<PAGE> 1
Registration No. 33-88576
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 2
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
Secretary
The Travelers Insurance Company
One Tower Square
Hartford, Connecticut 06183
(Name and address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b)
- ----
X on May 1, 1997 pursuant to paragraph (b)
- ----
60 days after filing pursuant to paragraph (a)(1)
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on __________ pursuant to paragraph (a)(1) of Rule 485.
- ----
Check the box if it is proposed that this filing will become
effective on _______ at
- ----
pursuant to Rule 487. ______
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AN INDEFINITE AMOUNT OF VARIABLE UNIVERSAL LIFE INSURANCE CONTRACTS WAS
REGISTERED PURSUANT TO RULE 24f-2 OF THE INVESTMENT COMPANY ACT OF 1940. A RULE
24f-2 NOTICE FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 WAS FILED ON FEBRUARY
28, 1997.
<PAGE> 2
RECONCILIATION AND TIE BETWEEN
FORM N-8B-2 AND PROSPECTUS
<TABLE>
<CAPTION>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
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
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Item No. of
Form N-8B-2 CAPTION IN PROSPECTUS
- ----------- ---------------------
<S> <C>
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
</TABLE>
<PAGE> 4
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
(Continued on the following page)
THE POLICY WILL OR MAY BE A MODIFIED ENDOWMENT CONTRACT. CERTAIN POLICY LOANS,
PARTIAL WITHDRAWALS OR SURRENDERS WILL OR MAY RESULT IN ADVERSE TAX CONSEQUENCES
OR PENALTIES.
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 MAY 1, 1997.
<PAGE> 5
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 Income and Growth, Alliance Growth, Van Kampen 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 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), MFS Emerging
Growth of The Travelers Series Trust; Select High Growth, Select Growth, Select
Balanced, Select Conservative, Select Income of Smith Barney Concert Allocation
Series Inc. 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.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY OF SPECIAL TERMS............................................................. 5
PROSPECTUS SUMMARY.................................................................... 7
THE INSURANCE COMPANY................................................................. 13
THE SEPARATE ACCOUNT.................................................................. 13
Separate Account Three.............................................................. 13
Addition, Deletion or Substitution of Investments................................... 13
THE INVESTMENT OPTIONS................................................................ 14
Investment Managers................................................................. 16
Mixed and Shared Funding............................................................ 16
THE POLICY............................................................................ 16
The Policy Application.............................................................. 16
Eligible Purchasers................................................................. 17
Payments Made Under the Policy...................................................... 17
Allocation of Premium Payments...................................................... 18
Right to Cancel Period.............................................................. 18
CHARGES AND DEDUCTIONS................................................................ 19
Monthly Deduction Amount............................................................ 19
Cost of Insurance Charge......................................................... 19
State Premium Tax Charge......................................................... 19
Charges for Supplemental Benefit Provisions...................................... 20
CHARGES AGAINST THE INVESTMENT OPTIONS OF SEPARATE ACCOUNT THREE.................... 20
Mortality and Expense Risk Charge................................................ 20
Administrative Expense Charge.................................................... 20
Income Taxes..................................................................... 21
Investment Option Expenses.......................................................... 21
Surrender Charges................................................................... 21
Transfer Charge..................................................................... 22
Reduction or Elimination of Charges................................................. 22
VALUATION OF THE SEPARATE ACCOUNT..................................................... 22
How the Cash Value Varies........................................................... 22
How the Investment Experience is Determined......................................... 22
Accumulation Unit Value............................................................. 22
Net Investment Factor............................................................... 23
Valuation Periods and Valuation Dates............................................... 23
TRANSFERS OF CASH VALUE............................................................... 23
Telephone Transfers................................................................. 23
Automated Transfers (Dollar Cost Averaging)......................................... 23
DEATH BENEFIT......................................................................... 24
Changes in Death Benefit Option..................................................... 25
Changes in Stated Amount............................................................ 25
Maturity and Maturity Extension Benefits............................................ 26
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
Policy Lapse and Reinstatement...................................................... 26
Exchange Rights..................................................................... 27
POLICY SURRENDERS AND CASH SURRENDER VALUE............................................ 27
Right to Surrender.................................................................. 27
Full Surrenders..................................................................... 27
Partial Surrenders.................................................................. 27
POLICY LOANS.......................................................................... 28
Risks Associated with Loans Taken Against a Variable Life Insurance Policy.......... 28
PAYMENT OPTIONS....................................................................... 29
OTHER MATTERS......................................................................... 29
Voting Rights....................................................................... 29
Reports to Policy Owners............................................................ 30
Limit on Right to Contest and Suicide Exclusion..................................... 30
Misstatement as to Sex and Age...................................................... 30
Suspension of Valuation............................................................. 31
Beneficiary......................................................................... 31
Assignment.......................................................................... 31
Dividends........................................................................... 31
FEDERAL TAX CONSIDERATIONS............................................................ 31
General............................................................................. 31
TAX STATUS OF THE POLICY............................................................ 31
Definition of Life Insurance........................................................ 31
Diversification..................................................................... 32
Investor Control.................................................................... 32
TAX TREATMENT OF POLICY BENEFITS.................................................... 33
In General.......................................................................... 33
Modified Endowment Contracts........................................................ 33
Exchanges........................................................................... 33
Aggregation of Modified Endowment Contracts......................................... 34
Policies which are not Modified Endowment Contracts................................. 34
Treatment of Loan Interest.......................................................... 34
THE COMPANY'S INCOME TAXES.......................................................... 34
MANAGEMENT............................................................................ 35
SENIOR OFFICERS OF THE TRAVELERS INSURANCE COMPANY.................................... 36
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS.......................................... 36
DISTRIBUTION OF THE POLICY............................................................ 36
LEGAL PROCEEDINGS AND OPINION......................................................... 36
REGISTRATION STATEMENT................................................................ 37
INDEPENDENT ACCOUNTANTS............................................................... 37
ILLUSTRATIONS......................................................................... 37
APPENDIX A-PERFORMANCE INFORMATION.................................................... 43
APPENDIX B-DEATH BENEFIT EXAMPLES..................................................... 45
APPENDIX C-REPRESENTATIVE STATED AMOUNTS.............................................. 47
FINANCIAL STATEMENTS.................................................................. F-1
</TABLE>
4
<PAGE> 8
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 GROWTH RATE -- an annual measurement of growth, used to determine
the next year's mortality and expense risk charge. For each Policy Owner, the
rate is determined each Policy Year as follows: total daily earnings of the
Investment Option(s) you select, divided by the average amount you allocated
during the Policy 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.
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.
5
<PAGE> 9
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 -- 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.
6
<PAGE> 10
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.")
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"). A Policy
Owner allocates premium payments to one or more of the investment options
("Investment Options") available to Separate Account Three. The following
Investment Options are currently available under the Policy:
<TABLE>
<S> <C>
Smith Barney Income and Growth Portfolio
Alliance Growth Portfolio
American Capital Enterprise Portfolio
Smith Barney International Equity Portfolio
TBC Managed Income Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
MFS Total Return Portfolio
Smith Barney Money Market Portfolio
AIM Capital Appreciation Portfolio
Smith Barney Total Return Portfolio
Travelers Zero Coupon Bond Fund Portfolio
1998
Travelers Zero Coupon Bond Fund Portfolio
2000
Travelers Zero Coupon Bond Fund Portfolio
2005
MFS Emerging Growth Portfolio
Select High Growth Portfolio
Select Growth Portfolio
Select Balanced Portfolio
Select Conservative Portfolio
Select Income Portfolio
</TABLE>
Further information regarding the investment objectives for each Investment
Option (including the investment manager) is contained under "The Investment
Options." Refer to each Investment Option's prospectus for a complete
description of the investment objectives, restrictions and other material
information.
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.") 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
7
<PAGE> 11
relationship 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.")
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.")
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.")
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.")
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.")
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 of each of 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 Contract year if the
Average Net Growth Rate of the investment options which you have selected under
your Policy was 6.5% or greater for the previous Contract 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
8
<PAGE> 12
provided by the Company under the Policy. (See "Charges Against the Investment
Options of Separate Account Three.")
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.
SUMMARY OF ASSET BASED POLICY CHARGES:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STATE MORTALITY &
POLICY PREMIUM EXPENSE ADMINISTRATIVE
YEARS TAX RISK CHARGE CHARGE TOTAL
<CAPTION>
<S> <C> <C> <C> <C>
1-10 .20% .90% .40% 1.50%
11+ N/A .90% .40% 1.30%
</TABLE>
SUMMARY OF ASSET BASED POLICY CHARGES IF THE AVERAGE NET GROWTH RATE IS
6.50% OR MORE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STATE MORTALITY &
POLICY PREMIUM EXPENSE ADMINISTRATIVE
YEARS TAX RISK CHARGE CHARGE TOTAL
<CAPTION>
<S> <C> <C> <C> <C>
2-10 .20% .75% .40% 1.35%
11+ N/A .75% .40% 1.15%
</TABLE>
NOTE. The Separate Account purchases shares of the underlying funds at net
asset value. The net asset values reflect investment advisory fees and other
expenses already deducted. Applicants should review the prospectuses for each
fund for a description of the charges assessed. (See "Charges Against the
Investment Options of Separate Account Three.")
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.")
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.")
9
<PAGE> 13
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 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," and "Federal Tax Considerations.")
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," and "Policy Lapse and Reinstatement.") If a Policy lapses with a loan
outstanding, adverse tax consequences may result. (See "Federal Tax
Considerations.")
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.")
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.")
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.")
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.")
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 be
imposed on income distributed before you attain age 59 1/2. Policies that are
not
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<PAGE> 14
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."
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.
11
<PAGE> 15
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12
<PAGE> 16
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 a majority of the 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 (860) 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.
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;
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<PAGE> 17
(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:
<TABLE>
<CAPTION>
INVESTMENT
INVESTMENT OPTION INVESTMENT OBJECTIVE ADVISER/SUBADVISER
- ---------------------------- -------------------------------------------- ----------------------------
<S> <C> <C>
Smith Barney Income and Seeks current income and long-term growth of Smith Barney Mutual Funds
Growth Portfolio income and capital by investing primarily, Management, Inc. ("SBMFM")
but not exclusively, in common stocks.
Alliance Growth Portfolio Seeks long-term growth of capital by SBMFM
investing predominantly in equity securities Subadviser: Alliance Capital
of companies with a favorable outlook for Management L.P.
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 Seeks capital appreciation through SBMFM
Portfolio investment in securities believed to have Subadviser: American Capital
above-average potential for capital Asset Management, Inc.
appreciation. Any income received on such
securities is incidental to the objective of
capital appreciation.
Smith Barney International Seeks total return on assets from growth of SBMFM
Equity Portfolio 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 Seeks high current income consistent with SBMFM
prudent risk of capital through investments Subadviser: The Boston
in corporate debt obligations, preferred Company Asset Management
stocks, and obligations issued or guaranteed Inc.
by the U.S. Government or its agencies or
instrumentalities.
Putnam Diversified Income Seeks high current income consistent with SBMFM
Portfolio preservation of capital. The Portfolio will Subadviser: Putnam
allocate its investments among U.S. Investment Management, Inc.
Government Sector, the High Yield Sector,
and the International Sector of the fixed
income securities markets.
Smith Barney High Income Seeks high current income. Capital SBMFM
Portfolio appreciation is a secondary objective. The
Portfolio will invest at least 65% of its
assets in high-yielding corporate debt
obligations and preferred stock.
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
INVESTMENT
INVESTMENT OPTION INVESTMENT OBJECTIVE ADVISER/SUBADVISER
- ---------------------------- -------------------------------------------- ----------------------------
<S> <C> <C>
MFS Total Return Portfolio Seeks above-average income (compared to a SBMFM
(a balanced portfolio) portfolio entirely invested in equity Subadviser: Massachusetts
securities) consistent with the prudent Financial Services Company
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 Seeks maximum current income and SBMFM
Portfolio preservation of capital by investing in high
quality, short-term money market
instruments.
AIM Capital Appreciation Seeks capital appreciation by investing SBMFM
Portfolio principally in common stock, with emphasis Subadviser: AIM Capital
on medium sized and smaller emerging growth Management, Inc.
companies.
Smith Barney Total Return Seeks total return, consisting of long-term SBMFM
Portfolio (an equity capital appreciation and income. The
portfolio) Portfolio will seek to achieve its goal by
investing primarily in a diversified
portfolio of dividend-paying common stocks.
Travelers Zero Coupon Bond Seeks as high an investment return as is Travelers Asset Management
Fund Portfolios (three consistent with the preservation of capital International Corp.
Portfolios: Series 1998, investing in primarily zero coupon
2000, 2005). 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.
MFS Emerging Growth Seeks long-term growth of capital by Travelers Asset Management
Portfolio investing primarily in common stocks of International Corp.
companies that are early in their life cycle Subadviser: Massachusetts
but have the potential to become major Financial Services Company
enterprises.
Select High Growth Portfolio Seeks capital appreciation by investing its Travelers Investment Adviser
assets in a combination of Equity and Fixed ("TIA")
Income Funds.
Select Growth Portfolio Seeks long-term growth of capital by TIA
investing its assets in a combination of
Equity and Fixed Income Funds.
Select Balanced Portfolio Seeks balanced growth of capital and income TIA
by investing its assets in a combination of
Equity and Fixed Income Funds.
Select Conservative Seeks income and, secondarily, long-term TIA
Portfolio growth of capital by investing its assets in
a combination of Equity and Fixed Income
Funds.
Select Income Portfolio Seeks high current income by investing its TIA
assets in a combination of Equity and Fixed
Income Funds.
</TABLE>
15
<PAGE> 19
INVESTMENT MANAGERS
The Investment Options receive investment management and advisory services from
the following investment professionals:
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 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
16
<PAGE> 20
time. (See "Changes in Stated Amount.") 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.
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.")
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 "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.")
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
17
<PAGE> 21
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.")
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 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.") 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
18
<PAGE> 22
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.
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" and "Changes in Stated Amount" 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 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
19
<PAGE> 23
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 amounts allocated to
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 Policy Year if the Average Net Growth Rate
is 6.5% or greater during the previous Policy 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 amounts allocated to each Investment Option to
compensate the Company for certain administrative expenses incurred in
connection with the Policy. The charge will be deducted daily 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.
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<PAGE> 24
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.")
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.") 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.
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.
21
<PAGE> 25
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.")
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.
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
22
<PAGE> 26
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 an 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.
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. The Company will take reasonable steps to ensure that telephone
transfer requests are genuine including the use of personal identification
numbers. Failure to take such measures may result in the Company being liable
for fraudulent transfer requests. If the transfer instructions are not in good
order, the Company will not execute the transfer and will promptly notify the
caller.
23
<PAGE> 27
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.
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.") 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," 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
24
<PAGE> 28
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>
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.)
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." 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.")
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.
25
<PAGE> 29
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
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.") 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.)"
26
<PAGE> 30
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" 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 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.")
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 surrender
effective date . 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).
27
<PAGE> 31
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."
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.") 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
28
<PAGE> 32
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. Loans from a modified endowment contract are
treated as distributions to the Policy Owner (see "Federal Tax Considerations,
Tax Treatment of Policy Benefits -- Modified Endowment Contracts.")
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:
<TABLE>
<C> <S> <C>
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
</TABLE>
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 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.
29
<PAGE> 33
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 semiannual 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).
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.
30
<PAGE> 34
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.
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 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
31
<PAGE> 35
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. There is less guidance on the
application of the rules with respect to a Policy that is issued on a
substandard basis (i.e., a premium class involving higher than standard
mortality risk). 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 diversification 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 each year. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
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 policy owners received the desired tax benefits because they were not
treated as owning the 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.
32
<PAGE> 36
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. Therefore, it is important to check
with a tax adviser prior to the purchase of a policy.
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 for tax purposes. 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 a
specific exception to the penalty applies. The penalty does not apply to amounts
which 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
33
<PAGE> 37
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.
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.
POLICIES WHICH ARE NOT MODIFIED ENDOWMENT CONTRACTS
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.
TREATMENT OF LOAN INTEREST
If there is any borrowing against the Policy, the interest paid on loans may not
be tax deductible.
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.
34
<PAGE> 38
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
- ------------------------- -------- -------------------------------------------------------
<S> <C> <C>
Jay S. Benet............. 1996 Senior Vice President since February 1994 and Vice
Director President (1990-1994) of The Travelers Insurance
Company; Partner (1986-1990) of Coopers & Lybrand.
Ian R. Stuart............ 1996 Senior Vice President since November, 1996, Chief
Director Financial Officer; Chief Accounting Officer and
Controller (1991-1996) Vice President since March 1991
of The Travelers Insurance Company.
Katherine M. Sullivan.... 1996 Senior Vice President and General Counsel since May
Director 1996 of The Travelers Insurance Company; Senior Vice
President and General Counsel (1994-1996) Connecticut
Mutual; Special Counsel & Chief of Staff (1988-1994)
Aetna Life & Casualty.
George C. Kokulis........ 1996 Senior Vice President since September 1995, Vice
Director President (1993-1995) of The Travelers Insurance
Company.
Michael A. Carpenter..... 1995 Chairman since June 1996 and President and Chief
Director Executive Officer since June 1995 of The Travelers
Insurance Company; Executive Vice President of
Travelers Group Inc. since January 1995; Chairman,
President and Chief Executive Officer (1989-1994),
Kidder Peabody Group Inc.
Robert I. Lipp........... 1992 Chairman, President and Chief Executive Officer since
Director April 1996 of Travelers/Aetna Property Casualty Corp.;
Chief Executive Officer and Director since December
1993 of The Travelers Insurance Group Inc.; 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.
Marc P. Weill............ 1994 Senior Vice President-Investments since 1993 and Chief
Director Investment Officer since 1995 of The Travelers
Insurance Group Inc.; Senior Vice President and Chief
Investment Officer of Travelers Group Inc. since 1992;
Vice President (1990-1992), Primerica Corporation; Vice
President (1989-1990), Smith Barney Inc.
</TABLE>
- ---------------
* Principal business address: Travelers Group Inc., 388 Greenwich Street, New
York, New York
35
<PAGE> 39
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
- --------------------------------------------------------------- -------------------------------
<S> <C>
Stuart Baritz.................................................. Senior Vice President
Barry Jacobson................................................. Senior Vice President
Russell H. Johnson............................................. Senior Vice President
Warren H. May.................................................. Senior Vice President
Jay S. Fishman................................................. Senior Vice President
David A. Tyson................................................. Senior Vice President
F. Denney Voss................................................. Senior Vice President
William H. White............................................... Vice President and Treasurer
Elizabeth C. Georgakopoulos.................................... Senior Vice President
Christine M. Modie............................................. Senior Vice President
</TABLE>
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. ("Tower Square"). Tower Square,
whose principal business address is One Tower Square, Hartford, Connecticut,
serves as the principal underwriter for the variable life insurance policies
described herein. Tower Square 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"). Tower Square 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 Tower Square are parties. No amounts have been or will be retained
by Tower Square for acting as principal underwriter for the Policies.
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.
36
<PAGE> 40
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 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., independent public accountants, 100 Pearl Street,
Hartford, Connecticut, are the independent auditors for Separate Account Three.
The services provided to Separate Account Three included primarily the audit of
Separate Account Three's financial statements. The financial statements for the
year ended December 31, 1996 have been audited by Coopers & Lybrand L.L.P., as
indicated in their report thereon and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of The Travelers Insurance Company and
Subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 have been included herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
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 1996. After deduction of these amounts, the
37
<PAGE> 41
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%.
38
<PAGE> 42
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>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
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 27,562 106,918 106,918 106,918 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.
39
<PAGE> 43
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>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
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 20,331 88,328 6,893 30,331 58,328
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.
40
<PAGE> 44
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>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
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 38,783 123,717 137,177 159,352 16,812 30,259 52,434 16,062 29,509 51,684
10 40,722 122,698 137,653 163,855 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.
41
<PAGE> 45
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>
TOTAL
PREMIUMS DEATH BENEFIT CASH VALUE CASH SURRENDER VALUE
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.
42
<PAGE> 46
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
September 5, 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 annual rates of
return include periods prior to the inception of the Investment Option, 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 Option 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 assessed under the Policy, see "Charges and
Deductions." For illustrations of how these charges affect Cash Values and Death
Benefits, see "Illustrations."
AVERAGE RATES OF RETURN (SINCE INCEPTION)
FOR PERIODS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
AVERAGE ANNUAL
INVESTMENT OPTION RATE OF RETURN INCEPTION DATE
-------------------------------------------------------- -------------- --------------
<S> <C> <C>
Smith Barney Income and Growth Portfolio................ 18.08% 6/20/94
Alliance Growth Portfolio............................... 25.55% 6/20/94
American Capital Enterprise Portfolio................... 21.88% 6/21/94
Smith Barney International Equity Portfolio............. 8.10% 6/20/94
TBC Managed Income Portfolio............................ 6.05% 6/28/94
Putnam Diversified Income Portfolio..................... 9.13% 6/20/94
Smith Barney High Income Portfolio...................... 10.79% 6/22/94
MFS Total Return Portfolio.............................. 13.29% 6/20/94
Smith Barney Money Market Portfolio..................... 3.62% 6/20/94
AIM Capital Appreciation Portfolio...................... 6.98% 10/10/95
Smith Barney Total Return Portfolio..................... 18.34% 11/21/94
Travelers Zero Coupon Bond Fund Portfolio 1998.......... 3.91% 10/11/95
Travelers Zero Coupon Bond Fund Portfolio 2000.......... 3.60% 10/11/95
Travelers Zero Coupon Bond Fund Portfolio 2005.......... 4.29% 10/11/95
MFS Emerging Growth Portfolio........................... .40% 8/30/96
Select High Growth Portfolio............................ -- 2/5/97
Select Growth Portfolio................................. -- 2/5/97
Select Balanced Portfolio............................... -- 2/5/97
Select Conservative Portfolio........................... -- 2/5/97
Select Income Portfolio................................. -- 2/5/97
</TABLE>
43
<PAGE> 47
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.
<TABLE>
<S> <C>
Male, Age 35, Non-Smoker Face Amount: $167,193
$25,000 Single Premium Level Death Benefit Option
Hypothetical Gross Annual Investment Rate of Return: 10%* Current Charges
</TABLE>
<TABLE>
<CAPTION>
MONTHLY DEDUCTION AMOUNTS
SURRENDER CHARGE -----------------------------
POLICY CUMULATIVE AS % OF CUM. COST OF INSURANCE PREMIUM
YEAR PREMIUMS 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.
44
<PAGE> 48
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 25 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 $20,000 ($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 $85,050 ($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 equals $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 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
45
<PAGE> 49
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 either 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.
46
<PAGE> 50
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 FEMALE
- ------------------------------------ ------------------------------------
AGE SP FAC AGE SP FAC AGE SP FAC AGE SP FAC
- ---- -------- ---- ------- ---- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
20 12.65742 51 3.32670 20 16.15463 51 4.13678
21 12.20773 52 3.19482 21 15.48558 52 3.97060
22 11.76323 53 3.06987 22 14.83810 53 3.81237
23 11.32222 54 2.95167 23 14.21155 54 3.66170
24 10.88482 55 2.83985 24 13.60662 55 3.51803
25 10.45123 56 2.73405 25 13.02272 56 3.38078
26 10.02300 57 2.63380 26 12.45932 57 3.24928
27 9.60257 58 2.53865 27 11.91653 58 3.12290
28 9.19198 59 2.44827 28 11.39430 59 3.00125
29 8.79287 60 2.36238 29 10.89240 60 2.88420
30 8.40647 61 2.28087 30 10.41067 61 2.77188
31 8.03383 62 2.20360 31 9.94865 62 2.66457
32 7.67547 63 2.13053 32 9.50535 63 2.56258
33 7.33157 64 2.06153 33 9.08002 64 2.46607
34 7.00238 65 1.99645 34 8.67288 65 2.37482
35 6.68772 66 1.93500 35 8.28367 66 2.28843
36 6.38750 67 1.87688 36 7.91217 67 2.20637
37 6.10155 68 1.82180 37 7.55883 68 2.12805
38 5.82963 69 1.76950 38 7.22327 69 2.05307
39 5.57132 70 1.71990 39 6.90517 70 1.98132
40 5.32610 71 1.67297 40 6.60400 71 1.91287
41 5.09358 72 1.62875 41 6.31898 72 1.84795
42 4.87303 73 1.58733 42 6.04912 73 1.78683
43 4.66378 74 1.54873 43 5.79305 74 1.72965
44 4.46520 75 1.51285 44 5.54958 75 1.67632
45 4.27672 76 1.47945 45 5.31792 76 1.62663
46 4.09775 77 1.44823 46 5.09715 77 1.58023
47 3.92765 78 1.41890 47 4.88652 78 1.53675
48 3.76588 79 1.39115 48 4.68553 79 1.49587
49 3.61205 80 1.36485 49 4.49387 80 1.45742
50 2.46573 50 4.31108
</TABLE>
47
<PAGE> 51
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments in eligible funds at market value:
The Travelers Series Trust:
Zero Coupon Bond Fund Portfolio Series 1998, 1,158 shares (cost $11,776)................. $ 11,568
Zero Coupon Bond Fund Portfolio Series 2000, 5,324 shares (cost $53,579)................. 53,029
Zero Coupon Bond Fund Portfolio Series 2005, 37,501 shares (cost $366,285)............... 373,883
Travelers Series Fund Inc.:
Alliance Growth Portfolio, 68,401 shares (cost $1,050,107)............................... 1,147,766
Van Kampen American Capital Enterprise Portfolio, 29,710 shares (cost $440,601).......... 469,712
TBC Managed Income Portfolio, 1,581 shares (cost $16,819)................................ 16,921
Smith Barney High Income Portfolio, 25,399 shares (cost $298,004)........................ 300,723
Smith Barney International Equity Portfolio, 55,016 shares (cost $659,294)............... 690,995
Smith Barney Income and Growth Portfolio, 24,518 shares (cost $354,175).................. 369,236
Smith Barney Money Market Portfolio, 1,085,663 shares (cost $1,085,663).................. 1,085,663
Putnam Diversified Income Portfolio, 22,857 shares (cost $263,403)....................... 264,451
MFS Total Return Portfolio, 67,110 shares (cost $862,942)................................ 883,844
AIM Capital Appreciation Portfolio, 66,141 shares (cost $697,113)........................ 729,533
Smith Barney Series Fund:
Total Return Portfolio, 35,638 shares (cost $513,944).................................... 560,592
------------
Total Investments (cost $6,673,705)................................................... $ 6,957,916
Receivables:
Dividends.................................................................................. 23,111
Premium payments and transfers from other Travelers accounts............................... 68
Other assets................................................................................. 15
------------
Total Assets............................................................................. 6,981,110
------------
LIABILITIES:
Payable for contract surrenders and transfers to other Travelers accounts.................... 9,529
Accrued liabilities.......................................................................... 1,065
------------
Total Liabilities........................................................................ 10,594
------------
NET ASSETS: $ 6,970,516
============
</TABLE>
See Notes to Financial Statements
-1-
<PAGE> 52
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.................................................................................... $ 176,298
EXPENSES:
Insurance charges............................................................................ $ 29,048
Administrative fees.......................................................................... 12,827
------------
Total expenses............................................................................. 41,875
------------
Net investment income.................................................................... 134,423
------------
REALIZED GAIN AND CHANGE IN UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain from investment transactions:
Proceeds from investments sold............................................................. 5,811,247
Cost of investments sold................................................................... 5,782,288
------------
Net realized gain........................................................................ 28,959
Change in unrealized gain (loss) on investments:
Unrealized loss at December 31, 1995....................................................... (2,936)
Unrealized gain at December 31, 1996....................................................... 284,211
------------
Net change in unrealized gain (loss) for the year........................................ 287,147
------------
Net realized gain and change in unrealized gain (loss)................................ 316,106
------------
Net increase in net assets resulting from operations......................................... $ 450,529
============
</TABLE>
See Notes to Financial Statements
-2-
<PAGE> 53
THE TRAVELERS VARIABLE LIFE INSURANCE
SEPARATE ACCOUNT THREE
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE PERIOD DECEMBER 4, 1995 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATIONS:
Net investment income............................................................................. $ 134,423 $ 4,510
Net realized gain (loss) from investment transactions............................................. 28,959 (7)
Net change in unrealized gain (loss) on investments............................................... 287,147 (2,936)
------------ ------------
Net increase in net assets resulting from operations............................................ 450,529 1,567
------------ ------------
UNIT TRANSACTIONS:
Participant premium payments
(applicable to 7,306,792 and 232,440 units, respectively)....................................... 7,516,947 233,982
Participant transfers from other Travelers accounts
(applicable to 5,161,526 and 129,995 units, respectively)....................................... 5,671,103 130,824
Contract surrenders
(applicable to 64,125 and 1,487 units, respectively)............................................ (69,391) (1,501)
Participant transfers to other Travelers accounts
(applicable to 6,632,386 and 129,809 units, respectively)....................................... (6,832,721) (130,823)
------------ ------------
Net increase in net assets resulting from unit transactions................................... 6,285,938 232,482
------------ ------------
Net increase in net assets................................................................. 6,736,467 234,049
NET ASSETS:
Beginning of period............................................................................... 234,049 -
------------ ------------
End of period..................................................................................... $ 6,970,516 $ 234,049
============ ============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Travelers Variable Life Insurance Separate Account Three ("Separate
Account Three") is a separate account of The Travelers Insurance Company
("The Travelers"), an indirect wholly owned subsidiary of Travelers Group
Inc., and is available for funding certain variable life insurance
contracts issued by The Travelers. Separate Account Three is registered
under the Investment Company Act of 1940, as amended, as a unit investment
trust.
Participant premium payments applied to Separate Account Three are invested
in one or more eligible funds in accordance with the selection made by the
contract owner. As of December 31, 1996, the eligible funds available
under Separate Account Three are: Zero Coupon Bond Fund Portfolio Series
1998, Zero Coupon Bond Fund Portfolio Series 2000 and Zero Coupon Bond Fund
Portfolio Series 2005 of The Travelers Series Trust; Alliance Growth
Portfolio, Van Kampen American Capital Enterprise Portfolio (formerly
American Capital Enterprise Portfolio), TBC Managed Income Portfolio, Smith
Barney High Income Portfolio, Smith Barney International Equity Portfolio,
Smith Barney Income and Growth Portfolio, Smith Barney Money Market
Portfolio, Putnam Diversified Income Portfolio, MFS Total Return Portfolio
and AIM Capital Appreciation Portfolio of Travelers Series Fund Inc.
(formerly Smith Barney/Travelers Series Fund Inc.); and Total Return
Portfolio of Smith Barney Series Fund. All eligible funds are managed by
affiliates of The Travelers. The Travelers Series Trust and Smith Barney
Series Fund are registered as Massachusetts business trusts. Travelers
Series Fund Inc. is incorporated under Maryland law. Not all funds are
available in all states.
The following is a summary of significant accounting policies consistently
followed by Separate Account Three in the preparation of its financial
statements.
SECURITY VALUATION. Investments are valued daily at the net asset values
per share of the underlying funds.
FEDERAL INCOME TAXES. The operations of Separate Account Three form a part
of the total operations of The Travelers and are not taxed separately. The
Travelers is taxed as a life insurance company under the Internal Revenue
Code of 1986, as amended (the "Code"). Under existing federal income tax
law, no taxes are payable on the investment income of Separate Account
Three. Separate Account Three is not taxed as a "regulated investment
company" under Subchapter M of the Code.
OTHER. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Security transactions are accounted for on the trade date. Dividend income
is recorded on the ex-dividend date.
2. INVESTMENTS
Purchases and sales of investments aggregated $12,223,279 and $5,811,247,
respectively, for the year ended December 31, 1996. Realized gains and
losses from investment transactions are reported on an identified cost
basis. The cost of investments in eligible funds was $6,673,705 at
December 31, 1996. Gross unrealized appreciation for all investments at
December 31, 1996 was $284,969. Gross unrealized depreciation for all
investments at December 31, 1996 was $758.
3. CONTRACT CHARGES
Insurance charges are paid for the mortality and expense risks assumed by
The Travelers. These charges are equivalent to 0.90% of the average net
assets of Separate Account Three on an annual basis. (Contracts in this
category are identified as Price I in Note 4.) For any contract year that
follows a contract year in which the participant's average net fund growth
rate (as described in the prospectus) is 6.5% or greater, these charges
will be reduced to 0.75%. (Contracts in this category are identified as
Price II in Note 4.)
Administrative fees are paid for administrative expenses incurred by The
Travelers. This charge is equivalent to 0.40% of the average net assets of
Separate Account Three on an annual basis.
-4-
<PAGE> 55
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. CONTRACT CHARGES (CONTINUED)
The Travelers receives contingent surrender charges on full or partial
contract surrenders. Such charges are computed by applying various
percentages to premiums and/or stated contract amounts (as described in the
prospectus). The Travelers received no contingent surrender charges for
the year ended December 31, 1996 and the period December 4, 1995 (date
operations commenced) to December 31, 1995.
4. NET CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------
UNIT NET
UNITS VALUE ASSETS
----- ----- ------
<S> <C> <C> <C>
The Travelers Series Trust
Zero Coupon Bond Fund Portfolio Series 1998
Price I................................................ 11,880 $ 1.025 $ 12,179
Zero Coupon Bond Fund Portfolio Series 2000
Price I................................................ 54,981 1.013 55,722
Zero Coupon Bond Fund Portfolio Series 2005
Price I................................................ 393,923 0.994 391,640
Travelers Series Fund Inc.
Alliance Growth Portfolio
Price I................................................ 852,007 1.318 1,123,117
Price II............................................... 18,536 1.321 24,477
Van Kampen American Capital Enterprise Portfolio
Price I................................................ 355,017 1.229 436,297
Price II............................................... 27,097 1.231 33,353
TBC Managed Income Portfolio
Price I................................................ 16,739 1.010 16,907
Smith Barney High Income Portfolio
Price I................................................ 234,385 1.148 268,963
Price II............................................... 27,591 1.150 31,718
Smith Barney International Equity Portfolio
Price I................................................ 578,127 1.195 690,917
Smith Barney Income and Growth Portfolio
Price I................................................ 305,299 1.179 359,808
Price II............................................... 7,940 1.180 9,372
Smith Barney Money Market Portfolio
Price I................................................ 1,031,783 1.045 1,077,958
Putnam Diversified Income Portfolio
Price I................................................ 230,611 1.066 245,906
Price II............................................... 17,331 1.068 18,508
MFS Total Return Portfolio
Price I................................................ 712,693 1.138 811,353
Price II............................................... 63,475 1.140 72,378
AIM Capital Appreciation Portfolio
Price I................................................ 618,631 1.158 716,195
Price II............................................... 11,415 1.160 13,236
Smith Barney Series Fund
Total Return Portfolio
Price I................................................ 420,517 1.293 543,715
Price II............................................... 12,968 1.295 16,797
-----------------
Net Contract Owners' Equity....................................................................... $ 6,970,516
=================
</TABLE>
-5-
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD DECEMBER 4, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
ZERO COUPON BOND ZERO COUPON BOND
FUND PORTFOLIO FUND PORTFOLIO
SERIES 1998 SERIES 2000
--------------------------- -----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 625 $ - $ 2,715 $ -
------------ ------------- ------------ -------------
EXPENSES:
Insurance charges......................................... 50 - 168 -
Administrative fees....................................... 22 - 74 -
------------ ------------- ------------ -------------
Net investment income (loss)........................ 553 - 2,473 -
------------ ------------- ------------ -------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold........................ 99 - 467 -
Cost of investments sold.............................. 97 - 453 -
------------ ------------- ------------ -------------
Net realized gain (loss)............................ 2 - 14 -
------------ ------------- ------------ -------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............ - - - -
Unrealized gain (loss) end of period.................. (208) - (550) -
------------ ------------- ------------ -------------
Net change in unrealized gain (loss) for the period. (208) - (550) -
------------ ------------- ------------ -------------
Net increase in net assets
resulting from operations........................... 347 - 1,937 -
------------ ------------- ------------ -------------
UNIT TRANSACTIONS:
Participant premium payments.............................. - - - -
Participant transfers from other Travelers accounts....... 11,928 - 54,107 -
Contract surrenders....................................... (96) - (322) -
Participant transfers to other Travelers accounts......... - - - -
------------ ------------- ------------ -------------
Net increase in net assets resulting
from unit transactions.............................. 11,832 - 53,785 -
------------ ------------- ------------ -------------
Net increase in net assets.......................... 12,179 - 55,722 -
NET ASSETS:
Beginning of period................................... - - - -
------------ ------------- ------------ -------------
End of period......................................... $ 12,179 $ - $ 55,722 $ -
============ ============= ============ =============
<CAPTION>
ZERO COUPON BOND
FUND PORTFOLIO
SERIES 2005
------------------------
1996 1995
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 17,813 $ -
------------ ----------
EXPENSES:
Insurance charges......................................... 1,871 -
Administrative fees....................................... 832 -
------------ ----------
Net investment income (loss)........................ 15,110 -
------------ ----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold........................ 143,755 -
Cost of investments sold.............................. 137,717 -
------------ ----------
Net realized gain (loss)............................ 6,038 -
------------ ----------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............ - -
Unrealized gain (loss) end of period.................. 7,598 -
------------ ----------
Net change in unrealized gain (loss) for the period. 7,598 -
------------ ----------
Net increase in net assets
resulting from operations........................... 28,746 -
------------ ----------
UNIT TRANSACTIONS:
Participant premium payments.............................. - -
Participant transfers from other Travelers accounts....... 504,315 -
Contract surrenders....................................... (5,076) -
Participant transfers to other Travelers accounts......... (136,345) -
------------ ----------
Net increase in net assets resulting
from unit transactions.............................. 362,894 -
------------ ----------
Net increase in net assets.......................... 391,640 -
NET ASSETS:
Beginning of period................................... - -
------------ ----------
End of period......................................... $ 391,640 $ -
============ ==========
</TABLE>
-6-
<PAGE> 57
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
VAN KAMPEN
AMERICAN CAPITAL TBC MANAGED SMITH BARNEY
ALLIANCE GROWTH PORTFOLIO ENTERPRISE PORTFOLIO INCOME PORTFOLIO HIGH INCOME PORTFOLIO
- ---------------------------- ---------------------------- --------------------------- ----------------------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 42,246 $ 592 $ 1,328 $ 658 $ 741 $ - $ 17,135 $ 1,118
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
4,402 4 1,790 4 108 - 1,160 6
1,891 2 790 2 31 - 517 2
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
35,953 586 (1,252) 652 602 - 15,458 1,110
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
48,032 45 69,063 46 14,296 - 6,114 61
44,860 46 62,757 47 14,376 - 6,031 63
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
3,172 (1) 6,306 (1) (80) - 83 (2)
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
(424) - (369) - - - (967) -
97,659 (424) 29,111 (369) 102 - 2,719 (967)
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
98,083 (424) 29,480 (369) 102 - 3,686 (967)
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
137,208 161 34,534 282 624 - 19,227 141
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
- - - - - - - -
1,015,173 19,480 455,052 19,480 30,519 - 257,425 25,973
(7,881) (43) (3,537) (43) (160) - (2,028) (57)
(16,504) - (36,118) - (14,076) - - -
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
990,788 19,437 415,397 19,437 16,283 - 255,397 25,916
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
1,127,996 19,598 449,931 19,719 16,907 - 274,624 26,057
19,598 - 19,719 - - - 26,057 -
- ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
$ 1,147,594 $ 19,598 $ 469,650 $ 19,719 $ 16,907 $ - $ 300,681 $ 26,057
============ ============= ============ ============= ============ ============= ============ =============
</TABLE>
-7-
<PAGE> 58
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD DECEMBER 4, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
SMITH BARNEY SMITH BARNEY INCOME
INTERNATIONAL EQUITY PORTFOLIO AND GROWTH PORTFOLIO
------------------------------ ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 656 $ - $ 8,374 $ -
------------ ------------- ------------ -------------
EXPENSES:
Insurance charges......................................... 2,851 - 1,047 -
Administrative fees....................................... 1,285 - 481 -
------------ ------------- ------------ -------------
Net investment income (loss)........................ (3,480) - 6,846 -
------------ ------------- ------------ -------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold........................ 55,450 - 8,241 -
Cost of investments sold.............................. 51,992 - 7,586 -
------------ ------------- ------------ -------------
Net realized gain (loss)............................ 3,458 - 655 -
------------ ------------- ------------ -------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............ - - - -
Unrealized gain (loss) end of period.................. 31,701 - 15,061 -
------------ ------------- ------------ -------------
Net change in unrealized gain (loss) for the period. 31,701 - 15,061 -
------------ ------------- ------------ -------------
Net increase in net assets
resulting from operations........................... 31,679 - 22,562 -
------------ ------------- ------------ -------------
UNIT TRANSACTIONS:
Participant premium payments.............................. - - - -
Participant transfers from other Travelers accounts....... 675,175 - 349,020 -
Contract surrenders....................................... (5,762) - (2,173) -
Participant transfers to other Travelers accounts......... (10,175) - (229) -
------------ ------------- ------------ -------------
Net increase in net assets resulting
from unit transactions.............................. 659,238 - 346,618 -
------------ ------------- ------------ -------------
Net increase in net assets.......................... 690,917 - 369,180 -
NET ASSETS:
Beginning of period................................... - - - -
------------ ------------- ------------ -------------
End of period......................................... $ 690,917 $ - $ 369,180 $ -
============ ============= ============ =============
<CAPTION>
SMITH BARNEY
MONEY MARKET PORTFOLIO
--------------------------
1996 1995
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 35,383 $ 467
------------ ----------
EXPENSES:
Insurance charges......................................... 6,616 84
Administrative fees....................................... 2,951 38
------------ ----------
Net investment income (loss)........................ 25,816 345
------------ ----------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold........................ 5,258,439 130,064
Cost of investments sold.............................. 5,258,439 130,064
------------ ----------
Net realized gain (loss)............................ - -
------------ ----------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............ - -
Unrealized gain (loss) end of period.................. - -
------------ ----------
Net change in unrealized gain (loss) for the period. - -
------------ ----------
Net increase in net assets
resulting from operations........................... 25,816 345
------------ ----------
UNIT TRANSACTIONS:
Participant premium payments.............................. 7,516,947 233,982
Participant transfers from other Travelers accounts....... 3,943 958
Contract surrenders....................................... (22,964) (1,216)
Participant transfers to other Travelers accounts......... (6,549,030) (130,823)
------------ ----------
Net increase in net assets resulting
from unit transactions.............................. 948,896 102,901
------------ ----------
Net increase in net assets.......................... 974,712 103,246
NET ASSETS:
Beginning of period................................... 103,246 -
------------ ----------
End of period......................................... $ 1,077,958 $ 103,246
============ ==========
</TABLE>
-8-
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
PUTNAM AIM CAPITAL
DIVERSIFIED INCOME PORTFOLIO MFS TOTAL RETURN PORTFOLIO APPRECIATION PORTFOLIO TOTAL RETURN PORTFOLIO
- ---------------------------- ----------------------------- --------------------------- ----------------------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 14,072 $ - $ 25,738 $ 1,838 $ 699 $ - $ 8,773 $ -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
1,179 - 2,709 15 3,188 - 1,909 -
526 - 1,209 6 1,368 - 850 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
12,367 - 21,820 1,817 (3,857) - 6,014 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
58,679 - 31,996 152 65,648 - 50,968 -
57,370 - 30,021 155 62,993 - 47,596 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
1,309 - 1,975 (3) 2,655 - 3,372 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
- - (1,176) - - - - -
1,048 - 20,902 (1,176) 32,420 - 46,648 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
1,048 - 22,078 (1,176) 32,420 - 46,648 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
14,724 - 45,873 638 31,218 - 56,034 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
- - - - - - - -
278,960 - 809,251 64,933 717,667 - 508,568 -
(3,912) - (6,179) (142) (5,448) - (3,853) -
(25,358) - (30,643) - (14,006) - (237) -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
249,690 - 772,429 64,791 698,213 - 504,478 -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
264,414 - 818,302 65,429 729,431 - 560,512 -
- - 65,429 - - - - -
- ------------ -------------- ------------ ------------- ------------ ------------- ------------ -------------
$ 264,414 $ - $ 883,731 $ 65,429 $ 729,431 $ - $ 560,512 $ -
============ ============== ============ ============= ============ ============= ============ =============
</TABLE>
-9-
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS - CONTINUED
5. SCHEDULE OF SEPARATE ACCOUNT THREE OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD DECEMBER 4, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
COMBINED
--------------------------------------
1996 1995
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Dividends................................................. $ 176,298 $ 4,673
----------------- ------------------
EXPENSES:
Insurance charges......................................... 29,048 113
Administrative fees....................................... 12,827 50
----------------- ------------------
Net investment income (loss)........................ 134,423 4,510
----------------- ------------------
REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) from investment transactions:
Proceeds from investments sold........................ 5,811,247 130,368
Cost of investments sold.............................. 5,782,288 130,375
----------------- ------------------
Net realized gain (loss)............................ 28,959 (7)
----------------- ------------------
Change in unrealized gain (loss) on investments:
Unrealized gain (loss) beginning of period............ (2,936) -
Unrealized gain (loss) end of period.................. 284,211 (2,936)
----------------- ------------------
Net change in unrealized gain (loss) for the period. 287,147 (2,936)
----------------- ------------------
Net increase in net assets
resulting from operations........................... 450,529 1,567
----------------- ------------------
UNIT TRANSACTIONS:
Participant premium payments.............................. 7,516,947 233,982
Participant transfers from other Travelers accounts....... 5,671,103 130,824
Contract surrenders....................................... (69,391) (1,501)
Participant transfers to other Travelers accounts......... (6,832,721) (130,823)
----------------- ------------------
Net increase in net assets resulting
from unit transactions.............................. 6,285,938 232,482
----------------- ------------------
Net increase in net assets.......................... 6,736,467 234,049
NET ASSETS:
Beginning of period................................... 234,049 -
----------------- ------------------
End of period......................................... $ 6,970,516 $ 234,049
================= ==================
</TABLE>
-10-
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of Variable Life Insurance Contracts of
The Travelers Variable Life Insurance Separate Account Three:
We have audited the accompanying statement of assets and liabilities of The
Travelers Variable Life Insurance Separate Account Three as of December 31,
1996, and the related statement of operations for the year then ended and the
statement of changes in net assets for each of the applicable periods ended
December 31, 1996 and 1995. These financial statements are the responsibility
of management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of shares owned as of December 31, 1996, by
correspondence with underlying funds. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Variable Life
Insurance Separate Account Three as of December 31, 1996, the results of its
operations for the year then ended and the changes in its net assets for each
of the applicable periods ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
February 7, 1997
-11-
<PAGE> 62
This page intentionally left blank.
<PAGE> 63
Independent Auditors' Report
The Board of Directors and Shareholder
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, 1996 and 1995, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
12
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $1,379 $1,496 $ 1,492
Net investment income 1,887 1,824 1,702
Realized investment gains 65 106 13
Other 298 221 199
- ---------------------------------------------------------------------------------------------------
Total revenues 3,629 3,647 3,406
- ---------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,163 1,185 1,216
Interest credited to contractholders 830 967 961
Amortization of deferred acquisition costs and
value of insurance in force 281 290 281
Other operating expenses 380 368 351
- ---------------------------------------------------------------------------------------------------
Total benefits and expenses 2,654 2,810 2,809
- ---------------------------------------------------------------------------------------------------
Income from continuing operations before
federal income taxes 975 837 597
- ---------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense (benefit) 284 233 (96)
Deferred 58 57 307
- ---------------------------------------------------------------------------------------------------
Total federal income taxes 342 290 211
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 633 547 386
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $18 and $83) -- 72 150
Gain on disposition (net of taxes of $14, $68 and $18) 26 131 9
- ---------------------------------------------------------------------------------------------------
Income from discontinued operations 26 203 159
- ---------------------------------------------------------------------------------------------------
Net income 659 750 545
Retained earnings beginning of year 2,312 1,562 1,017
Dividends to parent 500 -- --
- ---------------------------------------------------------------------------------------------------
Retained earnings end of year $2,471 $2,312 $ 1,562
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 65
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(at December 31, in millions) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $18,515; $18,187) $18,846 $18,842
Equity securities, at fair value (cost, $325; $182) 332 224
Mortgage loans 2,883 3,626
Real estate held for sale, net of accumulated depreciation of $0; $9 297 293
Policy loans 1,910 1,888
Short-term securities 891 1,554
Other investments 1,235 874
- -------------------------------------------------------------------------------------------------------
Total investments 26,394 27,301
- -------------------------------------------------------------------------------------------------------
Cash 74 73
Investment income accrued 343 338
Premium balances receivable 105 107
Reinsurance recoverables 3,858 4,107
Deferred acquisition costs and value of insurance in force 2,133 1,962
Separate and variable accounts 9,023 6,949
Other assets 1,043 1,464
- -------------------------------------------------------------------------------------------------------
Total assets $42,973 $42,301
- -------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $13,693 $14,525
Future policy benefits 11,450 11,783
Policy and contract claims 536 571
Separate and variable accounts 8,948 6,916
Commercial paper 50 73
Deferred federal income taxes 57 32
Other liabilities 1,911 2,173
- -------------------------------------------------------------------------------------------------------
Total liabilities 36,645 36,073
- -------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,170 3,134
Retained earnings 2,471 2,312
Unrealized investment gains, net of taxes 587 682
- -------------------------------------------------------------------------------------------------------
Total shareholder's equity 6,328 6,228
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $42,973 $42,301
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 66
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,387 $ 1,346 $ 1,394
Net investment income received 1,910 1,855 1,719
Other revenues received (expense paid) 131 90 (2)
Benefits and claims paid (1,060) (846) (1,115)
Interest credited to contractholders (820) (960) (868)
Operating expenses paid (343) (615) (536)
Income taxes paid (328) (63) (27)
Other (70) (137) (81)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 807 670 484
Net cash provided by (used in) discontinued operations (350) (596) 233
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operations 457 74 717
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,928 1,974 2,528
Mortgage loans 917 680 1,266
Proceeds from sales of investments
Fixed maturities 9,101 6,773 1,316
Equity securities 479 379 357
Mortgage loans 178 704 546
Real estate held for sale 210 253 728
Purchases of investments
Fixed maturities (11,556) (10,748) (4,594)
Equity securities (594) (305) (340)
Mortgage loans (470) (144) (102)
Policy loans, net (23) (325) (193)
Short-term securities, (purchases) sales, net 498 291 (367)
Other investments, (purchases) sales, net (137) (267) (299)
Securities transactions in course of settlement (52) 258 24
Net cash provided by (used in) investing activities of
discontinued operations 348 1,425 (261)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 827 948 609
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (redemption) of short-term debt, net (23) (1) 73
Contractholder fund deposits 2,493 2,705 1,951
Contractholder fund withdrawals (3,262) (3,755) (3,357)
Dividends to parent company (500) -- --
Return of capital to parent company -- -- (23)
Net cash provided by financing activities
of discontinued operations -- -- 84
Other 9 -- (2)
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,283) (1,051) (1,274)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ 1 $ (29) $ 52
- ----------------------------------------------------------------------------------------------------------
Cash at December 31 $ 74 $ 73 $ 102
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 67
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Travelers Insurance Company and Subsidiaries (the Company) is a
wholly owned subsidiary of The Travelers Insurance Group Inc. (TIGI).
TIGI is an indirect wholly owned subsidiary of Travelers Group Inc.
(Travelers Group), a financial services holding company engaged, through
its subsidiaries, principally in four business segments: (i) Investment
Services; (ii) Consumer Finance Services; (iii) Property & Casualty
Insurance Services; and (iv) Life Insurance Services (through the
Company). The periodic reports of Travelers Group provide additional
business and financial information concerning that company and its
consolidated subsidiaries.
The Company principally operates through two major business units within
its Life Insurance Services segment:
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred
annuities, payout annuities and term, universal and variable life and
long-term care insurance to individuals and small businesses. It also
provides group pension products, including guaranteed investment
contracts and group annuities for employer-sponsored retirement and
savings plans. These products are primarily marketed through The
Copeland Companies (Copeland), an indirect, wholly owned subsidiary
of the Company, the Financial Consultants of Smith Barney Inc., an
affiliate of the Company, and a core group of approximately 500
independent agencies. The Company's Corporate and Other Segment was
absorbed into Travelers Life and Annuity during the second quarter
of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily
term insurance, to consumers through a nationwide sales force of more
than 86,000 full and part-time independent representatives.
The Company sold group life and health insurance through its Managed Care
and Employee Benefits Operations segment (MCEBO) through 1994. See Note
4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of presentation
The consolidated financial statements include the accounts of the Company
and its insurance and non-insurance subsidiaries on a fully
consolidated basis. The primary insurance subsidiaries of the Company
are: The Travelers Life and Annuity Company (TLAC), and Primerica Life
Insurance Company (Primerica Life) and its subsidiary National Benefit
Life Insurance Company (NBL).
As discussed in Note 4 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the
Company were sold to Metropolitan Life Insurance Company (MetLife) and
also in January 1995, the group medical component was exchanged for a 42%
interest in The MetraHealth Companies, Inc. (MetraHealth). The Company's
interest in MetraHealth was sold on October 2, 1995 and through that date
had been accounted for on the equity method. The Company's discontinued
operations reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from the sales of these
businesses. All of the businesses sold to MetLife or contributed to
MetraHealth were included in the Company's MCEBO segment in 1994. MCEBO
marketed group life and health insurance, managed health care programs
and administrative services associated with employee benefit plans.
16
<PAGE> 68
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings
Inc., which at the time was a wholly owned subsidiary of Travelers Group
and was the indirect owner of the business of Transport Life Insurance
Company (Transport Life). Immediately prior to this distribution, the
Company distributed Transport Life, an indirect wholly owned subsidiary
of the Company, to TIGI, as a return of capital.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and benefits
and expenses during the reporting period. Actual results could differ
from those estimates.
As more fully described in Note 4, all of the operations comprising MCEBO
are presented as a discontinued operation and, accordingly, prior year
amounts have been restated.
Certain prior year amounts have been reclassified to conform with the
1996 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. Fixed maturities 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.
Equity securities, which include common and nonredeemable preferred
stocks, are classified as "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. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. For mortgage loans that
are determined to be impaired, a reserve is established for the
difference between the amortized cost and fair market value of the
underlying collateral. In estimating fair value, the Company uses
interest rates reflecting the higher returns required in the current real
estate financing market. Impaired loans were insignificant at December
31, 1996 and 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value of foreclosed properties is
established at time of foreclosure by internal analysis or external
appraisers, using discounted cash flow analyses and other acceptable
techniques. Thereafter, an allowance for losses on real estate held for
sale is established if the carrying value of the property exceeds its
current fair value less estimated costs to sell. There was no such
allowance at December 31, 1996 and 1995.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost which approximates market.
17
<PAGE> 69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Accrual of income, included in other assets, is suspended on fixed
maturities or mortgage loans that are in default, or on which it is
likely that future payments will not be made as scheduled. Interest
income on investments in default is recognized only as payment is
received.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, equity options, forward contracts and interest rate
swaps and caps, as a means of hedging exposure to interest rate, equity
price and foreign currency risk. Hedge accounting is used to account for
derivatives. To qualify for hedge accounting the changes in value of the
derivative must be expected to substantially offset the changes in value
of the hedged item. Hedges are monitored to ensure that there is a high
correlation between the derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to
adjust the basis of hedged investments and are recognized in net
investment income over the life of the investment.
Forward contracts, equity options, and interest rate swaps and caps were
not significant at December 31, 1996 and 1995. Information concerning
derivative financial instruments is included in Note 8.
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. Also included are gains and losses arising from
the remeasurement of the local currency value of foreign investments to
U.S. dollars, the functional currency of the Company. The foreign
exchange effects of Canadian operations are included in unrealized gains
and losses.
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 and Value of Insurance in Force
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, including term
insurance and guaranteed renewable health contracts, including long-term
care, are amortized in relation to 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- to
20-year period, and a 10- to 20-year period is employed for annuities.
Deferred acquisition costs are reviewed periodically for recoverability
to determine if any adjustment is required.
18
<PAGE> 70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. It represents the actuarially
determined present value of anticipated profits to be realized from life
insurance, annuities and health contracts at the date of acquisition
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%. Traditional life
insurance and guaranteed renewable health policies are amortized in
relation to 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 primarily
carried at market value. 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
Goodwill represents the cost of acquired businesses in excess of net
assets and is being amortized on a straight-line basis principally over a
40-year period. The carrying amount is regularly reviewed for indication
of impairment in value, which in the view of management, would be other
than temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain deferred annuity contracts.
Contractholder Fund balances are increased by such receipts and credited
interest and reduced by withdrawals, mortality charges and administrative
expenses charged to the contractholders. Interest rates credited to
contractholder funds range from 3.5% to 8.6%.
19
<PAGE> 71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Future Policy Benefits
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuities have been
computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 2.5% to
10.0%, including adverse deviation. These assumptions consider Company
experience and industry standards. The assumptions vary by plan, age at
issue, year of issue and duration. Appropriate recognition has been given
to experience rating and reinsurance.
Permitted Statutory Accounting Practices
The Company, whose insurance subsidiaries are 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 certain 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.
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
and revenues of non-insurance subsidiaries.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain deferred annuity contracts
in accordance with contract provisions.
20
<PAGE> 72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities. 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.
Future Application of Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". FAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered and derecognizes liabilities when extinguished. FAS
125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The requirements of FAS 125 are effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and are to be applied prospectively.
However, in December 1996 the FASB issued FAS 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which
delays until January 1, 1998 the effective date for certain provisions.
The adoption of the provisions of this statement effective January 1,
1997 will not have a material impact on results of operations, financial
condition or liquidity and the Company is currently evaluating the impact
of the provisions whose effective date has been delayed until January 1,
1998.
3. CHANGES IN ACCOUNTING PRINCIPLES
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires that
long-lived assets to be disposed (e.g., real estate held for sale) be
carried at the lower of cost or fair value less cost to sell and does not
allow such assets to be depreciated. The adoption of this standard did
not have a material impact on the Company's results of operations,
financial condition, or liquidity.
Accounting for Stock-Based Compensation
The Company participates in a stock option plan sponsored by Travelers
Group that provides for the granting of stock options in Travelers Group
common stock to officers and key employees. The Company applies
Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for stock options. Since stock options are
issued at fair market value on the date of award, no compensation cost
has been recognized for these awards. In October 1995, the Financial
Accounting Standards Board issued
21
<PAGE> 73
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement provides an
alternative to APB 25 whereby fair values may be ascribed to options
using a valuation model and amortized to compensation cost over the
vesting period of the options. Had the Company applied FAS 123 in
accounting for stock options, net income would have been reduced by $2.8
million and $1.3 million in 1996 and 1995, respectively.
Accounting by Creditors for Impairment of a Loan
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. Their
adoption did not have a material impact on the Company's results of
operations, financial condition, or liquidity.
4. DISPOSITIONS AND DISCONTINUED OPERATIONS
In December 1994, the Company and its affiliates sold their group dental
insurance business to MetLife for $52 million and recognized a gain of $9
million net of taxes. On January 3, 1995, the Company and its affiliates
completed the sale of their group life and related non-medical group
insurance businesses to MetLife for $350 million and recognized in the
first quarter of 1995 a gain of $20 million net of taxes. In connection
with the sale, the Company ceded 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 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. No gain was recognized as a result of this
transaction. Upon formation of the joint venture, the Company owned 42%
of the outstanding capital stock of MetraHealth, TIGI owned 8% 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 participation of the Company and TIGI,
and MetLife in the MetraHealth venture to 48.25% each. As the medical
insurance business of the Company came due for renewal, the risks were
transferred to MetraHealth and the related operating results for this
medical insurance business were reported by the Company in 1995 as part
of discontinued operations.
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and
through that date had accounted for its interest in MetraHealth on the
equity method. Gross proceeds to the Company in 1995 were $708 million in
cash recognizing a gain of $111 million after-tax. During 1996 the
Company received a contingency payment based on MetraHealth's 1995
results. In conjunction with this payment, certain reserves associated
with the group medical business and exit costs related to the
discontinued operations were reevaluated resulting in a final after-tax
gain of $26 million.
22
<PAGE> 74
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. DISPOSITIONS AND DISCONTINUED OPERATIONS, Continued
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994. The Company's
discontinued operations in 1996 and 1995 reflect the results of the
medical insurance business not transferred, the equity interest in the
earnings of MetraHealth through October 2, 1995 (date of sale) and the
gains from sales of these businesses. Revenues from discontinued
operations for the years ended December 31, 1996, 1995 and 1994 amounted
to $85.6 million, $1.2 billion and $3.3 billion, respectively. The assets
and liabilities of the discontinued operations have not been segregated
in the consolidated balance sheet as of December 31, 1996 and 1995. The
assets and liabilities of the discontinued operations consist primarily
of investments and insurance-related assets and liabilities. At December
31, 1996, these assets and liabilities each amounted to $180 million. At
December 31, 1995, these assets and liabilities each amounted to $1.8
billion.
In September 1995, Travelers Group made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings
Inc., which at the time was a wholly owned subsidiary of Travelers Group
and was the indirect owner of the business of Transport Life. Immediately
prior to this distribution, the Company distributed Transport, an
indirect, wholly owned subsidiary of the Company, to TIGI, as a return of
capital, resulting in a reduction in additional paid-in capital of $334
million. The results of Transport through September 1995 are included in
income from continuing operations.
5. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors and had $50
million outstanding at December 31, 1996. The Company maintains unused
credit availability under bank lines of credit at least equal to the
amount of the outstanding commercial paper. Interest expense related to
the commercial paper was not significant in 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly
owned subsidiary of Travelers Group) and the Company have an agreement
with a syndicate of banks to provide $1.0 billion of revolving credit, to
be allocated to any of Travelers Group, 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 2001. At December 31, 1996, $100 million was allocated to the
Company. Under this facility the Company is required to maintain certain
minimum equity and risk-based capital levels. At December 31, 1996, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1996 and 1995.
23
<PAGE> 75
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. 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 yearly
renewable term coinsurance and modified coinsurance. The Company remains
primarily liable as the direct insurer on all risks reinsured. Since June
1994, the Company is reinsuring its life insurance risks via first dollar
quota share treaties on an 80%/20% basis. Maximum retention of $1.5
million is generally reached on policies in excess of $7.5 million. For
other plans of insurance 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 an affiliate, Travelers
Property Casualty Corp. (TAP).
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below (in
millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Written Premiums:
Direct $ 1,982 $ 2,166 $ 2,153
Assumed from:
Non-affiliated companies 5 -- --
Ceded to:
Affiliated companies (284) (374) (358)
Non-affiliated companies (309) (302) (306)
- -------------------------------------------------------------------------------
Total net written premiums $ 1,394 $ 1,490 $ 1,489
- -------------------------------------------------------------------------------
Earned Premiums:
Direct $ 1,897 $ 2,067 $ 2,301
Assumed from:
Non-affiliated companies 5 -- --
Ceded to:
Affiliated companies (219) (283) (384)
Non-affiliated companies (315) (298) (305)
- -------------------------------------------------------------------------------
Total net earned premiums $ 1,368 $ 1,486 $ 1,612
- -------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 76
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. REINSURANCE, Continued
Reinsurance recoverables at December 31, include amounts recoverable on
unpaid and paid losses and were as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance Recoverables:
Life and accident and health business:
Non-affiliated companies $1,497 $1,744
Property-casualty business:
Affiliated companies 2,361 2,363
- --------------------------------------------------------------------------------
Total Reinsurance Recoverables $3,858 $4,107
================================================================================
</TABLE>
Total reinsurance recoverables at December 31, 1996 and 1995 include $720
million and $929 million, respectively, from MetLife in connection with
the sale of the Company's group life and related businesses. See Note 4.
7. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $36 million in additional paid-in capital during 1996 is
due primarily to contributions of non-insurance subsidiaries from TIGI.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments
is shown in Note 15.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $656 million, $235 million and $100 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company's statutory capital and surplus was $3,442 million and
$3,197 million at December 31, 1996 and 1995, respectively.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. Statutory
surplus of $507 million is available in 1997 for dividend payments by the
Company without prior approval of the Connecticut Insurance Department.
In addition, under a revolving credit facility, the Company is required
to maintain certain minimum equity and risk based capital levels. The
Company is in compliance with these covenants at December 31, 1996.
25
<PAGE> 77
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a
means of hedging exposure to foreign currency, equity price changes
and/or interest rate risk on anticipated transactions or existing assets
and liabilities. 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 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 loss of
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. Financial futures contracts and purchased listed option
contracts have little credit risk since organized exchanges are the
counterparties.
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.
The Company uses exchange traded financial futures contracts to manage
its exposure to changes in interest rates which arise from the sale of
certain insurance and investment products, or the need to reinvest
proceeds from the sale or maturity of investments. To hedge against
adverse changes in interest rates, the Company enters long or short
positions in financial futures contracts which offset asset price changes
resulting from changes in market interest rates until an investment is
purchased or a product is sold.
Margin payments are required to enter a futures contract and contract
gains or losses are settled daily in cash. The contract amount of futures
contracts represents the extent of the Company's involvement, but not
future cash requirements, as open positions are typically closed out
prior to the delivery date of the contract.
At December 31, 1996 and 1995, the Company held financial futures
contracts with notional amounts of $169 million and $68 million,
respectively, and a deferred gain of $1 million and a deferred loss of
$.2 million, respectively. Total gains from financial futures of $2
million were deferred at December 31, 1996. These deferred gains, which
relate to anticipated investment purchases and investment product sales
expected to occur by the end of the second quarter of 1997, are reported
as other liabilities. At December 31, 1996 and 1995, the Company's
futures contracts had no fair value because these contracts are marked to
market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1996 and 1995.
26
<PAGE> 78
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS, Continued
The Company purchased a 5-year interest rate cap, with a notional amount
of $200 million, from Travelers Group in 1995 to hedge against losses
that could result from increasing interest rates. This instrument, which
does not have off-balance sheet risk, gives the Company the right to
receive payments if interest rates exceed specific levels at specific
dates. The premium of $2 million paid for this instrument is being
amortized over its life. The interest rate cap asset is reported at fair
value which is $1 million at December 31, 1996.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant
at December 31, 1996 and 1995.
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, 1996 and 1995, investments in fixed maturities had a
carrying value and a fair value of $18.8 billion. See Note 15.
At December 31, 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value, compared with a carrying value of
$3.6 billion, which approximated fair value at December 31, 1995. In
estimating fair value, the Company used interest rates reflecting the
higher returns required in the current real estate financing market.
The carrying values of $154 million and $647 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1996 and 1995, respectively. The carrying values of $825
million and $1.3 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1996 and
1995, respectively. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 1996, contractholder funds with defined maturities had a
carrying value of $1.7 billion and a fair value of $1.7 billion, compared
with a carrying value of $2.4 billion and a fair value of $2.5 billion at
December 31, 1995. 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 had a carrying value of
$9.1 billion and a fair value of $8.8 billion at December 31, 1996,
compared with a carrying value of $9.3 billion and a fair value of $9.0
billion at December 31, 1995. These contracts generally are valued at
surrender value.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $1.1 billion and $1.1 billion,
respectively, at December 31, 1996, compared with a carrying value and a
fair value of $1.5 billion and $1.6 billion, respectively, at December
31, 1995. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $1.0 billion and $.9
billion, respectively, at December 31, 1996, compared with a carrying
value and a fair value of $1.5 billion and $1.4 billion, respectively, at
December 31, 1995.
27
<PAGE> 79
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS, Continued
The carrying values of cash, short-term securities, investment income
accrued and commercial paper approximated 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
The Company is a defendant or codefendant in various litigation matters
in the normal course of business. Although there can be no assurances, as
of December 31, 1996, 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 a qualified, noncontributory defined benefit
pension plan sponsored by Travelers Group covering the majority of
Travelers Group'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.
The Company also participates in a nonqualified, noncontributory defined
benefit pension plan sponsored by an affiliate covering the majority of
the Company's U.S. employees. Contributions are based on benefits paid.
The Company's share of net pension expense was not significant for 1996,
1995 and 1994.
Through plans sponsored by TIGI, 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 not
significant in 1996, 1995 and 1994.
28
<PAGE> 80
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS, Continued
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 TIGI. Retirees may elect certain prepaid health care benefit
plans. Life insurance benefits are generally set at a fixed amount.
Beginning January 1, 1996, these plans were amended to restrict benefit
eligibility to retirees and certain retiree-eligible employees. The cost
recognized by the Company for these benefits represents its allocated
share of the total costs of the plan, net of retiree contributions. The
Company's share of the total cost of the plan for 1996, 1995 and 1994 was
not significant.
401(K) Savings Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIGI, 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 the profitability of TIGI and its subsidiaries was added through
December 31, 1995. Effective January 1, 1996, the match remained at 50%
of an employee's first 5% contribution with a maximum of $1,000.
Effective January 1, 1997, employee contributions will be matched with
Travelers Group stock options. The Company's matching obligation was not
significant in 1996, 1995 and 1994.
11. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI are handled by
the Company. Settlements for these payments between the Company and its
affiliates are made regularly. The Company provides various employee
benefits coverages to employees of certain subsidiaries of TIGI. The
premiums for these coverages were charged in accordance with cost
allocation procedures based upon salaries or census. In addition,
investment advisory and management services, data processing services and
claims processing services are shared with affiliated companies. Charges
for these services are shared by the companies on cost allocation methods
based generally on estimated usage by department.
An affiliate maintains a short-term investment pool in which the Company
participates. The position of each company participating in the pool is
calculated and adjusted daily. At December 31, 1996 and 1995, the pool
totaled approximately $2.9 billion and $2.2 billion, respectively. The
Company's share of the pool amounted to $196 million and $1.4 billion at
December 31, 1996 and 1995, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to TAP in connection
with the settlement of certain policyholder obligations. Such deposits
were $40 million, $38 million and $39 million for 1996, 1995 and 1994,
respectively.
29
<PAGE> 81
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS, Continued
The Company markets deferred annuity products and life and health
insurance through its affiliate, Smith Barney Inc. Premiums and deposits
related to these products were $820 million, $583 million and $161
million in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had an investment of $22
million and $24 million, respectively, in bonds of its affiliate, CCC.
This is included in fixed maturities in the consolidated balance sheet.
The Company had an investment of $648 million and $445 million in common
stock of Travelers Group at December 31, 1996 and 1995, respectively.
This investment is carried at fair value.
12. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
TAP. In 1996, TAP assumed the obligations for several leases. Rent
expense related to all leases are shared by the companies on a cost
allocation method based generally on estimated usage by department. Rent
expense was $24 million, $22 million and $23 million in 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
-----------------------------------------------------------
Minimum operating
(in millions) rental payments
-----------------------------------------------------------
<S> <C>
Year ending December 31,
1997 $ 57
1998 49
1999 41
2000 39
2001 42
Thereafter 362
-----------------------------------------------------------
$590
-----------------------------------------------------------
</TABLE>
The Company is reimbursed by affiliates of TIGI for utilization of space
and equipment. Future sublease rental income of approximately $92 million
will partially offset these commitments. Minimum future capital lease
payments are not significant.
30
<PAGE> 82
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
-------------------------------------------------------------------------------------
Effective tax rate
<S> <C> <C> <C>
Income before federal income taxes $975 $837 $597
Statutory tax rate 35% 35% 35%
-------------------------------------------------------------------------------------
Expected federal income taxes $341 $293 $209
Tax effect of:
Nontaxable investment income (3) (4) (4)
Other, net 4 1 6
-------------------------------------------------------------------------------------
Federal income taxes (benefit) $342 $290 $211
-------------------------------------------------------------------------------------
Effective tax rate 35% 35% 35%
-------------------------------------------------------------------------------------
Composition of federal income taxes
Current:
United States $263 $220 $(108)
Foreign 21 13 12
-------------------------------------------------------------------------------------
Total 284 233 (96)
-------------------------------------------------------------------------------------
Deferred:
United States 57 52 302
Foreign 1 5 5
-------------------------------------------------------------------------------------
Total 58 57 307
-------------------------------------------------------------------------------------
Federal income taxes $342 $290 $211
-------------------------------------------------------------------------------------
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years
ended December 31, 1996 and 1995 were $8 million and $7 million,
respectively.
31
<PAGE> 83
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
The net deferred tax liabilities at December 31, 1996 and 1995 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
<TABLE>
<CAPTION>
(in millions) 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $ 510 $ 447
Contractholder funds 32 54
Operating lease reserves 71 56
Other employee benefits 104 74
Other 121 208
---------------------------------------------------------------------------------------
Total 838 839
---------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs and value of insurance in force 571 538
Investments, Net 131 152
Other 93 81
---------------------------------------------------------------------------------------
Total 795 771
---------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 43 68
Valuation allowance for deferred tax assets (100) (100)
---------------------------------------------------------------------------------------
Net deferred tax (liability) asset after valuation allowance $ (57) $ (32)
---------------------------------------------------------------------------------------
</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.
32
<PAGE> 84
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 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 Travelers Group commencing in
1999, or a change in circumstances which causes the recognition of the
benefits to become more likely than not. There was no change in the
valuation allowance during 1996. The initial recognition of any benefit
produced by the reversal of the valuation allowance will be recognized by
reducing goodwill.
At December 31, 1996, 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) would be
approximately $326 million.
14. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
(For the year ended December 31, in millions) 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross investment income
Fixed maturities $1,328 $1,191 $1,082
Mortgage loans 331 419 511
Policy loans 156 163 110
Real estate held for sale 94 111 174
Other 77 97 52
-------------------------------------------------------------------------------------------
1,986 1,981 1,929
-------------------------------------------------------------------------------------------
Investment expenses 99 157 227
-------------------------------------------------------------------------------------------
Net investment income $1,887 $1,824 $1,702
-------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 85
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities $(63) $(43) $(3)
Equity securities 47 36 18
Mortgage loans 49 47 -
Real estate held for sale 33 18 -
Other (1) 48 (2)
-----------------------------------------------------------------------------------------
Realized investment gains $ 65 $106 $13
----------------------------------------------------------------------------------------
</TABLE>
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) 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized
Fixed maturities $(323) $1,974 $(1,319)
Equity securities (35) 46 (25)
Other 220 200 165
-------------------------------------------------------------------------------------------
(138) 2,220 (1,179)
Related taxes (43) 778 (412)
-------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) (95) 1,442 (767)
Balance beginning of year 682 (760) 7
-------------------------------------------------------------------------------------------
Balance end of year $ 587 $ 682 $ (760)
--------------------------------------------------------------------------------------------
</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 $9.1 billion and $6.8 billion in 1996 and 1995, respectively. Gross
gains of $107 million and $80 million and gross losses of $175 million
and $124 million in 1996 and 1995, respectively, were realized on those
sales.
34
<PAGE> 86
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The amortized cost and fair value of investments in fixed maturities were
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(in millions) cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 3,755 $ 69 $23 $ 3,801
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 1,188 50 4 1,234
Obligations of states,
municipalities and
political subdivisions 76 1 1 76
Debt securities issued by
foreign governments 565 24 3 586
All other corporate bonds 12,925 259 41 13,143
Redeemable preferred stock 6 - - 6
---------------------------------------------------------------------------------------------
Total $18,515 $403 $72 $18,846
---------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 87
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
December 31, 1995
-----------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(in millions) cost gains losses value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 4,174 $103 $15 $ 4,262
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 1,327 116 - 1,443
Obligations of states,
municipalities and
political subdivisions 91 2 - 93
Debt securities issued by
foreign governments 311 17 - 328
All other corporate bonds 12,283 442 10 12,715
Redeemable preferred stock 1 - - 1
-----------------------------------------------------------------------------------------------
Total $18,187 $680 $25 $18,842
-----------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturities at December 31,
1996, 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 Fair
(in millions) cost value
-------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 971 $ 975
Due after 1 year through 5 years 4,970 5,043
Due after 5 years through 10 years 4,871 4,946
Due after 10 years 3,949 4,083
-------------------------------------------------------------------------------------------
14,761 15,047
Mortgage-backed securities 3,754 3,799
-------------------------------------------------------------------------------------------
Total $18,515 $18,846
-------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 88
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The Company makes 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,
including planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of interest rate 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, 1996 and 1995, the Company held CMOs, classified as
available for sale with a fair value of $1.9 billion and $2.3 billion,
respectively. Approximately 88% and 89% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
1996 and 1995. In addition, the Company held $843.5 million and $917
million of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1996 and 1995, respectively. Virtually all of these
securities are rated AAA. The Company also held $1.4 billion and $1.3
billion of securities that are backed primarily by credit card or car
loan receivables at December 31, 1996 and 1995, respectively.
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $211 $38 $30 $219
Nonredeemable preferred stocks 114 2 3 113
---------------------------------------------------------------------------------------
Total $325 $40 $33 $332
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
December 31, 1995
---------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------
Common stocks $138 $48 $5 $181
Nonredeemable preferred stocks 44 2 3 43
--------------------------------------------------------------------------------------
Total $182 $50 $8 $224
--------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 89
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Proceeds from sales of equity securities were $479 million and $379
million in 1996 and 1995, respectively. Gross gains of $64 million and
$27 million and gross losses of $11 million and $2 million in 1996 and
1995, respectively, were realized on those sales.
Real estate held for sale and mortgage loans
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market.
At December 31, 1996 and 1995, the Company's real estate held for sale
and mortgage loan portfolios consisted of the following (in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $2,832 $3,385
Underperforming mortgage loans 51 241
----------------------------------------------------------------------------
Total 2,883 3,626
----------------------------------------------------------------------------
Real estate held for sale 297 293
----------------------------------------------------------------------------
Total $3,180 $3,919
----------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
(in millions)
----------------------------------------------------
<S> <C>
Past maturity $ 78
1997 299
1998 349
1999 293
2000 364
2001 224
Thereafter 1,276
----------------------------------------------------
Total $2,883
----------------------------------------------------
</TABLE>
38
<PAGE> 90
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Concentrations
At December 31, 1996 and 1995, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's
equity.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 11.
Included in fixed maturities are below investment grade assets totaling
$1.1 billion and $1.0 billion at December 31, 1996 and 1995,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by internal analysts when a public rating does not exist. Such
assets include publicly traded below investment grade bonds and certain
other privately issued bonds that are classified as below investment
grade loans.
The Company also had concentrations of investments, primarily
fixed maturities, in the following industries:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking $1,959 $1,226
Finance 1,823 1,491
Electric utilities 1,093 1,023
Oil and gas 652 861
---------------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals above, were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking $ 1 $ 8
Finance 65 56
Electric utilities 49 26
Oil and gas 58 66
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
California $ 643 $ 736
New York 297 400
---------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 91
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Other mortgage loan investments are relatively evenly dispersed
throughout the United States, with no holdings in any state exceeding
$258 million and $332 million at December 31, 1996 and 1995,
respectively.
Concentrations of mortgage loans by property type at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(in millions) 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Office $1,195 $1,513
Agricultural 677 556
Retail 307 426
Apartment 284 580
----------------------------------------------------------------------------------------------
</TABLE>
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.
Non-Income Producing Investments
Investments included in the consolidated balance sheets that were
non-income producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(in millions) 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 7 $18
Real estate 37 65
Fixed maturities - 4
----------------------------------------------------------------------------------------
Total $44 $87
----------------------------------------------------------------------------------------
</TABLE>
Restructured Investments
The Company had mortgage loans and debt securities which were
restructured at below market terms totaling approximately $18 million and
$67 million at December 31, 1996 and 1995, respectively. 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 $5 million
in 1996 and $16 million in 1995. Interest on these assets, included in
net investment income, aggregated $2 million and $8 million in 1996 and
1995, respectively.
40
<PAGE> 92
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. DEPOSIT FUNDS AND RESERVES
At December 31, 1996, the Company had $21.9 billion of life and annuity
deposit funds and reserves. Of that total, $11.6 billion is not subject
to discretionary withdrawal based on contract terms. The remaining $10.3
billion is for life and annuity products that are subject to
discretionary withdrawal by the contractholder. Included in the amount
that is subject to discretionary withdrawal is $1.7 billion of
liabilities that are surrenderable with market value adjustments. Also
included are an additional $5.4 billion of the life insurance and
individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 5.0%. In the payout
phase, these funds are credited at significantly reduced interest rates.
The remaining $3.2 billion of liabilities are surrenderable without
charge. More than 11% of these relate to individual life products. These
risks would have to be underwritten again if transferred to another
carrier, which is considered a significant deterrent against withdrawal
by long-term policyholders. Insurance liabilities that are surrendered or
withdrawn are reduced by outstanding policy loans and related accrued
interest prior to payout.
17. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by
operating activities:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income from continuing operations $ 633 $ 547 $ 386
Adjustments to reconcile net income to
net cash provided by operating activities
Realized gains (65) (106) (13)
Deferred federal income taxes 58 57 307
Amortization of deferred policy acquisition
costs and value of insurance in force 281 290 281
Additions to deferred policy acquisition costs (350) (454) (435)
Investment income accrued 2 (9) (47)
Premium balances receivable (6) (8) 5
Insurance reserves and accrued expenses (1) 291 212
Other 255 62 (212)
----------------------------------------------------------------------------------------
Net cash provided by
operating activities 807 670 484
Net cash provided by (used in)
discontinued operations (350) (596) 233
----------------------------------------------------------------------------------------
Net cash provided by
operations $ 457 $ 74 $ 717
----------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 93
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
1995 transfer of assets with a fair market value of approximately $1.5
billion and statutory reserves and other liabilities of approximately
$1.5 billion to MetLife (see Note 4); b) the 1995 return of capital of
Transport to TIGI (see Note 4); c) the acquisition of real estate through
foreclosures of mortgage loans amounting to $117 million, $97 million and
$229 million in 1996, 1995 and 1994, respectively; d) the acceptance of
purchase money mortgages for sales of real estate aggregating $23
million, $27 million and $96 million in 1996, 1995 and 1994,
respectively; and e) the 1994 exchange of $23 million of the Company's
investment in Travelers Group common stock for $35 million of Travelers
Group nonredeemable preferred stock.
42
<PAGE> 94
MARKETLIFE
PROSPECTUS
INDIVIDUAL VARIABLE UNIVERSAL LIFE INSURANCE CONTRACTS
ISSUED BY
THE TRAVELERS LIFE AND ANNUITY COMPANY
HARTFORD, CONNECTICUT
L-12539 May, 1997
<PAGE> 95
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.
UNDERTAKING TO REPRESENT REASONABLENESS OF CHARGES
The Company hereby represents that the aggregate charges under the Policy of the
Registrant described herein are reasonable in relation to the services rendered,
the expenses expected to be incurred, and the risks assumed by the Company.
<PAGE> 96
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
o The facing sheet.
o The Prospectus.
o The undertaking to file reports.
o The signatures.
o Written consents of the following persons:
A. Consent of Katherine M. Sullivan, General Counsel, to the filing
of her opinion as an exhibit to this Registration Statement and
to the reference to her opinion under the caption "Legal
Proceedings and Opinion" in the Prospectus. (See Exhibit 11
below).
B. Consent and Actuarial Opinion pertaining to the illustrations
contained in the Prospectus.
C. Consent of Coopers & Lybrand L.L.P., Independent Accountants.
D. Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
o The following Exhibits:
1. Resolution of the Board of Directors of The Travelers Insurance
Company authorizing the establishment of the Registrant.
(Incorporated herein by reference to Exhibit 1 to Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-6, filed
August 21, 1995.)
2. Not applicable.
3(a). Form of Distribution Agreement between the Registrant, The
Travelers Insurance Company and Tower Square Securities, Inc.
(Incorporated herein by reference to Exhibit 3(a) to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form S-6, filed August 21, 1995.)
3(b). Specimen Form of Selling Agreement. (Incorporated herein by
reference to Exhibit 3(b) to Post-Effective Amendment No. 1 to
the Registration Statement on Form S-6, File No. 33-63927, filed
April 22, 1996.)
3(c). Agents Agreement, including schedule of sales commissions.
4. None
5. Variable Life Insurance Policy. (Incorporated herein by
reference to Exhibit 5 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6, filed August 21, 1995.)
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.)
<PAGE> 97
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 Counsel, regarding the legality of securities being
registered.
12. Powers of Attorney authorizing Ernest J. Wright or Kathleen A.
McGah as signatory for Michael A. Carpenter, Jay S. Benet,
George C. Kokulis, Ian R. Stuart, Katherine M. Sullivan,
Robert I. Lipp and Marc P. Weill.
13. Memorandum concerning transfer and redemption procedures, as
required by Rule 6e-3(T)(b)(12)(ii). (Incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6, filed August 21, 1995.)
27. Financial Data Schedules.
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, The
Travelers Variable Life Insurance Separate Account Three, certifies that it
meets all of the requirements for effectiveness of this post-effective amendment
to this registration statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this post-effective amendment 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 25th day of
April, 1997.
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
(Registrant)
By: *IAN R. STUART
-------------------------------------------
Ian R. Stuart
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Controller
The Travelers Insurance Company
Ernest J. Wright
Secretary
The Travelers Insurance Company
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Depositor, The
Travelers Insurance Company, certifies that it meets all of the requirements for
effectiveness of this post-effective amendment to this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this post-effective amendment 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 25th day of April, 1997.
THE TRAVELERS INSURANCE COMPANY
(Depositor)
By: *IAN R. STUART
-------------------------------------------
Ian R. Stuart
Senior Vice President, Chief Financial Officer,
Chief Accounting Officer and Controller
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to this registration statement has been signed by the following
persons in the capacities indicated on April 25th, 1997.
<TABLE>
<S> <C>
*MICHAEL A. CARPENTER Director, Chairman of the Board,
- ---------------------------- President and Chief Executive Officer
(Michael A. Carpenter)
*JAY S. BENET Director
- ----------------------------
(Jay S. Benet)
*GEORGE C. KOKULIS Director
- ----------------------------
(George C. Kokulis)
ROBERT I. LIPP Director
- ----------------------------
(Robert I. Lipp)
*IAN R. STUART Director, Senior Vice President,
- ---------------------------- Chief Financial Chief Accounting Officer
(Ian R. Stuart)
and Controller
*KATHERINE M. SULLIVAN Director, Senior Vice President and
- ---------------------------- General Counsel
(Katherine M. Sullivan)
*MARC P. WEILL Director
- ----------------------------
(Marc P. Weill)
</TABLE>
*By: Ernest J. Wright, Attorney-in-Fact
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
Attachment
or
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
OPINIONS AND CONSENTS:
A. Consent of Katherine M. Sullivan, General Counsel, Electronically
to the filing of her opinion as an exhibit to this
Registration Statement and to the reference to her
opinion under the caption "Legal Proceedings and
Opinion" in the Prospectus.
(See Exhibit 11 below)
B. Consent and Actuarial Opinion pertaining to the Electronically
illustrations contained in the Prospectus.
C. Consent of Coopers & Lybrand L.L.P., Independent Electronically
Accountants.
D. Consent of KPMG Peat Marwick LLP, Independent Electronically
Certified Public Accountants.
The following Exhibits:
1. Resolution of the Board of Directors of The Travelers
Insurance Company authorizing the establishment of the
Registrant. (Incorporated herein by reference to Exhibit 1
to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6, filed August 21, 1995.)
3(a). Form of Distribution Agreement between the Registrant,
The Travelers Insurance Company and Tower Square
Securities, Inc. (Incorporated herein by reference
to Exhibit 3(a) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6, filed August 21, 1995.)
3(b). Specimen Form of Selling Agreement. (Incorporated
herein by reference to Exhibit 3(b) to Post-Effective
Amendment No. 1 to the Registration Statement on
Form S-6, File No. 33-63927, filed April 22, 1996.)
3(c). Agents Agreement, including schedule of sales commissions. Electronically
5. Variable Life Insurance Policy. (Incorporated herein by
reference to Exhibit 5 to Pre-Effective Amendment No. 1
to the Registration Statement on Form S-6, filed August 21, 1995.)
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.)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
Attachment
or
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
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 Counsel regarding the legality of Electronically
the securities being registered.
12. Powers of Attorney authorizing Ernest J. Wright or Electronically
Kathleen A. McGah as signatory for Michael A.
Carpenter, Jay S. Benet, George C. Kokulis, Ian R.
Stuart, Katherine M. Sullivan, Robert I. Lipp and
Marc P. Weill.
13. Memorandum concerning transfer and redemption
procedures, as required by Rule 6e-3(T)(b)(12)(ii).
(Incorporated herein by reference to Exhibit 13 to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-6, filed August 21, 1995.)
27. Financial Data Schedules. Electronically
</TABLE>
<PAGE> 1
to come
<PAGE> 1
ATTACHMENT B
April 16, 1997
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.
Mahir Dugentas, ASA, MAAA
Director of Pricing
<PAGE> 1
ATTACHMENT C
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 2 to the
Registration Statement of The Travelers Variable Life Insurance Separate
Account Three (the "Trust") on Form S-6 (File No. 33-88576) of our report
dated February 7, 1997, on our audit of the financial statements of the Trust,
which report is included in the Trust's Annual Report for the year ended
December 31, 1996 which is included in this Post-Effective Amendment to the
Registration Statement. We also consent to the reference to our Firm as
experts in accounting and auditing under the caption "Independent Accountants".
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
April 23, 1997
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
The Travelers Insurance Company:
We consent to the use of our report included herein and to the reference to our
firm as experts under the heading "Independent Accountants".
KPMG Peat Marwick LLP
Hartford, Connecticut
April 22, 1997
<PAGE> 1
EXHIBIT 3(c)
LIFE MARKETING GENERAL AGENT CONTRACT
BETWEEN
THE TRAVELERS INSURANCE COMPANY, Hartford, Connecticut (we, us, our), and
of (you, your)
For the considerations hereinafter expressed, it is mutually agreed that your
authority to act as our General Agent is granted by us and accepted by you upon
the following limitations, terms, provisions and conditions:
1. This contract shall become effective on ________________, covering
those non-variable life insurance and annuity policies issued by our
Financial Services Department and shown on the attached schedules.
2. You are authorized to solicit applications covering such classes of
risks as we may from time to time authorize to be solicited. You are
authorized, subject to our instructions, to collect first or single
premiums with an application and any other premiums we may ask you to
collect. You shall submit completed application and remit premiums
promptly as instructed by our procedures.
3. In our sole discretion, we will select and price each policy form that
you may sell and we may reject any application.
4. In our sole discretion, we will appoint agents and brokers nominated by
you. Contracts may be made directly between such agents and brokers and
us on forms we supply. All commissions provided for in such contracts
shall be your obligation and deductible from the commissions we pay to
you under this contract.
5. You have no authority for or on behalf of us: to accept risks of any
kind; to make, alter, vary or discharge any policy; to extend the time
for payment of premiums; to waive or extend any policy obligation or
condition; to take payment of premiums other than in current funds; to
incur any liability or expense in our behalf; to deliver any policy
unless the applicant therefor is at the time of delivery in good health
and insurable condition; or to receive any money due or to become due
to us except as set forth in paragraph 2.
6. We will pay you as full compensation on premiums paid to us on policies
issued on applications obtained by or through you while this contract
is in effect, the commissions and allowances described in Parts 1, 2, 3
and 4. Your right to
<PAGE> 2
compensation shall be subject to the limitations of this contract, its
written amendments and the Schedules issued by us from time to time for
attachment to it.
If there is more than one contract between you and us that quotes
commissions on the same policy form we will pay commission under only
one such contract. We, as a condition precedent to any obligation for
payment hereunder, have a right to reduce or set-off any compensation
payable under this contract because of any indebtedness to us.
PART 1
COMMISSIONS ON PREMIUMS FOR THE FIRST YEAR OF INSURANCE:
See Schedule A.
PART 2
COMMISSIONS ON RENEWAL PREMIUMS:
See Schedule B.
PART 3
RENEWAL COMPENSATION (OVERRIDE) IN EVENT OF TERMINATION OF CONTRACT:
At termination, the renewal override, as shown in Schedule B, shall be payable
to you, your executors, administrators or assigns. But in no event will such
override be paid beyond the tenth year of insurance.
PART 4
ALLOWANCES DURING CONTINUANCE OF THIS CONTRACT:
See Schedule C.
7. At any time, by written notice to you, we may change the allowances
under this contract, and may change the compensation allowed as to
policies effective on and after the effective date of such change.
8. We will pay commissions and allowances on premiums paid for additional
benefits or increases in benefits of any kind at the same rate as is
being allowed at the time of addition, or increase for the premiums of
the policies to which they are added. We will not pay compensation: on
premiums for a policy which is a conversion of Employee Special
Protection Plan, Employee Life Insurance-Plan 1 or group life
2
<PAGE> 3
insurance; on extra premiums for a policy which are charged due to
temporary flat substandard rating because of physical impairments; or
on premiums of a policy which are waived under any provision of such
policy.
On policies issued with Table 7 or above rates we will pay a modified
commission for the first year of insurance in accordance with our
rules.
9. If you convert one of our term policies to a different form, we will
pay compensation in accordance with our rules applying to such policies
at the time of conversion.
10. Where, in our judgment, a policy replaces a policy previously issued by
us on the same policyholder (other than as a term conversion), the
commission payable for the first year of insurance on the new policy
will be adjusted in accordance with our procedures in effect at the
time of such replacement.
11. Compensation on all universal life policies which would otherwise be
payable, will not be paid on remittances received for policies
following a partial withdrawal until the sum of such remittances equals
the amount of the withdrawal at which time we will pay compensation on
subsequent remittances.
12. While recognizing the opportunity for flexibility in policyholder
service options inherent to universal life forms of insurance, evidence
of manipulation by you of universal life policies, contributions,
loans, surrenders or replacements, not deemed by us to be in the best
interest of the policyholder or us shall cause divestiture of your
right to continuing compensation and termination of this contract.
13. If we return the premiums on a policy or any portion of such premiums
for any cause, you will refund to us on demand, the amount of
compensation you received on such returned premiums.
14. No assignment of compensation payable under this contract shall be
binding upon us without our written consent.
15. You shall not pay or allow, or offer to pay or allow, as an inducement
to any person to insure, any rebate of premium or any inducement
whatever not specified in the policy, nor will you make any
misrepresentation or incomplete comparison for the purpose of inducing
a policyholder in any other company to lapse, forfeit, or surrender
insurance therein, nor will you cause any advertisement respecting us
to be published or broadcast in any form whatever without first
obtaining our written consent.
16. Nothing in this contract will be construed to imply that an employment
relationship exists between you and us. Acceptance of compensation
under this contract will constitute ratification by you of your status
as an independent contractor. You will
3
<PAGE> 4
not be treated as an employee for federal tax purposes and you are
responsible for paying your own estimated income and self-employment
tax.
17. This contract cancels all previous contracts or agreements whether oral
or written between you and us covering the lines of insurance referred
to in this contract and may be terminated by either party at any time
by giving to the other party seven days notice in writing to that
effect.
IN WITNESS WHEREOF, the parties hereto have signed this contract in duplicate.
THE TRAVELERS INSURANCE COMPANY
Senior Vice President
Financial Services Department
________________________________
General Agent (Firm Name)
By______________________________
Title_____________________________
Date_____________________________
4
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT (LGA)
SCHEDULE A
Commissions on Premiums Payable for the First Year of Insurance:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
COMMISSIONS AS A OVERRIDE AS A
FORM OF POLICY PERCENT OF PREMIUM PERCENT OF PREMIUM TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIVERSAL LIFE-NEW PREMIUM
VIP Classic (CLASUL/CLASU2) 50 5 55
* Travelers Universal Life (TUL91) 50 5 55
Travelers Pension Universal Life '88 (ULQP88) 50 5 55
* Travelers Survivorship Life II (TSL II) 50 5 55
* Travelers First Life Contract (TFTD) 50 5 55
</TABLE>
For VIP Classic New premium is equal to the lesser of the Selected Annual
Premium minus riders and benefits or the maximum amount quoted in the table of
commissionable premiums.
* Annual Renewable Term Riders/Insured Term Insurance Riders will pay new
commissions equal to 40% of first year premium for the rider.
- --------------------------------------------------------------------------------
UNIVERSAL LIFE-INCREASES IN STATED AMOUNT
Commissions on increases in stated amount are based on the additional premium
amount for the increase in coverage at the original issue age of the insured as
of the date of the increase.
For Travelers Pension Universal Life '88 increases in stated amount generate
commissions based on the table of commissionable premiums. The Company will pay
new commissions on increases in stated amount when new money is paid into the
policy. If the Company determines that the increase is prefunded, new
commissions will be paid even if no further premium is paid.
Commissions on Excess Premiums Payable for the First Year of Insurance:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
COMMISSIONS AS A OVERRIDE AS A
FORM OF POLICY PERCENT OF PREMIUM PERCENT OF PREMIUM TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNIVERSAL LIFE-EXCESS PREMIUMS
VIP Classic (CLASUL/CLASU2) 5 4.0 9.0
All Other Forms 4 2.5 6.5
</TABLE>
Excess premium for Travelers Universal Life is the premium credited during the
first policy year which is in excess of the New premium and includes premium
required in the low band ($25,000-599,999) for the flat load.
5
<PAGE> 6
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
COMMISSIONS AS A OVERRIDE AS A
FORM OF POLICY PERCENT OF PREMIUM PERCENT OF PREMIUM TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PERMANENT INSURANCE
Presidential Whole Life (PWL88) 50 5 55
Travelers Interest Sensitive Whole Life (CAWL) 50 5 55
Life Pay 50 5 55
40 Pay 50 5 55
30 Pay 50 5 55
20 Pay 45 5 50
15 Pay 40 5 45
10 Pay 35 5 40
TERM INSURANCE
* Annual Renewable Term to 75 (YRT75) 40 5 45
Yearly Renewable Term for 10 Years 40 5 45
* 10 Year level Term (10LT) 40 5 45
* Special T Term (APT) 40 5 45
* APT, YRT75 and 10LT policy fees are not commissionable
</TABLE>
On all other forms as quoted by the Company.
Under the provisions of this Contract, the first-year premiums on policies
written by Agents and Brokers of the General Agent, who are beneficial owners of
the General Agency, are eligible for the first-year overriding commission
provided the total combined production of the beneficial owners of the General
Agency does not exceed 50% of the total General Agency production according to
the Company's records for such calendar year. In the event the production of
such beneficial owners exceeds 50% of the total General Agency production,
first-year overriding commissions will be reduced by one percentum for each
one-tenth or a fraction thereof of such total business by which such business
obtained personally by such principals exceeds one-half of such total business.
This schedule of first-year commissions and overrides applies to policies
effective on or after and should be filed with the Life Marketing General Agent
Contract, of which it forms a part. This schedule may be amended by the Company
at any time.
THE TRAVELERS INSURANCE COMPANY
Senior Vice President
Financial Services Department
6
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT (LGA)
SCHEDULE B
Commissions on Premiums Payable After the First Year of Insurance:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COMMISSIONS AS A OVERRIDE AS A
FORM OF POLICY INSURANCE YEAR PERCENT OF PREMIUM PERCENT OF PREMIUM
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Life
VIP Classic (CLASUL/CLASU2) 2-10 5 4.0
11-15 - 2.0
All Other Forms 2-10 4 2.5
11-15 - 2.0
- ---------------------------------------------------------------------------------------------------------
Whole Life
Presidential Whole Life (PWL88) 2-10 4 2.5
11-15 - 2.0
Travelers Interest Sensitive Whole 2-10 4 2.5
Life (CAWL) 11-15 - 2.0
- ---------------------------------------------------------------------------------------------------------
Term Life
Annual Renewable Term to 75 (YRT75) 2-10 4 2.5
11-15 - 2.0
10 Year Level Term (10 LT) 2-10 4 2.5
11-15 - 2.0
Special T (APT) 2-10 2 2.0
11-15 - 2.0
Yearly Renewable Term for 10 Years 2-10 4 2.5
(YRT10)
On all other forms as quoted by the Company
- ---------------------------------------------------------------------------------------------------------
</TABLE>
This schedule applies to policies effective on or after and should be
filed with the Life Marketing General Agent Contract, of which it forms a part.
This schedule may be amended by the Company at any time.
THE TRAVELERS INSURANCE COMPANY
Vice President
Financial Services Department
7
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY
LIFE MARKETING GENERAL AGENT CONTRACT (LGA)
ALLOWANCES
SCHEDULE C
LIFE ALLOWANCES
UL PRODUCT: Universal Life policy forms as noted in Schedule A of this Life
Marketing General Agent Contract.
TERM PRODUCTS: Term policy forms as noted in Schedule A of this Life Marketing
General Agent Contract.
TIC NEW PREMIUM: New premium as defined by Addendum I of this Contract produced
by the Life Marketing General Agent in The Travelers Insurance Company (TIC).
LIFE NEW PREMIUM: The sum of all New premium credited for the Life Marketing
General Agent within a calendar year. New premium is defined by Addendum I of
this Contract produced by the Life Marketing General Agent for all products
noted in Schedule A of contracts for both The Travelers Insurance Company and
The Travelers Life and Annuity Company.
GENERAL AGENT ALLOWANCE: A percentage of Life New Premium earned by the Life
Marketing General Agent. This percentage may vary by form of policy and is
applied to TIC New premium. The amount paid will be in accordance with the
thresholds established in the schedule below.
<TABLE>
<CAPTION>
Percent of TIC New Premium
Total Compensation on New TIC
Life New Premium General Agent Allowance Premium (Schedules A + C)
Threshold UL Products Term Products UL Term
- --------- ----------- ------------- -- ----
<S> <C> <C> <C> <C>
$0-124,999 31 25 86 70
$125,000-249,999 41 30 96 75
$250,000-699,999 41 35 96 80
$700,000-999,999 41 40 96 85
$1,000,000 + 41 45 96 90
</TABLE>
ANNUITY ALLOWANCES
In addition to the commissions paid under the Life Producer Contract, an
allowance equal to 1% of single premiums on the T-Flex, Group Choice and Single
Premium Immediate Annuities will be paid to the Life Marketing General Agent.
The Company in its sole discretion and only during the continuance of your
contract as Life Marketing General Agent, will subject to the maximums imposed
by law or regulation, pay the allowances indicated in this schedule.
This schedule is effective on or after and should be filed with the Life
Marketing General Agent Contract, of which it forms a part. This schedule may be
amended by the Company at any time.
THE TRAVELERS INSURANCE COMPANY
Senior Vice President
Financial Services Department
8
<PAGE> 9
Travelers Life Contract
Addendum I
As used in all Travelers Agent Life Contracts:
1. "FLEXIBLE PREMIUM" policy means a policy under which the
policyholder can unilaterally vary the amount or timing of
premium.
2. "NEW" premium is the premium paid in the first year of the
Flexible Premium policy that is commissioned at the first year
rate. Increases in coverage after policy issue may also
generate New premium. For Term contracts, New premium is the
premium required to be paid in the first year. Certain Term
contracts may have non-commissionable policy fees in the first
year.
3. "EXCESS" premium is the premium credited to a Flexible Premium
policy in the first year that is greater than New premium.
4. "RENEWAL" premium is the premium credited to a Flexible
Premium policy in all years following the first year with the
exception of that portion of Renewal premium designated by the
Company, in its sole discretion, as an increase.
If, in the opinion of the Company, any payment, or credit or the
acceptance of premium would cause or contribute to the Company's
violation or the exceeding of limits of state or federal law applicable
to insurance companies or life insurance contracts including, but not
limited to the Internal Revenue Code of 1986 as amended, the Company
reserves the right, in its sole discretion, to reduce, postpone, cancel
or otherwise fail to pay or credit any commission, benefit,
consideration or right created hereunder, all without further liability
to the agent or the agent's heirs, assigns, successors or
administrators.
Senior Vice President
Financial Services Department
9
<PAGE> 1
EXHIBIT 10
The Travelers
Life Insurance Application
PART ONE
GENERAL INSTRUCTIONS
o Please PRINT legibly with black ink. DO NOT TYPE.
o Answer all appropriate questions fully.
o Please note instructions for each section provided in
italicized print.
o Please complete any necessary supplemental forms.
o The Medical Information Bureau/Fair Credit Reporting Act notice
must be #detached and given to the Proposed Insured.
-------------------------------------------------------------
Proposed Insured's Name (print full name)
$ ADVANCED PAYMENT AMOUNT ENCLOSED UNDERWRITING
----------------------
==============================================================================
REQUIREMENTS ORDERED:
<TABLE>
<S> <C> <C> <C>
[ ] Blood Profile [ ] Urine Specimen [ ] ECG [ ] Paramed Exam
[ ] Treadmill ECG [ ] Inspection Report [ ] M.D. Exam
ABOVE REQUIREMENTS ORDERED FROM:
[ ] ASB Meditest [ ] EMSI [ ] PMI (Equifax) [ ] Portamedic (Hooper Holmes)
[ ] M.D. Examiner Not Name:________________________________________________ (Facility or MD)
Affiliated with Address: ___________________________________________________
the above: Phone: (___) __________________ Fax: (____)
</TABLE>
[ ] WE HAVE NOT ORDERED UNDERWRITING REQUIREMENTS. PLEASE ARRANGE FOR US AND
ADVISE OUR OFFICE.
ATTACHED FORMS ARE REQUIRED TO PROCESS THIS CASE:
[ ] AIDS Consent Form [ ] Juvenile Supplement
[ ] State Required Replacement Form [ ] State Required Supplement
[ ] Life Financial Supplement [ ] Other (specify):
AGENCY CONTACT: Name: ________________________________________________________
__________ Phone: (____) _________ Fax: (____)________
AGENT'S NAME & PRODUCER CODE (Sticker or Plate)
SPECIAL PROCESSING UNDERWRITING INSTRUCTIONS:
____________________________________________________________
____________________________________________________________
[ ] Comments continued on back page of application.
L-11855 The Travelers
<PAGE> 2
Life Insurance Application - General Information
PROPOSED INSURED
Questions must be answered by the Proposed Insured. If the Proposed Insured is
under age 16, complete JUVENILE SUPPLEMENT.
<TABLE>
<S> <C>
1. Print Name in Full ______________________________________ Social Security No.__________
first middle last
2. Date of Birth _________ Birthplace ______________________________ Sex ____ Marital Status ________
city state country if other than U.S.
3. Residence Address _______________________________________________________Apt. No. _________
street and number
City _____________________________________________ State _________________ Zip _____________
Phone Number ____________ Best Time to Call ________Check Billing Preference: [ ] Home [ ] Business
4. If Proposed Insured has resided at address less than one year, show prior
address: Street and Number________________________________________________________ Apt. No. ________
City _______________________________________ State ____________________ Zip________________
5 . Employer (Name of Firm)__________________________________________________________________
6. Business Address _________________________________________________________ Suite No._______
street and number
City __________________________________ State ________________________ Zip ________________
Phone Number ___________ Best Time to Call _________ Check Calling Preference:[ ] Home [ ] Business
7. Occupation (Position or Title) _______________ Annual Salary $ ___________ Other Income $____________
POLICY INFORMATION
For face amounts of $1,000,000 and over, use Financial Supplement. For spousal
or child coverage, use FAMILY INSURANCE SUPPLEMENT. For Variable Universal Life policies,
complete VARIABLE UNIVERSAL LIFE SUPPLEMENT instead of questions 8 through 12 below.
8. Life Insurance Plan _____________ Amount $__________ Death Benefit (UL Only): [ ] Level [ ] Increasing
If increase on existing policy: Current Amount. $____________________ New Amount $_______________
9. Supplemental Benefits/Term Riders, where applicable and if available:
[ ] Waiver of Premium or Monthly Deduction Amount [ ] Insured Term Rider $_______
[ ] Cost of Living Adjustment (COLA) [ ] Accidental Death $ ___________
[ ] Accelerated Benefits Rider (TUL 91 only) [ ] Child Term Rider (Units) ______
[ ] Annual Renewable Term: Insured $__; Spouse $___ [ ] Survivor Insurability Rider (First Life
Other: ________________________________________________________________________________
10. Premium Payment Plan (Check one block in either the Regular or Statement
Bill section) Regular Bill: [ ] Single [ ] Annual [ ] Semi-Annual [ ] Automatic Premium Check/Payor Soc. Sec. No.
Statement Bill: [ ] Annual [ ] Semi-Annual [ ] Quarterly [ ] Monthly
If increase on existing policy, are you changing the Premium Payment Plan? [ ] Yes [ ] No
11. Planned Premium Amount $_____________________ (Modal)
If increase on existing policy Current Amount _________________ $ New Amount $________
12. Duration (Interest Sensitive Whole Life Only): [ ] Life Pay [ ] 40 Year [ ] 30 Year [ ] 20 Year [ ]
[ ] 15 Year [ ] 10 Year
[ ] Other, list product and duration(s)
</TABLE>
POLICY OWNER
Applicant is the owner of any contract issued on this application unless
otherwise noted below. For Multiple Ownership: Upon owner's death,
indicate whether owner ship interests pass to:
[ ] Surviving owner(s) (Joint Tenants) or [ ] Deceased Owner's Estate
(Tenants in Common)
13. Full Name and Social Security or Tax ID Number _____________________________
________________________________________________________________________________
If succeeding ownership is desired, indicate name, address and relationship to
Insured in Agent's Comments section on front cover. Succeeding owner will
become owner upon original owner's death.
BENEFICIARY
Payment due two or more beneficiaries or to the survivor(s) of them will
be in equal shares, unless otherwise requested. The right to
change a beneficiary is reserved.
14. Beneficiary Name (specify full name(s) and relationships) ________________
______________________________________________________________________________
______________________________________________________________________________
THE TRAVELERS INSURANCE COMPANY, ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
L-11855
<PAGE> 3
Policy Risk Information
TOBACCO USE DECLARATION
Have you smoked cigarettes, cigars or a pipe, chewed or used tobacco in any
other form within the last 12 months? [ ] YES [ ] NO
GENERAL RISK INFORMATION
Please give details to all YES answers in the space provided on the right. If
space insufficient, continue on Additional Information section.
HAS THE PROPOSED INSURED:
<TABLE>
<CAPTION>
YES NO
<S> <C> <C> <C>
1. Been postponed, rated or declined for Life, Health, Accident or Sickness
Insurance in the past 5 years? (If YES, state reason(s) and date(s) of such action.) [ ] [ ]
2. Flown within 5 years as a pilot, student pilot or crew member of any aircraft or
as a passenger on other than a scheduled airline, or expect to make such a
flight? (If YES, complete the AVIATION SUPPLEMENT.) [ ] [ ]
3. Engaged in automobile or motorcycle racing, sports parachuting, skin or scuba
diving or hang gliding? (If YES, complete the AVOCATION SUPPLEMENT. [ ] [ ]
4. Been convicted of 2 or more moving violations of any motor vehicle law or had
driver's license suspended in the past 3 years? (If YES, list driver's
license number and details.) [ ] [ ]
5. Does insurance applied for replace existing annuity or life insurance?
(If YES, list company name, amount, replacement date and policy number.) [ ] [ ]
6. Do you intend to change your occupation or reside or travel out of the United
States or Canada? (If YES, give details of occupation change and/or complete
the FOREIGN TRAVEL OR RESIDENCE SUPPLEMENT, as appropriate.) [ ] [ ]
</TABLE>
MEDICAL HISTORY
Answer all questions unless Part Two (Medical Examination) is required. For all
YES responses, give the question number, names and addresses of doctors, when
and why consulted. Include diagnosis dates, duration of illness or injury and if
recovery was full and complete. Complete MEDICAL SUPPLEMENT if Proposed Insured
has or has had a history of high blood pressure, chest pain, diabetes,
headaches, epilepsy, asthma, digestive problems, drug or alcohol abuse. If space
insufficient, continue on Additional Information section.
HAS THE PROPOSED INSURED EVER HAD, BEEN TREATED OR RECEIVED MEDICAL
CONSULTATION FOR:
<TABLE>
<CAPTION>
YES NO
<S> <C> <C>
7. Heart trouble, chest pain, angina, stroke or heart murmur? [ ] [ ]
8. High blood pressure, disorder of blood, anemia or varicose veins? [ ] [ ]
9. Nervous or mental problems, paralysis, epilepsy, fainting, or disorder of the
brain, nerves or nervous system? [ ] [ ]
10. Cancer, tumors, cysts or growths, disorder of skin or glands? [ ] [ ]
11. Diabetes, albumin, sugar/blood in urine? Disease of bladder or reproductive
organs or sexually transmitted disease? [ ] [ ]
12. Arthritis, rheumatism, gout, disorder of muscles or bones, spine or joints? [ ] [ ]
13. Ulcer or disorder of stomach, intestines, liver, kidneys, gallbladder, or hernia? [ ] [ ]
14. Asthma, allergy, pleurisy, tuberculosis, lung disorder, emphysema or chronic
cough? [ ] [ ]
15. Alcoholism or use of any habit-forming drugs? [ ] [ ]
16. Disorder of the immune system, Acquired Immune Deficiency Syndrome
(AIDS), AIDS-Related Complex (ARC) or a positive test for infection by the
AIDS (HIV) virus? [ ] [ ]
HAS THE PROPOSED INSURED:
17. Had in the past 5 years any other sickness or injury not referred to above? [ ] [ ]
18. Had health examinations or medical checkups or been a patient in a hospital,
clinic or sanitarium for treatment in the past 5 years? [ ] [ ]
19. Had any surgery or been advised to have surgery which has not been
performed? [ ] [ ]
20. Had or been advised to have electrocardiogram, X-ray or other medical tests
in the past 5 years? [ ] [ ]
21. Height ____ ft. ____ in. Weight _____ lbs. Weight loss past 12 mos. _______ lbs.
</TABLE>
<PAGE> 4
Policy Risk Information, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
22. Has a parent, brother or sister ever had heart disease, stroke, cancer, diabetes,
high blood pressure or hereditary disease? YES [ ] NO [ ]
23. Please complete the following family history information:
</TABLE>
<TABLE>
<CAPTION>
Age(s) Age(s)
(if Living) Condition of Health* (at death) Cause of Death
----------- ------------------- -------- --------------
<S> <C> <C> <C> <C>
Father
- -------------------------------------------------------------------------------------------------------------------
Mother
- -------------------------------------------------------------------------------------------------------------------
Brothers and Sisters
- -------------------------------------------------------------------------------------------------------------------
No. Living
- -------------------------------------------------------------------------------------------------------------------
No. Dead
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*If not "good", please provide details in Additional Information Section.
ADDITIONAL INFORMATION
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Authorization Section
DECLARATION: APPLICANT declares to the best of his/her knowledge and belief
that all of the statements and answers in Part One and Part Two, if required,
are complete and true. APPLICANT UNDERSTANDS AND AGREES THAT: (a) Part One and
Part Two, if required, and any supplements to it will form the basis for any
insurance issued; (b) Except as stated in the attached Advance Payment Receipt,
no insurance will take effect until: (1) the contract is delivered to the
Applicant; and (2) the first premium is paid in full while the health and other
conditions relating to insurability remain as described in this application;
(c) No agent is authorized: (1) to make, alter, or discharge any contract; (2)
to waive or change any condition or provision of any contract, application, or
receipt; and (3) to accept any risk or to pass on insurability. The Proposed
Insured will be the Applicant of any contract issued on this application unless
otherwise indicated below. The right to privacy is protected as required by
law.
AUTHORIZATION FOR THE RELEASE OF INFORMATION: THE PROPOSED INSURED(S) authorize
The Travelers Insurance Company (referred to as The Travelers), its Reinsurers,
insurance support organizations, and medical and other information in order to
evaluate this application for insurance. The Proposed Insured authorizes any
physician, medical facility, insurance company, the Medical Information Bureau,
Inc., employer, consumer reporting agency, or other organization, institution,
or person having information available as to employment, other insurance
coverage, medical care, treatment, supplies or advice with respect to the
Proposed Insured or his/her children to furnish such information to The
Travelers, its Reinsurers or their authorized representatives.
This authorization will be valid from the date signed for a period of 2-1/2
years. A photographic copy of this authorization is as valid as the original.
Information given in this application, including health care information, may
be made available without prior authorization to other insurance companies to
which an application for life or health insurance coverage is made, or to which
a claim is submitted.
ACKNOWLEDGMENT: The PROPOSED INSURED(S) acknowledge receipt of the following
notices: "Medical Information Bureau Disclosure Notice," and "Your Privacy and
The Fair Credit Reporting Act." The PROPOSED INSURED(S) and APPLICANT, if
different, have read this authorization and understand that they have a right
to receive a copy.
I have paid to ________________the sum of $_______ and hold a receipt bearing
the number imprinted hereon.
Witnessed by ___________________ Name of Proposed Insured (please print)_______
Licensed Resident Agent
Proposed Insured's signature_______________________________________________
parent/guardian if a minor
Applicant's signature, if different_________________________________________
If Qualified Pension Plan, name of plan and signature of Trustee.
Name and telephone number of Agent (please print)___________________________
Dated ________________ At (City or Town, State)_____________________________
<PAGE> 5
Advance Payment Form
ADVANCE PAYMENT QUESTIONNAIRE
The attached receipt provides for a LIMITED AMOUNT of Life Insurance
protection, for a LIMITED PERIOD of time, subject to the terms of the receipt.
This section MUST be completed for the proposed insured to be eligible for Life
Insurance protection under the terms of the receipt.
Has any person proposed for insurance:
<TABLE>
<CAPTION>
YES NO
<S> <C> <C>
(1) within the past 90 days, been admitted to a hospital
or other medical facility, been advised to be admitted,
or had surgery performed or recommended? [ ] [ ]
(2) within the past 2 years, been treated for heart trouble,
stroke, or cancer or had such treatment
recommended by a physician or other medical
practitioner? [ ] [ ]
</TABLE>
If any of the above questions are answered YES or LEFT BLANK, no representative
of The Travelers Insurance Company is authorized to accept money, and NO
COVERAGE will take effect under the agreement. The Proposed Insured also
understands and agrees that in no event will insurance take effect at an age or
amount requiring a medical examination as outlined in Item 4 of the attached
receipt until completion of the medical examination.
I declare that the answers to the above questions are true to the best of my
knowledge and belief. I understand and agree to the terms of the attached
receipt.
---------------------------------------------------------
Proposed Insured's signature (parent/guardian if a minor)
---------------------------------------------------------
Applicant's signature (if different)
---------------------------------------------------------
Date
L-11855-R-1
- -----------------------------------------------------------------------------
ADVANCE PAYMENT RECEIPT
The following receipt is to be given for advance payment at least equal to
one month's premium, but not less than $10. All premium checks must
be made payable to the company. Do not make checks payable to the
agent or leave the payee blank. For Variable Universal Life use
receipt attached to Variable Universal Life Supplement.
Type of Policy ______________________________________
Received from ______________________________________
the sum of $ _______________________________________
in connection with an application for life insurance to The Travelers Insurance
Company, One Tower Square, Hartford, CT 06183, bearing the number imprinted on
this receipt, upon the following terms and conditions:
1. Insurance under the terms of the policy applied for and subject to the
limits in Item 4 will be effective on the latest of the dates of the Part
One application, Part Two Medical examination or other medical tests if
required by the Company's underwriting rules for the Proposed Insured's
age, plan or amount of insurance applied for, provided that the above sum
is sufficient to pay in full the first premium for the policy. Coverage
under the terms of this receipt will end on the earlier of (a) 60 days
after the date of this application, or (b) the date we notify the Applicant
that there is no coverage. There is no insurance provided if there is
material misrepresentation in the Part One application, supplement (if
required) or Part Two medical examination or if the Proposed insured
commits suicide.
2. If the above sum is less than the full first premium but is at least
equivalent to a monthly premium for the amount and plan of insurance
applied for, then unless the remainder of the first premium is paid within
30 days from the date the insurance becomes effective, the insurance will
be effective as provided in Item 1 only for the fraction of one year as the
amount paid bears to the annual premium for the contract applied for. If
the sum paid is less than the equivalent of a monthly premium, no insurance
will be effected by this receipt.
<PAGE> 6
3. The above sum will be returned to the Applicant if the application is
rejected; or, if a contract is issued upon this application at other than
standard rates or for other than the amount and plan of insurance applied
for, unless acceptable to the Applicant as issued; or, on request of the
Applicant and surrender of this receipt, if within 60 days from the date of
this receipt a contract has not been issued on this application.
4. The maximum limits of insurance which may be effected under the terms of
this receipt are as follows:
<TABLE>
<CAPTION>
AGE OF NON-MEDICAL MEDICAL/PARAMEDICAL
PROPOSED INSURED AMOUNT AMOUNT
<S> <C> <C>
15 days-35 yrs. $250,000 $500,000
36-45 100,000 500,000
46-50 75,000 500,000
51-60 -0- 500,000
61-75 -0- 250,000
</TABLE>
Any insurance applied for in excess of these limits, including accidental death
benefit, and on which any premium is paid in advance, will not take effect
until the policy is delivered to the Applicant and the balance of the first
premium, if any, is paid in full, all while the Proposed Insured's health and
other conditions relating to insurability remain as described in the
application. In the event of the death of the Proposed Insured before the
excess insurance is effected, that portion of the sum received relating to the
excess insurance will be returned.
Licensed Resident Agent ____________________________
Dated ___________________
L-11855-R
<PAGE> 7
AUTHORIZATION OF AUTOMATIC PREMIUM CHECK PAYMENT
Please attach a voided check. Make sure your address and the bank address
appear correctly on the check.
Name: _______________________________ Phone Number:____________________________
Policy Number(s):______________________________________________________________
I hereby authorize you, the bank, to charge my account, to cover monthly
premium payments for my policy(ies) with The Travelers Insurance Company. I
understand and agree that the bank will not be liable for any payment that may
not be honored, intentionally or inadvertently, even if such dishonor results
in forfeiture of insurance. This authority is to remain in effect until my
further written notice.
Please select date of monthly withdrawal
[_] 8th [_] 22nd
[_] 15th [_] 29th
My signature below is exactly as I sign my personal checks.
Bank Name:_______________________________________
Bank Address: _____________________________________
Checking Account Number: __________________________
SIGNATURE OF DEPOSITOR __________________________________
DATE _____________________
L-11855-A
- -------------------------------------------------------------------------------
YOUR PRIVACY AND THE FAIR CREDIT REPORTING ACT
This notice must be detached and given to the Proposed Insured before the
application is completed.
Part of our underwriting may include an investigative report prepared with
information obtained in interviews with you, your neighbors, friends or other
acquaintances as to your character, reputation, personal characteristics and
mode of living. If an investigation is made we will handle it in the strictest
confidence.
Your application, with the medical history and other information you furnish,
and the investigative consumer report if made, are the initial basis of our
under writing evaluation. Your agent supplies information about you that serves
underwriting as well as marketing research purposes. The Fair Credit Reporting
Act requires that no investigative report be made on any consumer unless:
1. the person to be reported on has been given written notice that such a
report may be or has been requested,
and
2. that person is informed that he/she has the right to ask for disclosure of
the type of information being sought.
If you wish information on the nature and scope of the Consumer Report which
may be requested, or any other investigative report which may be made, write to
The Travelers Insurance Company, FSD Underwriting and Issue Division, One Tower
Square, Hartford, Connecticut 06183.
L-11855-P
<PAGE> 8
MEDICAL INFORMATION BUREAU DISCLOSURE NOTICE
Any health care information developed is necessary to classify insurance risks,
conduct normal administrative procedures and process claims, and will be used
for those purposes only. No other use of this information will be made without
first obtaining your written consent.
This information will be treated as confidential except that The Travelers
Insurance Company or its Reinsurer(s) may make a brief report to the Medical
Information Bureau, Inc., a non-profit membership corporation of life insurance
companies which operates an information exchange in behalf of its members. Upon
request by another member insurance company to which you have applied for life
or health insurance coverage or to which a claim is submitted, the Bureau will
supply such company with the information it may have in its files.
Upon receipt of a request from you, the Bureau will arrange disclosure of any
information it may have in your file. (Medical information will be disclosed
only to your attending physician, or you if requested.) If you question the
accuracy of information in the Bureau's file, you may contact the bureau and
seek a correction in accordance with the procedures set forth in the federal
Fair Credit Reporting Act. The address of the Bureau's information office is
Post Office Box 105, Essex Station, Boston, Massachusetts 02112, Telephone
(617) 426-3660.
The Travelers Insurance Company or its Reinsurer(s) may release information
given in your application file, including health care information, to other
life insurance companies to which you apply for life or health insurance or to
which a claim is submitted.
L-11855-M
TO: The Bank named on the reverse side
In consideration of your compliance with the request and authorization of the
depositor named on the reverse side The Travelers Insurance Company agrees
that:
1. It will indemnify and hold you harmless from any liability or loss you may
suffer arising out of payment by you pursuant to said authorization of any
debit entry whether or not genuine, purporting to be initiated by The
Travelers Insurance Company on the account of any of your depositors, or
arising out of the dishonor by you whether with or without cause,
intentionally or inadvertently, of any such debit entry purporting to be
initiated by The Travelers Insurance Company.
2. It will refund to you any amount erroneously paid by you on any such debit
entry if claim for the amount of such erroneous payment is made by you
within 12 months from the date of the debit entry on which such erroneous
payment was made.
3. It will defend at its own cost and expense any action which might be brought
by any depositor or any other persons because of your actions taken pursuant
to the foregoing request or in any manner arising by reason of your
participation in the foregoing plan.
THE TRAVELERS INSURANCE COMPANY
Director
Authorized in resolutions adopted by the Investment Committee of The Travelers
Insurance Company on June 10, 1982.
<PAGE> 9
Agent Information
AGENT'S CERTIFICATE
To help avoid processing delays, answers to the following questions MUST be
furnished with the application.
1. If salary allotment or other special plan, give:
Mass Marketing Case/Company Name: ________________________________________
__________________________________________________________________________
Case/Plan Number: ________________________________________________________
Accounting Location Number:
2. Is the Proposed Insured employed and working regularly?
[ ] Yes [ ] No
3. Did you personally ask the questions and have the application signed in your
presence? [ ] Yes [ ] No
4. Has Proposed Insured applied for insurance elsewhere in past 90 days? (Give
details in #17) [ ] Yes [ ] No
5. Life Premium quoted: $_____________/Yr. Age__________
6. How long have you known the Proposed Insured? _________
7. Will this insurance replace any existing Annuity Life Insurance? (If YES,
complete #8) [ ] Yes [ ] No
8. Is a 1035 exchange involved? [ ] Yes [ ] No
(If YES, attach policies and forms)
Name of Insurer to be replaced and replaced contract #: ___________________
If contract # not available, indicate Application or Receipt #: ___________
9. Is the Proposed Insured applying for any Disability or Long Term Care with
The Travelers or any other company? (If YES, specify form and name of
company) [ ] Yes [ ] No
_____________________________________________________________________________
10. Will the Proposed Insured pay the premium? [ ] Yes [ ] No
If NO, who will pay the premium?__________________________________________
11. Who initiate the inquiry that resulted in this application? ______________
12. State all Life and Health insurance now in effect on the Proposed Insured.
Include The Travelers and other companies. Indicate "G" for Group and "B"
for Business Insurance. If NONE so state.
______________________________________________________________________________
<TABLE>
<CAPTION>
Total in Force
Type Year Indemnity or
Company L-Life H-Health of Issue Daily Benefit PW Amt. of ADB
- ------- --------------- -------- ------------- ----- -----------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
13. Purpose of Insurance:
<TABLE>
<S> <C> <C>
[ ] Personal (check primary reason):
[ ] Income Replacement [ ] Savings/Investment
[ ] Estate Liquidity [ ] Other ____________________
[ ] Business:
[ ] Buy-Sell [ ] Key Person
[ ] Deferred Compensation [ ] Executive Bonus
[ ] Mortgage/Loan Coverage [ ] Other ____________________
</TABLE>
14. Is the applicant a small business owner? [ ] Yes [ ] No
If YES, how many employees in the insured's business?
[ ] 1-25 [ ] 26-50 [ ] 51-100 [ ] 100+
15. If available, is preferred rate being applied for? [ ] Yes [ ] No
16. If preferred rate is not available, is standard rate acceptable?
[ ] Yes [ ] No
17. Additional Remarks: __________________________________________________
____________________________________________________________________________
____________________________________________________________________________
18. Except as indicated below, I hereby declare that no person other than
myself has any interest whatsoever either directly or indirectly in this
application and that I will not pay or allow any commission or compensation
directly or indirectly in connection with this application to any person.
Signed _________________________________________ Date _______________________
(TO BE SIGNED PERSONALLY BY AGENT OR BROKER WHO COMPLETED THE APPLICATION)
<PAGE> 10
AGENT LICENSING INFORMATION
1. Are you properly licensed to write business for The Travelers in the state
where the application was secured?
[ ] Agent's License [ ] Solicitor's License [ ] Broker's License
2. Did anyone except you assist in securing the application? [ ] Yes [ ] No
If YES, who __________________________________________________________________
(For Variable Universal Life policies only)
3. Are you licensed to write Variable Universal Life for The Travelers in the
state where the application was secured?
List license type and number_______________________________________________
AGENT'S COMMENTS
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
THE TRAVELERS
The Travelers Insurance Company
Hartford, CT 06183
L-11855
<PAGE> 1
EXHIBIT 11
April 25, 1997
The Travelers Insurance Company
The Travelers Variable Life Insurance
Separate Account Three
One Tower Square
Hartford, Connecticut 06183
Gentlemen:
With reference to Post-Effective No. 2 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 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 Post-Effective Amendment No. 2.
Very truly yours,
Katherine M. Sullivan
General Counsel
The Travelers Insurance Company
<PAGE> 1
EXHIBIT 12(b)
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, Chairman of
the Board, President and Chief Executive Officer of The Travelers Insurance
Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST
J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, 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 10th day of
June, 1996.
Michael A. Carpenter
Chairman of the Board, President
and Chief Executive Officer
The Travelers Insurance Company
<PAGE> 2
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, JAY S. BENET of West Hartford, Connecticut, a director of
The Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN
A. McGAH, 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 July,
1996.
Jay S. Benet
Director
The Travelers Insurance Company
<PAGE> 3
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, GEORGE C. KOKULIS of Simsbury, Connecticut, a director of
The Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN
A. McGAH, 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 July,
1996.
George C. Kokulis
Director
The Travelers Insurance Company
<PAGE> 4
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, IAN R. STUART of East Hampton, Connecticut, Director, Senior
Vice President, Chief Financial Officer, Chief Accounting Officer and Controller
of The Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and KATHLEEN
A. McGAH, 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 10th day of
February, 1997.
Ian R. Stuart
Director, Senior Vice President,
Chief Financial Officer,
Chief Accounting Officer and Controller
The Travelers Insurance Company
<PAGE> 5
THE TRAVELERS VARIABLE LIFE INSURANCE SEPARATE ACCOUNT THREE
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That I, KATHERINE M. SULLIVAN of Longmeadow, Massachusetts,
Director, Senior Vice President and General Counsel of The Travelers Insurance
Company (hereafter the "Company"), do hereby make, constitute and appoint ERNEST
J. WRIGHT, Secretary of said Company, and KATHLEEN A. McGAH, 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 10th day of
June, 1996.
Katherine M. Sullivan
Director, Senior Vice President
and General Counsel
The Travelers Insurance Company
<PAGE> 6
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, a director of The
Travelers Insurance Company (hereafter the "Company"), do hereby make,
constitute and appoint ERNEST J. WRIGHT, Secretary of said Company, and
KATHLEEN A. McGAH, 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 Seperate Account Three, a seperate 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 18th day of
October, 1996.
Robert I. Lipp
Director
The Travelers Life and Annuity Company
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