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CONNECTICUT GENERAL LIFE INSURANCE COMPANY
[LOGO]
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
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HOME OFFICE LOCATION: MAILING ADDRESS:
900 COTTAGE GROVE ROAD CIGNA INDIVIDUAL INSURANCE
HARTFORD, CT 06152 VARIABLE PRODUCTS SERVICE CENTER, ROUTING
S-249
HARTFORD, CT 06152-2249
(800)(532-9898)
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THE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
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This prospectus describes a flexible premium variable life insurance
contract ("Policy") offered either in an individual or group form by Connecticut
General Life Insurance Company ("the Company"). This Policy is intended to
provide life insurance benefits. It allows flexible premium payments, a choice
of underlying funding options, and a choice of two death benefit options. Its
value will vary with the investment performance of the underlying funding
options selected, as may the death benefit payable by the Company upon the death
of the Insured. Policy values may be used to continue the Policy in force, may
be borrowed within certain limits, and may be fully or partially surrendered.
Full surrenders are subject to a surrender charge. Annuity settlement options
equivalent to the Death Benefit are available for payment to the Beneficiary
upon the death of the Insured.
The Company offers seventeen funding vehicles under a Policy through the
Separate Account, each a diversified open-end management investment company
(commonly called a mutual fund) with a different investment objective: AIM
Variable Insurance Funds, Inc. -- AIM V.I. Capital Appreciation Fund, AIM V.I.
Growth Fund, AIM V.I. Value Fund, AIM V.I. Diversified Income Fund; CIGNA
Variable Products Group -- CIGNA Variable Products Money Market Fund; Fidelity
Variable Insurance Products Fund -- Equity-Income Portfolio; Fidelity Variable
Insurance Products Fund II -- Asset Manager Portfolio and Investment Grade Bond
Portfolio; MFS Variable Insurance Trust -- MFS Total Return Series, MFS
Utilities Series and MFS World Governments Series; Templeton Variable Products
Series Fund -- Templeton Asset Allocation Fund; Templeton International Fund,
Templeton Stock Fund; Quest for Value Accumulation Trust -- Quest Global Equity
Portfolio, Quest Managed Portfolio and Quest Small Cap Portfolio.
The fixed interest option offered under the Policy is the Fixed Account.
Amounts held in the Fixed Account are guaranteed and will earn a minimum
interest rate of 4% per year. Unless specifically mentioned, this prospectus
only describes the variable investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with this Policy. This
entire Prospectus, and those of the Funds, should be read carefully to
understand the Policy being offered.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE MUTUAL FUNDS AVAILABLE AS FUNDING OPTIONS FOR THE POLICIES OFFERED BY THIS
PROSPECTUS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS DATED: DECEMBER 22, 1995
AS SUPPLEMENTED: FEBRUARY 27, 1996
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TABLE OF CONTENTS
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Definitions..................................... 3
Highlights...................................... 5
Initial Choices............................... 5
Charges and Fees.............................. 5
The Company..................................... 6
The Variable Account............................ 6
The Funds....................................... 7
General....................................... 12
Substitution of Securities.................... 12
Voting Rights................................. 12
Fund Participation Agreements................. 12
Death Benefit................................... 13
Death Benefit Options....................... 13
Changes in Death Benefit Option............. 13
Guaranteed Death Benefit Provision.......... 13
Payment of Death Benefit.................... 14
Changes in Specified Amount................. 15
Premium Payments; Transfers..................... 15
Premium Payments............................ 15
Allocation of Net Premium Payments.......... 16
Transfers................................... 17
Dollar Cost Averaging....................... 17
Charges; Fees................................... 18
Premium Load................................ 18
Monthly Deductions.......................... 18
Transaction Fee for Excess Transfers........ 20
Mortality and Expense Risk Charge........... 20
Surrender Charge............................ 20
The Fixed Account............................... 21
Policy Values................................... 21
Accumulation Value.......................... 21
Variable Accumulation Unit Value............ 22
Surrender Value............................. 22
Surrenders...................................... 22
Partial Surrenders.......................... 22
Full Surrenders............................. 23
Deferral of Payment and Transfers........... 23
Lapse and Reinstatement......................... 23
Lapse of a Policy; Effect of Guaranteed
Death Benefit Provision.................... 23
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Reinstatement of a Lapsed Policy............ 23
Policy Loans.................................... 24
Settlement Options.............................. 24
Other Policy Provisions......................... 25
Issuance.................................... 25
Short-Term Right to Cancel the Policy....... 25
Policy Owner................................ 25
Beneficiary................................. 25
Assignment.................................. 26
Right to Exchange for a Fixed Benefit
Policy..................................... 26
Incontestability............................ 26
Misstatement of Age or Sex.................. 26
Suicide..................................... 27
Nonparticipating Policies................... 27
Tax Matters..................................... 27
Policy Proceeds............................. 27
Taxation of the Company..................... 28
Section 848 Charges......................... 28
Other Considerations........................ 28
Other Matters................................... 29
Directors and Officers of the Company....... 29
Distribution of Policies.................... 29
Changes of Investment Policy................ 30
Other Contracts Issued by the Company....... 30
State Regulation............................ 30
Reports to Policy Owners.................... 30
Advertising................................. 31
Legal Proceedings........................... 31
Experts..................................... 31
Registration Statement...................... 31
Five Percent Owners......................... 31
Financial Statements........................ 32
Appendix 1...................................... 53
Illustration of Surrender Charges........... 53
Appendix 2...................................... 55
Illustration of Accumulation Values,
Surrender Values, and Death Benefits....... 55
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2
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DEFINITIONS
ACCUMULATION VALUE: The sum of the Fixed Account Value, Variable Account Value
and the Loan Account Value.
ACCUMULATION UNIT: A unit of measure used to calculate the value of a Variable
Account Sub-Account.
ADDITIONAL PREMIUMS: Any premium paid in addition to Planned Premiums.
CERTIFICATE: The document which evidences the participation of an Owner in a
group policy.
CODE: The Internal Revenue Code of 1986, as amended.
CORRIDOR DEATH BENEFIT: The Death Benefit calculated as a percentage of the
Accumulation Value rather than by reference to the Specified Amount to satisfy
the Internal Revenue Service definition of "life insurance."
COST OF INSURANCE: The portion of the Monthly Deduction attributable to the
basic insurance coverage, not including riders, supplemental benefits or monthly
expense charges.
DEATH BENEFIT: The amount payable to the beneficiary upon the death of the
Insured in accordance with the Death Benefit Option elected, before deduction of
the amount necessary to repay any loans in full, and overdue deductions.
DEATH BENEFIT OPTION: Either of two methods for determining the Death Benefit.
FIXED ACCOUNT: The account under which principal is guaranteed and interest is
credited at a rate of not less than 4% per year. Fixed Account assets are
general assets of the Company held in the Company's General Account.
FIXED ACCOUNT VALUE: The portion of the Accumulation Value, other than the Loan
Account Value, held in the Company's General Account.
FUND(S): One or more of AIM Variable Insurance Funds, Inc. -- AIM V.I. Capital
Appreciation Fund, AIM V.I. Growth Fund, AIM V.I. Value Fund, AIM V.I.
Diversified Income Fund; CIGNA Variable Products Group -- CIGNA Variable
Products Money Market Fund; Fidelity Variable Insurance Products Fund --
Equity-Income Portfolio; Fidelity Variable Insurance Products Fund II -- Asset
Manager Portfolio and Investment Grade Bond Portfolio; MFS Variable Insurance
Trust -- MFS Total Return Series, MFS Utilities Series, MFS World Governments
Series; Templeton Variable Products Series Fund -- Templeton Asset Allocation
Fund, Templeton International Fund, Templeton Stock Fund; Quest for Value
Accumulation Trust -- Quest Global Equity Portfolio, Quest Managed Portfolio and
Quest Small Cap Portfolio. Each of them is an open-end management investment
company (mutual fund) whose shares are available to fund the benefits provided
by the Policy.
GENERAL ACCOUNT: The Company's general asset account, in which assets
attributable to the non-variable portion of Policies are held.
GRACE PERIOD: The 61-day period following a Monthly Anniversary Day on which the
Policy's Surrender Value is insufficient to cover the current Monthly Deduction.
The Company will send notice at least 31 days before the end of the Grace Period
that the Policy will lapse without value unless a sufficient payment (described
in the notification letter) is received by the Company.
GUARANTEED INITIAL DEATH BENEFIT PREMIUM: The Premium Payment(s) which must be
made to guarantee the Initial Specified Amount for the first five Policy Years
after issue, regardless of investment performance, assuming there will be no
loans or partial surrenders.
GUIDELINE ANNUAL PREMIUM: The level amount, calculated in accordance with Rule
6e-3(T) under the Investment Company Act of 1940, required to mature the Policy
under guaranteed mortality and expense charges and an annual interest rate of
5%.
INITIAL SPECIFIED AMOUNT: The amount (at least $100,000), originally chosen by
the Policy Owner, initially equal to the Death Benefit. The Initial Specified
Amount may be increased or decreased as described in this Prospectus.
INSURED: The person on whose life the Policy is issued.
ISSUE AGE: The age of the insured, to the nearest birthday, on the Issue Date.
ISSUE DATE: The date on which the Policy becomes effective, as shown in the
Policy Specifications.
3
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LOAN ACCOUNT VALUE: An amount equal to the sum of all unpaid Policy loans and
loan interest.
MONTHLY ANNIVERSARY DAY: The day of the month as shown in the Policy
Specifications, or the next Valuation Day if that day is not a Valuation Day or
is nonexistent for that month, when the Company makes the Monthly Deduction.
MONTHLY DEDUCTION: The monthly deduction made from the Net Accumulation Value;
this deduction includes the cost of insurance, an administrative expense charge,
and charges for supplemental riders or benefits, if applicable.
NET ACCUMULATION VALUE: The Accumulation Value less the Loan Account Value.
NET AMOUNT AT RISK: The Death Benefit before subtraction of outstanding loans,
if any, minus the Accumulation Value.
NET PREMIUM PAYMENT: The portion of a Premium Payment, after deduction of 5.0%
for the premium load, available for allocation to the Fixed Account and the
Variable Account Sub-Accounts.
OWNER. The Owner on the Date of Issue will be the person designated in the
Policy Specifications as having all ownership rights under the Policy; includes
the Certificate Owner under a group policy. If no person is designated as Owner,
the Insured will be the Owner.
PLANNED PREMIUMS: The amount of premium the Policy Owner chooses to pay the
Company on a scheduled basis. This is the amount for which the Company sends a
premium reminder notice.
POLICY: The life insurance contract described in this Prospectus, i.e., either
an individual Policy or a Certificate evidencing the Owner's participation in a
group policy, under which flexible premium payments are permitted and the death
benefit and contract values may vary with the investment performance of the
funding option(s) selected.
POLICY YEAR: Each twelve-month period, beginning on the Issue Date, during which
the Policy is in effect.
PREMIUM PAYMENT: A premium payment made under the Policy.
RIGHT-TO-EXAMINE PERIOD: The period of time following the issuance of the Policy
during which the Owner may return the Policy and receive a refund of premiums
paid, the latest of (a) 10 days after the Policy is received, unless otherwise
stipulated by state law requirements, (b) 10 days after the Company mails or
personally delivers a Notice of Withdrawal Right to the Owner, or (c) 45 days
after the application for the Policy is signed.
SETTLEMENT OPTION(S): Several ways in which the Beneficiary may receive a Death
Benefit, or in which the Insured may choose to receive payments upon surrender
of the Policy.
SUB-ACCOUNT: That portion of the Variable Account which is invested in shares of
a specific Fund.
SURRENDER CHARGE: The amount retained by the Company upon the full surrender of
the Policy.
SURRENDER VALUE: The amount a Policy Owner can receive in cash by surrendering
the Policy. This equals the Net Accumulation Value minus the applicable
Surrender Charge. All of the Surrender Value may be applied to one or more of
the Settlement Options.
VALUATION DAY: Every day on which Accumulation Units are valued; any day on
which the New York Stock Exchange is open, except any day on which trading on
the Exchange is restricted, or on which an emergency exists, as determined by
the Securities and Exchange Commission, so that valuation or disposal of
securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day following a Valuation
Day and ending on the next Valuation Day. A Valuation Period may be more than
one day in length.
VARIABLE ACCOUNT: CG Variable Life Insurance Separate Account II. Consists of
all Sub-Accounts invested in shares of the Funds. Variable Account assets are
kept separate from the general assets of the Company and are not chargeable with
the general liabilities of the Company.
VARIABLE ACCOUNT VALUE: The portion of the Accumulation Value attributable to
the Variable Account.
VARIABLE PRODUCTS SERVICE CENTER: The office of the Company to which Premium
Payments should be sent, notices given and any customer service requests made.
Mailing address: CIGNA Individual Insurance, Variable Products Service Center,
Routing S-249, Hartford, CT 06152-2249.
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HIGHLIGHTS
The Policy is a flexible premium variable life insurance
policy. Its values may be accumulated on a fixed or variable
basis or a combination of fixed and variable bases. The
Policy's provisions may vary in some states.
INITIAL CHOICES
TO BE MADE
When purchasing a Policy, the Owner makes three important
choices:
1) Selecting one of the two Death Benefit Options;
2) Selecting the amount of Premium Payments to make; and
3) Selecting how Net Premium Payments will be allocated
among the available funding options.
LEVEL OR VARYING
DEATH BENEFIT
At the time of purchase, the Policy Owner (also called the
"Owner" in this Prospectus) must choose between the two
Death Benefit Options. The amount payable under either
option will be determined as of the date of the Insured's
death. Under the level Death Benefit Option, the Death
Benefit will be the greater of the Specified Amount, or the
Corridor Death Benefit. Under the varying Death Benefit
Option, the Death Benefit will be the greater of the
Specified Amount plus the Accumulation Value, or the
Corridor Death Benefit (See "Death Benefit").
The Policy also offers a Guaranteed Initial Death Benefit
Provision which ensures that for the first five Policy Years
the Death Benefit will not be less than the Initial
Specified Amount, regardless of market performance, assuming
there have been no loans or surrenders, even if the
Surrender Value is insufficient to cover the current Monthly
Deductions (See "Guaranteed Death Benefit Provision").
AMOUNT OF
PREMIUM PAYMENT
At the time of purchase, the Policy Owner must also choose
the amount of premium to be paid. The Owner may vary Premium
Payments to some extent and still keep the Policy in force.
Premium reminder notices will be sent for Planned Premiums
and for premiums required to continue this Policy in force.
If the Policy lapses it may be reinstated (See
"Reinstatement of a Lapsed Policy"). Premium Payments are
refundable during the Right-to-Examine Period.
SELECTION OF
FUNDING
VEHICLE(S)
The Policy Owner must choose how to allocate Net Premium
Payments. Net Premium Payments allocated to the Variable
Account may be allocated to one or more Sub-Accounts of the
Variable Account, each of which invests in shares of a
particular Fund. The Initial Premium Payment will not be
allocated to the Variable Account until three days following
the expiration of the Right-to-Examine Period (see
"Short-Term Right to Cancel the Policy"). The Fixed Account
may also be elected as an allocation option. Allocations to
any Sub-Account or to the Fixed Account must be in whole
percentages with a minimum of 5% each. The variable portion
of a Policy is supported by the Fund(s) selected as funding
vehicle(s). The portion of the Variable Account Value
attributable to a particular Fund through the Sub-Account of
the Variable Account is not guaranteed and will vary with
the investment performance of that Fund.
CHARGES
AND FEES
There is a 5.0% premium load on all Premium Payments.
Monthly deductions are made for the Cost of Insurance and
any riders.
Monthly deductions ($15 per month during the first Policy
Year and, currently, $5 per month thereafter) are also made
for administrative expenses.
Daily charges from Variable Account Value are made for the
mortality and expense risk, currently at the annual rate of
.80% during the first twelve Policy Years and .55%
thereafter.
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Investment results for each Sub-Account are affected by each
Fund's daily charge for investment advisory fees; these
charges vary by Fund and are shown at pp. 10-11 of this
Prospectus.
A transaction fee of $25 is imposed for partial surrenders
and for certain transfers in excess of 12 per Policy Year.
A surrender charge will be deducted upon full surrender of a
Policy within the first ten Policy Years or within ten years
after an increase in Specified Amount.
Interest is charged on Policy loans. The net interest spread
(the amount by which interest charged exceeds interest
credited) is currently 1% per year in the first ten Policy
Years and .50% per year thereafter
THE COMPANY
The Company is a stock life insurance company incorporated
in Connecticut in 1865. Its Home Office mailing address is
Hartford, Connecticut 06152, Telephone (860) 726-6000. It
has obtained authorization to do business in fifty states,
the District of Columbia and Puerto Rico. The Company issues
group and individual life and health insurance policies and
annuities. The Company has various wholly-owned subsidiaries
which are generally engaged in the insurance business. The
Company is a wholly-owned subsidiary of Connecticut General
Corporation, Bloomfield, Connecticut. Connecticut General
Corporation is wholly-owned by CIGNA Holdings Inc.,
Philadelphia, Pennsylvania which is in turn wholly-owned by
CIGNA Corporation, Philadelphia, Pennsylvania. As of
December 31, 1994, certain entities reported voting power or
dispositive power of more than 5% of the Common Stock of
CIGNA Corporation. See "Five Percent Owners." Connecticut
General Corporation is the holding company of various
insurance companies, one of which is Connecticut General
Life Insurance Company.
The Company markets the Policies through independent
insurance brokers, general agents, and registered
representatives of broker-dealers which are members of the
National Association of Securities Dealers, Inc.
The Company, in common with other insurance companies, is
subject to regulation and supervision by the regulatory
authorities of the states in which it is licensed to do
business. A license from the state insurance department is a
prerequisite to the transaction of insurance business in
that state. In general, all states have statutory
administrative powers. Such regulation relates, among other
things, to licensing of insurers and their agents, the
approval of policy forms, the methods of computing reserves,
the form and content of statutory financial statements, the
amount of policyholders' and stockholders' dividends, and
the type of distribution of investments permitted. A blanket
bond for $10 million covers all of the officers and
employees of the Company.
THE VARIABLE
ACCOUNT
CG Variable Life Insurance Separate Account II was
established pursuant to a July 6, 1994 resolution of the
Board of Directors of the Company. Under Connecticut
insurance law, the income, gains or losses of the Variable
Account are credited without regard to the other income,
gains or losses of the Company. The Company serves as the
custodian of the assets of the Variable Account. These
assets are held for the Policies. Although the assets
maintained in the Variable Account will not be charged with
any liabilities arising out of any other business conducted
by the Company, all obligations arising under the Policies
are general corporate liabilities of the Company. Any and
all
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distributions made by the Funds with respect to shares held
by the Variable Account will be reinvested in additional
shares at net asset value. Deductions and surrenders from
the Variable Account will, in effect, be made by
surrendering shares of the Funds at net asset value. On each
Valuation Day of each Fund, the Variable Account purchases
or redeems Fund shares based on a netting of all
transactions for that day. Shares of the Funds held in the
Variable Account are held by the Company through an open
account system, which makes unnecessary the issuance and
delivery of stock certificates.
The Variable Account is registered with the Securities and
Exchange Commission ("Commission") as a unit investment
trust under the Investment Company Act of 1940. Such
registration does not involve supervision of the Variable
Account or the Company's management or investment practices
or policies by the Commission. The Company does not
guarantee the Variable Account's investment performance.
The Company has three other separate accounts registered as
unit investment trusts with the Commission, two for the
purpose of funding the Company's variable annuity contracts,
and one for the purpose of funding other variable life
insurance policies of the Company.
THE FUNDS
Each of the seventeen Sub-Accounts of the Variable Account
is invested solely in the shares of one of the seventeen
Funds available as funding vehicles under the Policies. Each
of the Funds is a series of one of seven entities, all
Massachusetts business trusts, except for AIM Variable
Insurance Funds, Inc., a Maryland corporation. Each such
entity is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940.
These entities are collectively referred to herein as the
"Series Funds."
The seven Series Funds and their Investment advisers and
distributors are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. Fund"),
managed by AIM Advisors, Inc., and distributed by AIM
Distributors Inc., 11 Greenway Plaza, Suite 1919,
Houston, TX 77046-1173;
CIGNA Variable Products Group, managed by CIGNA
Investments, Inc., and distributed by CIGNA Financial
Advisors, Inc., 900 Cottage Grove Road, Bloomfield, CT
06002;
Variable Insurance Products Fund I ("Fidelity Trust I"),
and Variable Insurance Products Fund II ("Fidelity Trust
II"), managed by Fidelity Management & Research Company
and distributed by Fidelity Distributors Corporation, 82
Devonshire Street, Boston, MA 02103;
MFS Variable Insurance Trust ("MFS Trust"), managed by
Massachusetts Financial Services Company and distributed
by MFS Investor Services, Inc., 500 Boylston Street,
Boston, MA 02116;
Templeton Variable Products Series Fund ("Templeton
Fund"), managed by Templeton Investment Counsel, Inc.
and distributed by Franklin/Templeton Distributors,
Inc., 700 Central Avenue, St. Petersburg, FL 33701;
Quest for Value Accumulation Trust ("Quest for Value
Trust"), managed by Quest for Value Advisors and
distributed by Quest for Value Distributors, One World
Financial Center, New York, NY 10281.
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Four Funds of AIM V.I. Fund are available under the
Policies:
AIM V.I. Capital Appreciation Fund;
AIM V.I. Growth Fund;
AIM V.I. Value Fund;
AIM V.I. Diversified Income Fund.
One Fund of CIGNA VARIABLE PRODUCTS Group is available under
the Policies:
CIGNA Variable Products Money Market Fund.
One Fund of FIDELITY Trust I is available under the
Policies:
Equity-Income Portfolio ("Fidelity Equity-Income
Portfolio").
Two Funds of FIDELITY Trust II are available under the
Policies:
Asset Manager Portfolio ("Fidelity Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity Bond
Portfolio").
Three Funds of MFS Trust are available under the Policies:
MFS Total Return Series;
MFS Utilities Series;
MFS World Governments Series.
Three Funds of TEMPLETON Series Fund are available under the
Policies:
Templeton Asset Allocation Fund;
Templeton International Fund;
Templeton Stock Fund.
Three Funds of QUEST FOR VALUE Trust are available under the
Policies:
Quest for Value Global Equity Portfolio;
Quest for Value Managed Portfolio;
Quest for Value Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown on pages 10 and 11 of this Prospectus.
There follows a brief description of the investment
objective and program of each Fund. There can be no
assurance that any of the stated investment objectives will
be achieved.
AIM V.I. CAPITAL APPRECIATION FUND: Seeks to provide capital
appreciation through investments in common stocks, with
emphasis on medium-sized and smaller emerging growth
companies.
AIM V.I. GROWTH FUND: Seeks to provide growth of capital
through investments primarily in common stocks of leading
U.S. companies considered by its adviser to have strong
earnings momentum.
AIM V.I. VALUE FUND: Seeks to achieve long-term growth of
capital by investing primarily in equity securities judged
by its adviser to be undervalued relative to the current or
projected earnings of the companies issuing the securities,
or relative to current market values of assets owned by the
companies issuing the securities or relative to the equity
markets generally. Income is a secondary objective.
AIM V.I. DIVERSIFIED INCOME FUND: Seeks to achieve a high
level of current income primarily by investing in a
diversified portfolio of foreign and U.S. government and
corporate debt securities, including lower rated high yield
debt securities (commonly known as "junk bonds").
8
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CIGNA VARIABLE PRODUCTS MONEY MARKET FUND: Seeks to provide
as high a level of current income as is consistent with the
preservation of capital and liquidity and the maintenance of
a stable $1.00 per share net asset value by investing in
short-term money market instruments.
FIDELITY ASSET MANAGER PORTFOLIO: Seeks high total return
with reduced risk over the long-term by allocating its
assets among domestic and foreign stocks, bonds and short-
term fixed-income instruments.
FIDELITY BOND PORTFOLIO: Seeks as high a level of current
income as is consistent with the preservation of capital by
investing in a broad range of investment-grade fixed-income
securities, with a dollar-weighted average portfolio
maturity of ten years or less.
FIDELITY EQUITY-INCOME PORTFOLIO: Seeks reasonable income by
investing primarily in income-producing equity securities,
with some potential for capital appreciation, seeking to
exceed the composite yield on the securities comprising the
Standard and Poor's 500 Composite Stock Price Index.
MFS TOTAL RETURN SERIES: Seeks primarily to obtain
above-average income (compared to a portfolio entirely
invested in equity securities) consistent with the prudent
employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current
income (income above that obtainable from a portfolio
invested entirely in equity securities).
MFS WORLD GOVERNMENTS SERIES: Seeks not only preservation,
but also growth, of capital together with moderate current
income.
TEMPLETON ASSET ALLOCATION FUND: Seeks a high level of total
return through a flexible policy of investing in stocks of
companies in any nation, debt obligations of companies and
governments of any nation, and in money market instruments.
Assets are allocated among different investments depending
upon worldwide market and economic conditions.
TEMPLETON INTERNATIONAL FUND: Seeks long-term capital growth
through a flexible policy of investing in stocks and debt
obligations of companies and governments outside the United
States.
TEMPLETON STOCK FUND: Seeks capital growth through a policy
of investing primarily in common stocks issued by companies,
large and small, in various nations throughout the world.
QUEST FOR VALUE GLOBAL EQUITY PORTFOLIO: Seeks long-term
capital appreciation through a global investment strategy
primarily involving equity securities.
QUEST FOR VALUE MANAGED PORTFOLIO: Seeks growth of capital
over time through investment in a portfolio of common
stocks, bonds and cash equivalents, the percentage of which
will vary based on management's assessments of relative
investment values.
QUEST FOR VALUE SMALL CAP PORTFOLIO: Seeks capital
appreciation through investments in a diversified portfolio
of equity securities of companies with market
capitalizations of under $1 billion.
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EXPENSE DATA
The purpose of the following Table is to help Purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by Purchasers assuming that all Net Premium Payments are allocated
to the Variable Account. The table reflects expenses of the Variable Account as
well as of the Individual Funds underlying the Variable Sub-Accounts. The
Mortality and Expense Risk Charge shown is the currently charged rate during the
first twelve Policy Years. It currently declines to .55% per year thereafter and
is guaranteed not to exceed .80% per year.
FEE TABLE
<TABLE>
<CAPTION>
FIDELITY VARIABLE
CIGNA VARIABLE INSURANCE
AIM V.I. FUNDS, INC. PRODUCTS GROUP PRODUCTS FUNDS
------------------------------------------------------ -------------------- --------------------
AIM V.L. AIM V.I. AIM V.I. AIM V.I. CIGNA VARIABLE ASSET EQUITY
CAPITAL GROWTH VALUE DIVERSIFIED PRODUCTS MONEY MANAGER INCOME
APPRECIATION FUND FUND FUND INCOME FUND MARKET FUND PORTFOLIO PORTFOLIO
----------------- -------- --------- ------------ -------------------- -------- ---------
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SEPARATE ACCOUNT
ANNUAL EXPENSES
Mortality and
Expense Risk
Charge............. 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Total Separate
Account Annual
Expenses 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
FUND PORTFOLIO
ANNUAL EXPENSES
Management Fees..... 0.65% 0.65% 0.65% 0.60% 0.35% 0.72% 0.52%
Other Expenses...... 0.19% 0.30% 0.17% 0.43% 0.15% 0.08% 0.06%
Total Fund Portfolio
Annual Expenses.... 0.84% 0.95% 0.82% 1.03% 0.50%(1) 0.80%(2) 0.58%(2)
<CAPTION>
INVESTMENT
GRADE BOND
PORTFOLIO
----------
<S> <C>
SEPARATE ACCOUNT
ANNUAL EXPENSES
Mortality and
Expense Risk
Charge............. 0.80%
Total Separate
Account Annual
Expenses 0.80%
FUND PORTFOLIO
ANNUAL EXPENSES
Management Fees..... 0.48%
Other Expenses...... 0.21%
Total Fund Portfolio
Annual Expenses.... 0.67%
</TABLE>
<TABLE>
<S> <C>
<FN>
- ------------------------
(1) The Fund's investment adviser has voluntarily agreed to reimburse such
portion of its management fee as is necessary to cause the Total Fund
Portfolio Annual Expenses of the Fund during each calendar year not to
exceed .50% of the Fund's average daily net asset value for such year. If
this reimbursement is not sufficient to cause the Total Fund Portfolio
Annual Expenses of the Fund not to exceed .50% of average daily net asset
value, the adviser has agreed to pay such other expenses of the Fund as is
necessary to keep Total Fund Portfolio Annual Expenses from exceeding .50%.
This arrangement will continue in effect until the end of the fiscal year
ending December 31, 1996, and afterwards to the extent described in the
Fund's then current prospectus. To the extent management fees are
reimbursed by the adviser, or expenses of a Fund are paid by the adviser,
the total return to shareholders will increase. Total return to
shareholders will decrease to the extent management fees are no longer
reimbursed or expenses of the Fund are no longer paid. Other Expenses are
based on estimated amounts for the current fiscal year. Other Expenses
include all expenses not specifically assumed by the adviser.
(2) A portion of the brokerage commissions the Fund paid was used to reduce its
expenses. Without this reduction, Total Fund Portfolio Annual Expenses
would have been 0.81% for the Asset Manager Portfolio and .60% for the
Equity Income Portfolio.
</TABLE>
10
<PAGE>
The table does not reflect the monthly deductions for the cost of insurance and
any riders, nor does it reflect the monthly deduction of $15 during the first
Policy Year, and currently, $5 thereafter. The information set forth should be
considered together with the information provided in this Prospectus under the
heading "Charges and Fees", and in each Fund's Prospectus. All expenses are
expressed as a percentage of average account value.
<TABLE>
<CAPTION>
TEMPLETON VARIABLE PRODUCTS QUEST FOR VALUE
MFS VARIABLE INSURANCE TRUST SERIES FUNDS ACCUMULATION TRUST
- -------------------------------------- ------------------------------------------ ------------------------------------
MFS TEMPLETON QUEST
TOTAL MFS MFS WORLD ASSET TEMPLETON TEMPLETON GLOBAL QUEST QUEST
RETURN UTILITIES GOVERNMENTS ALLOCATION INTERNATIONAL STOCK EQUITY MANAGED SMALL CAP
SERIES SERIES SERIES FUND FUND FUND PORTFOLIO PORTFOLIO PORTFOLIO
- ---------- ---------- ------------ ------------ -------------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
0.75% 0.75% 0.75% 0.49% 0.50% 0.48% 0.75% 0.60% 0.60%
0.25% 0.25% 0.25% 0.26% 0.33% 0.25% 0.50% 0.06% 0.14%
1.00%(3) 1.00%(3) 1.00%(3) 0.75% 0.83% 0.73% 1.25%(4) 0.66%(4) 0.74%(4)
</TABLE>
<TABLE>
<S> <C>
- ------------------------
(3) The Funds' Adviser has agreed to bear, subject to reimbursement, expenses
for each of the Total Return Series and Utilities Series, such that each
Series' aggregate operating expense shall not exceed, on an annualized
basis, 1.00% of the average daily net assets of the Series from November 2,
1994 through December 31, 1996, 1.25% of the average daily net assets of
the Series from January 1, 1997 through December 31, 1998, and 1.50% of the
average daily net assets of the Series from January 1, 1999 through
December 31, 2004; provided however, that this obligation may be terminated
or revised at any time. Absent this expense arrangement, "Other Expenses"
and "Total Annual Expenses" would be 0.62% and 1.37%, respectively, for the
Total Return Series, and 0.99% and 1.68%, respectively, for the Utility
Series based on estimated expenses for the Series' current fiscal year. The
Adviser has agreed to bear, subject to reimbursement, until December 31,
2004, expenses of the World Governments Series such that the Series'
aggregate operating expenses do not exceed 1.00%, on an annualized basis,
of its average daily net assets. Absent this expense arrangement, "Other
Expenses" and "Total Annual Expenses" for the World Governments Series
would be 0.63% and 1.38%, respectively.
(4) The expenses for the Quest Managed, Small Cap and Global Equity Portfolios
will be voluntarily limited by Quest for Value Advisors, the Funds'
Adviser, so that annualized operating fund expenses do not exceed 0.66%,
0.74% and 1.25% for the Quest Managed, Small Cap and Global Equity
Portfolios, respectively, through December 31, 1995. Variations in the
actual amount of average assets in any of these Portfolios during 1995 can
cause significant variations in expenses expressed as a percentage of that
Portfolio's average net assets. It is estimated by Quest Management that by
the end of 1995, the net assets of each of these Portfolios will be
sufficient such that the total annual expenses of each Portfolio will, on
an annualized basis, be approximately equal to, if not less than, the
voluntary limits.
</TABLE>
11
<PAGE>
GENERAL
There is no assurance that the investment objective of any
of the Funds will be met. A Policy Owner bears the complete
investment risk for Accumulation Values allocated to a
Sub-Account. Each of the Sub-Accounts involves inherent
investment risk, and such risk varies significantly among
the Sub-Accounts. Policy Owners should read each Fund's
prospectus carefully and understand the Funds' relative
degrees of risk before making or changing investment
choices. Additional Funds may, from time to time, be made
available as investments to underlie the Policies. However,
the right to make such selections will be limited by the
terms and conditions imposed on such transactions by the
Company (See "Premium Payments").
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Variable Account or if, in the judgment of
the Company, further investment in such shares should become
inappropriate in view of the purpose of the investment
objectives of the Policies, the Company may substitute
shares of another Fund. No substitution of securities in any
Sub-Account may take place without prior approval of the
Commission and under such requirements as it may impose.
VOTING RIGHTS
In accordance with its view of present applicable law, the
Company will vote the shares of each Fund held in the
Variable Account at special meetings of the shareholders of
the particular Series Fund in accordance with written
instructions received from persons having the voting
interest in the Variable Account. The Company will vote
shares for which it has not received instructions, as well
as shares attributable to it, in the same proportion as it
votes shares for which it has received instructions. The
Series Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Series Fund not more than sixty (60) days prior to the
meeting of the particular Series Fund. Voting instructions
will be solicited by written communication at least fourteen
(14) days prior to the meeting.
The Funds' shares are issued and redeemed only in connection
with variable annuity contracts and variable life insurance
policies issued through separate accounts of the Company and
other life insurance companies. The Series Funds do not
foresee any disadvantage to Policy Owners arising out of the
fact that shares may be made available to separate accounts
which are used in connection with both variable annuity and
variable life insurance products. Nevertheless, the Series
Fund's Boards intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly
arise and to determine what action, if any, should be taken
in response thereto. If such a conflict were to occur, one
of the separate accounts might withdraw its investment in a
Fund. This might force a Fund to sell portfolio securities
at disadvantageous prices.
FUND PARTICIPATION AGREEMENTS
The Company has entered into agreements with the various
Series Funds and their advisers or distributors under which
the Company makes the Funds available under the Policies and
performing certain administrative services. In some cases,
the advisers or distributors may compensate the Company
therefor.
12
<PAGE>
DEATH BENEFIT
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available. The
amount payable under either option will be determined as of
the date of the Insured's death.
Under OPTION 1 the Death Benefit will be the greater of the
Specified Amount (a minimum of $100,000 as of the date of
this Prospectus), or the applicable percentage (the
"Corridor Percentage") of the Accumulation Value required to
maintain the Policy as a "life insurance contract" for tax
purposes (the "Corridor Death Benefit"). The Corridor
Percentage is 250% through the Insured's age 40 and
decreases in accordance with the table at page 14 of this
Prospectus to 100% at the Insured's age 95. Option 1
provides a level Death Benefit until the Corridor Death
Benefit exceeds the Specified Amount.
Under OPTION 2 the Death Benefit will be the greater of the
Specified Amount (a minimum of $100,000 as of the date of
this Prospectus), plus the Accumulation Value, or the
Corridor Death Benefit. Option 2 provides a varying Death
Benefit which increases or decreases over time, depending on
the amount of premium paid and the investment performance of
the underlying funding options chosen.
Under both Option 1 and Option 2, the proceeds payable upon
death will be the Death Benefit, reduced by partial
surrenders and by the amount necessary to repay any loans in
full. Option 1 will be in effect unless Option 2 has been
elected in the application for the Policy or unless a change
has been allowed.
CHANGES IN DEATH BENEFIT OPTION
A Death Benefit Option change will be allowed upon the
Owner's written request to the Variable Products Service
Center in form satisfactory to the Company, subject to the
following conditions:
- The change will take effect on the Monthly Anniversary Day
or on the next Valuation Day following the date of receipt
of the request.
- There will be no change in the Surrender Charge, and
evidence of insurability may be required.
- No change in the Death Benefit Option may reduce the
Specified Amount below $100,000.
- For changes from Option 1 to Option 2, the new Specified
Amount will equal the Specified Amount less the
Accumulation Value at the time of the change.
- For changes from Option 2 to Option 1, the new Specified
Amount will equal the Specified Amount plus the
Accumulation Value at the time of the change.
GUARANTEED DEATH BENEFIT PROVISION
The Guaranteed Death Benefit Provision assures that, as long
as the Guaranteed Initial Death Benefit Premium is paid, the
Death Benefit will not be less than the Initial Specified
Amount during the first five Policy Years even if the
Surrender Value is insufficient to cover the current Monthly
Deductions, assuming there have been no loans or partial
surrenders.
Changes in Initial Specified Amount, partial surrenders, and
option changes during the first five Policy Years may affect
the Guaranteed Death Benefit Premium. These events and loans
may also affect the Policy's ability to remain in force.
13
<PAGE>
PAYMENT OF DEATH BENEFIT
The Death Benefit under the Policy will be paid in a lump
sum within seven days after receipt at the Variable Products
Service Center of due proof of the Insured's death (a
certified copy of the death certificate), unless the Owner
or the Beneficiary has elected that it be paid under one or
more of the Settlement Options (See "Settlement Options").
Payment of the Death Benefit may be delayed if the Policy is
being contested.
While the Insured is living, the Owner may elect a
Settlement Option for the Beneficiary and deem it
irrevocable, and may revoke or change a prior election. The
Beneficiary may make or change an election within 90 days of
the death of the Insured, unless the Owner has made an
irrevocable election.
All or a part of the Death Benefit may be applied under one
or more of the Settlement Options, or such other options as
the Company may make available in the future.
If the Policy is assigned as collateral security, the
Company will pay any amount due the assignee in one lump
sum. Any excess Death Benefit due will be paid as elected.
The Death Benefit under the Policy at any point in time must
be at least the following "Corridor Percentage" of the
Accumulation Value based on the Insured's attained age:
<TABLE>
<CAPTION>
INSURED'S CORRIDOR INSURED'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
------------ ----------- ------------- -----------
<S> <C> <C> <C>
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
-- - --
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
-- - --
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
-- - --
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
-- - --
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
-- - --
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
-- - --
</TABLE>
14
<PAGE>
CHANGES IN SPECIFIED AMOUNT
Changes in the Specified Amount of a Policy can be made by
submitting a written request to the Variable Products
Service Center in form satisfactory to the Company.
Changes in the Specified Amount are subject to the following
conditions:
- Satisfactory evidence of insurability and a supplemental
application may be required for an increase in the
Specified Amount.
- An increase in the Specified Amount will increase the
Surrender Charge.
- As of the date of this Prospectus, the minimum allowable
increase in Specified Amount is $1,000.
- No decrease may reduce the Specified Amount to less than
$100,000.
- No decrease may reduce the Specified Amount below the
minimum required to maintain the Policy's status under the
Code as a life insurance policy.
PREMIUM
PAYMENTS;
TRANSFERS
PREMIUM PAYMENTS
The Policies provide for flexible premium payments. Premium
Payments are payable in the frequency and in the amount
selected by the Policy Owner. The initial Premium Payment is
due on the Issue Date and is payable in advance. The minimum
payment is the amount necessary to maintain a positive
Surrender Value or Guaranteed Minimum Death Benefit. Each
subsequent Premium Payment must be at least $100. The
Company reserves the right to decline any application or
Premium Payment.
After the initial Premium Payment, all Premium Payments must
be sent directly to the Variable Products Service Center and
will be deemed received when actually received there.
The Policy Owner may elect to increase, decrease or change
the frequency of Premium Payments.
PLANNED PREMIUMS are Premium Payments scheduled when a
Policy is applied for. They can be billed annually,
semiannually or quarterly. Pre-authorized automatic monthly
check payments may also be arranged.
ADDITIONAL PREMIUMS are any Premium Payments made ($100
minimum) in addition to Planned Premiums.
GUARANTEED INITIAL DEATH BENEFIT PREMIUM, if paid during
each of the first five Policy Years, enables the Policy to
remain in force regardless of investment performance,
assuming no surrenders or loans during that time. The
Guaranteed Initial Death Benefit Premium is stated in the
Policy Specifications. An increase in Specified Amount would
require a recalculation of the Guaranteed Initial Death
Benefit Premium. If this premium is not paid, or there are
partial surrenders or loans taken during the first five
Policy Years, the Policy will lapse during the first five
Policy Years if the Surrender Value is less than the next
Monthly Deduction, just as it would after the first five
Policy Years at any time the Surrender Value is less than
the next Monthly Deduction.
Payment of Planned Premiums or Additional Premiums in any
amount will not, except as noted above, guarantee that the
Policy will remain in force. Conversely, failure to pay
Planned Premiums or Additional Premiums will not necessarily
cause a Policy to lapse (See "Guaranteed Death Benefit
Provision").
15
<PAGE>
PREMIUM INCREASES. At any time, the Owner may increase
Planned Premiums, or pay Additional Premiums, but:
- Evidence of insurability may be required if the Additional
Premium or the new Planned Premium during the current
Policy Year would increase the difference between the
Death Benefit and the Accumulation Value. If satisfactory
evidence of insurability is requested and not provided,
the increase in premium will be refunded without interest
and without participation of such amounts in any
underlying funding options.
- In no event may the total of all Premium Payments exceed
the then-current maximum premium limitations established
by federal law for a Policy to qualify as life insurance.
If, at any time, a Premium Payment would result in total
Premium Payments exceeding such maximum premium
limitation, the Company will only accept that portion of
the Premium Payment which will make total premiums equal
the maximum. Any part of the Premium Payment in excess of
that amount will be returned or applied as otherwise
agreed and no further Premium Payments will be accepted
until allowed by the then-current maximum premium
limitations prescribed by law.
- If there is any Policy indebtedness, any additional Net
Premium Payments will be used first as a loan repayment
with any excess applied as an additional Net Premium
Payment.
ALLOCATION OF NET PREMIUM PAYMENTS
At the time of purchase of the Policy, the Owner must decide
how to allocate Net Premium Payments among the Sub-Accounts
and the Fixed Account. Allocation to any one Variable
Account Sub-Account or to the Fixed Account cannot be less
than 5% of the Net Premium Payment, and must be in whole
percentages. For each Variable Account Sub-Account, the Net
Premium Payments are converted into Accumulation Units. The
number of Accumulation Units credited to the Policy is
determined by dividing the Net Premium Payment allocated to
the Sub-Account by the value of the Accumulation Unit for
the Sub-Account.
During the Right-to-Examine Period, the Net Premium Payment
will be allocated to the Fixed Account, and interest
credited from the Issue Date if the Premium Payment was
received on or before the Issue Date. The Company will
allocate the initial Net Premium Payment directly to the
Sub-Account(s) selected by the Owner within three days after
expiration of the Right-to-Examine Period.
Unless the Company is directed otherwise by the Policy
Owner, subsequent Net Premium Payments will be allocated on
the same basis as the most recent previous Net Premium
Payment. Such allocation will occur as of the next Valuation
Period after each payment is received.
The allocation for future Premium Payments may be changed at
any time free of charge. Any new allocation will apply to
Premium Payments made more than one week after the Company
receives the notice of the new allocation. Any new
allocation must allocate a minimum of 5% to any single
funding vehicle and must be expressed in whole percents.
16
<PAGE>
TRANSFERS
Before the Insured attains age 100, values may, at any time,
be transferred ($500 minimum) from one Sub-Account to
another or from the Variable Account to the Fixed Account.
Within the 30 days after each Policy Anniversary, the Owner
may also transfer a portion of the Fixed Account Value to
one or more Sub-Accounts, until the Insured attains age 100.
Transfers from the Fixed Account are allowed in the 30-day
period after a Policy Anniversary and will be effective as
of the next Valuation Day after a request is received in
good order at the Variable Products Service Center. The
cumulative amount of transfers from the Fixed Account within
any such 30-day period cannot exceed 20% of the Fixed
Account Value on the most recent Policy Anniversary. The
Company may further limit transfers from the Fixed Account
at any time.
Subject to the above restrictions, up to 12 transfers may be
made in any Policy Year without charge, and any value
remaining in the Fixed Account or a Sub-Account after a
transfer must be at least $500. Transfers may be made in
writing or by telephone unless the Policy Owner has
indicated in writing in the application or otherwise that
telephone transfers are not to be permitted. To make a
telephone transfer, the Policy Owner must call the Variable
Products Service Center and provide, as identification, his
or her Policy Number and a requested portion of his or her
Social Security number. A customer service representative
will then come on the line and, upon ascertaining that
telephone transfers are permitted for that Policy, take the
transfer request, which will be processed as of the next
close of business and confirmed the day after that. The
Company disclaims all liability for losses resulting from
unauthorized or fraudulent telephone transactions, but
acknowledges that if it does not follow these procedures,
which it believes to be reasonable, it may be liable for
such losses.
Any transfer among the Funds or to the Fixed Account will
result in the crediting and cancellation of Accumulation
Units based on the Accumulation Unit values next determined
after a written request is received at the Variable Products
Service Center. Transfer requests must be received by the
Variable Products Center by 4:00 ET in order to be effective
that day. Any transfer made which causes the remaining value
of Accumulation Units for a Sub-Account to be less than $500
will result in those remaining Accumulation Units being
cancelled and their aggregate value reallocated
proportionately among the other funding options chosen. The
Policy Owner should carefully consider current market
conditions and each Fund's investment policies and related
risks before allocating money to the Sub-Accounts. See pages
8-11 of this Prospectus.
The Company, at its sole discretion, may waive minimum
balance requirements on the Sub-Accounts.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected,
enables a Policy Owner to systematically reallocate
specified dollar amounts from the Fixed Account to the Sub-
Accounts at regular intervals. By allocating on a regularly
scheduled basis as opposed to reallocating the total amount
at one particular time, a Policy Owner may be less
susceptible to the impact of market fluctuations.
Dollar Cost Averaging may be selected by establishing a
Fixed Account or Money Market Account Value of at least
$12,000. The minimum transfer amount is $1,000. All Dollar
Cost Averaging transfers will be made effective the
twentieth of the month (or the next Valuation Day if the
twentieth of the month is not a Valuation Day). Election
into this program may occur at any time by properly
completing the Dollar Cost Averaging
17
<PAGE>
election form, returning it to the Company so it is received
by the tenth of the month, to be effective that month, and
ensuring that sufficient value is in the Fixed Account or
Money Market Account.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the Fixed Account Value is insufficient
to complete the next transfer; (3) the Owner requests
termination in writing and such writing is received by the
tenth of the month in order to cancel the transfer scheduled
to take effect that month; or (4) the Policy is surrendered.
There is currently no charge for Dollar Cost Averaging, and
Dollar Cost Averaging transfers are not counted against the
twelve free transfers per Policy Year, but the Company
reserves the right to charge for this program. In the event
there are additional transfers, a transfer fee may be
charged. The Company does not intend to profit from any such
charge.
CHARGES;
FEES
PREMIUM LOAD
A deduction of 5.0% of each Premium Payment will be made to
cover the premium load. This load represents state taxes and
federal income tax liabilities and a portion of the sales
expenses incurred by the Company. The 2.35% portion of this
deduction for premium taxes may be higher or lower than the
actual tax imposed by the applicable jurisdiction; it is in
the mid-range of state premium taxes, which range from 1.75%
to 5.0%. The Company estimates 1.15% of each Premium Payment
will be used to meet federal income tax liabilities
attributable to the treatment of deferred acquisition costs.
The remaining 1.5% of the deduction is for sales expenses.
The combination of the 1.5% front-end sales load and the
deferred sales component of the surrender charge will not
exceed maximum sales charges permitted under the 1940 Act.
MONTHLY DEDUCTIONS
A Monthly Deduction is made from the Net Accumulation Value
for administrative expenses. The monthly administrative fee
is $15 during the first Policy Year and, currently, $5
during subsequent Policy Years. This charge is for items
such as premium billing and collection, policy value
calculation, confirmations and periodic reports and will not
exceed the Company's costs. For subsequent Policy Years,
this monthly fee will never exceed $10.
A Monthly Deduction is also made from the Net Accumulation
Value for the Cost of Insurance and any charges for
supplemental riders. The Cost of Insurance depends on the
attained age, risk class and gender classification (in
accordance with state law) of the Insured and the current
Net Amount at Risk.
The Cost of Insurance is determined by dividing the Death
Benefit at the previous Monthly Anniversary Day by
1.0032737, subtracting the Accumulation Value at the
previous Monthly Anniversary Day, and multiplying the result
(the Net Amount at Risk) by the applicable Cost of Insurance
Rate as determined by the Company. The Guaranteed Maximum
Cost of Insurance Rates, per $1,000 of Net Amount at Risk,
for standard risks are set forth in the following Table
based on the 1980 Commissioners Standard Ordinary Mortality
Tables, Age Nearest Birthday (1980 CSO); or, for unisex
rates, on the 1980 CSO-B Table.
18
<PAGE>
<TABLE>
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
0 0.34845 0.24089 0.32677
1 0.08917 0.07251 0.08667
2 0.08251 0.06750 0.07917
3 0.08167 0.06584 0.07834
4 0.07917 0.06417 0.07584
5 0.07501 0.06334 0.07251
6 0.07167 0.06084 0.06917
7 0.06667 0.06000 0.06584
8 0.06334 0.05834 0.06250
9 0.06167 0.05750 0.06084
10 0.06084 0.05667 0.06000
11 0.06417 0.05750 0.06250
12 0.07084 0.06000 0.06917
13 0.08251 0.06250 0.07834
14 0.09584 0.06887 0.09001
15 0.11085 0.07084 0.10334
16 0.12585 0.07601 0.11585
17 0.13919 0.07917 0.12752
18 0.14836 0.08167 0.13502
19 0.15502 0.08501 0.14085
20 0.15836 0.08751 0.14502
21 0.15919 0.08917 0.14585
22 0.15752 0.09084 0.14419
23 0.15502 0.09251 0.14252
24 0.15189 0.09501 0.14085
25 0.14752 0.09668 0.13752
26 0.11419 0.09918 0.13585
27 0.14252 0.10168 0.13418
28 0.14169 0.10501 0.13418
29 0.14252 0.10635 0.13585
30 0.14419 0.11251 0.13752
31 0.14836 0.11668 0.14169
32 0.15252 0.12085 0.14585
33 0.15919 0.12502 0.15252
34 0.16889 0.13168 0.15919
35 0.17586 0.13752 0.16836
36 0.18670 0.14669 0.17837
37 0.20004 0.15752 0.19170
38 0.21505 0.17003 0.20588
39 0.23255 0.18503 0.22338
40 0.25173 0.20171 0.24173
41 0.27424 0.22005 0.26340
42 0.29675 0.23922 0.28508
43 0.32260 0.25757 0.31010
44 0.34929 0.27674 0.33428
45 0.37931 0.29675 0.36263
46 0.41017 0.31677 0.39182
47 0.44353 0.33761 0.42268
48 0.47856 0.36096 0.45437
49 0.51777 0.38598 0.49107
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
50 0.55948 0.41350 0.53028
51 0.60870 0.44270 0.57533
52 0.66377 0.47523 0.62539
53 0.72636 0.51276 0.68297
54 0.79730 0.55114 0.74722
55 0.87326 0.59118 0.81566
56 0.95591 0.63123 0.88996
57 1.04192 0.66961 0.96593
58 1.13378 0.70633 1.04609
59 1.23236 0.74556 1.13211
60 1.34180 0.78979 1.22817
61 1.46381 0.84488 1.33511
62 1.60173 0.91417 1.45796
63 1.75809 1.00267 1.59922
64 1.93206 1.10539 1.75725
65 2.12283 1.21731 1.92955
66 2.32623 1.33511 2.11195
67 2.54312 1.45461 2.30614
68 2.77350 1.57247 2.50878
69 3.02328 1.69955 2.72909
70 3.30338 1.84590 2.97466
71 3.62140 2.02325 3.25640
72 3.98666 2.24419 3.58279
73 4.40599 2.51548 3.95978
74 4.87280 2.83552 4.38330
75 5.37793 3.19685 4.84334
76 5.91225 3.59370 5.33245
77 6.46824 4.01942 5.84227
78 7.04089 4.47410 6.36948
79 7.64551 4.97042 6.92851
80 8.30507 5.52957 7.54229
81 9.03761 6.17118 8.22883
82 9.86724 6.91414 9.01216
83 10.80381 7.77075 9.90124
84 11.82571 8.72632 10.87533
85 12.91039 9.76952 11.92213
86 14.03509 10.89151 13.01471
87 15.18978 12.08770 14.15507
88 16.36948 13.35774 15.33494
89 17.57781 14.70820 16.56493
90 18.82881 16.15259 17.85746
91 20.14619 17.71416 19.23699
92 21.57655 19.43814 20.76665
93 23.20196 21.40786 22.49837
94 25.28174 23.63051 24.70915
95 28.27411 27.16158 27.82758
96 33.10577 32.32378 32.78845
97 41.68476 41.21204 41.45783
98 58.01259 57.81394 57.95663
99 90.90909 90.90909 90.90909
</TABLE>
These Monthly Deductions are deducted proportionately from
the value of each funding option. This is accomplished for
the Sub-Accounts by canceling Accumulation Units and
withdrawing the value of the canceled Accumulation Units
from each funding option in the same proportion as their
respective values have to the Net Accumulation Value. The
Monthly Deductions are made on the Monthly Anniversary Day.
19
<PAGE>
If the Insured is still living at age 100 and the Policy has
not been surrendered, no further Monthly Deductions are
taken and any Variable Account Value is transferred to the
Fixed Account. The Policy will then remain in force until
surrender or the Insured's death.
TRANSACTION FEE FOR EXCESS TRANSFERS
There will be a $25 transaction fee for each transfer
between funding options in excess of 12 during any Policy
Year.
MORTALITY AND EXPENSE RISK CHARGE
For mortality and expense risks, a daily deduction,
currently equivalent to .80% per year during the first
twelve Policy Years and .55% per year thereafter, is made
from amounts held in the Variable Account. This deduction is
guaranteed not to exceed .90% per year.
SURRENDER CHARGE
Upon surrender of a Policy, a surrender charge may apply, as
described below. This charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs.
The initial Surrender Charge, as specified in the Policy, is
based on the Initial Specified Amount and the amount of
Premium Payments during the first two Policy Years. Once
determined, the Surrender Charge will remain the same dollar
amount during the third through fifth Policy Years.
Thereafter, it declines monthly at a rate of 20% per year so
that after the end of the tenth Policy Year (assuming no
increases in the Specified Amount) the Surrender Charge will
be zero. Thus, the Surrender Charge at the end of the sixth
Policy Year would be 80% of the Surrender Charge at the end
of the fifth Policy Year, at the end of the seventh Policy
Year would be 60% of the Surrender Charge at the end of the
fifth Policy Year, and so forth. However, in no event will
the Surrender Charge exceed the maximum allowed by state or
federal law.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new policy whose
Specified Amount was equal to the amount of the increase. As
of the date of this Prospectus, the minimum allowable
increase in Specified Amount is $1,000. The Company may
change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 is imposed, allocated pro-rata
among the Sub-Accounts (and, where applicable, the Fixed
Account) from which the partial surrender proceeds are taken
unless the Owner instructs the Company otherwise.
The portion of the Surrender Charge applied to reimburse the
Company for sales and promotional expense is at most 28.5%
of the sum of Premium Payments in the first two Policy Years
up to one Guideline Annual Premium, plus 8.5% of Premium
Payments in the first two Policy Years between one and two
times one Guideline Annual Premium plus 7.5% of Premium
Payments in the first two Policy Years in excess of two
times one Guideline Annual Premium. The portion applicable
to administrative expense is $6.00 per $1,000 of Initial
Specified Amount. Under certain circumstances involving the
payment of very large premiums during the first two Policy
Years, a lesser portion of the Surrender Charge will be
applied to reimburse the Company for sales and promotional
expense, to the extent required by federal or state law. Any
surrenders may result in tax implications. See "Tax
Matters".
20
<PAGE>
Based on its actuarial determination, the Company does not
anticipate that the Surrender Charge will cover all sales
and administrative expenses which the Company will incur in
connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution
expenses, would be available for recovery from the General
Account of the Company, which supports insurance and annuity
obligations.
THE FIXED
ACCOUNT
The Fixed Account is funded by the assets of the Company's
General Account. Amounts held in the Fixed Account are
guaranteed and will be credited with interest at rates as
determined from time to time by the Company, but not less
than 4% per year.
THE FIXED ACCOUNT IS MADE UP OF THE GENERAL ASSETS OF THE
COMPANY OTHER THAN THOSE ALLOCATED TO ANY SEPARATE ACCOUNT.
THE FIXED ACCOUNT IS PART OF THE COMPANY'S GENERAL ACCOUNT.
BECAUSE OF APPLICABLE EXEMPTIVE AND EXCLUSIONARY PROVISIONS,
INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT"), AND
NEITHER THE FIXED ACCOUNT NOR THE COMPANY'S GENERAL ACCOUNT
HAS BEEN REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE "1940 ACT"). THEREFORE, NEITHER THE FIXED ACCOUNT NOR
ANY INTEREST THEREIN IS GENERALLY SUBJECT TO REGULATION
UNDER THE PROVISIONS OF THE 1933 ACT OR THE 1940 ACT.
ACCORDINGLY, THE COMPANY HAS BEEN ADVISED THAT THE STAFF OF
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE
DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT.
POLICY VALUES
ACCUMULATION VALUE
Once a Policy has been issued, each Net Premium Payment
allocated to a Sub-Account of the Variable Account is
credited in the form of Accumulation Units, representing the
Fund in which assets of that Sub-Account are invested. Each
Net Premium Payment will be credited to the Policy as of the
end of the Valuation Period in which it is received at the
Variable Products Service Center (or portion thereof
allocated to a particular Sub-Account). The number of
Accumulation Units credited is determined by dividing the
Net Premium Payment by the value of an Accumulation Unit
next computed after receipt. Since each Sub-Account has a
unique Accumulation Unit value, a Policy Owner who has
elected a combination of funding options will have
Accumulation Units credited from more than one source.
The Accumulation Value of a Policy is determined by: (a)
multiplying the total number of Accumulation Units credited
to the Policy for each applicable Sub-Account by its
appropriate current Accumulation Unit value; (b) if a
combination of Sub-Accounts is elected, totaling the
resulting values; and (c) adding any values attributable to
the General Account (i.e., the Fixed Account Value and the
Loan Account Value).
The number of Accumulation Units credited to a Policy will
not be changed by any subsequent change in the value of an
Accumulation Unit. Such value may vary from Valuation Period
to Valuation Period to reflect the investment experience of
the Fund used in a particular Sub-Account.
The Fixed Account Value reflects amounts allocated to the
General Account through payment of premiums or transfers
from the Variable Account. The Fixed Account Value is
guaranteed; however, there is no assurance that the Variable
Account Value of the Policy will equal or exceed the Net
Premium Payments allocated to the Variable Account.
21
<PAGE>
Each Policy Owner will be advised at least annually as to
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Variable Account Value, the Fixed Account Value and the Loan
Account Value.
Accumulation Value will be affected by Monthly Deductions.
VARIABLE ACCUMULATION UNIT VALUE
The value of a Variable Accumulation Unit for any Valuation
Period is determined by multiplying the value of that
Variable Accumulation Unit for the immediately preceding
Valuation Period by the Net Investment Factor for the
current period for the appropriate Sub-Account. The Net
Investment Factor is determined separately for each
Sub-Account by dividing (a) by (b) and subtracting (c) from
the results where (a) equals the net asset value per share
of the Fund held in the Sub-Account at the end of a
Valuation Period plus the per share amount of any
distribution declared by the Fund if the "ex-dividend" date
is during the Valuation Period plus or minus taxes or
provisions for taxes, if any, attributable to the operation
of the Sub-Account during the Valuation Period; (b) equals
the net asset value per share of the Fund held in the
Sub-Account at the beginning of that Valuation Period, and
(c) is the daily charge for mortality and expense risk
multiplied by the number of days in the Valuation Period.
SURRENDER VALUE
The Surrender Value of a Policy is the amount the Owner can
receive in cash by surrendering the Policy. All or part of
the Surrender Value may be applied to one or more of the
Settlement Options. See "Surrender Charge."
SURRENDERS
PARTIAL SURRENDERS
A partial surrender may be made at any time by written
request to the Variable Products Service Center during the
lifetime of the Insured and while the Policy is in force.
Such request may also be made by telephone if telephone
transfers have been previously authorized in writing. A $25
transaction fee is charged.
The amount of a partial surrender may not exceed 90% of the
Surrender Value at the end of the Valuation Period in which
the election becomes or would become effective, and may not
be less than $500.
For an Option 1 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value, Death Benefit,
and Specified Amount. The Specified Amount and Accumulation
Value will be reduced by equal amounts and will reduce any
past increases in the reverse order in which they occurred.
For an Option 2 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value and the Death
Benefit, but it will not reduce the Specified Amount.
The Specified Amount remaining in force after a partial
surrender may not be less than $100,000. Any request for a
partial surrender that would reduce the Specified Amount
below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding
decrease in the Specified Amount, the Policy would not
comply with the maximum premium limitations required by
federal tax law, the decrease may be limited to the extent
necessary to meet the federal tax law requirements.
22
<PAGE>
If, at the time of a partial surrender, the Net Accumulation
Value is attributable to more than one funding option, the
$25 transaction charge and the amount paid upon the
surrender will be taken proportionately from the values in
each funding option, unless the Policy Owner and the Company
agree otherwise.
FULL SURRENDERS
A full surrender may be made at any time. The Company will
pay the Surrender Value next computed after receiving the
Owner's written request at the Variable Products Service
Center in a form satisfactory to the Company. Payment of any
amount from the Variable Account on a full surrender will
usually be made within seven calendar days thereafter.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of the surrendered amount from the Variable Account
may be postponed when the New York Stock Exchange is closed
and for such other periods as the Commission may require.
Payment or transfer from the Fixed Account may be deferred
up to six months at the Company's option. If the Company
exercises its right to defer such payments or transfers
interest will be added as required by law.
LAPSE AND
REINSTATEMENT
LAPSE OF A POLICY; EFFECT OF GUARANTEED DEATH BENEFIT
PROVISION
A Policy will not lapse during the five-year period after
its Issue Date regardless of investment performance if, on
each Monthly Anniversary Day within that period the sum of
premiums paid equals or exceeds the required amount of the
Guaranteed Initial Death Benefit Premium for that period,
assuming there have been no loans or partial surrenders. If
there have been any loans or partial surrenders, the Policy
may lapse unless there is sufficient Surrender Value to
cover the Monthly Deduction.
After the five-year period expires, and depending on the
investment performance of the funding options, the
Accumulation Value may be insufficient to keep this Policy
in force, and payment of an additional premium may be
necessary.
A lapse occurs if a Monthly Deduction is greater than the
Surrender Value and no payment to cover the Monthly
Deduction is made within the Grace Period. The Company will
send the Owner a lapse notice at least 31 days before the
Grace Period expires.
REINSTATEMENT OF A LAPSED POLICY
The Owner can apply for reinstatement at any time during the
Insured's lifetime. To reinstate a Policy, the Company will
require satisfactory evidence of insurability and an amount
sufficient to pay for the current Monthly Deduction plus two
additional Monthly Deductions.
If the Policy is reinstated within five years of the Issue
Date, all values including the Loan Account Value will be
reinstated to the point they were on the date of lapse.
However, the Guaranteed Initial Death Benefit Option will
not be reinstated.
23
<PAGE>
If the Policy is reinstated after five years following the
Issue Date, it will be reinstated on the Monthly Anniversary
Day following the Company approval. The Accumulation Value
at reinstatement will be the Net Premium Payment then made
less the Monthly Deduction due that day.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
POLICY LOANS
A Policy loan requires that a loan agreement be executed and
that the Policy be assigned to the Company. The loan may be
for any amount up to 100% of the Surrender Value; however,
the Company may limit the amount of such loan so that total
Policy indebtedness will not exceed 90% of an amount equal
to the Accumulation Value less the Surrender Charge which
would be imposed on a full surrender. The amount of a loan,
together with subsequent accrued but not paid interest on
the loan, becomes part of the Loan Account Value. If Policy
values are held in more than one funding option, withdrawals
from each funding option will be made in proportion to the
assets in each funding option at the time of the loan for
transfer to the Loan Account, unless the Company is
instructed otherwise in writing at the Variable Products
Service Center.
Interest on loans will accrue at an annual rate of 8%, and
net loan interest (interest charged less interest credited
as described below) is payable once a year in arrears on
each anniversary of the loan, or earlier upon full surrender
or other payment of proceeds of a Policy. Any interest not
paid when due becomes part of the loan and the net interest
will be withdrawn proportionately from the values in each
funding option.
The Company will credit interest on the Loan Account Value.
During the first ten Policy Years, the Company's current
practice is that interest will be credited at an annual rate
equal to the interest rate charged on the loan minus 1%
(guaranteed not to exceed 2%). Beginning with the eleventh
Policy Year, the Company's current practice is that interest
will be credited at an annual rate equal to the interest
rate charged on the loan, less .50% annually (guaranteed not
to exceed 1%). In no case will the annual credited interest
rate be less than 6% in each of the first ten Policy Years
and 7% thereafter.
Repayments on the loan will be allocated among the funding
options according to current Net Premium Payment
allocations. The Loan Account Value will be reduced by the
amount of any loan repayment.
A Policy loan, whether or not repaid, will affect the
proceeds payable upon the Insured's death and the
Accumulation Value because the investment results of the
Variable Account or the Fixed Account will apply only to the
non-loaned portion of the Accumulation Value. The longer a
loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the Variable Account
or the Fixed Account while the loan is outstanding, the
effect could be favorable or unfavorable.
SETTLEMENT OPTIONS
Proceeds in the form of Settlement Options are payable by
the Company at the Beneficiary's election upon the Insured's
death, or while the Insured is alive upon election by the
Owner of one of the Settlement Options.
A written request may be made to elect, change, or revoke a
Settlement Option before payments begin under any Settlement
Option. This request must be in form satisfactory to the
Company, and will take effect upon its receipt at the
Variable Products Service Center. Payments after the first
payment will be made on the first day of each month.
FIRST OPTION -- Payments for the lifetime of the payee.
24
<PAGE>
SECOND OPTION -- Payments for the lifetime of the payee,
guaranteed for 60, 120, 180, or 240 months;
THIRD OPTION -- Payment for a stated number of years, at
least five but no more than thirty;
FOURTH OPTION -- Payment of interest annually on the sum
left with the Company at a rate of at least 3% per year, and
upon the payee's death the amount on deposit will be paid.
ADDITIONAL OPTIONS -- Policy proceeds may also be settled
under any other method of settlement offered by the Company
at the time the request is made.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only where the
Insured is below the age of 80.
SHORT-TERM RIGHT TO CANCEL THE POLICY
A Policy may be returned for cancellation and a full refund
of premium within 10 days after the Policy is received,
unless otherwise stipulated by state law requirements,
within 10 days after the Company mails or personally
delivers a Notice of Withdrawal Right to the Owner, or
within 45 days after the application for the Policy is
signed, whichever occurs latest. The Initial Premium Payment
made when the Policy is issued will be held in the Fixed
Account and not allocated to the Variable Account even if
the Policy Owner may have so directed until three business
days following the expiration of the Right-to-Examine
Period. If the Policy is returned for cancellation in a
timely fashion, the refund of premiums paid, without
interest, will usually occur within seven days of notice of
cancellation, although a refund of premiums paid by check
may be delayed until the check clears.
POLICY OWNER
While the Insured is living, all rights in this Policy are
vested in the Policy Owner named in the application or as
subsequently changed, subject to assignment, if any.
The Policy Owner may name a new Policy Owner while the
Insured is living. Any such change in ownership must be in a
written form satisfactory to the Company and recorded at the
Variable Products Service Center. Once recorded, the change
will be effective as of the date signed; however, the change
will not affect any payment made or action taken by the
Company before it was recorded. The Company may require that
the Policy be submitted for endorsement before making a
change.
If the Policy Owner is other than the Insured, names no
contingent Policy Owner and dies before the Insured, the
Policy Owner's rights in this Policy belong to the Policy
Owner's estate.
BENEFICIARY
The Beneficiary(ies) shall be as named in the application or
as subsequently changed, subject to assignment, if any.
The Policy Owner may name a new Beneficiary while the
Insured is living. Any change must be in a written form
satisfactory to the Company and recorded at the Variable
Products Service Center. Once recorded, the change will be
effective as of the date signed; however, the change will
not affect any payment made or action taken by the Company
before it was recorded.
25
<PAGE>
If any Beneficiary predeceases the Insured, that
Beneficiary's interest passes to any surviving
Beneficiary(ies), unless otherwise provided. Multiple
Beneficiaries will be paid in equal shares, unless otherwise
provided. If no named Beneficiary survives the Insured, the
death proceeds shall be paid to the Policy Owner or the
Policy Owner's executor(s), administrator(s) or assigns.
ASSIGNMENT
While the Insured is living, the Policy Owner may assign his
or her rights in the Policy. The assignment must be in
writing, signed by the Policy Owner and recorded at the
Variable Products Service Center. No assignment will affect
any payment made or action taken by the Company before it
was recorded. The Company is not responsible for any
assignment not submitted for recording, nor is the Company
responsible for the sufficiency or validity of any
assignment. The assignment will be subject to any
indebtedness owed to the Company before it was recorded.
RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY
The Policy Owner may, within the first two Policy Years,
exchange the Policy for a permanent life insurance policy
then being offered by the Company. The benefits for the new
policy will not vary with the investment experience of a
separate account. The exchange must be elected within 24
months from the Issue Date. No evidence of insurability will
be required.
The Policy Owner, the Insured and the Beneficiary under the
new policy will be the same as those under the exchanged
Policy on the effective date of the exchange. The new policy
will have a Death Benefit on the exchange date not more than
the Death Benefit of the original Policy immediately prior
to the exchange date. The new policy will have the same
Issue Date and Issue Age as the original Policy. The initial
Specified Amount and any increases in Specified Amount will
have the same rate class as those of the original Policy.
Any indebtedness may be transferred to the new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed the Policy Owner, the Company will pay
the excess to the Policy Owner in cash. The exchange may be
subject to federal income tax withholding.
INCONTESTABILITY
The Company will not contest payment of the death proceeds
based on the Initial Specified Amount after the Policy has
been in force during the Insured's lifetime for two years
from the Issue Date. For any increase in Specified Amount
requiring evidence of insurability, the Company will not
contest payment of the death proceeds based on such an
increase after it has been in force during the Insured's
lifetime for two years from its effective date.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the
affected benefits will be adjusted. The amount of the Death
Benefit will be 1. multiplied by 2. and then the result
added to 3. where:
1. is the Net Amount at Risk at the time of the Insured's
death;
2. is the ratio of the monthly cost of insurance applied
in the policy month of death to the monthly cost of
insurance that should have been applied at the true age
and sex in the policy month of death; and
3. is the Accumulation Value at the time of the Insured's
death.
26
<PAGE>
SUICIDE
If the Insured dies by suicide, while sane or insane, within
two years from the Issue Date, the Company will pay no more
than the sum of the premiums paid, less any indebtedness. If
the Insured dies by suicide, while sane or insane, within
two years from the date an application is accepted for an
increase in the Specified Amount, the Company will pay no
more than a refund of the monthly charges for the cost of
such additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of the Company.
TAX MATTERS
POLICY PROCEEDS
Section 7702 of the Code provides that if certain tests are
met, a Policy will be treated as a life insurance policy for
federal tax purposes. The Company will monitor compliance
with these tests. The Policy should thus receive the same
federal income tax treatment as fixed benefit life
insurance. As a result, the death proceeds payable under a
Policy are excludable from gross income of the Beneficiary
under Section 101 of the Code.
Section 7702A of the Code defines modified endowment
contracts as those policies issued or materially changed on
or after June 21, 1988 on which the total premiums paid
during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits
after seven level annual premiums. The Code provides for
taxation of surrenders, partial surrenders, loans,
collateral assignments and other pre-death distributions
from modified endowment contracts in the same way annuities
are taxed. Modified endowment contract distributions are
defined by the Code as amounts not received as an annuity
and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into
the policy. A 10% tax penalty generally applies to the
taxable portion of such distributions unless the Policy
Owner is over age 59 1/2 or disabled.
It may not be advantageous to replace existing insurance
with Policies described in this Prospectus. It may also be
disadvantageous to purchase a Policy to obtain additional
insurance protection if the purchaser already owns another
variable life insurance policy.
The Policies offered by this Prospectus may or may not be
issued as modified endowment contracts. The Company will
monitor premiums paid and will notify the Policy Owner when
the Policy's non-modified endowment contract status is in
jeopardy. If a Policy is not a modified endowment contract,
a cash distribution during the first 15 years after a policy
is issued which causes a reduction in death benefits may
still become fully or partially taxable to the Owner
pursuant to Section 7702(f)(7) of the Code. The Policy Owner
should carefully consider this potential effect and seek
further information before initiating any changes in the
terms of the Policy. Under certain conditions, a Policy may
become a modified endowment contract as a result of a
material change or a reduction in benefits as defined by
Section 7702A(c) of the Code.
In addition to meeting the tests required under Section 7702
and Section 7702A, Section 817(h) of the Code requires that
the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the
Secretary of the Treasury set the standards for measuring
the adequacy of this diversification. A variable life
insurance policy that is not adequately diversified under
these regulations
27
<PAGE>
would not be treated as life insurance under Section 7702 of
the Code. To be adequately diversified, each Sub-Account of
the Variable Account must meet certain tests. The Company
believes the Variable Account investments meet the
applicable diversification standards.
Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code,
the Company will take whatever steps are available to remain
in compliance.
The Company will monitor compliance with these regulations
and, to the extent necessary, will change the objectives or
assets of the Sub-Account investments to remain in
compliance.
A total surrender or termination of the Policy by lapse may
have adverse tax consequences. If the amount received by the
Policy Owner plus total Policy indebtedness exceeds the
premiums paid into the Policy, the excess will generally be
treated as taxable income, regardless of whether or not the
Policy is a modified endowment contract.
Federal estate and state and local estate, inheritance and
other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Policy Owner or
Beneficiary.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the
Code. Since the Variable Account is not a separate entity
from the Company and its operations form a part of the
Company, it will not be taxed separately as a "regulated
investment company" under Sub-chapter M of the Code.
Investment income and realized capital gains on the assets
of the Variable Account are reinvested and taken into
account in determining the value of Accumulation Units.
The Company does not initially expect to incur any Federal
income tax liability that would be chargeable to the
Variable Account. Based upon these expectations, no charge
is currently being made against the Variable Account for
federal income taxes. If, however, the Company determines
that on a separate company basis such taxes may be incurred,
it reserves the right to assess a charge for such taxes
against the Variable Account.
The Company may also incur state and local taxes in addition
to premium taxes in several states. At present, these taxes
are not significant. If they increase, however, additional
charges for such taxes may be made.
SECTION 848 CHARGES
The 5.0% premium load is assessed to cover state taxes,
federal income tax liabilities and a portion of the sales
expenses incurred by the Company. This load is made up of
2.35% for state taxes, 1.15% for the additional federal
income tax burden under Section 848 of the Code relating to
the tax treatment of deferred acquisition costs and a 1.5%
sales load. The 1.15% charge for federal income tax
liabilities is reasonable in relation to the Company's
increased taxes under this Section of the Code.
OTHER CONSIDERATIONS
The foregoing discussion is general and is not intended as
tax advice. Counsel and other competent advisers should be
consulted for more complete information. This
28
<PAGE>
discussion is based on the Company's understanding of
Federal income tax laws as they are currently interpreted by
the Internal Revenue Service. No representation is made as
to the likelihood of continuation of these current laws and
interpretations.
OTHER MATTERS
DIRECTORS AND OFFICERS OF THE COMPANY
The following persons are Directors and officers of the
Company. The address of each is 900 Cottage Grove Road,
Hartford, CT 06152 and each has been employed by the Company
or its affiliates for more than five years except Mr.
Alexander and Dr. Schaffer. Prior to December 1994, Mr.
Alexander was Director, Human Development E.I. Dupont De
Nemours, Inc. Prior to May 1993, Dr. Schaffer was Vice
President, Professional Affairs, Aetna Health Plans, Aetna
Life & Casualty and until 1990 was Vice President, Quality
Management, Humana, Inc.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE COMPANY
- ------------------------------ -----------------------------------
<S> <C>
Thomas Jones President
(Principal Executive Officer)
James T. Kohan Vice President and Actuary
(Principal Financial Officer)
Robert Moose Vice President
(Principal Accounting Officer)
David C. Kopp Corporate Secretary
Andrew G. Helming Secretary
Stephen C. Stachelek Vice President and Treasurer
Harold W. Albert Director
Martin A. Brennan Director and Senior Vice President
Robert W. Burgess Director
John G. Day Director and Chief Counsel
Lawrence P. English Director and Chairman of the Board
S. Tyrone Alexander Director and Senior Vice President
Joseph M. Fitzgerald Director and Senior Vice President
Arthur C. Reeds, III Director and Senior Vice President
Patricia L. Rowland Director and Senior Vice President
W. Allen Schaffer, M.D. Director and Senior Vice President
John Wilkinson Director, Senior Vice President and
Chief Financial Officer
</TABLE>
DISTRIBUTION OF POLICIES
The Policies will be sold by licensed insurance agents in
those states where the Policies may lawfully be sold. Such
agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers,
Inc. (NASD). The Policies will be distributed by the
Company's principal underwriter, CIGNA Financial Advisors,
Inc. ("CFA"), whose address is the same as the Company's.
CFA is a Connecticut corporation organized in 1967, and is
the principal underwriter for the Company's other registered
separate accounts and for a registered separate account of
CIGNA Life Insurance Company, a wholly-owned subsidiary of
the Company.
29
<PAGE>
Gross first year commissions paid by the Company, including
expense reimbursement allowances, on the sale of these
Policies are not more than 112.5% of Premium Payments. Gross
renewal commissions paid by the Company will not exceed
5.625% of Premium Payments.
CHANGES OF INVESTMENT POLICY
The Company may materially change the investment policy of
the Variable Account. The Company must inform the Policy
Owners and obtain all necessary regulatory approvals. Any
change must be submitted to the various state insurance
departments which shall disapprove it if deemed detrimental
to the interests of the Policy Owners or if it renders the
Company's operations hazardous to the public. If a Policy
Owner objects, the Policy may be converted to a
substantially comparable fixed benefit life insurance policy
offered by the Company on the life of the Insured. The
Policy Owner has the later of 60 days (6 months in
Pennsylvania) from the date of the investment policy change
or 60 days (6 months in Pennsylvania) from being informed of
such change to make this conversion. The Company will not
require evidence of insurability for this conversion.
The new policy will not be affected by the investment
experience of any separate account. The new policy will be
for an amount of insurance not exceeding the Death Benefit
of the Policy converted on the date of such conversion.
OTHER CONTRACTS ISSUED BY THE COMPANY
The Company does presently and will, from time to time,
offer other variable annuity contracts and variable life
insurance policies with benefits which vary in accordance
with the investment experience of a separate account of the
Company.
STATE REGULATION
The Company is subject to the laws of Connecticut governing
insurance companies and to regulation by the Connecticut
Insurance Department. An annual statement in a prescribed
form is filed with the Insurance Department each year
covering the operation of the Company for the preceding year
and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine the Company's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. The Company's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its operations is conducted
periodically by the Connecticut Department of Insurance.
Such regulation does not, however, involve any supervision
of management or investment practices or policies.
REPORTS TO POLICY OWNERS
The Company maintains Policy records and will mail to each
Policy Owner, at the last known address of record, an annual
statement showing the amount of the current death benefit,
the Accumulation Value, and Surrender Value, premiums paid
and monthly charges deducted since the last report, the
amounts invested in the Fixed Account and in the Variable
Account and in each Sub-Account of the Variable Account, and
any Loan Account Value.
Policy Owners will also be sent annual and semi-annual
reports containing financial statements for the Variable
Account as required by the 1940 Act.
In addition, Policy Owners will receive statements of
significant transactions, such as changes in Specified
Amount, changes in Death Benefit Option, changes in future
premium allocation, transfers among Sub-Accounts, Premium
Payments, loans, loan repayments, reinstatement and
termination.
30
<PAGE>
ADVERTISING
The Company is also ranked and rated by independent
financial rating services, including Moody's, Standard &
Poor's, Duff & Phelps and A.M. Best Company. The purpose of
these ratings is to reflect the financial strength or
claims-paying ability of the Company. The ratings are not
intended to reflect the investment experience or financial
strength of the Variable Account. The Company may advertise
these ratings from time to time. In addition, the Company
may include in certain advertisements, endorsements in the
form of a list of organizations, individuals or other
parties which recommend the Company or the Policies.
Furthermore, the Company may occasionally include in
advertisements comparisons of currently taxable and tax
deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
LEGAL PROCEEDINGS
There are no material legal or administrative proceedings
pending or known to be contemplated, other than ordinary
routine litigation incidental to the business, to which the
Company and the Variable Account are parties or to which any
of their property is subject. The principal underwriter,
CFA, is not engaged in any material litigation of any
nature.
EXPERTS
Actuarial opinions regarding Deferred Acquisition Cost Tax
(DAC Tax) and Mortality and Expense Charges included in this
Prospectus have been rendered by Michelle L. Kunzman, as
stated in the opinion filed as an Exhibit to the
Registration Statement given on the authority of Ms. Kunzman
as an expert in actuarial matters.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
Chief Counsel, CIGNA Individual Insurance, 900 Cottage Grove
Road, Hartford, CT 06152, in the opinion filed as an Exhibit
to the Registration Statement given on his authority as an
expert in these matters.
The consolidated financial statements of Connecticut General
Life Insurance Company as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31,
1994 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts
in auditing and accounting.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Variable Account, the Company, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
FIVE PERCENT OWNERS
CIGNA Corporation has no information that any person or
concern beneficially owns more than five percent of the
outstanding Common Stock, except as reported on three
Schedules 13G received in February 1995. Vanguard Windsor
Fund, Inc. ("Windsor"), Vanguard Financial Center, Valley
Forge, Pennsylvania 19482, reported sole voting power and
shared dispositive power as to 6,268,500 shares of Common
Stock, or 8.68% of the outstanding Common Stock as of
December 31, 1994. Also, Wellington
31
<PAGE>
Management Company ("Wellington"), 75 State Street, Boston,
Massachusetts 02109, in its capacity as investment advisor
to Windsor and other investment advisory clients, reported
shared dispositive power as to 7,136,400 shares (which
includes the shares reported by Windsor), or 9.88% of the
outstanding Common Stock as of December 31, 1994, and shared
voting power as to 301,200 of these shares. Finally, Sanford
C. Bernstein & Co., Inc. ("Bernstein"), One State Street
Plaza, New York, New York 10004, reported sole dispositive
power as to 5,788,890 of such shares, or 8.02% of the
outstanding Common Stock as of December 31, 1994 and sole
voting power as to 2,952,350 of these shares of Common Stock
as of December 31, 1994.
FINANCIAL STATEMENTS
There follow consolidated balance sheets of the Company and
its subsidiaries as of December 31, 1994 and 1993 and
related consolidated statements of income and retained
earnings and cash flows for the years ended December 31,
1994, 1993 and 1992.
The most current financial statements of the Company are
those as of the end of the most recent fiscal year. The
Company does not prepare financial statements more often
than annually and believes that any incremental benefit to
prospective Policy Owners that may result from preparing and
delivering more current financial statements, though
unaudited, does not justify the additional cost that would
be incurred. In addition, the Company represents that there
have been no adverse changes in the financial condition or
operations of the Company between the end of 1994 and the
date of this Prospectus.
These financial statements should be considered only as
bearing upon the ability of the Company to meet its
obligations under the Policies. No financial statements of
the Variable Account are included, because as of the date of
this Prospectus the Variable Account had not yet commenced
operations.
32
<PAGE>
NORTHEAST INSURANCE SERVICES Telephone 203 240 2000
One Financial Plaza Facsimile 203 249 0457
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 13, 1995
The Board of Directors and Shareholder
Connecticut General Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Connecticut
General Life Insurance Company and its subsidiaries at December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The Company implemented certain new accounting pronouncements as discussed in
Note 1 to the consolidated financial statements.
[SIG]
33
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 4,960 $ 4,704 $ 4,541
Net investment income............................................... 2,805 2,742 2,649
Realized investment gains (losses).................................. 27 (65) (13)
Other revenues...................................................... 8 15 20
--------- --------- ---------
Total revenues.................................................. 7,800 7,396 7,197
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 5,574 5,215 5,168
Policy acquisition expenses......................................... 89 84 75
Other operating expenses............................................ 1,363 1,351 1,368
--------- --------- ---------
Total benefits, losses and expenses............................. 7,026 6,650 6,611
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES........................................................... 774 746 586
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 220 433 131
Deferred.......................................................... 45 (197) (61)
--------- --------- ---------
Total taxes..................................................... 265 236 70
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES............... 509 510 516
Cumulative effect of accounting changes for postemployment and
postretirement benefits other than pensions, net of taxes......... -- -- (270)
Cumulative effect of accounting change for income taxes............. -- -- 105
--------- --------- ---------
NET INCOME.......................................................... 509 510 351
Dividends declared.................................................. (300) (190) (165)
Retained earnings, beginning of year................................ 2,759 2,439 2,253
--------- --------- ---------
RETAINED EARNINGS, END OF YEAR...................................... $ 2,968 $ 2,759 $ 2,439
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
34
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value, $10,075; $11,158).... $ 10,061 $ 9,950
Available for sale, at fair value (amortized cost, $8,571; $8,187).... 8,324 9,145
Mortgage loans.......................................................... 8,975 8,854
Equity securities, at fair value (cost, $109; $121)..................... 119 120
Policy loans............................................................ 5,237 3,623
Real estate............................................................. 1,442 1,484
Other long-term investments............................................. 128 94
Short-term investments.................................................. 143 96
--------- ---------
Total investments................................................... 34,429 33,366
Cash and cash equivalents................................................. 80 --
Accrued investment income................................................. 578 504
Premiums and accounts receivable.......................................... 911 1,021
Reinsurance recoverables.................................................. 2,533 2,815
Deferred policy acquisition costs......................................... 700 623
Property and equipment, net............................................... 346 364
Current income taxes...................................................... 119 --
Deferred income taxes, net................................................ 661 434
Goodwill.................................................................. 518 532
Other assets.............................................................. 135 203
Separate account assets................................................... 14,498 13,620
- ------------------------------------------------------------------------------------------------
Total............................................................... $ 55,508 $ 53,482
- ------------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 26,696 $ 25,054
Future policy benefits.................................................... 7,875 7,915
Unpaid claims and claim expenses.......................................... 1,096 1,210
Unearned premiums......................................................... 84 86
--------- ---------
Total insurance and contractholder liabilities...................... 35,751 34,265
Accounts payable, accrued expenses and other liabilities.................. 1,632 1,539
Current income taxes...................................................... -- 76
Separate account liabilities.............................................. 14,427 13,618
- ------------------------------------------------------------------------------------------------
Total liabilities................................................... 51,810 49,498
- ------------------------------------------------------------------------------------------------
--------------------
CONTINGENCIES -- NOTE 9
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 764 764
Net unrealized appreciation (depreciation) on investments................. (66) 428
Net translation of foreign currencies..................................... 2 3
Retained earnings......................................................... 2,968 2,759
- ------------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 3,698 3,984
- ------------------------------------------------------------------------------------------------
Total............................................................... $ 55,508 $ 53,482
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of accounting changes............. $ 509 $ 510 $ 516
Adjustments to reconcile income before cumulative effect of
accounting changes to net cash provided by (used in) operating
activities:
Insurance liabilities........................................... (249) 251 (360)
Reinsurance recoverables........................................ 282 (392) 128
Premiums and accounts receivable................................ (188) 85 199
Deferred income taxes, net...................................... 45 (197) (61)
Other assets.................................................... 68 54 (72)
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... (192) 5 43
Other, net...................................................... (24) (82) (68)
--------- --------- ---------
Net cash provided by operating activities..................... 251 234 325
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities -- available for sale.......................... 1,389 -- --
Fixed maturities -- held to maturity............................ 12 599 595
Mortgage loans.................................................. 496 1,004 362
Equity securities............................................... 41 41 14
Other (primarily short-term investments)........................ 1,247 3,840 2,340
Investment maturities and repayments:
Fixed maturities -- available for sale.......................... 686 -- --
Fixed maturities -- held to maturity............................ 1,764 3,167 2,972
Mortgage loans.................................................. 194 202 266
Investments purchased:
Fixed maturities -- available for sale.......................... (2,390) -- --
Fixed maturities -- held to maturity............................ (1,788) (5,128) (4,834)
Mortgage loans.................................................. (882) (823) (795)
Equity securities............................................... (12) (112) (35)
Policy loans.................................................... (1,614) (1,561) (434)
Other (primarily short-term investments)........................ (1,093) (3,587) (2,176)
Other, net........................................................ (129) (48) (68)
--------- --------- ---------
Net cash used in investing activities......................... (2,079) (2,406) (1,793)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds.... 6,388 7,537 5,294
Withdrawals from contractholder deposit funds..................... (4,216) (5,166) (4,073)
Dividends paid to Parent.......................................... (300) (190) (165)
Other, net........................................................ 36 (30) (47)
--------- --------- ---------
Net cash provided by financing activities................... 1,908 2,151 1,009
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents.............. 80 (21) (459)
Cash and cash equivalents, beginning of year...................... -- 21 480
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ 80 $ -- $ 21
- ---------------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 411 $ 352 $ 301
Interest paid................................................... $ 5 $ 5 $ 3
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Connecticut General Life Insurance Company (the Company) and its
wholly-owned subsidiaries, CIGNA Life Insurance Company, ICO, Inc., and First
Equicor Life Insurance Company (FELIC). During 1994, the Company sold FELIC, the
effects of which were not material to the financial statements. The Company is a
wholly-owned subsidiary of Connecticut General Corporation (the Parent), which
is an indirect wholly-owned subsidiary of CIGNA Corporation (CIGNA). These
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain reclassifications have been
made to prior years' amounts to conform with the 1994 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1993, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that
debt and equity securities be classified into different categories and carried
at fair value if they are not classified as held to maturity. SFAS No. 115 does
not permit retroactive application of its provisions. The effect of implementing
SFAS No. 115 as of December 31, 1993 resulted in an increase in investment
assets of $958 million and an increase in shareholder's equity of $443 million
resulting from the classification of certain fixed maturities previously carried
at amortized cost to available for sale. The increase in shareholder's equity is
net of policyholder share of $277 million and deferred income taxes of $238
million. See Note 2 for additional information.
In 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which provides guidance on
the accounting and disclosure for impaired loans, and must be implemented by the
first quarter of 1995, with the cumulative effect of implementation included in
net income. In October 1994, the FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which
eliminates the income recognition requirements of SFAS No. 114. The Company will
adopt SFAS Nos. 114 and 118 in 1995. The effect on the Company's results of
operations and financial condition upon adoption is not expected to be material.
In 1992, the Company implemented SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions;" SFAS No. 109, "Accounting for
Income Taxes;" and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits." These accounting changes were implemented as of January 1, 1992
through cumulative effect adjustments. Prior year financial statements were not
restated.
The cumulative effect of implementing SFAS Nos. 106, 109 and 112 as of January
1, 1992 resulted in non-cash after-tax charges (benefit) to net income of $263
million, ($105) million and $7 million, respectively. In addition, the
implementation of SFAS No. 106 increased 1992 other operating expenses by $23
million ($15 million after-tax). The effect on income tax expense for 1992 as a
result of implementation of SFAS No. 109 was immaterial. There was no
incremental effect on 1992 net income from adopting SFAS No. 112. For additional
information on SFAS No. 109, see Note 5; for additional information on SFAS Nos.
106 and 112, see Note 6.
In 1992, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position (SOP) 92-3, "Accounting for Foreclosed
Assets," which resulted in a realized investment loss of $5 million ($3 million
after-tax).
C) FINANCIAL INSTRUMENTS: In the normal course of business, the Company
enters into transactions involving various types of financial instruments,
including investments such as fixed maturities and equity securities; and off-
balance-sheet financial instruments such as investment and loan commitments,
financial guarantees, and interest rate swap and futures contracts. These
instruments have credit risk and also may be subject to risk of loss due to
interest rate and market fluctuations. However, risk of loss due to interest
rate fluctuations is reduced through the use of certain derivative instruments.
The Company evaluates and monitors each financial instrument individually and,
where appropriate, obtains collateral or other forms of security to minimize
risk of loss.
D) INVESTMENTS: Investments in fixed maturities include bonds, asset-backed
securities, including collateralized mortgage obligations (CMOs); and redeemable
preferred stocks. Fixed maturities classified as held to maturity are
37
<PAGE>
carried at amortized cost, net of impairments, and those classified as available
for sale are carried at fair value, with unrealized appreciation or depreciation
included in Shareholder's Equity. Fixed maturities are considered impaired and
written down to fair value when a decline in value is considered to be other
than temporary.
Mortgage loans are carried principally at unpaid principal balances, net of
valuation reserves. Generally, mortgage loans are considered impaired and a
valuation reserve is established when a decline in the fair value of the
collateral below the carrying value is other than temporary.
Fixed maturities and mortgage loans that are delinquent or restructured to
modify basic financial terms, typically to reduce the interest rate and, in
certain cases, extend the term, are placed on non-accrual status, and thereafter
interest income is recognized only when payment is received.
Real estate investments are either held for the production of income or held
for sale. Real estate investments held for the production of income are carried
at depreciated cost less valuation reserves when a decline in value is other
than temporary. Depreciation is generally calculated using the straight-line
method based on the estimated useful lives of the assets. Real estate
investments held for sale are those which are acquired through the foreclosure
of mortgage loans. These assets are valued at their fair value at the time of
foreclosure. The fair value is established as the new cost basis and the asset
acquired is reclassified from mortgage loans to real estate held for sale.
Subsequent to foreclosure, these investments are carried at the lower of
depreciated cost or current fair value less estimated costs to sell. Adjustments
to the carrying value as a result of changes in fair value subsequent to
foreclosure are recorded as valuation reserves and reported in realized
investment gains and losses. The Company considers several methods in
determining fair value for real estate acquired through foreclosure, with
greater emphasis placed on the use of discounted cash flow analyses and, in some
cases, the use of third-party appraisals. Assets held for sale are depreciated
using the straight-line method based on the estimated useful lives of the
assets.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value. Short-term investments are carried at fair value,
which approximates cost. Equity securities and short-term investments are
classified as available for sale.
Policy loans are generally carried at unpaid principal balances.
Realized investment gains and losses result from sales, investment asset
write-downs and changes in valuation reserves, after deducting amounts
attributable to experience-rated pension policyholders' contracts and
participating life policies ("policyholder share"). Generally, realized
investment gains and losses are based upon specific identification of the
investment assets.
Unrealized investment gains and losses, after deducting policyholder share and
net of deferred income taxes, if applicable, for investments carried at fair
value are included in Shareholder's Equity.
See Note 2(F) for a discussion of the Company's accounting policies for
derivative financial instruments.
E) CASH AND CASH EQUIVALENTS: Short-term investments with a maturity of three
months or less at the time of purchase are reported as cash equivalents.
F) REINSURANCE RECOVERABLES: Reinsurance recoverables are estimates of
amounts to be received from reinsurers, including amounts under reinsurance
agreements with affiliated companies. Allowances are established for amounts
deemed uncollectible.
G) DEFERRED POLICY ACQUISITION COSTS: Acquisition costs consist of
commissions, premium taxes and other costs, which vary with, and are primarily
related to, the production of revenues. Group life and a portion of group health
insurance business acquisition costs are deferred and amortized over the terms
of the insurance policies. Acquisition costs related to universal life products
and contractholder deposit funds are deferred and amortized in proportion to
total estimated gross profits over the expected life of the contracts.
Acquisition costs related to annuity and other life insurance businesses are
deferred and amortized, generally in proportion to the ratio of annual revenue
to the estimated total revenues over the contract periods. Deferred acquisition
costs are reviewed to determine if they are recoverable from future income,
including investment income. If such costs are determined to be unrecoverable,
they are expensed at the time of determination.
38
<PAGE>
H) PROPERTY AND EQUIPMENT: Property and equipment are carried at cost less
accumulated depreciation. When applicable, cost includes interest and real
estate taxes incurred during construction and other construction-related costs.
Depreciation is calculated principally on the straight-line method based on the
estimated useful lives of the assets. Accumulated depreciation was $333 million
and $261 million at December 31, 1994 and 1993, respectively.
I) OTHER ASSETS: Other Assets consists of various insurance-related assets,
principally ceded unearned premiums, reinsurance deposits and other amounts due
from affiliated companies.
J) GOODWILL: Goodwill represents the excess of the cost of businesses
acquired over the fair value of their net assets. These costs are amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits expected to be derived from the acquisition. The Company evaluates the
carrying amount of goodwill by analyzing historical and expected future income
and undiscounted cash flows of the related businesses. Write-downs of goodwill
are recognized when it is determined that the amount has been impaired. Also,
amortization periods are revised if it is determined that the remaining period
of benefit of the goodwill has changed. Accumulated amortization was $70 million
and $56 million at December 31, 1994 and 1993, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value, with less than 4% carried at amortized cost, and
represent policyholder funds maintained in accounts having specific investment
objectives. The investment income, gains and losses of these accounts generally
accrue to the policyholders and, therefore, are not included in the Company's
net income.
L) CONTRACTHOLDER DEPOSIT FUNDS: Contractholder Deposit Funds are liabilities
for investment-related and universal life products which were $18.6 billion and
$8.1 billion as of December 31, 1994, respectively, compared with $19.1 billion
and $6.0 billion as of December 31, 1993, respectively. These liabilities
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality and surrender charges.
M) FUTURE POLICY BENEFITS: Future policy benefits are liabilities for life,
health and annuity products. Such liabilities are established in amounts
adequate to meet the estimated future obligations of policies in force. These
liabilities are computed using premium assumptions for group annuity policies
and the net level premium method for individual life and annuity policies, and
are based upon estimates as to future investment yield, mortality and
withdrawals that include provisions for adverse deviation. Future policy
benefits for individual life insurance and annuity policies are computed using
interest rates ranging from 2% to 11%, generally graded down after 10 to 30
years. Mortality, morbidity, and withdrawal assumptions for all policies are
based on either the Company's own experience or various actuarial tables.
N) UNPAID CLAIMS AND CLAIM EXPENSES: Liabilities for unpaid claims and claim
expenses are estimates of payments to be made on insurance claims for reported
losses and estimates of losses incurred but not reported. The Company's prior
year claims and claim adjustment expenses were not material.
O) UNEARNED PREMIUMS: Premiums for group life, and accident and health
insurance are reported as earned on a pro rata basis over the contract period.
The unexpired portion of these premiums is recorded as Unearned Premiums.
P) OTHER LIABILITIES: Other Liabilities consists principally of
postretirement and postemployment benefits and various insurance-related
liabilities, including amounts related to reinsurance contracts. Also included
in Other Liabilities are liabilities for guaranty fund assessments that can be
reasonably estimated.
Q) TRANSLATION OF FOREIGN CURRENCIES: Foreign operations primarily utilize
the local currencies as their functional currencies, and assets and liabilities
are translated at the rates of exchange as of the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing during
the year. The translation gain or loss on such functional currencies is
generally reflected in Shareholder's Equity, net of applicable taxes.
R) PREMIUM AND FEES, REVENUES AND RELATED EXPENSES: Premiums for group life
and accident and health insurance are recognized as revenue on a pro rata basis
over their contract periods. Premiums for individual life and health insurance
as well as individual and group annuity products, excluding universal life and
investment-related products, are recognized as revenue when due. Benefits,
losses and expenses are matched with premiums.
39
<PAGE>
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund values
during the period. Benefit expenses for universal life products consist of
benefit claims in excess of fund values and net investment income credited to
fund values. Revenues for investment-related products consist of net investment
income and contract charges assessed against the fund values during the period.
Benefit expenses for investment-related products primarily consist of net
investment income credited to the fund values after deduction for investment and
risk fees.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in the earnings
of the Company's business. The participating insurance in force accounted for
5.2% of total insurance in force at December 31, 1994, compared with 3.6% at
December 31, 1993 and .4% at December 31, 1992.
T) INCOME TAXES: The Company and its subsidiaries are included in the
consolidated United States federal income tax return filed by CIGNA. In
accordance with United States federal income tax consolidated return
regulations, all corporations included in a consolidated tax return are jointly
and severally liable for all tax liabilities. In accordance with a tax sharing
agreement, the provision for federal income tax is computed as if the Company
was filing a separate federal income tax return, except that benefits arising
from tax credits and net operating losses are allocated to those subsidiaries
producing such attributes only to the extent they are utilized in the
consolidated federal income tax provision.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes. These
differences result primarily from loss reserves, policy acquisition expenses,
investments, reserves for postretirement benefits and unrealized appreciation or
depreciation on investments.
NOTE 2 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$78 million and $76 million, including policyholder share, as of December 31,
1994 and 1993, respectively.
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1994 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity (Carried at Amortized Cost)
Due in one year or less.................................................. $ 201 $ 204
Due after one year through five years.................................... 2,275 2,272
Due after five years through ten years................................... 3,424 3,383
Due after ten years...................................................... 2,298 2,403
Asset-backed securities.................................................. 1,863 1,813
- ------------------------------------------------------------------------------------------------
Total.................................................................... $ 10,061 $ 10,075
- ------------------------------------------------------------------------------------------------
---------------------
Available for Sale (Carried at Fair Value)
Due in one year or less.................................................. $ 85 $ 93
Due after one year through five years.................................... 1,474 1,447
Due after five years through ten years................................... 1,769 1,681
Due after ten years...................................................... 2,290 2,250
Asset-backed securities.................................................. 2,953 2,853
- ------------------------------------------------------------------------------------------------
Total.................................................................... $ 8,571 $ 8,324
- ------------------------------------------------------------------------------------------------
---------------------
</TABLE>
Actual maturities could differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Also, the Company may extend maturities in some cases.
40
<PAGE>
As of December 31, 1994, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized Cost)
State and local government bonds................. $ 61 $ 4 $ (1) $ 64
Foreign government bonds......................... 49 1 (1) 49
Corporate securities............................. 8,088 293 (232) 8,149
Asset-backed securities.......................... 1,863 46 (96) 1,813
- --------------------------------------------------------------------------------------------------
Total............................................ $ 10,061 $ 344 $ (330) $ 10,075
- --------------------------------------------------------------------------------------------------
-----------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds......................... $ 393 $ 35 $ (13) $ 415
State and local government bonds................. 48 -- (4) 44
Foreign government bonds......................... 135 1 (6) 130
Corporate securities............................. 5,042 84 (244) 4,882
Asset-backed securities.......................... 2,953 98 (198) 2,853
- --------------------------------------------------------------------------------------------------
Total............................................ $ 8,571 $ 218 $ (465) $ 8,324
- --------------------------------------------------------------------------------------------------
-----------------------------------------------
</TABLE>
As of December 31, 1993, gross unrealized appreciation (depreciation) for
fixed maturities, including policyholder share, by type of issuer was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity (Carried at Amortized Cost)
State and local government bonds................. $ 56 $ 12 $ -- $ 68
Foreign government bonds......................... 25 2 -- 27
Corporate securities............................. 8,495 1,106 (13) 9,588
Asset-backed securities.......................... 1,374 107 (6) 1,475
- -------------------------------------------------------------------------------------------------
Total............................................ $ 9,950 $ 1,227 $ (19) $ 11,158
- -------------------------------------------------------------------------------------------------
----------------------------------------------
Available for Sale (Carried at Fair Value)
Federal government bonds......................... $ 77 $ 10 $ -- $ 87
State and local government bonds................. 43 4 -- 47
Foreign government bonds......................... 209 12 (2) 219
Corporate securities............................. 5,244 670 (28) 5,886
Asset-backed securities.......................... 2,614 311 (19) 2,906
- -------------------------------------------------------------------------------------------------
Total............................................ $ 8,187 $ 1,007 $ (49) $ 9,145
- -------------------------------------------------------------------------------------------------
----------------------------------------------
</TABLE>
At December 31, 1994, contractual fixed maturity investment commitments
approximated $226 million. The majority of investment commitments are for the
purchase of investment grade fixed maturities, bearing interest at a fixed
market rate, and require no collateral. These commitments are diversified by
issuer and maturity date, and it is estimated that the full amount will be
disbursed in 1995, with the majority occurring within the first three months.
B) SHORT-TERM INVESTMENTS: As of December 31, 1994 and 1993, short-term
investments include debt securities, principally corporate securities of $139
million and $36 million, respectively; federal government securities of $3
million and $53 million, respectively; and foreign government securities of $1
million and $7 million as of December 31, 1994 and 1993, respectively.
C) MORTGAGE LOANS AND REAL ESTATE: The Company's mortgage loans and real
estate investments are diversified by property type and location and, for
mortgage loans, by borrower. Mortgage loans are collateralized by the related
properties and generally approximate 80% of the property's value at the time the
original loan is made.
41
<PAGE>
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 8,975 $ 8,854
--------- ---------
Real estate:
Held for sale........................................................... 760 807
Held for production of income........................................... 682 677
--------- ---------
Total real estate......................................................... 1,442 1,484
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Valuation reserves for mortgage loans, including policyholder share, were $115
million and $160 million as of December 31, 1994 and 1993, respectively.
Valuation reserves and cumulative write-downs related to real estate, including
policyholder share, were $294 million and $321 million as of December 31, 1994
and 1993, respectively.
During 1994, 1993 and 1992, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $127 million, $458
million and $411 million, respectively.
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office buildings........................................................ $ 4,092 $ 4,252
Retail facilities....................................................... 3,867 3,650
Hotels.................................................................. 819 876
Apartment buildings..................................................... 997 905
Other................................................................... 642 655
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,664 $ 3,513
Pacific................................................................. 2,558 2,675
Middle Atlantic......................................................... 1,652 1,654
South Atlantic.......................................................... 1,585 1,557
New England............................................................. 958 939
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 10,417 $ 10,338
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, 1994, scheduled mortgage loan maturities were as follows: 1995
- -- $752 million; 1996 -- $1.0 billion; 1997 -- $1.1 billion; 1998 -- $743
million; 1999 -- $1.2 billion, and $4.2 billion thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties, and loans may be
refinanced. During 1994 and 1993, the Company refinanced approximately $600
million and $800 million, respectively, of its mortgage loans relating to
borrowers that were unable to obtain alternative financing.
At December 31, 1994, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $286 million, all
of which were at a fixed market rate of interest. These commitments generally
expire within one year, in most cases within three months, and are diversified
by property type and geographic region. Included in these commitments is
approximately $180 million of commitments to refinance mortgage loans, currently
in a separate account, relating to borrowers that are not expected to be able to
obtain alternative financing.
42
<PAGE>
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation and depreciation for investments carried at fair value as of
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities........................................................... $ 218 $ 1,007
Equity securities.......................................................... 22 4
--------- ---------
240 1,011
--------- ---------
Unrealized depreciation:
Fixed maturities........................................................... (465) (49)
Equity securities.......................................................... (12) (5)
--------- ---------
(477) (54)
--------- ---------
Less: Policyholder net unrealized appreciation (depreciation)................ (141) 298
--------- ---------
Shareholder net unrealized appreciation (depreciation)....................... (96) 659
Less: Deferred income tax expenses (benefits)................................ (30) 231
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)................................... $ (66) $ 428
- ---------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation (depreciation) on investments that are carried at
fair value is included as a separate component of Shareholders' Equity, net of
policyholder share and deferred income taxes. The increase (decrease) in net
unrealized appreciation/depreciation was ($494) million, $423 million and ($3)
million for the years ended December 31, 1994, 1993 and 1992, respectively,
including ($446) million and $443 million for fixed maturities that are carried
at fair value for the years ended December 31, 1994 and 1993.
The net unrealized appreciation on fixed maturities that are carried at
amortized cost is not recorded in the financial statements. The increase
(decrease) in such net unrealized appreciation was ($1,194) million, ($129)
million, and $115 million in 1994, 1993 and 1992, respectively.
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments that were non-income producing during the preceding 12 months,
including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 71 $ 83
Mortgage loans................................................................. 81 84
Real estate.................................................................... 280 270
Other long-term investments.................................................... 32 --
- -----------------------------------------------------------------------------------------------------
Total.......................................................................... $ 464 $ 437
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage investment assets to reflect the underlying characteristics of related
insurance and contractholder liabilities such as liquidity, currency, yield and
duration, which vary among the Company's principal product lines. In connection
with this investment strategy, the Company uses derivative instruments through
hedging applications to manage market risk.
Generally, the Company uses interest rate swap contracts to create, when
combined with cash flows from variable rate bonds, fixed rate cash flows that
meet its portfolio investment strategy. Currency swaps are used to match the
currency of individual investments to that of the associated liabilities.
Interest rate futures are used to temporarily hedge against changes in market
values of bonds and mortgage loans to be purchased or sold, and stock index
futures may be used to hedge the temporary cash position of equity accounts.
Interest rate futures also are used to hedge interest rate risk associated with
withdrawals by contractholders over a scheduled time period.
Cash requirements arise as a result of the Company's derivative activities.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and variable rate
interest amounts calculated by reference to an agreed-upon notional principal
amount. Under futures contracts, initial margin requirements are settled with
cash or other instruments and changes in the contract values are settled
43
<PAGE>
in cash daily with the exchange on which the instrument is traded. Under
currency swaps, the parties generally exchange a principal amount in the two
relevant currencies, agreeing to re-exchange principal amounts at a specified
future date using an agreed-upon exchange rate, and agreeing to periodically
exchange amounts equal to interest payments using the agreed-upon exchange rate.
Because the Company's use of derivatives is limited to hedging applications,
changes in the market value of the derivatives are substantially offset by
changes in the market value of the hedged assets or underlying liabilities,
minimizing market risk. The Company routinely monitors, by individual
counterparty, exposure to credit risk associated with swap contracts. Futures
contracts are exchange-traded and, therefore, credit risk is limited since the
exchange assumes the obligations. The Company manages legal risks by following
industry standardized documentation procedures, by monitoring legal developments
and, consistent with its credit exposure policies, by limiting risks associated
with counterparty failure by diversifying the swaps portfolio among approved
dealers of high credit quality.
Changes in the market value of futures contracts that qualify as hedges are
deferred and recorded as adjustments to the carrying value of the related bond
or mortgage loan. Deferred gains and losses are amortized into net investment
income over the life of the investments purchased or recognized in full as
realized investment gains and losses in the event that the investment or futures
contract is sold prior to maturity. Futures contracts totaled $142 million and
$129 million as of December 31, 1994 and 1993, respectively, and were accounted
for as hedges. At December 31, 1994, gains and losses on futures contracts
deferred in anticipation of investment purchases were $1 million and $3 million,
respectively.
Net interest received or paid on an interest rate swap contract is recognized
currently as an adjustment to net investment income. Underlying notional
principal amounts associated with interest rate swap contracts outstanding were
$596 million and $542 million at December 31, 1994 and 1993, respectively.
The interest payment cash flows received in U.S. dollars from currency swaps
related to foreign currency denominated investment securities (primarily
Canadian dollars, pound sterling, Swiss francs, New Zealand dollars and Japanese
yen) are recognized as net investment income when received. Gains and losses
from changes in exchange rates related to foreign currency swaps are recognized
in realized investment gains and losses, offset by exchange rate gains and
losses on the related investments. Underlying principal amounts associated with
currency swap contracts outstanding were $325 million and $248 million at
December 31, 1994 and 1993, respectively.
As of December 31, 1994, the Company's variable rate investments consisted of
approximately $810 million of fixed maturities and the Company's fixed rate
investments consisted of $18 billion of fixed maturities and $9 billion of
mortgage loans. For the year ended December 31, 1994, the average yield on the
Company's investments in fixed maturities and mortgage loans was 8.7%. For the
year ended December 31, 1994, net investment income on bonds and mortgage loans
was increased by $7 million and $1 million, respectively, as a result of
recognizing amortization of deferred market value changes in futures contracts.
In addition, the increase in net investment income for bonds resulting from
interest rate swap contracts was $12 million, $19 million and $17 million for
the years ended December 31, 1994, 1993 and 1992, respectively.
G) OTHER: As of December 31, 1994 and 1993, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
44
<PAGE>
NOTE 3 -- INVESTMENT INCOME AND GAINS AND LOSSES
A) NET INVESTMENT INCOME: The components of net investment income, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,596 $ 1,547 $ 1,511
Mortgage loans...................................................... 776 892 931
Equity securities................................................... 20 16 9
Policy loans........................................................ 365 253 163
Real estate......................................................... 291 238 162
Other long-term investments......................................... 23 20 11
Short-term investments.............................................. 8 18 34
--------- --------- ---------
3,079 2,984 2,821
Less investment expenses............................................ 274 242 172
- -----------------------------------------------------------------------------------------------------
Net investment income............................................... $ 2,805 $ 2,742 $ 2,649
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Net investment income attributable to policyholder contracts, which is
included in the Company's revenues and is primarily offset by amounts included
in Benefits, Losses and Settlement Expenses, was approximately $1.5 billion for
1994 and $1.6 billion for 1993 and 1992. Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $693 million,
$604 million and $656 million for December 31, 1994, 1993 and 1992,
respectively.
As of December 31, 1994, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $272 million and $743 million,
including restructured investments of $148 million and $543 million,
respectively. Amounts on non-accrual status as of December 31, 1993 were $332
million of fixed maturities and $827 million of mortgage loans, including
restructurings of $245 million and $689 million, respectively. If interest on
these investments had been recognized in accordance with their original terms,
net income would have been increased by $14 million, $17 million and $20 million
in 1994, 1993 and 1992, respectively.
B) REALIZED INVESTMENT GAINS AND LOSSES: Realized gains and losses on
investments, excluding policyholder share, for the year ended December 31 were
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities....................................................... $ 4 $ 28 $ 4
Mortgage loans......................................................... -- (5) (16)
Equity securities...................................................... 2 (5) 4
Real estate............................................................ 15 (66) (13)
Other.................................................................. 6 (17) 8
--- --- ---
27 (65) (13)
Income tax expenses (benefits)........................................... 12 (16) (31)
- ---------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 15 $ (49) $ 18
- ---------------------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Impairments in the value of investments, net of recoveries, that are included
in realized investment gains and losses were $33 million, $55 million and $38
million in 1994, 1993 and 1992, respectively.
Realized investment gains (losses) for separate accounts, which are not
reflected in the Company's revenues, were ($51) million, $612 million and $243
million for the years ended December 31, 1994, 1993 and 1992, respectively.
Realized investment (losses) attributable to policyholder contracts, which also
are not reflected in the Company's revenues, were ($5) million and ($103)
million for the years ended December 31, 1993 and 1992, respectively. Net
realized investment gains (losses) attributable to policyholder contracts were
zero for the year ended December 31, 1994.
45
<PAGE>
During 1994, proceeds from sales of available-for-sale fixed maturities and
equities, including policyholder share, were $1.4 billion. Such sales resulted
in gross realized gains and gross realized losses of $73 million and $70
million, respectively.
During 1994, the Company also sold $14 million of held to maturity fixed
maturities, including policyholder share, resulting in gross proceeds of $12
million and a pre-tax realized loss of $2 million. In addition, $82 million of
fixed maturities classified as held to maturity, including policyholder share,
were transferred to the available-for-sale category at fair value, which was not
significantly different from the carrying value. The sales of fixed maturities
classified as held to maturity and the transfer of such securities to the
available-for-sale category were the result of significant credit deterioration
of the issuers of the affected investments.
Prior to adoption of SFAS No. 115, proceeds from voluntary sales of
investments in fixed maturities, including policyholder share, were $599 million
and $595 million in 1993 and 1992, respectively. Such sales resulted in gross
realized gains and gross realized (losses), including policyholder share, of $36
million and ($3) million in 1993, compared with $36 million and ($14) million in
1992. These amounts exclude the effects of sales of fixed maturities that, prior
to the implementation of SFAS No. 115, were classified as short-term
investments.
NOTE 4 -- SHAREHOLDER'S EQUITY AND DIVIDEND RESTRICTIONS
The Connecticut Insurance Department (the Department) recognizes as net income
and surplus (shareholder's equity) those amounts determined in conformity with
statutory accounting practices prescribed or permitted by the Department, which
differ in certain respects from generally accepted accounting principles. As of
December 31, 1994, there were no material permitted accounting practices
utilized by the Company.
Capital stock of the Company at December 31, 1994 and 1993 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5.00).
Statutory surplus was $2.0 billion at both December 31, 1994 and 1993. The
Connecticut Insurance Holding Company Act limits the maximum amount of annual
dividends or other distributions available to shareholders of Connecticut
insurance companies without prior approval of the Insurance Commissioner. Under
current law, the maximum dividend distribution which may be made by the Company
during 1995 without prior approval is $429 million.
NOTE 5 -- INCOME TAXES
In accordance with SFAS No. 109, the Company adopted the liability method of
accounting for income taxes as discussed in Note 1.
As of December 31, 1994 and 1993, the net deferred tax asset was $661 million
and $434 million, respectively.
Management believes, based on the Company's earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize the net deferred tax asset. In determining the adequacy of
future taxable income, management considered the future reversal of its existing
taxable temporary differences and available tax planning strategies that could
be implemented, if necessary.
In accordance with the Life Insurance Company Income Tax Act of 1959, a
portion of the Company's statutory income was not subject to current income
taxation but was accumulated in an account designated Policyholders' Surplus
Account. Under the Tax Reform Act of 1984, no further additions may be made to
the Policyholders' Surplus Account for tax years ending after December 31, 1983.
The balance in the account of approximately $450 million at December 31, 1994
would result in a tax liability of $158 million (at a 35% rate), only if
distributed to the shareholders or if the account balance exceeded a prescribed
maximum. No income taxes have been provided on this amount because, in
management's opinion, the likelihood that these conditions will be met is
remote.
CIGNA's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS), and provisions are made in the financial statements in
anticipation of the results of these audits. CIGNA resolved all issues relative
to the Company arising out of audits for 1982 through 1990 which resulted in an
increase to net income of $2 million, $3 million and $121 million for 1994, 1993
and 1992, respectively.
In management's opinion, adequate tax liabilities have been established for
all years.
46
<PAGE>
The tax effect of temporary differences which give rise to deferred income tax
assets and liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance and contractholder liabilities..................................... $ 337 $ 410
Employee and retiree benefit plans........................................... 175 166
Investments, net............................................................. 220 152
Unrealized depreciation on investments....................................... 30 --
Other........................................................................ 71 123
--- ---
Total deferred tax assets.................................................... 833 851
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 60 68
Depreciation................................................................. 102 105
Unrealized appreciation on investments....................................... -- 235
Other........................................................................ 10 9
--- ---
Total deferred tax liabilities............................................... 172 417
- -----------------------------------------------------------------------------------------------------
Deferred income taxes, net................................................... $ 661 $ 434
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
As a result of the Omnibus Budget Reconciliation Act of 1993 (OBRA), the
federal corporate income tax rate increased by one percent to 35% retroactive to
January 1, 1993. Deferred income tax benefits for 1993 included $13 million
related to an increase in the Company's net deferred tax asset as of January 1,
1993, due to the effect of the tax rate increase.
Total income tax expense was less than the amount computed using the nominal
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate (35% for 1994 and 1993, 34% for 1992)...... $ 271 $ 261 $ 199
Tax-exempt interest income............................................. (7) (6) (5)
Dividends received deduction........................................... (3) (4) (5)
Amortization of goodwill............................................... 4 5 5
Resolved federal tax audit issues...................................... (2) (3) (121)
Increase in deferred tax asset for tax rate change..................... -- (13) --
Other, net............................................................. 2 (4) (3)
- --------------------------------------------------------------------------------------------------------
Total income tax expense............................................... $ 265 $ 236 $ 70
- --------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
Temporary and other differences which resulted in the deferred tax expense
(benefit) for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance and contractholder liabilities.............................. $ 93 $ (80) $ (31)
Policy acquisition expenses........................................... (8) (39) (11)
Investments, net...................................................... (19) (36) (3)
Employee and retiree benefit plans.................................... (9) (16) (3)
Realized investment gains/losses...................................... (20) (24) (18)
Other................................................................. 8 (2) 5
- -------------------------------------------------------------------------------------------------------
Deferred taxes (benefits)............................................. $ 45 $ (197) $ (61)
- -------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
47
<PAGE>
NOTE 6 -- PENSION AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PLANS
A) PENSION PLANS: The Company provides retirement benefits to eligible
employees and agents. These benefits are provided through a single integrated
plan (the Plan) sponsored by CIGNA covering most domestic employees and by
several separate pension plans for various subsidiaries, agents and foreign
employees.
The Plan is a non-contributory, defined benefit, trusteed plan available to
eligible domestic employees. Benefits are based on employees' years of service
and compensation during the highest three or, if service commenced after
December 31, 1988, five consecutive years of employment, offset by a portion of
the Social Security benefit for which they are eligible. CIGNA funds at least
the minimum amount required by the Employee Retirement Income Security Act of
1974. Allocated pension cost for the Company was $31 million, $27 million and
$24 million in 1994, 1993 and 1992, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totalling approximately $1.7 billion and
$1.6 billion at December 31, 1994 and 1993, respectively.
B) OTHER POSTRETIREMENT BENEFITS PLANS: In addition to providing pension
benefits, the Company provides certain health care and life insurance benefits
to retired employees, spouses and other eligible dependents through various
plans sponsored by CIGNA. A substantial portion of the Company's employees may
become eligible for these benefits upon retirement. As of January 1, 1992, the
health care benefit plans required nominal contributions by retirees. In August
1992, CIGNA amended its plans effective January 1, 1993, whereby CIGNA's
contributions for health care benefits will depend upon a retiree's date of
retirement, age and years of service. In addition, the plan amendments increased
the level of other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can continue to be adjusted. In general, retiree health care benefits
are not funded and are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
Effective January 1, 1992, the Company adopted SFAS No. 106 for all of its
postretirement benefit plans (See Note 1). Under SFAS No. 106, an employer's
postretirement benefit liability is primarily measured by determining the
present value of the projected future costs of health benefits based on an
estimate of health care cost trend rates. Expense for postretirement benefits
other than pensions allocated to the Company totalled $28 million for 1994, $15
million for 1993 and $23 million for 1992. The other postretirement benefit
liability included in Accounts Payable, Accrued Expenses and Other Liabilities
as of December 31, 1994 and 1993 was $422 million and $415 million, including
net intercompany payables of $29 million and $32 million, respectively for
services provided by affiliates' employees.
C) OTHER POSTEMPLOYMENT BENEFITS: The Company provides certain salary
continuation (severance and disability), health care and life insurance benefits
to inactive and former employees, spouses and other eligible dependents through
various employee benefit plans sponsored by CIGNA. Those plans are unfunded and
noncontributory, except for the life insurance and health care plans.
Although severance benefits accumulate with additional service, the Company
recognizes severance expense when severance is probable and the costs can be
reasonably estimated. Postemployment benefits other than severance generally do
not vest or accumulate; therefore, the estimated cost of benefits is accrued
when determined to be probable and estimable, generally upon disability or
termination. See Note 1 for additional information regarding implementation of
SFAS No. 112.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a before-tax basis (401(k)) are
supplemented by CIGNA matching contributions. Contributions are invested, at the
election of the employee, in one or more of the following investments: CIGNA
common stock fund, several non-CIGNA stock and bond portfolios and a
fixed-income fund. The Company's expense for such plans totaled $14 million, $13
million and $12 million for December 31, 1994, 1993 and 1992, respectively.
NOTE 7 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $62 million, $66 million and $65 million in 1994, 1993 and 1992,
respectively.
48
<PAGE>
As of December 31, 1994, future net minimum rental payments under
non-cancelable operating leases were $151 million, payable as follows: 1995 -
$48 million; 1996 -$43 million; 1997 - $27 million; 1998 - $14 million; 1999 -
$10 million; and $9 million thereafter.
NOTE 8 -- REINSURANCE
In the normal course of business, the Company enters into agreements,
primarily relating to short-duration contracts, to assume and cede reinsurance
with other insurance companies. Reinsurance is ceded primarily to limit losses
from large exposures and to permit recovery of a portion of direct losses,
although ceded reinsurance does not relieve the originating insurer of
liability. The Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of its reinsurers. Failure of reinsurers
to indemnify the Company, as a result of reinsurer insolvencies or disputes,
could result in losses. As of December 31, 1994 and 1993 there were no
allowances for uncollectible amounts. While future charges for unrecoverable
reinsurance may materially affect results of operations in future periods, such
amounts are not expected to have a material adverse effect on the Company's
liquidity or financial condition.
The effects of reinsurance on net earned premiums and fees for the year ended
December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and Fees:
Direct............................................................ $ 3,419 $ 2,666 $ 2,461
Assumed........................................................... 716 1,248 1,320
Ceded............................................................. (291) (329) (197)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees...................................... $ 3,844 $ 3,585 $ 3,584
- -----------------------------------------------------------------------------------------------------
-------------------------------
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
LONG-DURATION CONTRACTS
Premiums and Fees:
Direct............................................................ $ 1,068 $ 1,023 $ 827
Assumed........................................................... 126 166 204
Ceded............................................................. (78) (70) (74)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees...................................... $ 1,116 $ 1,119 $ 957
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown above. Benefits,
Losses and Settlement Expenses for 1994, 1993 and 1992 were net of reinsurance
recoveries of $149 million, $119 million and $124 million, respectively.
NOTE 9 -- CONTINGENCIES
A) FINANCIAL GUARANTEES: The Company is contingently liable for financial
guarantees provided in the ordinary course of business on the repayment of
principal and interest on certain industrial revenue bonds. The contractual
amounts of financial guarantees reflect the Company's maximum exposure to credit
loss in the event of nonperformance. To limit the Company's exposure in the
event of default of any guaranteed obligation, various programs are in place to
ascertain the creditworthiness of guaranteed parties and to monitor this status
on a periodic basis. Risk is further reduced through reinsurance and, in certain
programs, use of letters of credit and other types of security.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 21 years. The guarantees provide for payment of debt service
only as it becomes due; consequently, an event of default would not cause an
acceleration of scheduled principal and interest payments. The principal amount
of the bonds guaranteed by the Company at December 31, 1994 and 1993 was $296
million and $323 million, respectively. Revenues in connection with industrial
revenue bond guarantees are derived principally from equity participations in
the related projects and are included in Net Investment Income as earned. Loss
reserves for financial guarantees
49
<PAGE>
are established when a default has occurred or when the Company believes that a
loss has been incurred. During 1994 and 1992, losses for industrial revenue
bonds were $1 million, and $4 million, respectively. There were no such losses
in 1993.
Prior to 1993, the Company had an arrangement with CIGNA Property and Casualty
Insurance Company (CIGNA P&C), an affiliate, whereby the Company guaranteed the
performance of certain investments purchased to support a group accident and
health reinsurance agreement between the companies. (See Note 11 for additional
information.) In accordance with 1993 amendments to the reinsurance treaties,
the Company and CIGNA P&C mutually agreed to terminate this arrangement. The
principal amount of such investments guaranteed by the Company was $150 million
as of December 31, 1992. A loss of $2 million related to this guarantee was
reported by the Company in 1992.
The Company also guarantees a minimum level of benefits for certain separate
account contracts and, in the event that separate account assets are
insufficient to fund minimum policy benefits, the Company is obligated to fund
the difference. As of December 31, 1994 and 1993, the amount of minimum benefit
guarantees for separate account contracts was $4.8 billion and $4.9 billion,
respectively. Reserves in addition to the separate account liabilities are
established when the Company believes a payment will be required under one of
these guarantees. As of December 31, 1994 and 1993, reserves of $6 million were
recorded. Guarantee fees are part of the overall management fee charged to
separate accounts and are recognized in income as earned.
Although the ultimate outcome of any loss contingencies arising from the
Company's financial guarantees may adversely affect results of operations in
future periods, they are not expected to have a material adverse effect on the
Company's liquidity or financial condition.
B) REGULATORY AND INDUSTRY DEVELOPMENTS: The Company's businesses are subject
to a changing social, economic, legal, legislative and regulatory environment
which could adversely affect them. Some of the changes include initiatives to:
restrict insurance pricing and the application of underwriting standards; reform
health care; restrict investment practices; and expand regulation.
Proposals on national health care reform were under consideration in 1994
which could have significantly changed the way health care is financed and
delivered in the United States. Congress recessed in 1994 without enacting
health care reform. New legislation could be introduced in Congress in 1995;
however, comprehensive national reform is not likely to be proposed in 1995.
Instead, the Company expects federal and state proposals seeking modest
insurance reform and limitations on the formation and operation of efficient
health care networks. Due to uncertainties associated with the timing and
content of any health care legislation, the effect on the Company's future
results of operations, liquidity or financial condition cannot be reasonably
estimated at this time.
The National Association of Insurance Commissioners (NAIC) has developed model
solvency-related guidelines ("risk-based capital" rules) to strengthen solvency
regulation of insurance companies. Depending on the ratio of the insurer's
surplus to its risk-based capital, the insurer could be subject to various
regulatory actions ranging from increased scrutiny to conservatorship. As of
December 31, 1994, the Company was adequately capitalized under the risk-based
capital rules. Also, the NAIC is addressing a proposal that would limit the
types and amounts of investments held. The Company does not expect such
guidelines to have a material adverse effect on its future results of
operations, liquidity or financial condition.
Unfavorable economic conditions have contributed to an increase in the number
of insurance companies that are impaired or insolvent. This is expected to
result in an increase in mandatory assessments by state guaranty funds of, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. Assessments against the
Company were $12 million, $10 million and $7 million for 1994, 1993 and 1992,
respectively, before giving effect to future premium tax recoveries. Although
future assessments and payments may adversely affect results of operations in
future periods, such amounts are not expected to have a material adverse effect
on the Company's liquidity or financial condition.
The eventual effect on the Company of the changing environment in which it
operates remains uncertain.
50
<PAGE>
C) LITIGATION:
The Company is routinely engaged in litigation incidental to its business,
including litigation associated with syndicated investment products. While the
outcome of all litigation involving the Company, including insurance-related
litigation, cannot be determined, litigation is not expected to result in losses
that differ from recorded reserves by amounts that would be material to results
of operations, liquidity or financial condition.
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that are subject to fair value disclosure requirements
(insurance contracts, real estate, goodwill and taxes are excluded) are carried
in the financial statements at amounts that approximate fair values, unless
otherwise indicated in the table below. The fair values used for financial
instruments are estimates that in many cases may differ significantly from the
amounts that could be realized upon immediate liquidation. In cases where market
prices are not available, estimates of fair value are based on discounted cash
flow analyses which utilize current interest rates for similar financial
instruments with comparable terms and credit quality. The fair value of
liabilities for contractholder deposit funds was estimated using the amount
payable on demand and, for those not payable on demand, discounted cash flow
analyses.
The following table presents carrying amounts and estimated fair values as of
December 31 for the Company's financial instruments that are not carried in the
financial statements at amounts approximating fair value.
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
(IN MILLIONS) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
Fixed maturities-held to maturity....................... $ 10,061 $ 10,075 $ 9,950 $ 11,158
Mortgage loans.......................................... $ 8,975 $ 8,610 $ 8,854 $ 9,053
Contractholder deposit funds --
non-insurance products................................. $ 18,561 $ 18,512 $ 19,042 $ 20,249
- ----------------------------------------------------------------------------------------------------
</TABLE>
For additional information on fair values of fixed maturities, see Note 2(A).
Fair values of off-balance-sheet financial instruments as of December 31, 1994
and 1993 were not material.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company has ceded group accident and health business under an
experience-rated stop loss agreement to CIGNA P&C. Reinsurance recoverables from
CIGNA P&C were $1.3 billion and $1.5 billion at December 31, 1994 and 1993,
respectively. During 1993 and 1992, the Company earned experience-rated refunds
from CIGNA P&C, net of premiums ceded, of $63 million, and $25 million,
respectively. Effective January 1, 1995 the reinsurance arrangement was
terminated. Effective with this termination, reserves of $312 million, primarily
related to long-term disability business, were recaptured, with CIGNA P&C
assuming responsibility for runout claims on the remaining reserves. Assets,
principally mortgages, with a fair market value equal to reserves were received
as part of the recapture.
The Company has assumed the settlement annuity and group pension business
written by Life Insurance Company of North America (LINA), an affiliate.
Reserves held by the Company with respect to this business were $1.8 billion at
December 31, 1994 and 1993.
The Company cedes all long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1994 and 1993 were $921 million and $911
million, respectively.
The Company had lines of credit available from affiliates totaling $600
million at both December 31, 1994 and 1993. All borrowings are payable upon
demand with interest rates equivalent to CIGNA's average monthly short-term
borrowing rate plus 1/4 of 1%. Interest expense was $1 million for 1994 and $3
million for 1993 and 1992. As of December 31, 1994 and 1993, there were no
borrowings outstanding under such lines.
The Company extended lines of credit to affiliates totalling $600 million at
December 31, 1994 and 1993. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. As of
December 31, 1994 and 1993, the Company had $1.5 million and $2.5 million,
respectively, in outstanding loans to affiliates under such lines.
51
<PAGE>
The Company, together with other CIGNA subsidiaries, has entered into a
pooling arrangement known as the CIGNA Corporate Liquidity Account (the Account)
for the purpose of maximizing earnings on funds available for short-term
investments. As of December 31, 1994 and 1993, the Company had a balance in the
Account of $259 million and $99 million, respectively.
CIGNA allocates to the Company its share of operating expenses incurred at the
corporate level. The Company also allocates a portion of its operating expenses
to affiliated companies on whose behalf it performs certain administrative
services.
52
<PAGE>
APPENDIX 1
ILLUSTRATION OF SURRENDER CHARGES
The Surrender Charge is calculated as (a) times (b), where
(a) is the sum of (i) a Deferred Sales Charge and (ii) a
Deferred Administrative Charge and (b) is the applicable
Surrender Charge Grading Factor. If the Specified Amount is
increased, a new Surrender Charge will be applicable, in
addition to any existing Surrender Charge.
Below are examples of Surrender Charge calculations, one
involving a level Specified Amount and one involving an
increase in the Specified Amount, followed by Definitions
and Tables used in the calculations.
EXAMPLE 1: A male nonsmoker, age 35, purchases a Policy with
a Specified Amount of $100,000 and a scheduled annual
premium of $1100. He now wants to surrender the Policy at
the end of the sixth Policy Year.
The Surrender Charge computed is as follows:
Sum of the premiums paid through the end of the second
Policy Year = $2200.00
Guideline Annual Premium Amount (Male, Age 35, $100,000
Specified Amount) = $1195.63
Surrender Charge =
<TABLE>
<S> <C>
(.285X$1195.63) + (.085X($2200-$1195.63)) = $340.75 + $85.37 = $ 426.12(i)
$6.00 per $1000 of Specified Amount $ 600.00(ii)
--------
$1026.12(a)
</TABLE>
The total Surrender Charge is $1026.12(a), times the
surrender charge grading factor,(b): ($1026.12 X 80%) =
$820.90.
EXAMPLE 2: A female nonsmoker, age 45, purchases a Policy
with an Initial Specified Amount of $200,000 and a scheduled
annual premium of $1500. She pays the scheduled annual
premium for the first five Policy Years. At the start of the
sixth Policy Year, she increases the Specified Amount to
$250,000 and continues to pay the scheduled annual premium
of $1500. She now wants to surrender the Policy at the end
of the eighth Policy Year. Separate Surrender Charges must
be calculated for the Initial Specified Amount and for the
increase in Specified Amount.
The Surrender Charges are computed as follows:
For the Initial Specified Amount,
Sum of the premiums paid through the end of the second
Policy Year = $3000.00
Guideline Annual Premium Amount (Female, Age 45, $200,000
Specified Amount = $2966.81
<TABLE>
<S> <C>
Surrender Charge for Initial Specified Amount =
(.285X$2966.81) +(.085X($3000.00-$2966.81)) = $845.54 + $2.82 = $ 848.36(i)
$6.00 per $1000 of Initial Specified Amount $1200.00(ii)
--------
$2048.36(a)
</TABLE>
The total Surrender Charge for the Initial Specified Amount
is $2048.36,(a), times the applicable surrender charge
grading factor,(b): ($2048.36 X 40%) = $819.34.
53
<PAGE>
For the increase in Specified Amount;
Sum of the premiums in the first two years following the
increase in Specified Amount, applicable to the increase in
Specified Amount =
($1500 X 2) X ($50,000 / $250,000) = $600.00.
Guideline Annual Premium Amount (Female, Age 50, $50,000
Specified Amount) = $993.68.
<TABLE>
<S> <C>
Surrender Charge for the increase in Specified Amount =
(.285 X $600.00) $ 171.00(i)
$6.00 per $1000 of increase in Specified Amount $ 300.00(ii)
--------
$ 471.00(a)
</TABLE>
The total Surrender Charge for the increase in the Specified
Amount is $471.00,(a), times the applicable surrender charge
grading factor,(b): ($471.00 X 100%) = $471.00
The overall Surrender Charge for the Policy is ($819.34 +
$471.00) = $1290.34.
DEFINITIONS AND TABLES
(a)(i) The Deferred Sales Charge is based on the actual
premium paid and the applicable Guideline Annual
Premium Amount, and is calculated assuming the
following:
<TABLE>
<S> <C>
DURING POLICY YEAR:
1 and 2 28.5% of the sum of the
premiums paid up to an amount
equal to the Guideline Annual
Premium Amount,* plus 8.5% of
the sum of the premiums paid
between one and two times the
Guideline Annual Premium
Amount, plus 7.5% of the sum
of the premiums paid in excess
of two times the Guideline
Annual Premium Amount.
3 through 10 same dollar amount as of the
end of Policy Year 2.
</TABLE>
In no event will the Deferred Sales Charge exceed the
maximum permitted under federal or state law.
(ii) The Deferred Administrative Charge is $6.00 per
$1,000 of Specified Amount.
(b) SURRENDER CHARGE GRADING FACTORS
<TABLE>
<S> <C>
Policy Years**
1-5 100%
Policy Year 6 80%
Policy Year 7 60%
Policy Year 8 40%
Policy Year 9 20%
Policy Year 10 0%
</TABLE>
If a Surrender Charge becomes effective at other than the
end of a Policy Year, any applicable Surrender Charge
grading factor will be applied on a pro rata basis as of
such effective date.
* Guideline Annual Premium Amount is the level annual amount
that would be payable through the latest maturity date
permitted under the Policy but not less than 20 years
after date of issue or (if earlier) age 95 for the future
benefits under the Policy, subject to the following
provisions: (A) the payments were fixed by the Life
Insurer as to both timing and amount; and (B) the payments
were based on the 1980 Commissioners Standard Ordinary
Mortality Table, net investment earnings at the greater of
an annual effective of 5% or rate or rates guaranteed at
issue of the policy, the sales load under the policy, and
the fees and charges specified in the policy. A
54
<PAGE>
new Guideline Annual Premium Amount is determined for each
increase in Specified Amount under the policy; in such
event, "Policy Years" are measured from the effective
date(s) of such increase(s).
** Number of Policy Years elapsed since the Date of Issue or
since the effective date(s) of any increase(s) in
Specified Amount.
APPENDIX 2
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES,
AND DEATH BENEFITS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations illustrate how
Accumulation Values, Surrender Values and Death Benefits
under a Policy would vary over time if the hypothetical
gross investment rates of return were a uniform annual
effective rate of either 0%, 6% or 12%. If the hypothetical
gross investment rate of return averages 0%, 6%, or 12% over
a period of years, but fluctuates above or below those
averages for individual years, the Accumulation Values,
Surrender Values and Death Benefits may be different. The
illustrations also assume there are no Policy loans or
partial surrenders, no additional Premium Payments are made
other than shown, no Accumulation Values are allocated to
the Fixed Account, and there are no changes in the Specified
Amount or Death Benefit Option.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit as of each Policy Anniversary
reflect the fact that the net investment return on the
assets held in the Sub-Accounts is lower than the gross
return. This is due to the daily charges made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Variable Account. On
each Policy Anniversary beginning with the 13th, the
mortality and expense risk charge is reduced to 0.55% on an
annual basis of the daily net assets of the Variable
Account. In addition, the net investment returns also
reflect the deduction of Fund investment advisory fees and
other expenses which will vary depending on which funding
vehicle is chosen but which are assumed for purposes of
these illustrations to be equivalent to an annual effective
rate of 1.00% of the daily net asset value of the Variable
Account.
Considering current charges for mortality and expense risks
and the assumed Fund expenses, gross annual rates of return
of 0%, 6%, and 12% correspond to net investment experience
at constant annual rates of -1.80%, 4.25% and 10.25%. On
each Policy Anniversary beginning with the 13th, the gross
annual rates of return of 0%, 6%, and 12% correspond to net
investment experience at constant annual rates of -1.55%,
4.45%, and 10.45%. This is due to a reduction, currently in
effect, in the mortality and expense risk charge from an
annual effective rate of 0.80% to an annual effective rate
of 0.55% after twelve Policy Years.
The illustrations also reflect the fact that the Company
makes monthly charges for providing insurance protection.
Current values reflect current Cost of Insurance charges and
guaranteed values reflect the maximum Cost of Insurance
charges guaranteed in the Policy. The values shown are for
Policies which are issued as standard. Policies issued on a
substandard basis would result in lower Accumulation Values
and Death Benefits than those illustrated.
The illustrations also reflect the fact that the Company
deducts a premium load from each Premium Payment. Current
and guaranteed values reflect a deduction of 5.0% of each
Premium Payment.
55
<PAGE>
The Surrender Values shown in the illustrations reflect the
fact that the Company will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first ten years.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is $15 per month in the first year. Current
values reflect a current monthly administrative expense
charge of $5 in renewal years, and guaranteed values reflect
the $10 maximum monthly administrative charge under the
Policy in renewal years.
Upon request, the Company will furnish a comparable
illustration based on the proposed insured's age, gender
classification, smoking classification, risk classification
and premium payment requested.
56
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 45
PREFERRED -- $5,998 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.80% 4.20% 10.20% -1.80% 4.20% 10.20% -1.80% 4.20% 10.20%
ACCUMULATED IN YEARS 1-12 IN YEARS 1-12 IN YEARS 1-12
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.55% 4.45% 10.45% -1.55% 4.45% 10.45% -1.55% 4.45% 10.45%
YEAR PER YEAR IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER
- ------ ----------- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,298 500,000 500,000 500,000 4,000 4,290 4,581 0 0 0
2 12,911 500,000 500,000 500,000 7,961 8,796 9,668 2,066 2,901 3,772
3 19,854 500,000 500,000 500,000 11,743 13,382 15,163 5,847 7,486 9,267
4 27,145 500,000 500,000 500,000 15,373 18,078 21,138 9,478 12,182 15,243
5 34,800 500,000 500,000 500,000 18,879 22,915 27,671 12,984 17,020 21,776
6 42,838 500,000 500,000 500,000 22,288 27,926 34,849 17,572 23,210 30,132
7 51,278 500,000 500,000 500,000 25,578 33,097 42,716 22,041 29,559 39,179
8 60,139 500,000 500,000 500,000 28,636 38,317 51,230 26,278 35,958 48,872
9 69,444 500,000 500,000 500,000 31,629 43,756 60,630 30,450 42,577 59,451
10 79,214 500,000 500,000 500,000 34,489 49,357 70,944 34,489 49,357 70,944
15 135,900 500,000 500,000 500,000 44,319 77,631 138,064 44,319 77,631 138,064
20 208,246 500,000 500,000 500,000 45,340 105,340 244,619 45,340 105,340 244,619
25 300,580 500,000 500,000 500,000 37,318 132,921 424,382 37,318 132,921 424,382
30 418,425 500,000 500,000 778,679 11,127 154,191 727,738 11,127 154,191 727,738
</TABLE>
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results 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, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The "Net" percentages in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 1.00% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
57
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 55
PREFERRED -- $9,727 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.80% 4.20% 10.20% -1.80% 4.20% 10.20% -1.80% 4.20% 10.20%
ACCUMULATED IN YEARS 1-12 IN YEARS 1-12 IN YEARS 1-12
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.55% 4.55% 10.45% -1.55% 4.45% 10.45% -1.55% 4.45% 10.45%
YEAR PER YEAR IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER
- ------ ----------- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,213 500,000 500,000 500,000 6,365 6,832 7,300 592 1,060 1,528
2 20,937 500,000 500,000 500,000 12,435 13,768 15,162 4,602 5,936 7,330
3 32,198 500,000 500,000 500,000 18,121 20,721 23,551 10,289 12,889 15,718
4 44,021 500,000 500,000 500,000 23,522 27,788 32,624 15,690 19,955 24,792
5 56,435 500,000 500,000 500,000 28,593 34,927 42,413 20,760 27,095 34,581
6 69,470 500,000 500,000 500,000 33,472 42,283 53,141 27,206 36,017 46,875
7 83,157 500,000 500,000 500,000 38,188 49,893 64,941 33,488 46,194 60,242
8 97,528 500,000 500,000 500,000 42,721 57,752 77,918 39,588 54,620 74,785
9 112,618 500,000 500,000 500,000 46,912 65,714 92,049 45,345 64,147 90,482
10 128,462 500,000 500,000 500,000 50,683 73,711 107,404 50,683 73,711 107,404
15 220,389 500,000 500,000 500,000 62,817 114,443 209,608 62,817 114,443 209,608
20 337,714 500,000 500,000 500,000 57,448 152,334 379,078 57,448 152,334 379,078
25 487,454 500,000 500,000 708,884 14,697 173,453 675,127 14,697 173,453 675,127
30 678,563 500,000 500,000 1,214,357 0 162,954 1,156,530 0 162,954 1,156,530
</TABLE>
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results 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, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The "Net" percentages in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 1.00% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
58
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 45
PREFERRED -- $4,459 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.80% 4.20% 10.20% -1.80% 4.20% 10.20% -1.80% 4.20% 10.20%
ACCUMULATED IN YEARS 1-12 IN YEARS 1-12 IN YEARS 1-12
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.55% 4.45% 10.45% -1.55% 4.45% 10.45% -1.55% 4.45% 10.45%
YEAR PER YEAR IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER
- ------ ----------- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,682 500,000 500,000 500,000 2,904 3,117 3,331 0 0 0
2 9,598 500,000 500,000 500,000 5,831 6,444 7,084 611 1,224 1,864
3 14,760 500,000 500,000 500,000 8,664 9,870 11,179 3,444 4,649 5,958
4 20,180 500,000 500,000 500,000 11,405 13,398 15,651 6,184 8,177 10,430
5 25,871 500,000 500,000 500,000 14,055 17,034 20,541 8,834 11,813 15,320
6 31,846 500,000 500,000 500,000 16,569 20,735 25,844 12,392 16,558 21,667
7 38,120 500,000 500,000 500,000 18,950 24,505 31,605 15,817 21,372 28,473
8 44,708 500,000 500,000 500,000 21,200 28,349 37,876 19,112 26,260 35,787
9 51,626 500,000 500,000 500,000 23,370 32,319 44,760 22,325 31,275 43,716
10 58,889 500,000 500,000 500,000 25,461 36,423 52,324 25,461 36,423 52,324
15 101,030 500,000 500,000 500,000 33,460 57,937 102,201 33,460 57,937 102,201
20 154,813 500,000 500,000 500,000 35,842 79,784 180,816 35,842 79,784 180,816
25 223,456 500,000 500,000 500,000 33,209 102,827 310,649 33,209 102,827 310,649
30 311,063 500,000 500,000 568,410 22,419 125,079 531,225 22,419 125,079 531,225
</TABLE>
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results 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, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The "Net" percentages in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 1.00% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
59
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 55
PREFERRED -- $7,095 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
NET NET NET NET NET NET NET NET NET
PREMIUMS -1.80% 4.20% 10.20% -1.80% 4.20% 10.20% -1.80% 4.20% 10.20%
ACCUMULATED IN YEARS 1-12 IN YEARS 1-12 IN YEARS 1-12
END OF AT NET NET NET NET NET NET NET NET NET
POLICY 5% INTEREST -1.55% 4.45% 10.45% -1.55% 4.45% 10.45% -1.55% 4.45% 10.45%
YEAR PER YEAR IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER IN YEARS 13 AND AFTER
- ------ ----------- ------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,450 500,000 500,000 500,000 4,650 4,991 5,332 0 0 310
2 15,272 500,000 500,000 500,000 9,149 10,123 11,141 2,550 3,524 4,542
3 23,485 500,000 500,000 500,000 13,402 15,305 17,375 6,803 8,706 10,776
4 32,109 500,000 500,000 500,000 17,474 20,602 24,146 10,875 14,003 17,547
5 41,165 500,000 500,000 500,000 21,335 25,988 31,479 14,736 19,389 24,881
6 50,673 500,000 500,000 500,000 25,076 31,557 39,529 19,797 26,277 34,250
7 60,656 500,000 500,000 500,000 28,704 37,323 48,379 24,745 33,364 44,420
8 71,138 500,000 500,000 500,000 32,216 43,295 58,114 29,577 40,655 55,475
9 82,145 500,000 500,000 500,000 35,497 49,362 68,714 34,177 48,042 67,394
10 93,702 500,000 500,000 500,000 38,510 55,495 80,242 38,510 55,495 80,242
15 160,755 500,000 500,000 500,000 49,637 87,610 156,880 49,637 87,610 156,880
20 246,333 500,000 500,000 500,000 52,074 121,059 281,808 52,074 121,059 281,808
25 355,555 500,000 500,000 517,215 33,673 146,134 492,586 33,673 146,134 492,586
30 494,953 500,000 500,000 889,973 0 145,576 847,594 0 145,576 847,594
</TABLE>
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results 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, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The "Net" percentages in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 1.00% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
60
<PAGE>
[LOGO]
550253 (3/96)
