<PAGE>
Registration No. 33-88576
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective Amendment No. 1
to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
(Exact Name of Trust)
THE TRAVELERS INSURANCE COMPANY
-------------------------------
(Name of Depositor)
One Tower Square, Hartford, Connecticut 06183
----------------------------------------------
(Complete Address of Depositor's Principal Executive Offices)
Ernest J. Wright
Assistant Secretary
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
----------------------------
(Name and address of Agent for Service)
Title and amount of securities being registered: Pursuant to Rule 24f-2 of the
Investment Company Act of 1940, the Registrant hereby declares that an
indefinite amount of Variable Life Insurance Policies is being registered under
the Securities Act of 1933.
Amount of filing fee: $500.00
Approximate date of proposed public offering: As soon as practicable following
the effectiveness 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 Section 8(a), may
determine.
___ Check box if it is proposed that this filing will become effective on
at pursuant to Rule 487
--------------- --------------
<PAGE>
RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND PROSPECTUS
--------------------------
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
----------- ---------------------
1 Cover page
2 Cover page
3 Safekeeping of the Separate Account's Assets
4 Distribution of the Policy
5 The Separate Account
6 The Separate Account
7 Not applicable
8 Not applicable
9 Legal Proceedings and Opinion
10 Prospectus Summary; The Insurance Company; The Separate
Account; The Investment Options; The Policy; Transfers of
Cash Value; Policy Surrenders and Cash Surrender Value;
Voting Rights; Dividends
11 The Separate Account; The Investment Options
12 The Investment Options
13 Charges and Deductions; Distribution of the Policies
14 The Policy
15 The Policy
16 The Separate Account; The Investment Options; Allocation of
Premium Payments
17 Prospectus Summary; Right to Cancel Period; Policy Surrenders
and Cash Surrender Value; Policy Loans; Exchange Rights
18 The Investment Options; Charges and Deductions; Federal Tax
Considerations
19 Reports to Policy Owners
20 The Insurance Company
21 Policy Loans
22 Not applicable
23 Not applicable
24 Not applicable
25 The Insurance Company
26 Not applicable
27 The Insurance Company
28 The Insurance Company; Management
29 The Insurance Company
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 Distribution of the Policy
36 Not applicable
37 Not applicable
38 Distribution of the Policy
39 Distribution of the Policy
40 Not applicable
<PAGE>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
----------- ---------------------
41 Distribution of the Policy
42 Not applicable
43 Not applicable
44 Valuation of the Separate Account
45 Not applicable
46 The Policy; Valuation of the Separate Account; Transfers of
Cash Value; Policy Surrenders and Cash Surrender Value
47 The Separate Account; The Investment Options
48 The Insurance Company
49 Safekeeping of the Separate Account's Assets
50 Not applicable
51 Prospectus Summary; The Insurance Company; The Policy; Death
Benefits; Policy Lapse and Reinstatement
52 The Separate Account; The Investment Options; Investment
Managers
53 Federal Tax Considerations
54 Not applicable
55 Not applicable
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
<PAGE>
VINTAGELIFE
MODIFIED SINGLE PREMIUM INDIVIDUAL VARIABLE LIFE INSURANCE POLICY
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
PROSPECTUS
, 1995
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
-------------------------------------------------------------------------------
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PROSPECTUS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
This Prospectus describes a modified single premium individual variable life
insurance policy (the "Policy") offered by The Travelers Insurance Company
(the "Company") and funded by The Travelers Variable Life Insurance Separate
Account Three ("Separate Account Three"). Separate Account Three invests in
certain mutual funds that are referred to in this Prospectus as "Investment
Options." Although the Policy can operate as a single premium policy,
additional premium payments may be made under certain circumstances provided
there are no outstanding policy loans. The minimum Initial Premium required to
issue a Policy is $25,000.
The Policy provides for the payment of a Death Benefit upon the death of the
Insured, and for a Cash Value that can be obtained through policy loans or
full or partial surrenders of the Policy. The Death Benefit and Cash Value of
a Policy will vary based on the performance of underlying investment options.
There is no guaranteed minimum Cash Value for a Policy. Additionally, the Cash
Value is reduced by the various fees and charges assessed under the Policy, as
described in this Prospectus. Regardless of the performance of the Investment
Options, so long as the Policy is in force, the Death Benefit can never be
less than the current Stated Amount (with proceeds payable reduced by
outstanding policy loans and unpaid interest). The Policy will remain in force
for as long as the Cash Surrender Value is sufficient to pay the monthly
charges imposed under the Policy.
From the Issue Date through the end of the Right to Cancel Period, the
Initial Premium will be allocated to the Smith Barney Money Market Portfolio.
Thereafter, the Cash Value and any premium payments made under the Policy may
be allocated to one or more of the following Investment Options available
under Separate Account Three where they will accumulate on a variable basis:
Smith Barney
(CONTINUED ON THE FOLLOWING PAGE)
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR
THE UNDERLYING INVESTMENT OPTIONS. THESE PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, 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.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG-TERM INVESTMENT. PROSPECTIVE POLICY
OWNERS SHOULD CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S
LONG-TERM INVESTMENT POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY
SIMILAR OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
THE DATE OF THIS PROSPECTUS IS , 1995.
INTRO -- 1
-------------------------------------------------------------------------------
<PAGE>
Income and Growth, Alliance Growth, American Capital Enterprise, Smith Barney
International Equity, TBC Managed Income, Putnam Diversified Income, Smith
Barney High Income, MFS Total Return, Smith Barney Money Market and AIM
Capital Appreciation Portfolios of The Smith Barney/Travelers Series Fund
Inc.; Smith Barney Total Return Portfolio of the Smith Barney Series Fund;
three Zero Coupon Bond Fund Portfolios (Series 1998, 2000, 2005) of The
Travelers Series Trust. The Policy Owner bears the investment risk for all
amounts allocated to the underlying Investment Options.
The Policy has a Right to Cancel Period during which the applicant may
return the Policy to the Company for a refund. The Right to Cancel Period
expires on the latest of ten days after the Owner receives the Policy, ten
days after we mail or deliver a written Notice of Right to Cancel to the
Owner, or 45 days after the applicant signs the application for insurance (or
later, if state law requires).
It may not be advantageous to purchase this Policy as a replacement for
another type of life insurance or as a means to obtain additional insurance
protection if you already own a variable life insurance policy. Because the
Policy is designed to operate generally as a single premium policy, in all but
very limited circumstances the Policy will be treated as a modified endowment
contract for federal income tax purposes. As a modified endowment contract,
any loan, partial withdrawal, or surrender may result in adverse tax
consequences, including possible penalties. However, as with any life
insurance contract, (1) a Policy Owner generally should not be considered in
constructive receipt of the Policy's Cash Value, including incremental
increases therein, unless and until he or she is in actual receipt of
distributions from the Policy, and (2) Death Benefit payments should generally
be excluded from the gross income of the Policy beneficiary. A prospective
Policy Owner who wants to purchase a Policy that is not a modified endowment
contract should consult his or her personal tax adviser.
-------------------------------------------------------------------------------
INTRO -- 2
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS......................................... GLOSSARY -- 1
PROSPECTUS SUMMARY................................................. SUMMARY -- 1
THE INSURANCE COMPANY....................................................... 1
THE SEPARATE ACCOUNT........................................................ 1
Separate Account Three.................................................... 1
Addition, Deletion or Substitution of Investments......................... 2
THE INVESTMENT OPTIONS...................................................... 2
Investment Managers....................................................... 4
Mixed and Shared Funding.................................................. 4
THE POLICY.................................................................. 5
The Policy Application.................................................... 5
Eligible Purchasers....................................................... 5
Payments Made Under the Policy............................................ 6
Allocation of Premium Payments............................................ 7
Right to Cancel Period.................................................... 7
CHARGES AND DEDUCTIONS...................................................... 8
MONTHLY DEDUCTION AMOUNT.................................................. 8
Cost of Insurance Charge................................................ 8
State Premium Tax Charge................................................ 8
Charges for Supplemental Benefit Provisions............................. 9
CHARGES AGAINST THE INVESTMENT OPTIONS OF SEPARATE ACCOUNT THREE.......... 9
Mortality and Expense Risk Charge....................................... 9
Administrative Expense Charge........................................... 9
Income Taxes............................................................ 10
INVESTMENT OPTION EXPENSES................................................ 10
SURRENDER CHARGES......................................................... 10
TRANSFER CHARGE........................................................... 11
REDUCTION OR ELIMINATION OF CHARGES....................................... 11
VALUATION OF THE SEPARATE ACCOUNT........................................... 11
How the Cash Value Varies................................................. 11
How the Investment Experience is Determined............................... 12
Accumulation Unit Value................................................... 12
Net Investment Factor..................................................... 12
Valuation Periods and Valuation Dates..................................... 12
TRANSFERS OF CASH VALUE..................................................... 13
Telephone Transfers....................................................... 13
Automated Transfers (Dollar Cost Averaging)............................... 13
DEATH BENEFIT............................................................... 14
Changes in Death Benefit Option........................................... 15
Changes in Stated Amount.................................................. 15
Maturity and Maturity Extension Benefits.................................. 15
Policy Lapse and Reinstatement............................................ 16
Exchange Rights........................................................... 16
</TABLE>
--------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
POLICY SURRENDERS AND CASH SURRENDER VALUE................................. 17
Right to Surrender....................................................... 17
Full Surrenders.......................................................... 17
Partial Surrenders....................................................... 17
POLICY LOANS............................................................... 18
Risks Associated with Loans Taken Against a Variable Life Insurance Poli-
cy...................................................................... 18
PAYMENT OPTIONS............................................................ 19
OTHER MATTERS.............................................................. 19
Voting Rights............................................................ 19
Reports to Policy Owners................................................. 20
Limit on Right to Contest and Suicide Exclusion.......................... 20
Misstatement as to Sex and Age........................................... 21
Suspension of Valuation.................................................. 21
Beneficiary.............................................................. 21
Assignment............................................................... 21
Dividends................................................................ 21
FEDERAL TAX CONSIDERATIONS................................................. 21
General.................................................................. 21
TAX STATUS OF THE POLICY................................................. 22
Definition of Life Insurance............................................. 22
Diversification.......................................................... 22
Investor Control......................................................... 22
TAX TREATMENT OF POLICY BENEFITS......................................... 23
In General............................................................... 23
Modified Endowment Contracts............................................. 24
Exchanges................................................................ 24
Treatment of Loan Interest............................................... 25
Aggregation of Modified Endowment Contracts.............................. 25
THE COMPANY'S INCOME TAXES............................................... 25
MANAGEMENT................................................................. 26
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS............................... 27
DISTRIBUTION OF THE POLICY................................................. 27
LEGAL PROCEEDINGS AND OPINION.............................................. 28
REGISTRATION STATEMENT..................................................... 28
INDEPENDENT ACCOUNTANTS.................................................... 28
FINANCIAL STATEMENTS....................................................... 28
ILLUSTRATIONS.............................................................. 29
APPENDIX A--PERFORMANCE INFORMATION........................................ 34
APPENDIX B--DEATH BENEFIT EXAMPLES......................................... 35
APPENDIX C--REPRESENTATIVE STATED AMOUNTS.................................. 38
</TABLE>
--------------------------------------------------------------------------------
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
GLOSSARY OF SPECIAL TERMS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following terms are used throughout the Prospectus, and have the indicated
meanings:
ACCUMULATION UNIT -- a standard of measurement used to calculate the values
allocated to the investment options.
AVERAGE NET FUND GROWTH RATE -- an annual measurement of growth, used to
determine the next year's mortality and expense risk charge. The rate is
determined each calendar year as follows: total daily earnings of the
Investment Option(s) you select, divided by the average amount allocated
during the calendar year. The daily earnings are measured using the net
asset value per share of the Investment Options.
BENEFICIARY(IES) -- the person(s) named to receive the benefits of this Policy
at the Insured's death.
CASH SURRENDER VALUE -- the Cash Value less any outstanding policy loan and
surrender charges.
CASH VALUE -- the current value of Accumulation Units credited to each of the
Investment Options available under the Policy, plus the value of the Loan
Account.
COMPANY'S HOME OFFICE -- the principal executive offices of The Travelers
Insurance Company located at One Tower Square, Hartford, Connecticut 06183.
COVERAGE AMOUNT -- an amount equal to the Death Benefit minus the Cash Value.
DEATH BENEFIT -- the amount payable to the Beneficiary if the Insured dies
while the Policy is in force.
DEDUCTION DATE -- the day in each Policy Month on which the Monthly Deduction
Amount is deducted from the Policy's Cash Value.
GRACE PERIOD -- the period during which the Policy remains in force after the
Company has given notice to the Policy Owner that the Cash Surrender Value
of the Policy is insufficient to pay the Monthly Deduction Amount due.
INITIAL PREMIUM -- the Premium Payment made in connection with the issuance of
a Policy.
INSURED -- the person on whose life the Policy is issued.
INVESTMENT OPTIONS -- the open-end management investment companies or
portfolios thereof to which you may allocate premiums under Separate
Account Three.
ISSUE DATE -- the date on which the Policy is issued by the Company for
delivery to the Policy Owner.
LOAN ACCOUNT -- an account in the Company's general account to which we
transfer the amount of any policy loan, and to which we credit a fixed rate
of interest.
LOAN ACCOUNT VALUE -- the amount of any policy loan, plus capitalized loan
interest, plus the net rate of return credited to the Loan Account.
MATURITY DATE -- the anniversary of the Policy Date on which the Insured is
age 100.
MINIMUM AMOUNT INSURED -- a percentage of Cash Value required to qualify this
Policy as life insurance under federal tax law.
MONTHLY DEDUCTION AMOUNT -- a monthly charge, deducted from the Policy's Cash
Value, which is comprised of the Cost of Insurance charge, the deduction
for premium tax, and any charge for supplemental benefits.
-------------------------------------------------------------------------------
GLOSSARY -- 1
<PAGE>
POLICY DATE -- the date on which the Policy becomes effective, which date is
used to determine all future cyclical transactions under the Policy (i.e.,
Deduction Dates, Policy Months, Policy Years).
POLICY MONTH -- monthly periods computed from the Policy Date.
POLICY OWNER (YOU, YOUR OR OWNER) -- the person(s) having rights to benefits
under the Policy during the lifetime of the Insured; the Policy Owner may
or may not be the Insured.
POLICY YEARS -- annual periods computed from the Policy Date.
SEPARATE ACCOUNT THREE -- The Travelers Variable Life Insurance Separate
Account Three, a separate account established by The Travelers Insurance
Company for the purpose of funding this Policy.
STATED AMOUNT -- the amount used to determine the Death Benefit under the
Policy.
VALUATION DATE -- generally, a day on which Accumulation Units are valued. A
valuation date is any day on which the New York Stock Exchange is open for
trading. The value of Accumulation Units will be determined as of the close
of trading on the New York Stock Exchange.
VALUATION PERIOD -- the period between the close of business on successive
Valuation Dates.
-------------------------------------------------------------------------------
GLOSSARY -- 2
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PROSPECTUS SUMMARY
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INTRODUCTION
The Policy described in this Prospectus is an individual variable life
insurance contract which provides for a premium payment to be allocated to one
or more of the Investment Options available under Separate Account Three. The
Policy is credited with Accumulation Units of the applicable Investment
Options.
The Policy has a death benefit, cash surrender value and other features
traditionally associated with a fixed benefit whole life insurance policy. The
Policy is "variable" because unlike the fixed benefits of an ordinary whole
life insurance contract, the Cash Value and, under certain circumstances, the
Death Benefit of the Policy may increase or decrease depending on the
investment experience of the Investment Options to which the premium
payment(s) have been allocated. The Cash Value will also vary to reflect
partial cash surrenders and Monthly Deduction Amounts. In accordance with the
Continuation of Insurance provision of the Policy, the Policy will remain in
effect until the Cash Surrender Value is insufficient to cover the Monthly
Deduction Amount due. There is no minimum guaranteed Cash Value or Cash
Surrender Value and the Policy Owner bears the investment risk associated with
an investment in the Investment Options. (See "Valuation of the Separate
Account," page 11.)
WHAT TYPES OF VARIABLE INVESTMENT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy is funded by The Travelers Variable Life Insurance Separate
Account Three ("Separate Account Three"), a registered unit investment trust
separate account established by The Travelers Insurance Company (the
"Company"). Separate Account Three invests in certain mutual funds (the
"Investment Options"): The following Investment Options are currently
available under the Policy.
Smith Barney Income and Growth Portfolio MFS Total Return Portfolio
Alliance Growth Portfolio Smith Barney Money Market Portfolio
American Capital Enterprise Portfolio Smith Barney Total Return Portfolio
Smith Barney International Equity AIM Capital Appreciation Portfolio
Portfolio Travelers Zero Coupon Bond Fund
TBC Managed Income Portfolio Portfolio 1998
Putnam Diversified Income Portfolio Travelers Zero Coupon Bond Fund
Smith Barney High Income Portfolio Portfolio 2000
Further information regarding the investment objectives for each Investment
Option--including the investment manager--is contained under "The Investment
Options" on page 2 of this Prospectus. Complete descriptions of the Investment
Options investment objectives and restrictions and other material information
regarding the Funds is contained in each of the Underlying Fund
prospectuses.
Travelers Zero Coupon Bond Fund
Portfolio 2005
WHAT ARE THE REQUIRED AND PERMISSIBLE PREMIUM PAYMENTS?
The minimum Initial Premium is $25,000. Although the Policy can operate as a
single premium policy, additional payments may be made under certain
circumstances, provided there are no outstanding policy loans. If there are
any outstanding loans, any payment received will be treated first as a
repayment of the loan rather than an additional premium payment. (See
"Additional Premium Payments," page 6.) No premiums can be accepted if they
would disqualify the Policy as life insurance under federal tax law.
The Initial Premium purchases a Death Benefit initially equal to the
Policy's Stated Amount (if Option 1 is selected), or to the Stated Amount plus
the Cash Value (if Option 2 is selected). The relationship
--------------------------------------------------------------------------------
SUMMARY -- 1
<PAGE>
between the Initial Premium and the Stated Amount depends on the age and sex
of the Insured (as permitted by state law). Generally, the same Initial
Premium will purchase a slightly higher stated amount for a female Insured
than for a male Insured of the same age. Representative Stated Amounts per
dollar of Initial Premium are set forth in Appendix C.
HOW WILL PREMIUM PAYMENTS BE ALLOCATED?
During the Right to Cancel Period (as described below), the Initial Premium
will be allocated to the Smith Barney Money Market Portfolio. After the
expiration of the Right to Cancel Period, the values in the Money Market
Portfolio will be allocated to the Investment Options selected on the Policy
Application, and the Policy will be credited with the applicable Accumulation
Units. (See "Allocation of Premium Payments," page 7.)
AFTER THE INITIAL ALLOCATION, MAY I CHANGE THE ALLOCATION OF MY CASH VALUE?
As long as the Policy remains in force, you may transfer all or a portion of
your Policy's Cash Value (not including the Loan Account Value) among any of
the Investment Options. Currently, transfers may be made at any time without
charge. You may request a reallocation of your investment either through
written request, or by telephone in accordance with the Company's telephone
transfer procedures. (See "Transfers of Cash Value," page 13.)
You may also request that the Company establish automated transfers of Cash
Values from any Investment Option to any other Investment Option through
written request or other method acceptable to the Company. The minimum
automated transfer amount is $100 per month. (See "Automated Transfers," page
13.)
DOES THIS POLICY HAVE A RIGHT TO CANCEL PERIOD?
You have a limited right to return the Policy for cancellation and receive a
full refund. You must return the Policy, by mail or hand delivery, to the
Company or to the agent who sold the Policy during the Right to Cancel Period,
which ends 10 days after the Policy has been delivered to you, 45 days after
completion of the application, or 10 days after the Notice of Right to Cancel
has been mailed or delivered to you, whichever is latest. Within seven (7)
days following our receipt of your request for a refund, we will refund to you
the greater of (1) any premium paid, or (2) the Cash Value of the Policy on
the date we receive the returned policy, plus any charges and expenses which
may have been deducted, less any Loan Account Value. (See "Right to Cancel
Period," page 7.)
WHAT TYPES OF CHARGES ARE DEDUCTED UNDER THE POLICY?
MONTHLY DEDUCTION AMOUNT. Beginning on the Policy Date, the Company will
make monthly deductions from the Policy's Cash Value on a pro rata basis from
amounts allocated to the Investment Options. The Deduction Amount may vary
from month to month and includes the cost of insurance charges, the deduction
for premium tax, and any charges for supplemental benefits. (See "Monthly
Deduction Amount," page 8.)
CHARGES AGAINST THE INVESTMENT OPTIONS UNDER SEPARATE ACCOUNT THREE. In
order to cover the Company's assumption of mortality and expense risks under
the Policy, the Company assesses a daily charge against the assets allocated
to the Investment Options on a pro rata basis at an annual rate of 0.90% of
such assets. This rate will be reduced to 0.75% for the current calendar year
if the Average Net
--------------------------------------------------------------------------------
SUMMARY -- 2
<PAGE>
Fund Growth Rate of the investment options which you have selected under your
Policy was 6.5% or greater for the previous calendar year. This determination
will be made on an annual basis.
The Company also assesses a daily charge against the amounts allocated to
the Investment Options at an annual rate of 0.40% to cover administrative
expenses assumed by the Company. This administrative expense charge does not
exceed the expected cost of administrative services provided by the Company
under the Policy. (See "Charges Against the Investment Options of Separate
Account Three," page 9.)
Currently, the Company makes no charge against the Separate Account for
federal income taxes since the Company does not expect to incur federal income
taxes attributable to the Separate Account. However, if the Company incurs
federal income taxes attributable to the Separate Account in future years, it
may charge for those taxes.
CHARGES AGAINST THE INVESTMENT OPTIONS. The Separate Account purchases
shares of the Investment Options at net asset value. The net asset value of
each Investment Option reflects investment advisory fees and other expenses
already deducted. Applicants should review the prospectuses for each
Investment Option for a description of the charges assessed. (See "Charges
Against the Investment Options of Separate Account Three," page 9.)
SURRENDER CHARGES. A percent of premium surrender charge will be assessed
upon a full surrender of the Policy during the first nine years after a
Premium Payment is received by the Company. For the first two years following
a Premium Payment, the surrender charge will be 7.5% of such Premium Payment.
Thereafter, the charge will decline in years three (3) through nine (9),
respectively, as follows: 7%, 7%, 6.5%, 6%, 5%, 4% and 3%. The surrender
charge will be 0% starting in the tenth year following a Premium Payment.
Partial surrenders will also be subject to a surrender charge, except that
after the first Policy Year the Company will permit partial surrenders of the
Policy's earnings in an amount of up to 10% of the Policy's Cash Value as of
the beginning of the current Policy Year. For partial surrenders in excess of
the free withdrawal amount, a charge equal to a percentage of the amount
surrendered, not to exceed the charge that would apply to a full surrender,
will apply. (See "Surrender Charges," page 10.)
TRANSFER CHARGES. The Company reserves the right to charge a reasonable
administrative fee (up to $10) for each transfer in excess of four (4) per
Policy Year, and reserves the right to assess a processing fee for the
Automated Transfer (Dollar Cost Averaging) service.
WHAT IS THE DEATH BENEFIT UNDER THE POLICY?
The Policy provides for a death benefit upon the death of the Insured. You
may choose one of two options to be used for the calculation of the Death
Benefit payable under the Policy. Under Option 1 (the Level Option), the Death
Benefit will be equal to the greater of the Stated Amount of the Policy or the
Minimum Amount Insured. Under Option 2 (the Variable Option), the Death
Benefit will be equal to the greater of the Stated Amount of the Policy plus
the Cash Value (determined as of the date of the Insured's death) or the
Minimum Amount Insured. Under both options, the Death Benefit will be reduced
by any applicable Loan Account Value, unpaid Monthly Deduction Amount, and any
amount payable to an assignee pursuant to a collateral assignment of the
Policy. You may change the Death Benefit option or the Stated Amount subject
to certain conditions. (See "Death Benefit," page 14.)
MAY I TAKE A POLICY LOAN AGAINST THE CASH VALUE OF MY POLICY?
You may request a Policy Loan in an amount not to exceed 90% of the Policy's
Cash Value minus surrender penalties (determined at the time the Company
receives the written loan request). If there is a
--------------------------------------------------------------------------------
SUMMARY -- 3
<PAGE>
loan outstanding at the time a subsequent loan request is made, the amount of
the outstanding loan will be added to the new loan amount. The Company will
charge interest on the outstanding amounts of the loan, which interest must be
paid in advance by the Policy Owner.
The amount of the loan will be transferred on a pro rata basis from each of
the Investment Options (unless the Owner states otherwise in writing) to the
Loan Account, which is part of the Company's general account. The Loan Account
is credited with a fixed annual rate of interest set forth in the Policy. The
Loan Account Value does not vary with the performance of the Investment
Options; therefore, the Policy's Death Benefit and Cash Value will be
permanently affected by a loan. Additionally, any outstanding Loan Account
Value will be subtracted from any Death Benefit or surrender proceeds payable
under the Policy. Subject to state law, no loan requests may be made for
amounts of less than $500. Policy loans may have federal income tax
consequences. (See "Policy Loans," page 18, and "Federal Tax Considerations,"
page 22.)
WHAT ARE THE CONDITIONS UNDER WHICH MY POLICY MIGHT LAPSE?
If the Cash Surrender Value of a Policy on any Deduction Date is
insufficient to cover the Monthly Deduction Amount due, the Company will send
you a written notice of the required premium. If the required premium is not
paid within 61 days, the Policy may lapse. In addition, outstanding loans
decrease the Cash Surrender Value and could, therefore, cause the Policy to
lapse. (See "Policy Loans," page 18, and "Policy Lapse and Reinstatement,"
page 16.) If a Policy lapses with a loan outstanding, adverse tax consequences
may result. (See "Federal Tax Considerations," page 22.)
ARE THERE ANY OTHER POLICY PROVISIONS THAT I SHOULD KNOW ABOUT?
SURRENDERS AND PARTIAL WITHDRAWALS. The Policy may be surrendered at any
time for its Cash Surrender Value. In addition, partial withdrawals may be
made. Surrenders or partial withdrawals made within nine years of a premium
payment may be subject to a surrender charge. (See "Policy Surrenders and Cash
Surrender Value," page 17.)
RIGHT TO EXCHANGE THE POLICY. Once the Policy is in effect, you may exchange
it at any time during the first two Policy Years for a fixed life insurance
policy issued by the Company (or one of its affiliates, if allowed) on the
life of the Insured without submitting proof of insurability. (See "Exchange
Rights," page 17.)
PAYMENT OF POLICY BENEFITS. Surrender and death benefits under the Policy
may be paid in a lump sum or under one of the payment options set forth in the
Policy. (See "Payment Options," page 19.)
SPECIAL TAX CONSIDERATIONS. The Company believes that a Policy issued on a
standard rate class basis generally should meet the Section 7702 definition of
a life insurance contract. With respect to a Policy issued on a substandard
basis, there is insufficient guidance to determine if such a Policy would
satisfy the Section 7702 definition of a life insurance contract, particularly
if you pay the full amount of premiums permitted under such a Policy. Assuming
that a Policy qualifies as a life insurance contract for federal income tax
purposes, you should not be deemed to be in constructive receipt of Cash Value
under a Policy until there is a distribution from the Policy. Moreover, death
benefits payable under a Policy should be completely excludable from the gross
income of the Beneficiary. As a result, the Beneficiary generally should not
be taxed on these proceeds. (See "Tax Status of the Policy," page 22.)
In almost all cases, the Policy will be a modified endowment contract
("MEC"). If a Policy is a MEC, certain distributions made during an Insured's
lifetime, such as loans and partial withdrawals from, and collateral
assignments of, the Policy, are taxable to you on an income-first basis. A 10%
penalty tax may
--------------------------------------------------------------------------------
SUMMARY -- 4
<PAGE>
-------------------------------------------------------------------------------
be imposed on income distributed before you attain age 59 1/2. Policies that
are not MECs receive preferential tax treatment with respect to certain
distributions. For a discussion of the tax issues associated with this Policy,
see "Federal Tax Considerations" on page 22.
WRITTEN REQUESTS
Certain changes and elections must be made in writing to the Company. Where
the term "written request" is used, it means that written information must be
sent to the Company's Home Office in a form and content satisfactory to the
Company.
-------------------------------------------------------------------------------
SUMMARY -- 5
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
THE INSURANCE COMPANY
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Travelers Insurance Company (the "Company") is a stock insurance company
which has been continuously engaged in the insurance business since its
incorporation in the state of Connecticut in 1864. The Company writes
individual life insurance and individual and group annuity contracts on a
nonparticipating basis, and acts as the depositor for Separate Account Three.
The Company is licensed to conduct life insurance business in all states of
the United States, the District of Columbia, Puerto Rico, Guam, the British
and U.S. Virgin Islands and the Bahamas. The Company's obligations as
depositor for Separate Account Three may not be transferred without notice to
and consent of Policy Owners.
The Company is a wholly owned subsidiary of The Travelers Insurance Group
Inc., which is an indirect wholly owned subsidiary of Travelers Group Inc. The
Company's principal executive offices are located at One Tower Square,
Hartford, Connecticut 06183, telephone number (203) 277-0111.
The Company is subject to Connecticut law governing insurance companies and
is regulated and supervised by the Connecticut Insurance Commissioner. An
annual statement in a prescribed form must be filed with the Commissioner on
or before March 1 in each year covering the operations of the Company for the
preceding year and its financial condition on December 31 of such year. The
Company's books and assets are subject to review or examination by the
Commissioner or his agents at all times, and a full examination of its
operations is conducted by the National Association of Insurance Commissioners
at least once every four years. In addition, the Company is subject to the
insurance laws and regulations of any jurisdiction in which it sells its
insurance contracts, as well as to various federal and state securities laws
and regulations.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
THE SEPARATE ACCOUNT
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SEPARATE ACCOUNT THREE
The Travelers Variable Life Insurance Separate Account Three was established
on September 23, 1994 pursuant to the insurance laws of the state of
Connecticut, and is registered with the Securities and Exchange Commission
("SEC") as a unit investment trust under the Investment Company Act of 1940,
as amended (the "1940 Act"). Separate Account Three meets the definition of a
separate account under the federal securities laws. Registration of Separate
Account Three with the SEC does not involve supervision by the SEC of the
management or investment policies of Separate Account Three. Additionally, the
operations of Separate Account Three are subject to the provisions of Section
38a-433 of the Connecticut General Statutes which authorizes the Connecticut
Insurance Commissioner to adopt regulations under it. Section 38a-433 contains
no restrictions on the investments of Separate Account Three.
Connecticut law provides that the assets of Separate Account Three will be
held for the exclusive benefit of Policy Owners and the persons entitled to
payments under the Policy offered by this Prospectus and other policies that
may be funded through Separate Account Three. The Policies provide that the
assets of Separate Account Three are not chargeable with liabilities arising
out of any other business which the Company may conduct. Any obligations
arising under the Policy are general corporate obligations of the Company.
-------------------------------------------------------------------------------
1
<PAGE>
There are currently fourteen Investment Options available under Separate
Account Three.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to state and federal laws, to make
additions to, deletions from, or substitutions for Separate Account Three and
the Investment Options which fund the Policy. The Company can substitute
shares or units of another mutual fund or unit investment trust for shares or
units of another Investment Option if: (a) it is determined that an Investment
Option no longer suits the purpose of the Policy due to a change in its
investment objectives or restrictions; (b) the shares or units of an
Investment Option are no longer available for investment; (c) in the Company's
view, it has become inappropriate to continue investing in the shares or units
of an Investment Option. Substitution may be made with respect to both
existing investments and the investment of any future Premium Payments.
However, no substitution of securities will be made without prior notice to
you, and without prior approval of the SEC or such other regulatory
authorities as may be necessary, all to the extent required by the 1940 Act or
other applicable law.
Subject to Policy Owner approval and applicable law, the Company reserves
the right to end Separate Account Three's registration under the 1940 Act.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
THE INVESTMENT OPTIONS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
You may allocate Premium Payments to one or more of the available Investment
Options. Each Investment Option is a series of an open-end management
investment company registered with the SEC under the 1940 Act. Such
registration does not involve supervision by the SEC of the investments or
investment policy of an Investment Option.
The investments of each funding option are subject to the risks of changing
economic conditions and the ability of each Investment Option's investment
manager or sub-adviser to anticipate such changes. There is no assurance that
the Investment Options will achieve their stated objectives. Please read
carefully the complete risk disclosure in each Portfolio's prospectus before
investing.
The Investment Options and their investment objectives are as follows:
SMITH BARNEY/TRAVELERS SERIES FUND, INC.
SMITH BARNEY INCOME AND GROWTH PORTFOLIO. The objectives of the Income and
Growth Portfolio are current income and long-term growth of income and
capital by investing primarily, but not exclusively, in common stocks.
ALLIANCE GROWTH PORTFOLIO. The objective of the Growth Portfolio is long-
term growth of capital by investing predominantly in equity securities of
companies with a favorable outlook for earnings and whose rate of growth is
expected to exceed that of the U.S. economy over time. Current income is
only an incidental consideration.
AMERICAN CAPITAL ENTERPRISE PORTFOLIO. The Enterprise Portfolio's objective
is capital appreciation through investment in securities believed to have
above-average potential for capital appreciation. Any income received on
such securities is incidental to the objective of capital appreciation.
-------------------------------------------------------------------------------
2
<PAGE>
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO. The objective of the
International Equity Portfolio is total return on assets from growth of
capital and income by investing at least 65% of its assets in a diversified
portfolio of equity securities of established non-U.S. issuers.
TBC MANAGED INCOME PORTFOLIO. The objective of the Managed Income Portfolio
is to seek high current income consistent with prudent risk of capital
through investments in corporate debt obligations, preferred stocks, and
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
PUTNAM DIVERSIFIED INCOME PORTFOLIO. The objective of the Diversified
Income Portfolio is to seek high current income consistent with
preservation of capital. The Portfolio will allocate its investments among
the U.S. Government Sector, the High Yield Sector, and the International
Sector of the fixed income securities markets.
SMITH BARNEY HIGH INCOME PORTFOLIO. The investment objective of the High
Income Portfolio is high current income. Capital appreciation is a
secondary objective. The Portfolio will invest at least 65% of its assets
in high-yielding corporate debt obligations and preferred stock.
MFS TOTAL RETURN PORTFOLIO (A BALANCED PORTFOLIO). The Total Return
Portfolio's objective is to obtain above-average income (compared to a
portfolio entirely invested in equity securities) consistent with the
prudent employment of capital. While current income is the primary
objective, the Portfolio believes that there should also be a reasonable
opportunity for growth of capital and income since many securities offering
a better than average yield may also possess growth potential. Thus, in
selecting securities for its portfolio, the Portfolio considers each of
these objectives. Generally, at least 40% of the Portfolio's assets will be
invested in equity securities.
SMITH BARNEY MONEY MARKET PORTFOLIO. The investment objective of the Money
Market Portfolio is maximum current income and preservation of capital by
investing in high quality, short-term money market instruments.
AIM CAPITAL APPRECIATION PORTFOLIO. The investment objective of the AIM
Capital Appreciation Portfolio is to seek capital appreciation by investing
principally in common stock, with emphasis on medium sized and smaller
emerging growth companies.
SMITH BARNEY SERIES FUND
SMITH BARNEY TOTAL RETURN PORTFOLIO (AN EQUITY PORTFOLIO). The investment
objective of the Smith Barney Total Return Portfolio is total return,
consisting of long-term capital appreciation and income. The Portfolio will
seek to achieve its goal by investing primarily in a diversified portfolio
of dividend-paying common stocks.
THE TRAVELERS SERIES TRUST
TRAVELERS ZERO COUPON BOND FUND PORTFOLIOS (THREE PORTFOLIOS: SERIES 1998,
2000, 2005). The investment objectives of each of the Zero Coupon Bond Fund
Portfolios is to provide as high an investment return as is consistent with
the preservation of capital investing in primarily zero coupon securities
that pay cash income but are acquired by the Portfolio at substantial
discounts from their values at maturity. The Zero Coupon Bond Fund
Portfolios may not be appropriate for Policy Owners who do not plan to have
their premiums invested in shares of the Portfolios for the long-term or
until maturity.
-------------------------------------------------------------------------------
3
<PAGE>
INVESTMENT MANAGERS
The Investment Options receive investment management and advisory services
from the following investment professionals:
<TABLE>
---------------------------------------------------------------------------------------
<CAPTION>
FUND INVESTMENT MANAGER SUB-ADVISER
---------------------------------------------------------------------------------------
<S> <C> <C>
Smith Barney Income and Smith Barney Mutual Funds
Growth Portfolio Management Inc.
---------------------------------------------------------------------------------------
Alliance Growth Smith Barney Mutual Funds Alliance Capital Management L.P.
Portfolio Management Inc.
---------------------------------------------------------------------------------------
American Capital Smith Barney Mutual Funds American Capital Asset
Enterprise Portfolio Management Inc. Management, Inc.
---------------------------------------------------------------------------------------
Smith Barney Smith Barney Mutual Funds
International Equity Management Inc.
Portfolio
---------------------------------------------------------------------------------------
TBC Managed Income Smith Barney Mutual Funds The Boston Company Asset
Portfolio Management Inc. Management, Inc.
---------------------------------------------------------------------------------------
Putnam Diversified Smith Barney Mutual Funds Putnam Investment
Income Portfolio Management Inc. Management, Inc.
---------------------------------------------------------------------------------------
Smith Barney High Income Smith Barney Mutual Funds
Portfolio Management Inc.
---------------------------------------------------------------------------------------
MFS Total Return Smith Barney Mutual Funds Massachusetts Financial Services
Portfolio Management Inc. Company
---------------------------------------------------------------------------------------
Smith Barney Money Smith Barney Mutual Funds
Market Portfolio Management Inc.
---------------------------------------------------------------------------------------
AIM Capital Appreciation AIM Capital Management, Inc.
Portfolio
---------------------------------------------------------------------------------------
Smith Barney Total Smith Barney Mutual Funds
Return Portfolio Management Inc.
---------------------------------------------------------------------------------------
Zero Coupon Bond Fund Travelers Asset Management
Portfolios (Series International Corp.
1998, 2000, 2005)
---------------------------------------------------------------------------------------
</TABLE>
Smith Barney Mutual Funds Management Inc. ("SBMFM"), an affiliate of the
Company, receives an investment advisory fee from each applicable Investment
Option pursuant to the terms of an investment advisory agreement between the
Investment Option and SBMFM. SBMFM then pays each Sub-Adviser a sub-advisory
fee pursuant to the terms of a sub-advisory agreement among the Investment
Options, SBMFM and the sub-advisor. For the Travelers Zero Coupon Bond Fund
Portfolios, Travelers Asset Management International Corporation ("TAMIC"), an
affiliate of the Company, receives an investment advisory fee pursuant to an
agreement between the Portfolios and TAMIC. More detailed information
regarding the Investment Options and the investment managers may be found in
the current prospectuses for the Investment Options; these prospectuses are
included with and must accompany this Prospectus. You are urged to read these
documents carefully before investing.
MIXED AND SHARED FUNDING
It is conceivable that in the future it may not be advantageous for Separate
Account Three and other variable life insurance or variable annuity separate
accounts to invest in the Investment Options simultaneously (called "mixed"
and "shared" funding). Although neither the Company nor the Investment Options
currently foresees any such disadvantages either to variable life insurance or
to variable annuity Policy Owners, the Investment Options' Boards of Directors
intends to monitor events to identify any
-------------------------------------------------------------------------------
4
<PAGE>
material conflicts between such policy owners and to determine what action, if
any, should be taken in response thereto. Conflicts could arise due to changes
in the law (such as insurance law or federal tax law) that affect the
different variable life insurance and variable annuity separate accounts
investing in the Investment Options. They could also arise by reason of
differences in voting instructions from the Policy Owners and owners of other
variable life insurance policies and variable annuity contracts, or for other
reasons.
If an Investment Option's Boards of Directors concludes that separate mutual
funds should be established for variable life insurance and variable annuity
separate accounts, the Company will bear the attendant expenses, but variable
life insurance and variable annuity Policy Owners would no longer have the
economies of scale resulting from a larger combined fund. Please consult the
prospectuses of the Investment Options for additional information.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
THE POLICY
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Policy described in this Prospectus is a variable life insurance policy
which is both an insurance product and a security. The Policy has a Death
Benefit, cash surrender value and other features traditionally associated with
a fixed benefit whole life policy. The Policy is deemed to be "variable"
because unlike the fixed benefits of an ordinary whole life insurance
contract, the Policy's Cash Value and, under certain circumstances, the Death
Benefit may increase or decrease depending on the investment experience of the
Investment Option(s) to which the Premium Payment has been allocated.
As an insurance product, the Policy is subject to the insurance laws and
regulations of each state or jurisdiction in which it is available for
distribution. There may be differences between the Policy issued and the
general policy description contained in this Prospectus because of
requirements of the state where your Policy is issued. Any such differences
will be included in your Policy.
THE POLICY APPLICATION
Individuals wishing to purchase a Policy must submit an application to the
Company. As with traditional insurance contracts, you pay an initial premium,
which must be at least $25,000. You may request an increase or decrease in the
Stated Amount of the Policy in writing from time to time. (See "Changes in
Stated Amount," page 15.) No change in the terms or conditions of the Policy
will be made without your consent.
ELIGIBLE PURCHASERS
A person can purchase a Policy to insure the life of another person provided
that the Policy Owner has an insurable interest in the life of the Insured,
and the Insured consents to such purchase. In most states, any person between
the ages of 20 and 80 is eligible to be insured subject to the submission of a
Policy Application to the Company. In some states, the maximum issue age may
be lower. Insurance coverage under a Policy will begin only after the
applicant has satisfied all outstanding underwriting delivery requirements,
and after the Company has received the Initial Premium. Acceptance of an
application is subject to the Company's underwriting rules. The Company
reserves the right to reject an application for any lawful reason, provided
that such rejection is made in a manner consistent with that with which
similarly situated risks are treated and provided that unfair discrimination
is avoided.
-------------------------------------------------------------------------------
5
<PAGE>
The Company assigns Insureds to risk classes which determine the current
cost of insurance rates used in calculating the cost of insurance charge under
the Policy. Policies may be issued on Insureds either in the standard non-
smoker or smoker risk class. To the extent permitted by state law, Policies
may also be issued on the basis of the sex of the Insured. Policies may also
be issued on insureds in a sub-standard underwriting class. (For a discussion
of the effect of risk class on the cost of insurance charge, see "Cost of
Insurance Charge" on page 8.)
PAYMENTS MADE UNDER THE POLICY
INITIAL PREMIUM. The Initial Premium is due on or before the Policy Date and
is payable in full at the Company's Home Office. The Initial Premium is the
guideline single premium for the life insurance coverage provided under the
Policy, as determined in accordance with the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). The minimum Initial Premium is $25,000.
Additional Premium Payments may be made under the Policy, as described below.
However, if there are any outstanding policy loans, any payment received will
be treated first as repayment of loans rather than as an additional Premium
Payment.
The Initial Premium purchases a Death Benefit equal to the Policy's Stated
Amount (if Option 1 is selected), or to the Policy's Stated Amount plus the
Cash Value (if Option 2 is selected). The relationship between the Initial
Premium and the Stated Amount depends on the age, sex (where permitted by
state law) and risk class of the Insured. Generally, the same Initial Premium
will purchase a higher Stated Amount for a younger insured than for an older
insured. Likewise, the same Initial Premium will purchase a slightly higher
Stated Amount for a female insured than for a male insured of the same age.
Also, the same Initial Premium will purchase a higher Stated Amount for a
standard Insured than for a substandard Insured. Representative Stated Amounts
per dollar of Initial Premium are set forth in Appendix C.
ADDITIONAL PREMIUM PAYMENTS. Although the Policy can operate as a single
premium policy, additional Premium Payments may be made under certain
circumstances, provided there are no outstanding loans. If there are any
outstanding loans, any payment received by the Company will be considered
repayment of that debt. The circumstances under which additional Premium
Payments can be made under the Policy are as follows:
1. INCREASES IN STATED AMOUNT -- You may request an increase in Stated Amount
at any time. If your request is approved, the Company will require you to
make an additional Premium Payment in order for an increase in Stated
Amount to become effective. The minimum additional Premium Payment
permitted by the Company in connection with an increase in Stated Amount is
$1,000. (See "Changes in Stated Amount," page 15.)
2. TO PREVENT LAPSE -- If the Cash Surrender Value on any Deduction Day is
insufficient to cover the Monthly Deduction Amount due on that day, then
you must make an additional Premium Payment during the Grace Period
sufficient to cover the Monthly Deduction Amount in order to prevent lapse.
The minimum amount of any payment that may be required to be made in this
circumstance will be stated in the Notice mailed to you in accordance with
the Policy; payments in excess of the amount required to prevent lapse will
be considered a payment "at your discretion" and consequently subject to
the rules described below. If you do not make a sufficient payment, the
Policy will lapse and terminate without value. (See "Policy Lapse and
Reinstatement," page 16.)
3. AT YOUR DISCRETION -- Additional Premium Payments may be made at your
discretion so long as the payment plus the total of all premiums previously
paid does not exceed the maximum premium limitation derived from the
guideline premium test for life insurance prescribed by the Internal
-------------------------------------------------------------------------------
6
<PAGE>
Revenue Code. Because of the test, the maximum premium limitation will
ordinarily equal the Initial Premium for a number of years after the Policy
has been issued. Therefore, discretionary additional Premium Payments
normally will not be permitted during the early years of the Policy.
Discretionary additional Premium Payments must be at least $250, and may
not be paid on or after the Maturity Date.
Any Additional Premium Payments made under the Policy may be subject to new
evidence of insurability. Payments received in excess of any Loan Account
Value will be treated as an additional Premium Payment.
ALLOCATION OF PREMIUM PAYMENTS
You specify on the Policy Application how the Initial Premium will be
allocated among the Investment Options of Separate Account Three. You may
allocate premium to one or more Investment Options, provided that such
allocation is made in whole percentages of 5% or more.
Regardless of the allocation made in the application, during the period
between premium receipt and policy issuance (the "Underwriting Period"), the
Initial Premium will be held by the Company in a general suspense account
established for such purposes. At the time a Policy is issued, the Initial
Premium attributable to such Policy will be credited with interest comparable
to the effective yield during the Underwriting Period of the Money Market
Portfolio (e.g., as if the Policy had been issued and the premium allocated to
the Money Market Portfolio on the date the premium was received in good order
by the Company), which amount will become the initial Cash Value of the
Policy. The Cash Value will then be allocated to the Money Market Portfolio
until the expiration of the Right to Cancel Period. At the end of the Right to
Cancel Period, the Cash Value in the Money Market Portfolio will be allocated
(in whole percentages of 5% or more) among the Investment Options designated
on the Policy Application. The number of Accumulation Units to be credited to
the Policy once a Premium Payment has been received by the Company will be
determined by dividing the amount of Premium Payment applied to each
Investment Option by the Accumulation Unit Value of that Investment Option, as
computed on the next valuation date following receipt of the payment.
You may change the allocation of Cash Value or any Additional Premiums
received on or after the expiration of the Right to Cancel Period among any of
the Investment Options then available under the Policy. (See "Transfers of
Cash Value," page 13.) You should periodically review the allocation of Cash
Value in light of market conditions and overall financial planning
requirements to ensure that such allocation continues to be consistent with
your investment objectives.
RIGHT TO CANCEL PERIOD
A Policy may be returned to the Company for cancellation by mailing or
delivering it to the Company or to the agent who sold the Policy within the
latest of (1) 10 days after delivery of the Policy to you, (2) 45 days of
completion of the policy application, or (3) 10 days after the Notice of Right
to Cancel has been mailed or delivered to you (or later, if state law
requires).
Within seven days following the Company's receipt of your request for a
refund, the Company will refund the greater of (1) any premium paid, or (2)
the Cash Value of the Policy on the date we receive the returned policy, plus
any charges or expenses which may have been deducted less any Loan Account
Value. After the Policy is returned, it will be considered as if it were never
in effect.
-------------------------------------------------------------------------------
7
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
MONTHLY DEDUCTION AMOUNT
The Company will deduct a Monthly Deduction Amount from the Policy's Cash
Value attributable to the Investment Options to cover certain charges and
expenses incurred in connection with the Policy. The Monthly Deduction Amount
will be deducted pro rata from each of the Investment Options attributable to
the Policy on the first day of each Policy Month (the "Deduction Date"),
commencing on the Policy Date. The dollar amount of the Deduction Amount may
vary from month to month.
The following is a summary of monthly charges and expenses which make up the
Monthly Deduction Amount.
COST OF INSURANCE CHARGE
The cost of insurance charge is to cover the Company's expected
mortality cost for basic insurance coverage, not including supplemental
benefit provisions. The cost of insurance charge is deducted monthly, and
is equal to the difference between the Death Benefit payable under the
Policy (discounted at the rate set forth in the Policy) and the Cash Value
of the Policy (each determined on the Deduction Date) (the "Coverage
Amount"), multiplied by a monthly "cost of insurance rate," i.e., a
monthly rate charged for each dollar of insurance coverage. The cost of
insurance rate varies annually and is based on the attained age, sex
(where permitted by state law) and risk class of the Insured.
The cost of insurance rate for standard risks will not exceed those
based on the 1980 Commissioners Standard Ordinary Mortality Tables ("1980
Tables"). Substandard risks will have monthly deductions based on cost of
insurance rates which may be higher than those set forth in the 1980
Tables. A table of guaranteed cost of insurance rates per $1,000 will be
included in each Policy; however, the Company reserves the right to use
rates less than those shown in the Policy. Any changes in the cost of
insurance rates will be made uniformly for all Insureds in the same class.
Because the Cash Value and, under certain conditions, the Death Benefit
of a Policy may vary from month to month, the cost of insurance charge may
also vary on each Deduction Date. In addition, you should note that the
cost of insurance charge is based on the difference between the Death
Benefit payable under the Policy and the Cash Value of the Policy. An
increase in the Cash Value or a decrease in the Death Benefit would result
in a smaller cost of insurance charge assuming that everything else
remains the same; while a decrease in the Cash Value or an increase in the
Death Benefit would result in a larger cost of insurance charge.
Changes in the Policy's Death Benefit option and in the Stated Amount
will affect how the cost of insurance charge is calculated. See "Changes
in Death Benefit Option," page 15 and "Changes in Stated Amount," page 15
for a discussion of the effect of changes in the Stated Amount on the cost
of insurance.
STATE PREMIUM TAX CHARGE
Premium tax charges are not deducted at the time that a premium payment
is made, although the Company does pay state premium taxes attributable to
a particular Policy when those taxes are
-------------------------------------------------------------------------------
8
<PAGE>
incurred. To reimburse the Company for the payment of such taxes, during
the first ten years following the Policy Date, the Company will deduct a
premium tax charge of 0.0166667% from the Policy's Cash Value on each
Deduction Date, irrespective of whether additional Premium Payments have
been made. If an additional Premium Payment is made during the first ten
Policy Years, then after Policy Year 10, the Company will deduct a premium
tax charge of 0.0166667% of the portion of the Cash Value attributable to
the additional Premium Payment. The portion of the Cash Value attributable
to the additional Premium Payment is calculated by dividing (a) by (b),
where (a) is the amount of the additional Premium Payment, and (b) is the
Policy's Cash Value immediately after receipt of the additional Premium
Payment. Each additional Premium Payment made during the first ten Policy
Years has a portion of the Cash Value attributable to it, as defined
above. These deductions will continue until ten years following the
date(s) on which an additional Premium Payment was made. If no additional
Premium Payments are made during the first ten Policy Years, deductions
for the premium tax charge will not be made after Policy Year 10. The
premium tax charge is equivalent to an annual rate of 0.20%.
Premium taxes vary from state to state and currently range from 0.75% to
3.5%. Because there is a range of premium tax rates, you may pay premium
tax charges in total that are higher or lower than the premium tax
actually assessed in your jurisdiction.
CHARGES FOR SUPPLEMENTAL BENEFIT PROVISIONS
Although there are no supplemental benefits provisions available under
the Policy as of the date of this Prospectus, the Company may, at some
time in the future, offer supplemental benefits to be purchased under the
Policy for an additional charge. If you elect any such supplemental
benefits provisions, the Company will include the supplemental benefits
charge in the Monthly Deduction Amount. The amount of this charge will
vary depending upon the actual supplemental benefits selected.
CHARGES AGAINST THE INVESTMENT OPTIONS OF SEPARATE ACCOUNT THREE
MORTALITY AND EXPENSE RISK CHARGE
A mortality and expense risk charge will be deducted from each
Investment Option to compensate the Company for mortality and expense
risks assumed in connection with the Policy. The charge will be deducted
daily and equals 0.002466% for each day in the Valuation Period. The
annual rate of the charge is 0.90%. The annual rate of the mortality and
expense risk charge will be reduced to 0.75% for the current calendar year
if the Average Net Fund Growth Rate is 6.5% or greater during the previous
calendar year. This determination will be made on an annual basis.
The mortality risk assumed is that Insureds may live for a shorter
period of time than estimated and, therefore, a greater amount of Death
Benefit proceeds than expected will be payable. The expense risk assumed
is that expenses incurred in issuing and administering the Policy will be
greater than estimated and, therefore, will exceed the administrative
expense charge imposed by the Policy. If all money collected by the
Company from this charge is not needed to cover the mortality and expense
costs, the excess will be contributed to the Company's general account.
ADMINISTRATIVE EXPENSE CHARGE
A charge will be deducted from each Investment Option to compensate the
Company for certain administrative expenses incurred in connection with
the Policy. The charge will be deducted daily
-------------------------------------------------------------------------------
9
<PAGE>
and equals 0.001096% for each day in a Valuation Period. The annual rate
of this charge is 0.40%. The administrative expense charge will compensate
the Company for the issuance, underwriting, processing, start-up and
ongoing administrative expenses of the Policy and the Separate Account.
These expenses include the cost of processing applications; conducting
medical examinations; determining insurability; establishing and
maintaining policy and Separate Account records; processing death benefit
claims, surrenders, transfers, policy loans and changes; and reporting and
overhead costs. The Company has set this charge at a level which is
intended to recover no more than the actual expected costs of the
administrative services to be provided while the Policies are in force.
INCOME TAXES
Although the Company does not currently incur any charge for income
taxes as a result of the operations of the Investment Options, the Company
reserves the right to assess a charge for such taxes if it determines that
such taxes will be incurred. (See "Federal Tax Considerations," page 22.)
INVESTMENT OPTION EXPENSES
Separate Account Three purchases shares of the Investment Options at net
asset value. The net asset value of the Investment Option shares reflects
investment advisory fees and other expenses already deducted. The investment
advisory fees and other expenses applicable to each of the Investment Options
are described in the individual Investment Option prospectuses.
SURRENDER CHARGES
A percent of premium surrender charge will be imposed upon full surrenders
of the Policy that occur within nine (9) years after the Company has received
any Premium Payments under the Policy. For partial surrenders a percentage of
amount surrendered will be charged. This charge is intended to cover certain
expenses relating to the sale of the Policy, including commissions to
registered representatives and other promotional expenses. To the extent that
the surrender charges assessed under the Policy are less than the sales
commissions paid with respect to the Policy, the Company will pay the
shortfall from its general account assets, which will include any profits it
may derive from charges imposed under the Policy. (See also "Policy Surrenders
and Cash Surrender Value," page 17.) Surrenders charges are determined as
follows:
<TABLE>
<CAPTION>
LENGTH OF TIME FROM FULL SURRENDERS PARTIAL SURRENDERS
PREMIUM PAYMENT (% OF PREMIUM) (% OF AMOUNT SURRENDERED)
------------------- --------------- -------------------------
<S> <C> <C>
1-2 years 7.5% 7.5%
3-4 7% 7%
5 6.5% 6.5%
6 6% 6%
7 5% 5%
8 4% 4%
9 3% 3%
Year 10 and Thereafter 0% 0%
</TABLE>
PARTIAL SURRENDERS. The Company will impose a surrender charge equal to a
percentage of the amount surrendered for partial surrenders in excess of the
free withdrawal amount described below. The surrender charge will be limited
so that the total charge for partial surrenders will not exceed the charge
that would apply to a full surrender of the Policy.
-------------------------------------------------------------------------------
10
<PAGE>
For purposes of determining the surrender charge percentage that will apply
to a partial surrender, surrender charges are calculated on a "last-in, first-
out basis." This means that any partial withdrawal in excess of the free
withdrawal amount will be taken against premiums in the reverse order in which
they were made, if more than one premium was paid under the Policy. Surrender
charges will be assessed only against that portion of the partial withdrawal
taken from premium payment(s).
FREE WITHDRAWAL ALLOWANCE. The Company will permit partial surrenders of the
Policy's earnings in an amount of up to 10% of the Policy's Cash Value each
year (beginning with the Second Policy Year) without the imposition of a
surrender charge. The amount of Cash Value available for free withdrawal will
be determined on the Policy Anniversary on or immediately prior to the date
that the partial surrender request is received. The amount of earnings
available for withdrawal will be determined on the date the request for such
withdrawal is received by the Company.
TRANSFER CHARGE
Although there are currently no charges for transfers among the investment
alternatives provided under this Policy, the Company reserves the right to
limit the number of transfers to no more than four in any Policy Year (twelve
in New York state), and to charge a reasonable administrative fee (up to $10)
for any transfer request in excess of four (twelve in New York state) in any
Policy Year. The Company also reserves the right to assess a processing fee
for the Automated Transfer (Dollar Cost Averaging) service. (See "Transfers of
Cash Value," page 13.)
REDUCTION OR ELIMINATION OF CHARGES
The Company may offer the Policy in arrangements where an employer or
trustee will own a group of policies on the lives of certain employees, or in
other situations where groups of policies will be purchased at one time. The
Company may reduce or eliminate sales charges and administrative charges in
such arrangements to reflect the reduced sales expenses and administrative
costs expected as a result of sales to a particular group. The Company makes
any reductions according to rules in effect when an application for a Policy
or additional Premium Payment is approved. While it may change these rules
from time to time, reductions in charges will not discriminate unfairly
against any person.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
VALUATION OF THE SEPARATE ACCOUNT
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
HOW THE CASH VALUE VARIES
The Policy's Cash Value is determined daily. A Policy's Cash Value will vary
to reflect a number of factors, including Premium Payments made, partial
withdrawals, loans, charges assessed in connection with the Policy, and the
investment experience of each Investment Option to which Cash Value is
allocated. The Policy's total Cash Value on a Valuation Date equals the
Accumulation Unit Value(s) for each applicable Investment Option, plus the
Loan Account Value, on that date.
The shares of each Investment Option are purchased by Separate Account Three
at net asset value (i.e., without a sales charge). All dividends and capital
gains distributions received from an Investment Option are reinvested by
Separate Account Three in that Fund's shares at net asset value and will
increase the associated Accumulation Unit Value. Investment Option shares will
be redeemed by Separate Account Three at their net asset value to the extent
necessary to make payments under the Policy.
-------------------------------------------------------------------------------
11
<PAGE>
All valuations made under the Policy (e.g., the determination of Cash Value
or Cash Surrender Value, policy loans, and the determination of the number of
Accumulation Units to be credited to a Policy), will be determined as of the
Valuation Date on which the Company receives the Policy Owner's written
request for a transaction under the Policy, or on which the Company is
assessing charges under the Policy.
HOW THE INVESTMENT EXPERIENCE IS DETERMINED
The Cash Value is related to the rate of return of the Investment Option(s)
to which Premium Payments made under the Policy have been allocated. The Cash
Value on any Valuation Date is calculated by multiplying the number of
Accumulation Units credited to the Policy for each Investment Option by the
corresponding Accumulation Unit Value, then adding the result for each
Investment Option credited to the Policy, and adding any value of the Loan
Account.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit for each Investment Option of Separate
Account Three (the "Accumulation Unit Value") is established on each Valuation
Date. For each Investment Option, the Accumulation Unit Value for a Valuation
Period is determined by multiplying the Accumulation Unit Value on the
preceding Valuation Period by the Net Investment Factor for the Investment
Option during the subsequent Valuation Period.
The Accumulation Unit Value may increase or decrease from Valuation Period
to Valuation Period. The number of Accumulation Units credited to your Policy
will not change as a result of the investment experience of the Investment
Options. The Accumulation Unit Value of the Investment Options reflects the
reinvestment of any dividends or capital gains distributions declared by the
Investment Option.
NET INVESTMENT FACTOR
For each Investment Option, the value of an Accumulation Unit for each
subsequent Valuation Period fluctuates based upon the net rate of return for
that period. The Company determines the net rate of return of a Investment
Option at the end of each Valuation Period. The net rate of return reflects
the investment performance of the Investment Option for the Valuation Period
and is net of the charges to Separate Account Three described above.
VALUATION PERIODS AND VALUATION DATES
A Valuation Period is the period commencing at the close of business of the
New York Stock Exchange on any Valuation Date and ending at the close of
business on the next succeeding Valuation Date. A Valuation Date is each day
that the New York Stock Exchange is open for trading.
-------------------------------------------------------------------------------
12
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TRANSFERS OF CASH VALUE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
As long as the Policy remains in effect, the Policy Owner may transfer all
or a portion of the Cash Value (less the Loan Account) among any of the
Investment Option(s). Although there are currently no charges, penalties or
restrictions on the amount or frequency of transfers between the Investment
Options, the Company reserves the right to limit the number of transfers to no
more than four in any Policy Year, and to charge a reasonable fee (up to $10)
for any transfer request in excess of four per Policy Year.
Some Investment Options have higher investment advisory fees and/or other
expenses than others; therefore, a transfer from one Investment Option to
another could result in a Policy becoming subject to higher or lower fees and
expenses. A transfer between Investment Options has no other effect on the
amount or timing of any of the other charges under the Policy.
The number of Accumulation Units credited to the Investment Options involved
in the transfer will be adjusted by dividing the amount transferred from or to
that Investment Option by the Accumulation Unit Value of that Investment
Option. The Accumulation Unit Values will be determined on the Valuation Date
on which the Company receives the written request for a transfer.
TELEPHONE TRANSFERS
You may request a transfer of Cash Value either in writing or by telephone.
The telephone transfer privilege is available automatically; no special
election is necessary for a Policy Owner to have this privilege available. All
transfers must be in accordance with the terms of the Policy. Transfer
instructions are currently accepted on each Valuation Date between 9:00 a.m.
and 4:00 p.m., Eastern time, by calling 1-800-334-4298. Once instructions have
been accepted, they may not be rescinded; however, new telephone instructions
may be given the following day. If the transfer instructions are not in good
order, the Company will not execute the transfer and will promptly notify the
caller.
AUTOMATED TRANSFERS (DOLLAR COST AVERAGING)
You may establish automated transfers of Cash Value on a monthly basis from
any Investment Option to any other Investment Option through a written request
or other method acceptable to the Company. You must have a minimum Cash Value
of $5,000 allocated to the Investment Option(s) from which the transfers are
to be made in order to enroll in the Dollar Cost Averaging Program. The
minimum automated transfer amount is $100 per month.
You may start or stop participation in the Dollar Cost Averaging Program at
any time, but you must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. Automated
transfers are subject to all of the provisions and terms of the Policy,
including provisions relating to the transfer of money between Investment
Options. The Company reserves the right to suspend or modify automated
transfers at any time and to assess a processing fee for this service.
Before transferring any part of the Cash Value, Policy Owners should
consider the risks involved in switching between investments available under
the Policy. Dollar cost averaging requires regular investments regardless of
fluctuating price levels, and does not guarantee profits or prevent losses in
a declining market. A potential investor should consider his or her financial
ability to continue purchases through periods of low price levels.
-------------------------------------------------------------------------------
13
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
DEATH BENEFIT
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
As long as the Policy remains in force, the Policy provides a Death Benefit
upon the death of the Insured. The death benefit proceeds will be paid to a
named Beneficiary. The amount of the death benefit proceeds will be determined
on the date on which the Insured's death occurred. The death benefit proceeds
may be paid in a lump sum or under any optional payment plan.
Death Benefits are payable within seven days of the Company's receipt of
satisfactory proof of the Insured's death. To the extent permitted by state
law, the amount of Death Benefit actually paid to the Policy beneficiary may
be adjusted to reflect any policy loan, suicide by the Insured within two
years after the Issue Date of the Policy, any material misstatements in the
policy application as to age or sex of the Insured, and any amounts payable to
an assignee under a collateral assignment of the Policy. (See "Assignment,"
page 21.) In addition, if the Insured dies during the Grace Period, the Death
Benefit actually paid to the Policy Owner's beneficiary will be reduced by the
amount of the Deduction Amount that is due and unpaid, and by the amount of
any outstanding Policy Loan. (See "Policy Surrenders and Cash Surrender
Value," page 17, for the effects of partial cash surrenders on Death
Benefits.)
The Policy provides for two Death Benefit options. Under Option 1 (the Level
Option), the Death Benefit will be equal to the Policy's Stated Amount or, if
greater, a specified multiple of Cash Value determined as of the date of the
Insured's death (the "Minimum Amount Insured"). Under Option 2 (the Variable
Option), the Death Benefit will be equal to the Policy's Stated Amount plus
the Cash Value (determined as of the date of the Insured's death) or, if
greater, the Minimum Amount Insured. The Minimum Amount Insured is the amount
required to qualify the Policy as a life insurance contract under the current
federal tax law. Under that law, the Minimum Amount Insured is equal to a
stated percentage of the Cash Value of the Policy determined daily. The
percentages, which differ according to the attained age of the Insured, are
set forth in the Policy and may change as federal income tax laws or
regulations change. The percentages used to calculate the Minimum Amount
Insured decrease after the Insured is age 40. The following is a schedule of
the applicable percentages:
<TABLE>
<CAPTION>
% SHALL DECREASE
BY A RATABLE PORTION
ATTAINED AGE FOR EACH FULL YEAR:
MORE BUT NOT
THAN MORE THAN FROM TO
---- --------- ----------- ----------
<S> <C> <C> <C>
0 40 250 250
40 45 250 215
45 50 215 185
50 55 185 150
55 60 150 130
60 65 130 120
65 70 120 115
70 75 115 105
75 90 105 105
90 95 105 100
</TABLE>
The federal tax law imposes another cash funding limitation on cash value
life insurance policies that, when applicable, may increase the Minimum Amount
Insured in excess of the figures shown in the schedule above. (See Appendix B
for examples demonstrating the relationship between the Death Benefit, the
Cash Surrender Value and the Minimum Amount Insured under the Level and
Variable Options of the Policy.)
-------------------------------------------------------------------------------
14
<PAGE>
CHANGES IN DEATH BENEFIT OPTION
You may change the Death Benefit option at any time prior to the Insured's
death by sending a written request to the Company. There is no direct
consequence of changing a Death Benefit option, except as described under
"Modified Endowment Contracts" on page 24. However, the change could affect
future values of the Coverage Amount, and with some Variable Option to Level
Option changes involving substantially funded policies, there may be a cash
distribution which is included in the gross income of the Policy Owner. The
cost of insurance charge, which is based on the Coverage Amount, may be
different in the future. A change from the Level Option to the Variable Option
will not be permitted if the change would result in a Stated Amount of less
than the minimum amount of $25,000. (See "Changes in Stated Amount" below.)
Contact your registered representative for more information.
CHANGES IN STATED AMOUNT
A Policy Owner may request in writing that the Stated Amount of the Policy
be increased or decreased. An increase may only be requested prior to the
earlier of the Insured's attaining age 80 and the date of the Insured's death,
and the Stated Amount after any decrease may not be less than the minimum
amount of $25,000.
A decrease in Stated Amount in a substantially funded Policy may cause a
cash distribution that is includable in the gross income of the Policy Owner.
(See "Federal Tax Considerations," page 22.)
For increases in the Stated Amount, the Company will generally require a new
application and satisfactory evidence of insurability, as well as an
additional Premium Payment. The effective date of any increase will be as
shown on the new Policy Summary Page which the Company will send to the Policy
Owner. The effective date of any increase in the Stated Amount will generally
be the Deduction Date next following either the date of a new application or,
if different, the date requested by the Policy Owner. There is no additional
charge for a decrease in Stated Amount.
For purposes of determining the cost of insurance charge, a decrease in the
Stated Amount will reduce the Stated Amount in the following order:
1) against the most recent increase in the Stated Amount;
2) to other increases in the reverse order in which they occurred;
3) to the initial Stated Amount.
MATURITY AND MATURITY EXTENSION BENEFITS
If the Insured is living on the Maturity Date (the anniversary of the Policy
Date on which the Insured is age 100), the Company will pay the Policy Owner
the Cash Value of the Policy as of the Maturity Date, less any outstanding
policy loan, amounts payable to an assignee under a collateral assignment of
the Policy, and any Deduction Amount due and unpaid. The Policy Owner must
surrender the Policy to the Company before such payment can be made, at which
point the Policy will terminate and the Company will have no further
obligations under the Policy.
Where permitted by state law, the Policy provides for a Maturity Extension
Benefit which effectively allows the Policy Owner to request that coverage be
extended beyond the Maturity Date. Such request may only be made during the
twelve months following the Insured's attainment of age 99. If the Maturity
Extension Benefit is elected, any past due Monthly Deduction Amounts must
first be paid in order for the benefit to become effective on the Maturity
Date. After the Company receives a request for the Maturity Extension Benefit,
the Policy will continue in force until the earlier of the death of the
Insured or the date
-------------------------------------------------------------------------------
15
<PAGE>
on which the Policy Owner surrenders the Policy for its Cash Surrender Value.
On the Maturity Date, the Death Benefit will be the Cash Value less any Loan
Account Value and less any Deduction Amounts due but not paid. After the
Maturity Date, the Death Benefit will be the Cash Value less any Loan Account
Value. The Death Benefit is based on the experience of the Investment Options
selected and is variable and is not guaranteed. After the Maturity Date, the
Monthly Deduction Amount will no longer be charged against the Cash Value, and
additional premiums will not be accepted.
Any loan outstanding need not be extinguished as of the Maturity Date. The
loan may be continued into the maturity extension period. New loans may also
be initiated during the maturity extension period. Restrictions on loans prior
to the maturity date of the contract are still valid.
The Company intends that the Policy and the Maturity Extension Benefit be
considered life insurance for tax purposes. The Death Benefit is designed to
comply with Section 7702 of the Code, or other equivalent section of the Code.
However, the Company does not give tax advice, and cannot guarantee that the
Death Benefit and Cash Value will be exempt from any future tax liability. The
tax results of any benefits under the Maturity Extension provision depend upon
interpretation of the Internal Revenue Code. The Policy Owner should consult
his or her own personal tax adviser prior to the exercise of the Maturity
Extension Benefit to assess any potential tax liability.
POLICY LAPSE AND REINSTATEMENT
The Policy will remain in effect until the Cash Surrender Value of the
Policy is insufficient to cover the Monthly Deduction Amount. If such event
occurs, the Company will give written notice to the Policy Owner indicating
that if the amount shown in the notice (which will be sufficient to cover the
Deduction Amount due) is not paid within 61 days (the "Grace Period"), the
Policy will lapse. The Policy will continue through the Grace Period, but if
no payment is received, the Policy will terminate without value at the end of
the Grace Period. If the person insured under the Policy dies during the Grace
Period, the Death Benefit payable under the Policy will be reduced by the
Monthly Deduction Amount due plus the amount of any outstanding loan and any
interest accrued thereon. (See "Death Benefit," page 14.) If the Policy is
surrendered during the Grace Period, the Policy's Cash Surrender Value will be
reduced by the Monthly Deduction Amount due. (See "Policy Surrenders and Cash
Surrender Value," page 17.)
If the Policy lapses, the Policy Owner may reinstate the Policy upon payment
of the reinstatement premium (and any applicable charges) shown in the Policy.
A request for reinstatement may be made at any time within three years of
lapse (five years for policies issued in Missouri), provided that (1) the
Policy was not surrendered for cash; (2) satisfactory evidence of insurability
is provided; (3) all Monthly Deduction Amounts past due are paid; (4) premium
at least equal to three Monthly Deduction Amounts is paid; and (5) all Loan
Account Value is repaid or restored. The Cash Value of the Policy upon
reinstatement will be equal to the amount provided by the premium paid.
The tax consequences of a lapse may not be reversible by a reinstatement.
Policy Owners should also refer to "Risks Associated with Loans Taken Against
a Variable Life Insurance Policy" (on page 19) to consider the effects of
loans on their Policy.
EXCHANGE RIGHTS
Once the Policy is in effect, it may be exchanged at any time during the
first 24 months after its issuance for a general account life insurance policy
issued by the Company (or an affiliated company, if allowed) on the life of
the Insured. Benefits under the new life insurance policy will be as described
in that policy. No evidence of insurability will be required. The Policy Owner
has the right to select the same
-------------------------------------------------------------------------------
16
<PAGE>
Death Benefit or Coverage Amount as the former Policy had at the time of the
exchange. Cost of insurance rates will be based on the same risk
classification as those of the former Policy. Any outstanding policy loan must
be repaid before the Company will make an exchange. In addition, there may be
an adjustment for the difference in Cash Value between the two policies.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
POLICY SURRENDERS AND CASH SURRENDER VALUE
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
RIGHT TO SURRENDER
At any time during the lifetime of the Insured and while the Policy is in
force, the Policy Owner may make a written request for a full or partial
surrender of the Policy, without the consent of the beneficiary (provided the
designation of beneficiary is not irrevocable). In the case of full
surrenders, the Policy should be returned to the Company. The amount available
upon surrender is the Cash Surrender Value (i.e., the Cash Value of the Policy
determined as of the Valuation Date on which the Company receives the Policy
Owner's written request, less any outstanding policy loan, and less any
applicable Surrender Charges). (See "Surrender Charges," page 10.)
Upon full or partial surrender, the Company will generally pay the Cash
Surrender Value of the Policy within seven days following its receipt of the
written request, or on the date requested by the Policy Owner, whichever is
later.
FULL SURRENDERS
If the Policy is fully surrendered, the Policy will terminate on the
effective date of the surrender. The Policy must be returned to the Company
along with a written release and surrender of all claims under the Policy in a
form satisfactory to the Company. The Policy Owner may elect to have the
surrender amount paid in a lump sum or under a payment option.
PARTIAL SURRENDERS
The Company will permit partial surrenders of the Cash Value in the Policy
at any time during the lifetime of the Insured and while the Policy is in
effect. A partial surrender reduces the Policy's Cash Value by the amount of
the partial surrender requested, plus the amount of the surrender charge
imposed in connection with the partial surrender. The deduction from Cash
Value for a partial surrender will be made on a pro rata basis against the
Cash Value of each of the Investment Options attributable to the Policy
(unless the Policy Owner states otherwise in writing).
In addition to reducing the Cash Value of the Policy, partial cash
surrenders will reduce the Death Benefit payable under the Policy and may
reduce the Stated Amount. The Company may require return of the Policy to
record such reduction. After a partial surrender, the remaining Stated Amount
must be no less than $25,000. Partial surrenders will not be permitted if they
would cause the Policy to fail to qualify as "life insurance" under applicable
federal income tax laws. Reductions in Stated Amount will be processed as
described under "Changes in Stated Amount."
-------------------------------------------------------------------------------
17
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
POLICY LOANS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
A Policy Owner may obtain a cash loan from the Company secured by the Policy
not to exceed 90% of the Policy's Cash Value minus surrender charges
(determined on the day on which the Company receives the written loan
request). The Company will make the loan to the Policy Owner within seven days
after receipt of the written request. No loan requests may be made for amounts
of less than $500 (subject to state law). If there is a loan outstanding at
the time a subsequent loan request is made, the amount of the outstanding loan
will be added to the new loan request. The amount of the loan will be
transferred as of the date the loan is made on a pro rata basis from the
Investment Options (unless the Policy Owner states otherwise) to another
temporary account (the "Loan Account").
The Company will charge interest on the outstanding amounts of the loan,
which interest must be paid in advance by the Policy Owner at the beginning of
each Policy Year. Interest not paid when due will be capitalized, and an
amount equal to such interest will be transferred to the Loan Account pro rata
from the Investment Options. Loans made during the first ten Policy Years will
be made at a 2% net cost on principal, and a 1% net cost on earnings. Loans
made after the tenth Policy Year will be made at 2% net cost on principal and
0% net cost on earnings. Additionally, loans may be taken at any time at 0%
net cost for the purchase of a Travelers long-term care policy, where
permitted by state law. For these purposes, "earnings" represents any unloaned
Cash Value, minus the total premiums paid under the Policy. Loans will be
taken from earnings first, and then from premium. Loans taken against earnings
will be charged an interest rate of 4.75% during the first ten Policy Years,
and 3.85% for Policy Year 11 and thereafter. Loans taken against principal
will be charged an interest rate of 5.65% in all Policy Years. Amounts in the
Loan Account will be credited by the Company with a fixed annual rate of
return of 4%, and will not be affected by the investment performance of the
Investment Options. The rate of return credited to amounts held in the Loan
Account will be transferred back to the Investment Options on a pro rata basis
after each Policy Year. The Policy's "Loan Account Value" is equal to amounts
transferred from the Investment Options to the Loan Account when a loan is
taken, plus capitalized loan interest, plus the net rate of return credited to
the Loan Account that has not yet been transferred back to the Investment
Options. Loan repayments reduce the Loan Account Value, and increase the Cash
Value in the Investment Options.
While the Insured is living and the Policy is in effect, loans may be
repaid. Loan repayments will be first applied to that portion of the loan
comprised of premiums paid. The amount of the repayment will be transferred
from the Loan Account and will be allocated among the Investment Options in
proportion to the outstanding loan amount associated with each Investment
Option.
RISKS ASSOCIATED WITH LOANS TAKEN AGAINST A VARIABLE LIFE INSURANCE POLICY
An outstanding loan amount decreases the Cash Surrender Value. If a loan is
not repaid, it permanently decreases the Cash Surrender Value, which could
cause the Policy to lapse (see "Policy Lapse and Reinstatement," page 16). For
example, if a Policy has a Cash Surrender Value of $100,000, the Policy Owner
may take a loan of 90% or $90,000, leaving a new Cash Surrender Value of
$10,000. In addition, the Death Benefit actually payable would be decreased
because of the outstanding loan. Furthermore, even if the loan is repaid, the
Death Benefit and Cash Surrender Value may be permanently affected since the
Policy Owner was not credited with the investment experience of an Investment
Option on the amount in the Loan Account while the loan was outstanding. All
or any part of a loan secured by a Policy may be repaid while the Policy is
still in force. Any payment received while there is an outstanding loan on the
Policy will be considered a loan repayment rather than an additional Premium
Payment. A loan outstanding at the end of the Grace Period cannot be repaid
unless the Policy is reinstated.
-------------------------------------------------------------------------------
18
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PAYMENT OPTIONS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Proceeds payable upon the death of the Insured or upon surrender of the
Policy, and the benefits payable upon maturity, may be paid in a lump sum, or
in whole or in part under any of the payment options available under the
Policy. Payment of proceeds which exceed the Death Benefit may be deferred for
up to six months from the date of the request for the payment. A combination
of options may be used. The minimum amount that may be placed under a payment
option is $5,000 unless the Company consents to a lesser amount. Proceeds
applied under an option will no longer be affected by the investment
experience of the Investment Options or Trusts. Once in effect, some of the
payment options may not provide any surrender rights.
The following payment options are available under the Policy:
OPTION 1 -- Payments of a Fixed Amount
OPTION 2 -- Payments for a Fixed Period
OPTION 3 -- Amounts Held at Interest
OPTION 4 -- Monthly Life Income
OPTION 5 -- Joint and Survivor Level Amount Monthly Life Income
OPTION 6 -- Joint and Survivor Monthly Life Income--Two-thirds to Survivor
OPTION 7 -- Joint and Last Survivor Monthly Life Income--Monthly Payment
Reduces on Death of First Person Named
OPTION 8 -- Other Options
The Company will make any other arrangements for periodic payments as may be
agreed upon. If any periodic payment due any payee is less than $100, the
Company may make payments less often. If the Company has declared a higher
rate under an option at the date the first payment under an option is due, the
Company will base the payments on the higher rate.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
OTHER MATTERS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
VOTING RIGHTS
VOTING RIGHTS OF THE INVESTMENT OPTIONS. In accordance with its view of
present applicable law, the Company will vote the shares of the Investment
Options at regular and special meetings of the shareholders of the Investment
Options in accordance with instructions from Policy Owners having a voting
interest in Separate Account Three. The Company will vote shares for which no
instructions have been given or shares which are not otherwise attributable to
Policy Owners in the same proportion as it votes shares for which it has
received instructions. If the 1940 Act or any rule promulgated thereunder
should be amended, however, or if the Company's present interpretation should
change and, as a result, the Company determines it is permitted to vote the
shares of the Investment Options in its own right, it may elect to do so.
The voting interests of the Policy Owner in the Investment Options will be
determined as follows: Policy Owners may cast one vote for each $100 of Cash
Value of the Policy allocated to the Investment Option, the assets of which
are invested in the particular Investment Option on the record date for the
shareholder meeting for that Fund. Fractional votes are counted. If, however,
a Policy Owner has taken a
-------------------------------------------------------------------------------
19
<PAGE>
loan secured by the Policy, amounts transferred from the Investment Option(s)
to the Loan Account in connection with the loan will not be considered in
determining the voting interests of the Policy Owner.
Policy Owners should review the prospectuses for the Investment Options to
determine matters on which shareholders may vote and the definition of a
majority vote required on some matters.
DISREGARD OF VOTING INSTRUCTIONS. When permitted by state insurance
regulatory authorities, the Company may disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
investment objective or policies of Separate Account Three or one of the
Investment Options, or to approve or disapprove an investment advisory
contract of one of the Investment Options. In addition, the Company may
disregard voting instructions in favor of changes in the investment policies
or the investment adviser of any of the Investment Options which are initiated
by a Policy Owner if the Company 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 if the Company
determines that the change would have an adverse effect on its general account
in that the proposed investment policy for an Investment Option may result in
overly speculative or unsound investments. Should the Company disregard voting
instructions, a summary of that action and the reasons for such action would
be included in the next annual report to Policy Owners.
REPORTS TO POLICY OWNERS
The Company will maintain all records relating to Separate Account Three and
the Investment Options. At least once in each Policy Year, the Company will
send to Policy Owners a statement containing the following information: (1)
the Stated Amount and the Cash Value of the Policy (indicating the number of
Accumulation Units credited to the Policy in each Investment Option and the
corresponding Accumulation Unit Value); (2) the date and amount of each
Premium Payment; (3) the date and amount of each Monthly Deduction; (4) the
amount of any outstanding policy loan as of the date of the statement, and the
amount of any loan interest charged on the Loan Account; (5) the date and
amount of any partial cash surrenders and the amount of any partial surrender
charges; (6) the annualized cost of any supplemental benefits purchased under
the Policy; and (7) a reconciliation since the last report of any change in
Cash Value and Cash Surrender Value. The Company will also send any other
reports required by any applicable state or federal laws or regulations.
Each Policy Owner will also receive semi-annual and annual reports
containing financial statements for each of the Investment Options in which
premium payments are allocated at the time of the report.
LIMIT ON RIGHT TO CONTEST AND SUICIDE EXCLUSION
The Company may not contest the validity of the Policy after it has been in
effect during the Insured's lifetime for two years from the Issue Date. If the
Policy is reinstated, the two-year period will be measured from the date of
reinstatement (subject to state regulation). Each requested increase in Stated
Amount is contestable for two years from its effective date.
In addition, if the Insured commits suicide during the two-year period
following issue, subject to state law, the Death Benefit will be limited to
the premiums paid less the amount of any partial surrender and the amount of
any outstanding policy loan. During the two-year period following an increase,
the Death Benefit in the case of suicide will be limited to an amount equal to
the premium paid for such increase (subject to state law).
-------------------------------------------------------------------------------
20
<PAGE>
MISSTATEMENT AS TO SEX AND AGE
If there has been a misstatement with regard to sex or age in the Policy
Application, benefits payable will be adjusted to what the Policy would have
provided with the correct information based on the most recent cost of
insurance charge. A misstatement with regard to sex or age in a substantially
funded Policy may cause a cash distribution that is includable in whole or in
part in the gross income of the Policy Owner.
SUSPENSION OF VALUATION
The Company reserves the right to suspend or postpone the date of any
payment of any benefit or values for any Valuation Period (1) when the New
York Stock Exchange is closed (except holidays or weekends); (2) when trading
on the Exchange is restricted; (3) when an emergency exists as determined by
the SEC so that disposal of the securities held in the Investment Options is
not reasonably practicable or it is not reasonably practicable to determine
the value of the Investment Options' net assets; or (4) during any other
period when the SEC, by order, so permits for the protection of security
holders.
BENEFICIARY
The Applicant names the beneficiary in the application for the Policy. The
Policy Owner may change the beneficiary (unless irrevocably named) during the
Insured's lifetime, and while the Policy is in force, by sending a written
request to the Company. Any change will be effective from the date the written
request was signed. The Company has no responsibility for payments made or
actions taken prior to receipt of the written request. If no beneficiary is
living when the Insured dies, the Death Benefit will be paid to the Policy
Owner, if living; otherwise, the Death Benefit will be paid to the Policy
Owner's estate.
The rights of any collateral assignee may affect the interest of the
Beneficiary.
ASSIGNMENT
The Policy Owner is specified in the Policy Application. The Policy may be
assigned as collateral for a loan or other obligation. The Company is not
responsible for any payment made or action taken before receipt of written
notice of such assignment, and is not responsible for determining the validity
of any assignment. Proof of interest must be filed with any claim under a
collateral assignment.
DIVIDENDS
No dividends will be paid under the Policy.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
GENERAL
The following is a general discussion of the federal income tax
considerations relating to the Policies. This discussion is based upon the
Company's understanding of the federal income tax laws as they are currently
interpreted by the Internal Revenue Service ("IRS"). These laws are complex,
and tax results may vary among individuals. A person contemplating the
purchase of or the exercise of elections under a Policy should seek competent
tax advice.
-------------------------------------------------------------------------------
21
<PAGE>
IT SHOULD BE UNDERSTOOD THAT THIS IS NOT AN EXHAUSTIVE DISCUSSION OF ALL TAX
QUESTIONS THAT MIGHT ARISE UNDER THE POLICIES. NO ATTEMPT HAS BEEN MADE TO
ADDRESS ANY FEDERAL ESTATE TAX OR STATE AND LOCAL TAX CONSIDERATIONS WHICH MAY
ARISE IN CONNECTION WITH A POLICY. FOR COMPLETE INFORMATION, A QUALIFIED TAX
ADVISOR SHOULD BE CONSULTED.
THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF ANY POLICY AND THE
FOLLOWING TAX DISCUSSION IS BASED ON THE COMPANY'S UNDERSTANDING OF FEDERAL
INCOME TAX LAWS AS THEY ARE CURRENTLY INTERPRETED. THE COMPANY CANNOT
GUARANTEE THAT THOSE LAWS OR INTERPRETATIONS WILL REMAIN UNCHANGED.
--------------------------------
TAX STATUS OF THE POLICY
--------------------------------
DEFINITION OF LIFE INSURANCE.
Section 7702 of the Internal Revenue Code sets forth a definition of a life
insurance contract for federal tax purposes. Guidance as to how Section 7702
is to be applied, however, is limited. Although the Secretary of the Treasury
(the "Treasury") is authorized to prescribe regulations implementing Section
7702, and while proposed regulations and other limited, interim guidance has
been issued, final regulations have not been adopted. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide the tax advantages normally provided by a life
insurance policy.
With respect to a Policy issued on the basis of a standard rate class, the
Company believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under Section 7702) that such a Policy should meet the Section
7702 definition of a life insurance contract. With respect to a Policy that is
issued on a substandard basis (i.e., a premium class involving higher than
standard mortality risk), there is less guidance. Thus, it is not clear
whether such a Policy would satisfy Section 7702, particularly if the Policy
Owner pays the full amount of premiums permitted under the Policy.
The Company reserves the right to make changes in the Policy if such changes
are deemed necessary to attempt to assure its qualification as a life
insurance contract for tax purposes.
DIVERSIFICATION
Section 817(h) of the Code provides that separate account investments (or
the investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy
to qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. Separate Account Three, through the Investment Options, intends to
comply with these requirements. Although the Company does not control the
Investment Options, it intends to monitor the investments of the Investment
Options to ensure compliance with the requirements prescribed by the Treasury
Department.
INVESTOR CONTROL
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contract. In those circumstances,
income and gains from the separate account assets would be includable in the
variable contract owner's gross income. The IRS has stated in published
rulings that a variable contract
-------------------------------------------------------------------------------
22
<PAGE>
owner will be considered the owner of separate account assets if the contract
owner possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury has also announced,
in connection with the issuance of regulations concerning diversification,
that those regulations "do not provide guidance concerning the circumstances
in which investor control of the investments of a segregated asset account may
cause the investor (i.e., the Policy Owner), rather than the insurance
company, to be treated as the owner of the assets in the account." This
announcement also stated that guidance would be issued by way of regulations
or rulings on the "extent to which policyholders may direct their investments
to particular Investment Options without being treated as owners of the
underlying assets." As of the date of this prospectus, no such guidance has
been issued.
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
determined that the owners were not owners of separate account assets. For
example, a Policy Owner of this Policy has additional flexibility in
allocating payments and cash values. These differences could result in the
Policy Owner being treated as the owner of the assets of Separate Account
Three. In addition, the Company does not know what standard will be set forth
in the regulations or rulings which the Treasury is expected to issue, nor
does the Company know if such guidance will be issued. The Company therefore
reserves the right to modify the Policy as necessary to attempt to prevent the
Policy Owner from being considered the owner of a pro rata share of the assets
of Separate Account Three.
The remaining tax discussion assumes that the Policy qualifies as a life
insurance contract for federal income tax purposes.
--------------------------------------------
TAX TREATMENT OF POLICY BENEFITS
--------------------------------------------
IN GENERAL
The Company 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.
In addition, the Policy Owner will generally not be deemed to be in
constructive receipt of the Cash Value, including increments thereof, until
there is a distribution. The tax consequences of distribution from, and loans
taken from or secured by, a Policy depend on whether the Policy is classified
as a "Modified Endowment Contract." However, whether a Policy is or is not a
Modified Endowment Contract, upon a complete surrender or lapse of a Policy or
when benefits are paid at a Policy's maturity date, if the amount received
plus the amount of indebtedness exceeds the total investment in the Policy,
the excess will generally be treated as ordinary income subject to tax.
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's Death Benefit Option, a Policy loan, a partial withdrawal, a
surrender, a change in ownership, or an assignment of the Policy may have
federal income tax consequences. In addition, federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or beneficiary.
-------------------------------------------------------------------------------
23
<PAGE>
MODIFIED ENDOWMENT CONTRACTS
In light of Policy premium requirements, a Policy will, in almost all cases,
be a modified endowment contract. (See, however, the discussion below on a
Policy issued in exchange for another life insurance contract.)
Loans and partial withdrawals from, as well as collateral assignments of,
Policies that are modified endowment contracts will be treated as
distributions to the Policy Owner. All pre-death distributions (including
loans, partial withdrawals and collateral assignments) from these Policies
will be included in gross income on an income-first basis to the extent of any
income in the Policy (the cash value less the Policy Owner's investment in the
Policy) immediately before the distribution.
The law also imposes a 10% penalty tax on pre-death distributions (including
loans, collateral assignments, partial withdrawals and complete surrenders)
from modified endowment contracts to the extent they are included in income,
unless such amounts are distributed on or after the date on which the taxpayer
attains age 59 1/2, because the taxpayer is disabled, or as substantially
equal periodic payments over the taxpayer's life (or life expectancy) or over
the joint lives (or joint life expectancies) of the taxpayer and his or her
beneficiary. Furthermore, if the loan interest is capitalized by adding the
amount due to the balance of the loan, the amount of the capitalized interest
will be treated as an additional distribution subject to income tax as well as
the 10% penalty tax, if applicable, to the extent of income in the Policy.
EXCHANGES
Any Policy issued in exchange for a modified endowment contract will be
subject to the tax treatment accorded to modified endowment contracts.
However, the Company believes that any Policy received in exchange for a life
insurance contract that is not a modified endowment contract will generally
not be treated as a modified endowment contract if the face amount of the
Policy is greater than or equal to the death benefit of the policy being
exchanged. The payment of any premiums at the time of or after the exchange
may, however, cause the Policy to become a modified endowment contract. A
prospective purchaser should consult a qualified tax advisor before
authorizing the exchange of his or her current life insurance contract for a
Policy.
Unlike loans from modified endowment contracts, a loan from a Policy that is
not a modified endowment contract will be considered indebtedness of the owner
and no part of a loan will constitute income to the owner. However, the
treatment of loans taken on earnings after the tenth Policy Year, or of loans
taken to acquire a Travelers long-term care policy, is unclear; such loans
might be considered a withdrawal instead of indebtedness for federal tax
purposes.
Pre-death distributions from a Policy that is not a modified endowment
contract will generally not be included in gross income to the extent that the
amount received does not exceed the Policy Owner's investment in the Policy.
(An exception to this general rule may occur in the case of a decrease or
change that reduces the benefits provided under a Policy in the first 15 years
after the Policy is issued and that results in a cash distribution to the
Policy Owner. Such a cash distribution may be taxed in whole or in part as
ordinary income to the extent of any gain in the Policy.) Further, the 10%
penalty tax on pre-death distributions does not apply to Policies that are not
modified endowment contracts.
Certain changes to Policies that are not modified endowment contracts may
cause such Policies to be treated as modified endowment contracts. A Policy
Owner should therefore consult a tax advisor before effecting any change to a
Policy that is not a modified endowment contract.
-------------------------------------------------------------------------------
24
<PAGE>
TREATMENT OF LOAN INTEREST
If there is any borrowing against the Policy, the interest paid on loans may
not be tax deductible.
AGGREGATION OF MODIFIED ENDOWMENT CONTRACTS
In the case of a pre-death distribution (including a loan, partial
withdrawal, collateral assignment or complete surrender) from a Policy that is
treated as a modified endowment contract, a special aggregation requirement
may apply for purposes of determining the amount of the income on the Policy.
Specifically, if the Company or any of its affiliates issues to the same
Policy Owner more than one modified endowment contract within a calendar year,
then for purposes of measuring the income on the Policy with respect to a
distribution from any of those Policies, the income on the Policy for all
those Policies will be aggregated and attributed to that distribution.
-------------------------------------
THE COMPANY'S INCOME TAXES
-------------------------------------
The Company currently makes no charge to Separate Account Three for any
federal, state or local taxes that it incurs that may be attributable to
Separate Account Three or to the Policies. The Company reserves the right,
however, to make a charge for any tax or other economic burden responsibility
from the application of tax laws that it determines to be properly
attributable to Separate Account Three or to the Policies.
-------------------------------------------------------------------------------
25
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGEMENT
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIRECTORS OF THE TRAVELERS INSURANCE COMPANY
The following are the Directors and Executive Officers of The Travelers
Insurance Company. Unless otherwise indicated, the principal business address
for all individuals is the Company's Home Office at One Tower Square, Hartford,
Connecticut 06183. References to Travelers Group Inc. include, prior to
December 31, 1993, Primerica Corporation or its predecessors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AND POSITION SINCE PRINCIPAL BUSINESS
----------------- -------- -----------------------------------------
<C> <C> <S>
Robert I. Lipp 1992 Chairman of The Travelers Insurance
Director Company since June 1994; Director and
Chairman, President and Chief Executive
Officer of The Travelers Insurance Group
Inc. since December 1993; Vice Chairman
and Director of Travelers Group Inc.
since 1991; Chairman and Chief Executive
Officer of Commercial Credit Company
(1991-1993); Executive Vice President
(1986-1991), Primerica Corporation.
Michael A. Carpenter 1995 President and Chief Executive Officer of
Director The Travelers Insurance Company since
and Chief Executive Officer June 1995; Executive Vice President of
Travelers Group Inc. since January 1995;
Chairman, President and Chief Executive
Officer (1989-1994), Kidder Peabody Group
Inc.
Jay S. Fishman 1994 Director and Chief Financial Officer
Director and since December 1993 of The Travelers
Chief Financial Officer Insurance Group Inc.; Senior Vice
President since 1991 and Treasurer (1991-
1994) of Travelers Group Inc.; Executive
Vice President and Chief Financial
Officer (1989-1991), Consumer Services
Group, Commercial Credit Company.
Charles O. Prince* 1994 Senior Vice President, General Counsel
Director and Secretary of Travelers Group Inc.
since 1985.
Marc P. Weill 1994 Senior Vice President-Investments since
Director December 1993 of The Travelers Insurance
Group Inc.; Senior Vice President of
Travelers Group Inc. since 1992; Vice
President (1990-1992), Primerica
Corporation; Vice President (1989-1990),
Smith Barney Inc.
Irwin R. Ettinger* 1994 Senior Vice President (1987-present) and
Director Chief Accounting Officer (1990-present),
Travelers Group Inc.
Donald T. DeCarlo 1995 General Counsel and Secretary of The
Director Travelers Insurance Company since October
1994; Deputy General Counsel since June
1989 of Travelers Group Inc.; Executive
Vice President since August 1987 of Gulf
Insurance Group.
</TABLE>
*Principal business address: Travelers Group Inc., 388 Greenwich Street, New
York, New York.
================================================================================
26
<PAGE>
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY
The following are the Senior Officers of The Travelers Insurance Company,
other than the Directors listed above, as of the date of this Prospectus.
Unless otherwise indicated, the principal business address for all individuals
listed is One Tower Square, Hartford, Connecticut 06183.
<TABLE>
<CAPTION>
NAME POSITION WITH INSURANCE COMPANY
---- -------------------------------
<C> <S>
Robert E. Evans Senior Vice President
Jay S. Benet Senior Vice President
Barry L. Mannes* Senior Vice President
Richard F. Morrison Senior Vice President
Thompson Shea Senior Vice President-Audit
David A. Tyson Senior Vice President
F. Denney Voss Senior Vice President
W. Douglas Willet Senior Vice President
Christine B. Mead Vice President--Finance and Controller
William H. White Vice President and Treasurer
</TABLE>
*Principal business address: Travelers Group Inc., 388 Greenwich Street, New
York, New York.
Information relating to the management of the Investment Options is
contained in the Investment Option prospectuses.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The assets of Separate Account Three are held by the Company and are kept
physically segregated and held separate and apart from the Company's general
account. The Company maintains records of all of Separate Account Three's
purchases and redemptions of shares of the Investment Options.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
DISTRIBUTION OF THE POLICY
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Company intends to sell the Policy in all jurisdictions where it is
licensed to do business and where the Policy is approved.
Policies may be purchased from agents who are licensed by state insurance
authorities to sell variable life insurance policies issued by the Company,
and who are also registered representatives of broker-dealers which have
Selling Agreements with Tower Square Securities, Inc. ("TSSI"). TSSI, whose
principal business address is One Tower Square, Hartford, Connecticut, serves
as the principal underwriter for the variable life insurance policies
described herein. TSSI is registered as a broker-dealer with the Securities
and Exchange Commission under the Securities Exchange Act of 1934, and is a
member of the National Association of Securities Dealers, Inc. ("NASD"). TSSI
is an affiliate of the Company and an indirect wholly owned subsidiary of
Travelers Group Inc., and serves as principal underwriter pursuant to an
Underwriting Agreement to which Separate Account Three, the Company, and TSSI
are parties. No amounts have been or will be retained by TSSI for acting as
principal underwriter for the Policies.
-------------------------------------------------------------------------------
27
<PAGE>
Agents will be compensated for sales of the Policies on a commission and
service fee basis. The maximum sales commissions to be paid under the Policy
will be 6.5% of premiums. In addition, certain production, persistency and
managerial bonuses may be paid.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
LEGAL PROCEEDINGS AND OPINION
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
There are no pending material legal proceedings affecting the Policy,
Separate Account Three or any of the Investment Options.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Policy described in this Prospectus and the organization
of the Company, its authority to issue the Policy under Connecticut law and
the validity of the forms of the Policy under Connecticut law have been passed
on by the General Counsel of the Life and Annuities Division of The Travelers
Insurance Company.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
REGISTRATION STATEMENT
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This Prospectus does
not contain all information set forth in the Registration Statement, its
amendments and exhibits, to which reference is made for further information
concerning Separate Account Three, the Company and the Policy.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Coopers & Lybrand L.L.P., certified public accountants, 100 Pearl Street,
Hartford, Connecticut, are the independent auditors for Separate Account
Three. The services provided to Separate Account Three will include primarily
the examination of Separate Account Three's financial statements.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The financial statements of the Company contained herein (see page 39)
should be considered only as bearing upon the Company's ability to meet its
obligations under the Policy, and they should not be considered as bearing on
the investment performance of Separate Account Three or its Investment
Options. The financial statements of Separate Account Three are not included
in this registration statement because, as of the date of this Prospectus,
Separate Account Three had not yet commenced operations.
-------------------------------------------------------------------------------
28
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ILLUSTRATIONS
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following pages are intended to illustrate hypothetically how the Cash
Value, Cash Surrender Value and Death Benefit can change over time for
Policies issued to a 45-year old male. The difference between the Cash Value
and the Cash Surrender Value in these illustrations reflects the Surrender
Charge that would be incurred upon a full surrender of the Policy.
Two pages of values are shown for each Death Benefit Option (Level and
Variable). One page illustrates the assumption that the maximum Guaranteed
Cost of Insurance Rates allowable under the Policy are charged in all years.
The other page illustrates the assumption that the current scale of Cost of
Insurance Rates are charged in all years. The Cost of Insurance Rates charged
vary by age, sex (where permitted by state law) and underwriting
classification. The illustrations also reflect a monthly deduction of
0.016667% for the first ten years following the Initial Premium for premium
taxes.
The values shown in these illustrations vary according to assumptions used
for charges, and gross rates of investment returns. The charges consist of
0.90% for mortality and expense risks, 0.40% for administrative expenses, and
0.75% for Investment Option expenses. The 12% illustration will assume that
the mortality and expense risk charge has been reduced to 0.75% in the second
policy year and thereafter. The charge for Investment Option expenses
reflected in the illustrations assumes that Cash Value is allocated equally
among all Investment Options and that no Policy Loans are outstanding, and is
an average of the investment advisory fees and other expenses charged by each
of the Investment Options during 1994. After deduction of these amounts, the
illustrated gross annual investment rates of return of 0% and 6% correspond to
approximate net annual rates of -2.05% and 3.95%, respectively. The
illustrated gross annual investment rate of return of 12% corresponds to an
approximate net annual rate of return of 9.95% in the first Policy Year, and
10.10% thereafter. The actual charges under a Policy for expenses of the
Investment Options will depend on the actual allocation of Cash Value and may
be higher or lower than those illustrated.
As stated above, the examples illustrate values that would result based upon
hypothetical uniform gross investment rates of return of 0%, 6% and 12%. The
values would be different from those shown if the gross rates averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages.
The illustrations also assume that premiums are paid as indicated, no policy
loans are made, no increases or decreases to the Stated Amount are requested,
no partial surrenders are made, and no charges for transfers between funds are
incurred.
The illustrations do not reflect any charges for federal income taxes
against Separate Account Three, since the Company is not currently deducting
such charges from Separate Account Three. However, such charges may be made in
the future, and in that event, the gross annual investment rates of return
would have to exceed 0%, 6% and 12% by an amount sufficient to cover the tax
charges in order to produce the Death Benefits, Cash Values and Cash Surrender
Values illustrated.
The second column of each Illustration shows the amount that would
accumulate if an amount equal to the Premium Payment was invested to earn
interest (after taxes) at 5%, compounded annually.
Upon request, the Company will provide a comparable personalized
illustration based upon the proposed insured's age, sex, underwriting
classification, the specified insurance benefits, and the premium requested.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
-------------------------------------------------------------------------------
29
<PAGE>
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000.00
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
------------------------ ---------------------- ----------------------
TOTAL
PREMIUMS
WITH 5%
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 106,918 106,918 106,918 24,054 25,542 27,030 22,179 23,667 25,155
2 27,562 106,918 106,918 106,918 23,093 26,074 29,276 21,218 24,199 27,401
3 28,941 106,918 106,918 106,918 22,114 26,596 31,723 20,364 24,846 29,973
4 30,388 106,918 106,918 106,918 21,115 27,103 34,392 19,365 25,353 32,642
5 31,907 106,918 106,918 106,918 20,090 27,594 37,306 18,465 25,969 35,681
6 33,502 106,918 106,918 106,918 19,035 28,061 40,490 17,535 26,561 38,990
7 35,178 106,918 106,918 106,918 17,941 28,499 43,969 16,691 27,249 42,719
8 36,936 106,918 106,918 106,918 16,801 28,900 47,777 15,801 27,900 46,777
9 38,783 106,918 106,918 106,918 15,605 29,256 51,946 14,855 28,506 51,196
10 40,722 106,918 106,918 106,918 14,344 29,558 56,521 14,344 29,558 56,521
15 51,973 106,918 106,918 118,360 6,893 30,331 88,328 6,893 30,331 88,328
20 66,332 0* 106,918 169,877 0* 28,127 139,243 0* 28,127 139,243
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or
12% over a period of years but fluctuated above or below the average for
individual contract years. No representations can be made that these rates of
return can be achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
-------------------------------------------------------------------------------
30
<PAGE>
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
LEVEL DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
----------------------- --------------------- ---------------------
TOTAL
PREMIUMS
WITH 5%
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 106,918 106,918 106,918 24,204 25,695 27,187 22,329 23,820 25,312
2 27,563 106,918 106,918 106,918 23,405 26,400 29,615 21,530 24,525 27,740
3 28,941 106,918 106,918 106,918 22,600 27,112 32,271 20,850 25,362 30,521
4 30,388 106,918 106,918 106,918 21,788 27,831 35,178 20,038 26,081 33,428
5 31,907 106,918 106,918 106,918 20,966 28,557 38,362 19,341 26,932 36,737
6 33,502 106,918 106,918 106,918 20,130 29,285 41,851 18,630 27,785 40,351
7 35,178 106,918 106,918 106,918 19,277 30,014 45,676 18,027 28,764 44,426
8 36,936 106,918 106,918 106,918 18,402 30,740 49,872 17,402 29,740 48,872
9 38,783 106,918 106,918 106,918 17,507 31,466 54,482 16,757 30,716 53,732
10 40,722 106,918 106,918 106,918 16,580 32,183 59,548 16,580 32,183 59,548
15 51,973 106,918 106,918 126,838 11,660 36,093 94,655 11,660 36,093 94,655
20 66,332 106,918 106,918 184,174 5,209 39,534 150,962 5,209 39,534 150,962
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or
12% over a period of years but fluctuated above or below the average for
individual contract years. No representations can be made that these rates of
return can be achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
-------------------------------------------------------------------------------
31
<PAGE>
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH GUARANTEED COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000.00
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
------------------------ ---------------------- ----------------------
TOTAL
PREMIUMS
WITH 5%
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 130,857 132,338 133,819 23,939 25,420 26,901 22,064 23,545 25,026
2 27,562 129,779 132,731 135,900 22,861 25,813 28,982 20,986 23,938 27,107
3 28,941 128,682 133,094 138,142 21,764 26,176 31,224 20,014 24,426 29,474
4 30,388 127,562 133,422 140,555 20,644 26,504 33,637 18,894 24,754 31,887
5 31,907 126,417 133,710 143,151 19,499 26,792 36,233 17,874 25,167 34,608
6 33,502 125,239 133,948 145,942 18,321 27,030 39,024 16,821 25,530 37,524
7 35,178 124,022 134,127 148,939 17,104 27,209 42,021 15,854 25,959 40,771
8 36,936 122,757 134,236 152,152 15,839 27,318 45,234 14,839 26,318 44,234
9 38,783 121,435 134,261 155,592 14,517 27,343 48,674 13,767 26,593 47,924
10 40,722 120,050 134,190 159,272 13,132 27,272 52,354 13,132 27,272 52,354
15 51,973 112,062 132,301 182,701 5,144 25,383 75,783 5,144 25,383 75,783
20 66,332 0* 125,727 215,673 0* 18,809 108,755 0* 18,809 108,755
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or
12% over a period of years but fluctuated above or below the average for
individual contract years. No representations can be made that these rates of
return can be achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
-------------------------------------------------------------------------------
32
<PAGE>
VINTAGE LIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
VARIABLE DEATH BENEFIT OPTION
ILLUSTRATED WITH CURRENT COST OF INSURANCE CHARGES
Male, Issue Age 45 Face Amount: $106,918
Non-Smoker Single Premium: $25,000.00
<TABLE>
<CAPTION>
DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
----------------------- --------------------- ---------------------
TOTAL
PREMIUMS
WITH 5%
YEAR INTEREST 0% 6% 12% 0% 6% 12% 0% 6% 12%
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 26,250 131,052 132,539 134,026 24,134 25,621 27,108 22,259 23,746 25,233
2 27,562 130,180 133,157 136,353 23,262 26,239 29,435 21,387 24,364 27,560
3 28,941 129,302 133,771 138,882 22,384 26,853 31,964 20,634 25,103 30,214
4 30,388 128,414 134,379 141,629 21,496 27,461 34,711 19,746 25,711 32,961
5 31,907 127,515 134,977 144,615 20,597 28,059 37,697 18,972 26,434 36,072
6 33,502 126,601 135,560 147,859 19,683 28,642 40,941 18,183 27,142 39,441
7 35,178 125,667 136,124 151,380 18,749 29,206 44,462 17,499 27,956 43,212
8 36,936 124,709 136,662 155,200 17,791 29,744 48,282 16,791 28,744 47,282
9 38,783 123,730 137,177 159,352 16,812 30,259 52,434 16,062 29,509 51,684
10 40,722 122,717 137,653 163,855 15,799 30,735 56,937 15,799 30,735 56,937
15 51,973 117,377 139,855 193,983 10,459 32,937 87,065 10,459 32,937 87,065
20 66,332 110,597 140,268 240,124 3,679 33,350 133,206 3,679 33,350 133,206
</TABLE>
These hypothetical rates of return are illustrative only and should not be
considered a representation of past or future investment results. Actual
investment results may be more or less than those shown and will depend on a
number of factors. The Account Values and Cash Surrender Values will be
different from those shown if the actual rates of return averaged 0%, 6%, or
12% over a period of years but fluctuated above or below the average for
individual contract years. No representations can be made that these rates of
return can be achieved for any one year or sustained over a period of time.
* Insufficient cash value would be developed to continue the contract without
additional premium payments.
-------------------------------------------------------------------------------
33
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
APPENDIX A -- PERFORMANCE INFORMATION
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
From time to time, Separate Account Three's Investment Options may show the
percentage change in the value of an Accumulation Unit based on the
performance of the Investment Option over a period of time, determined by
dividing the increase (decrease) in value for that unit by the Accumulation
Unit Value at the beginning of the period. Separate Account Three commenced
operations on , 1995. All Investment Options of Separate Account Three
invest in Investment Options that were in existence prior to the date on which
the Investment Options became available under the Policy. Average rates of
return since inception include periods prior to the availability of
VintageLife, and are calculated by adjusting the actual returns of the
Investment Options to reflect the charges that would have been assessed under
the Investment Options had the Investment Options been available under
Separate Account Three during the period shown.
The following performance information represents the percentage change in
the value of an Accumulation Unit of the Investment Options for the periods
indicated, and reflects all expenses of the Investment Options, as well as the
0.90% mortality and expense risk charge and the 0.40% administrative expense
charge assessed against the Investment Options. The rates of return do not
reflect surrender charges or Monthly Deduction Amounts (which are depicted in
the Example following the Rates of Return), nor do they reflect a reduction in
mortality and expense risk charges which may apply under certain
circumstances. For information about the Charges and Deductions assessed under
the Policy, see page 8. For illustrations of how these charges affect Cash
Values and Death Benefits, see the illustrations beginning on page 29.
-------------------------------------------------------------------------------
AVERAGE RATES OF RETURN (SINCE INCEPTION)
FOR PERIODS ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL
INVESTMENT OPTION TOTAL RETURN INCEPTION DATE
----------------- -------------- --------------
<S> <C> <C>
Smith Barney Income and Growth Portfolio (1.85)% 6/20/94
Alliance Growth Portfolio 4.71 % 6/20/94
American Capital Enterprise Portfolio 3.86 % 6/21/94
Smith Barney International Equity Portfolio (4.50)% 6/20/94
TBC Managed Income Portfolio (0.33)% 6/28/94
Putnam Diversified Income Portfolio 0.85 % 6/20/94
Smith Barney High Income Portfolio (1.24)% 6/22/94
MFS Total Return Portfolio (2.12)% 6/20/94
Smith Barney Money Market Portfolio 1.57 % 6/20/94
AIM Capital Appreciation Portfolio*
Travelers Zero Coupon Bond Fund Portfolios
(1998, 2000, 2005)*
Smith Barney Total Return Portfolio 1.14 % 11/21/94
</TABLE>
* not yet commenced business
-------------------------------------------------------------------------------
34
<PAGE>
EXAMPLE OF POLICY CHARGES
The following chart illustrates the surrender charges and Monthly Deduction
Amounts (including the Cost of Insurance charges and the deduction for premium
tax) that would apply under a Policy based on the assumptions listed below.
Surrender charges and Monthly Deduction Amounts generally will be higher for
an Insured who is older than the assumed Insured, and lower for an Insured who
is younger (assuming the Insureds have the same risk classification). Cost of
insurance rates increase each year as the Insured becomes a year older.
Male, Age 35 Face Amount: $167,193
Non-Smoker Level Death Benefit Option
Single Premium: $25,000 Current Charges
Hypothetical Gross Annual Investment Rate of Return: 10%*
<TABLE>
<CAPTION>
MONTHLY DEDUCTION AMOUNTS
---------------------------
POLICY CUMULATIVE SURRENDER CHARGE COST OF INSURANCE PREMIUM
YEAR PREMIUMS AS % OF CUM. PREM. CHARGES TAX
------ ---------- ------------------ ----------------- -------
<S> <C> <C> <C> <C>
1 $25,000 7.5% $214.78 $51.55
2 $25,000 7.5% $222.97 $55.11
3 $25,000 7.0% $232.58 $58.98
5 $25,000 6.5% $255.05 $67.60
10 $25,000 0% $323.22 $95.26
</TABLE>
* Hypothetical investment results shown above are illustrative only and should
not be deemed a representation of past or future investment results. Actual
investment results may be more or less than those shown. Hypothetical
investment results may be different from those shown if the actual rates of
return averaged 10%, but fluctuated above or below that average for
individual policy years. No representations can be made that the
hypothetical rates assumed can be achieved for any one year or sustained
over any period of time.
-------------------------------------------------------------------------------
35
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
APPENDIX B -- DEATH BENEFIT EXAMPLES
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The following examples demonstrate the relationship between the Death
Benefit, the Cash Surrender Value and the Minimum Amount Insured under the
Level and Variable Death Benefit Options available under the Policy. Both sets
of examples assume an Insured of age 40, a Minimum Amount Insured of 250% of
Cash Value (in accordance with the table on page 14 of this Prospectus), and
no outstanding policy loans.
OPTION 1 -- LEVEL DEATH BENEFIT
Under a "Level Death Benefit, the Death Benefit under the Policy is
generally equal to the Stated Amount of $25,000. Since the Policy is designed
to qualify as a life insurance contract, the Death Benefit cannot be less than
the Minimum Amount Insured (or, in this example, 250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equals $8,000, the Minimum
Amount Insured would be $20,00 ($8,000 X 250%). If the Death Benefit in the
Policy is the greater of the Stated Amount ($25,000) or the Minimum Amount
Insured ($20,000), then the Death Benefit would be $25,000.
EXAMPLE TWO. If the Cash Value of the Policy equals $40,000, the Minimum
Amount Insured would be $100,000 ($40,000 X 250%). The resulting Death
Benefit would be $100,000 since the Death Benefit is the greater of the
Stated Amount ($25,000) or the Minimum Amount Insured ($100,000).
EXAMPLE THREE. If the Insured is age 41, and the Cash Value of the Policy
equals $44,000, the Minimum Amount Insured would be $106,920 ($44,000 X
243%) (243% is the applicable percentage for a 41-year old insured). The
Death Benefit would be equal to $106,920 which is the greater of the Stated
Amount ($25,000) and the Minimum Amount Insured ($106,920).
EXAMPLE FOUR. The Death Benefit may also increase or decrease with the
investment experience of the applicable Underlying Funds to the extent the
Minimum Amount Insured exceeds the Stated Amount. Consequently, if the 41-
year old Insured has a Cash Value equal to $35,000 instead of $44,000, the
Death Benefit would be $85,000 ($35,000 X 243%).
OPTION 2 -- VARIABLE DEATH BENEFIT
Under a "Variable" Death Benefit, the Death Benefit under the Policy will
vary with the investment experience of the Investment Option(s) to which
Premium Payments are allocated under the Policy. The Variable Death Benefit
will generally be equal to the Stated Amount ($25,000) plus the Cash Value of
the Policy (determined on the date of the Insured's death). The Death Benefit
cannot, however, be less than the Minimum Amount Insured (or, in this example,
250% of the Cash Value).
EXAMPLE ONE. If the Cash Value of the Policy equal $10,000, the Minimum
Amount Insured would be $25,000 ($10,000 X 250%). The Death Benefit
($35,000) would be equal to the Stated Amount ($25,000) plus the Cash Value
($10,000), unless the Minimum Amount Insured ($25,000) was greater.
EXAMPLE TWO. If the Cash Value of the Policy equals $60,000, then the
Minimum Amount Insured would be $150,000 ($60,000 X 250%). The resulting
Death Benefit would be $150,000 because
-------------------------------------------------------------------------------
36
<PAGE>
the Minimum Amount Insured ($150,000) is greater than the Stated Amount
plus the Cash Value ($25,000 + $60,000 = $85,000).
EXAMPLE THREE. If the Insured is age 41, and the Cash Value of the Policy
equals $65,000, the Minimum Amount Insured would be $157,950 ($65,000 X
243%) (243% IS THE APPLICABLE PERCENTAGE FOR A 41-YEAR OLD INSURED). THE
RESULTING DEATH BENEFIT UNDER THE POLICY WOULD BE EQUAL TO $157,950 BECAUSE
THE MINIMUM AMOUNT INSURED ($157,950) IS GREATER THAN THE STATED AMOUNT
PLUS THE CASH VALUE ($25,000 + $65,000 = $90,000).
As long as the Policy remains in effect, the Company guarantees that the
Death Benefit under either option will not be less than the current Stated
Amount of the Policy less any outstanding policy loan, Deduction Amount due
but unpaid, and any amount payable pursuant to a collateral assignment of the
Policy. The Death Benefit under with option may vary with the Cash Value of
the Policy. Under Option 1, the Death Benefit equals the Stated Amount and
will vary only when the Minimum Amount Insured exceeds the Stated Amount of
the Policy. Under Option 2, the Death Benefit equals the greater of the Stated
Amount plus the Cash Value, and the Minimum Amount Insured.
-------------------------------------------------------------------------------
37
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
APPENDIX C -- REPRESENTATIVE STATED AMOUNTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The following table represents the Single Premium Factors for the
determination of the Stated Amount per dollar of Gross Premium, varying by Male
and Female (applicable to standard lives).
<TABLE>
<CAPTION>
MALE
AGE SP FAC AGE SP FAC
<S> <C> <C> <C>
20 12.65742 51 3.32670
21 12.20773 52 3.19482
22 11.76323 53 3.06987
23 11.32222 54 2.95167
24 10.88482 55 2.83985
25 10.45123 56 2.73405
26 10.02300 57 2.63380
27 9.60257 58 2.53865
28 9.19198 59 2.44827
29 8.79287 60 2.36238
30 8.40647 61 2.28087
31 8.03383 62 2.20360
32 7.67547 63 2.13053
33 7.33157 64 2.06153
34 7.00238 65 1.99645
35 6.68772 66 1.93500
36 6.38750 67 1.87688
37 6.10155 68 1.82180
38 5.82963 69 1.76950
39 5.57132 70 1.71990
40 5.32610 71 1.67297
41 5.09358 72 1.62875
42 4.87303 73 1.58733
43 4.66378 74 1.54873
44 4.46520 75 1.51285
45 4.27672 76 1.47945
46 4.09775 77 1.44823
47 3.92765 78 1.41890
48 3.76588 79 1.39115
49 3.61205 80 1.36485
50 3.46573
</TABLE>
<TABLE>
<CAPTION>
FEMALE
AGE SP FAC AGE SP FAC
<S> <C> <C> <C>
20 16.15463 51 4.13678
21 15.48558 52 3.97060
22 14.83810 53 3.81237
23 14.21155 54 3.66170
24 13.60662 55 3.51803
25 13.02272 56 3.38078
26 12.45932 57 3.24928
27 11.91653 58 3.12290
28 11.39430 59 3.00125
29 10.89240 60 2.88420
30 10.41067 61 2.77188
31 9.94865 62 2.66457
32 9.50535 63 2.56258
33 9.08002 64 2.46607
34 8.67288 65 2.37482
35 8.28367 66 2.28843
36 7.91217 67 2.20637
37 7.55883 68 2.12805
38 7.22327 69 2.05307
39 6.90517 70 1.98132
40 6.60400 71 1.91287
41 6.31898 72 1.84795
42 6.04912 73 1.78683
43 5.79305 74 1.72965
44 5.54958 75 1.67632
45 5.31792 76 1.62663
46 5.09715 77 1.58023
47 4.88652 78 1.53675
48 4.68553 79 1.49587
49 4.49387 80 1.45742
50 4.31108
</TABLE>
--------------------------------------------------------------------------------
38
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK.
--------------------------------------------------------------------------------
39
<PAGE>
VINTAGELIFE
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE
PROSPECTUS
INDIVIDUAL VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
HARTFORD, CONNECTICUT
L-12430 , 1995
<PAGE> 1
Independent Auditors' Report
The Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations and retained earnings and cash
flows for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for the year ended December
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", in 1994.
/s/KPMG PEAT MARWICK LLP
Hartford, Connecticut
January 17, 1995
16
<PAGE> 2
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the consolidated statements of operations and retained earnings
and cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993. These consolidated financial statements are the
responsibility of Company management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
/S/ COOPERS & LYBRAND
Hartford, Connecticut
January 24, 1994
17
<PAGE> 3
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the consolidated statements of operations and retained earnings
and cash flows for The Travelers Insurance Company and Subsidiaries for the
year ended December 31, 1992. These consolidated financial statements are the
responsibility of Company management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of The Travelers Insurance Company and Subsidiaries
for the year ended December 31, 1992 in conformity with generally accepted
accounting principles.
As discussed in Notes 2, 5, 10 and 13 to the consolidated financial statements,
the Company changed its method of accounting for postretirement benefits other
than pensions, accounting for income taxes and accounting for foreclosed assets
in 1992.
/S/ COOPERS & LYBRAND
Hartford, Connecticut
February 9, 1993, except for Notes 2 and 5,
as to which the date is January 24, 1994
18
<PAGE> 4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------|------------------------------
(for the year ended December 31, in millions) 1994 | 1993 1992
--------------------------------------------------------------------------|------------------------------
|
<S> <C> | <C> <C>
REVENUES |
Premiums $ 3,861 | $ 2,725 $ 2,686
Net investment income 1,849 | 1,884 2,101
Realized investment gains (losses) 14 | (21) (747)
Other 1,023 | 859 785
--------------------------------------------------------------------------|------------------------------
6,747 | 5,447 4,825
--------------------------------------------------------------------------|------------------------------
BENEFITS AND EXPENSES |
Current and future insurance benefits 3,421 | 3,121 3,000
Interest credited to contractholders 967 | 1,206 1,456
Claim settlement expenses 193 | 231 264
Amortization of deferred acquisition costs and value of |
insurance in force 284 | 55 61
General and administrative expenses 1,025 | 751 987
--------------------------------------------------------------------------|------------------------------
5,890 | 5,364 5,768
--------------------------------------------------------------------------|------------------------------
|
Income (loss) before federal income taxes |
and cumulative effects |
of changes in accounting principles 857 | 83 (943)
--------------------------------------------------------------------------|------------------------------
|
Federal income taxes: |
Current 36 | 20 2
Deferred 276 | (78) (340)
--------------------------------------------------------------------------|------------------------------
312 | (58) (338)
--------------------------------------------------------------------------|------------------------------
|
Income (loss) before cumulative effects of changes |
in accounting principles 545 | 141 (605)
Cumulative effect of change in accounting |
for postretirement benefits other than |
pensions, net of tax - | - (126)
Cumulative effect of change in accounting |
for income taxes - | - 350
--------------------------------------------------------------------------|------------------------------
|
Net income (loss) 545 | 141 (381)
Retained earnings beginning of year 1,017 | 888 1,281
Dividends to parent company - | (14) (14)
Preference stock tax benefit allocated by parent - | 2 2
--------------------------------------------------------------------------|------------------------------
Retained earnings end of year $ 1,562 | $ 1,017 $ 888
--------------------------------------------------------------------------|------------------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(at December 31, in millions) 1994 1993
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at market in 1994 (cost, $18,579);
at lower of aggregate cost or market in 1993 (market, $18,284) $17,260 $18,045
Bonds, held for investment (market, $18) - 18
Equity securities, at market (cost, $173; $199) 169 220
Mortgage loans 4,938 6,845
Real estate held for sale, net of accumulated depreciation of $9; $0 383 954
Policy loans 1,581 1,366
Short-term securities 2,279 1,376
Other investments 885 687
---------------------------------------------------------------------------------------------------------
Total investments 27,495 29,511
---------------------------------------------------------------------------------------------------------
Cash 102 50
Investment income accrued 362 379
Premium balances receivable 215 224
Reinsurance recoverable 2,915 2,883
Deferred acquisition costs and value of insurance in force 1,939 1,794
Deferred federal income taxes 950 855
Separate and variable accounts 5,160 4,666
Other assets 1,397 979
---------------------------------------------------------------------------------------------------------
Total assets $40,535 $41,341
---------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $16,354 $17,850
Future policy benefits 11,480 11,263
Policy and contract claims 1,222 1,274
Separate and variable accounts 5,128 4,644
Short-term debt 74 -
Other liabilities 1,923 2,007
---------------------------------------------------------------------------------------------------------
Total liabilities 36,181 37,038
---------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,452 3,179
Unrealized investment gains (losses), net of taxes (760) 7
Retained earnings 1,562 1,017
---------------------------------------------------------------------------------------------------------
Total shareholder's equity 4,354 4,303
---------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $40,535 $41,341
---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1994 | 1993 1992
----------------------------------------------------------------------------|--------------------------------
<S> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Premiums collected $ 3,722 | $ 2,530 $ 2,594
Net investment income received 1,895 | 1,794 2,134
Other revenues received 734 | 568 568
Benefits and claims paid (3,572) | (2,902) (3,123)
Interest credited to contractholders (922) | (1,154) (1,404)
Operating expenses paid (972) | (859) (869)
Income taxes (paid) refunded (27) | 25 (2)
Trading account investments, (purchases) sales, net - | (1,576) (364)
Other (141) | 202 522
----------------------------------------------------------------------------|--------------------------------
Net cash provided by (used in) operating activities 717 | (1,372) 56
----------------------------------------------------------------------------|--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES |
Investment repayments |
Fixed maturities 2,783 | 2,624 2,084
Mortgage loans 1,337 | 1,210 1,063
Proceeds from investments sold |
Fixed maturities 1,370 | 102 175
Equity securities 359 | 75 173
Mortgage loans 557 | 310 254
Real estate 728 | 949 235
Investments in |
Fixed maturities (4,767) | (3,269) (2,471)
Equity securities (340) | (51) (119)
Mortgage loans (94) | (246) (63)
Policy loans, net (215) | (2) (184)
Short-term securities, (purchases) sales, net (903) | 860 (615)
Other investments, (purchases) sales, net (50) | 53 191
Securities sold under repurchase agreement (209) | - -
Cash from disposition of operations 53 | - 5
----------------------------------------------------------------------------|--------------------------------
Net cash provided by investing activities 609 | 2,615 728
----------------------------------------------------------------------------|--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES |
Issuance (redemption) of short-term debt, net 74 | - -
Contractholder fund deposits 2,197 | 3,159 3,047
Contractholder fund withdrawals (3,529) | (4,418) (5,003)
Dividends to parent company - | (14) (14)
Return of capital to parent company (23) | - -
Contributions from parent company - | - 500
Other 7 | 6 2
----------------------------------------------------------------------------|--------------------------------
Net cash used in financing activities (1,274) | (1,267) (1,468)
----------------------------------------------------------------------------|--------------------------------
Net increase (decrease) in cash $ 52 | $ (24) $ (684)
----------------------------------------------------------------------------|--------------------------------
|
Cash at December 31 $ 102 | $ 50 $ 74
-------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Travelers Insurance Company and its subsidiaries (the Company) is a
wholly owned subsidiary of The Travelers Insurance Group Inc. (TIG).
TIG is an indirect wholly owned subsidiary of The Travelers Inc.
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of presentation
In December 1992, Primerica Corporation (Primerica) acquired
approximately 27% of the common stock of the Company's then parent, The
Travelers Corporation (the Acquisition). The Acquisition was accounted
for as a purchase. In connection with the Acquisition, Primerica
transferred 100% of the preferred provider organization and third party
administrator networks of Transport Life Insurance Company (a wholly
owned subsidiary of Primerica) to The Travelers Corporation, which
contributed them to the Company. The Company realized an increase to
shareholder's equity of $23 million related to this contribution.
Effective December 31, 1993, Primerica acquired the approximately 73% of
The Travelers Corporation common stock which it did not already own, and
The Travelers Corporation was merged into Primerica, which was renamed
The Travelers Inc. This was effected through the exchange of .80423
shares of The Travelers Inc. common stock for each share of The
Travelers Corporation common stock (the Merger). All subsidiaries of
The Travelers Corporation were contributed to TIG. In conjunction with
the Merger, The Travelers Inc. contributed Travelers Insurance Holdings
Inc. (formerly Primerica Insurance Holdings, Inc.) and its subsidiaries
(TIHI) to TIG, which in turn contributed TIHI to the Company.
TIHI is an intermediate holding company whose primary subsidiaries are
Primerica Life Insurance Company (Primerica Life) and its subsidiary
National Benefit Life Insurance Company (NBL), and Transport Life
Insurance Company (Transport). Through its subsidiaries, TIHI primarily
offers individual insurance and specialty accident and health insurance.
The Company realized an increase to shareholder's equity of $2.1 billion
at December 31, 1993 related to the contribution of TIHI. At December
31, 1993 and subsequent, TIHI is included in the Life and Annuities
segment.
The consolidated financial statements and the accompanying notes reflect
the historical operations of the Company for the years ended December 31,
1993 and 1992. The results of operations of TIHI and its subsidiaries
are not included in the 1993 and 1992 financial statements. The
Company's consolidated balance sheet and related data at December 31,
1994 and 1993 include TIHI on a fully consolidated basis. The
Acquisition and the Merger are being accounted for as a "step
acquisition." The consolidated balance sheet and related data at
December 31, 1993 reflect adjustments of assets and liabilities of the
Company (except TIHI) to their fair values determined at each acquisition
date (i.e., 27% of values at December 31, 1992 as carried forward and 73%
of the values at December 31, 1993). These assets and liabilities are
reflected in the consolidated balance sheet at December 31, 1993 based
upon management's then best estimate of their fair values. Evaluation and
appraisal of assets and liabilities, including investments, the value of
insurance in force, reinsurance recoverable, other insurance assets and
liabilities and related deferred income taxes were completed during 1994.
22
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The excess of the 27% share of assigned value of identifiable net assets
over cost at December 31, 1992, which was allocated to the Company
through the "pushdown" basis of accounting, was approximately $56
million and is being amortized over ten years on a straight-line basis.
The excess of the purchase price of the common stock over the fair value
of the 73% of net assets acquired at December 31, 1993, which was
allocated to the Company through the "pushdown" basis of accounting, was
approximately $340 million and is being amortized over 40 years on a
straight-line basis.
The consolidated statement of operations and retained earnings, the
consolidated statement of cash flows and the related accompanying notes
for the year ended December 31, 1994, which are presented on a purchase
accounting basis, are separated from the corresponding 1993 and 1992
information, which is presented on a historical accounting basis, to
indicate the difference in valuation bases.
Principles of Consolidation
The financial statements have been prepared in conformity with generally
accepted accounting principles and include the Company and its
significant insurance and noninsurance subsidiaries. Certain prior
year amounts have been reclassified to conform with the 1994
presentation.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if
quoted market prices are not available, discounted expected cash flows
using market rates commensurate with the credit quality and maturity of
the investment. Securities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to shareholder's
equity. As of December 31, 1993, in conjunction with the Merger, the
majority of fixed maturities were classified as "available for sale" and
recorded at the lower of aggregate cost or market value. Fixed
maturities classified as "held for investment" were carried at amortized
cost.
Equity securities, which include common and nonredeemable preferred
stocks, are available for sale and carried at fair value based primarily
on quoted market prices. Changes in fair values of equity securities
are charged or credited directly to shareholder's equity, net of income
taxes.
Mortgage loans are carried at amortized cost. Real estate held for sale
is carried at the lower of cost or fair value less estimated costs to
sell. Fair value was established at time of foreclosure by appraisers,
both internal and external, using discounted cash flow analyses and
other acceptable techniques.
23
<PAGE> 9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Accrual of income is suspended on fixed maturities or mortgage loans
that are in default, or on which it is likely that future interest
payments will not be made as scheduled. Interest income on investments
in default is recognized only as payment is received.
Gains or losses arising from futures contracts used to hedge investments
are treated as basis adjustments and are recognized in income over the
life of the hedged investments.
Gains and losses arising from forward contracts used to hedge foreign
investments in the Company's U.S. portfolios are a component of realized
investment gains and losses. Gains and losses arising from forward
contracts used to hedge investments in foreign operations (primarily
Canadian) are reflected directly in shareholder's equity, net of income
taxes.
Interest rate swaps are used to manage interest rate risk in the
investment portfolio and are marked to market with unrealized gains and
losses recorded as a component of shareholder's equity, net of income
taxes. Rate differentials on interest rate swap agreements are accrued
between settlement dates and are recognized as an adjustment to interest
income from the related investment.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pretax revenues based upon specific identification of the investments
sold on the trade date and, prior to the Merger, included adjustments to
investment valuation reserves. These adjustments reflected changes
considered to be other than temporary in the net realizable value of
investments. Also included are gains and losses arising from the
translation of the local currency value of foreign investments to U.S.
dollars, the functional currency of the Company.
Policy Loans
Policy loans are carried at the amount of the unpaid balances that are
not in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
Deferred Acquisition Costs
Costs of acquiring individual life insurance, annuities, and health
business, principally commissions and certain expenses related to policy
issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business, are deferred.
Acquisition costs relating to traditional life insurance and guaranteed
renewable health contracts are amortized over the period of anticipated
premiums; universal life in relation to estimated gross profits; and
annuity contracts employing a level yield method. For life insurance, a
10- to 25-year amortization period is used; for guaranteed renewable
health, a 10-year period, and a 10- to 15-year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
24
<PAGE> 10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Value of Insurance In Force
The value of insurance in force represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health contracts at the date of the Merger using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially
determined present value of the projected future profits discounted at
interest rates ranging from 14% to 18% for the business acquired. The
value of the business in force is amortized over the contract period
using current interest crediting rates to accrete interest and using
amortization methods based on the specified products. Traditional life
insurance and guaranteed renewable health policies are amortized over
the period of anticipated premiums; universal life is amortized in
relation to estimated gross profits; and annuity contracts are amortized
employing a level yield method. The value of insurance in force is
reviewed periodically for recoverability to determine if any adjustment
is required.
Separate and Variable Accounts
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to,
and investment risk is borne by, the contractholders. Each account has
specific investment objectives. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. The assets of these accounts are carried at
market value. Certain other separate accounts provide guaranteed levels
of return or benefits and the assets of these accounts are carried at
amortized cost, except at December 31, 1993 the assets and liabilities
of these accounts were recorded at the value assigned at the acquisition
dates. Amounts assessed to the contractholders for management services
are included in revenues. Deposits, net investment income and realized
investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
Goodwill
The excess of the 27% share of assigned value of identifiable assets
over cost at December 31, 1992 allocated to the Company as a result of
the Acquisition amounted to approximately $56 million and is being
amortized over 10 years on a straight-line basis. Goodwill resulting
from the excess of the purchase price over the fair value of the 73% of
net assets acquired related to the Merger amounted to approximately $340
million at December 31, 1993 and is being amortized over 40 years on a
straight-line basis. TIHI has goodwill of $246 million.
25
<PAGE> 11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain individual annuity contracts. Such
receipts are considered deposits on investment contracts that do not
have substantial mortality or morbidity risk. Account balances are also
increased by interest credited and reduced by withdrawals, mortality
charges and administrative expenses charged to the contractholders.
Calculations of contractholder account balances for investment contracts
reflect lapse, withdrawal and interest rate assumptions based on
contract provisions, the Company's experience and industry standards.
Interest rates credited to contractholder funds range from 3.4% to 8.0%.
Contractholder funds also include other funds that policyholders leave
on deposit with the Company.
Benefit Reserves
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for traditional life insurance, annuities,
and accident and health policies have been computed based upon
mortality, morbidity, persistency and interest assumptions applicable to
these coverages, which range from 2.5% to 12.0%, including adverse
deviation. These assumptions consider Company experience and industry
standards and may be revised if it is determined that the future
experience will differ substantially from that previously assumed. The
assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and
reinsurance.
Operating Leases
At December 31, 1993, operating leases were recorded at the value
assigned at the acquisition dates and included in the consolidated
balance sheet as a component of other liabilities. This liability is
being amortized over the average lease period.
Permitted Statutory Accounting Practices
The Company, domiciled principally in Connecticut and Massachusetts,
prepares statutory financial statements in accordance with the
accounting practices prescribed or permitted by the insurance
departments of those states. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The impact of any
permitted accounting practices on statutory surplus of the Company is
not material.
Premiums
Premiums are recognized as revenues when due. Reserves are established
for the portion of premiums that will be earned in future periods and
for deferred profits on limited-payment policies that are being
recognized in income over the policy term. At December 31, 1993, the
deferred profits on limited-payment policies were recorded at the values
assigned at the acquisition dates.
26
<PAGE> 12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Other Revenues
Other revenues include surrender, mortality and administrative charges
and fees as earned on investment, universal life and other insurance
contracts. Other revenues also include gains and losses on dispositions
of assets and operations other than realized investment gains and
losses, revenues of noninsurance subsidiaries, and the pretax operating
results of real estate joint ventures.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain individual annuity
contracts in accordance with contract provisions.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes in the Company's deferred federal income tax
asset during the year. The deferred federal income tax asset is
recognized to the extent that future realization of the tax benefit is
more likely than not, with a valuation allowance for the portion that is
not likely to be recognized.
Accounting Standards not yet Adopted
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(FAS 118), and Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (FAS 114), describe
how impaired loans should be measured when determining the amount of a
loan loss accrual. These statements also amend existing guidance on the
measurement of restructured loans in a troubled debt restructuring
involving a modification of terms. The adoption of these statements,
effective January 1, 1995, will not have a material effect on results of
operations or financial position.
2. CHANGES IN ACCOUNTING PRINCIPLES
Accounting for Certain Debt and Equity Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FAS 115), which addresses accounting and
reporting for investments in equity securities that have a readily
determinable fair value and for all debt securities. Investment
securities have been classified as "available for sale" and are
reported at fair value, with unrealized gains and losses, net of income
taxes, charged or credited directly to shareholder's equity. Previously,
securities classified as available for sale were carried at the lower
of aggregate cost or market value. Initial adoption of this standard
resulted in an increase of approximately $232 million (net of taxes) to
net unrealized gains which is included in shareholder's equity. This
increase included an unrealized gain of $133 million (net of income
taxes) on TIHI's investment in the common stock of The Travelers Inc.
See note 15 for additional disclosures.
27
<PAGE> 13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Offsetting of Amounts Related to Certain Contracts
Effective January 1, 1994, the Company adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts" (Interpretation 39). The general principle of
Interpretation 39 states that amounts due from and due to another party
may not be offset in the consolidated balance sheet unless a right of
setoff exists and the parties intend to exercise the right of setoff.
Implementation of Interpretation 39 did not have a material impact on the
Company's financial position; however, assets and liabilities were both
increased by $68 million as of December 31, 1994.
Accounting and Reporting for Reinsurance Contracts
In the first quarter of 1993, the Company implemented Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" (FAS 113).
FAS 113 requires the reporting of reinsurance receivables and prepaid
reinsurance premiums as assets and precludes the immediate recognition
of gains for all reinsurance contracts unless the liability to the
policyholder has been extinguished. Implementation of FAS 113 did not
have an impact on the Company's earnings, however, assets and
liabilities increased by like amounts. See note 5 for additional
reinsurance disclosures.
Postretirement Benefits Other Than Pensions
In 1992, the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (FAS 106). As required, the Company changed its method of
accounting for retiree benefit plans effective January 1, 1992, to
accrue for the Company's share of the costs of postretirement benefits
over the service period rendered by employees. Previously these
benefits were charged to expense when paid. The Company elected
to recognize immediately the liability for postretirement benefits as
the cumulative effect of a change in accounting principle. This
resulted in a noncash after-tax charge to net income of $126 million.
See note 10 for additional information relating to FAS 106.
Accounting for Income Taxes
In the third quarter of 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109)
with retroactive application to January 1, 1992. FAS 109 establishes new
principles for calculating and reporting the effects of federal income
taxes in financial statements. FAS 109 replaces the income statement
orientation inherent in the prior income tax accounting standard with a
balance sheet approach. Under the new approach, deferred tax assets and
liabilities are generally determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. FAS 109 allows recognition of deferred tax assets
if future realization of the tax benefit is more likely than not, with a
valuation allowance for the portion that is not likely to be recognized.
28
<PAGE> 14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. CHANGES IN ACCOUNTING PRINCIPLES, Continued
The implementation of FAS 109 resulted in a one time increase to
earnings of $350 million in the first quarter of 1992. This increase in
earnings was principally due to tax rate differences and the recognition
of a portion of previously unrecognized deferred tax assets. See note
13 for further discussion of FAS 109.
Accounting for Foreclosed Assets
In February 1993, The Travelers Corporation announced its intent to
accelerate the sale of foreclosed real estate and, effective December
31, 1992, changed its method of accounting for foreclosed assets in
compliance with the American Institute of Certified Public Accountants'
Statement of Position 92-3, "Accounting for Foreclosed Assets" (SOP
92-3). This guidance requires that in-substance foreclosures and
foreclosed assets held for sale be carried at the lower of cost or
fair value less estimated costs to sell. Previously, all foreclosed
assets were carried at cost less accumulated depreciation. This
accounting change resulted in a pretax charge of $412 million to
realized investment losses in 1992.
3. ACQUISITIONS AND DISPOSITIONS
In December 1994, the Company and its affiliates sold its group dental
insurance business to Metropolitan Life Insurance Company (MetLife) and
realized a gain on the sale of $9 million (aftertax).
On January 3, 1995, the Company and its affiliates completed the sale of
its group life and related businesses to MetLife, and completed the
formation of The MetraHealth Companies, Inc. (MetraHealth), a joint
venture of the medical businesses of the Company and its affiliates and
MetLife.
The Company and its affiliates sold its group life business as well as
related non-medical group insurance businesses to MetLife for $350
million. The assets transferred included customer lists, books and
records, and furniture and equipment. In connection with the sale, the
Company and its affiliates agreed to cede 100% of its risks in the
group life and related businesses to MetLife on an indemnity reinsurance
basis, effective January 1, 1995. In connection with the reinsurance
transaction, the Company and its affiliates transferred assets with a
fair market value of approximately $1.5 billion to MetLife, equal to the
statutory reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their
affiliates formed the MetraHealth joint venture by contributing their
group medical businesses to MetraHealth, in exchange for shares of
common stock of MetraHealth. The assets transferred included cash,
fixed assets, customer lists, books and records, certain trademarks and
other assets used exclusively or primarily in the medical businesses.
The Company also contributed all of the capital stock of its wholly
owned subsidiary, The Travelers Employee Benefits Company, to
MetraHealth. The total contribution by the Company amounted to $336
million at carrying value on the date of contribution. No gain was
recognized upon the formation of the joint venture. Upon formation of
the joint venture the Company owned 42.6% of the outstanding capital
stock of MetraHealth, TIG owned 7.4% and the other 50% was owned by
MetLife and its affiliates.
29
<PAGE> 15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. ACQUISITIONS AND DISPOSITIONS, Continued
In connection with the formation of the joint venture, the transfer of
the fee based medical business (Administrative Services Only) and other
noninsurance business to MetraHealth was completed on January 3, 1995.
As the medical insurance business of the Company comes due for renewal
and after obtaining regulatory approvals, the risks will be transferred
to MetraHealth. In the interim the related operating results for this
medical insurance business will be reported by the Company.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefits Operations
(MCEBO). Revenues and net income from MCEBO for the year ended 1994
amounted to $3.5 billion and $157 million, respectively. Beginning in
1995 the Company's results will reflect the runoff medical insurance
business, plus its equity interest in the earnings of MetraHealth.
On December 31, 1993, in conjunction with the Merger, The Travelers Inc.
contributed TIHI to TIG, which TIG then contributed to the Company at a
carrying value of $2.1 billion. Through its subsidiaries TIHI primarily
offers individual life insurance and specialty accident and health
insurance.
In December 1992, in conjunction with the Acquisition, The Travelers
Corporation acquired Transport Life Insurance Company's preferred
provider and third party administrator organizations from Primerica
Corporation (see note 1), and on December 30, 1992 contributed these
businesses to the Company.
4. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors and had $74
million outstanding at December 31, 1994. The Company maintains unused
credit availability under bank lines of credit at least equal to the
amount of the outstanding commercial paper.
In 1994, The Travelers Inc., Commercial Credit Company (an indirect
wholly owned subsidiary of The Travelers Inc.) and the Company entered
into an agreement with a syndicate of banks to provide $1.5 billion of
revolving credit, to be allocated to any of the above-indicated
companies. The revolving credit facility consists of a 364-day
revolving credit in the amount of $300 million and a 5-year revolving
credit in the amount of $1.2 billion. The participation of the Company
in this facility is limited to $300 million, and at December 31, 1994,
the Company's allocation was $200 million, all of which was unused.
30
<PAGE> 16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. Reinsurance is
accomplished through various plans of reinsurance, primarily
coinsurance, modified coinsurance and yearly renewable term. The
Company remains primarily liable as the direct insurer on all risks
reinsured. It is the policy of the Company to obtain reinsurance for
amounts above certain retention limits on individual life policies which
vary with age and underwriting classification. Generally, the maximum
retention on an ordinary life risk is $1.5 million. The Company writes
workers' compensation business through its Accident Department. This
business is ceded 100% to the Travelers Indemnity Company.
A summary of reinsurance financial data reflected within the
consolidated statement of operations and retained earnings is presented
below (in millions):
<TABLE>
<CAPTION>
-----------------------------------------------------------------|------------------------------
1994 | 1993 1992
-----------------------------------------------------------------|------------------------------
<S> <C> | <C> <C>
Written Premiums: |
Direct $ 4,529 | $ 3,308 $ 3,163
|
Assumed from: |
Affiliated companies 59 | 31 15
Non-affiliated companies 33 | 60 115
|
Ceded to: |
Affiliated companies (358) | (496) (522)
Non-affiliated companies (341) | (98) (62)
-----------------------------------------------------------------|------------------------------
|
Total Net Written Premiums $ 3,922 | $ 2,805 $ 2,709
=================================================================|==============================
|
Earned Premiums: |
Direct $ 4,475 | $ 3,256 $ 3,124
|
Assumed from: |
Affiliated companies 65 | 32 15
Non-affiliated companies 30 | 32 110
|
Ceded to: |
Affiliated companies (384) | (512) (491)
Non-affiliated companies (333) | (87) (64)
-----------------------------------------------------------------|------------------------------
|
Total Net Earned Premiums $ 3,853 | $ 2,721 $ 2,694
=================================================================|==============================
</TABLE>
31
<PAGE> 17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE, Continued
Reinsurance recoverables at December 31 include amounts recoverable on
unpaid and paid losses and were as follows (in millions):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance Recoverables:
Life and accident and health business:
Affiliated companies $ 3 $ 3
Non-affiliated companies 661 689
Property-casualty business:
Affiliated companies 2,251 2,191
------------------------------------------------------------------------------
Total Reinsurance Recoverables $ 2,915 $ 2,883
==============================================================================
</TABLE>
6. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $273 million in additional paid-in capital during 1994
is due primarily to the finalization of the evaluations and appraisals
used to assign fair values to assets and liabilities under purchase
accounting.
The increase of $1.7 billion in additional paid-in capital during 1993
arose from a contribution of $400 million from The Travelers Corporation
and the contribution of TIHI (see notes 1 and 3). This was partially
offset by the impact of the initial evaluations and appraisals used to
assign fair values to assets and liabilities under purchase accounting.
The increase in additional paid-in capital during December 31, 1992
arose from a contribution of $500 million in 1992 from The Travelers
Corporation and the contribution of Transport Life Insurance Company's
preferred provider and third party administrator organizations in 1992
(see note 3).
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments
is shown in note 15.
32
<PAGE> 18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. SHAREHOLDER'S EQUITY, Continued
Shareholder's Equity and Dividend Availability
The statutory net income, including TIHI, was $100 million for the year
ended December 31, 1994. The statutory net loss, excluding TIHI, was
$648 million and $346 million for the years ended December 31, 1993 and
1992, respectively.
Statutory capital and surplus was $2.1 billion and $1.8 billion at
December 31, 1994 and 1993, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to TIG without prior
approval of insurance regulatory authorities. Under statutory
accounting practices, there is no statutory surplus available in 1995
for dividends to TIG without prior approval of the Connecticut Insurance
Department.
Dividend payments to the Company from its insurance subsidiaries are
subject to similar restrictions and statutory surplus of the
subsidiaries is not available in 1995 for dividends to the Company
without prior approval of insurance regulatory authorities.
7. ADDITIONAL OPERATING INFORMATION
The Company has segmented its business by major product lines. TIHI was
contributed to the Company on December 31, 1993, and its assets at that
date and subsequent and its operations for the year ended December 31,
1994 are included in the following table in the Life and Annuities
segment. Transport Life Insurance Company's preferred provider and
third party administrator organizations were contributed to the Company
in December 1992 and are included in the Managed Care and Employee
Benefits segment.
33
<PAGE> 19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. ADDITIONAL OPERATING INFORMATION, continued
Results included in the table below reflect 1993 fourth quarter
after-tax charges of $103 million for an addition to reserves for
foreclosed properties held for sale and 1992 fourth quarter after-tax
charges of $272 million for implementation of SOP 92-3 and $193 million
for an addition to mortgage loan valuation reserves.
<TABLE>
<CAPTION>
Managed Care Corporate
Travelers Life and Employee and Other
(in millions) and Annuities Benefits Operations Consolidated
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
----
Revenues
Premiums $ 1,492 $ 2,369 $ - $ 3,861
Net investment income 1,603 246 - 1,849
Realized investment gains 13 - 1 14
Other 173 850 - 1,023
------------------------------------------------------------------------------------------------------------------------
Total $ 3,281 $ 3,465 $ 1 $ 6,747
------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 604 $ 257 $ (4) $ 857
Net income (loss) 392 157 (4) 545
Assets 33,078 5,131 2,326 40,535
------------------------------------------------------------------------------------------------------------------------
1993
----
Revenues
Premiums $ 330 $ 2,395 $ - $ 2,725
Net investment income 1,616 265 3 1,884
Realized investment gains (losses) (45) 24 - (21)
Other 120 737 2 859
------------------------------------------------------------------------------------------------------------------------
Total $ 2,021 $ 3,421 $ 5 $ 5,447
------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ (87) $ 173 $ (3) $ 83
Net income (loss) 19 123 (1) 141
Assets (purchase accounting value) 34,155 4,744 2,442 41,341
------------------------------------------------------------------------------------------------------------------------
1992
----
Revenues
Premiums $ 278 $ 2,408 $ - $ 2,686
Net investment income 1,799 290 12 2,101
Realized investment gains (losses) (725) (22) - (747)
Other 140 645 - 785
------------------------------------------------------------------------------------------------------------------------
Total $ 1,492 $ 3,321 $ 12 $ 4,825
------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal
income taxes and cumulative effects of
changes in accounting principles $ (844) $ (100) $ 1 $ (943)
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax (25) (101) - (126)
Cumulative effect of change in
accounting for income taxes 223 124 3 350
Net income (loss) (343) (42) 4 (381)
Assets 31,378 4,498 2,191 38,067
------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures, interest rate swaps and forward contracts, as a means of
prudently hedging exposure to price, foreign currency and/or interest
rate risk on anticipated investment purchases or existing assets and
liabilities. Also, in the normal course of business, the Company has
fixed and variable rate loan commitments and unfunded commitments to
partnerships. The Company does not hold or issue derivative instruments
for trading purposes.
These derivative financial instruments have off-balance-sheet risk.
Financial instruments with off-balance-sheet risk involve, to varying
degrees, elements of credit and market risk in excess of the amount
recognized in the consolidated balance sheet. The contract or notional
amounts of these instruments reflect the extent of involvement the
Company has in a particular class of financial instrument. However, the
maximum credit loss or cash flow associated with these instruments can be
less than these amounts. For forward contracts and interest rate swaps,
credit risk is limited to the amounts calculated to be due the Company on
such contracts. For unfunded commitments to partnerships, credit
exposure is the amount of the unfunded commitments. For fixed and
variable rate loan commitments, credit exposure is represented by the
contractual amount of these instruments.
The Company monitors creditworthiness of counterparties to these
financial instruments by using criteria of acceptable risk that are
consistent with on-balance-sheet financial instruments. The controls
include credit approvals, limits and other monitoring procedures. Many
transactions include the use of collateral to minimize credit risk and
lower the effective cost to the borrower.
The Company may occasionally enter into interest rate swaps in
connection with other financial instruments to provide greater risk
diversification and better match an asset with a corresponding
liability. Under interest rate swaps, the Company agrees with other
parties to exchange, at specified intervals, the difference between
fixed-rate and floating rate interest amounts calculated by reference to
an agreed notional principal amount. Generally, no cash is exchanged at
the outset of the contract and no principal payments are made by either
party. A single net payment is usually made by one counterparty at each
due date. Swap agreements are not exchange traded so they are subject
to the risk of default by the counterparty. In all cases,
counterparties under these agreements are major financial institutions
with the risk of non-performance considered remote. At December 31,
1994 and 1993, the Company had entered into interest rate swaps with
contract values of $145 million and $153 million, respectively. At both
December 31, 1994 and 1993, the fair value of interest rate swaps was $1
million (loss position) which is determined using a discounted cash flow
method.
The off-balance-sheet risks of financial futures contracts, forward
contracts, fixed and variable rate loan commitments and unfunded
commitments to partnerships were not considered significant at December
31, 1994 and 1993.
35
<PAGE> 21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS, Continued
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Fair values of financial instruments which are considered
insurance contracts are not required to be disclosed and are not
included in the amounts discussed.
At December 31, 1994 and 1993, investments in fixed maturities have a
fair value of $17.3 billion and $18.3 billion, respectively. See note
15.
At December 31, 1994, mortgage loans have a carrying value of $4.9
billion, which approximates fair value, compared with a carrying value
and a fair value of $6.8 billion at December 31, 1993. In estimating
fair value, the Company used interest rates reflecting the higher
returns required in the current real estate financing market.
The carrying value of $417 million and $320 million of financial
instruments classified as other assets approximates fair values at
December 31, 1994 and 1993, respectively. The carrying value of $1.2
billion and $878 million of financial instruments classified as other
liabilities also approximates their fair values at December 31, 1994 and
1993, respectively. Fair value is determined using various methods
including discounted cash flows and carrying value, as appropriate for
the various financial instruments.
At December 31, 1994, contractholder funds with defined maturities have
a carrying value of $4.2 billion and a fair value of $4.0 billion,
compared with a carrying value and a fair value of $5.0 billion at
December 31, 1993. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with
the Company's credit risk and the expected timing of cash flows.
Contractholder funds without defined maturities have a carrying value of
$9.1 billion and a fair value of $8.8 billion at December 31, 1994,
compared with a carrying value of $13.0 billion and a fair value of
$12.7 billion at December 31, 1993. These contracts generally are
valued at surrender value.
The assets of separate accounts providing a guaranteed return have a
carrying value and a fair value of $1.5 billion and $1.4 billion,
respectively, at December 31, 1994, compared with a carrying value and a
fair value of $1.5 billion and $1.6 billion, respectively, at December
31, 1993. The liabilities of separate accounts providing a guaranteed
return have a carrying value and a fair value of $1.5 billion and $1.3
billion, respectively, at December 31, 1994, compared with a carrying
value and a fair value of $1.5 billion and $1.7 billion, respectively,
at December 31, 1993.
36
<PAGE> 22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS, Continued
The carrying values of cash, short-term securities and investment income
accrued approximate their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
9. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
See Note 8 for a discussion of financial instruments with
off-balance-sheet risk.
Litigation
In April 1989, a lawsuit was filed against the Company by the federal
government alleging the Company improperly handled health benefit claims
for individuals who are actively employed and eligible for Medicare
coverage. In November 1992, the court ruled on cross motions for
summary judgment. The court found that the Company had no liability
when acting in the capacity of an administrator of claims. However, the
court also recognized that, while the government's right of recovery
with respect to insured claims is governed by the substantive terms of
our customers' health benefit plan, the right of recovery is independent
of procedural limitations in the Company's contracts.
The Company is a defendant or codefendant in various litigation matters.
Although there can be no assurances, as of December 31, 1994, the
Company believes, based on information currently available, that the
ultimate resolution of these legal proceedings would not be likely to
have a material adverse effect on its results of operations, financial
condition or liquidity.
10. BENEFIT PLANS
Pension Plans
The Company participates in qualified and nonqualified, noncontributory
defined benefit pension plans covering the majority of the Company's
U.S. employees. Benefits for the qualified plan are based on an account
balance formula. Under this formula, each employee's accrued benefit
can be expressed as an account that is credited with amounts based upon
the employee's pay, length of service and a specified interest rate, all
subject to a minimum benefit level. This plan is funded in accordance
with the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code. For the nonqualified plan, contributions are
based on benefits paid.
Certain subsidiaries of TIHI participate in a noncontributory defined
benefit plan sponsored by their ultimate parent, The Travelers Inc.
37
<PAGE> 23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS, Continued
The Company's share of net pension expense was $6 million, $8 million
and $22 million for 1994, 1993 and 1992, respectively.
Through plans sponsored by TIG, the Company also provides defined
contribution pension plans for certain agents. Company contributions
are primarily a function of production. The expense for these plans was
$2 million in 1994, 1993 and 1992. Certain non-U.S. employees of TIHI
are covered by noncontributory defined benefit plans. These plans are
funded based upon local laws.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health
care and life insurance benefits for retired employees through a plan
sponsored by TIG. This plan does not include employees of TIHI.
Covered employees may become eligible for these benefits if they reach
retirement age while working for the Company. These retirees may elect
certain prepaid health care benefit plans. Life insurance benefits
generally are set at a fixed amount. The cost recognized by the Company
for these benefits represents its allocated share of the total costs of
the plan, net of employee contributions.
In the third quarter of 1992, TIG adopted FAS 106 and elected to
recognize the accumulated postretirement benefit obligation (i.e., the
transition obligation) as a change in accounting principle retroactive
to January 1, 1992. The Company's pretax share of the total cost of the
plan for 1994, 1993 and 1992 was $14 million, $29 million and $26
million, respectively.
The Merger resulted in a change in control of The Travelers Corporation
as defined in the applicable plans, and provisions of some employee
benefit plans secured existing compensation and benefit entitlements
earned prior to the change in control, and provided a salary and benefit
continuation floor for employees whose employment was affected. The
costs related to these changes have been assumed by TIG.
Savings, Investment and Stock Ownership Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIG (except TIHI), the Company matches a
portion of employee contributions. Effective April 1, 1993, the match
decreased from 100% to 50% of an employee's first 5% contribution and a
variable match based on TIG's profitability was added. The Company's
matching obligations were $7 million, $10 million and $16 million in
1994, 1993 and 1992, respectively.
38
<PAGE> 24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS
The principal banking functions for certain subsidiaries and affiliates
of TIG, and salaries and expenses for TIG and its insurance subsidiaries
(excluding TIHI), are handled by the Company. Settlements for these
functions between the Company and its affiliates are made regularly.
The Company provides various insurance coverages, principally life and
health, to employees of certain subsidiaries of TIG. The premiums for
these coverages were charged in accordance with normal cost allocation
procedures. In addition, investment advisory and management services,
data processing services and claims processing services are provided by
affiliated companies.
TIG and its subsidiaries maintain short-term investment pools in which
the Company participates. The positions of each company participating
in the pools are calculated and adjusted daily. At December 31, 1994
and 1993, the pools totaled approximately $1.5 billion and $1.3 billion,
respectively. The Company's share of the pools amounted to $1.1 billion
and $439 million at December 31, 1994 and 1993, respectively, and is
included in short-term securities in the consolidated balance sheet.
The Company markets a variable annuity product through its affiliate,
Smith Barney. Sales of this product were $158 million in 1994.
The Company leases new furniture and equipment from a noninsurance
subsidiary of TIG. The rental expense charged to the Company for this
furniture and equipment was $9 million, $10 million and $9 million in
1994, 1993 and 1992, respectively.
At December 31, 1994 and 1993, TIC has an investment of $23 million and
$27 million, respectively, in bonds of its affiliate, Commercial Credit
Company. This is included in fixed maturities in the consolidated
balance sheet.
TIHI has an investment of $231 million and $110 million in common stock
of The Travelers Inc. at December 31, 1994 and 1993, respectively.
This is carried at fair value at December 31, 1994 and at cost at
December 31, 1993. At December 31, 1994, TIHI has an investment of $35
million in redeemable preferred stock of The Travelers Inc. which is
carried at fair value. TIHI has notes receivable from The Travelers
Inc. of $30 million at December 31, 1994 and 1993, which are carried at
cost. These assets are included in other investments in the
consolidated balance sheet.
39
<PAGE> 25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. LEASES
The Company has entered into various operating and capital lease
agreements for office space and data processing and certain other
equipment. Rental expense under operating leases was $99 million, $113
million and $122 million in 1994, 1993 and 1992, respectively. Future
net minimum rental and lease payments are estimated as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Minimum operating Minimum capital
------------------------------------------------------------------------------------------
(in millions) rental payments lease payments
------------------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31,
1995 $ 112 $ 7
1996 85 7
1997 69 4
1998 54 4
1999 47 4
Thereafter 36 64
------------------------------------------------------------------------------------------
$ 403 $ 90
------------------------------------------------------------------------------------------
</TABLE>
The Company is reimbursed by affiliates of TIG for utilization of space
and equipment.
The following is a summary of assets under capital leases:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
(in millions) 1994 1993
-------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 25 $ 25
Equipment 14 14
-------------------------------------------------------------------------
39 39
Less accumulated depreciation 17 14
-------------------------------------------------------------------------
Net $ 22 $ 25
-------------------------------------------------------------------------
</TABLE>
The net carrying value of the assets is recorded at amortized cost and
at the value assigned at the acquisition dates at December 31, 1994 and
1993, respectively.
40
<PAGE> 26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
(in millions) 1994 | 1993 1992
------------------------------------------------------------|------------------------------
<S> <C> | <C> <C>
Effective tax rate |
|
Income (loss) before federal |
income taxes $ 857 | $ 83 $ (943)
------------------------------------------------------------|------------------------------
Statutory tax rate 35% | 35% 34%
------------------------------------------------------------|------------------------------
|
Expected federal income taxes $ 300 | $ 29 $ (321)
Tax effect of: |
Nontaxable investment income (4) | (1) (1)
Adjustments to benefit and other reserves - | (46) (18)
Adjustment to deferred tax asset for |
enacted change in tax rates from |
34% to 35% - | (25) -
Goodwill 12 | - -
Other 4 | (15) 2
------------------------------------------------------------|------------------------------
Federal income taxes $ 312 | $ (58) $ (338)
------------------------------------------------------------|------------------------------
|
Effective tax rate 36% | (70%) 36%
------------------------------------------------------------|------------------------------
|
Composition of federal income taxes |
Current: |
United States $ 22 | $ 17 $ (3)
Foreign 14 | 3 5
------------------------------------------------------------|------------------------------
Total 36 | 20 2
------------------------------------------------------------|------------------------------
|
Deferred: |
United States 271 | (78) (340)
Foreign 5 | - -
------------------------------------------------------------|------------------------------
Total 276 | (78) (340)
------------------------------------------------------------|------------------------------
Federal income taxes $ 312 | $ (58) $ (338)
-------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
The net deferred tax assets at December 31, 1994 and 1993 were comprised
of the tax effects of the temporary differences related to the following
assets and liabilities:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(in millions) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $ 453 $ 575
Contractholder funds 158 184
Investments 690 492
Other employee benefits 87 65
Other 257 146
----------------------------------------------------------------------------------------------
Total 1,645 1,462
----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs and value of insurance in force 529 504
Prepaid pension expense 5 3
Other 61 -
----------------------------------------------------------------------------------------------
Total 595 507
----------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 1,050 955
Valuation allowance for deferred tax assets (100) (100)
----------------------------------------------------------------------------------------------
Net deferred tax asset after valuation allowance $ 950 $ 855
----------------------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, the Company and
its life insurance subsidiaries will file a consolidated federal income
tax return. Federal income taxes are allocated to each member of the
consolidated return on a separate return basis adjusted for credits and
other amounts required by the consolidation process. Any resulting
liability will be paid currently to the Company. Any credits for losses
will be paid by the Company to the extent that such credits are for tax
benefits that have been utilized in the consolidated federal income tax
return. The Company has no receivable for unreimbursed credits from its
previous allocation agreement with The Travelers Corporation.
42
<PAGE> 28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the net deferred tax asset on investment losses to
the amount that, based upon available evidence, is more likely than not
to be realized. Reversal of the valuation allowance is contingent upon
the recognition of future capital gains in the Company's consolidated
life insurance company federal income tax return through 1998, and the
consolidated federal income tax return of The Travelers Inc. commencing
in 1999 or a change in circumstances which causes the recognition of the
benefits to become more likely than not. There was no net change in the
valuation allowance during 1994. The initial recognition of any benefit
produced by the reversal of the valuation allowance will be recognized
by reducing goodwill.
The Company has a net deferred tax asset, after the valuation allowance
of $100 million, which relates to temporary differences that are
expected to reverse as net ordinary deductions except for a deferred tax
asset of $319 million which relates to the unrealized loss on fixed
maturity investments. Management does not intend to realize the
unrealized loss on the fixed maturity investments except to the extent
of offsetting capital gains. The Company will have to generate
approximately $1.8 billion of taxable income, before reversal of these
temporary differences, primarily over the next 10 to 15 years, to
realize the remainder of the deferred tax asset, exclusive of the
unrealized loss on fixed maturity investments. Management expects to
realize the remainder of the deferred tax asset based upon its
expectation of future positive taxable income, after the reversal of
these deductible temporary differences, in the consolidated life
insurance company federal income tax return through 1998, and the
consolidated federal income tax return of The Travelers Inc. commencing
in 1999. The taxable income of The Travelers Inc. consolidated return,
after reversal of the deductible temporary differences, is expected to
be at least $1 billion annually. At December 31, 1994, the Company has
no ordinary or capital loss carryforwards.
The "policyholders surplus account", which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for
which no provision has been made in the financial statements) is
approximately $326 million.
See note 2 for a discussion of the implementation of new principles for
accounting for income taxes.
43
<PAGE> 29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
------------------------------------------------------------------|------------------------------
(For the year ended December 31, in millions) 1994 | 1993 1992
------------------------------------------------------------------|------------------------------
<S> <C> | <C> <C>
Gross investment income |
Fixed maturities $ 1,253 | $ 1,221 $ 1,242
Mortgage loans 534 | 692 868
Real estate 177 | 383 384
Policy loans 112 | 106 109
Other 7 | (23) -
------------------------------------------------------------------|------------------------------
2,083 | 2,379 2,603
------------------------------------------------------------------|------------------------------
|
Investment expenses 234 | 495 502
------------------------------------------------------------------|------------------------------
Net investment income $ 1,849 | $ 1,884 $ 2,101
------------------------------------------------------------------|------------------------------
</TABLE>
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------|-----------------------------
(For the year ended December 31, in millions) 1994 | 1993 1992
-------------------------------------------------------------------|-----------------------------
<S> <C> | <C> <C>
Realized |
|
Fixed maturities $ (3) | $ 182 $ (11)
Equity securities 19 | 14 9
Mortgage loans - | (32) (386)
Real estate - | (222) (400)
Other (2) | 37 41
-------------------------------------------------------------------|-----------------------------
Realized investment gains (losses) $ 14 | $ (21) $ (747)
-------------------------------------------------------------------|-----------------------------
</TABLE>
44
<PAGE> 30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Changes in net unrealized investment gains (losses) that are included as
a separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1994 | 1993 1992
-------------------------------------------------------------------|-----------------------------
<S> <C> | <C> <C>
Unrealized |
|
Fixed maturities $ (1,319) | $ (235) $ 146
Equity securities (25) | (17) 6
Other 165 | 28 4
-------------------------------------------------------------------|-----------------------------
(1,179) | (224) 156
Related taxes (412) | (83) 53
-------------------------------------------------------------------|-----------------------------
|
Net unrealized investment gains (losses) (767) | (141) 103
Contribution of TIHI - 5 | -
Balance beginning of year 7 143 | 40
--------------------------------------------------------------------------------------|----------
Balance end of year $ (760) $ 7 | $ 143
-------------------------------------------------------------------------------------------------
</TABLE>
The initial adoption of FAS 115 resulted in an increase of approximately
$232 million (net of taxes) to net unrealized gains in 1994.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale
were $1.4 billion in 1994, resulting in gross realized gains of $15
million and gross realized losses of $27 million. There were no sales
of fixed maturities classified as available for sale in 1993 or 1992 as,
in conjunction with the Merger, fixed maturities were first classified
as "available for sale" effective December 31, 1993.
Prior to December 31, 1993, fixed maturities that were intended to be
held to maturity were recorded at amortized cost and classified as held
for investment. Sales from the amortized cost portfolios have been made
periodically. Such sales were $97 million and $195 million in 1993 and
1992, respectively. Gross gains of $7 million and $10 million in 1993
and 1992, respectively, and gross losses of $1 million and $6 million in
1993 and 1992, respectively, were realized on those sales.
Prior to December 31, 1993, the carrying values of the trading portfolio
fixed maturities were adjusted to market value as it was likely they
would be sold prior to maturity. At December 31, 1992, these fixed
maturities had market values of $4.8 billion. Sales of trading
portfolio fixed maturities were $4.0 billion and $642 million in 1993
and 1992, respectively. Gross gains of $165 million and $24 million in
1993 and 1992, respectively, and gross losses of $2 million and $4
million in 1993 and 1992, respectively, were realized on those sales.
45
<PAGE> 31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The amortized cost and market value of investments in fixed maturities
were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
December 31, 1994
------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
(in millions) cost gains losses value
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 3,779 $ 3 $ 304 $ 3,478
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 3,080 3 306 2,777
Obligations of states,
municipalities and
political subdivisions 87 - 7 80
Debt securities issued by
foreign governments 398 - 26 372
All other corporate bonds 11,225 14 696 10,543
Redeemable preferred stock 10 - - 10
------------------------------------------------------------------------------------------------
Total $ 18,579 $ 20 $ 1,339 $ 17,260
------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE> 32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
December 31, 1993
------------------------------------------------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
(in millions) value gains losses value
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 4,219 $ 18 $ 18 $ 4,219
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 2,807 67 6 2,868
Obligations of states,
municipalities and
political subdivisions 259 9 - 268
Debt securities issued by
foreign governments 333 6 - 339
All other corporate bonds 10,474* 125 29 10,570
Redeemable preferred stock 20 - - 20
Held for investment 18 - - 18
------------------------------------------------------------------------------------------------
Total $ 18,130 $ 225 $ 53 $ 18,302
------------------------------------------------------------------------------------------------
</TABLE>
* Before valuation reserves of $67 million.
The amortized cost and market value of fixed maturities at December 31,
1994, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Maturity Amortized Market
(in millions) cost value
------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,217 $ 1,197
Due after 1 year through 5 years 4,691 4,434
Due after 5 years through 10 years 5,731 5,310
Due after 10 years 3,161 2,841
------------------------------------------------------------------------------------------------
14,800 13,782
Mortgage-backed securities 3,779 3,478
------------------------------------------------------------------------------------------------
Total $ 18,579 $ 17,260
------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The Company's investment strategy
is to purchase CMO tranches which are protected against prepayment risk,
primarily planned amortization class (PAC) tranches. Prepayment
protected tranches are preferred because they provide stable cash flows
in a variety of scenarios. The Company does invest in other types of
CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1994 and 1993, the Company held CMOs with a market value
of $2.2 billion and $2.5 billion, respectively. Approximately 88% of
the Company's CMO holdings are fully collateralized by GNMA, FNMA or
FHLMC securities at December 31, 1994 and 1993. The majority of these
are GNMA-backed securities. In addition, the Company held $1.3 billion
and $1.9 billion of GNMA, FNMA or FHLMC mortgage-backed securities at
December 31, 1994 and 1993, respectively. Virtually all of these
securities are rated AAA. The Company also held $927 million and $899
million of securities that are backed primarily by credit card or car
loan receivables at December 31, 1994 and 1993, respectively.
Equity Securities
The cost and market values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
December 31, 1994
------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Market
(in thousands) Cost gains losses value
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $ 133 $ 19 $ 21 $ 131
Nonredeemable preferred stocks 40 - 2 38
------------------------------------------------------------------------------------------------
Total $ 173 $ 19 $ 23 $ 169
------------------------------------------------------------------------------------------------
December 31, 1993
------------------------------------------------------------------------------------------------
Common stocks $ 129 $ 22 $ 3 $ 148
Nonredeemable preferred stocks 70 3 1 72
------------------------------------------------------------------------------------------------
Total $ 199 $ 25 $ 4 $ 220
------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $359 million in 1994,
resulting in gross realized gains of $24 million and gross realized
losses of $6 million.
48
<PAGE> 34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Mortgage loans and real estate
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market. The Company continues its strategy, adopted in
conjunction with the Merger, to dispose of these real estate assets and
some of the mortgage loans and to reinvest the proceeds to obtain
current market yields.
At December 31, 1994 and 1993, the Company's mortgage loan and real
estate held for sale portfolios consisted of the following (in
millions):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 4,467 $ 5,680
Underperforming mortgage loans 471 1,165
------------------------------------------------------------------------------
Total mortgage loans 4,938 6,845
------------------------------------------------------------------------------
Real estate held for sale 383 954
------------------------------------------------------------------------------
Total mortgage loans and real estate $ 5,321 $ 7,799
------------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
(in millions)
-----------------------------------------------------
<S> <C>
Past maturity $ 196
1995 708
1996 517
1997 550
1998 614
1999 611
Thereafter 1,742
-----------------------------------------------------
Total $ 4,938
-----------------------------------------------------
</TABLE>
Concentrations
At December 31, 1994 and 1993, the Company had no concentration of
credit risk in a single investee exceeding 10% of consolidated
shareholder's equity.
The Company participates in two short-term investment pools maintained by
TIG and its subsidiaries. These pools are discussed in note 11.
49
<PAGE> 35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Included in fixed maturities are below investment grade assets totaling
$922 million and $814 million at December 31, 1994 and 1993,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or
the equivalent by the internal analysts when a public rating does not
exist. Such assets include publicly traded below investment grade
bonds, highly leveraged transactions and certain other privately issued
bonds that are classified as below investment grade loans.
The Company also has significant concentrations of investments in the
following industries:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(in millions) 1994 1993
------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 1,241 $ 1,442
Electric utilities 1,222 1,348
Banking 953 743
Oil and gas 859 651
------------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals above, are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(in millions) 1994 1993
------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 75 $ 45
Electric utilities 32 47
Banking 21 21
Oil and gas 33 38
------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1994 and 1993, significant concentrations of mortgage
loans were for properties located in highly populated areas in the
states listed below. The amounts are shown below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(in millions) 1994 1993
------------------------------------------------------------------------------------------------
<S> <C> <C>
California $ 929 $ 1,174
New York 558 780
Florida 432 588
Texas 380 584
Illinois 347 485
------------------------------------------------------------------------------------------------
</TABLE>
Other mortgage loan investments are fairly evenly dispersed throughout
the United States, with no holdings in any state exceeding $273 million
and $324 million at December 31, 1994 and 1993, respectively.
50
<PAGE> 36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Concentrations of mortgage loans by property type at December 31, 1994
and 1993 are shown below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(in millions) 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Office $ 2,065 $ 2,769
Apartment 1,029 1,635
Retail 606 891
Agricultural 540 643
Hotel 402 547
-----------------------------------------------------------------------------------------------
</TABLE>
Real estate investments are dispersed throughout the United States, with
no holdings in any state exceeding $111 million or $191 million at
December 31, 1994 or 1993, respectively.
Real estate assets at December 31, 1994 and 1993 included office
properties with carrying values of $205 million and $568 million,
respectively.
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with
respect to new mortgage loans generally require loan to value ratios of
75% or less at the time of mortgage origination.
Investment Valuation Reserves
At December 31, 1994, 1993 and 1992, total investment valuation
reserves, which are deducted from the applicable investment carrying
values in the consolidated balance sheet, were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
(in millions) 1994 | 1993 1992
------------------------------------------------------------------|------------------------------
<S> <C> | <C> <C>
Beginning of year $ 67 | $ 1,417 $ 864
Increase - | 195 821
Impairments, net of gains/recoveries - | (602) (268)
FAS 115/Purchase accounting adjustment (67) | (943) -
-------------------------------------------------------------------------------------------------
End of year $ - $ 67 | $ 1,417
-------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, investment valuation reserves were comprised of
$67 million for securities. Increases in the investment valuation
reserves are reflected as realized investment losses.
51
<PAGE> 37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Nonincome Producing
Investments included in the consolidated balance sheets that were
nonincome producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(in millions) 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 127 $ 249
Real estate 73 147
Fixed maturities 6 24
-----------------------------------------------------------------------------------------------
Total $ 206 $ 420
-----------------------------------------------------------------------------------------------
</TABLE>
Restructured
The Company has mortgage loans and debt securities which were
restructured at below market terms totaling approximately $259 million
and $796 million at December 31, 1994 and 1993, respectively. At
December 31, 1993, the Company's restructured assets are recorded at
purchase accounting value. The new terms typically defer a portion of
contract interest payments to varying future periods. The accrual of
interest is suspended on all restructured assets, and interest income is
reported only as payment is received. Gross interest income on
restructured assets that would have been recorded in accordance with the
original terms of such loans amounted to $52 million in 1994 and $121
million in 1993. Interest on these assets, included in net investment
income, aggregated $17 million and $52 million in 1994 and 1993,
respectively.
16. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES
At December 31, 1994, the Company has $23.2 billion of life and annuity
deposit funds and reserves. Of that total, $11.6 billion are not
subject to discretionary withdrawal based on contract terms and related
market conditions. The remaining $11.6 billion are for life and annuity
products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal are $1.9 billion of liabilities that are surrenderable with
market value adjustments. An additional $5.7 billion of the life
insurance and individual annuity liabilities are subject to
discretionary withdrawals with an average surrender charge of 5.5%.
Another $1.4 billion of liabilities are surrenderable at book value over
5 to 10 years. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $2.6 billion of
liabilities are surrenderable without charge. Approximately 30% of
these liabilities relate to individual life products. These risks would
have to be underwritten again if transferred to another carrier, which
is considered a significant deterrent for long-term policyholders.
Insurance liabilities that are surrendered or withdrawn from the Company
are reduced by outstanding policy loans and related accrued interest
prior to payout.
52
<PAGE> 38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. RESTRUCTURING COSTS
During 1992, the Company announced a series of organizational
restructuring initiatives associated with its plan to streamline its
business and corporate operations. These initiatives have been
substantially completed. These initiatives resulted in a pretax charge
in 1992 of $151 million, consisting of $96 million for severance,
benefits, accrued vacation and outplacement costs, $5 million for
relocation costs due to consolidation efforts, $19 million for lease
costs, $15 million for writeoff of goodwill related to identified
divestitures and $16 million of miscellaneous other costs.
18. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
In the first quarter of 1992, the Company changed its presentation of
cash flows from operating activities from the indirect method to the
direct method. The following table reconciles net income (loss) to net
cash provided by operating activities:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1994 | 1993 1992
----------------------------------------------------------------|-------------------------------
<S> <C> | <C> <C>
Net income (loss) $ 545 | $ 141 $ (381)
Reconciling adjustments |
Realized gains (losses) (14) | 21 747
Deferred federal income taxes 276 | (78) (340)
Amortization of deferred policy acquisition |
costs and value of insurance in force 284 | 55 61
Additions to deferred policy acquisition costs (429) | 5 (2)
Trading account investments, |
(purchases) sales, net - | (1,576) (364)
Investment income accrued 17 | 1 29
Premium balances receivable 9 | 41 3
Insurance reserves and accrued expenses 165 | 542 (81)
Restructuring reserves - | (79) 121
Cumulative effects of changes in |
accounting principles - | - (224)
Other, including investment valuation reserves |
in 1993 and 1992 (136) | (445) 487
----------------------------------------------------------------|-------------------------------
|
Net cash provided by (used in) |
operating activities $ 717 | $ (1,372) $ 56
------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
19. NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
1994 exchange of $23 million of TIHI's investment in The Travelers Inc.
common stock for $35 million of The Travelers Inc. nonredeemable
preferred stock; b) the acquisition of real estate through foreclosures
of mortgage loans amounting to $229 million, $563 million and $753
million in 1994, 1993 and 1992, respectively; c) the acceptance of
purchase money mortgages for sales of real estate aggregating $96
million, $190 million and $72 million in 1994, 1993 and 1992,
respectively; d) the 1993 contribution of TIHI by The Travelers Inc. (see
note 3); e) the 1993 contribution of $400 million of bond investments by
The Travelers Corporation (see note 6); f) increases in investment
valuation reserves in 1993 and 1992 for securities, mortgage loans and/or
investment real estate (see note 15); g) the 1993 transfer of $352
million of mortgage loans and bonds from the Company's general account to
two separate accounts; and h) the contribution in 1992 of Transport Life
Insurance Company's preferred provider and third party administrator
organizations by The Travelers Corporation (see note 3).
54
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
------------------
Commission file number 33-33691
------------------
THE TRAVELERS INSURANCE COMPANY
(exact name of registrant as specified in its charter)
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(203) 277-0111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------------- ---------------
As of August 11, 1995, there were outstanding 40,000,000 shares of common stock,
par value $2.50, of the Registrant, all of which were owned by The Travelers
Insurance Group Inc., a subsidiary of Travelers Group Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
<PAGE> 2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 1995
Table of Contents
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statement of Operations and Retained Earnings for the Quarter and
Six Months Ended June 30, 1995 and 1994 (unaudited) ........................................................... 3
Condensed Consolidated Balance Sheet as of June 30, 1995 (unaudited) and
December 31, 1994.............................................................................................. 4
Condensed Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 1995 and 1994 (unaudited)............................................................ 5
Notes to Condensed Consolidated Financial Statements (unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................................. 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................................................................... 13
SIGNATURES .................................................................................................... 14
</TABLE>
2
<PAGE> 3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 387 $ 373 $ 773 $ 742
Net investment income 455 384 905 775
Realized investment gains (losses) 11 10 (12) 16
Other revenues 49 40 117 87
------- ------- ------- -------
902 807 1,783 1,620
------- ------- ------- -------
BENEFITS AND EXPENSES
Current and future insurance benefits 315 280 601 588
Interest credited to contractholders 239 224 498 452
Amortization of deferred acquisition costs
and value of insurance in force 75 71 146 133
General and administrative expenses 80 81 184 169
------- ------- ------- -------
709 656 1,429 1,342
------- ------- ------- -------
Income from continuing operations
before federal income taxes 193 151 354 278
Federal income taxes 67 53 122 97
------- ------- ------- -------
Income from continuing operations 126 98 232 181
Discontinued operations, net of income taxes
Income from operations 26 33 39 63
Gain on disposition -- -- 20 --
------- ------- ------- -------
Income from discontinued operations 26 33 59 63
------- ------- ------- -------
Net income 152 131 291 244
Retained earnings beginning of period 1,701 1,130 1,562 1,017
------- ------- ------- -------
Retained earnings end of period $ 1,853 $ 1,261 $ 1,853 $ 1,261
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments, including real estate held for sale $ 26,618 $ 24,956
Separate and variable accounts 6,041 5,160
Reinsurance recoverable 2,920 2,886
Assets of discontinued operations 2,638 3,414
Other assets 3,845 4,119
--------- ---------
Total assets $ 42,062 $ 40,535
--------- ---------
LIABILITIES
Contractholder funds $ 14,683 $ 15,373
Benefit and other insurance reserves 11,376 11,291
Separate and variable accounts 6,012 5,128
Liabilities of discontinued operations 2,389 3,235
Other liabilities 1,921 1,154
--------- ---------
Total liabilities 36,381 36,181
--------- ---------
SHAREHOLDER'S EQUITY
Capital stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,464 3,452
Unrealized investment gains (losses), net of taxes 264 (760)
Retained earnings 1,853 1,562
--------- ---------
Total shareholder's equity 5,681 4,354
--------- ---------
Total liabilities and shareholder's equity $ 42,062 $ 40,535
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities
Net cash provided by (used in) continuing operations $ 610 $ (17)
Net cash provided by (used in) discontinued operations (787) 171
------- -------
Net cash provided by (used in) operations (177) 154
------- -------
Cash flows from investing activities
Investment repayments
Fixed maturities 1,097 1,591
Mortgage loans 194 711
Proceeds from sales of investments including real estate held for sale
Fixed maturities 2,990 771
Equity securities 205 169
Mortgage loans 315 160
Real estate held for sale 115 523
Investments in
Fixed maturities (4,036) (2,329)
Equity securities (189) (191)
Mortgage loans (61) (73)
Policy loans, net (320) (203)
Short-term securities, (purchases) sales, net (532) (851)
Other investments, net (61) (25)
Securities transactions in course of settlement 123 549
Net cash flows provided by (used in) investing activities of discontinued operations 962 (147)
------- -------
Net cash provided by investing activities 802 655
------- -------
Cash flows from financing activities
Issuance (redemption) of short-term debt, net (7) 89
Contractholder fund deposits 1,531 1,049
Contractholder fund withdrawals (2,188) (1,967)
Other 1 (3)
Net cash flows provided by financing activities of discontinued operations -- 54
------- -------
Net cash used in financing activities (663) (778)
------- -------
Net increase (decrease) in cash (38) 31
Cash at beginning of period 102 50
------- -------
Cash at end of period $ 64 $ 81
======= =======
Supplemental disclosure of cash flow information
Interest paid $ 2 $ 1
======= =======
Income taxes paid (refunded) $ 48 $ (38)
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995
1. General
The interim financial statements of The Travelers Insurance Company (an
indirect, wholly owned subsidiary of Travelers Group Inc.) and Subsidiaries
(the Company) have been prepared in conformity with generally accepted
accounting principles (GAAP) and are unaudited. They reflect all
adjustments (none of which were other than normal recurring adjustments)
necessary, in the opinion of management, for a fair statement of results
for the periods reported. The accompanying condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form 10-K for the
year ended December 31, 1994.
Certain financial information that is normally included in financial
statements prepared in accordance with GAAP but is not required for interim
reporting purposes has been condensed or omitted.
As more fully described in Note 3, all of the operations comprising the
Managed Care and Employee Benefits Operations (MCEBO) segment are presented
as discontinued operations and, accordingly, prior year amounts have been
restated.
In June 1995, Travelers Group Inc. (Travelers) announced that it plans to
make a pro rata distribution to Travelers' common stockholders of shares
of Class A Common Stock, $.01 par value per share, of Transport Holdings
Inc., currently a wholly owned subsidiary of Travelers and which, at the
time of the distribution, will be the indirect owner of the business of
Transport Life Insurance Company. Immediately prior to this distribution,
the Company will dividend Transport Life Insurance Company, an indirect,
wholly owned subsidiary of the Company, to its parent. The distribution
is subject to the satisfaction of various conditions.
2. Changes in Accounting Principles
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan", and Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures",
which describe how impaired loans should be measured when determining the
amount of a loan loss accrual. These statements amended existing guidance on
the measurement of restructured loans in a troubled debt restructuring
involving a modification of terms. The adoption of these standards did not
have a material impact on the Company's financial condition, results of
operations or liquidity.
6
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
3. Dispositions
Sale of subsidiaries
In December 1994, the Company and its affiliates sold its group dental
insurance business to Metropolitan Life Insurance Company (MetLife) and on
January 3, 1995, the Company and its affiliates sold its group life and
related businesses to MetLife for $350 million, and the Company recognized,
in the first quarter of 1995, an after-tax gain of $20 million ($31 million
pretax).
On January 3, 1995, the Company and MetLife, and certain of their
affiliates, formed The MetraHealth Companies, Inc. (MetraHealth) joint
venture by contributing their medical businesses to MetraHealth, in exchange
for shares of common stock of MetraHealth. The Company's total contribution
amounted to approximately $364 million at carrying value on the date of
contribution. No gain was recognized upon the formation of the joint
venture, at which time the Company owned 42.6% of the outstanding capital
stock of MetraHealth, its parent, the Travelers Insurance Group Inc. (TIG),
owned 7.4%, and the other 50% was owned by MetLife and its affiliates. In
March 1995, MetraHealth acquired HealthSpring, Inc., for common stock of
MetraHealth, resulting in a reduction in the ownership interest of the
Company to 41.10%, TIG to 7.15%, and MetLife to 48.25%.
In connection with the formation of the joint venture, the transfer of the
fee-based medical business (Administrative Services Only) and other
noninsurance business to MetraHealth was completed on January 3, 1995. As
the medical insurance business of the Company comes due for renewal, and
after obtaining regulatory approvals, the risks will be transferred to
MetraHealth. In the interim the related operating results for this medical
insurance business are being reported by the Company.
On June 25, 1995, Travelers agreed to United HealthCare Corporation's
proposed acquisition of MetraHealth. According to the terms, the Company
will receive a total of $708 million in cash, and up to an additional $144
million if a contingency payment based on 1995 results is made.
Discontinued operations
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994 and in 1995, the Company's
results reflect the medical insurance business not yet transferred, plus its
equity interest in the earnings of MetraHealth. These operations have been
accounted for as discontinued operations. Revenues from discontinued
operations for the six months ended June 30, 1995 and 1994 amounted to $741
million and $1.7 billion, respectively, and for the three months ended June
30, 1995 and 1994 amounted to $361 million and $860 million, respectively.
The assets and liabilities of the discontinued operations have been
segregated in the Condensed Consolidated Balance Sheet as of June 30, 1995
and December 31, 1994. The assets and liabilities of the discontinued
operations consist primarily of investments, the equity interest in
MetraHealth and insurance-related assets and liabilities.
7
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
4. Capital and Debt
The Company issues commercial paper directly to investors and had $68
million and $74 million outstanding at June 30, 1995 and December 31, 1994,
respectively. This is included in other liabilities in the condensed
consolidated balance sheet. The Company maintains unused credit availability
under bank lines of credit at least equal to the amount of the outstanding
commercial paper.
Travelers, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers) and the Company have an agreement with a syndicate
of banks to provide $1.2 billion of revolving credit, to be allocated to any
of Travelers, CCC or the Company. The Company's participation in this
agreement is limited to $250 million. The revolving credit facility consists
of a five-year revolving credit facility which expires in 1999. At June 30,
1995, $160 million was allocated to the Company. Under this facility the
Company is required to maintain certain minimum equity and risk-based
capital levels. At June 30, 1995, the Company was in compliance with these
provisions.
Under Connecticut law the statutory capital and surplus of the Company,
which amounted to $2.1 billion at December 31, 1994, is not available in
1995 for dividends to its parent without prior approval of the Connecticut
Insurance Department. Dividend payments to the Company from its insurance
subsidiaries are subject to similar restrictions and statutory surplus of
the subsidiaries is not available in 1995 for dividends to the Company
without prior approval of insurance regulatory authorities.
5. Commitments and Contingencies
The Company is a defendant or co-defendant in various litigation matters.
Although there can be no assurances, as of June 30, 1995, the Company
believes, based on information currently available, that the ultimate
resolution of these legal proceedings would not be likely to have a material
adverse effect on its results of operations, financial condition or
liquidity.
8
<PAGE> 9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q.
CONSOLIDATED OVERVIEW
<TABLE>
<CAPTION>
For the six months ended June 30, 1995 1994
--------------------------------- ---- ----
(in millions)
<S> <C> <C>
Revenues $1,783 $1,620
====== ======
Income from continuing operations $ 232 $ 181
Income from discontinued operations 59 63
------ ------
Net income $ 291 $ 244
====== ======
</TABLE>
The Travelers Insurance Company and its subsidiaries (the Company) write
principally individual life insurance, annuities, accident and health insurance,
and pension programs. The Company principally operates through one major
business segment, Life and Annuities, which offers individual life, long-term
care, annuities and investment products to individuals and small businesses, and
investment products to employer-sponsored retirement and savings plans. The
Company's Corporate and Other Operations segment manages the investment
portfolio of the Company.
Net income for the first six months of 1995 increased $47 million when compared
to the first six months of 1994. The principal reason for this increase was
higher retained investment margins.
Premiums from continuing operations of $773 million for the six months ended
June 30, 1995 increased $31 million as compared to premiums from continuing
operations of $742 million for the six months ended June 30, 1994, reflecting
an increase in term life insurance premiums.
Pretax realized investment losses from continuing operations were $12 million
for the first six months of 1995 as compared to pretax realized investment gains
from continuing operations of $16 million for the comparable period in 1994.
Other revenues from continuing operations include mortality, surrender and
administrative charges on universal life and investment contracts, net of
related benefits and expenses.
At June 30, 1995, the Company had mortgage loans and real estate investments
(including joint ventures) totaling $4.9 billion compared to $6.6 billion at
June 30, 1994. Underperforming mortgage loans and real estate accounted for $734
million of the total at June 30, 1995, down from $1,670 million at June 30,
1994. Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, joint ventures, loans modified at interest rates below
market and real estate held for sale. The Company adopted a strategy to
accelerate the disposition of its mortgage loans and real estate assets in 1993.
The sale of mortgage loans and real estate has enabled the Company to reinvest
and obtain current market yields.
9
<PAGE> 10
DISCONTINUED OPERATIONS
On January 3, 1995, the Company and its affiliates completed the sale of its
group life and related businesses to Metropolitan Life Insurance Company
(MetLife). The Company agreed to cede to MetLife 100% of its risks in the
businesses sold on an indemnity reinsurance basis, effective January 1, 1995.
Also on January 3, 1995, the Company and MetLife, including certain of their
affiliates, each contributed its medical businesses to The MetraHealth
Companies, Inc. (MetraHealth), a newly formed joint venture, in exchange for
common stock of MetraHealth. The Company's total contribution to MetraHealth
amounted to approximately $364 million, at carrying value. In March 1995,
MetraHealth acquired HealthSpring, Inc., for common stock of MetraHealth. The
Company and its affiliates and MetLife and its affiliates are equal partners in
the joint venture.
Substantially all of the businesses sold to MetLife or contributed to
MetraHealth were included in the Company's Managed Care and Employee Benefits
Operations (MCEBO) segment in 1994. MCEBO marketed group life and health
insurance, managed health care programs and administrative services associated
with employee benefit plans.
On June 25, 1995, The Travelers Insurance Group Inc. (TIGI) and the Company,
both wholly owned subsidiaries of Travelers Group Inc. (Travelers), entered into
a definitive agreement with MetLife HealthCare Holdings, Inc. (MHH), a
subsidiary of MetLife, MetraHealth and United HealthCare Corporation (United)
and its acquisition subsidiary for the acquisition by merger of MetraHealth by
United (the Acquisition). The Travelers entities and MHH each own 48.25% of
MetraHealth. The Company owns 41.1% of MetraHealth's stock. According to the
terms of the merger agreement, the Company will receive $708 million of the
initial consideration in cash, and up to an additional $144 million if a
contingent payment based on 1995 results is made. The merger is subject to
customary regulatory approvals, including approvals from a number of state
insurance commissioners.
As discussed in Note 3 of Notes to Condensed Consolidated Financial Statements,
all of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994. In 1995, the Company's results
reflect the medical insurance business not yet transferred, plus its equity
interest in the earnings of MetraHealth. These operations have been accounted
for as discontinued operations.
LIFE AND ANNUITIES
<TABLE>
<CAPTION>
For the six months ended June 30, 1995 1994
--------------------------------- ---- ----
(in millions)
<S> <C> <C>
Revenues $1,774 $1,618
====== ======
Net income $ 231 $ 182
====== ======
</TABLE>
Life and Annuities net income increased 27% to $231 million for the six months
ended June 30, 1995 from $182 million in the 1994 period. Higher retained
investment margins and lower administrative expenses propelled the six month's
earnings growth. Investment margins continue to be helped by the reinvestment of
proceeds from real estate sales and the generally higher level of interest
rates. Primerica Life Insurance Company (Primerica Life) earnings increased over
the comparable 1994 period reflecting continued growth in life insurance in
force as well as improved mortality results compared to the first six months of
1994.
10
<PAGE> 11
Individual annuity production was strong during the first six months of 1995,
compared to the prior period levels, primarily reflecting increased sales of
variable annuities. Sales continue to be aided by the success of the Vintage
annuity product distributed by Smith Barney Financial Consultants, which was
launched in June 1994. Net written premiums and deposits for individual
annuities during the first six months of 1995 totaled $767 million compared to
$617 million in the comparable 1994 period, bringing total policyholder account
balances and benefit reserves to $11.8 billion at June 30, 1995 versus $10.4
billion at June 30, 1994. Annuity sales activity has been helped by the ratings
upgrades that accompanied the merger with Primerica. The most recent upgrade in
April 1995 by A.M. Best, which upgraded The Travelers Insurance Company to an
"A" (excellent) rating, is expected to have a positive impact on Life and
Annuities production. (This rating is not a recommendation to buy, sell or hold
securities, and it may be revised or withdrawn at any time).
In the group annuity business, a management decision not to renew low margin
guaranteed investment contracts (GICs) written in prior years accounted for the
reduction in policyholder account balances and reserves from $12.6 billion at
June 30, 1994 to $11.3 billion at June 30, 1995. Net written premiums and
deposits for the first six months of 1995 were $582 million (excluding
intercompany items) compared to $511 million in last year's period reflecting an
increase in the sale of GICs that are being selectively underwritten in 1995.
During the first six months of 1995, the Life and Annuities operations
(excluding Primerica Life discussed below) issued $3.0 billion of face amount of
individual life insurance, down from $5.0 billion during the first six months of
1994, bringing total life insurance in force to $49.2 billion. The reduction in
face amount issued reflects intense competition in the independent agent segment
of the term insurance market. Individual life insurance net written premiums and
deposits totaled $125 million during the first six months of 1995 compared to
$133 million in the first six months of 1994, reflecting the purchase of
additional reinsurance coverage in 1995.
Net written premiums for individual accident and health products, primarily
long-term care, increased to $162 million for the six months ended June 30,
1995, from $160 million for the six months ended June 30, 1994.
Primerica Life issued $26.9 billion in face amount of new term life insurance
during the first six months of 1995, compared with $27.9 billion in face amount
during the first six months of 1994. Life insurance in force increased to a
record $341.8 billion at June 30, 1995 up from $325.9 billion at June 30, 1994,
and continued to reflect good policy persistency.
CORPORATE AND OTHER OPERATIONS
<TABLE>
<CAPTION>
For the six months ended June 30, 1995 1994
--------------------------------- ---- ----
(in millions)
<S> <C> <C>
Revenues $ 9 $ 2
=== ===
Net income (loss) $ 1 $(1)
=== ===
</TABLE>
11
<PAGE> 12
DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
For the six months ended June 30, 1995 1994
--------------------------------- ---- ----
(in millions)
<S> <C> <C>
Income from operations of discontinued operations $39 $63
Gain on disposition 20 --
--- ---
Income from discontinued operations $59 $63
=== ===
</TABLE>
In 1995, income from operations of discontinued operations of $39 million
includes the results of the medical insurance business not yet transferred
plus the Company's equity interest in the earnings of MetraHealth. The
after-tax gain on disposition of $20 million represents the gain from the
sale in January 1995 of the group life and related businesses to MetLife.
INSURANCE REGULATIONS
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
merit further regulatory action. At June 30, 1995, the Company and its insurance
subsidiaries had adjusted capital in excess of amounts requiring any regulatory
action.
The Company is subject to various regulatory restrictions that limit the maximum
amount of dividends available to its parent without prior approval of insurance
regulatory authorities in the state of domicile. No statutory surplus is
available in 1995 for dividends to the Company's shareholder without prior
approval of the Connecticut Insurance Department.
Dividend payments to the Company from its insurance subsidiaries are subject to
similar restrictions and statutory surplus of the subsidiaries is not available
in 1995 for dividends to the Company without prior approval of insurance
regulatory authorities.
ACCOUNTING STANDARDS NOT YET ADOPTED
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for Long-Lived Assets and for
Long-Lived Assets to be Disposed Of (FAS 121). This Statement establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. This Statement requires write down to fair value when long-lived
assets to be held and used are impaired. The Statement also requires long-lived
assets to be disposed of (e.g., real estate held for sale) to be carried at the
lower of cost or fair value less cost to sell and does not allow such assets to
be depreciated. This Statement will be effective for 1996 financial statements,
although earlier adoption is permissible. The Company has not yet determined
when it will adopt FAS 121, however the impact is not expected to be material to
its results of operations, financial condition or liquidity.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description Filing Method
------- ----------- -------------
<S> <C> <C>
2. Agreement and Plan of Merger dated June 25, 1995, by and among United
HealthCare Corporation, Montana Acquisition Inc., The MetraHealth
Companies, Inc., The Travelers Insurance Group Inc., The Travelers
Insurance Company (the Company), MetLife Healthcare Holdings, Inc.
and Metropolitan Life Insurance Company, incorporated by reference to
Exhibit 2 to the Registration Statement on Form S-2, as amended
(File No. 33-58677), of the Company and The Travelers Life and
Annuity Company.
3. Articles of Incorporation and By-laws
a. Charter of the Company, as effective October 19, 1994,
incorporated by reference to Exhibit 3.01 to the
Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1994 (File No. 33-33691)
(the "Company's September 30, 1994 10-Q").
b. By-laws of the Company as effective October 20, 1994,
incorporated by reference to Exhibit 3.02 to the Company's
September 30, 1994 10-Q.
27. Financial Data Schedule Electronic
</TABLE>
(b) Reports on Form 8-K.
On April 21, 1995, the Company filed a Current Report on Form 8-K, dated April
21, 1995, reporting under Item 5 thereof certain pro forma financial information
as of and for the year ended December 31, 1994 related to the previously
reported sale of its group life and related businesses to Metropolitan Life
Insurance Company (MetLife) and the formation of The MetraHealth Companies, Inc.
(MetraHealth).
On June 30, 1995, the Company filed a Current Report on Form 8-K, dated June 25,
1995, reporting under Item 5 thereof certain pro forma financial information as
of and for the three months ended March 31, 1995 and for the year ended December
31, 1994 related to the definitive agreement with MetLife HealthCare Holdings,
Inc. (a subsidiary of MetLife), MetraHealth and United HealthCare Corporation
(United) and its acquisition subsidiary for the acquisition by merger of
MetraHealth by United. This pro forma financial information also reflects the
proposed dividend of Transport Life Insurance Company to the Company's parent
in connection with a proposed distribution to Travelers Group Inc.'s common
stockholders.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
Date August 14, 1995 /s/ Jay S. Fishman
-------------------------------------
Jay S. Fishman
Chief Financial Officer
Date August 14, 1995 /s/ Christine B. Mead
-------------------------------------
Christine B. Mead
Vice President - Finance
and Controller
14
<PAGE>
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.
RULE 484 UNDERTAKING
--------------------
Section 33-320a of the Connecticut General Statutes regarding indemnification of
directors and officers of Connecticut corporations provides in general that
Connecticut corporations shall indemnify their officers, directors and certain
other defined individuals against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses actually incurred in connection with
proceedings against the corporation. The corporation's obligation to provide
such indemnification generally does not apply unless (1) the individual is
successful on the merits in the defense of any such proceeding; or (2) a
determination is made (by persons specified in the statute) that the individual
acted in good faith and in the best interests of the corporation; or (3) the
court, upon application by the individual, determines in view of all of the
circumstances that such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine. With
respect to proceedings brought by or in the right of the corporation, the
statute provides that the corporation shall indemnify its officers, directors
and certain other defined individuals, against reasonable expenses actually
incurred by them in connection with such proceedings, subject to certain
limitations.
C.G.S. Section 33-320a provides an exclusive remedy; a Connecticut corporation
cannot indemnify a director or officer to an extent either greater or less than
that authorized by the statute, e.g., pursuant to its certificate of
incorporation, by-laws, or any separate contractual arrangement. However, the
statute does specifically authorize a corporation to procure indemnification
insurance to provide greater indemnification rights. The premiums for such
insurance may be shared with the insured individuals on an agreed basis.
Travelers Group Inc. also provides liability insurance for its directors and
officers and the directors and officers of its subsidiaries, including the
Depositor. This insurance provides for coverage against loss from claims made
against directors and officers in their capacity as such, including, subject to
certain exceptions, liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act of
1933 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.
<PAGE>
RULE 6E-3 (T) REPRESENTATIONS
-----------------------------
A. With regard to the maximum sales load deductions permitted under the Rule,
the Registrant hereby elects to be governed by subparagraph (b)(13)(i)(B) of
the Rule.
B. With regard to the deduction from the Separate Account of a charge to cover
the mortality risk and expense risk, the Registrant is relying on
subparagraph (b)(13)(iii)(F) to permit such deduction. Furthermore, the
depositor does hereby represent that the level of the risk charge is within
the range of industry practice for comparable flexible contracts.
C. With regard to explicit sales loads not covering the expected costs of
distributing the flexible contracts, the Registrant hereby represents that
the distribution financing arrangement of the Separate Account will benefit
the Separate Account and Policy Owners. Furthermore, the Depositor hereby
represents that the Separate Account will invest only in management
investment companies which have undertaken to have a board of directors, a
majority of whom are not interested persons of the company, formulate and
approve any plan under Rule 12b-1 to finance distribution expenses.
CONTENTS OF REGISTRATION STATEMENT
----------------------------------
This Registration Statement comprises the following papers and documents:
. The facing sheet.
. The Prospectus.
. The undertaking to file reports.
. The signatures.
. Written consents of the following persons:
A. Consent of Ernest J. Wright, General Counsel, to the filing of his
opinion as an exhibit to this Registration Statement and to the
reference to his opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus. (See Exhibit 11 below).
B. Consent and Actuarial Opinion of Bennett D. Kleinberg, ASA, pertaining
to the illustrations contained in the Prospectus.
C. Consent of Coopers & Lybrand L.L.P., Certified Public Accountants.
D. Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
<PAGE>
. The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Insurance Company
authorizing the establishment of the Registrant.
2. Not applicable.
3(a). Form of Distribution Agreement between the Registrant, The Travelers
Insurance Company and Tower Square Securities, Inc.
3(b). Specimen Form of Selling Agreement. (Incorporated herein by reference
to Exhibit 3(b) to the Registration Statement on Form S-6, File No.
33-88576, filed on January 17, 1995.)
4. None
5. Variable Life Insurance Policy.
6(a). Charter of The Travelers Insurance Company, as amended on October 19,
1994. (Incorporated herein by reference to Exhibit 3(a)(i) to the
Registration Statement on Form S-2, File No. 33-58677 filed via Edgar
on April 18, 1995.)
6(b). By-Laws of The Travelers Insurance Company, as amended on October 20,
1994. (Incorporated herein by reference to Exhibit 3(b)(i) to the
Registration Statement on Form S-2, File No. 33-58677 filed via Edgar
on April 18, 1995.)
7. None
8. None
9. None
10. Application for Variable Life Insurance Policy.
11. Opinion of Ernest J. Wright, General Counsel, regarding the legality of
securities being registered.
12. Powers of Attorney authorizing Jay S. Fishman or Ernest J. Wright as
signatory for Robert I. Lipp, Michael A. Carpenter, Charles O. Prince,
III, Marc P. Weill, Irwin R. Ettinger, Donald T. DeCarlo and Christine
B. Mead.
13. Memorandum concerning transfer and redemption procedures, as required
by Rule 6e-3(T)(b)(12)(ii).
27. Financial Data Schedule. (Incorporated herein by reference to Exhibit
27 to Form 10-Q for the quarter ended June 30, 1995, File No. 33-33691,
filed via Edgar on August 14, 1995.)
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Variable Life Insurance Separate Account Three, has duly caused this
Pre-Effective Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hartford,
State of Connecticut, on the 18th day of August, 1995.
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
(Registrant)
By: /s/Jay S. Fishman
-------------------------------
Jay S. Fishman
Chief Financial Officer
The Travelers Insurance Company
Attest:
By: /s/Ernest J. Wright
-----------------------------------
Assistant Secretary
The Travelers Insurance Company
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the Depositor, The
Travelers Insurance Company, has duly caused this Pre-Effective Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hartford, State of Connecticut, on the
18th day of August, 1995.
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: /s/Jay S. Fishman
-------------------------
Jay S. Fishman
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective
Amendment No. 1 to this Registration Statement has been signed by the following
persons in the capacities indicated on August 18th, 1995.
*ROBERT I. LIPP Director, Chairman of the Board,
------------------------------
(Robert I. Lipp)
*MICHAEL A. CARPENTER Director, President and
------------------------------ Principal Executive Officer
(Michael A. Carpenter)
/s/JAY S. FISHMAN Director and Chief Financial Officer
------------------------------
(Jay S. Fishman)
*CHARLES O. PRINCE III Director
------------------------------
(Charles O. Prince, III)
*MARC P. WEILL Director
------------------------------
(Marc P. Weill)
*IRWIN R. ETTINGER Director
------------------------------
(Irwin R. Ettinger)
*DONALD T. DeCARLO Director
------------------------------
(Donald T. DeCarlo)
/s/CHRISTINE B. MEAD Vice President - Finance
------------------------------ and Controller
(Christine B. Mead)
* By: /s/Jay S. Fishman
------------------------------
Jay S. Fishman, Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Attachment
or
Exhibit
No. Description Method of Filing
---------- ------------ ----------------
OPINIONS AND CONSENTS:
<S> <C> <C>
A. Consent of Ernest J. Wright, General Counsel, to the filing Electronically
of his opinion as an exhibit to this Registration Statement
and to the reference to his opinion under the caption "Legal
Proceedings and Opinion" in the Prospectus. (See Exhibit 11
below)
B. Consent and Actuarial Opinion of Bennett D. Kleinberg, ASA, Electronically
pertaining to the illustrations contained in the
Prospectus.
C. Consent of Coopers & Lybrand L.L.P., Certified Public Electronically
Accountants.
D. Consent of KPMG Peat Marwick LLP, Independent Certified Electronically
Public Accountants.
The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Electronically
Insurance Company authorizing the establishment of the
Registrant.
3(a). Form of Distribution Agreement between the Registrant, The Electronically
Travelers Insurance Company and Tower Square Securities, Inc.
3(b). Specimen Form of Selling Agreement. (Incorporated herein by
reference to Exhibit 3(b) to the Registration Statement on
Form S-6, File No. 33-88576, filed on January 17, 1995.)
5. Variable Life Insurance Policy. Electronically
6(a). Charter of The Travelers Insurance Company, as amended on
October 19, 1994. (Incorporated herein by reference to
Exhibit 3(a)(i) to the Registration Statement on Form S-2,
File No. 33-58677, filed via Edgar on April 18, 1995.)
6(b). By-Laws of The Travelers Insurance Company, as amended on
October 20, 1994. (Incorporated herein by reference to
Exhibit 3(b)(i) to the Registration Statement on Form S-2,
File No. 33-58677, filed via Edgar on April 18, 1995.)
10. Application for Variable Life Insurance Policy. Electronically
11. Opinion of Ernest J. Wright, General Counsel, regarding Electronically
the legality of securities being registered.
</TABLE>
<PAGE>
ATTACHMENT B
ACTUARIAL OPINION
The illustrations included in the prospectus have been based on assumptions and
charges which are consistent with the provisions of the Vintage Life contract.
The rate structure of the contract has not been designed to make the
relationship between premiums and benefits, as shown in the illustrations,
appear more favorable for contract owners at the ages illustrated than for
contract owners at other ages.
/s/ Bennett D. Kleinberg, ASA
Actuarial Assistant
<PAGE>
ATTACHMENT C
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Pre-Effective Amendment No. 1 of this
Registration Statement on Form S-6 (File No. 33-88576) of our reports on the
consolidated statements of operations and retained earnings and cash flows for
the years ended December 31, 1993 and 1992 of The Travelers Insurance Company
and Subsidiaries (the "Company") dated January 24, 1994 and February 9, 1993
(except for Notes 2 and 5, as to which the date is January 24, 1994), which
includes an explanatory paragraph regarding the change in the methods of
accounting for post-retirement benefits other than pensions, income taxes and
foreclosed assets in 1992, on our audits of the consolidated financial
statements of the Company.
/S/ COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
August 15, 1995
<PAGE>
ATTACHMENT D
The Board of Directors
The Travelers Insurance Company:
We consent to the inclusion in this Pre-Effective Amendment No. 1 to the
registration statement (No. 33-88576) on Form N-8B-2, filed for The Travelers
Variable Life Insurance Separate Account Three, of our report, dated January 17,
1995. Our report refers to a change in accounting for investments in accordance
with the provisions of Statement of Financial Accounting Standards No. 115.
"Accounting for Certain Investments in Debt and Equity Securities."
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Hartford, Connecticut
August 15, 1995
<PAGE>
EXHIBIT 1
CERTIFICATE
-----------
I, ERNEST J. WRIGHT, Assistant Secretary of THE TRAVELERS INSURANCE
COMPANY, DO HEREBY CERTIFY that by unanimous consent action of the Board of
Directors of The Travelers Insurance Company effective the 22nd day of October,
1993, the following resolution was adopted:
VOTED: That pursuant to authority granted by Section 38a-433 of the Connecticut
General Statutes, the Chairman of the Board, the President or Chief
Investment Officer, or any one of them acting alone, for the purpose of
doing variable life insurance or variable annuity business, is authorized
to establish a separate account or accounts to invest in shares of
investment companies pursuant to plans and contracts issued and sold by
the Company in connection therewith.
VOTED: That the proper officers are authorized to take such action as may be
necessary to register as unit investment trust investment companies under
the Investment Company Act of 1940 the separate account or accounts to be
established to hold shares of investment companies; to file any necessary
or appropriate exemptive requests, and any amendments thereto, for such
separate account or accounts under the Investment Company Act of 1940; to
file one or more registration statements, and any amendments, exhibits
and other documents thereto, in order to register plans and contracts of
the Company and interests in such separate account or accounts in
connection therewith under the Securities Act of 1933; and to take any
and all action as may in their judgment be necessary or appropriate in
connection therewith.
I FURTHER CERTIFY that by unanimous consent action of the Board of
Directors of The Travelers Insurance Company effective the 21st day of
September, 1994, the following resolution was adopted:
VOTED: That each officer and director who may be required, on their own behalf
and in the name and on behalf of the Company, to execute one or more
registration statements, and any amendments thereto, under the Securities
Act of 1933 and the Investment Company Act of 1940 relating to the
separate account or accounts to be established to invest in shares of
investment companies is authorized to execute a power of attorney
appointing representatives to act as their attorney and agent to execute
said registration statement, and any amendments thereto, in their name,
place and stead; and that the Secretary, or any Assistant Secretary
designated by the Secretary, is designated and appointed the agent for
service of process of the Company under the Securities Act of 1933 and
the Investment Company Act of 1940 in connection with such registration
statement, and any amendments thereto, with all the powers incident to
such appointment.
AND I DO FURTHER CERTIFY that the foregoing action of the said Board of
Directors is still in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of THE
TRAVELERS INSURANCE COMPANY at Hartford, Connecticut, this _______ day of
August, 1995.
---------------------
SEAL Ernest J. Wright
Assistant Secretary
<PAGE>
EXHIBIT 3(a)
FORM OF
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT (the "Agreement") made this ____ day of _________,
1995, by and among The Travelers Insurance Company, a Connecticut stock
insurance company (hereinafter the "Company"), Tower Square Securities, Inc., a
Connecticut general business corporation (hereinafter "TSSI"), and The Travelers
Variable Life Insurance Separate Account Three (hereinafter "Separate Account
Three"), a separate account of the Company established on September 23, 1994 by
its Chief Investment Officer in accordance with a resolution adopted by the
Company's Board of Directors and pursuant to Section 38a-433 of the Connecticut
General Statutes.
1. The Company hereby agrees to provide all administrative services relative
to variable life insurance contracts and revisions thereof (hereinafter
"Contracts") sold by the Company, the net proceeds of which or reserves for
which are maintained in Separate Account Three.
2. TSSI hereby agrees to perform all sales functions relative to the
Contracts. The Company agrees to reimburse TSSI for commissions paid, other
sales expenses and properly allocable overhead expenses incurred in performance
thereof.
3. For providing the administrative services referred to in paragraph 1
above and for reimbursing TSSI for the sales functions referred to in paragraph
2 above, the Company will receive the deductions for sales and administrative
expenses which are stated in the Contracts.
4. The Company will furnish at its own expense and without cost to Separate
Account Three the administrative expenses of Separate Account Three, including
but not limited to:
(a) office space in the offices of the Company or in such other place as may
be agreed upon from time to time, and all necessary office facilities
and equipment;
(b) necessary personnel for managing the affairs of Separate Account Three,
including clerical, bookkeeping, accounting and other office personnel;
(c) all information and services, including legal services, required in
connection with registering and qualifying Separate Account Three or the
Contracts with federal and state regulatory authorities, preparation of
registration statements and prospectuses, including amendments and
revisions thereto, and annual,
1
<PAGE>
semi-annual and periodic reports, notices and proxy solicitation
materials furnished to variable life insurance Policy Owners or
regulatory authorities, including the costs of printing and mailing such
items;
(d) the costs of preparing, printing, and mailing all sales literature;
(e) all registration, filing and other fees in connection with compliance
requirements of federal and state regulatory authorities;
(f) the charges and expenses of any custodian or depository appointed by
Separate Account Three for the safekeeping of its cash, securities and
other property; and
(g) the charges and expenses of independent accountants retained by Separate
Account Three.
5. The services of the Company and TSSI to Separate Account Three hereunder
are not to be deemed exclusive and the Company or TSSI shall be free to render
similar services to others so long as its services hereunder are not impaired or
interfered with thereby.
6. The Company agrees to guarantee that the death benefit payments will not
be affected by mortality experience (under Contracts the reserves for which are
invested in Separate Account Three) and as such assumes the risks (a) that the
actuarial estimate of mortality rates among insureds may prove erroneous and
that reserves set up on the basis of such estimates will not be sufficient to
meet the Company's death benefit payment obligations, and (b) that the charges
for services and expenses of the Company set forth in the Contracts may not
prove sufficient to cover its actual expenses. For providing these mortality and
expense risk guarantees, the Company will receive from Separate Account Three an
amount per valuation period of Separate Account Three, as provided from time to
time.
7. This Agreement will be effective on the date executed, and will remain
effective until terminated by any party upon sixty (60) days notice; provided,
however, that this Agreement will terminate automatically in the event of its
assignment by any of the parties hereto.
8. Notwithstanding termination of this Agreement, the Company shall continue
to provide administrative services and mortality and expense risk guarantees
provided for herein with respect to Contracts in effect on the date of
termination, and the Company shall continue to receive the compensation provided
under this Agreement.
2
<PAGE>
9. This Agreement is subject to the provisions of the Investment Company
Act of 1940, as amended, and the rules of the Securities and Exchange
Commission.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officials thereunto duly authorized and, in the case
of the Company and TSSI, seals to be affixed as of the day and year first above
written.
THE TRAVELERS INSURANCE COMPANY
(Seal)
By:__________________________________
Title:_________________________________
ATTEST:
________________________
Assistant Secretary
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
By:__________________________________
Title:_________________________________
WITNESS:
________________________
TOWER SQUARE SECURITIES, INC.
By: _________________________________
Title: ________________________________
ATTEST: (SEAL)
________________________
3
<PAGE>
Corporate Secretary
4
<PAGE>
[LOGO OF THE TRAVELERS APPEARS HERE]
THE TRAVELERS INSURANCE COMPANY * One Tower Square*Hartford, Connecticut * 06183
MODIFIED SINGLE PREMIUM VARIABLE LIFE INSURANCE POLICY
We will pay the Death Benefit to the Beneficiary upon receipt at Our Office of
Due Proof of the Insured's Death while this policy was in force. Refer to the
"Death Benefit" provision on Page 6 and to the "Policy Values" section on Page 7
for information on determining the amount payable at death.
READ YOUR POLICY CAREFULLY
This is a legal contract between you and us.
RIGHT TO CANCEL
We want you to be satisfied with the policy you have purchased. We urge you to
examine it closely. If, for any reason, you are not satisfied, you may return
the policy to us or to the agent from whom it was purchased to be cancelled
within the latest of:
1. 10 days of its delivery to you; or
2. 10 days after we have mailed or delivered the Notice of the Right to
Cancel to you; or
3. 45 days of the date the application for this policy was signed.
Within 7 days of our receipt of your request for a refund, we will refund to you
the greater of (1) any premium paid; or (2) the Cash Value of the policy on the
date we receive the returned policy; plus any charges and expenses which may
have been deducted; less any Loan Account value. After the policy is returned,
it will be considered as if it were never in effect.
Signed at Hartford, Connecticut
/s/ Robert J. Lipp
Chairman
Modified Single Premium Variable Life Insurance Policy
Limited Premium Flexibility
Insurance Payable at Insured's Death
Non-Participating
THE AMOUNT AND DURATION OF THE DEATH BENEFIT AND OTHER VALUES PROVIDED BY THIS
POLICY ARE BASED ON THE INVESTMENT EXPERIENCE OF THE SEPARATE ACCOUNT(S). ALL
VALUES ARE VARIABLE, MAY INCREASE OR DECREASE, AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT.
<PAGE>
TABLE OF CONTENTS
Right to Cancel Policy Jacket
Policy Specifications Page 3
Definitions Page 4
Benefits--Basic Policy Page 6
Policy Values Page 7
Premium and Valuation Provisions Page 9
Continuation of Insurance Page 10
Grace Period Page 10
Reinstatement Page 11
Ownership Rights Page 11
General Provisions Page 12
Settlement Options
A copy of the application and any riders follows the Settlement Options.
<PAGE>
DEFINITIONS
Accumulation Unit: a standard of measurement used to determine the values in
each Sub-Account.
Age: age last birthday.
Amount Insured: equals the greatest of the Stated Amount; or the Stated Amount
plus Cash Value (if Death Benefit Option 2 is selected); or any Minimum Amount
Insured described on the Policy Summary.
Beneficiary(ies): the person(s) named to receive the benefits of this policy
at the Insured's death.
Cash Surrender Value: the Cash Value less any Loan Account value and applicable
surrender penalties.
Cash Value: the sum of the values in the Sub-Accounts and the Loan Account.
Coverage Amount: the Amount Insured less the Cash Value.
Death Benefit: the amount payable to the Beneficiary if the Insured dies while
the policy is in force.
Deduction Amount: a monthly charge, deducted from the Cash Value, which is
comprised of the cost of insurance charge and any other monthly charge shown on
the Policy Summary and any charge for supplemental benefits.
Deduction Day: the day of each month on which the Deduction Amount is deducted.
Shown on the Policy Summary.
Due Proof of the Insured's Death: a copy of a certified death certificate; a
copy of a certified decree of a court of a competent jurisdiction as to the
finding of death; a written statement by a medical doctor who attended the
deceased; or any other proof satisfactory to us.
Earnings: an amount calculated in conjunction with a request for a loan or
partial surrender. This amount is equal to (a - b) - c, where a is Cash Value, b
is the value of any loans that are not comprised of premiums paid; and c equals
total premiums paid. The values of a, b and c are calculated as of the date that
we receive the request for the loan or partial surrender.
In Writing: in a written form satisfactory to us and received at Our Office.
Insured: the person on whose life this policy is issued. Shown on the Policy
Summary.
Issue Date: the date on which we issue the policy. Shown on the Policy Summary.
Loan Account: the account to which we transfer the amount of any policy loan.
Maturity Date: an anniversary of the Policy Date on which the policy matures
(see Maturity Benefit, page 6). Shown on the Policy Summary.
Minimum Amount Insured: a stated percentage of the Cash Value determined as of
the first day of the Policy Month. Shown on the Policy Summary.
Our Office: The Travelers Insurance Company, Policyholder Services, One Tower
Square, Hartford, Connecticut 06183-5071 or any other office which we may
designate for the purpose of administering this policy.
Policy Anniversary: an anniversary of the Policy Date.
Policy Date: the date on which the policy becomes effective. Shown on the Policy
Summary.
Policy Month: twelve one-month periods during the Policy Year, each of which
begins on the Policy Date or the monthly Deduction Day.
Policy Year: each successive twelve-month period; the first beginning with the
Policy Date.
Separate Account(s): the Separate Account(s) which we established for this class
of policies and certain other policies. Shown on the Policy Summary. Each of its
Sub-Accounts invests in shares of an Underlying Fund or units of a Trust.
Stated Amount: a dollar amount used to determine the Death Benefit of the
policy. Shown on the Policy Summary.
Sub-Account: the portion of the assets of the Separate Account(s) which is
allocated to a particular Underlying Fund or Trust.
Page 4
<PAGE>
Trust: a unit investment trust which serves as an investment option under the
Separate Account. If available, shown on the Policy Summary.
Underlying Fund(s): an open-ended management investment company which serves as
an investment option under the Separate Account. Shown on the Policy Summary.
Valuation Date: a day on which a Sub-Account is valued. This is any day on which
the New York Stock Exchange is open for trading and we are open for business.
Valuation Period: the period between successive valuations.
We, Us, Our: The Travelers Insurance Company.
You, Your: the owner(s) of this policy.
Page 5
<PAGE>
BENEFITS--BASIC POLICY
Death Benefit
Upon receipt at Our Office of Due Proof of the Insured's Death while the policy
is in force, we will pay to the Beneficiary the Death Benefit of the policy. The
Death Benefit will be the Amount Insured at the time of death, less any:
1. Loan Account value;
2. amount payable to an assignee under a collateral assignment of the
policy; and
3. monthly Deduction Amount due but not paid.
The Death Benefit may be limited as provided under the Misstatement and Suicide
provisions on Page 12. The Death Benefit depends on the Death Benefit Option in
effect at the date of death and any increase or decrease you have made to the
Initial Stated Amount. Benefits provided by any rider attached to this policy
will end according to the termination provision(s) therein.
Maturity Benefit
If the Insured is living on the Maturity Date, we will pay you the Cash Value as
of the Maturity Date, less any:
1. Loan Account value;
2. monthly Deduction Amount due but not paid; and
3. amount payable to an assignee under a collateral assignment of the
policy.
Upon maturity, insurance will end and we will have no other obligation under
this policy except as stated in the Maturity Extension Rider, if applicable.
Death Benefit Options and Amount Insured
There are two Death Benefit Options. Under Option 1 (the Level Death Benefit
Option), the Amount Insured is the greater of the Stated Amount or any Minimum
Amount Insured on the Insured's date of death. Under Option 2 (the Variable
Death Benefit Option), the Amount Insured is the greater of the Stated Amount
plus the Cash Value or any Minimum Amount Insured on the Insured's date of
death.
You may change the Death Benefit Option at any time prior to the Insured's
death. We will effect the change on the monthly Deduction Day on or following
the day we receive the request. If you request to change from Option 2 to Option
1, the Stated Amount will be increased by the Cash Value. If you request to
change from Option 1 to Option 2, the Stated Amount will be decreased by the
Cash Value. We may require evidence of insurability satisfactory to us if you
request a change from Option 1 to Option 2.
The remaining Amount Insured and the remaining Stated Amount in effect after any
change may not be less than the respective minimum amounts shown on the Policy
Summary.
Requested Changes in Stated Amount
Increases--You may request an increase to the Stated Amount which requires a
minimum premium payment of $1,000 at any time prior to the earlier of the
Insured's attaining Age 80 or his/her death. The request must be made In Writing
to Our Office. The increase will be effective on the date shown on the
supplemental Policy Summary we will send you. We may require evidence of
insurability satisfactory to us if you request an increase.
Decreases--You may request decreases to the Stated Amount under this policy
after the first Policy Year. The decrease will be effective on the later of the
monthly Deduction Day on or following our receipt of your request at Our Office,
or the monthly Deduction Day on or immediately following the date you request it
to be effective.
The decrease will be applied as follows: first against the most recent increase
in the Stated Amount; then to other increases in the Stated Amount in the
reverse order in which they occurred; and last, to the Initial Stated Amount.
After any change, the Stated Amount in effect may not be less than the Minimum
Stated Amount shown on the Policy Summary. We will send you a supplemental
Policy Summary reflecting any change.
Page 6
<PAGE>
POLICY VALUES
Cash Value
The Cash Value on the Issue Date is equal to the initial premium paid. On each
Valuation Date, the Cash Value is equal to the sum of the accumulated values in
the Sub-Accounts plus any Loan Account value. The accumulated value in a Sub-
Account equals a times b where:
a is the number of Accumulation Units on the Valuation Date; and
b is the then current Accumulation Unit Value for that Sub-Account.
Policy values on other days are calculated in a manner consistent
with this method.
Deduction Amount
The first monthly Deduction Day is the Policy Date. The monthly Deduction Day is
shown on the Policy Summary.
The Deduction Amount will be charged monthly against each Sub-Account in
proportion to each account's value on each monthly Deduction Day. The Deduction
Amount is equal to:
1. the cost of insurance; plus
2. the premium tax charge (shown on the Policy Summary); plus
3. the cost of supplemental benefits, if any, for which a separate charge
is shown on the Policy Summary; plus
4. any other applicable charges shown on the Policy Summary.
The cost of insurance for any month is equal to c times the result of a minus b
where:
a is the Amount Insured for the month divided by the Death Benefit
Interest Factor shown on the Policy Summary;
b is the Cash Value on the monthly Deduction Day;
c is the cost for each $1,000 of Coverage Amount shown in the Cost of
Insurance Table on the Policy Summary at the Insured's age, divided
by $1,000.
The cost is based on the Insured's age, sex and rate class for the Initial
Stated Amount and each increase in the Stated Amount. When the Amount Insured is
equal to the Minimum Amount Insured shown on the Policy Summary, we will use the
rate class for the most recent increase that required evidence of insurability
to determine the cost of insurance.
If you have selected Death Benefit Option 1 and have made increases in the
Stated Amount, the Cash Value will first be considered a part of the Initial
Stated Amount. If the Cash Value exceeds the Initial Stated Amount, it will then
be considered a part of the additional Stated Amount resulting from increases in
the order of those increases.
The monthly Deduction Amount for the following month will be taken out of the
Cash Value on the monthly Deduction Day shown on the Policy Summary. If the Cash
Surrender Value is not enough to pay the Deduction Amount due and no further
premiums are paid, the Grace Period will begin (see Grace Period provision, Page
10).
The cost of insurance rates are shown in the Cost of Insurance Table on the
Policy Summary. We may use rates less than those shown. We will base these rates
only on our future outlook for mortality and expenses. Nothing in this policy
will be affected by our actual mortality and expenses. We will determine the
rates at the start of each Policy Year and will guarantee them for that Policy
Year. Any change we make in the rates will be on a uniform basis for insureds of
the same age, sex, duration and rate class.
Page 7
<PAGE>
Cash Surrender Value
The Cash Surrender Value is equal to the Cash Value less any Loan Account value
and applicable surrender penalties as shown on the Policy Summary. It will not
be not less than the minimum value required by the insurance laws of the state
in which this policy is delivered. A detailed statement of the method of
calculating the Cash Surrender Values has been filed with the insurance
department of the state in which this policy is delivered.
Cash Surrender
At any time during the lifetime of the Insured and while the policy is in force,
you may request, In Writing, a full or partial surrender. You may do so without
the consent of any Beneficiary, unless irrevocably named. We will calculate your
Cash Surrender Value as of the day we receive your written request. We will pay
any Cash Surrender Value within seven business days of receipt of request.
If you request a full surrender, the policy will end on the Deduction Day on or
immediately following the date that we receive your request and the surrendered
policy at Our Office.
If you request a partial surrender, then the Death Benefit, Amount Insured, and
Cash Value will be reduced by the amount surrendered, including any applicable
surrender penalty. Additionally, under Death Benefit Option 1, the Stated Amount
will be reduced by the amount of the surrender. The deduction from the Cash
Value will be made on a pro-rata basis against the Cash Value of each Sub-
Account unless you request otherwise In Writing. The amount of any partial cash
surrender may not exceed the Cash Surrender Value. After the reduction, the
Amount Insured must be no less than the Minimum Amount Insured shown on the
Policy Summary. In determining a partial surrender charge, partial surrenders
will be allocated to premium payments in the reverse order in which such
payments were made.
Policy Loans
We will make a loan to you with the policy as security if you assign this policy
to us while it is in force. We will make the loan within seven business days
after we receive the request for the loan at Our Office. We will not make a loan
to you or increase an outstanding loan for less than the Minimum Loan Amount
shown on the Policy Summary.
The total Loan Account value may not exceed the Maximum Loan Amount shown on the
Policy Summary. Interest on the loan will be payable in advance, at the begining
of each Policy Year, at the Loan Interest Rate Charged as described on the
Policy Summary. Loans will be taken first from Earnings, if any, and then from
premium payments. Interest not paid when due will be added to the Loan Account
Value.
Loans will be transferred from the Sub-Accounts to the Loan Account in
proportion to the Cash Value in each Sub-Account as of the date the loan is
made, unless you request otherwise. A Loan Account will be maintained while a
loan is outstanding and credited at the Loan Account Annual Interest Rate
Credited shown on the Policy Summary. The value of the Loan Account is the
amount of any outstanding loan plus any interest we charge to the Loan Account,
less any interest we may transfer to the Sub-Accounts.
While the Insured is living and the policy is in effect, all or part of any loan
may be repaid. A payment received while there is an outstanding loan on the
policy will be considered a loan repayment rather than an additional premium
payment. Loan repayments will be first applied to that portion of the loan
comprised of premiums paid. The amount of the repayment will be transferred from
the Loan Account and will be allocated among the Sub-Accounts in proportion to
the outstanding loan amount associated with each Sub-Account. You may not repay
a loan that exists at the end of the Grace Period (see provision on Page 10)
unless you reinstate this policy.
If the Loan Account Value exceeds the Cash Value, less applicable surrender
penalties, this policy will end without value 31 days after we mail notice of
termination to your last known address.
Page 8
<PAGE>
PREMIUM AND VALUATION PROVISIONS
Premium
An initial lump sum premium payment must be made to the policy and is due and
payable before the policy becomes effective. All premiums are payable at Our
Office or to one of our authorized representatives.
Premium Allocation
During the Right to Cancel period, any premium that has been paid will be
invested in the money market Sub-Account specified on the Policy Summary. At the
end of the Right to Cancel period, we will apply the resulting premium amount to
provide Accumulation Units to be credited to each of the selected Sub-Accounts
in the proportion stated in your application or as you have instructed us most
recently.
Additional Premium Payments
You may make additional premium payments under the following circumstances:
1. upon our approval of a requested increase in Stated Amount which
requires an additional payment of at least $1,000; or
2. when payment is required to keep the policy in force as described in
the Grace Period provision; or
3. when payment is required to reinstate the policy as described in the
Reinstatement provision; or
4. payment at least equal to the Minimum Discretionary Payment Amount
shown on the Policy Summary may be made at any time before the
Maturity Date, provided that the premium payment plus the total of all
premiums already paid does not exceed the limits prescribed by federal
income tax laws or regulations to qualify the policy as life
insurance.
We reserve the right to require evidence of insurability before accepting any
additional premium payments which would increase the Coverage Amount. A payment
received while there is an outstanding loan on the policy will be considered a
loan repayment rather than an additional premium payment.
Any premium received after the initial premium is paid will be applied as of the
Valuation Date following its receipt at Our Office. We will apply such premium
to provide Accumulation Units to be credited to the Sub-Accounts in the
proportion stated in your application, or as you have instructed us most
recently.
SUB-ACCOUNT VALUATION
Accumulation Units
The number of Accumulation Units to be credited to each Sub-Account once a
premium payment has been received by us will be determined by dividing the
premium applied to that Sub-Account by the current Accumulation Unit Value of
that Sub-Account.
Accumulation Unit Value
The value of an Accumulation Unit for each Sub-Account was initially set at
$1.00. We will determine the Accumulation Unit value for each Sub-Account on
each Valuation Date by multiplying the value on the immediately preceding
Valuation Date by the net investment factor (see Net Investment Factor
provision, Page 10) for that Sub-Account for the Valuation Period just ended.
The value of an Accumulation Unit on any date other than a Valuation Date will
be equal to its value as of the next Valuation Date.
Page 9
<PAGE>
Net Investment Factor
The net investment factor is a factor applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The net
investment factor for a Sub-Account for any Valuation Period is determined by
dividing a by b and subtracting c where:
a is
1. the net asset value, per share of the Underlying Fund or per unit of
the Trust, held in the Sub-Account as of the Valuation Date, plus
2. the per-share amount of any dividend or capital gain distributions by
the Underlying Fund if the ex-dividend date occurs in the Valuation
Period just ended; plus or minus
3. a per-share charge or credit, as we may determine on the Valuation
Date for tax reserves; and
b is
1. the net asset value, per share of the Underlying Fund or per unit of
the Trust, held in the Sub-Account as of the last prior Valuation
Date; plus or minus
2. the per-share or per-unit charge or credit for tax reserves as of the
end of the last prior Valuation Date; and
c is the applicable Sub-Account deduction applicable to the Valuation
Period.
Assets in each Sub-Account will be valued at fair market value in accordance
with accepted accounting practices and applicable laws and regulations.
All Sub-Account deductions are shown on the Policy Summary.
TRANSFERS BETWEEN ACCOUNTS
As long as the policy is in effect, you may request that we transfer all or a
part of the Cash Value (minus Loan Account value) from a Sub-Account to any
other Sub-Account available under the policy at the time of request. Such
transfers must be in accordance with our rules. We reserve the right to limit
the number of free transfers between Sub-Accounts to that shown on the Policy
Summary. We reserve the right to charge a reasonable administrative fee for
transfers beyond that number.
Transfers between accounts will result in the addition or deletion of
Accumulation Units having a total value equal to the dollar amount being
transferred to or from a particular account. The number of Accumulation Units
will be determined by dividing the amount transferred by the Accumulation Unit
Value of the accounts involved as of the next valuation after we receive your
request for transfer at Our Office.
CONTINUATION OF INSURANCE, GRACE PERIOD AND REINSTATEMENT
Continuation of Insurance
Subject to the Grace Period provision below, if sufficient premium payments are
not made, this policy will continue until the day on which the Cash Surrender
Value would not be enough to pay the monthly Deduction Amount due, or until the
Maturity Date, if earlier.
The Continuation of Insurance benefit will not be less than the minimum benefit
required by the insurance laws of the state in which this policy is delivered.
Grace Period
When the Cash Surrender Value is insufficient to pay the Deduction Amount due,
we will send you a notice of required premium to your last known address. If the
required premium is not paid within 61 days (the "Grace Period"), the policy
will lapse. The policy will have no Cash Value. The policy will continue through
the Grace Period, but if the required payment has not been received at Our
Office, the policy will terminate at the end of the Grace Period. If the Insured
dies during the Grace Period, the Death Benefit payable will be reduced by any
Deduction Amount due but not paid and by any Loan Account value.
Page 10
<PAGE>
Reinstatement
This policy may be reinstated at any time within three years from the date to
which the monthly Deduction Amount had been paid, if:
1. the policy was not surrendered for cash; and
2. evidence of insurability acceptable to us is furnished; and
3. all monthly Deduction Amounts past due are paid; and
4. premium at least equal to three monthly Deduction Amounts is paid; and
5. all Loan Account value is repaid or restored. (Interest charged will
not exceed 5.65% compounded annually).
Upon reinstatement, the Cash Value of the policy will be the amount provided by
the premium paid.
EXCHANGE OPTION
While this policy is in effect, you may exchange it during the first two Policy
Years for a form of individual permanent life insurance which we, or one of our
affiliates, then regularly issue for the amount exchanged. No evidence of
insurability will be required. We will issue the policy as provided below:
1. the amount of insurance under the new policy may not exceed your
choice of either:
a. the Coverage Amount of this policy at the time of the exchange;
or
b. the Death Benefit of this policy at the time of the exchange; and
2. the Issue Date of the new policy will be the same as the Issue Date of
this policy; and
3. the premium for the new policy will be based on the Insured's Attained
Age under this policy; and
4. the new policy will be based on the same rate class as that on which
this policy was issued, or, if the same rate class is not available
under the new policy, then the new policy will be based on the class
for which the Insured qualifies based on his/her insurability at the
time this policy was issued.
Any Loan Account value must be repaid prior to the issuance of the new policy.
Rider benefits included with this policy will be included with the new policy
only if such rider benefits are available with the new policy and will be
subject to our rules then in effect.
An exchange made pursuant to this provision is subject to an equitable
adjustment in payments and Cash Values to reflect variance, if any, in the
payments and Cash Values under this policy and the new policy.
OWNERSHIP RIGHTS
Ownership
The original owner(s) is (are) shown on the application. During the Insured's
lifetime, you may, without the consent of any Beneficiary unless irrevocably
named, exercise all rights and options that this policy provides and that we
permit.
Ownership is transferable by assignment. No assignment is binding on us until we
receive a copy of the written assignment at Our Office. We will not determine if
an assignment is valid. Proof of interest must be filed with any claim under a
collateral assignment.
Beneficiary
The original Beneficiary is stated in the application. You may name a new
Beneficiary during the Insured's lifetime and while this policy is in force. Any
change will be effective from the date you signed the notice of change, even if
the Insured is not living when we receive it. We will have no further
responsibility for any payment we make before we receive the notice at Our
Office.
If no Beneficiary survives the Insured, you will be the Beneficiary. If you are
the Insured, your estate will be the Beneficiary. The rights of any collateral
assignee may affect the interest of the Beneficiary.
Page 11
<PAGE>
GENERAL PROVISIONS
Entire Contract
The entire contract consists of this policy and the application, a copy of which
is attached. The policy is issued in consideration of the application and the
payment of premium. We will not use any statement to void this policy or to deny
a claim under it, unless that statement is contained in an attached written
application. All statements in the application will be considered
representations and not warranties.
Changes
Any agreement to alter this policy must be in writing and signed by one of our
officers.
No Dividends
This policy is non-participating. It does not share in our surplus earnings, so
you will receive no dividends under it.
Misstatement
If the age and/or sex of the Insured was incorrectly stated in the application,
the amount of the Death Benefit will be adjusted to the amount which would have
been purchased at the correct age and/or sex, based on the most recent cost of
insurance charge.
Proof of age may be filed at any time at Our Office.
Suicide
If, within two years from the Issue Date, the Insured dies due to suicide, while
sane or insane, the Death Benefit will be limited to the premiums paid, less any
Loan Account value and amount of any partial surrenders.
If you have applied for an increase to the Stated Amount, this Suicide provision
will be measured from the effective date of the increase with respect to payment
of the increase amount.
If this policy is reinstated, this Suicide provision will be measured from the
reinstatement date.
Contest
No misstatements made in any application for this policy will be used to contest
payment of any Death Benefit after the policy has been in force during the
Insured's lifetime for two years from the Issue Date.
If you have applied for an increase to the Stated Amount, this Contest provision
will be measured from the effective date of the increase with respect to payment
of the increase amount.
If this policy is reinstated, this Contest provision will be measured from the
reinstatement date.
Separate Accounts
We have exclusive and absolute ownership and control of the assets of the
Separate Account(s) and the Sub-Accounts. The assets of the Separate Account(s)
will be available to cover the liabilities of our general account only to the
extent that those assets exceed the reserves and other policy liabilities of
that Separate Account(s) arising under the variable life insurance policies
supported by that Separate Account. The assets of the Separate Account(s) will
be valued at least as often as any policy benefits but under no circumstances
less than monthly. Our determination of the value of an Accumulation Unit by the
method described in the policy will be conclusive. To the extent required by
law, the investment policy of the Separate Account(s) will not be changed
without the approval of the Insurance Commissioner of Connecticut. This approval
process is on file with the Commissioner of the state where this policy is
issued for delivery.
Page 12
<PAGE>
Substitution of Separate Account, Underlying Fund or Trust
If the use of a Separate Account, Underlying Fund or Trust is no longer
possible, or in our judgment becomes inappropriate for the purposes of this
policy, we may substitute another Separate Account, Underlying Fund or Trust
without your consent. Substitution may be made with respect to both existing
premium payments and investment of future premium payments. However, no such
substitution will be made without notice to you and without prior approval of
the Securities and Exchange Commission and the approval of the Insurance
Commissioner of the state where this policy is issued for delivery, to the
extent required by law. We may also add other Underlying Funds or Trusts under
the policy.
Emergency Procedure
We reserve the right to suspend or postpone the date of any payment of any
benefit or values (including the payments of cash surrenders and policy loans)
for any Valuation Period (1) when the New York Stock Exchange is closed (except
for holidays or weekends); (2) when trading on the Exchange is restricted; (3)
when an emergency exists as determined by the Securities and Exchange Commission
so that disposal of the securities held in the Sub-Accounts is not reasonably
practicable or it is not reasonably practicable to determine the value of the
Sub-Account's net assets; or (4) when the Commission has ordered that the right
of surrender be suspended for your protection; or (5) during any other period
when the Securities and Exchange Commission, by order, so permits for your
protection. Any provision of this policy which specifies a Valuation Date will
be superseded by this Emergency Procedure.
Voting Rights
For each Sub-Account in which the basic policy is credited with Accumulation
Units and which invests in an Underlying Fund, you, or the Beneficiary after the
Insured's death, will be entitled to certain voting rights with respect to the
Underlying Fund corresponding to that Sub-Account.
If current law requires, you will be entitled to instruct us how to vote at
meetings of the shareholders of the Underlying Funds. We will determine the
number of votes to which you will be entitled to instruct us. If there is a
change in the law which permits us to vote the shares of the Underlying Funds
without direction from you, we reserve the right to do so.
Maturity of a Sub-Account
If any Cash Value is attributable to a Sub-Account having a specified maturity
date, the Cash Value in that Sub-Account as of such maturity date will be
allocated to the money market Sub-Account specified on the Policy Summary,
unless you request otherwise. We will send written notice to your last known
address at least 30 days in advance of the maturity date of that Sub-Account. To
select an allocation to a Sub-Account other than the money market Sub-Account,
we must receive your notification In Writing at least seven days before the
maturity date of that Sub-Account.
Annual Statement
As often as required by law, but at least once in each Policy Year, we will send
you a statement showing:
1. the Cash Value, Stated Amount and Amount Insured; and
2. the premiums paid, deductions, surrenders and loans made during the
preceding Policy Year; and
3. total Loan Account value.
Illustrative Reports
You may request an up-to-date illustrative report of values based on past
results and current assumptions.
We will provide the illustrative report within a reasonable time and for a
reasonable service fee (unless prohibited by state law).
Page 13
<PAGE>
SETTLEMENT OPTIONS
You may elect any of the following Options for amounts payable in one sum under
this policy if the amount placed under an Option is at least $5,000. The
election must be made In Writing by you, if the Insured is living, or by the
Beneficiary, if the Insured has died.
Your election as to payments after the Insured dies is not binding on the payee
unless restricted in the election. If you have not made an election prior to the
Insured's death, the Beneficiary(ies) may make the election. While the Insured
is living, you may cancel an election you made:
a. before the Maturity Date if the policy is an endowment; or
b. before surrender if the policy has a Cash Value;
unless you made the election irrevocable.
If you cancel an election and have not named a Beneficiary under this policy
when the Insured dies, the Beneficiary is you. If you are deceased when the
Insured dies, the Beneficary(ies) is (are) your executors, administrators, or
assigns.
If any periodic payment due any payee is less than $100, we may make payments
less often so that each payment is at least $100.
If, at the date the first payment under an Option is due, we have declared a
higher rate under an Option, we will base the payments on the higher rate.
Option 1 -- Payments of a Fixed Amount -- We will make equal monthly payments of
the amount elected until the amount placed under this Option, with interest at a
rate of not less than 3 1/2% per year, has been paid. This Option cannot be
elected if the amount of each monthly payment is not at least $4.50 for each
$1,000 of proceeds. The last payment will include any amount that is not enough
to make another full payment.
Option 2 -- Payments for a Fixed Period -- We will make equal monthly payments
as shown in Table A, for the number of years elected.
Option 3 -- Amounts Held at Interest -- We will keep amounts under this Option
and pay interest on them (monthly, quarterly, semi-annually, or annually, as
elected) during the lifetime of the first payee, or for any other period agreed
on. Interest will be at rates we set from time to time, but not less than 3 1/2%
per year. We will not make interest payments to any other payee after the 30th
anniversary of the date this Option first became payable. On the 30th
anniversary, we will pay in one sum any amounts being kept for any other payee.
If the death of the first payee occurs on or after the 30th anniversary, we will
pay the balance to the next payee in one sum.
Option 4 -- Monthly Life Income -- We will make monthly payments, as shown in
Table B, during the lifetime of the person on whose life the payments are based
either:
a. with the number of payments assured for 60, 120, 180 or 240 months
as elected; or
b. on the cash refund basis where, if at the death of that person
payments have been made for less than the number of months
elected, we will pay in one sum any amount used to provide this
income that exceeds the sum of monthly payments already made.
Option 5 -- Joint and Survivor Level Amount Monthly Life Income-- We will make
monthly payments, as shown in Table C, based on the lifetime of two persons. We
will make monthly payments as long as either person lives.
The payments will be either:
a. without payments assured (no payments will be made after the death
of the survivor); or
b. with payments assured for 120 months.
Option 6 -- Joint and Survivor Monthly Life Income -- Two-thirds to Survivor --
We will make monthly payments, as shown in Table D, during the joint lifetime of
two persons on whose lives payments are based. After the death of either, we
will make payments of two-thirds the original amount during the lifetime of the
survivor. No payments will be made after the death of the survivor.
<PAGE>
Option 7 -- Joint and Last Survivor Monthly Life Income -- Monthly Payment
Reduces on Death of First Person Named We will make monthly income payments, as
shown in Table E, during the joint lifetime of two persons on whose lives
payments are based. One of the two persons will be named the first person. The
other will be named the second person. If the second person dies first, we will
continue to make monthly payments during the life of the first person. These
payments will be in the same amount that was payable during the joint lifetime
of the two persons. If the first person dies first, we will continue to make
monthly payments during the life of the second person in an amount equal to 50%
of the payments that we would have made during the lifetime of the first person.
No payments will be made after the death of the survivor.
Option 8 -- Other Options -- We will make any other arrangements for income
payments as may be agreed upon.
Payment Due -- The first payment under an option, except Option 3, is due on the
date the proceeds become payable under that option. Under Option 3, the first
payment is due one month after that date.
Payee -- We will make each payment under an elected Option when due (as long as
the payment is at least $100) to the designated payee, with the designation
applying at the due date of each payment. If two or more payees are to share
payments under Option 3, we will divide the proceeds on which interest is
payable in the proportions designated. Any rights of each payee will apply to
each payee's share of the proceeds.
If any payee or the last surviving payee dies while receiving payments, we will
pay in one sum:
a. any amounts not paid which remain (as to that payee) under the
option; or
b. the present value of any remaining payments assured; to the
executors, administrators or assigns of that payee.
Rights of Payee -- Unless restricted, a payee under Option 3 has the right to:
1. Elect Option 1, 2 or 4; but no election may be made under Option 1 or 2
which would continue payments past the 30th anniversary of the date the
first payment was due;
2. Withdraw part or all of the proceeds at any time but not more than four
times in any one calendar year; after four times in a calendar year,
the payee has the right to withdraw in one sum the entire amount not
already paid.
Unless restricted, the payee under Options 1, 2, 4, 5, 6 and 7 has:
1. the right to assign any payments under an option; and
2. the right to receive the present value of future benefits.
A payee has no right to receive the present value of future benefits under a
Life Income Option during the lifetime of the person on whose life the payments
are based.
Any payee who has a right to withdraw or receive the present value of future
benefits can exercise that right to the exclusion of the rights of any
succeeding payee. The calculation of the present value of future benefits under
any option will be at an interest rate which will not exceed the actual rate
which was used to calculate those benefits by more than one percent.
If, at the time an Option is elected, there is any outstanding loan on or
secured by this policy, that loan may be repaid to us in whole or in part.
All amounts that we hold and payments which we make under an Option are exempt
from the claims of all creditors to the extent allowed by law. Amounts payable
under any Option are a part of and invested in our general corporate funds.
<TABLE>
<CAPTION>
Table A--Monthly Payments For Fixed Period Per $1,00 0 of Proceeds--3 1/2%
Monthly Monthly Monthly Monthly Monthly Monthly
Years Installment Years Installment Years Installment Years Installment Years Installment Years Installment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $84.654 6 $15.350 11 $9.086 16 $6.763 21 $5.565 26 $4.842
2 43.055 7 13.376 12 8.464 17 6.465 22 5.393 27 4.732
3 29.194 8 11.899 13 7.939 18 6.201 23 5.236 28 4.630
4 22.268 9 10.751 14 7.490 19 5.966 24 5.093 29 4.535
5 18.115 10 9.835 15 7.101 20 5.755 25 4.963 30 4.44
</TABLE>
<PAGE>
Table B - Monthly Life Income Per $1,000 of Proceeds
Male
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Cash 60 120 180 240 Cash 60 120 180 240 Cash 60 120 180 240
Age Ref. Mo. Mo. Mo. Mo. Age Ref. Mo. Mo. Mo. Mo. Age Ref. Mo. Mo. Mo. Mo.
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
20* $3.35 $3.39 $3.38 $3.37 $3.36 44 $4.06 $4.20 $4.18 $4.14 $4.09 68 $6.10 $6.87 $6.52 $6.01 $5.44
21 3.37 3.40 3.39 3.38 3.37 45 4.11 4.26 4.24 4.19 4.13 69 6.26 7.09 6.68 6.11 5.49
22 3.38 3.42 3.41 3.40 3.39 46 4.16 4.32 4.30 4.25 4.18 70 6.42 7.31 6.85 6.21 5.53
23 3.40 3.44 3.43 3.42 3.41 47 4.21 4.39 4.36 4.30 4.23 71 6.60 7.55 7.02 6.30 5.57
24 3.43 3.47 3.46 3.45 3.44 48 4.26 4.45 4.42 4.36 4.28 72 6.79 7.81 7.19 6.40 5.61
25 3.45 3.49 3.48 3.47 3.46 49 4.32 4.53 4.49 4.42 4.33 73 6.99 8.08 7.37 6.48 5.64
26 3.47 3.51 3.50 3.49 3.48 50 4.38 4.60 4.56 4.48 4.39 74 7.20 8.37 7.56 6.57 5.66
27 3.49 3.54 3.53 3.52 3.51 51 4.44 4.68 4.63 4.55 4.44 75 7.44 8.67 7.74 6.65 5.69
28 3.52 3.56 3.55 3.54 3.53 52 4.50 4.76 4.70 4.61 4.49 76 7.67 8.99 7.92 6.72 5.70
29 3.54 3.59 3.58 3.57 3.56 53 4.57 4.84 4.78 4.68 4.55 77 7.94 9.33 8.11 6.79 5.72
30 3.57 3.61 3.60 3.59 3.58 54 4.64 4.93 4.86 4.76 4.61 78 8.24 9.69 8.29 6.85 5.73
31 3.60 3.64 3.63 3.62 3.61 55 4.71 5.03 4.95 4.83 4.67 79 8.53 10.07 8.47 6.90 5.74
32 3.62 3.67 3.66 3.65 3.64 56 4.79 5.12 5.04 4.91 4.73 80 8.87 10.46 8.64 6.95 5.74
33 3.65 3.71 3.70 3.69 3.67 57 4.87 5.23 5.13 4.99 4.79 81 9.26 10.88 8.81 6.99 5.75
34 3.68 3.74 3.73 3.72 3.70 58 4.95 5.34 5.23 5.07 4.85 82 9.62 11.31 8.97 7.02 5.75
35 3.71 3.78 3.77 3.75 3.74 59 5.04 5.45 5.34 5.15 4.91 83 10.08 11.77 9.11 7.04 5.75
36 3.75 3.81 3.80 3.79 3.77 60 5.14 5.58 5.44 5.24 4.98 84 10.52 12.24 9.25 7.06 5.75
37 3.78 3.85 3.84 3.83 3.80 61 5.23 5.70 5.56 5.33 5.04 85 11.06 12.73 9.36 7.07 5.75
38 3.82 3.89 3.89 3.87 3.84 62 5.34 5.84 5.68 5.42 5.10 and
39 3.85 3.94 3.93 3.91 3.88 63 5.45 5.99 5.80 5.52 5.16 over
40 3.89 3.99 3.97 3.95 3.92 64 5.57 6.14 5.93 5.61 5.22
41 3.93 4.04 4.02 4.00 3.96 65 5.69 6.31 6.07 5.71 5.28
42 3.97 4.09 4.07 4.04 4.00 66 5.82 6.49 6.22 5.81 5.33
43 4.02 4.14 4.12 4.09 4.04 67 5.96 6.67 6.36 5.91 5.39
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*and under 20
Table B - Monthly Life Income Per $1,000 of Proceeds
Female
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Cash 60 120 180 240 Cash 60 120 180 240 Cash 60 120 180 240
Age Ref. Mo. Mo. Mo. Mo. Age Ref. Mo. Mo. Mo. Mo. Age Ref. Mo. Mo. Mo. Mo.
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C> <S> <C> <C> <C> <C> <C>
20* $3.25 $3.28 $3.27 $3.26 $3.25 44 $3.83 $3.89 $3.88 $3.87 $3.85 68 $5.63 $6.09 $5.93 $5.65 $5.27
21 3.26 3.30 3.29 3.28 3.27 45 3.87 3.94 3.93 3.91 3.89 69 5.78 6.28 6.09 5.76 5.33
22 3.28 3.31 3.30 3.29 3.28 46 3.91 3.99 3.98 3.96 3.93 70 5.93 6.48 6.26 5.88 5.38
23 3.29 3.33 3.32 3.31 3.31 47 3.96 4.03 4.02 4.00 3.97 71 6.08 6.70 6.43 5.99 5.44
24 3.31 3.35 3.34 3.33 3.32 48 4.00 4.09 4.08 4.05 4.02 72 6.26 6.93 6.61 6.10 5.49
25 3.33 3.36 3.35 3.34 3.33 49 4.05 4.14 4.13 4.10 4.07 73 6.43 7.18 6.80 6.21 5.53
26 3.34 3.38 3.37 3.36 3.35 50 4.10 4.20 4.19 4.16 4.12 74 6.62 7.44 6.99 6.31 5.57
27 3.36 3.40 3.39 3.38 3.37 51 4.15 4.26 4.25 4.21 4.17 75 6.83 7.73 7.19 6.41 5.60
28 3.38 3.42 3.41 3.40 3.39 52 4.21 4.33 4.31 4.27 4.22 76 7.04 8.03 7.39 6.50 5.63
29 3.40 3.44 3.43 3.42 3.41 53 4.26 4.40 4.38 4.33 4.27 77 7.28 8.35 7.59 6.58 5.65
30 3.42 3.46 3.45 3.44 3.43 54 4.32 4.47 4.44 4.40 4.33 78 7.54 8.70 7.79 6.66 5.67
31 3.45 3.48 3.47 3.46 3.45 55 4.39 4.55 4.52 4.47 4.39 79 7.78 9.06 7.99 6.73 5.69
32 3.47 3.51 3.50 3.49 3.48 56 4.45 4.63 4.59 4.54 4.45 80 8.07 9.44 8.18 6.79 5.70
33 3.49 3.53 3.52 3.51 3.50 57 4.53 4.71 4.67 4.61 4.52 81 8.35 9.84 8.36 6.84 5.72
34 3.52 3.56 3.55 3.54 3.53 58 4.60 4.80 4.76 4.69 4.58 82 8.66 10.25 8.53 6.88 5.72
35 3.54 3.58 3.57 3.56 3.55 59 4.68 4.90 4.85 4.77 4.65 83 9.00 10.68 8.68 6.92 5.73
36 3.57 3.61 3.60 3.59 3.58 60 4.76 5.00 4.94 4.85 4.71 84 9.32 11.11 8.83 6.96 5.74
37 3.60 3.64 3.63 3.62 3.61 61 4.85 5.10 5.04 4.94 4.78 85 9.69 11.55 8.96 6.98 5.74
38 3.63 3.67 3.66 3.65 3.64 62 4.94 5.22 5.15 5.03 4.85 and
39 3.66 3.70 3.69 3.68 3.67 63 5.04 5.34 5.26 5.12 4.92 over
40 3.69 3.74 3.73 3.72 3.70 64 5.15 5.47 5.38 5.22 4.99
41 3.72 3.77 3.76 3.75 3.74 65 5.26 5.61 5.50 5.33 5.05
42 3.76 3.81 3.80 3.79 3.77 66 5.38 5.76 5.64 5.43 5.13
43 3.79 3.85 3.84 3.83 3.81 67 5.50 5.92 5.78 5.54 5.20
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*and under 20
<PAGE>
Joint and Survivor Monthly Life Income Per $1,000 of Proceeds
<TABLE>
<CAPTION>
TABLE C - Level Amount TABLE D - 2/3 To Survivor
-----------------------------------------------------------------------------------------------------------------------
Age and Sex Age and Sex
-----------------------------------------------------------------------------------------------------------------------
Male 50 55 60 65 70 50 55 60 65 70
-----------------------------------------------------------------------------------------------------------------------------------
Fem. 55 60 65 70 75 55 60 65 70 75
-----------------------------------------------------------------------------------------------------------------------------------
No 120 No 120 No 120 No 120 No 120 No No No No No
Ref. Mo. Ref. Mo. Ref. Mo. Ref. Mo. Ref. Mo. Ref. Ref. Ref. Ref. Ref.
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 55 $4.04 $4.03 $4.17 $4.16 $4.28 $4.27 $4.37 $4.36 $4.45 $4.44 $4.40 $4.58 $4.77 $4.98 $5.21
51 56 4.07 4.06 4.20 4.19 4.32 4.31 4.42 4.41 4.51 4.50 4.44 4.62 4.82 5.04 5.28
52 57 4.08 4.08 4.23 4.22 4.36 4.35 4.48 4.47 4.57 4.56 4.47 4.66 4.86 5.09 5.34
53 58 4.12 4.11 4.27 4.26 4.41 4.40 4.53 4.52 4.63 4.62 4.51 4.70 4.91 5.15 5.40
54 59 4.14 4.13 4.30 4.29 4.45 4.44 4.59 4.58 4.70 4.69 4.54 4.74 4.96 5.21 5.47
55 60 4.17 4.16 4.34 4.33 4.50 4.49 4.64 4.63 4.77 4.75 4.58 4.79 5.01 5.27 5.54
56 61 4.19 4.18 4.37 4.36 4.54 4.53 4.70 4.69 4.84 4.82 4.62 4.83 5.07 5.33 5.61
57 62 4.21 4.20 4.40 4.39 4.59 4.58 4.76 4.75 4.91 4.89 4.65 4.87 5.12 5.39 5.69
58 63 4.23 4.22 4.44 4.43 4.63 4.62 4.82 4.81 4.99 4.97 4.69 4.92 5.17 5.46 5.77
59 64 4.26 4.25 4.47 4.46 4.68 4.67 4.88 4.87 5.06 5.04 4.73 4.97 5.23 5.52 5.85
60 65 4.28 4.27 4.50 4.49 4.72 4.71 4.95 4.93 5.14 5.12 4.77 5.01 5.29 5.59 5.93
61 66 4.30 4.29 4.53 4.52 4.77 4.76 5.01 4.99 5.22 5.19 4.81 5.06 5.34 5.66 6.01
62 67 4.32 4.31 4.56 4.55 4.81 4.80 5.07 5.05 5.31 5.27 4.85 5.11 5.40 5.73 6.10
63 68 4.34 4.33 4.59 4.58 4.86 4.84 5.13 5.11 5.39 5.35 4.90 5.16 5.47 5.81 6.19
64 69 4.35 4.34 4.62 4.61 4.90 4.89 5.20 5.17 5.48 5.43 4.94 5.21 5.53 5.89 6.29
65 70 4.37 4.36 4.64 4.63 4.95 4.93 5.26 5.23 5.56 5.52 4.98 5.27 5.59 5.96 6.38
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table E - Joint and Last Survivor Monthly Life Income Per $1,000 of Proceeds
Monthly Payment Reduces on Death of First Person Named
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Age and Sex Age and Sex-Second Person Named
--------------------------------------------------------------------------------
Male 50 55 60 65 70
--------------------------------------------------------------------------------
Female 55 60 65 70 75
--------------------------------------------------------------------------------
No No No No No
Ref. Ref. Ref. Ref. Ref.
--------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
50 55 $4.30 $4.37 $4.44 $4.49 $4.53
51 56 4.35 4.43 4.50 4.55 4.60
52 57 4.40 4.49 4.56 4.62 4.67
53 58 4.45 4.54 4.62 4.69 4.75
First 54 59 4.51 4.60 4.69 4.76 4.82
Person 55 60 4.56 4.66 4.76 4.84 4.91
Named 56 61 4.62 4.73 4.83 4.92 4.99
57 62 4.67 4.79 4.90 5.00 5.08
58 63 4.73 4.86 4.98 5.08 5.17
59 64 4.79 4.93 5.05 5.17 5.27
60 65 4.85 5.00 5.13 5.26 5.37
61 66 4.92 5.07 5.22 5.36 5.48
62 67 4.98 5.14 5.30 5.45 5.59
63 68 5.05 5.22 5.39 5.56 5.70
64 69 5.12 5.30 5.48 5.66 5.82
65 70 5.19 5.38 5.58 5.77 5.95
--------------------------------------------------------------------------------
</TABLE>
We will furnish the amount of monthly income for other age combinations on
request. Age as used above means age when income begins.
<PAGE>
MATURITY EXTENSION RIDER
This Rider is made a part of the policy on the date specified on Page 3.
Benefit--Upon the Insured's attaining Age 99 and at any time in the twelve
calendar months thereafter, you may request that coverage be extended beyond the
Maturity Date shown on Page 3. Upon receipt of such request, In Writing, at Our
Office, we will continue this policy in force after the Maturity Date until the
death of the Insured.
The Death Benefit on the Maturity Date shown on Page 3 will be the Cash Value
less any Loan Account value and less any Deduction Amounts due but not paid.
On the Maturity Date shown on Page 3, any past due monthly Deduction Amounts
must be paid in order for this Rider to become effective. The Death Benefit
after the Maturity Date will be the Cash Value less any Loan Account value. All
other provisions of the policy relating to the payment of the Death Benefit
apply to the Death Benefit as described in this Rider. The Death Benefit is
based on the experience of the Sub-Accounts selected and is variable and is not
guaranteed.
After the Maturity Date shown on Page 3, periodic Deduction Amounts will no
longer be charged against the Cash Value and additional premiums will not be
accepted.
Taxation--The policy to which this Rider is attached is intended to qualify as a
life insurance policy for Federal tax purposes. The amount payable under this
policy upon the death of the Insured is intended to qualify for the Federal
income tax exclusion. The provisions of the policy are to be interpreted to
ensure such tax qualification, notwithstanding any other provision to the
contrary.
The policy may be surrendered prior to the death of the Insured for its Cash
Surrender Value. Such a surrender will be treated as a taxable distribution.
The Travelers Insurance Company does not give tax advice. No language in this
Rider should be construed to mean that the Death Benefit and Cash Value will be
exempt from any future tax liability. The tax results of any benefits received
under this Rider depend upon interpretation of the Internal Revenue Code. You
should consult your personal tax advisor prior to the exercise of this option to
assess any potential tax liability.
THE TRAVELERS INSURANCE COMPANY
/s/ Robert J. Lipp
Chairman
<PAGE>
LOAN ENDORSEMENT
This Endorsement is made a part of the policy at its Issue Date.
The "Loan Interest Rate Charged" defined on the Policy Summary is modified by
adding the following:
"The Loan Interest Rate Charged is 3.85% in advance on any loan amount directly
transferred from this policy to us or one of our affiliates for the purpose of
paying premiums on any long term care policy issued by The Travelers Insurance
Company or one of its affiliates at the time the loan is made effective."
THE TRAVELERS INSURANCE COMPANY
/s/ Robert J. Lipp
Chairman
<PAGE>
POLICY SUMMARY
INSURED: JOHN DOE POLICY NO.: 12345
ISSUE AGE: 35 POLICY DATE: OCT 01, 1994
MATURITY DATE: OCT 01, 2059 ISSUE DATE: OCT 01, 1994
STATED AMOUNT: $ 167,193 MONTHLY DEDUCTION DAY: 1ST DAY OF
EACH MONTH
-------------------------------------------------------------------------------
BENEFIT DESCRIPTION
-------------------------------------------------------------------------------
Initial Premium: $ 25,000
Initial Stated Amount: $167,193
Minimum Stated Amount: $ 25,000
Minimum Amount Insured: The greater of: 250% of the Cash Value
until age 40, with the percentage
reducing to 100% at age 95; or the
amounts required by Federal income tax
laws or regulations to qualify as life
insurance.
Minimum Discretionary
Payment Amount: $ 250
Monthly Premium Tax Charge: Policy Years 1-10: .0166667% of Cash
Value on each Deduction Day.
Policy Years 11+: .0166667% of Cash Value
attributable to each additional premium
payment made after the Initial Premium
payment and before the 10th Policy
Anniversary. The Cash Value attributable
to an additional premium payment is
calculated by multiplying the entire
Cash Value on the monthly Deduction Day
by the result of (a) divided by
(b), where (a) is the amount of the
additional premium payment and (b) is
the Cash Value as of the date of receipt of
the additional premium payment. Charge
expires 10 years from the effective date
of the additional premium payment.
Charge for Full Surrender: Charge is equal to a percentage of each
premium paid as follows:
YEARS FROM DATE
---------------
OF PREMIUM RECEIPT % OF PREMIUM PAID
------------------ -----------------
1-2 7.5%
3-4 7%
5 6.5%
6 6%
7 5%
8 4%
9 3%
10+ 0%
Page 3
<PAGE>
POLICY SUMMARY
INSURED: JOHN DOE POLICY NO.: 12345
ISSUE AGE: 35 POLICY DATE: OCT 01, 1994
MATURITY DATE: OCT 01, 2059 ISSUE DATE: OCT 01, 1994
STATED AMOUNT: $167,193 MONTHLY DEDUCTION DAY: 1ST DAY OF
EACH MONTH
------------------------------------------------------------------------------
BENEFIT DESCRIPTION
------------------------------------------------------------------------------
Charge for Partial Surrender: No charge for partial surrenders of
Earnings up to a cumulative amount, in
any one Policy Year, of 10% of the Cash
Value as calculated on the Policy
Anniversary immediately preceding the
request for surrender. Partial surrenders
in excess of this amount will incur a
charge equal to a percentage of the
amount surrendered, not to exceed the
charge that would apply to a full
surrender, as follows:
YEARS FROM DATE % OF AMOUNT
--------------- -----------
OF PREMIUM RECEIPT SURRENDERED
------------------ -----------
1-2 7.5%
3-4 7%
5 6.5%
6 6%
7 5%
8 4%
9 3%
10+ 0%
Maximum Loan Amount: 90% of (Cash Value minus surrender
penalties) as of the date that we receive
your loan request.
Minimum Loan Amount: $ 500
Loan Account Annual
Interest Rate Credited: 4% in arrears
Loan Interest Rate Charged: [Rate on portion of loan comprised of
Earnings:
Policy Years 1-10: 4.75% in advance (net
charge 1%).
Policy Years 11 and thereafter: 3.85% in
advance (net charge 0%).
Rate on portion of the loan comprised of
premiums paid: 5.65% in advance (net
charge 2%) in all Policy Years.]
Rate Class: Male Nonsmoker
Death Benefit Interest Factor: 1.00327374
Page 3 (Continued)
<PAGE>
POLICY SUMMARY
INSURED: JOHN DOE POLICY NO.: 12345
ISSUE AGE: 35 POLICY DATE: OCT 01, 1994
MATURITY DATE: OCT 01, 2059 ISSUE DATE: OCT 01, 1994
STATED AMOUNT: $167,193 MONTHLY DEDUCTION DATE: 1ST DAY OF
EACH MONTH
-------------------------------------------------------------------------------
BENEFIT DESCRIPTION
-------------------------------------------------------------------------------
Separate Account:
THE TRAVELERS VARIABLE LIFE Maximum Subaccount Deduction
--------------------------- Per Day (In Basis Points)
INSURANCE SEPARATE ACCOUNT THREE ----------------------------
--------------------------------
[Underlying Funds:
Smith Barney/Travelers Series Fund, Inc.
Smith Barney Income & Growth Portfolio 0.3562
Alliance Growth Portfolio 0.3562
American Capital Enterprise Portfolio 0.3562
Smith Barney International Equity Portfolio 0.3562
TBC Managed Income Portfolio 0.3562
Putnam Diversified Income Portfolio 0.3562
Smith Barney High Income Portfolio 0.3562
MFS Total Return Portfolio 0.3562
Smith Barney Money Market Portfolio 0.3562
Smith Barney Series Fund
Smith Barney Total Return Portfolio 0.3562
Travelers Zero Coupon Bond Series Fund of
Stripped U.S. Treasury Securities
Travelers Zero Coupon Bond Fund 1998 0.3562
Travelers Zero Coupon Bond Fund 2000 0.3562
Travelers Zero Coupon Bond Fund 2005 0.3562]
Information about the Separate Account is provided in the prospectus for
the Separate Account.
We reserve the right to limit transfers among the Sub-Accounts to four
times in any Policy Year and to charge a reasonable fee for each additional
transfer that we allow.
We will invest any initial premium in the Smith Barney Money Market Portfolio
Sub-Account during the Right to Cancel period.
Insurance under this policy may end before the Maturity Date shown above if
premium and investment experience are insufficient to continue insurance to
such date.
Life insurance premium for the basic policy may be paid to the Maturity Date
(see Additional Premium Payments provision, Page 9) or until the prior death of
the Insured. Charges for any riders are payable to the applicable expiry dates
or until prior death of the Insured.
No insurance will be in effect unless at least one Deduction Amount has
been paid.
Page 3 (Continued)
<PAGE>
POLICY SUMMARY
INSURED: JOHN DOE POLICY NO.: 12345
ISSUE AGE: 35 POLICY DATE: OCT 01, 1994
MATURITY DATE: OCT 01, 2059 ISSUE DATE: OCT 01, 1994
STATED AMOUNT: $167,193 MONTHLY DEDUCTION DAY: 1ST DAY OF
EACH MONTH
------------------------------------------------------------------------------
COST OF INSURANCE RATES
(MONTHLY RATE FOR EACH $1000 OF COVERAGE AMOUNT)
<TABLE>
<CAPTION>
AGE MAXIMUM AGE MAXIMUM AGE MAXIMUM
--- RATE --- RATE --- RATE
---- ---- ----
<S> <C> <C> <C> <C> <C>
35 0.1815 64 2.0493 93 28.0075
36 0.1936 65 2.2509 94 31.4016
37 0.2078 66 2.4663 95 36.7981
38 0.2241 67 2.6961 96 46.5898
39 0.2424 68 2.9435 97 67.0415
40 0.2634 69 3.2170 98 83.3333
41 0.2859 70 3.5268 99 83.3333
42 0.3102 71 3.8818
43 0.3365 72 4.2910
44 0.3650 73 4.7555
45 0.3956 74 5.2677
46 0.4278 75 5.8188
47 0.4622 76 6.4006
48 0.4995 77 7.0068
49 0.5402 78 7.6431
50 0.5859 79 8.3307
51 0.6384 80 9.0934
52 0.6976 81 9.9561
53 0.7649 82 10.9409
54 0.8390 83 12.0462
55 0.9190 84 13.2508
56 1.0042 85 14.5325
57 1.0941 86 15.8744
58 1.1905 87 17.2697
59 1.2959 88 18.7194
60 1.4132 89 20.2361
61 1.5452 90 21.8455
62 1.6949 91 23.5954
63 1.8631 92 25.5745
</TABLE>
-------------------------------------------------------------------------------
The rates used for the cost of insurance deduction are guaranteed not to exceed
the maximum rates shown above. The rates are based on the 1980 Commissioner's
Standard Ordinary Mortality Table. The cost of insurance is deducted on the
monthly Deduction Day.
PAGE 3 (Continued)
<PAGE>
EXHIBIT 11
August 18, 1995
The Travelers Insurance Company
The Travelers Variable Life Insurance
Separate Account Three
One Tower Square
Hartford, Connecticut 06183
Gentlemen:
With reference to the Registration Statement on Form S-6 filed by The
Travelers Insurance Company and The Travelers Variable Life Insurance Separate
Account Three with the Securities and Exchange Commission covering modified
single premium individual variable life insurance policies, I have examined such
documents and such law as I have considered necessary and appropriate, and on
the basis of such examination, it is my opinion that:
1. The Travelers Insurance Company is duly organized and existing under the
laws of the State of Connecticut and has been duly authorized to do
business and to issue variable life insurance policies by the Insurance
Commissioner of the State of Connecticut.
2. The Travelers Variable Life Insurance Separate Account Three is a duly
authorized and existing separate account established pursuant to Section
38a-433 of the Connecticut General Statutes.
3. The variable life insurance policies covered by the above Registration
Statement, and all pre- and post-effective amendments relating thereto,
have been or will be approved and authorized by the Insurance
Commissioner of the State of Connecticut and when issued will be valid,
legal and binding obligations of The Travelers Insurance Company and of
The Travelers Variable Life Insurance Separate Account Three.
4. Assets of The Travelers Variable Life Insurance Separate Account Three
are not chargeable with liabilities arising out of any other business The
Travelers Insurance Company may conduct.
I hereby consent to the filing of this opinion as an exhibit to the above-
referenced Registration Statement and to the reference to this opinion under the
caption "Legal Proceedings and Opinion" in the Prospectus constituting a part of
the Registration Statement.
Very truly yours,
Ernest J. Wright
General Counsel
Life and Annuities Division
The Travelers Insurance Company
<PAGE>
EXHIBIT 12
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, ROBERT I. LIPP of Scarsdale, New York, director of The
Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint JAY S. FISHMAN, Director and Chief Financial Officer of
said Company, and ERNEST J. WRIGHT, Assistant Secretary of said Company, or
either one of them acting alone, my true and lawful attorney-in-fact, for me,
and in my name, place and stead to sign registration statements on behalf of
said Company on Form S-6 or other appropriate Form under the Securities Act of
1933 for The Travelers Variable Life Insurance Separate Account Three, a
separate account of the Company dedicated specifically to the funding of
variable life insurance contracts to be offered by said Company, and further, to
sign any and all amendments thereto, including post-effective amendments, that
may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 26th day of
September, 1994.
/s/Robert I. Lipp
Director
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, MICHAEL A. CARPENTER of Greenwich, Connecticut, director,
President and Chief Executive Officer of The Travelers Insurance Company
(hereafter the "Company"), do hereby make, constitute and appoint JAY S.
FISHMAN, Director and Chief Financial Officer of said Company, and ERNEST J.
WRIGHT, Assistant Secretary of said Company, or either one of them acting alone,
my true and lawful attorney-in-fact, for me, and in my name, place and stead to
sign registration statements on behalf of said Company on Form S-6 or other
appropriate Form under the Securities Act of 1933 for The Travelers Variable
Life Insurance Separate Account Three, a separate account of the Company
dedicated specifically to the funding of variable life insurance contracts to be
offered by said Company, and further, to sign any and all amendments thereto,
including post-effective amendments, that may be filed by the Company on behalf
of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 12th day of June,
1995.
/s/Michael A. Carpenter
Director, President and
Chief Executive Officer
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, CHARLES O. PRINCE, III of Weston, Connecticut, director of The
Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint JAY S. FISHMAN, Director and Chief Financial Officer of
said Company, and ERNEST J. WRIGHT, Assistant Secretary of said Company, or
either one of them acting alone, my true and lawful attorney-in-fact, for me,
and in my name, place and stead to sign registration statements on behalf of
said Company on Form S-6 or other appropriate form under the Securities Act of
1933 for The Travelers Variable Life Insurance Separate Account Three, a
separate account of the Company dedicated specifically to the funding of
variable life insurance contracts to be offered by said Company, and further, to
sign any and all amendments thereto, including post-effective amendments, that
may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 23rd day of
September, 1994.
/s/Charles O. Prince, III
Director
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, MARC P. WEILL of New York, New York, director of The Travelers
Insurance Company (hereafter the "Company"), do hereby make, constitute and
appoint JAY S. FISHMAN, Director and Chief Financial Officer of said Company,
and ERNEST J. WRIGHT, Assistant Secretary of said Company, or either one of them
acting alone, my true and lawful attorney-in-fact, for me, and in my name, place
and stead to sign registration statements on behalf of said Company on Form S-6
or other appropriate Form under the Securities Act of 1933 for The Travelers
Variable Life Insurance Separate Account Three, a separate account of the
Company dedicated specifically to the funding of variable life insurance
contracts to be offered by said Company, and further, to sign any and all
amendments thereto, including post-effective amendments, that may be filed by
the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 28th day of
November, 1994.
/s/Marc P. Weill
Director
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, IRWIN R. ETTINGER of Stamford, Connecticut, director of The
Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint JAY S. FISHMAN, Director and Chief Financial Officer of
said Company, and ERNEST J. WRIGHT, Assistant Secretary of said Company, or
either one of them acting alone, my true and lawful attorney-in-fact, for me,
and in my name, place and stead to sign registration statements on behalf of
said Company on Form S-6 or other appropriate Form under the Securities Act of
1933 for The Travelers Variable Life Insurance Separate Account Three, a
separate account of the Company dedicated specifically to the funding of
variable life insurance contracts to be offered by said Company, and further, to
sign any and all amendments thereto, including post-effective amendments, that
may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 30th day of
September, 1994.
/s/Irwin R. Ettinger
Director
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, DONALD T. DeCARLO of Douglaston, New York, director of The
Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint JAY S. FISHMAN, Director and Chief Financial Officer of
said Company, and ERNEST J. WRIGHT, Assistant Secretary of said Company, or
either one of them acting alone, my true and lawful attorney-in-fact, for me,
and in my name, place and stead to sign registration statements on behalf of
said Company on Form S-6 or other appropriate Form under the Securities Act of
1933 for The Travelers Variable Life Insurance Separate Account Three, a
separate account of the Company dedicated specifically to the funding of
variable life insurance contracts to be offered by said Company, and further, to
sign any and all amendments thereto, including post-effective amendments, that
may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 28th day of April,
1995.
/s/Donald T. DeCarlo
Director
The Travelers Insurance Company
<PAGE>
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
------------------------------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, CHRISTINE B. MEAD of Avon, Connecticut, Vice President and
Controller of The Travelers Insurance Company (hereafter the "Company"), do
hereby make, constitute and appoint JAY S. FISHMAN, Director and Chief Financial
Officer of said Company, and ERNEST J. WRIGHT, Assistant Secretary of said
Company, or either one of them acting alone, my true and lawful attorney-in-
fact, for me, and in my name, place and stead to sign registration statements on
behalf of said Company on Form S-6 or other appropriate Form under the
securities Act of 1933 for The Travelers Variable Life Insurance Separate
Account Three, a separate account of the Company dedicated specifically to the
funding of variable life insurance contracts to be offered by said Company, and
further, to sign any and all amendments thereto, including post-effective
amendments, that may be filed by the Company on behalf of said registrant.
IN WITNESS WHEREOF I have hereunto set my hand this 1st day of June,
1995.
/s/Christine B. Mead
Vice President and Controller
The Travelers Insurance Company
<PAGE>
Exhibit 13
December 28, 1994
This document sets forth, as required by Rule 6E-3(T)(b)(12)(iii), the
administrative procedures that will be followed by the Travelers Insurance
Company (TIC) in connection with the issuance of its modified single premium
Variable Life insurance contract, the transfer of assets held thereunder, and
the redemption by Policyowners of their interest in the contracts. The document
also describes the method that TIC will use in adjusting the payment and cash
values when a Contract is exchanged for a fixed benefit insurance policy, as
required by Rule 6E-3(T)(b)(13)(v)(B).
Transfer and Redemption Procedures
----------------------------------
I. Purchase and Related Transactions
------------------------------------
A. Premium Schedules and Underwriting Standards
This Contract is a modified single premium contract. The Initial Premium
purchases a Death Benefit equal to the Policy's Stated Amount if Option 1 is
selected, and Stated Amount plus Cash Value if Option 2 is selected. The
relationship between the Initial Premium and the Stated Amount depends on the
age, sex (where permitted by state law), and underwriting class of the insured.
Generally, the same Initial Premium will purchase a higher Stated Amount for a
younger insured than for an older insured. Likewise, the same Initial Premium
will purchase a slightly higher Stated Amount for a female insured than for a
male insured of the same age. Also, the same Initial Premium will purchase a
higher Stated Amount for a standard insured than for a substandard insured.
Although the Policy can operate as a single premium policy, Additional Premium
Payments may be made under certain circumstances. The circumstances under which
Additional Premium Payments can be made under the Policy are as follows:
1. Increases in Stated Amount- The policy owner may request an increase in
Stated Amount at any time. The Company will require the policy owner to make
an Additional Premium Payment in order for the increase to become effective.
2. To Prevent Lapse- If the Surrender Value on any Deduction Day is
insufficient to cover the Monthly Deduction Amount due on that day, then in
order to prevent lapse, the policy owner must make a
<PAGE>
payment during the Grace Period sufficient to cover the Monthly Deduction
Amount.
3. At Policy Owner's Discretion- Additional Premium Payments may be made at
the policyholder's discretion so long as the payment plus the total of all
premiums previously paid does not exceed the maximum premiums limitation
derived from the guideline premium test for life insurance prescribed by the
Internal Revenue Code. Because of the test, the maximum premiums limitation
will ordinarily equal the Initial Premium for a number of years after the
policy has been issued. Therefore, discretionary Additional Premium Payments
normally will not be permitted during the early years of the Policy.
Any Additional Premium Payments made under the Policy may be subject to new
evidence of insurability.
The Contract will be offered and sold pursuant to established underwriting
standards and in accordance with state insurance laws, which prohibit unfair
discrimination among Contract owners, but recognize that premiums must be based
upon factors such as age, health, or occupation.
B. Application and Initial Premium Processing
Upon receipt of a completed application, the Travelers will follow certain
insurance underwriting (i.e. evaluation of risk) procedures designed to
determine whether the applicant is insurable. This process may involve such
verification procedures as medical examinations and may require that further
information be provided by the proposed Insured before a determination can be
made. A contract will not be issued until this underwriting procedure has been
completed.
Insurance coverage under a Policy will begin only after the Applicant has
satisfied all outstanding underwriting delivery requirements, and after the
Company has received the Initial Premium Payment. The Policy Date is the date
used to determine all future cyclical transactions on the Policy, e.g.,
Deduction Dates, Policy Months, and Policy Years. The Policy Date may be prior
to, or the same date as, the date on which the Policy is issued (the "Issue
Date").
<PAGE>
C. Premium Allocation
When the Policy is issued, the Cash Value will be allocated to the Money Market
Portfolio Sub-Account until the expiration of the Right to Cancel Period. At
the end of the Right to Cancel Period, shares of the Underlying Funds will be
purchased at net asset value, and the Cash Values in the Money Market Portfolio
will be allocated (in whole percentages of 5% or more) among the Sub-Accounts
selected on the Application.
D. Contract Loans
A Policy Owner may obtain a cash loan from the Company secured by the Policy not
to exceed 90% of the Policy's Cash Surrender Value (determined on the day on
which the Company receives the written loan request). No loan request may be
made for amounts less than $500. If there is a loan outstanding at the time a
subsequent loan request is made, the amount of the outstanding loan will be
added to the new request. The Company will charge interest on the outstanding
amounts of the loan. Interest must be paid in advance by the Policy Owner.
Loans are considered to be loans on the Policy Owner's Earnings first. Once all
of the earnings have been loaned out, loans are considered to be loans of
premium. During the first ten Policy Years, the Loan Interest Rate on the
portion of loan comprised of Earnings is 4.75%. During policy years eleven and
thereafter, the Loan Interest Rate on the Earnings will be 3.85%. For all Policy
Years, the Loan Interest Rate on the portion of the loan comprised of Premium is
5.65%.
The amount of the loan will be transferred as of the date the loan is made on a
pro rata basis from each of the Sub-Accounts attributable to the Policy (unless
the Policy Owner states otherwise) to the Loan Account, which is part of the
Company's general account. The Loan Account is credited with a fixed annual rate
of interest set forth in the policy which does not vary with the performance of
the Underlying Funds. When loan repayments are made, the amount of the repayment
will be deducted from the Loan Account and will be reallocated based upon
premium allocation percentages among the Sub-Accounts applicable to the Policy
(unless the Policy Owner states otherwise). The Company will make the loan to
the Policy Owner within seven days after receipt of the written loan request.
<PAGE>
An outstanding loan amount decreases the Cash Surrender Value. If a loan is not
repaid, it permanently decreases the Cash Surrender Value, which could cause the
Policy to lapse. In addition, the Death Benefit actually payable would be
decreased because of the outstanding loan. Furthermore, even if the loan is
repaid, the Death Benefit and Cash Surrender Value may be permanently affected
since the Policy Owner was not credited with the investment experience of an
Underlying Fund on the amount in the Loan Account while the loan was
outstanding. All or any part of a loan secured by a Policy may be repaid while
the Policy is still in effect.
E. Reinstatement
If the Policy lapses, the Policy owner may reinstate the Contract on payment of
the reinstatement premium, (and any applicable charges) shown in the Contract. A
request for reinstatement may be made at any time within three years of lapse
(five years for policies issued in Missouri). The premium on reinstatement is at
least equal to the Monthly Deduction Amount, calculated as of the Deduction Date
next following receipt of premium. The Cash Value of the Policy on reinstatement
will be equal to the premium paid in conjunction with the reinstatement. In
addition, TIC reserves the right to require satisfactory evidence of
insurability.
F. Transfer of Cash Value
As long as the Policy remains in effect, the Policy Owner may transfer all or a
portion of the Cash Value (less the Loan Account) among any of the Sub-
Account(s). Although there are currently no charges, penalties or restrictions
on the amount or frequency of transfers, the Company reserves the right to limit
the number of transfers to no more than four in any Policy Year, and to charge a
reasonable fee for any transfer request in excess of four.
G. Misstatement as to Sex and Age
If there has been a misstatement with regard to sex or age, benefits payable
will be adjusted to what the Contract would have provided with the correct
information.
II. Redemption Procedures: Surrender and Related Transactions
---------------------------------------------------------
A. Surrender for Cash Value
<PAGE>
As long as the Contract is in effect, a Contract Owner may elect to surrender
the Contract and receive its Cash Surrender Value, or Cash Value less any
outstanding policy loan less any applicable Surrender Charges.
Upon full or partial surrender, the Travelers will generally pay the Cash
Surrender Value of the Contract within seven days of receipt of the written
request or on the date requested by the Contract owner, if later. The Cash
Surrender Value for partial surrenders will be equal to the net amount requested
to be surrendered minus any applicable surrender charges. There will be no
charge for partial surrenders on Earnings (calculated on the date of
policyholder request) up to a cumulative amount, in any one Policy Year, of 10%
of the Cash Value (calculated on the first Valuation Date of the year in which
the surrender is requested). The deduction from Cash Value for a partial
surrender will be made on a pro rata basis against the Cash Value of each of the
Sub-Accounts attributable to the policy, unless the Contract owner states
otherwise in writing. In addition to reducing the Cash Value of the policy,
partial cash surrenders will reduce the death benefit payable under the policy.
B. Benefit Claims
As long as the Policy remains in force, the Policy provides a Death Benefit upon
the death of the insured. The death benefit proceeds will be paid to a named
Beneficiary. The amount of the death benefit proceeds will be determined on the
date on which the Insured's death occurred. The death benefit proceeds may be
paid in a lump sum or under any optional payment plan. In determining the
proceeds payable, the Death Benefit provided by the Policy will be reduced by
any outstanding charges, fees, and policy loans. The proceeds will be paid
within seven days after the Company receives due proof of death.
The Policy provides for two death benefit options. Under Option 1 (the Level
Option) the Death Benefit will be equal to the Policy's Stated Amount or, if
greater, a specified multiple of Cash Value (the "Minimum Amount Insured").
Under Option 2 (the Variable Option), the Death Benefit will be equal to the
Policy's Stated Amount plus the Cash Value (determined as of the date of the
Insured's death) or, if greater, the Minimum Amount Insured. The Minimum Amount
Insured is the amount required to qualify the Policy as a life insurance
contract under the current federal tax law. Under that law, the Minimum Amount
Insured is equal to a stated percentage of the Cash Value of the Policy
determined daily. The percentages differ according to the attained age of the
insured. The
<PAGE>
Minimum Amount Insured will be set forth in the Policy and may change as federal
income tax laws or regulations change.
A Policy Owner may request in writing that the Stated Amount of the Policy be
increased or decreased provided that the Stated Amount after any decrease may
not be less than the minimum amount of $25,000. A decrease in the Stated Amount
in a substantially funded Policy may cause a cash distribution that is
includable in the gross income of the Policy Owner.
For increases in the Stated Amount, the Company may require a new application
and evidence of insurability as well as an additional Premium Payment. The
effective date of any increase will be as shown on the new Policy Summary which
the Company will send to the Policy Owner. The effective date of any increase in
the Stated Amount will generally be the Deduction Date next following either the
date of a new application or, if different, the date requested by the Policy
Owner. There is no additional charge for a decrease in Stated Amount.
A Policy Owner may change the Death Benefit option at any time prior to the
Insured's death by sending a written request to the Company. There is no direct
consequence of changing a Death Benefit option, except as described in the
prospectus under "Tax Consequences of Modified Endowment Contracts". However,
the change could affect future value of the Coverage Amount, and with some
Option 2 to Option 1 changes involving substantially funded Policies, there may
be a cash distribution which is included in the gross income of the Policy
Owner. Consequently, the cost of insurance charge which is based on the Coverage
Amount may be different in the future. If the change is from Option 2 to Option
1, the Stated Amount of the Policy will be increased by the Cash Value
(determined on the day the Company receives the written change request or on the
date the change is requested to become effective, if later). If the change is
from Option 1 to Option 2, the Stated Amount of the Policy will be decreased by
the Cash Value (determined on the date the Company receives the written change
request) so that the Death Benefit payable under Option 2 at the time of the
change will equal that which would have been payable under Option 1. No change
from Option 1 to Option 2 will be permitted if the change results in a Stated
Amount of less than the minimum amount of $25,000.
<PAGE>
If the Insured is living on the Maturity Date (the anniversary of the Policy
Date on which the Insured is age 100), the Company will pay the Policy Owner the
Cash Value of the Policy, less any outstanding policy loan, amounts payable to
an assignee under a collateral assignment of the Policy, or Deduction Amount due
and unpaid. The Policy Owner must surrender the Policy to the Company before
such payment can be made, at which point the Policy will terminate and the
Company will have no further obligations under the Policy.
C. Lapse
The Policy will remain in effect until the Cash Surrender Value of the Policy is
insufficient to cover the Monthly Deduction Amount. If such event occurs, the
Company will give written notice to the Policy Owner indicating that if the
amount shown in the notice (which will be sufficient to cover the Deduction
Amount due) is not paid within 61 days (the "Late Period"), the Policy will
lapse. The Policy will continue through the Late Period, but if not payment is
forthcoming, it will terminate without value at the end of the Late Period. If
the person insured under the Policy dies during the Grace Period, the Death
Benefit payable under the Policy will be reduced by the Monthly Deduction Amount
due plus the amount of any outstanding loan.
If the Policy lapses, the Policy Owner may reinstate the Policy upon payment of
the reinstatement premium (and any applicable charges) shown in the Policy. A
request for reinstatement may be made at any time within three years of lapse
(five years for policies issued in Missouri). The Cash Value of the Policy upon
reinstatement will be equal to the premium paid in conjunction with the
reinstatement. In addition, the Company reserves the right to require
satisfactory evidence of insurability.
D. Contract Loans
See Purchase and Related Transactions- Contract Loans.
E. Transfers
See Purchase and Related Transactions- Transfer of Cash Value
<PAGE>
III. Cash Adjustment Upon Exchange of Contract
-------------------------------------------
Once the Policy is in effect, it may be exchanged at any time during the first
24 months after its issuance for a general account life insurance policy issued
by the Company (or an affiliated company) on the life of the Insured. Benefits
under the new life insurance policy will be as described in that policy. No
evidence of insurability will be required. The Policy Owner has the right to
select the same Death Benefit or Net Amount at Risk as the former Policy. Cost
of insurance rates will be based on the same risk classification as those of the
former Policy. Any outstanding policy loan must be repaid before the Company
will make an exchange. In addition, there may be an adjustment for the
difference in Cash Value between the two policies.
/s/Bennett D. Kleinberg, ASA
Actuarial Assistant
<PAGE>
December 28, 1994
Introduction:
-------------
SEC Rule 6E-3(T)(b) requires that mortality and expense risk charges of The
Travelers Insurance Company (TIC) modified single premium Variable Life contract
be:
a. within the range of industry practice for comparable flexible premium VLI
contracts
or
b. reasonable in relation to the risks assumed
This memorandum represents that TIC's mortality and expense risk charge of 0.90%
is reasonable and within the range of industry practice. It includes a brief
description of the analysis used to support the representation, and will be
maintained in the principal office of TIC and made available to the Commission
upon request.
Description of Mortality and Expense Risk Charges:
--------------------------------------------------
A daily charge is deducted from the Separate Account Three for the mortality and
expense risks assumed by TIC. This charge will be at an annual rate of 0.90% of
assets in the Separate Account. This rate will be reduced to 0.75% for the
current calendar year if the average net fund growth rate is at least 6.5% in
the previous calendar year. This determination will be made on an annual basis.
The average net fund growth rate is the total daily earnings attributed to the
policy divided by the average amount invested during the year. The daily
earnings are measured using the net asset values per share of the Underlying
Funds selected by the policyholder. If all the money collected from this charge
is not needed to cover the mortality and expense costs, the excess will be
contributed to the TIC's general account.
Description of Mortality and Expense Risks:
-------------------------------------------
TIC will assume a mortality risk and expense risk with respect to these
Contracts. The mortality risk assumed is that the actual cost of insurance
charge specified in the Contract (and subject to the maximum rates guaranteed in
the Contract) may be insufficient to meet actual claims. The expense risk
assumed is that the expenses incurred in issuing and administering the Contracts
will exceed the administrative charges set forth in the Contract. The
Administrative charges are imposed at an annual rate of 0.40% of assets in the
Separate Account, deducted daily.
<PAGE>
All charges made under the Contract are subject to refund should the Contract
owner exercise the "Right To Cancel".
The mortality risk assumed by the Contract is greater than under traditional
policies or scheduled premium Variable Life contracts. The flexible premium,
withdrawal, and transfer of Cash Value features of the Contract allow the
Contract owner to manipulate the Net Amount at Risk, and therefore the Cost of
Insurance charge under the death benefit Option 1 (the "Level Option"). Also,
the death benefit automatically increases without underwriting if the Cash Value
of the Contract is in the tax corridor. This allows greater exposure to
antiselection and manipulation by the Contract owner.
Other Contract owner options add to the expense risk assumed by the Contract.
Features such as partial surrenders, Contract loans, transfers of Cash Value,
increases and decreases in Stated Amount, and changes in Death Benefit Option,
are all available to Contract owners at no or minimal additional cost and
without substantial restriction. All require administrative action, and
therefore magnify the expense risk for these Contracts.
Analysis of Comparable Products:
--------------------------------
Rule 6E-3T provides for an exemption for risk charges provided that the level of
the charges are reasonable and within the range of industry practice. In order
to support this representation for the guaranteed maximum 0.90% mortality and
expense charge of this Contract, the charge was compared with the mortality and
expense risk charges for the single and modified single premium variable life
insurance products which the TIC benchmarked. 75% of those products had
guaranteed mortality and expense charges of 0.90%.
Conclusion:
-----------
It is clear the TIC will incur both mortality and expense risk with the
Contract. The analysis of mortality and expense risk charges made for comparable
products in the industry demonstrates that TIC's mortality and expense risk
charge is reasonable and within the range of industry practice.
/s/Bennett D. Kleinberg, ASA
Actuarial Assistant
<PAGE>
December 28, 1994
Analysis of The Travelers Insurance Company (TIC)
Distribution Financing Arrangement of the Separate Account Three
This memorandum supports the representation that there is reasonable likelihood
that the distribution financing arrangement of the Separate Account Three will
benefit the Separate Account and its Contract owners. This memorandum will be
kept at the Principal Office of TIC and will be made available to the Commission
upon request.
I. The Contract
------------
TIC's modified single premium Variable Life Insurance Contracts are funded by
the Separate Account Three. The Separate Account Three is presently comprised of
thirteen sub-accounts, each of which invests exclusively in one of the
underlying funds. When the Policy is issued, the Cash Value will be allocated to
the Money Market Portfolio Sub-Account until the expiration of the Right to
Cancel Period. At the end of the Right to Cancel Period, shares of the
Underlying Funds will be purchased at net asset value, and the Cash Values in
the Money Market Portfolio will be allocated (in whole percentages of 5% or
more) among the Sub-Accounts selected on the Application. A contract owner may
transfer the cash values among the Underlying Funds.
The Contracts are variable, because the Cash Value and, under certain
circumstances, the death benefit of the Contract, may increase or decrease
depending on the investment experience of the Underlying Funds. The Contract
will remain in effect until the Cash Surrender Value is insufficient to cover a
Deduction Amount due, and the Late Period expires without sufficient payment
being made. The Late Period is 61 days after TIC sends a notice of any
insufficiency to the Contract owner.
II. Deductions and Charges:
-----------------------
A. Deductions from Premiums
There are no deductions from Premiums.
<PAGE>
B. Monthly Deduction
TIC will deduct from the Cash Value of the Contract an amount, (the Deduction
Amount), on the first day of each Contract month to cover the cost of insurance,
the state premium tax charge (for ten years following a premium payment), and
any supplemental benefits added by rider.
The cost of insurance charge covers the expected mortality cost for basic
insurance coverage. The Supplemental Benefit Provisions charges will be charged
if the Contract includes supplemental benefit provisions.
The State Premium Tax charge is a ten year charge following a premium payment,
and covers the expected cost of state Premium Taxes.
C. Charges on Surrender
A percent of premium surrender charge will be imposed upon full or partial
surrenders of the Policy that occur within nine years of any Premium Payments
made under the policy. This charge is intended to cover certain expenses
relating to the sale of the Policy, including commissions to registered
representatives and other promotional expenses. However, Partial Surrenders may
be taken penalty free on the earnings of the policy, up to a maxiumum amount of
10% of the cash value in any policy year. Full surrender charges are 7.5% of
premium payments for the first two policy years, reducing to 7%, 7%, 6.5%, 6%,
5%, 4%, and 3% in the third, fourth, fifth, sixth, seventh, eighth, and ninth
policy years, respectively. Thereafter, the full surrender charge is 0%. Partial
surrenders in excess of the penalty free partial surrender amount are charged
the same percentages, but of the amount surrendered. However, partial surrender
penalties cannot exceed full surrender penalties.
D. Charges Against the Separate Account
A daily charge is deducted from the Separate Account Three for mortality and
expense risks assumed by TIC. This charge will be at an annual rate of 0.90% of
assets in the Separate Account. The rate will be reduced to 0.75% for the
current calendar year if the average net fund growth rate is at least 6.5% in
the previous calendar year. This determination will be made on an annual basis.
The mortality risk assumed is that the actual cost of insurance
<PAGE>
charge may be insufficient to meet actual claims. The expense risk assumed is
that expenses incurred in issuing and administering the Contracts will exceed
the administrative charges set forth in the Contract.
In addition, a daily charge is deducted from the Separate Account Three for
administrative expenses incurred by TIC. The charge will be at an annual rate of
0.40% of assets in the Separate Account. This fee is expected to cover the
administrative costs associated with the maintenance of the Contracts, and is
set at a level which does not exceed the average expected cost of the
administrative services to be provided while the contract is in force.
III. Distribution Expenses:
----------------------
TIC will incur significant expenses in connection with the distribution of the
contract. Distribution expenses include sales commissions, advertising, and
printing of prospectuses. The distribution expenses will be paid with funds
generated from the contingent deferred sales charges assessed upon surrenders.
IV. Analysis of the Proposed Distribution Financing Arrangement:
------------------------------------------------------------
The contingent deferred sales charges will be used to cover the distribution
expenses. However, these charges will not be assessed upon issuance of the
contract and will not be deducted form any death benefit proceeds payable under
the contract. The surrender charges will be deducted only if the Contract is
surrendered during the first nine Contract years.
The imposition of a sales charge in the form of a contingent deferred charge is
more favorable to the Separate Account and Contract owners than a charge
deducted entirely from premiums or cash value in the first Contract year. The
amount of the Contract owner's investment in the Separate Account is not reduced
as it would be if the charge was taken in full from premium or Cash Value in the
first Contract year. This permits Contract owners to receive any positive
investment experience on the portion of the sales charge that is deferred. This
reduces the cost of insurance charge for Contract with a Level Death Benefit
Option, (by reducing the Net Amount at Risk), and provides greater insurance
protection for Contract owners with a Variable Death Benefit Option.
Also, there is no charge for Contract owners who do not surrender during the
first nine Contract years, or the first nine years following an increase in
Stated Amount, and the charge is reduced for Contract owners who surrender
<PAGE>
in Contract years three through nine. Finally, every Contract owner receives
insurance protection without incurring this sales charge prior to surrender.
V. Conclusion
----------
Based on the analysis set forth above, there is a reasonable likelihood that the
distribution financing arrangement proposed will benefit the Separate Account
Three and its Contract owners.
/s/Bennett D. Kleinberg, ASA
Actuarial Assistant
<PAGE>
December 28, 1994
The Travelers Insurance Company (TIC)
Test for Maximum Sales Load- Rule 6E-3(T)(b)(13)(i)(A) or (B)
TIC must elect one of two alternate tests for determining the maximum sales load
and make an election on the registration statement form. The total amount
deducted cannot exceed either (1) 9% of 20 guideline annual premiums (subject to
the insured's life expectancy), or (2) 9% of actual payments. If TIC requires
more than four guideline annual premiums in the first two years of the contract
or after an increase, the insurer must elect to be governed by the second test.
Therefore, TIC must elect the second test.
The only sales load in the contract is the contingent deferred sales charge
assessed upon surrenders. A percent of premium surrender charge will be imposed
upon full or partial surrenders of the Policy that occur within nine years of
any Premium Payments made under the policy. This charge is intended to cover
certain expenses relating to the sale of the Policy, including commissions to
registered representatives and other promotional expenses. However, Partial
Surrenders may be taken penalty free on the earnings of the policy, up to a
maxiumum amount of 10% of the cash value in any policy year. Full surrender
charges are 7.5% of premium payments for the first two policy years, reducing to
7%, 7%, 6.5%, 6%, 5%, 4%, and 3% in the third, fourth, fifth, sixth, seventh,
eighth, and ninth policy years, respectively. Thereafter, the full surrender
charge is 0%. Partial surrenders in excess of the penalty free partial surrender
amount are charged the same percentages, but of the amount surrendered. However,
partial surrender penalties cannot exceed full surrender penalties.
The largest surrender charge possible would result from a full surrender during
the first or second year of the contract. This surrender charge would be 7.5% of
premium payments. This charge is less than 9% of payments, and therefore will
always be below the maximum allowed.
/s/Bennett D. Kleinberg, ASA
Actuarial Assistant
