Indemnified Party shall fully cooperate with WRL in defense of the action,
regardless of whether WRL assumes or only participates in the defense. After
notice from WRL to such party of its election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and WRL will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation, unless (i) WRL and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include WRL and the Indemnified
Party and representation of these parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. WRL
shall not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final judgment
for the plaintiff, WRL agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment.
8.2(d) Each Indemnified Party will promptly notify WRL of the
commencement of any litigation or proceedings against it in connection with the
issuance or sale of the Shares or the Policies or the operation of the Fund and
each Indemnified Party will provide WRL with all relevant information and
documents in its possession or in the possession of a person within its control
requested by WRL. For purposes of this Section 8.2(d), the "commencement" of
proceedings shall include any informal or formal communications from the SEC or
its staff (or the receipt of information from any other persons or entities)
indicating that enforcement action by the SEC or its staff may be contemplated
or forthcoming, to include any information to the effect that any matter(s) has
been referred to the SEC's Division of Enforcement, or that any matter(s) is
being discussed with that Division.
8.3 INDEMNIFICATION BY THE FUND
8.3(a) The Fund agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an
16
<PAGE>
"Indemnified Party, or collectively, the "Indemnified Parties" for purposes of
this Section 8.3) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Fund) or
litigation (including legal and other expenses) to which any Indemnified Party
may become subject under any statute, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Shares or
Policies and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of
the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statement
therein not misleading, PROVIDED that this statement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reasonable and good faith reliance upon and in
conformity with information furnished to the Fund by or on
behalf of the Company for use in the registration statement or
prospectus for the Fund or in sales literature for the Fund
(or any amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus or sales literature for the
Policies not supplied by the Fund, or persons under its
control and on which the Fund has reasonably relied in good
faith) or wrongful conduct of the Fund or persons under its
control, with respect to the sale or distribution of the
Policies or Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature covering the Policies, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Fund; or
(iv) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund (including a failure,
whether unintentional or in good faith or otherwise, to comply
with the requirements specified in Article VI of this
Agreement);
except to the extent provided in Sections 8.3(b), 8.3(c) and 8.3(e) hereof.
17
<PAGE>
8.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or the Account(s).
8.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that failure to
notify results in the failure of actual notice to the Fund and the Fund is
damaged solely as a result of failure to give such notice. In case any such
action is brought against one or more of the Indemnified Parties, the Fund will
be entitled to participate, at its own expense, in the defense thereof. The Fund
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the actions. Each Indemnified Party shall fully cooperate
with the Fund in defense of the action, regardless of whether the Fund assumes
or only participates in the defense. After notice from the Fund to such party of
its election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Fund will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation, unless (i) the Fund and
the Indemnified Party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include the Fund and the Indemnified Party and representation
of these parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. The Fund shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the Fund
agrees to indemnify
18
<PAGE>
the Indemnified Party from and against any loss or liability by reason of such
settlement or judgment.
8.3(d) Each Indemnified Party will promptly notify the Fund of the
commencement of any litigation or proceedings against it in connection with the
issuance or sale of the Shares or the Policies or the operation of the Fund with
all relevant information and documents in its possession or in the possession of
a person within its control requested by the Fund. For purposes of this Section
8.3(d), the "commencement" of proceedings shall include any informal or formal
communications from the SEC or its staff (or the receipt of information from any
other persons or entities) indicating that enforcement action by the SEC or its
staff may be contemplated or forthcoming, to include any information to the
effect that any matter(s) has been referred to the SEC's Division of
Enforcement, or that any matter(s) is being discussed with that Division.
8.3(e) Notwithstanding any other provisions of this Article VIII to
the contrary, any liability which the Fund may have under this indemnification
provision shall be the liability only of the particular Portfolio or Portfolios
to which such liability relates; any such liability of a Portfolio may be
satisfied only by and to the extent of the assets of that Portfolio.
8.4 A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article VIII.
The indemnification contained in this Article VIII shall survive any termination
of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of Florida.
9.2 This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X TERMINATION
10.1 This Agreement shall terminate with respect to the Account(s),
or one, some, or all Portfolios:
(a) at the option of any party upon six months' advance written
notice to the other parties; or
19
<PAGE>
(b) at the option of the Company to the extent that the Shares are
not reasonably available to meet the requirements of the Policies or are not
"appropriate funding vehicles" for the Policies, as determined by the Company
reasonably and in good faith. Without limiting the generality of the foregoing,
the Shares of any Portfolio would not be "appropriate funding vehicles" if, for
example, such Shares did not meet the diversification or other requirements
referred to in Article VI hereof; or if such Portfolio did not qualify under
Subchapter M of the Code, as referred to in Section 2.4 hereof; or if the
investments or investment policies, objectives, and/or limitations of such
Portfolio would impose unanticipated risks on the Company; or if the Company
would be permitted to disregard policyowner voting instructions pursuant to
Rules 6e-2 or 6e-3(T) under the 1940 Act; etc. Prompt notice of the election to
terminate for such cause and an explanation of such cause shall be furnished by
the Company; or
(c) at the option of the Fund upon institution of formal proceedings
against the Company by the National Association of Securities Dealers, Inc. (the
"NASD"), the SEC, or any insurance department or any other regulatory body
regarding the Company's duties under this Agreement or related to the sale of
the Policies, the operation of the Account(s), or the purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body; or
(e) at the option of the Company or the Fund upon receipt of any
necessary regulatory approvals and/or the vote of the Policyowners having an
interest in the Account(s) (or any subaccount) to substitute the shares of
another investment company for the corresponding Shares in accordance with the
terms of the Policies for which those Shares had been selected to serve as the
underlying investment media. The Company will give 30 days' prior written notice
to the Fund of the date of any proposed vote or other action taken to replace
the Shares; or
(f) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement.
10.2 The notice shall specify the Portfolio or Portfolios, Policies
and, if applicable, the Account(s) as to which this Agreement is to be
terminated.
20
<PAGE>
10.3 It is understood and agreed that the right of any party hereto
to terminate this Agreement pursuant to Section 10.1(a) may be exercised for
cause or for no cause.
10.4 Except as necessary to implement Policyowner initiated
transactions, or as required by state insurance laws or regulations, the Company
shall not redeem the Shares attributable to the Policies (as opposed to the
Shares attributable to the Company's assets held in the Account(s)), and the
Company shall not prevent Policyowners from allocating payments to a Portfolio
that was otherwise available under the Policies, until 30 days after the Company
shall have notified the Fund and WRL of its intention to do so.
10.5 Notwithstanding any termination of this Agreement, the Fund
shall, at the option of the Company, continue to make available additional
Shares pursuant to the terms and conditions of this Agreement, for all Policies
in effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Policies"), except as otherwise provided under Article
VII of this Agreement. Specifically, without limitation, the owners of the
Existing Policies shall be permitted to transfer or reallocate investments under
the Policies, redeem Shares in any Portfolio and/or invest in the Fund upon the
making of additional purchase payments under the Existing Policies.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
WRL Series Fund, Inc.
201 Highland Avenue
Largo, Florida 33770
Attn: Thomas E. Pierpan, Esq.
If to WRL:
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
Attn: Thomas E. Pierpan, Esq.
If to the Company:
AUSA Life Insurance Company, Inc.
21
<PAGE>
4 Manhattanville Road
Purchase, New York 10577
Attn: John F. Hughes, Esq.
ARTICLE XII. MISCELLANEOUS
12.1 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Policies and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement or as otherwise required by applicable law or regulation, shall
not disclose, disseminate or utilize such names and addresses and other
confidential information without the express written consent of the affected
party until such time as it may come into the public domain.
12.2 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.3 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.4 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
12.5 The Schedules attached hereto, as modified from time to time,
are incorporated herein by reference and are part of this Agreement.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transaction contemplated hereby.
12.7 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
22
<PAGE>
COMPANY:
AUSA Life Insurance Company, Inc
By its authorized officer,
By: _______________________________
Robert F. Colby
Title: VICE PRESIDENT,
ASSISTANT SECRETARY AND COUNSEL
Date: _____________________________
FUND:
WRL Series Fund, Inc.
By its authorized officer,
By: _______________________________
Alan Yaeger
Title: EXECUTIVE VICE PRESIDENT
Date: _____________________________
WRL:
Western Reserve Life Assurance
Co. of Ohio
By its authorized officer,
By: _______________________________
Jack Kenney
Title: CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: _____________________________
23
<PAGE>
SCHEDULE A
ACCOUNT(S), POLICY(IES) AND PORTFOLIO(S) SUBJECT
TO THE PARTICIPATION AGREEMENT
ACCOUNT(S): AUSA Series Life Account
POLICIES: AUSA Freedom Wealth Protector
AUSA Financial Freedom Builder
PORTFOLIO(S): WRL Series Fund, Inc. Growth Portfolio
WRL Series Fund, Inc. Bond Portfolio
WRL Series Fund, Inc. Money Market Portfolio
WRL Series Fund, Inc. Global Portfolio
WRL Series Fund, Inc. Emerging Growth Portfolio
WRL Series Fund, Inc. Strategic Total Return Portfolio
WRL Series Fund, Inc. International Equity Portfolio
WRL Series Fund, Inc. Growth & Income Portfolio
WRL Series Fund, Inc. Balanced Portfolio
WRL Series Fund, Inc. Aggressive Growth Portfolio
WRL Series Fund, Inc. Tactical Asset Allocation Portfolio
WRL Series Fund, Inc. U.S. Equity Portfolio
WRL Series Fund, Inc. Value Equity Portfolio
WRL Series Fund, Inc. Global Sector Portfolio
WRL Series Fund, Inc. Third Avenue Value Portfolio
WRL Series Fund, Inc. Real Estate Securities Portfolio
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding
responsibilities for handling of proxies relating to the Fund by WRL, the Fund
and the Company. The defined terms herein shall have the meanings assigned in
the Participation Agreement except that the term "Company" shall also include
the department or third party assigned by the Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by WRL on a
date as early as possible before the date set by the Fund for the
shareholder meeting (the "Record Date") to facilitate the
establishment of tabulation procedures. At this time, WRL will
inform the Company of the Record, mailing and meeting dates. This
will be done orally approximately two months before the meeting.
2. Promptly after the Record Date, the Company will perform a "tape
run", or other activity, which will generate the names, addresses
and number of shares in each Portfolio which are attributed to each
contract owner/policyholder ( the "Customer") as of the Record Date.
Fractional shares will be counted. The number of shares for which a
Customer has the right to give voting instructions will be
calculated separately for each sub-account of the Account(s) and
will be determined by dividing the portion of the value allocable to
the Customer's Policy in the sub-account by $100. Allowance should
be made for account adjustments made after this date that could
effect the status of the Customers' accounts as of the Record Date.
NOTE: The number of voting instruction cards is determined by the
activities described in Step #2. If the proxy proposal only
affects a particular Portfolio, then only the shares of that
Portfolio may be voted and only the Customers with investment
of all or a portion of their Policies in that Portfolio may
vote on the proposal to the extent of their investment. The
Company will use its best efforts to call in the number of
Customers to
<PAGE>
WRL, as soon as possible, but no later than two weeks after
the Record Date.
3. The Fund's annual report must be sent to each Customer by the
Company either before or together with the Customer's receipt of a
proxy statement. The Fund or WRL will provide to the Company as many
copies of the last annual report as the Company shall reasonably
require for distribution to the Customers.
4. The voting instruction cards (the "Cards" or "Card") are produced
and paid for by the Fund and sent to the Company. (This and related
steps may occur later in the chronological process due to possible
uncertainties relating to the proposals.)
5. The Company will, at its expense, print account information on the
Cards.
6. Allow approximately 2-4 business days for printing information on
the Cards. Information commonly found on the Card includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding which indicates number of shares of the Fund
attributable to the Customer and, if appropriate, of each
applicable Portfolio (depends upon tabulation process used by
the computer system, I.E., whether or not system knows number
of shares held just by "reading" the account number)
e. individual Card number for use in tracking and
verification of votes (already on Cards as printed by the
Fund)
NOTE: When the Cards are printed by the Fund, each Card is
numbered individually to guard against potential
Card/vote duplication.
f. spaces where the Customer can vote "yes" or "no" on each proxy
proposal.
7. During this time, the Law Department of WRL or its affiliates ("WRL
Law") will develop, produce, and the Fund will pay for as many
copies of the notice of proxy and the proxy statement (one document)
for the Fund or, if appropriate, for the Portfolio(s) in which the
Customer's Policy is invested as the Company may reasonably require
for distribution to each Customer. Printed and folded notices and
statements will be sent to Company for insertion into envelopes
(envelopes
<PAGE>
and return envelopes are provided and paid for by the Company).
Contents of envelope sent to each Customer by the Company will
include:
a. voting instruction card
b. proxy notice and statement (one document) (for the Fund or, if
appropriate, for the Portfolio(s) in which the Customer's
Policy is invested)
c. the Fund's annual report (if not sent prior to this time)
d. return envelope (postage pre-paid by the Company) addressed to
the Company or its tabulation agent
e. "urge buckslip" - optional, but recommended (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One copy
will be supplied by the Fund.)
f. cover letter - optional, supplied by the Company and reviewed
and orally approved in advance by WRL Law.
8. The above contents should be received by the Company approximately
3-5 Business Days before the date set for mailing. The individual in
charge at the Company reviews and approves in writing the contents
of the mailing package supplied by WRL Law to ensure correctness and
completeness. Copy of this approval must be sent to WRL Law.
9. Package mailed by the Company at its expense to the Customers.
* The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. ( A 5-week period is recommended,
but not necessary, to receive a proper response percentage.)
Solicitation time is calculated as days from (but NOT
including) the meeting, counting backwards.
** If the Customers were actually the shareholders, at least 50%
of the outstanding shares must be represented and 66 2/3% of
that 50% must have voted affirmatively on the proposals to
have an effective vote. HOWEVER, since the Company is the
shareholder, the Customers' votes will (except in certain
limited circumstances) be used to dictate how the Company will
vote.
<PAGE>
10. Collection and tabulation of the Cards begins. Tabulation usually
takes place in another department or by another vendor depending on
process used. An often used procedure is to sort the Cards on
arrival into vote categories of all yes, no, or mixed replied, and
to begin data entry.
* Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by WRL in the past.
11. Signatures on the Card checked against legal name of account
registration which was printed on the Card.
* This verifies whether an individual has signed correctly with
the same name as is on the account registration.
For Example:
If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on
the Card and is the signature need on the Card.
12. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated, illegible or
improperly signed Card is disregarded and considered to be NOT
RECEIVED for purposes of vote tabulation. (If the vote on any one
proxy proposal on a Card with more than one proxy proposal is
legible and the Card properly signed, then that vote shall be
counted, and the remainder of the Card which is illegible shall be
disregarded and shall be considered to be NOT RECEIVED for purposes
of vote tabulation.) Any Cards that have "kicked out" (E.G.,
mutilated, illegible) of the procedures are "hand verified," I.E.,
examined as to why they did not complete the proxy process. Any
questions on those Cards are usually remedied individually.
13. There are various control procedures used to ensure proper
tabulation of votes and accuracy of that tabulation. The most
prevalent is to sort the Cards as they first arrive into categories
depending upon their vote; an estimate of how the vote is
progressing may be calculated. If the initial estimates and the
actual vote do not coincide, then an internal audit of that vote
should occur. This may entail a recount.
<PAGE>
14. The actual tabulation of votes is done in shares. (It is very
important that the Fund receives the tabulation stated in terms of
percentage and the number of SHARES.)
15. Final tabulation in shares is orally given by the Company to WRL Law
on the morning of the meeting by 10:00 a.m. E.S.T.
16. The vote is verified by the Company and is sent to WRL Law.
17. The Company then votes its proxy in accordance with the votes
received from the Customers the morning of the meeting (except as
provided in the Participation Agreement or in limited circumstances
as may be otherwise required by law). Voting instructions to abstain
on any item to be voted upon reduces the votes eligible to be cast
by the Company. A letter documenting the Company's vote is supplied
by WRL Law and is sent to an officer of the Company for his
signature. This letter is normally sent after the meeting has taken
place.
NOTE: Shares do not have cumulative voting rights and the holders
of more than 50% of the shares of the Fund voting for the
election of directors of the Board can elect all of the
directors if they choose to do so, and in such event holders
of the remaining shares would not be able to elect any
directors.
18. The Company will be required to box and archive the Cards received
from the Customers in an accessible place for six years from the
date of the meeting. In the event that any vote is challenged or if
otherwise necessary for legal, regulatory, or accounting purposes,
WRL will be permitted reasonable access to such Cards.
19. All approvals and "signing-off" may be done orally, but must always
be followed up in writing.
20. During tabulation procedures, the Fund and the Company determine if
a resolicitation is advisable and what form that resolicitation
should take, whether it should be by a mailing, or by a recorded
telephone call. A resolicitation may be considered, for example,
when the vote response is slow and a judgement is made that the
number of votes is too low under the circumstances. The meeting
could be adjourned to leave enough time for the resolicitation.
<PAGE>
A determination is made by the Company and the Fund to find the most
cost effective candidates for resolicitation. These are Customers
who have not yet voted, but whose balances are large enough that
their vote would significantly increase the number of votes with
minimal costs.
a. By mail: WRL Law amends the voting instruction cards, if
necessary, and writes a resolicitation letter. The Fund
supplies these to the Company. The Company generates a mailing
list etc., as per step #2 onward.
b. By phone: Rarely used. This must be done on a recorded line.
WRL Law and the Fund will supply the necessary procedures and
script if a phone resolicitation were to be required.
EXHIBIT 99.A7
EXHIBIT 1.A.(5)(a)
Specimen Flexible Premium Variable Life Insurance Policy
<PAGE>
AUSA Life Insurance Company, Inc.
(A STOCK COMPANY)
Home Office: Purchase, New York
Administrative Office: Clearwater, Florida
- --------------------------------------------------------------------------------
IN THIS POLICY AUSA Life Insurance Company, Inc. will be referred to as WE, OUR
or US.
- --------------------------------------------------------------------------------
WE AGREE to pay the Death Benefit Proceeds to the Beneficiary upon the death of
the Surviving Insured when we receive proof that both Joint Insureds died while
this Policy is in force. THE AMOUNT OF THE DEATH BENEFIT PROCEEDS AND THE
DURATION OF COVERAGE WILL INCREASE OR DECREASE DEPENDING ON THE INVESTMENT
EXPERIENCE OF THE SUBACCOUNTS IN THE SEPARATE ACCOUNT AND ON THE DEATH BENEFIT
OPTION SELECTED AS DESCRIBED IN THE DEATH BENEFIT PROVISIONS.
WE AGREE to pay the Net Surrender Value to the Owner if at least one of the
Joint Insureds is alive on the Maturity Date and this Policy is in force. CASH
VALUES WILL INCREASE OR DECREASE IN ACCORDANCE WITH THE POLICY VALUE PROVISIONS
AND THE INVESTMENT EXPERIENCE OF THE SUBACCOUNTS IN THE SEPARATE ACCOUNT. CASH
VALUES ARE NOT GUARANTEED AS TO DOLLAR AMOUNT.
THE PROVISIONS on the following pages are part of this Policy.
IN WITNESS WHEREOF, we have signed this Policy at our Office in Clearwater,
Florida as of the Policy Date.
/s/ WILLIAM H. GEIGER /s/ JOHN R. KENNEY
Secretary President
- -------------------------------------------------------------------------------
RIGHT TO EXAMINE POLICY - The Owner may cancel this Policy by returning it to us
at P.O. Box 5068, Clearwater, Florida 33758 or to the representative through
whom it was purchased within the later of: (a) 45 days after the application was
signed; (b) 10 days after receipt of this Policy; or (c) 10 days after we mail
or deliver the Notice of Withdrawal Right. If the Policy is returned within this
period, it will be void from the beginning and a refund will be made to the
Owner. The refund will equal the sum of:
1. The difference between the premiums paid and the amounts allocated to
any Accounts under the Policy; plus
2. The total amount of monthly deductions made and any other charges imposed on
amounts allocated to the Accounts; plus
3. The value of amounts allocated to the Accounts on the date we or our agent
receive the returned Policy.
If state law prohibits the calculation above, the refund will be the total of
all premiums paid for this Policy.
- -------------------------------------------------------------------------------
Joint Survivorship Flexible Premium Variable Life Insurance Policy
Death Benefit Proceeds Payable at Death of Surviving Insured
Prior to Maturity Date
Net Surrender Value Payable at Maturity Date
Flexible Premiums Payable During Lifetime of Surviving Insured
Until the Maturity Date
Non-Participating - No Dividends
Some Benefits Reflect Investment Results
<PAGE>
POLICY GUIDE
POLICY SCHEDULE........................................................... 3
RIDER INFORMATION......................................................... 4
TABLE OF GUARANTEED RATES................................................. 4A
DEFINITIONS............................................................... 5
GENERAL PROVISIONS........................................................ 6
DEATH BENEFIT PROVISIONS.................................................. 8
SEPARATE ACCOUNT PROVISIONS............................................... 9
PREMIUM PROVISIONS........................................................ 11
POLICY VALUE PROVISIONS................................................... 12
POLICY SPLIT OPTION....................................................... 15
SETTLEMENT OPTIONS........................................................ 16
- -------------------------------------------------------------------------------
ENDORSEMENTS
Page 2
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
POLICY SCHEDULE
JOINT INSUREDS: JOHN DOE POLICY NUMBER: 01-23456789
JANE DOE
SPECIFIED AMOUNT; $1,000,000 POLICY DATE: JUNE 01, 1993
OPTION TYPE: A RECORD DATE: JUNE 01, 1993
PLANNED PREMIUM: $10,000.00 NO LAPSE DATE: JUNE 01, 1998
PAYMENT FREQUENCY: ANNUALLY MATURITY DATE: JUNE 01, 2048
INITIAL PREMIUM: $10,000.00
MINIMUM MONTHLY
GUARANTEE PREMIUM: $ 806.89
MINIMUM SPECIFIED AMOUNT $100,000
SEPARATE ACCOUNT PROVISIONS
SEPARATE ACCOUNT: AUSA SERIES LIFE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE: .00002455
POLICY VALUE PROVISIONS
NET PREMIUM FACTOR
POLICY YEARS 1-10: 94.00%
POLICY YEARS 11+: 97.50%
MONTHLY POLICY CHARGE
INITIAL: $ 5.00
GUARANTEED: $10.00
MONTHLY DEATH BENEFIT GUARANTEE CHARGE: $.04 PER $1,000 SPECIFIED AMOUNT
GUIDELINE PREMIUM: $15,703.72
DEFERRED SURRENDER CHARGES
ISSUE CHARGES: $5.00 PER $1,000 SPECIFIED AMOUNT
INITIAL PERCENTAGE: 26.5%
EXCESS PERCENTAGE: 2.6%
SURRENDER CHARGE PERCENTAGE
END OF POLICY YEAR* AT ISSUE 1-10 11 12 13 14 15 16+
PERCENTAGE 100% 100% 80% 60% 40% 20% 0% 0%
* THE CHARGE ON ANY DATE OTHER THAN AN ANNIVERSARY WILL BE INTERPOLATED
BETWEEN THE TWO END OF YEAR CHARGES.
Page 3
<PAGE>
Form JLS01 NY
AUSA LIFE INSURANCE COMPANY, INC.
POLICY NUMBER: 01-12345678
RIDER INFORMATION
RIDER MONTHLY DEDUCTION
NONE
Page 4
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
POLICY SCHEDULE
POLICY NUMBER: 01-012345678
TABLE OF GUARANTEED MAXIMUM LIFE INSURANCE RATES
GUARANTEED RATE BASIS FOR INITIAL SPECIFIED AMOUNT ON JOINT INSUREDS
COMMISSIONERS 1980 STANDARD ORDINARY MORTALITY TABLE
JOHN DOE: MALE AGE 45, STANDARD, NONSMOKER
JANE DOE: FEMALE AGE 45, STANDARD, NONSMOKER
THE ANNUAL RATE REFLECTS THE MAXIMUM COST OF INSURANCE PER $1,000. THE
MONTHLY COST OF INSURANCE CALCULATIONS WILL USE ONE-TWELFTH OF THESE RATES.
POLICY YEAR ANNUAL RATE POLICY YEAR ANNUAL
RATE
1 0.010 29 17.950
2 0.033 30 21.437
3 0.060 31 25.523
4 0.094 32 30.181
5 0.134 33 35.402
6 0.182 34 41.158
7 0.240 35 47.578
8 0.311 36 54.864
9 0.400 37 63.205
10 0.506 38 72.843
11 0.636 39 83.937
12 0.791 40 96.347
13 0.974 41 109.921
14 1.188 42 124.486
15 1.439 43 139.897
16 1.737 44 156.074
17 2.095 45 172.988
18 2.533 46 190.749
19 3.075 47 209.522
20 3.737 48 229.855
21 4.529 49 252.644
22 5.458 50 280.353
23 6.519 51 318.153
24 7.721 52 376.222
25 9.099 53 475.123
26 10.718 54 655.824
27 12.665 55 1000.000
28 15.040
Page 4A
<PAGE>
DEFINITIONS
ACCOUNTS. Allocation options including the Fixed Account and the Subaccounts of
the Separate Account.
ANNIVERSARY. The same day and month as the Policy Date for each succeeding year
the Policy remains in force.
BENEFICIARY. The person or persons specified by the Owner to receive the Death
Benefit Proceeds upon the death of the Surviving Insured.
DEATH BENEFIT PROCEEDS. The amount payable upon the death of the Surviving
Insured in accordance with the Death Benefit Provisions of this Policy.
FIXED ACCOUNT. An allocation option other than the Separate Account.
INITIAL PREMIUM. The amount which must be paid before coverage begins. The
amount is shown on the Policy Schedule Page.
JOINT INSUREDS. The persons whose lives are insured under this Policy as shown
on the Policy Schedule Page.
MATURITY DATE. The date when coverage under the Policy will terminate if the
Policy is in force. The Maturity Date will occur on the Anniversary nearest the
younger insured's 100th birthday.
MONTHIVERSARY. The day of each month coinciding with the Policy Date. If there
is no day in a calendar month which coincides with the Policy Date, the
Monthiversary will be the first day of the next month.
NET SURRENDER VALUE. The amount payable upon surrender in accordance with the
Policy Value Provisions of this Policy.
OFFICE. Refers to our Administrative Office located in Clearwater, Florida.
POLICY DATE. The date coverage is effective and monthly deductions commence
under the Policy. Policy months, years and anniversaries are measured from the
Policy Date, as shown on the Policy Schedule Page.
RECORD DATE. The date the Policy is recorded on our books as an in force Policy.
The Record Date is shown on the Policy Schedule Page.
RIDER. Any attachment to this Policy which provides additional coverages or
benefits.
SEC. The Securities and Exchange Commission.
SEPARATE ACCOUNT. A separate investment account shown on the Policy Schedule
Page which is composed of several Subaccounts established to receive and invest
net premiums under the Policy.
SUBACCOUNT. A sub-division of the Separate Account. Each Subaccount invests
exclusively in the shares of a specified series fund portfolio.
Page 5
<PAGE>
SURVIVING INSURED. The Joint Insured who remains alive after the other Joint
Insured has died.
VALUATION DATE. Any day we are required by law to value the assets of the
Separate Account.
VALUATION PERIOD. The period commencing at the end of one Valuation Date and
continuing to the end of the next succeeding Valuation Date.
WE, OUR, US. Western Reserve Life Assurance Co. of Ohio.
WRITTEN NOTICE. Written Notice means a notice by the Owner to us requesting or
exercising a right of the Owner as provided in the Policy provisions. In order
for a notice to be considered a Written Notice, it must: be: in writing, signed
by the Owner; be in a form acceptable to us; and contain the information and
documentation, as determined in our sole discretion, necessary for us to take
the action requested or for the Owner to exercise the right specified. A Written
Notice will not be considered complete until all necessary supporting
documentation required or requested by us has been received by us at our
Administrative Office.
- -------------------------------------------------------------------------------
GENERAL PROVISIONS
THE POLICY. This Policy is issued in consideration of the attached application
and payment of the Initial Premium. This Policy, the attached application and
any additional applications at the time of reinstatement constitute the entire
contract. All statements in these applications will be deemed representations
and not warranties. No statement can be used to void this Policy or be used in
defense of a claim unless it is contained in the written application. No policy
provision can be waived or changed except by endorsement. Such endorsement must
be signed by our President or Secretary.
OWNERSHIP. This Policy belongs to the Owner. The Owner, as named in the
application or subsequently changed, may exercise all rights under this Policy
while either or both of the Joint Insureds are living. If two Owners are named,
this Policy will be owned jointly and the consent of each Owner will be required
to exercise ownership rights under the Policy.
We will not be bound by any change in the Ownership designation unless it is
made by Written Notice. The change will be effective on the date the Written
Notice is accepted by us. If we request, this Policy must be returned to our
Office for endorsement.
BENEFICIARY. The Beneficiary, as named in the application or subsequently
changed, will receive the benefits payable upon the death of the Surviving
Insured. If the Beneficiary dies before the Surviving Insured, the Contingent
Beneficiary, if named, becomes the Beneficiary. If no Beneficiary survives the
Surviving Insured, the benefits payable upon the death of the Surviving Insured
will be paid to the Owner or the Owner's estate.
We will not be bound by any change in the Beneficiary designation unless it is
made by Written Notice. The change will be effective on the date the Written
Notice was signed; however, no change will apply to any payment we made before
the Written Notice is received. If we request, this Policy must be returned to
our Office for endorsement.
ASSIGNMENT. This Policy may be assigned. We will not be bound by any assignment
unless made by Written Notice. The assignment will be effective on the date the
Written Notice is received at our Office and accepted by us. We assume no
responsibility for the validity of any assignment.
Page 6
<PAGE>
AGE AND SEX. If either Joint Insured's date of birth or sex is not correctly
stated, the death benefit will be adjusted. The death benefit will be adjusted
based on what the cost of insurance charge for the most recent monthly deduction
would have purchased based on the correct date of birth and sex.
INCONTESTABILITY. This Policy shall be incontestable after it has been in force,
while either Joint Insured is still alive, for two years from the Policy Date.
At the end of the second policy year, we will mail the Owner a notice requesting
to know if either Joint Insured has died. Failure to tell us of the death of a
Joint Insured will not avoid a contest, if we have basis to do so, even if the
Policy is still in force.
If this Policy is reinstated, a new two year contestability period (apart from
any remaining contestability period) shall apply from the date of the
application for reinstatement and will apply only to statements made in the
application for reinstatement.
SUICIDE. If either Joint Insured dies by suicide within two years from the
Policy Date of this Policy, this Policy shall terminate and our total liability,
including all Riders attached to this Policy, will be limited to the total
premiums paid within such two year period less any loan and any prior
withdrawals during such period. In that event, such proceeds will be payable to
the Owner, if surviving, otherwise to the Owner's estate. No other death benefit
will be payable.
In lieu of the above, and at the request of the Owner, we will allow this Policy
to be exchanged without evidence of insurability, for a new policy on the life
of the Surviving Insured. Such new policy will be issued upon Written Notice,
subject to the following:
1. The new policy is on any permanent plan of insurance then offered by us; and
2. The amount of insurance upon exhcange will equal one-half the Face Amount,
excluding any Riders, then in force under this Policy.
ANNUAL REPORT. We will send a report to the Owner at least once each year. It
will show for the Policy:
1. The current cash value; 4. Any current policy loans;
2. The current Net Surrender Value; 5. Activity since the last report;
3. The current death benefit; 6. Projected values.
Additional activity within each Subaccount showing investment experience will
also be provided. The report will also show any other information required by
the Laws or Regulations of the State in which the policy is issued.
TERMINATION. This Policy will terminate on the earliest of:
1. The Maturity Date; 3. The end of the grace period;
2. The date of the Surviving Insured's death; 4. The date of surrender.
POLICY PAYMENT. All proceeds to be paid upon termination will be paid in one sum
unless otherwise elected under the Settlement Options section of this Policy.
All payments and transfers from the Subaccounts will be processed as provided in
this Policy unless one of the following situations exists:
1. The New York Stock Exchange is closed; or
2. The SEC requires that trading be restricted or declares an emergency; or
Page 7
<PAGE>
We reserve the right to defer the payment of any Fixed Account values for the
period permitted by law, but not for more than 6 months. CONVERSION RIGHTS. At
any time upon Written Notice within the first 2 policy years, the Owner may
elect to transfer all Subaccount values to the Fixed Account without a transfer
charge.
PROTECTION OF PROCEEDS. Unless the Owner directs by filing Written Notice, no
Beneficiary may assign any payments under this Policy before the same are due.
To the extent permitted by law, no payments under this Policy will be subject to
the claims of creditors of any Beneficiary.
- -------------------------------------------------------------------------------
DEATH BENEFIT PROVISIONS
DEATH BENEFIT. The death benefit is based upon the Specified Amount, Option Type
and the limitation percentage applicable at time of death.
SPECIFIED AMOUNT. The Specified Amount is as shown on the Policy Schedule Page,
unless changed in accordance with the Changes section or reduced by a cash
withdrawal.
OPTION TYPE. The Option Type is as shown on the Policy Schedule Page, unless
changed in accordance with the Changes section of this provision.
If Option Type A is in effect, the death benefit is the greater of:
1. the Specified Amount; or
2. the limitation percentage times the cash value of this Policy on the date of
the Surviving Insured's death.
If Option Type B is in effect, the death benefit is the greater of:
1. the Specified Amount plus the cash value of this Policy on the date of the
Surviving Insured's death; or
2. the limitation percentage times the cash value of this Policy on the date of
the Surviving Insured's death.
LIMITATION PERCENTAGE. The limitation percentage is a percentage based on
attained age of the younger Joint Insured at the beginning of the policy year
equal to:
ATTAINED AGE LIMITATION PERCENTAGE
--------------------------------------------------------------
40 and under 250%
41 through 45 250% minus 7% for each age over age 40
46 through 50 215% minus 6% for each age over age 45
51 through 55 185% minus 7% for each age over age 50
56 through 60 150% minus 4% for each age over age 55
61 through 65 130% minus 2% for each age over age 60
66 through 70 120% minus 1% for each age over age 65
71 through 75 115% minus 2% for each age over age 70
76 through 90 105%
91 through 95 105% minus 1% for each age over age 90
96 and older 100%
Page 8
<PAGE>
CHANGES. The Owner may change the Option Type or decrease the Specified Amount
after the third policy year by Written Notice. Either one change or one decrease
may be allowed within each policy year. The change will be effective on the
first Monthiversary on or next following the day we receive the Written Notice.
No change in the Option Type will be allowed if the resulting Specified Amount
would be less than the Minimum Specified Amount shown on the Policy Schedule
Page. A change in the Option Type will change the Specified Amount as follows:
1. If the change is from Option Type A to Option Type B, the Specified Amount
after such change will be equal to:
(a) the Specified Amount prior to such change; minus
(b) the cash value on the date of change.
2. If the change is from Option Type B to Option Type A, the Specified Amount
after such change will be equal to:
(a) the Specified Amount prior to such change; plus
(b) the cash value on the date of change.
We reserve the right to limit any decrease in the Specified Amount to no more
than 20% of the then current Specified Amount. Any decrease will become
effective on the first Monthiversary on or next following the day we receive the
request. No decrease will be allowed if: (a) the Specified Amount after any
requested decrease would be less than the Minimum Specified Amount shown on the
Policy Schedule Page; or (b) the requested decrease would force a cash
withdrawal in order to maintain compliance with the definition of a life
insurance contract as defined by the United States Internal Revenue Code and
applicable regulations.
DEATH BENEFIT PROCEEDS. The Death Benefit Proceeds is the amount payable by us
under this Policy provided this Policy has not terminated prior to the Surviving
Insured's death. Except as provided in the Suicide section of the General
Provisions, the Death Benefit Proceeds will be equal to:
1. The death benefit; minus
2. Any monthly deductions due during the grace period; minus
3. Any outstanding policy loan; plus
4. Any unearned loan interest.
- -------------------------------------------------------------------------------
SEPARATE ACCOUNT PROVISIONS
The Separate Account was established by us as a separate, segregated asset
account under the laws of the State of New York, and is subject to the laws of
the State of New York. The Separate Account receives and invests net premiums
paid by you under the Policy according to your instructions.
THE SEPARATE ACCOUNT. The variable benefits under this Policy are provided
through the Separate Account as shown on the Policy Schedule Page. The assets of
the Separate Account are our property. Assets equal to the reserve and other
contractual liabilities under all policies issued in connection with the
Separate Account will not be charged with liabilities arising out of any other
business we may conduct. If the assets of the Separate Account exceed the
liabilities arising under the policies supported by the Separate Account, then
the excess may be used to cover the liabilities of our general account. The
assets of the Separate Account shall be valued as often as any policy benefits
vary, but at least monthly.
Page 9
<PAGE>
SUBACCOUNTS. The Separate Account has various Subaccounts with different
investment objectives. We reserve the right to add or remove any Subaccount of
the Separate Account. Income, if any, and any gains or losses, realized or
unrealized, from assets in each Subaccount are credited to, or charged against,
the amount allocated to that Subaccount without regard to income, gains, or
losses in other Subaccounts. Any amount charged against the investment base for
federal or state income taxes will be deducted from that Subaccount. The assets
of each Subaccount are invested in shares of a corresponding series fund
portfolio. The value of a portfolio share is based on the value of the assets of
the portfolio determined at the end of each Valuation Period in accordance with
applicable law.
TRANSFERS. The Owner may transfer all or a portion of this Policy's value in
each Subaccount to other Subaccounts or the Fixed Account. We reserve the right
to charge a $10 fee for each transfer after the first twelve transfers during
any one policy year. This charge will be deducted from the funds transferred. A
request for a transfer must be made in a form satisfactory to us. The transfer
will ordinarily take effect on the first Valuation Date on or following the date
the request is received at our Office. We reserve the right to revoke, modify,
postpone or suspend the ability to make transfers, or any feature of the ability
to make transfers, at any time.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS. We reserve the right to
transfer assets of the Separate Account, which we determine to be associated
with the class of contracts to which this Policy belongs, to another Separate
Account. If this type of transfer is made, the term "Separate Account", as used
in this Policy, shall then mean the Separate Account to which the assets were
transferred. We also reserve the right to add, delete, or substitute investments
held by any Subaccount.
We reserve the right, when permitted by law, to:
1. Deregister the Separate Account under the Investment Company Act of 1940;
2. Manage the Separate Account under the direction of a committee at any time;
3. Restrict or eliminate any voting privileges of owners or other persons who
have voting privileges as to the Separate Account;
4. Combine the Separate Account or any Subaccount(s) with one or more other
separate accounts or subaccounts;
5. Operate the Separate Account as a management investment company;
6. Establish additional Subaccounts to invest in either a new series of the
series fund, or in shares of another diversified, open-end registered
investment company; and
7. Fund additional classes of variable life insurance contracts through the
Separate Account.
CHANGE OF INVESTMENT OBJECTIVE. We reserve the right to change the investment
objective of a Subaccount. If required by law or regulation, an investment
objective of the Separate Account, or of a series fund portfolio designated for
a Subaccount, will not be materially changed unless a statement of the change is
filed with and approved by the appropriate insurance official of the state of
our domicile or deemed approved in accordance with such law or regulation. If
required, approval of or change of any investment objective will be filed with
the Insurance Department of the state where this Policy is delivered.
UNIT VALUE. Some of the policy values fluctuate with the investment results of
the Subaccounts. In order to determine how investment results affect the policy
values, a unit value is determined for each Subaccount. The unit value may
increase or decrease from one Valuation Period to the next. Unit values also
will vary between Subaccounts. The unit value of any Subaccount at the end of a
Valuation Period is the result of:
1. The total value of the assets held in the Subaccount. This value is
determined by multiplying the number of shares of the designated series fund
portfolio owned by the Subaccount times the net asset value per share; minus
Page 10
<PAGE>
2. The accrued risk charge for adverse mortality and expense experience. The
daily amount of this charge is equal to the net assets of the Subaccount
multiplied by the Mortality and Expense Risk Charge shown on the Policy
Schedule Page; minus
3. The accrued amount of reserve for any taxes or other economic burden
resulting from the application of tax laws that are determined by us to be
properly attributable to the Subaccount; and the result divided by
4. The number of outstanding units in the Subaccount.
The use of the unit value in determining policy values is described in the
Policy Value Provisions.
- -------------------------------------------------------------------------------
PREMIUM PROVISIONS
PAYMENT. The Initial Premium shown on the Policy Schedule Page must be paid on
or before the Policy Date. All premiums after the Initial Premium are payable at
our Office.
PREMIUMS. The amount and frequency of the Planned Premium are shown on the
Policy Schedule Page. The amount and frequency may be changed upon request,
subject to our approval.
While this Policy is in force, additional premiums may be paid at any time prior
to the Maturity Date. We reserve the right to limit or refund any premium if:
1. The amount is below our current minimum payment requirement; or
2. The premium would increase the death benefit by more than the amount of the
premium; or
3. The premium would disqualify this Policy as a life insurance contract as
defined by the United States Internal Revenue Code and applicable
regulations.
GRACE PERIOD. If the Net Surrender Value on any Monthiversary is not sufficient
to cover the monthly deductions on such day, we will mail a notice to the last
known address of the Owner and any assignee of record. A grace period of 61 days
after the mailing date of the notice will be allowed for the payment of
premiums. The notice will specify the minimum payment and the final date on
which such payment must be received by us to keep the Policy in force. The
Policy will remain in force during the grace period. If the amount due is not
received by us within the grace period, all coverage under the Policy and any
Riders will terminate without value at the end of the grace period.
Until the No Lapse Date shown on the Policy Schedule Page, no grace period will
begin provided the total premiums received (minus any withdrawals and minus any
outstanding loans) equals or exceeds the Minimum Monthly Guarantee Premium times
the number of months for such premium since the Policy Date, including the
current month. The Minimum Monthly Guarantee Premium is as shown on the Policy
Schedule Page unless changed due to a requested change under the Policy. Upon
such change, the Owner will be notified of the new Minimum Monthly Guarantee
Premium and the effective date for the new premium.
REINSTATEMENT. If this Policy terminates, as provided in the Grace Period
section, it may be reinstated. The reinstatement is subject to:
1. Receipt at our Office of a Written Notice. Such notice must be within 5
years after the date of termination and prior to the Maturity Date; and
2. Receipt of evidence of insurability satisfactory to us; and
3. Payment of a minimum premium sufficient to provide a net premium to cover
(a) 1 monthly deduction at the time of termination, plus (b) the next 2
monthly deductions which will become due after the time of reinstatement;
and
Page 11
<PAGE>
4. Payment of an additional amount sufficient to cover any surrender charge as
of the date of reinstatement.
The effective date of a reinstatement shall be the first Monthiversary on or
next following the day we approve the application for reinstatement. Any policy
loan as of the date of termination will not be reinstated. Any cash value equal
to the policy loan on the date of reinstatement will also not be reinstated.
- -------------------------------------------------------------------------------
POLICY VALUE PROVISIONS
NET PREMIUM. The net premium equals the premium paid times the Net Premium
Factor shown on the Policy Schedule Page.
ALLOCATION OF NET PREMIUMS. Net premiums will be allocated to the Subaccounts of
the Separate Account and the Fixed Account on the first Valuation Date on or
following the date the premium is received at our Office; except any net premium
received prior to the Policy Date will be allocated on the first Valuation Date
on or following the Policy Date. All net premiums allocated prior to the Record
Date will be allocated to the Money Market Subaccount. On the first Valuation
Date on or following the Record Date, the values in the Money Market Subaccount
will be transferred in accordance with the Owner's allocation as shown in the
application.
Any allocation to any Account must not be less than 10%. No fractional
percentages are permitted. The allocation may be changed by the Owner. We
reserve the right to limit such change to once each year. The request for change
of allocations must be in a form satisfactory to us. The allocation change will
be effective on the date the request for change is recorded by us.
MONTHLY DEDUCTIONS. On each Monthiversary, a monthly deduction for this Policy
will be made equal to the sum of the following:
1. The Monthly Policy Charge;
2. The monthly cost of insurance for this Policy;
3. The Monthly Death Benefit Guarantee Charge;
4. Any charges for benefits provided by Riders attached to this Policy.
Deductions will be withdrawn from each Subaccount and the Fixed Account in
accordance with the Owner's current allocation. If the value of any Account is
insufficient to pay its part of the monthly deduction, the monthly deduction
will be taken on a pro rata basis from all Accounts.
MONTHLY POLICY CHARGE. Both the Initial and Guaranteed Monthly Policy Charge are
shown on the Policy Schedule Page. It is our intention to charge the Initial
Monthly Policy Charge each month; however, we reserve the right to increase the
Monthly Policy Charge up to the Guaranteed Monthly Policy Charge after the first
policy year. Any change in this charge will be applied uniformly to all policies
in effect for the same length of time.
MONTHLY COST OF INSURANCE. The monthly cost of insurance on each Monthiversary
is determined as follows:
1. Divide the death benefit on the Monthiversary by 1.0032737; and
2. Reduce the result by the cash value on the Monthiversary; and
3. Multiply (2) by the appropriate monthly cost of insurance rates.
Page 12
<PAGE>
MONTHLY COST OF INSURANCE RATES. The monthly cost of insurance rates are based
on the sex, attained age, plan of insurance and rating class of the persons
insured. Monthly cost of insurance rates may be changed by us from time to time.
A change in the cost of insurance rates will apply uniformily to all persons of
the same sex, attained age, plan of insurance and rating class and whose
policies have been in effect for the same length of time. Any increase in the
rates will not exceed those shown in the Table of Guaranteed Maximum Cost of
Insurance Rates.
MONTHLY DEATH BENEFIT GUARANTEE CHARGE. The charge is equal to the Monthly Death
Benefit Guarantee Charge as shown on the Policy Schedule Page times the initial
Specified Amount. This charge will be deducted up until the No Lapse Date. On
and after the No Lapse Date, this charge will be zero.
SUBACCOUNT VALUE. At the end of any Valuation Period, the value of the
Subaccount is equal to the number of units that the Policy has in the
Subaccount, multiplied by the unit value of the Subaccount.
The number of units in a Subaccount is equal to:
1. The initial units purchased on the Policy Date; plus
2. Units purchased at the time additional net premiums are allocated to the
Subaccount; plus
3. Units purchased through transfers from another Subaccount or the Fixed
Account; minus
4. Those units redeemed to pay for monthly deductions as they are due; minus
5. Any units redeemed to pay for cash withdrawals; minus
6. Any units redeemed as part of a transfer to another Subaccount or the Fixed
Account.
FIXED ACCOUNT VALUE. At the end of any Valuation Period, the Fixed Account value
is equal to:
1. All net premiums allocated to the Fixed Account; plus
2. Any amounts transferred from a Subaccount to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts charged to pay for monthly deductions as they are due; minus
5. Any amounts withdrawn from the Fixed Account to pay for cash withdrawals;
minus
6. Any amounts transferred from the Fixed Account to a Subaccount.
Interest on the Fixed Account will be compounded daily at a minimum guaranteed
effective annual interest rate of 4% per year. We may declare from time to time
various higher current interest rates. We may also apply a different current
interest rate to that part of the cash value that equals the loan reserve.
On transfers from the Fixed Account to a Subaccount, we reserve the right to
impose the following limitations:
1. Written Notice must be received by us within 30 days after a policy
anniversary.
2. The transfer will take place on the date we receive such Written Notice.
3. The maximum amount that may be transferred is the greater of (a) 25% of the
amount in the Fixed Account; or (b) the amount transferred in the prior
policy year from the Fixed Account.
We further reserve the right to defer payment of any amounts from the Fixed
Account for no longer than six months after we receive Written Notice.
CASH VALUE. At the end of any Valuation Period, the cash value of the Policy is
equal to the sum of the Subaccount values plus the Fixed Account value.
Page 13
<PAGE>
NET SURRENDER VALUE. The Net Surrender Value is the amount payable upon
surrender of this Policy. The Net Surrender Value as of any date is equal to:
1. the cash value as of such date; minus
2. any surrender charge as of such date; minus
3. any outstanding policy loan; plus
4. any unearned loan interest.
SURRENDER CHARGE. During the first 15 policy years, a surrender charge will be
incurred upon surrender of this Policy. The charge is calculated as:
(a) x (b+c+d) where:
(a) is the Surrender Charge Percentage varying by policy year as shown on the
Policy Schedule Page;
(b) is the Issue Charge as shown on the Policy Schedule Page times the initial
Specified Amount;
(c) is the Initial Percentage as shown on the Policy Schedule Page times the
sum of all premiums paid up to one Guideline Premium as shown on the Policy
Schedule Page;
(d) is the sum of all premiums paid in excess of the first Guideline Premium
times the Excess Percentage as shown on the Policy Schedule Page.
SURRENDER. The Owner may surrender this Policy for the Net Surrender Value at
any time while the Policy is in force. Payment will usually be made within seven
days of Written Notice, subject to the Policy Payment section of the General
Provisions.
WITHDRAWALS. Cash withdrawals may be made any time after the first policy year
and while the Policy is in force. Only one withdrawal is allowed during a policy
year. The amount of a withdrawal may be limited to no less than $500 and to no
more than 10% of the Net Surrender Value. The request for a withdrawal must be
by Written Notice. A processing fee of no more than $25 will be deducted from
each withdrawal amount and the balance will be paid to the Owner.
When a withdrawal is made, the cash value shall be reduced by the amount of the
withdrawal. If the death benefit is Option Type A, the Specified Amount shall
also be reduced by the amount of the withdrawal. These reductions will result in
a reduction in the death benefit, which may be determined from the Death Benefit
section. No withdrawal will be allowed if the resulting Specified Amount would
be less than Minimum Specified Amount shown on the Policy Schedule Page.
The Accounts from which the withdrawal will be made may be specified in the
Written Notice. If no Account is specified, the withdrawal amount will be
withdrawn from each Account in accordance with the Owner's current allocation
instructions. Payment will be made within seven days of Written Notice, subject
to the Policy Payment section of the General Provisions of this Policy.
CONTINUATION OF INSURANCE. Subject to the Grace Period section of the Premium
Provisions, insurance coverage under this Policy and any benefits provided by
rider will be continued in force until the Net Surrender Value is insufficient
to cover the monthly deductions. This provision shall not continue this Policy
beyond the Maturity Date nor continue any Rider beyond the date for its
termination, as provided in the Rider.
INSUFFICIENT VALUE. If the Net Surrender Value on any Monthiversary is not
sufficient to cover the monthly deductions then due, this Policy shall terminate
subject to the Grace Period section of the Premium Provisions.
Page 14
<PAGE>
BASIS OF COMPUTATIONS. Policy values and reserves are at least equal to those
required by law. A detailed statement of the method of computation of values and
reserves has been filed with the insurance department of the state in which this
Policy was delivered.
POLICY LOANS. After the first policy year and during the continuance of this
Policy, the Owner can borrow against the Policy an amount which is not greater
than 90% of the cash value, less any surrender charge and any outstanding policy
loan. The amount of any policy loan may be limited to no less than $500, except
as noted below.
When a loan is made, an amount equal to the loan plus interest in advance until
the next Anniversary will be withdrawn from the Accounts and transferred to the
loan reserve. The loan reserve is a portion of the Fixed Account used as
collateral for any policy loan. The Owner may specify the Account or Accounts
from which the withdrawal will be made. If no Account is specified, the
withdrawal will be made from each Account in accordance with the Owner's current
premium allocation instructions.
The loan date is the date we process a loan request. Payment will usually be
made within seven days of the date we receive a proper loan request, subject to
the Policy Payment section of the General Provisions of this Policy. This Policy
will be the sole security for the loan.
While this Policy is in force, any loan may be repaid. Any amounts received on
this Policy will be considered premiums unless clearly marked as loan
repayments.
Interest on any loan will be at the policy loan rate of 5.2%, payable annually
in advance. Interest is due at each Anniversary. Interest not paid when due will
be added to the loan and will bear interest at the same rate.
At each Anniversary, we will compare the amount of the outstanding loan
(including interest in advance until the next Anniversary, if not paid) to the
amount in the loan reserve. We will also make this comparison anytime the Owner
repays all or part of the loan. At each such time, if the amount of the
outstanding loan exceeds the amount in the loan reserve, we will withdraw the
difference from the Accounts and transfer it to the loan reserve, in the same
fashion as when a loan is made. If the amount in the loan reserve exceeds the
amount of the outstanding loan, we will withdraw the difference from the loan
reserve and transfer it to the Accounts in accordance with the Owner's current
allocation instructions. However, we reserve the right to require the transfer
to the Fixed Account.
- -------------------------------------------------------------------------------
POLICY SPLIT OPTION
SPLIT OPTION. Subject to our evidence of insurability requirements, the Owner
may request to split this Policy, not including any Riders, and purchase two
permanent individual fixed account life insurance policies offered by us at the
time of the request; one on the life of each Joint Insured. The Owner may
request this Split Option by notifying us at our Office in writing within 90
days following either:
1. The later of the enactment or the effective date of a change in the Federal
estate tax laws that would reduce or eliminate the unlimited marital
deduction; or
2. The date of entry of a final decree of divorce with respect to the Joint
Insureds; or
3. Written confirmation of a dissolution of a business partnership of which
the partners are the Joint Insureds.
If more than one person owns this Policy, each Owner must agree to the split.
Page 15
<PAGE>
SPECIFIED AMOUNT. The initial specified amount for each new policy cannot be
greater than 50% of this Policy's Specified Amount, not including the face
amount of any Riders.
CASH VALUE. Cash value and indebtedness under this Policy will be allocated
equally to each of the new policies. If one Joint Insured does not meet our
insurability requirements we will pay the Owner one half of this Policy's Net
Surrender Value and issue only the policy covering that Joint Insured who meets
our insurability requirements or; the Owner may elect to keep this Policy in
force on both Joint Insureds and no new policies will be issued.
ISSUE LIMITS/PREMIUM RATE CLASSIFICATION. The new policies will be subject to
our minimum and maximum specified amounts and issue ages for the plan of
insurance selected.
If one of the Joint Insureds is older than the new policy's maximum issue age at
the time the split option is requested, our approval must be obtained to
exercise this split option.
PREMIUMS. The premiums for the new policies will be based on each Joint
Insured's attained age and premium rate class as determined by current evidence
of insurability. Premiums are payable as of the policy dates for each new
policy.
POLICY DATE. The policy date for each new policy will be the Monthiversary
following notification to us to execute this split option.
OWNER/BENEFICIARY. The owner and beneficiary for the new policies will be those
named in this Policy, unless otherwise specified.
- -------------------------------------------------------------------------------
SETTLEMENT OPTIONS
EFFECTIVE DATE AND FIRST PAYMENT DUE. The effective date of a settlement option
will be either the date of surrender or the date of death of the Surviving
Insured. The first payment due will be on the effective date of the settlement
option.
BETTERMENT OF MONTHLY ANNUITY. The payee will receive the greater of:
1. The income rate guaranteed in this Policy; or
2. The income rates in effect for us at the effective date of the settlement
option.
AVAILABILITY. If the payee is not a natural person, a settlement option is only
available with our permission. No settlement option is available if:
1. The payee is an assignee; or
2. The periodic payment is less than $20.
AGE. Age, when required, means age nearest birthday on the effective date of the
option. We will furnish rates for other ages and for two males or two females
upon request.
Page 16
<PAGE>
PROOF OF AGE. Prior to making the first payment under this Policy, we reserve
the right to require satisfactory evidence of the birthdate and sex of any
payee. If required by law to ignore differences in sex of any payee, annuity
payments will be determined using unisex rates.
PROOF OF SURVIVAL. Prior to making any payment under this Policy, we reserve the
right to require satisfactory evidence that any payee is alive on the due date
of such payment.
INTEREST AND MORTALITY. All settlement options are based on a guaranteed
interest rate of 3%. Mortality is based on the "1983 Table a" mortality table
with projection. Gender based mortality tables will be used unless prohibited by
law.
AMOUNT OF MONTHLY ANNUITY PAYMENT. The amount of each monthly annuity payment
will be determined by multiplying:
1. The appropriate rate based on the guaranteed interest rate and, for Options
B and C, the mortality table for the payments; times
2. The proceeds as of the effective date of the settlement option.
OPTIONS. The following options are available for payment of monthly annuity
payments. The rates shown are the guaranteed rates for each $1,000 of proceeds
at selected ages. Any guaranteed rates not shown for the options below will be
available upon request. Higher current rates may be available as of the
effective date of the settlement option.
Option A - Fixed Period. The proceeds will be paid in equal installments. The
installments will be paid over a fixed period determined from the following
table:
FIXED PERIOD RATE
-----------------------
(in Months)
60 17.91
120 9.61
180 6.87
240 5.51
Option B - Life Income. The proceeds will be paid in equal installments
determined from the following table. Such installments are payable:
1. during the payee's lifetime only (Life Annuity); or
2. during a 10 Year fixed period certain and for the payee's remaining
lifetime (Certain Period); or
3. until the sum of installments paid equals the proceeds applied and for the
payee's remaining lifetime (Installment Refund).
Page 17
<PAGE>
PAYEE'S LIFE ANNUITY CERTAIN PERIOD INSTALLMENT REFUND
AGE MALE FEMALE MALE FEMALE MALE FEMALE
- -----------------------------------------------------------------------------
55 4.20 3.81 4.15 3.79 4.00 3.71
60 4.67 4.17 4.59 4.14 4.37 4.02
65 5.33 4.68 5.17 4.61 4.84 4.42
70 6.26 5.39 5.89 5.24 5.45 4.94
75 7.53 6.42 6.75 6.06 6.24 5.64
80 9.33 7.95 7.66 7.04 7.25 6.57
85 11.84 10.21 8.48 8.04 8.55 7.78
90 15.31 13.49 9.08 8.81 10.21 9.30
Option C - Joint and Survivor Life Income. The proceeds will be paid in equal
installments during the joint lifetime of two payees and continuing upon the
death of the first payee for the remaining lifetime of the survivor.
Page 18
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
- -------------------------------------------------------------------------------
Joint Survivorship Flexible Premium Variable Life Insurance Policy
Death Benefit Proceeds Payable at Death of Surviving Insured
Prior to Maturity Date
Net Surrender Value Payable at Maturity Date
Flexible Premiums Payable During Lifetime of Surviving Insured
Until the Maturity Date
Non-Participating - No Dividends
Some Benefits Reflect Investment Results
EXHIBIT 99.1
EXHIBIT 1.A.(5)(b)
Joint Insured Term Rider
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
( A STOCK COMPANY)
Home Office: Purchase, New York
Administrative Office: Clearwater, Florida
JOINT INSURED TERM RIDER
- -------------------------------------------------------------------------------
IN THIS RIDER, the Joint Insureds are named on Page 3 of the Policy.
AUSA Life Insurance Company, Inc. will be referred to as We, Our or Us.
- -------------------------------------------------------------------------------
BENEFIT. We will pay to the Beneficiary the then current Face Amount of this
Rider upon the death of the Surviving Insured when we receive proof that both
Joint Insureds died while this Rider is in force.
FACE AMOUNT. The initial Face Amount of this Rider is shown on Page 4 of the
Policy. The Face Amount may be decreased at any time after the first policy
year. Any decrease will become effective on the first Monthiversary on or next
following the day we receive a Written Notice.
CONSIDERATION. This Rider is issued in consideration of:
1. the application for this Rider; and
2. the payment of the Initial Premium.
INCONTESTABILITY. The Incontestability Provision of the Policy also
applies to the Face Amount of this Rider.
SUICIDE. If either Joint Insured dies by suicide within two years after the
effective date of this Rider, our liability shall be limited to an amount equal
to the total monthly deductions for this Rider. However, in no event will this
increase the total liability set forth in the Suicide Provision of the Policy to
which this Rider is attached.
TERMINATION. This Rider will terminate on the earliest of:
1. the Maturity Date of the Policy;
2. the date this Policy terminates;
3. the Monthiversary on which this Rider is terminated by Written Notice;
4. the date of your 70th birthday.
GENERAL. This Rider is part of the Policy. It is subject to all the terms of
this Rider and the Policy. This Rider has no cash value.
The monthly deduction for this Rider, for each of the first 12 policy months, is
shown on Page 4 of the Policy. Monthly deductions after the first policy year
will be calculated consistent with:
1. the Face Amount of this Rider and the Monthly Cost of Insurance Rates
Provision of the Policy to which this Rider is attached; and
2. the death benefit Guarantee Charge for this Rider as shown on Page 4 of the
Policy. This Guarantee Charge will not be deducted on and after the No
Lapse Date shown in the Policy.
<PAGE>
EFFECTIVE DATE. This Rider becomes effective on the same date as the Policy
unless a later date is shown here.
AUSA LIFE INSURANCE COMPANY, INC.
/s/ WILLIAM H. GEIGER
Secretary
EXHIBIT 99.2
EXHIBIT 1.A.(5)(c)
Individual Insured Rider
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
(A STOCK COMPANY)
Home Office: Purchase, New York
Administrative Office: Clearwater, Florida
INDIVIDUAL INSURED TERM RIDER
- -------------------------------------------------------------------------------
IN THIS RIDER, the Individual Insured is named on Page 4 of the Policy. The
Individual Insured will be referred to as You or Your. AUSA Life Insurance
Company, Inc. will be referred to as We, Our or Us.
- -------------------------------------------------------------------------------
BENEFIT. We will pay to the Beneficiary the Face Amount of this Rider as shown
on Page 4 of the Policy when we receive due proof that your death occurred while
this Rider is in force.
CONSIDERATION. This Rider is issued in consideration of:
1. the application for this Rider; and
2. the payment of the Initial Premium.
INCONTESTABILITY. This Rider shall be incontestable after it has been in force
while you are still alive, for two years after the effective date of this Rider.
SUICIDE. If you die by suicide within two years after the effective date of this
Rider, our liability shall be limited to an amount equal to the total monthly
deductions for this Rider. However, in no event will this increase the total
liability set forth in the Suicide Provision of the Policy to which this Rider
is attached.
CONVERSION PRIVILEGE. On any Monthiversary while this Rider is in force, the
Owner may exchange this Rider without evidence of insurability for a new policy
on your life. Such new policy will be issued upon Written Notice subject to the
following:
1. the Rider has not reached the Anniversary nearest your 70th birthday; and
2. the new policy is on any permanent plan of insurance then offered by us;
and
3. the amount of insurance upon conversion will equal the Face Amount then in
force under this Rider; and
4. the payment of the premium based on your rate class under this Rider.
The Incontestability and Suicide provisions of the new Policy shall be measured
from the issue date of this rider.
TERMINATION. This Rider will terminate on the earliest of:
1. the Maturity Date of the Policy;
2. the date this Policy terminates;
3. the date of conversion of this Rider;
4. the Monthiversary on which this Rider is terminated by Written Notice;
5. the date of your 70th birthday.
<PAGE>
GENERAL. This Rider is part of the Policy. It is subject to all the terms of
this Rider and the Policy. This Rider has no cash value.
The monthly deduction for this Rider, for each of the first 12 policy months, is
shown on Page 4 of the Policy. Monthly deductions after the first policy year
will be calculated consistent with the Face Amount of this Rider and the Monthly
Cost of Insurance Rates provision of the Policy to which this Rider is attached.
A Table of Guaranteed Maximum Cost of Insurance Rates applicable to this Rider
is shown in the Policy Schedule pages.
EFFECTIVE DATE. This Rider becomes effective on the same date as the Policy
unless a later date is shown here.
AUSA LIFE INSURANCE COMPANY, INC.
/s/ WILLIAM H. GEIGER
Secretary
Page 2
EXHIBIT 99.3
EXHIBIT 1.A.(5)(d)
Wealth Protector Rider
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
(A STOCK COMPANY)
Home Office: Purchase, New York
Administrative Office: Clearwater, Florida
WEALTH PROTECTOR RIDER
- -------------------------------------------------------------------------------
IN THIS RIDER, the Joint Insureds are named on Page 3 of the Policy. AUSA Life
Insurance Company, Inc. will be referred to as We, Our or Us.
- -------------------------------------------------------------------------------
BENEFIT. We will pay to the Beneficiary the Face Amount of this Rider as shown
on Page 4 of the Policy upon the death of the Surviving Insured when we receive
proof that both Joint Insureds died while this Rider is in force.
CONSIDERATION. This Rider is issued in consideration of:
1. the application for this Rider; and
2. the payment of the Initial Premium.
INCONTESTABILITY AND SUICIDE. The Incontestability and Suicide Provisions of the
Policy also apply to the Face Amount of this Rider.
TERMINATION. This Rider will terminate on the earliest of:
1. the date this Policy terminates;
2. the fourth Anniversary of this Policy;
3. the Monthiversary on which this Rider is terminated by Written Notice.
GENERAL. This Rider is part of the Policy. It is subject to all the terms of
this Rider and the Policy. This Rider has no cash value.
The monthly deduction for this Rider, for each of the 48 policy months this
Rider is in force, is shown on Page 4 of the Policy.
EFFECTIVE DATE. This Rider becomes effective on the same date as the Policy
unless a later date is shown here.
AUSA LIFE INSURANCE COMPANY, INC.
/s/ WILLIAM H. GEIGER
Secretary
EXHIBIT 99.4
EXHIBIT 1.A.(11)
Memorandum describing issuance, transfer and redemption procedures
<PAGE>
JOINT SURVIVORSHIP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
AUSA LIFE INSURANCE COMPANY, INC.
ISSUANCE, REDEMPTION AND TRANSFER PROCEDURES
This document sets forth, as required by Rule 6e-3(T)(b)(12)(ii), the
administrative procedures that will be followed by AUSA Life Insurance Company,
Inc. ("AUSA Life") in connection with the issuance of the Joint Survivorship
Flexible Premium Variable Life Insurance Policy ("Policy") described in this
Registration Statement, the transfer of assets held thereunder, and the
redemption by Policyowners of their interest in the Policies.
---------------------------------
1. "Public Offering Price":
PURCHASE AND RELATED TRANSACTIONS
Set out below is a summary of the principal Policy provisions and
administrative procedures which might be deemed to constitute, either directly
or indirectly, a "purchase" transaction. The summary shows that, because of the
insurance nature of the Policies, the procedures involved necessarily differ in
certain significant respects from the purchase procedures for mutual funds and
contractual plans.
(a) PREMIUM SCHEDULES AND UNDERWRITING STANDARDS
Premiums for the Policies will not be the same for all Policyowners.
AUSA Life will require the Policyowner to pay an initial premium that is at
least equal to a minimum monthly first year premium set forth in the
Policy. Policyowners will determine a planned periodic premium payment
schedule that provides for a level premium payable at a fixed interval for
a specified period of time. Payment of premiums in accordance with this
schedule is not, however, mandatory, and failure to make a planned periodic
premium payment will not of itself cause the Policy to lapse. Instead,
Policyowners may make premium payments in any amount at any frequency,
subject only to the minimum premium amount,(1) and the maximum premium
limitation.(2) If at any time a
- ----------------------
(1) The minimum premium amount is currently $100.00
2
<PAGE>
premium is paid which would result in total premiums exceeding the
current maximum premium limitation set forth in the Policy, AUSA Life will
accept only that portion of the premium which will make total premiums
equal that amount. Any portion of the premium in excess of that amount will
be returned to the Policyowner and no further premiums will be accepted
until allowed by the current maximum premium limitations set forth in the
Policy. The Policy will remain in force so long as net surrender value is
sufficient to pay certain monthly charges imposed in connection with the
Policy. Thus, the amount of a premium, if any, that must be paid to keep
the Policy in force depends upon the net surrender value of the Policy,
which in turn depends on such factors as the investment experience and the
cost of insurance charge. However, until the No Lapse Date shown on the
Policy Schedule Page, the Policy will remain in force and no grace period
will begin provided: (1) the total of the premiums received (minus any
withdrawals and minus any outstanding loans) equals or exceeds the minimum
monthly guarantee premium times the number of months since the policy date,
including the current month, and (2) the excess indebtedness (total of all
Policy loans less any unearned loan interest on Policy loans) does not
exceed the cash value.
The cost of insurance rate utilized in computing the cost of insurance
charge will not be the same for each insured. The chief reason is that the
principle of pooling and distribution of mortality risks is based upon the
assumption that the joint insureds incur an insurance rate commensurate
with their mortality risk which is actuarially determined based upon
factors such as attained age, sex, rate class and length of time a Policy
is in force. Accordingly, while not all joint insureds will be subject to
the same cost of insurance rate, there will be a single "rate" for all
joint insureds in a given actuarial category.
The Policies will be offered and sold pursuant to established
underwriting standards and in accordance with state insurance laws. State
insurance laws prohibit unfair discrimination among
- ----------------------
(2) The maximum premium limitation will be set forth in the Policy Summary.
This limitation will be imposed to conform the Policy to certain
restrictions on premiums contained in the Internal Revenue Code of 1986, as
amended.
3
<PAGE>
joint insureds, but recognize that premiums must be based upon factors
such as age, sex, health and occupation.
(b) APPLICATION AND INITIAL PREMIUM PROCESSING
Upon receipt of a completed application, AUSA Life will follow certain
insurance underwriting (I.E., evaluation of risks) procedures designed to
determine whether the proposed joint insureds are insurable. This process
may involve such verification procedures as medical examinations and may
require that further information be provided by the proposed joint insureds
before a determination can be made. A Policy will not be issued until this
underwriting procedure has been completed.
If a premium of $2,000 or more is paid upon submission of the
application, amounts will then be allocated to the Money Market Account of
the AUSA Series Life Account ("Series Account"). In such instances, the
policy date will ordinarily be the date of receipt of the premium payment.
If a premium of less than $2,000 is paid with the application, such amounts
will be held by AUSA Life until the policy date. In such instances, the
policy date will ordinarily be the date the Policy goes in force. Insurance
coverage under the Policy and associated monthly deductions commence on the
policy date. In either case, the record date of the Policy will be the date
on which the Policy is recorded on AUSA Life's books as an "in force"
Policy and AUSA Life will allocate net premiums to the sub-accounts of the
Series Account on the first valuation date on or following the record date
in accordance with the directions on the application.
If AUSA Life determines to its satisfaction that on the date the
application is signed and submitted with an initial payment the proposed
joint insureds were insurable and acceptable under AUSA Life's underwriting
rules and standards for insurance for the amount, plan and risk
classification applied for in the application, then the insurance
protection applied for, subject to the limits of liability and in
accordance with the terms set forth in the Policy and in the conditional
receipt, will by reason of such payment take effect on the later of the
date of the application, or the completion of all medical tests and
examinations, if required.
4
<PAGE>
Under AUSA Life's current rules, the minimum specified amount at
issue is $100,000. AUSA Life reserves the right to revise its rules from
time to time to specify a different minimum specified amount at issue.
(c) PREMIUM ALLOCATION
In the application for a Policy, the Policyowner can allocate net
premiums (total premiums less any premium expense charges) among the
sub-accounts of the Series Account and the Fixed Account.
Notwithstanding the allocation in the application, if a premium payment
of $2,000 or more is paid upon submission of the application, the net
premium will initially be allocated to the sub-account of the Series
Account that invests exclusively in shares of the Money Market Portfolio
and will be re-allocated on the first valuation date on or following the
record date in accordance with the directions in the application. If a
premium payment of less than $2,000 accompanies the application, the net
premium payment will be allocated on the first valuation date on or
following the record date in accordance with the directions in the
application. Net premiums paid after the record date will be allocated
in accordance with the Policyowner's instructions in the application.
The minimum percentage of each premium that may be allocated to any
account is 10%; percentages must be in whole numbers. The allocation for
future net premiums may be changed at any time by providing AUSA Life
with written notification. However, AUSA Life reserves the right to
limit the number of changes of the allocation of net premiums to one per
year.
(d) REINSTATEMENT
A lapsed Policy may be reinstated any time within 5 years after the
date of lapse and before the maturity date by submitting the following
items to AUSA Life:
1. A written application for reinstatement from the Policyowner;
2. Evidence of insurability satisfactory to AUSA Life; and
3. A premium that, after the deduction of premium expense charges,
is large enough to cover:
5
<PAGE>
(a)one monthly deduction at the time of termination; (b) the next
two monthly deductions which will become due after the time of
reinstatement; and (c) an amount sufficient to cover any
surrender charge (as set forth in the Policy) as of the date of
reinstatement.
Any indebtedness on the date of lapse will not be reinstated. The cash
value of the Policy loan on the date of reinstatement will also not be
reinstated. The amount of cash value on the date of reinstatement will
be equal to the amount of the cash value on the date of lapse (exclusive
of any Policy loan on that date) increased by the net premiums paid at
reinstatement, less the amounts paid in accordance with (a) above. Upon
approval of the application for reinstatement, the effective date of
reinstatement will be the first monthly anniversary on or next following
the date of approval of the application of reinstatement.
(e) REPAYMENT OF INDEBTEDNESS
A loan under the Policy will be subject to an interest rate of 5.2%
payable annually in advance. Outstanding indebtedness may be repaid at
any time before the maturity date of the Policy and while the Policy is
in force. Payments made by the Policyowner while there is indebtedness
will be treated as premium payments unless the Policyowner indicates
that the payment should be treated as a loan repayment. Under AUSA
Life's current procedures, at each Policy anniversary, AUSA Life will
compare the amount of the outstanding loan (including interest in
advance until the next Policy anniversary, if not paid) to the amount in
the loan reserve. AUSA Life will also make this comparison any time the
Policyowner repays all or part of the loan. At each such time, if the
amount of the outstanding loan exceeds the amount in the loan reserve,
AUSA Life will withdraw the difference from the accounts and transfer it
to the loan reserve, in the same manner as when a loan is made. If the
amount in the loan reserve exceeds the amount of the outstanding loan,
AUSA Life will withdraw the difference from the loan reserve and
transfer it to the accounts in the same manner as premiums are
allocated. AUSA Life will allocate the
6
<PAGE>
repayment of indebtedness at the end of the valuation period(3) during
which the repayment is received.
(f) CORRECTION OF MISSTATEMENT OF AGE OR SEX
If AUSA Life discovers that the age or sex of either joint insured
has been misstated, AUSA Life will adjust the death benefits based on
what the cost of insurance charge for the most recent monthly deduction
would have purchased based on the correct age or sex.
- ----------
(3) A valuation period is the period between two successive valuation dates,
commencing at the close of business of each valuation date and ending at the
close of business of the next succeeding valuation. The net asset value per
share of a portfolio of the Fund will be determined, once daily, as of the
close of the regular session of business on the New York Stock Exchange
(currently 4:00 p.m., New York City time) Monday through Friday, except on
customary national holidays on which the New York Stock Exchange is closed.
7
<PAGE>
2. "REDEMPTION PROCEDURES":
SURRENDER AND RELATED TRANSACTIONS
This section outlines those procedures which might be deemed to
constitute redemptions under the Policy. These procedures differ in certain
significant respects from the redemption procedures for mutual funds and
contractual plans.
(a) CASH VALUES
At any time before the earlier of the death of the surviving insured
or the maturity date, the Policyowner may totally surrender or, after
the first Policy year, make a cash withdrawal from the Policy by sending
a written request to AUSA Life. The amount available for surrender is
the net surrender value at the end of the valuation period during which
the surrender request is received at AUSA Life's office. The net
surrender value as of any date is equal to:
(1) the cash value as of such date; minus
(2) any surrender charge as of such date; minus
(3) any outstanding Policy loan; plus
(4) any unearned interest.
A surrender charge will be deducted if the Policy is surrendered
during the first 15 Policy years. The surrender charge consists of a
deferred issue charge of $5.00 per $1,000 of specified amount and of a
deferred sales charge equal to 26.5% of one guideline premium and not
more than 4.2% of premiums above that amount. A declining percentage of
the surrender charges as set forth in the Policy is assessed after the
tenth year. Surrenders from the Series Account will generally be paid
within seven days of receipt of the written request. Postponement of
payments may, however, occur in certain circumstances.(4)
- ----------
(4) Payment of any amount from the Series Account upon complete surrender, cash
withdrawal, Policy loan, or benefits payable at death or maturity may be
postponed whenever: (i) the New York Stock Exchange is closed other than
customary week-end and holiday closings, or trading on the New York Stock
Exchange is restricted as determined by the Commission; (ii) the Commission
by order permits postponement for the protection of Policyowners; or (iii)
an emergency exists, as determined by the Commission, as a result of which
disposal of securities is not reasonable practicable or it is not resonably
practicable to determine the value of the Series Account's net assets.
Transfers may also be postponed under these circumstances. AUSA Life further
resolves the right to defer payment of transfer, cash withdrawals or
8
<PAGE>
If the Policy is being totally surrendered, the Policy itself must be
returned to AUSA Life along with the request. A Policyowner may elect to
have the amount paid in a lump sum or under a settlement option.
For a cash withdrawal, the amount available may be limited to no less
than $500 and to no more than 10% of the net surrender value. The amount
paid plus a charge equal to the lesser of $25 or 2% of the amount
withdrawn will be deducted from the Policy's cash value at the end of
the valuation period during which the request is received. The amount
will be deducted from the accounts in the same manner as the current
allocation instructions unless the Policyowner directs otherwise. Cash
withdrawals are allowed only once each Policy year.
In addition, when death benefit Option A is in effect, the specified
amount will be reduced by the cash withdrawal. No cash withdrawal will
be permitted which would result in a specified amount lower than the
minimum specified amount set forth in the Policy or would deny the
Policy status as life insurance under the Internal Revenue Code and
applicable regulations.
(b) BENEFIT CLAIMS
As long as the Policy remains in force, AUSA Life will generally pay
a death benefit to the named beneficiary in accordance with the
designated death benefit option within seven days after AUSA Life
receives due proof of death of the surviving insured, and AUSA Life
receives proof that both joint insureds died while the Policy was in
force, and verifies the validity of the claim. Payment of death benefits
may, however, be postponed under certain circumstances.(5) In
particular, during the first two Policy years, and during the first two
years after a Policy is reinstated, and in other circumstances in which
AUSA Life may have a basis for contesting the claim, there can be a
delay beyond the seven day period. The amount of the death benefit is
determined at the end of the valuation period during which the surviving
insured dies. The death
- --------------------------------------------------------------------------------
surrenders from the Fixed Account for up to six months. Payments under
the Policy of any amount paid by check may be postponed until such time
as the check has cleared the Policyowner's bank.
(5) SEE note 4, SUPRA.
9
<PAGE>
benefit proceeds payable under the designated death benefit option will
be reduced by any outstanding indebtedness and any due and unpaid
charges. The proceeds will be increased by any additional insurance
provided by rider and any unearned loan interest.
The amount of the death benefit is guaranteed not to be less than the
specified amount of the Policy. These proceeds may be reduced by any
outstanding indebtedness and any due and unpaid charges. The death
benefit may, however, exceed the specified amount of the Policy. The
amount by which the death benefit exceeds the specified amount depends
upon the death benefit option in effect and the cash value of the
Policy. Under Death Benefit Option B, the death benefit will always vary
with the cash value because the death benefit will at least equal the
specified amount plus the cash value.
The amount of the benefit payable at maturity is the net surrender
value of the Policy on the maturity date. This benefit will only be paid
if either insured is living and the Policy is in force on the Policy's
maturity date. The Policy will mature on the anniversary nearest the
younger insured's 100th birthday, if either joint insured is living and
the Policy is in force.
(c) POLICY LOANS
After the first Policy year and so long as the Policy remains in
force, the Policyowner may borrow money from AUSA Life using the Policy
as the only security for the loan. The maximum amount that may be
borrowed is an amount which, together with any loans already outstanding
and any surrender charge, is 90% of the cash value. Indebtedness equals
the total of all Policy loans less any unearned loan interest on the
loans. The loan value will be determined at the end of the valuation
period during which the loan request is received. Loans have priority
over the claims of any assignee or other person. The loan may be repaid
all of in part at any time before that maturity date and while the
Policy is in force. Payments made by the Policyowner while there is
indebtedness will be treated as premium payments unless the Policyowner
indicates that the payment should be treated as a loan repayment. The
interest rate charged on Policy loans accrues daily. Interest payments
are payable annually in advance. If unpaid when due, interest
10
<PAGE>
will be added to the amount of the loan and will become part of the loan
and bear interest at the same rate.
A Policyowner may allocate a Policy loan among the accounts. If no
such allocation is made, AUSA Life will allocate the loan in accordance
with the Policyowner's current allocation instructions. The loan amount
will normally be paid within seven days after receipt of a written
request. Postponement of loans may take place under certain
circumstances.(6)
Cash value equal to the portion of the Policy loan plus interest in
advance until the next Policy anniversary allocated to each account will
be transferred from the account to the loan reserve, reducing the
Policy's cash value in that account. The loan reserve is a portion of
the Fixed Account to which amounts are transferred as collateral for
Policy loans. As noted above, under AUSA Life's current procedures, at
each Policy anniversary, AUSA Life will compare the amount of the
outstanding loan (including interest in advance until the next Policy
anniversary, if not paid) to the amount in the loan reserve. AUSA Life
will also make this comparison any time, if the Policyowner repays all
or part of the loan. At each such time, if the amount of the outstanding
loan exceeds the amount in the loan reserve, AUSA Life will withdraw the
difference from the accounts and transfer it to the loan reserve, in the
same manner as when a loan is made. If the amount in the loan reserve
exceeds the amount of the outstanding loan, AUSA Life will withdraw the
difference from the loan reserve and transfer it to the accounts in the
same manner as premiums are allocated. Cash value in the loan reserve
will be credited with guaranteed interest at 4% per year. Additional
interest may be credited to this cash value.
(d) POLICY LAPSE
Lapse will only occur where net surrender value is insufficient to
cover the monthly deduction, and a grace period expires without a
sufficient payment. If net surrender value is insufficient to cover the
monthly deduction, the Policyowner must, except as noted below, pay
during the grace
- ----------
(6) SEE note 4, SUPRA.
11
<PAGE>
period a payment at least sufficient to provide a net premium to cover
the sum of the monthly deductions due within the grace period. However,
until the No Lapse date shown on the Policy Schedule Page, the Policy
will remain in force and no grace period will begin provided: (1) the
total premiums received (minus any withdrawals and minus any outstanding
loans) equals or exceeds the minimum monthly guarantee premium times the
number of months since the Policy date, including the current month, and
(2) the excess indebtedness (total of all Policy loans less any unearned
loan interest on Policy loans) does not exceed the cash value.
If net surrender value is insufficient to cover the monthly
deduction, AUSA Life will notify the Policyowner and any assignee of
record of the minimum payment needed to keep the Policy in force. The
Policyowner will then have a grace period of 61 days, measured from the
date notice is sent to the Policyowner, to make sufficient payment. If
AUSA Life does not receive a sufficient payment within the grace period,
lapse of the Policy will result. If a sufficient payment is received
during the grace period, any resulting net premium will be allocated
among the accounts in accordance with the Policyowner's then current
instructions. If the surviving insured dies during the grace period, the
death benefit proceeds will equal the amount of death benefit proceeds
immediately prior to the commencement of the grace period, reduced by
any due and unpaid charges. SEE Reinstatement, p. 4.
3. TRANSFERS
The Series Account currently has fifteen sub-accounts. Each sub-account
invests exclusively in the shares of a corresponding portfolio of WRL Series
Fund, Inc., an open-end diversified management company registered with the
Securities and Exchange Commission. Policyowners may transfer cash value
among the sub-accounts of the Series Account or from the sub-accounts to the
Fixed Account, which is part of AUSA Life's General Account. For transfers
from the Fixed Account to a sub-account, AUSA Life reserves the right to
require that transfer requests be in writing and received at AUSA Life's
administrative office within thirty days after a Policy anniversary. Under
the Policy, the amount that may be transferred is limited to the greater of
(a) 25% of the amount in the
12
<PAGE>
Fixed Account, or (b) the amount transferred in the prior Policy year from
the Fixed Account, unless AUSA Life consents otherwise. Currently, AUSA Life
allows 100% of the amount in the Fixed Account to be transferred within 30
days after each Anniversary. The transfer will take place on the day AUSA
Life receives the request. No transfer charge will apply to transfers from
the Fixed Account to a Sub-Account. Amounts may be withdrawn from the Fixed
Account for cash withdrawals and surrenders only upon written request of the
Policyowner. AUSA Life further reserves the right to defer payment of
transfers, cash withdrawals, or surrenders from the Fixed Account for up to
six months. In addition, Policy provisions relating to transfers, cash
withdrawals or surrenders from the Series Account will also apply to Fixed
Account transactions. Policyowners may make transfer requests in writing or
by telephone. Written requests must be in a form acceptable to AUSA Life.
Telephonic requests are permissible if the Policyowner has previously
authorized telephone transfers in writing. AUSA Life may, at any time,
revoke or modify the transfer privilege. Cash value transferred from one
sub-account into more than one sub-account counts as one transfer. AUSA Life
will effectuate transfers and determine all values in connection with
transfers at the end of the valuation period during which the transfer
request is received. Postponement of transfers may take place under certain
circumstances.(7) A transfer charge of $10 may be imposed for the thirteenth
and each subsequent transfer in a Policy year and would be deducted from
each sub-account from which a transfer is being made in an equal amount.
Transfers resulting from policy loans, the exercise of conversion rights,
and the reallocation of cash value immediately after the record date, will
not be subject to a transfer charge. No transfer charge will apply to
transfers from the Fixed Account to a sub-account.
4. CONVERSION PROCEDURE
- ----------
(7) SEE note 4, SUPRA.
13
<PAGE>
At any time upon written request within 24 months of the Policy date,
the Policyowner may elect to transfer all sub-account values to the Fixed
Account. No transfer charge will be assessed.
14
EXHIBIT 99.C6
EXHIBIT 6
Opinion and Consent of Alan Yaeger as to actuarial matters
pertaining to the securities being registered
<PAGE>
AUSA Letterhead
June 22, 1998
AUSA Life Insurance Company, Inc.
4 Manhattanville Road
Purchase, New York 10577
RE: Registration No. 33-86696
Gentlemen:
This opinion is furnished in connection with the Pre-Effective Amendment
No. 3 registration by AUSA Life Insurance Company, Inc. of flexible premium
variable life insurance policies ("Policies") under the Securities Act of 1933.
The Prospectus included in the Registration Statement on Form S-6 describes the
Policies. The forms of Policies were prepared under my direction, and I am
familiar with the Registration Statement and Exhibits thereof.
In my opinion, the illustrations of death benefits, cash values and net
surrender values included in the sections entitled "Death Benefit, Cash Value
and Net Surrender Value Illustrations" and "Illustration of Benefits" (Appendix
A) of the Prospectus, based on the assumptions stated in the illustrations, are
consistent with the provisions of the respective forms of the Policies.
I hereby consent to use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
Prospectus.
Very truly yours,
/s/ ALAN M. YAEGER
Alan M. Yaeger
Actuary
EXHIBIT 99.2A
EXHIBIT 7
Consent of Robert F. Colby, Esq.
<PAGE>
AUSA LIFE LETTERHEAD
June 22, 1998
AUSA Life Insurance Company, Inc.
4 Manhattanville Road
Purchase, New York 10577
Gentlemen:
I hereby consent to reference to my name under the caption "Legal Matters" in
the Prospectus incorporated by reference in Pre-Effective Amendment No. 3 to the
Registration Statement on Form S-6 (File No. 33-86696) for the AUSA Series Life
Account filed by AUSA Life Insurance Company, Inc. with the Securities and
Exchange Commission.
/s/ ROBERT F. COLBY
Robert F. Colby
Vice President, Assistant
Secretary and Counsel
EXHIBIT 99.2B
EXHIBIT 8
Consent of Sutherland, Asbill & Brennan LLP
<PAGE>
S.A.B. LETTERHEAD
June 19, 1998
Board of Directors
AUSA Life Insurance Company, Inc.
AUSA Series Life Account
4 Manhattanville Road
Purchase, New York 10577
RE: AUSA Series Life Account
File No. 33-86696
Gentlemen:
We hereby consent to the use of our name under the caption "Legal Matters"
in the Prospectus for the AUSA Freedom Wealth Protector contained in
Pre-Effective Amendment No. 3 to the Registration Statement on Form S-6 (File
No. 33-86696) of the AUSA Series Life Account filed by AUSA Life Insurance
Company, Inc. with the Securities and Exchange Commission. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ STEPHEN E. ROTH
-----------------------
Stephen E. Roth
EXHIBIT 99.C1
EXHIBIT 9
Consent of Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 27, 1998, with respect to the statutory-basis
financial statements and schedules of AUSA Life Insurance Company, Inc. included
in Pre-Effective Amendment No. 3 to the Registration Statement (Form S-6 No.
33-86696) and related Prospectus of AUSA Series Life Account.
ERNST & YOUNG
Des Moines, Iowa
June 19, 1998