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CONNECTICUT GENERAL LIFE INSURANCE COMPANY
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CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
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HOME OFFICE LOCATION: MAILING ADDRESS:
900 COTTAGE GROVE ROAD CIGNA INDIVIDUAL INSURANCE
BLOOMFIELD, CONNECTICUT ANNUITY & VARIABLE LIFE SERVICES CENTER,
ROUTING S-249
HARTFORD, CT 06152-2249
(800)(552-9898)
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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 nineteen 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 VP Money Market Fund, CIGNA VP S&P 500 Index
Fund; Fidelity Variable Insurance Products Fund -- Equity-Income Portfolio;
Fidelity Variable Insurance Products Fund II -- Asset Manager Portfolio and
Investment Grade Bond Portfolio; MFS-Registered Trademark- Variable Insurance
Trust -- MFS Emerging Growth Series, 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; OCC Accumulation Trust -- Global Equity Portfolio, Managed Portfolio
and 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: MAY 1, 1997
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TABLE OF CONTENTS
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Definitions..................................... 3
Highlights...................................... 5
Initial Choices to be Made.................... 5
Charges and Fees.............................. 6
The Company..................................... 6
The Variable Account............................ 6
The Funds....................................... 7
Expense Data/Fee Table........................ 10
General....................................... 12
Substitution of Securities.................... 12
Voting Rights................................. 12
Fund Participation Agreements................. 13
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
Optional Variable Account Sub-Account
Allocation Programs........................ 17
Dollar Cost Averaging..................... 18
Automatic Rebalancing..................... 18
Charges; Fees................................... 19
Premium Load................................ 19
Monthly Deductions.......................... 19
Transaction Fee for Excess Transfers........ 20
Mortality and Expense Risk Charge........... 20
Surrender Charge............................ 21
The Fixed Account............................... 22
Policy Values................................... 22
Accumulation Value.......................... 22
Variable Accumulation Unit Value............ 22
Surrender Value............................. 23
Surrenders...................................... 23
Partial Surrenders.......................... 23
Full Surrenders............................. 23
Deferral of Payment and Transfers........... 24
Lapse and Reinstatement......................... 24
Lapse of a Policy; Effect of Guaranteed
Death Benefit Provision.................... 24
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Reinstatement of a Lapsed Policy............ 24
Policy Loans.................................... 25
Settlement Options.............................. 25
Other Policy Provisions......................... 26
Issuance.................................... 26
Short-Term Right to Cancel the Policy....... 26
Policy Owner................................ 26
Beneficiary................................. 26
Assignment.................................. 27
Right to Exchange for a Fixed Benefit
Policy..................................... 27
Incontestability............................ 27
Misstatement of Age or Sex.................. 27
Suicide..................................... 28
Nonparticipating Policies................... 28
Tax Matters..................................... 28
Policy Proceeds............................. 28
Taxation of the Company..................... 29
Section 848 Charges......................... 29
Other Considerations........................ 30
Other Matters................................... 30
Directors and Officers of the Company....... 30
Distribution of Policies.................... 31
Changes of Investment Policy................ 31
Other Contracts Issued by the Company....... 31
State Regulation............................ 31
Reports to Policy Owners.................... 31
Advertising................................. 32
Legal Proceedings........................... 32
Experts..................................... 32
Registration Statement...................... 32
Financial Statements............................ 33
Connecticut General Life Insurance
Company.................................... 35
CG Variable Life Insurance Separate Account
II......................................... 54
Appendix 1...................................... 66
Illustration of Surrender Charges........... 66
Appendix 2...................................... 68
Illustration of Accumulation Values,
Surrender Values, and Death Benefits....... 68
Appendix 3...................................... 78
Tax Information............................. 78
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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.
ANNUITY & VARIABLE LIFE SERVICES 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, Annuity & Variable Life
Services Center, Routing S-249, Hartford, CT 06152-2249.
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
designed to compensate the Company for the anticipated cost
of paying Death Benefits in excess of the Accumulation
Value, 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 VP Money Market Fund; CIGNA
VP S&P 500 Index Fund; Fidelity Variable Insurance Products
Fund -- Equity-Income Portfolio; Fidelity Variable Insurance
Products Fund II -- Asset Manager Portfolio and Investment
Grade Bond Portfolio; MFS-Registered Trademark- Variable
Insurance Trust -- MFS Emerging Growth Series; 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; OCC Accumulation Trust -- Global
Equity Portfolio, Managed Portfolio and 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.
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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.
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 Owner 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.
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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.
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. No allocation can be made which would result in
a Sub-Account Value of less than $50 or a Fixed Account
value of less than $2,500. Further, at this time, no more
than 18 Sub-Accounts may be opened during the life of the
Policy. The Company may expand this number at a future date.
The variable portion of a Policy is supported by
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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 deductions 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.
Investment results for each Sub-Account are affected by each
Fund's daily charge for management fees; these charges vary
by Fund and are shown at pages 10-11 of this Prospectus.
A transaction fee of $25 is imposed for each partial
surrender 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 .25% per year thereafter.
The Company may derive a profit from its charges except from
the monthly deduction for administrative expenses and the
transaction fee.
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. 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 $100 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.
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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 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 ("1940 Act").
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 several other separate accounts registered
as unit investment trusts with the Commission for the
purpose of funding the variable annuity contracts and
variable life insurance policies of the Company.
THE FUNDS
Each of the nineteen Sub-Accounts of the Variable Account is
invested solely in the shares of one of the nineteen 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 1940 Act. These entities are
collectively referred to herein as the "Trusts."
The seven Trusts and their Investment advisers and
distributors are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. Fund"),
managed by A I M Advisors, Inc., and distributed by
A I M Distributors, Inc., 11 Greenway Plaza, Suite 100,
Houston, TX 77046-1173;
CIGNA Variable Products Group ("CIGNA Group"), managed
by CIGNA Investments, Inc., and distributed by CIGNA
Financial Advisors, Inc., 900 Cottage Grove Road,
Hartford, CT 06152;
Variable Insurance Products Fund ("Fidelity VIP"), and
Variable Insurance Products Fund II ("Fidelity VIP II"),
managed by Fidelity Management & Research
Company and distributed by Fidelity Distributors
Corporation, 82 Devonshire Street, Boston, MA 02103;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
Trust"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
Templeton Variable Products Series Fund ("Templeton
Trust"), managed by Templeton Investment Counsel, Inc.
and its Templeton and Franklin affiliates and
distributed by Franklin/Templeton Distributors, Inc.,
700 Central Avenue, St. Petersburg, FL 33701;
OCC Accumulation Trust ("OCC Trust") (formerly Quest for
Value Accumulation Trust), managed by OpCap Advisors
(formerly Quest for Value Advisors) and distributed by
OCC Distributors (formerly Quest for Value
Distributors), One World Financial Center, New York, NY
10281.
Four Funds of AIM V.I. Fund are available under the
Policies:
AIM V.I. Capital Appreciation Fund;
AIM V.I. Diversified Income Fund;
AIM V.I. Growth Fund;
AIM V.I. Value Fund.
Two Funds of CIGNA GROUP are available under the Policies:
CIGNA VP Money Market Fund;
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CIGNA VP S&P 500 Index Fund.
One Fund of FIDELITY VIP is available under the Policies:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio").
Two Funds of FIDELITY VIP II are available under the
Policies:
Asset Manager Portfolio ("Fidelity VIP II Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade Bond Portfolio").
Four Funds of MFS Trust are available under the Policies:
MFS Emerging Growth Series;
MFS Total Return Series;
MFS Utilities Series;
MFS World Governments Series.
Three Funds of TEMPLETON Trust are available under the
Policies:
Templeton Asset Allocation Fund: Class 1;
Templeton International Fund: Class 1;
Templeton Stock Fund: Class 1.
Three Funds of OCC Trust are available under the Policies:
Global Equity Portfolio;
Managed Portfolio;
Small Cap Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown on pages 11 and 12 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 (Small Cap Stocks): Seeks
to provide capital appreciation through investments in
common stocks, with emphasis on medium-sized and smaller
emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND (Fixed
Income - Intermediate Term Bonds): 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").
AIM V.I. GROWTH FUND (Large Cap Stocks): 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 (Large Cap Stocks): 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.
CIGNA VP MONEY MARKET FUND (Money Market): 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.
CIGNA VP S&P 500 INDEX FUND (Large Cap Stocks): Seeks to
achieve its objective of long-term growth of capital by
attempting to replicate the composition and total return,
reduced by fund expenses, of the Standard and Poor's 500
Composite Stock Price Index.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
Return): 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.
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FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income - Intermediate Term Bonds): 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.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's Composite Index of 500 Stocks.
MFS EMERGING GROWTH SERIES (Large Cap Stocks): Seeks to
provide long-term growth of capital by investing primarily
in common stocks of foreign and domestic issuers.
MFS TOTAL RETURN SERIES (Balanced or Total Return): Seeks
primarily to obtain above-average income (compared to a
portfolio invested entirely 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 (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities) by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
MFS WORLD GOVERNMENTS SERIES (International Fixed Income):
Seeks not only preservation, but also growth, of capital
together with moderate current income through a
professionally managed, internationally diversified
portfolio consisting primarily of debt securities and to a
lesser extent equity securities.
TEMPLETON ASSET ALLOCATION FUND (Balanced or Total Return):
Seeks a high level of total return through a flexible policy
of investing in stocks of companies in any nation, debt
securities 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 (International Stocks): 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 (Global Stocks): Seeks capital growth
through a policy of investing primarily in common stocks
issued by companies, large and small, in various nations
throughout the world, including the U.S.
OCC GLOBAL EQUITY PORTFOLIO (International Stocks): Seeks
long-term capital appreciation through a global investment
strategy primarily involving equity securities.
OCC MANAGED PORTFOLIO (Balanced or Total Return): 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.
OCC SMALL CAP PORTFOLIO (Small Cap Stocks): Seeks capital
appreciation through investments in a diversified portfolio
of equity securities of companies with market
capitalizations of under $1 billion.
The AIM Diversified Income Fund, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP II Asset Manager Portfolio, MFS
Total Return Series, MFS Utilities Series, MFS World
Governments Series, OCC Global Equity Portfolio, OCC Managed
Portfolio, OCC Small Cap Portfolio, Templeton Asset
Allocation Fund, Templeton International Fund and Templeton
Stock Fund portfolios may invest in non-investment grade,
high yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
prospectuses.
9
<PAGE>
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 .90% per year.
FEE TABLE
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS, INC.
--------------------------------------------------
AIM V.L.
CAPITAL AIM V.I. AIM V.I. AIM V.I.
APPRECIATION DIVERSIFIED GROWTH VALUE
FUND INCOME FUND FUND FUND
------------- ------------ -------- ---------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk
Charge............................ 0.80% 0.80% 0.80% 0.80%
Total Separate Account Annual
Expenses.......................... 0.80% 0.80% 0.80% 0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.................... 0.64% 0.60% 0.65% 0.64%
Other Expenses..................... 0.09% 0.26% 0.13% 0.09%
Total Fund Portfolio Annual
Expenses.......................... 0.73% 0.86% 0.78% 0.73%
<CAPTION>
FIDELITY VARIABLE INSURANCE
CIGNA VP PRODUCTS FUNDS
GROUP ---------------------------------
----------------------------------- VIP II VIP I VIP II
CIGNA VP CIGNA ASSET EQUITY- INVESTMENT
MONEY VP S&P MANAGER INCOME GRADE BOND
MARKET FUND 500 INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO
---------------- ---------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk
Charge............................ 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%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees.................... 0.35% 0.25% 0.64% 0.51% 0.45%
Other Expenses..................... 0.15% 0.00% 0.10% 0.07% 0.13%
Total Fund Portfolio Annual
Expenses.......................... 0.50%(1) 0.25%(1) 0.74%(2) 0.58%(2) 0.58%
</TABLE>
- ------------------------
(1) The Funds' investment adviser has voluntarily agreed to waive such portion
of its management fee as is necessary to cause the Total Fund Portfolio
Annual Expenses of the Fund not to exceed .50% of the VP Money Market Fund's
average daily net asset value and .25% of the VP S&P 500 Index Fund's
average daily net asset value. If this is not sufficient to cause the Total
Fund Portfolio Annual Expenses of the VP Money Market Fund and VP S&P 500
Index Fund not to exceed the applicable percentage of average daily net
asset value, the adviser has agreed to pay such other expenses of those
Funds as is necessary to keep Total Fund Portfolio Annual Expenses from
exceeding the applicable percentage. This arrangement will continue in
effect until May 1, 1998, and afterwards to the extent described in the
Funds' then current prospectus. To the extent management fees are waived 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 waived or expenses of a Fund are no
longer paid. Total Fund Portfolio Annual Expenses would have been 1.53% and
0.64% for VP Money Market and VP S&P 500 Index Fund, respectively, prior to
reimbursement by the adviser.
(2) A portion of the brokerage commissions that certain funds paid was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest earned
on uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, Total Fund Portfolio Annual Expenses
would have been 0.73% for the VIP II Asset Manager Portfolio and 0.56% for
the VIP Equity-Income Portfolio.
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 for administrative expenses. 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>
MFS VARIABLE INSURANCE TRUST
---------------------------------------------------------
MFS MFS
EMERGING TOTAL MFS MFS WORLD
GROWTH RETURN UTILITIES GOVERNMENTS
SERIES SERIES SERIES SERIES
------------ ----------- ------------ ------------
<S> <C> <C> <C>
0.80% 0.80% 0.80% 0.80%
0.80% 0.80% 0.80% 0.80%
0.75% 0.75% 0.75% 0.75%
0.25%(4) 0.25%(4) 0.25%(4) 0.25%(4)
1.00%(3) 1.00%(3) 1.00%(3) 1.00%(3)
<CAPTION>
TEMPLETON VARIABLE PRODUCTS
SERIES FUNDS
--------------------------------------------
------------ TEMPLETON
MFS ASSET TEMPLETON TEMPLETON
EMERGING ALLOCATION INTERNATIONAL STOCK
GROWTH FUND FUND FUND
SERIES CLASS 1 CLASS 1 CLASS 1
------------ -------------- ------------- ---------
<S> <C> <C> <C>
0.80% 0.80% 0.80% 0.80%
0.80% 0.80% 0.80% 0.80%
0.75% 0.61% 0.70% 0.70%
0.25%(4) 0.17% 0.18% 0.18%
1.00%(3) 0.78%(5) 0.88%(5) 0.88%(5)
<CAPTION>
------------ OCC ACCUMULATION TRUST
MFS -----------------------------------
EMERGING GLOBAL
GROWTH EQUITY MANAGED SMALL CAP
SERIES PORTFOLIO PORTFOLIO PORTFOLIO
------------ --------- --------- ---------
0.80% 0.80% 0.80% 0.80%
0.80% 0.80% 0.80% 0.80%
0.75% 0.80% 0.80% 0.80%
0.25%(4) 0.63% 0.10% 0.22%
1.00%(3) 1.48%(6) 0.90%(6) 1.02%(6)
<FN>
- ------------------------
(3) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Emerging Growth
Series, Total Return Series, Utilities Series and World Government Series
would be 0.41%, 1.35%, 2.00% and 1.28% respectively, and "Total Fund
Portfolio Annual Expenses" would be 1.16%, 2.10%, 2.75%, and 2.03%
respectively, for these Series. See "Information Concerning Shares of Each
Series--Expenses."
(4) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(5) Management Fees and Total Fund Portfolio Annual Expenses have been restated
to reflect the management fee schedule approved by shareholders effective
May 1, 1997. See fund prospectus for details. Actual fees and annual
expenses before May 1, 1997 were lower.
(6) The annual expenses of OCC Accumulation Trust Portfolios (the "Portfolios")
as of December 31, 1996 have been restated to reflect new management fee
and expense limitation arrangements in effect as of May 1, 1996.
Additionally, Other Expenses are shown gross of certain expense offsets
afforded the Portfolios which effectively lowered overall custody expenses.
Effective May 1, 1996, the expenses of the Portfolios were contractually
limited by OpCap Advisors so that their respective annualized operating
expenses (net of any expense offsets) do not exceed 1.25% of their
respective average daily net assets. Furthermore, through December 31,
1997, the annualized operating expenses of the Managed and Small Cap
Portfolios will be voluntarily limited by OpCap Advisors so that annualized
operating expenses (net of any expense offsets) of these Portfolios do not
exceed 1.00% of their respective average daily net assets. Without such
contractual and voluntary expense limitations and without giving effect to
any expense offsets, the Management Fees, Other Expenses and Total
Portfolio Annual Expenses incurred for the fiscal year ended December 31,
1996 would have been: .80%, 1.04% and 1.84%, respectively, for the Global
Equity Portfolio; .80%, .10% and .90%, respectively, for the Managed
Portfolio; and .80%, .26% and 1.06%, respectively, for the Small Cap
Portfolio.
</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").
Required premium levels will vary based on market
performance. In a prolonged market downturn, affecting all
Sub-Accounts, additional Premium Payments may be necessary
to maintain the level of coverage or to avoid lapsing of the
Policy. Review of periodic contract statements is strongly
suggested to determine appropriate premium requirements.
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
Funds' 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.
12
<PAGE>
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
performs certain administrative services. In some cases, the
advisers or distributors may compensate the Company
therefor.
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 in "Payment of Death
Benefit" 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 Annuity & Variable Life
Services 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
13
<PAGE>
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
Death Benefit 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.
PAYMENT OF DEATH BENEFIT
The Death Benefit under the Policy will be paid in a lump
sum within seven days after receipt at the Annuity &
Variable Life Services 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
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
INSURED'S CORRIDOR INSURED'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
------------ ----------- ------------- -----------
<S> <C> <C> <C>
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>
CHANGES IN SPECIFIED AMOUNT
Changes in the Specified Amount of a Policy can be made by
submitting a written request to the Annuity & Variable Life
Services 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 Annuity & Variable Life Services
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
15
<PAGE>
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").
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 must be in whole
percentages. No allocation can be made which would result in
a Sub-Account Value of less than $50 or a Fixed Account
value of less than $2,500. Further, at this time, no more
than 18 Sub-Accounts may be opened during the life of the
Policy. The Company may expand this number at a future date.
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.
16
<PAGE>
The allocation for future Net 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 allocatin. Any new
allocation is subject to the same requirements as the
initial allocation. The Company may, at its sole discretion,
waive minimum premium allocation requirements.
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 Annuity & Variable Life Services 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 Annuity &
Variable Life Services 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 Sub-Accounts 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
Annuity & Variable Life Services Center. Transfer requests
must be received by the Annuity & Variable Life Services
Center by 4:00 Eastern Time 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 Sub-Account'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.
OPTIONAL VARIABLE ACCOUNT SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to enroll in either of the following
programs. However, both programs cannot be in effect at the
same time.
17
<PAGE>
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected by the
Owner, systematically allocates specified dollar amounts
from the Money Market Sub-Account or the Fixed Account to
one or more of the Contract's Variable Account Sub-Accounts
at regular intervals as selected by the Owner. By allocating
on a regularly scheduled basis as opposed to allocating the
total amount at one particular time, an Owner may be less
susceptible to the impact of market fluctuations.
Dollar Cost Averaging may be elected by establishing a Money
Market Sub-Account or the Fixed Account value of at least
$1,000. The minimum amount per month to allocate is $100
(subject to the 18 Sub-Account limitation described under
"Allocation of Net Premium Payments" above). Enrollment in
this program may occur at any time by calling the Annuity &
Variable Life Services Center or by providing the
information requested on the Dollar Cost Averaging election
form to the Company, provided that sufficient value is in
the Money Market Sub-Account or the Fixed Account. Transfers
to the Fixed Account are not permitted under Dollar Cost
Averaging. The Company may, at its sole discretion, waive
Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market Sub-
Account or the Fixed Account is insufficient to complete the
next transfer; (3) the Owner requests termination by
telephone or in writing and such request is received at
least one week prior to the next scheduled transfer date to
take effect that month; or (4) the Policy is surrendered.
There is no current charge for Dollar Cost Averaging but the
Company reserves the right to charge for this program.
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Owner on the initial application, or thereafter by calling
the Annuity & Variable Life Services Center, periodically
restores to a pre-determined level the percentage of Policy
Value allocated to each Sub-Account (e.g. 20% Money Market,
50% Growth, 30% Utilities). This pre-determined level will
be the allocation initially selected on the application,
unless subsequently changed. The Automatic Rebalancing
allocation may be changed at any time by submitting a
written request to the Company or by calling the Annuity &
Variable Life Services Center.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts must be subject to
Automatic Rebalancing. The Fixed Account is not available
for Automatic Rebalancing.
Automatic Rebalancing may take place on either a quarterly,
semi-annual or annual basis, as selected by the Owner. Once
Automatic Rebalancing is activated, any Sub-Account
transfers executed outside of the rebalancing option will
terminate the Automatic Rebalancing. Any subsequent premium
payment or withdrawal that modifies the net account balance
within each Sub-Account may also cause termination of
Automatic Rebalancing. Any such termination will be
confirmed to the Owner. The Owner may terminate Automatic
Rebalancing or re-enroll at any time by calling or writing
the Annuity & Variable Life Services Center.
There is no current charge for Automatic Rebalancing but the
Company reserves the right to charge for this program.
18
<PAGE>
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.
<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
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
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
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
<CAPTION>
ATTAINED
AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- ----------- --------- --------- ---------
<S> <C> <C> <C>
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.
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.
20
<PAGE>
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. (See "Appendix 1 -- Illustration of
Surrender Charges".)
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".)
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.
21
<PAGE>
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
Annuity & Variable Life Services 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.
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
22
<PAGE>
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 Annuity & Variable Life Services 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.
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 Annuity & Variable Life
Services 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.
23
<PAGE>
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 payment or transfer
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.
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.
24
<PAGE>
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 Annuity & Variable
Life Services 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 .25% 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
Annuity & Variable Life Services 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.
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;
25
<PAGE>
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
Annuity & Variable Life Services 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 Annuity &
Variable Life Services 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.
If any Beneficiary predeceases the Insured, that
Beneficiary's interest passes to any surviving
Beneficiary(ies), unless otherwise provided. Multiple
Beneficiaries will be paid
26
<PAGE>
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
Annuity & Variable Life Services 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
Accumulation Value under the new Policy will be equal to the
Accumulation Value under the old Policy on the date the
exchange request is received. 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. If the Accumulation Value is insufficient to
support the Death Benefit, the Policy Owner will be required
to make additional Premium Payments in order to effect the
exchange. 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;
27
<PAGE>
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.
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.
28
<PAGE>
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 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
29
<PAGE>
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 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. Jones,
Mr. Pacy and Dr. Schaffer. Prior to February 1994, Mr. Jones
was Executive Vice President, Chief Administrative Officer,
Chief Operating Officer and Director, NAC Re Corporation and
NAC Reinsurance Corporation (Chief Operating Officer of NAC
Re Corporation beginning June 1993). Prior to January 1995,
Mr. Pacy was Senior Manager -- IT Infrastructure and
Technology Management Officer, Digital Equipment
Corporation. Prior to May 1993, Dr. Schaffer was Vice
President, Professional Affairs, Aetna Health Plans, Aetna
Life & Casualty.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE COMPANY
- ------------------------------ -----------------------------------
<S> <C>
Thomas C. Jones President
(Principal Executive Officer)
Bradley K. Miller Assistant 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
H. Edward Hanway Director and Chairman of the Board
Harold W. Albert Director
Robert W. Burgess Director
John G. Day Director and Chief Counsel
Joseph M. Fitzgerald Director and Senior Vice President
Carol M. Olsen Director and Senior Vice President
John E. Pacy 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
Marc L. Preminger Director, Senior Vice President and
Chief Financial Officer
</TABLE>
30
<PAGE>
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"), located at 900 Cottage Grove Road, Bloomfield,
CT. 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.
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
31
<PAGE>
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 reports containing
financial statements for the Variable Account and annual and
semi-annual reports of the Funds 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.
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, 1996 and 1995 and
for each of the three years in the period ended December 31,
1996 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. Price Waterhouse LLP's consent
to this reference to the firm as an "expert" is filed as an
exhibit to the registration statement of which this
Prospectus is a part.
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
32
<PAGE>
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.
FINANCIAL STATEMENTS
There follow consolidated balance sheets of the Company and
its subsidiaries as of December 31, 1996 and 1995 and
related consolidated statements of income and retained
earnings and cash flows for the years ended December 31,
1996, 1995 and 1994. There also follow, for the Variable
Account, statements of assets and liabilities as of December
31, 1996 and related statements of operations and statements
of changes in net assets for the period ended December 31,
1996.
The most current financial statements of the Company are
those as of the end of the most recent fiscal year. The
Company represents that there have been no adverse changes
in the financial condition or operations of the Company
between the end of 1996 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.
33
<PAGE>
One Financial Plaza Telephone 860 240 2000
Hartford, CT 06103
PRICE WATERHOUSE LLP [LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
February 11, 1997
The Board of Directors and Shareholder of
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, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
[SIG]
34
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS)
- -----------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and fees................................................... $ 5,314 $ 4,998 $ 4,960
Net investment income............................................... 3,199 3,138 2,805
Realized investment gains (losses).................................. 37 (7) 27
Other revenues...................................................... 9 9 8
--------- --------- ---------
Total revenues.................................................. 8,559 8,138 7,800
--------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Benefits, losses and settlement expenses............................ 6,069 5,892 5,574
Policy acquisition expenses......................................... 143 127 89
Other operating expenses............................................ 1,477 1,358 1,363
--------- --------- ---------
Total benefits, losses and expenses............................. 7,689 7,377 7,026
--------- --------- ---------
INCOME BEFORE INCOME TAXES.......................................... 870 761 774
--------- --------- ---------
Income taxes (benefits):
Current........................................................... 394 301 220
Deferred.......................................................... (81) (44) 45
--------- --------- ---------
Total taxes..................................................... 313 257 265
--------- --------- ---------
NET INCOME.......................................................... 557 504 509
Dividends declared.................................................. (600) (252) (300)
Retained earnings, beginning of year................................ 3,220 2,968 2,759
- -----------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR...................................... $ 3,177 $ 3,220 $ 2,968
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
35
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost, $19,882; $20,147)...... $ 20,816 $ 22,162
Mortgage loans.......................................................... 10,152 10,218
Equity securities, at fair value (cost, $59; $54)....................... 41 66
Policy loans............................................................ 7,133 6,925
Real estate............................................................. 1,025 1,158
Other long-term investments............................................. 193 193
Short-term investments.................................................. 417 138
--------- ---------
Total investments................................................... 39,777 40,860
Cash and cash equivalents................................................. -- --
Accrued investment income................................................. 619 626
Premiums and accounts receivable.......................................... 817 991
Reinsurance recoverables.................................................. 1,303 1,258
Deferred policy acquisition costs......................................... 780 689
Property and equipment, net............................................... 276 319
Current income taxes...................................................... 12 21
Deferred income taxes, net................................................ 639 403
Goodwill.................................................................. 488 503
Other assets.............................................................. 249 149
Separate account assets................................................... 22,555 18,177
- ------------------------------------------------------------------------------------------------
Total assets........................................................ $ 67,515 $ 63,996
- ------------------------------------------------------------------------------------------------
--------------------
LIABILITIES
Contractholder deposit funds.............................................. $ 29,621 $ 29,762
Future policy benefits.................................................... 8,187 8,547
Unpaid claims and claim expenses.......................................... 1,170 1,151
Unearned premiums......................................................... 200 95
--------- ---------
Total insurance and contractholder liabilities...................... 39,178 39,555
Accounts payable, accrued expenses and other liabilities.................. 1,808 1,872
Separate account liabilities.............................................. 22,365 18,075
- ------------------------------------------------------------------------------------------------
Total liabilities................................................... 63,351 59,502
- ------------------------------------------------------------------------------------------------
CONTINGENCIES -- NOTE 11
SHAREHOLDER'S EQUITY
Common stock (6 shares outstanding)....................................... 30 30
Additional paid-in capital................................................ 766 766
Net unrealized appreciation on investments................................ 188 476
Net translation of foreign currencies..................................... 3 2
Retained earnings......................................................... 3,177 3,220
- ------------------------------------------------------------------------------------------------
Total shareholder's equity.......................................... 4,164 4,494
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity.......................... $ 67,515 $ 63,996
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
36
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................ $ 557 $ 504 $ 509
Adjustments to reconcile net income to net cash provided by
operating activities:
Insurance liabilities........................................... 57 (90) (249)
Reinsurance recoverables........................................ (11) 1,201 282
Premiums and accounts receivable................................ 77 32 (188)
Deferred income taxes, net...................................... (82) (44) 45
Other assets.................................................... 43 (14) 68
Accounts payable, accrued expenses, other liabilities and
current income taxes........................................... (113) 212 (192)
Other, net...................................................... (149) 22 (24)
--------- --------- ---------
Net cash provided by operating activities..................... 379 1,823 251
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from investments sold:
Fixed maturities -- available for sale.......................... 1,589 1,070 1,389
Fixed maturities -- held to maturity............................ -- -- 12
Mortgage loans.................................................. 640 383 496
Equity securities............................................... 13 119 41
Real estate..................................................... 345 299 242
Other (primarily short-term investments)........................ 3,613 2,268 1,005
Investment maturities and repayments:
Fixed maturities -- available for sale.......................... 2,634 478 686
Fixed maturities -- held to maturity............................ -- 1,756 1,764
Mortgage loans.................................................. 630 420 194
Investments purchased:
Fixed maturities -- available for sale.......................... (3,834) (3,054) (2,390)
Fixed maturities -- held to maturity............................ -- (1,385) (1,788)
Mortgage loans.................................................. (1,300) (1,908) (882)
Equity securities............................................... (3) (20) (12)
Policy loans.................................................... (207) (2,129) (1,614)
Other (primarily short-term investments)........................ (3,930) (2,334) (1,093)
Other, net........................................................ (94) (119) (129)
--------- --------- ---------
Net cash provided by (used in) investing activities........... 96 (4,156) (2,079)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder deposit funds:
Deposits and interest credited.................................. 7,260 7,489 6,388
Withdrawals and benefit payments................................ (7,135) (4,985) (4,216)
Dividends paid to Parent.......................................... (600) (252) (300)
Other, net........................................................ -- 1 36
--------- --------- ---------
Net cash (used in) provided by financing activities......... (475) 2,253 1,908
- ---------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents.............. -- (80) 80
Cash and cash equivalents, beginning of year...................... -- 80 --
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year............................ $ -- $ -- $ 80
- ---------------------------------------------------------------------------------------------------
-------------------------------
Supplemental Disclosure of Cash Information:
Income taxes paid, net of refunds............................... $ 385 $ 211 $ 411
Interest paid................................................... $ 7 $ 7 $ 5
- ---------------------------------------------------------------------------------------------------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
37
<PAGE>
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Connecticut General Life Insurance Company and its subsidiaries (the Company)
provide insurance and related financial services throughout the United States
and in many locations worldwide. Principal products and services include group
life and health insurance, individual life insurance and annuity products, and
retirement and investment products and services. The Company is a wholly-owned
subsidiary of Connecticut General Corporation, which is an indirect wholly-owned
subsidiary of CIGNA Corporation (CIGNA).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries. These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles, and reflect management's estimates and assumptions, such
as those regarding medical costs and interest rates, that affect the recorded
amounts. Significant estimates used in determining insurance and contractholder
liabilities, related reinsurance recoverables, and valuation allowances for
investment assets are discussed throughout the Notes to Financial Statements.
Certain reclassifications have been made to prior years' amounts to conform with
the 1996 presentation.
B) RECENT ACCOUNTING PRONOUNCEMENTS: In 1996, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires write-down to fair value when long-lived assets to be held
and used are impaired. Long-lived assets to be disposed of, including real
estate held for sale, must be carried at the lower of cost or fair value less
costs to sell. Depreciation of assets to be disposed of is prohibited. The
effect of implementing SFAS No. 121 was not material to the Company.
In 1993, the Company implemented SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which required that debt and equity
securities be classified into different categories and carried at fair value if
they are not classified as held-to-maturity. During the fourth quarter of 1995,
the Financial Accounting Standards Board (FASB) issued a guide to implementation
of SFAS No. 115, which permitted a one-time opportunity to reclassify securities
subject to SFAS No. 115. Consequently, the Company reclassified all held-to-
maturity securities to available-for-sale as of December 31, 1995. The non-cash
reclassification of these securities, which had an aggregate amortized cost of
$9.2 billion and fair value of $10.1 billion, resulted in an increase of
approximately $396 million, net of policyholder-related amounts and deferred
income taxes, in net unrealized appreciation included in Shareholder's Equity as
of December 31, 1995.
In 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," which provides guidance on the accounting and disclosure for
impaired loans. In 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
adopted SFAS Nos. 114 and 118 in the first quarter of 1995, which resulted in a
$6 million increase in net income.
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 and
financial guarantees. These instruments are subject to risk of loss due to
interest rate and market fluctuations and most have credit risk. The Company
evaluates and monitors each financial instrument individually and, where
appropriate, uses certain derivative instruments or obtains collateral or other
forms of security to minimize risk of loss.
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 value, except for
Mortgage Loans and Contractholder Deposit Funds (non-insurance products). For
these financial instruments, the fair value was not materially different from
the carrying amount as of December 31, 1996 and 1995. Fair values of off-balance
sheet financial instruments as of December 31, 1996 and 1995 were not material.
38
<PAGE>
Fair values 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.
D) INVESTMENTS: Investments in fixed maturities, which are classified as
available-for-sale, include bonds, asset-backed securities, including
collateralized mortgage obligations (CMOs), and redeemable preferred stocks.
Fixed maturities 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. Mortgage loans are considered impaired when it is probable
that the Company will not collect all amounts according to the contractual terms
of the loan agreement. If impaired, a valuation reserve is utilized to record
any change in the fair value of the underlying collateral below the carrying
value of the mortgage loan.
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. Net investment
income on such investments 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 any write-downs to fair value. Depreciation is
generally calculated using the straight-line method based on the estimated
useful lives of these assets.
Real estate investments held for sale are generally those which are acquired
through the foreclosure of mortgage loans. The Company's policy is to
rehabilitate, re-lease and sell foreclosed properties, which generally takes two
to four years. At the time of foreclosure, properties are valued at fair value
less estimated costs to sell and reclassified from mortgage loans to real estate
held for sale. Subsequent to foreclosure, these investments are carried at the
lower of 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, with emphasis placed on the use of
discounted cash flow analyses and, in some cases, the use of third-party
appraisals. Effective with the implementation of SFAS No. 121, real estate held
for sale is no longer depreciated.
Equity securities, which include common and non-redeemable preferred stocks,
are carried at fair value, with unrealized appreciation or depreciation included
in Shareholder's Equity. 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. Realized investment gains and
losses do not include amounts attributable to experience-rated pension
policyholders' contracts and participating life policies (policyholder share).
Realized investment gains and losses are based upon specific identification of
the investment assets.
Unrealized investment gains and losses for investments carried at fair value
are included in Shareholder's Equity net of policyholder-related amounts and
deferred income taxes.
See Note 3(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
estimated to be uncollectible.
39
<PAGE>
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. Acquisition costs for universal life
products and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits over the expected lives of the
contracts. Acquisition costs for annuity and other individual life insurance
products are deferred and amortized, generally in proportion to the ratio of
annual revenue to the estimated total revenues over the contract periods.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income. If such costs are
estimated to be unrecoverable, they are expensed. If such costs are estimated to
be unrecoverable or are accelerated as a result of treating unrealized
investment gains and losses as though they had been realized, a deferred
acquisition cost valuation allowance may be established or adjusted, with a
comparable offset in net unrealized appreciation (depreciation).
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 $427 million
and $387 million at December 31, 1996 and 1995, 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. Goodwill is amortized on
systematic bases over periods, not exceeding 40 years, that correspond with the
benefits estimated to be derived from the acquisitions. The Company evaluates
the carrying amount of goodwill by analyzing historical and estimated future
income and undiscounted estimated cash flows of the related businesses. Goodwill
is written down when impaired. Amortization periods are revised if it is
estimated that the remaining period of benefit of the goodwill has changed.
Accumulated amortization was $99 million and $84 million at December 31, 1996
and 1995, respectively.
K) SEPARATE ACCOUNTS: Separate account assets and liabilities are principally
carried at market value 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 revenues and expenses.
L) CONTRACTHOLDER DEPOSIT FUNDS: Liabilities for Contractholder Deposit Funds
consist of deposits received from customers and investment earnings on their
fund balances, less administrative charges and, for universal life fund
balances, mortality 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 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 from 1 to 20 years. Mortality, morbidity,
and withdrawal assumptions 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 reported and incurred but not
reported insurance claims.
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 consist 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.
40
<PAGE>
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. The
translation gain or loss on such functional currencies, net of applicable taxes,
is generally reflected in Shareholder's Equity. Revenues and expenses are
translated at the average rates of exchange prevailing during the year.
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. Benefits, losses and settlement expenses are
recognized when incurred.
Premiums for individual life 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 settlement expenses are
matched with premiums.
Revenues for universal life products consist of net investment income and
mortality, administration and surrender fees assessed against the fund balances
during the period. Net investment income represents investment income on assets
supporting universal life products and is recognized as earned. Fees for
mortality are recognized ratably over the policy year. Administration fees are
recognized as services are provided, and surrender charges are recognized as
earned. Benefit expenses for universal life products consist of benefit claims
in excess of fund balances, which are recognized when claims are filed, and
interest credited in accordance with contract provisions.
Revenues for investment-related products consist of net investment income and
contract fees assessed against the fund balances during the period. Net
investment income represents investment income on assets supporting
investment-related products and is recognized as earned. Contract fees are based
upon related administrative expenses and are assessed ratably over the contract
year. Benefit expenses for investment-related products primarily consist of
interest credited in accordance with contract provisions.
S) PARTICIPATING BUSINESS: Certain life insurance policies contain dividend
payment provisions that enable the policyholder to participate in a portion of
the earnings of the Company's business. The participating insurance in force
accounted for approximately 7% of total insurance in force at December 31, 1996,
and 1995, and 5% at December 31, 1994.
T) INCOME TAXES: The Company and its domestic subsidiaries are included in
the consolidated United States federal income tax return filed by CIGNA. In
accordance with a tax sharing agreement with CIGNA, the provision for federal
income tax is computed as if the Company were filing a separate federal income
tax return, except that benefits arising from tax credits and net operating and
capital losses are allocated to those subsidiaries producing such attributes to
the extent they are utilized in CIGNA's 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. See
Note 6 for additional information.
NOTE 3 -- INVESTMENTS
A) FIXED MATURITIES: Fixed maturities are net of cumulative write-downs of
$95 million and $103 million, including policyholder share, as of December 31,
1996 and 1995, respectively.
The amortized cost and fair value by contractual maturity periods for fixed
maturities, including policyholder share, as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Amortized Fair
(IN MILLIONS) Cost Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................................. $ 936 $ 955
Due after one year through five years.................................... 5,252 5,419
Due after five years through ten years................................... 4,591 4,773
Due after ten years...................................................... 3,301 3,702
Asset-backed securities.................................................. 5,802 5,967
- ------------------------------------------------------------------------------------------------
Total.................................................................... $ 19,882 $ 20,816
- ------------------------------------------------------------------------------------------------
---------------------
</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.
41
<PAGE>
Gross unrealized appreciation (depreciation) for fixed maturities, including
policyholder share, by type of issuer was as follows:
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
December 31, 1996
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Federal government bonds......................... $ 475 $ 160 $ -- $ 635
State and local government bonds................. 174 13 (4) 183
Foreign government bonds......................... 121 6 -- 127
Corporate securities............................. 13,310 742 (148) 13,904
Asset-backed securities.......................... 5,802 226 (61) 5,967
- -----------------------------------------------------------------------------------------------------
Total............................................ $ 19,882 $ 1,147 $ (213) $ 20,816
- -----------------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
December 31, 1995
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Amortized Unrealized Unrealized Fair
(IN MILLIONS) Cost Appreciation Depreciation Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Federal government bonds......................... $ 503 $ 300 $ -- $ 803
State and local government bonds................. 207 24 (1) 230
Foreign government bonds......................... 131 9 (1) 139
Corporate securities............................. 13,773 1,427 (73) 15,127
Asset-backed securities.......................... 5,533 371 (41) 5,863
- -----------------------------------------------------------------------------------------------------
Total............................................ $ 20,147 $ 2,131 $ (116) $ 22,162
- -----------------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------
</TABLE>
Asset-backed securities include investments in CMOs as of December 31, 1996 of
$2.2 billion carried at fair value (amortized cost, $2.1 billion), compared with
$2.1 billion carried at fair value (amortized cost, $2.0 billion) as of December
31, 1995. Certain of these securities are backed by Aaa/AAA-rated government
agencies. All other CMO securities have high quality ratings through use of
credit enhancements provided by subordinated securities or mortgage insurance
from Aaa/AAA-rated insurance companies. CMO holdings are concentrated in
securities with limited prepayment, extension and default risk, such as planned
amortization class bonds. The Company's investments in interest-only and
principal-only CMOs, which are subject to interest rate risk due to accelerated
prepayments, represented approximately 0.1% and 1.9% of total CMO investments at
December 31, 1996 and 1995, respectively.
At December 31, 1996, contractual fixed maturity investment commitments were
$93 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 approximately 75% will be disbursed in 1997.
B) 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 75% of the property's value at the time the
original loan is made.
42
<PAGE>
At December 31, the carrying values of mortgage loans and real estate
investments, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Loans............................................................ $ 10,152 $ 10,218
--------- ---------
Real estate:
Held for sale........................................................... 586 671
Held for production of income........................................... 439 487
--------- ---------
Total real estate......................................................... 1,025 1,158
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 11,177 $ 11,376
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
At December 31, mortgage loans and real estate investments comprised the
following property types and geographic regions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Retail facilities....................................................... $ 4,453 $ 4,327
Office buildings........................................................ 4,241 4,493
Apartment buildings..................................................... 1,272 1,246
Hotels.................................................................. 665 711
Other................................................................... 546 599
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 11,177 $ 11,376
- ------------------------------------------------------------------------------------------------
--------------------
Geographic region:
Central................................................................. $ 3,452 $ 4,032
Pacific................................................................. 3,132 2,580
Middle Atlantic......................................................... 1,920 1,951
South Atlantic.......................................................... 1,526 1,647
New England............................................................. 1,147 1,166
- ------------------------------------------------------------------------------------------------
Total..................................................................... $ 11,177 $ 11,376
- ------------------------------------------------------------------------------------------------
--------------------
</TABLE>
MORTGAGE LOANS
At December 31, 1996, scheduled mortgage loan maturities were as follows: 1997
- -- $.9 billion; 1998 -- $.7 billion; 1999 -- $1.3 billion; 2000 -- $1.5 billion;
2001 -- $1.2 billion; and $4.7 billion thereafter. Actual maturities could
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties; the maturity date may
be extended; and loans may be refinanced. During 1996 and 1995, the Company
refinanced at current market rates approximately $477 million and $379 million,
respectively, of its mortgage loans relating to borrowers that were unable to
obtain alternative financing.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $397 million, all
of which were at a fixed market rate of interest. These commitments expire
within six months, and are diversified by property type and geographic region.
At December 31, 1996, the Company's impaired mortgage loans were $814 million,
including $442 million before valuation reserves totaling $94 million, and $372
million which had no valuation reserves. At December 31, 1995, the Company's
impaired mortgage loans were $838 million, including $447 million before
valuation reserves totaling $82 million, and $391 million which had no valuation
reserves.
43
<PAGE>
During the year ended December 31, changes in reserves for impaired mortgage
loans, including policyholder share, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Reserve balance -- January 1................................................... $ 82 $ 127
Transfers to foreclosed real estate............................................ (29) (27)
Charge-offs upon sales......................................................... (19) (33)
Net increase in valuation reserves............................................. 60 15
- -----------------------------------------------------------------------------------------------------
Reserve balance -- December 31................................................. $ 94 $ 82
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
During 1996 and 1995, impaired mortgage loans, before valuation reserves,
averaged approximately $852 million and $935 million, respectively. Interest
income recorded and cash received on these loans was approximately $73 million
and $71 million in 1996 and 1995, respectively.
REAL ESTATE
During 1996, 1995 and 1994, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which totaled $107 million, $144
million and $127 million, respectively.
Valuation reserves and cumulative write-downs related to real estate,
including policyholder share, were $273 million and $310 million as of December
31, 1996 and 1995, respectively.
Net income for 1996 included $19 million and $1 million for net investment
income and write-downs upon foreclosures, respectively, for real estate held for
sale.
C) SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS: At December 31, 1996 and
1995, short-term investments and cash equivalents, in the aggregate, primarily
included debt securities, principally corporate securities of $418 million and
$203 million, respectively.
D) NET UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS: Unrealized
appreciation (depreciation) for investments carried at fair value as of December
31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized appreciation:
Fixed maturities.......................................................... $ 1,147 $ 2,131
Equity securities......................................................... 8 23
--------- ---------
1,155 2,154
--------- ---------
Unrealized depreciation:
Fixed maturities.......................................................... (213) (116)
Equity securities......................................................... (26) (11)
--------- ---------
(239) (127)
--------- ---------
Less policyholder-related amounts........................................... 610 1,279
--------- ---------
Shareholder net unrealized appreciation..................................... 306 748
Less deferred income taxes.................................................. 118 272
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation................................................. $ 188 $ 476
- --------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Net unrealized appreciation for investments carried at fair value is included
as a separate component of Shareholder's Equity, net of policyholder-related
amounts and deferred income taxes. The net unrealized (depreciation)
appreciation for these investments, primarily fixed maturities, during 1996,
1995 and 1994 was ($288) million, $542 million and ($494) million, respectively.
During 1995 and 1994, certain fixed maturities were carried at amortized cost
in the financial statements. The change in net unrealized appreciation
(depreciation) for such investments was ($14) million and ($1.2) billion during
1995 and 1994, respectively.
44
<PAGE>
E) NON-INCOME PRODUCING INVESTMENTS: At December 31, the carrying values of
investments, including policyholder share, that were non-income producing during
the preceding 12 months were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturities............................................................... $ 52 $ 75
Mortgage loans................................................................. 14 17
Real estate.................................................................... 172 234
- -----------------------------------------------------------------------------------------------------
Total.......................................................................... $ 238 $ 326
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
F) DERIVATIVE FINANCIAL INSTRUMENTS: The Company's investment strategy is to
manage the characteristics of investment assets, such as liquidity, currency,
yield and duration, to reflect the underlying characteristics of the related
insurance and contractholder liabilities, which vary among the Company's
principal product lines. In connection with this investment strategy, the
Company's use of derivative instruments, including interest rate and currency
swaps, purchased options and futures contracts, is limited to hedging
applications to minimize market risk.
Hedge accounting treatment requires a probability of high correlation between
the changes in the market value or cash flows of the derivatives and the hedged
assets or liabilities. Under hedge accounting, the changes in market value or
cash flows of the derivatives and the hedged assets or liabilities are
recognized in net income in the same period. If the Company's use of derivatives
does not qualify for hedge accounting treatment, the derivative is recorded at
fair value and changes in its fair value are recognized in net income without
considering changes in the hedged asset or liability.
The Company routinely monitors, by individual counterparty, exposure to credit
risk associated with swap and option contracts and diversifies the portfolio
among approved dealers of high credit quality. 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 and by monitoring legal developments.
Underlying contract, notional or principal amounts associated with derivatives
at December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps............................................................ $ 335 $ 508
Currency swaps................................................................. 275 335
Purchased options.............................................................. 632 --
Futures........................................................................ 45 22
- -----------------------------------------------------------------------------------------------------
</TABLE>
Under interest rate swaps, the Company agrees with other parties to
periodically exchange the difference between variable rate and fixed rate asset
cash flows to provide stable returns for related liabilities. The Company uses
currency swaps (primarily Canadian dollars, pounds sterling and Swiss francs) to
match the currency of investments to that of the associated liabilities. Under
currency swaps, the parties exchange principal and interest amounts in two
relevant currencies using agreed-upon exchange amounts.
The net interest cash flows from interest rate and currency swaps are
recognized currently as an adjustment to net investment income, and the fair
value of these swaps is reported as an adjustment to the related investments.
Using purchased options to reduce the effect of changes in interest rates or
equity indexes on liabilities, the Company pays an up-front fee to receive cash
flows from third parties when interest rates or equity indexes vary from
specified levels. Purchased options that qualify for hedge accounting are
recorded consistent with the related liabilities, at amortized cost plus
adjustments based on current equity indexes, and income is reported as an
adjustment to benefit expense. Purchased options are reported in other assets,
and fees paid are amortized to benefit expense over their contractual periods.
Purchased options with underlying notional amounts of $112 million at December
31, 1996 that are designated as hedges, but do not qualify for hedge accounting,
are reported in other long-term investments at fair value with changes in fair
value recognized as realized investment gains and losses.
45
<PAGE>
Interest rate futures are used to temporarily hedge against the changes in
market values of bonds and mortgage loans to be purchased or sold. Under futures
contracts, changes in the contract values are settled in cash daily with the
exchange on which the instrument is traded. These changes in contract values 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 are recognized in full as
realized investment gains and losses if investments are sold. Gains and losses
on futures contracts deferred in anticipation of investment purchases were
immaterial at December 31, 1996 and 1995.
The effects of interest rate and currency swaps, purchased options and futures
on the components of net income for 1996, 1995 and 1994 were not material.
As of December 31, 1996 and 1995, the Company's variable interest rate
investments consisted of approximately $1.3 billion and $1.4 billion of fixed
maturities, respectively. As of December 31, 1996 and 1995, the Company's fixed
interest rate investments consisted of $19.5 billion and $20.6 billion,
respectively, of fixed maturities, and $10.2 billion and $10.0 billion,
respectively, of mortgage loans.
G) OTHER: As of December 31, 1996 and 1995, the Company had no concentration
of investments in a single investee exceeding 10% of Shareholder's Equity.
NOTE 4 -- 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) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities.................................................... $ 1,647 $ 1,663 $ 1,596
Equity securities................................................... -- 15 20
Mortgage loans...................................................... 921 866 776
Policy loans........................................................ 548 499 365
Real estate......................................................... 227 301 291
Other long-term investments......................................... 23 33 23
Short-term investments.............................................. 35 46 8
--------- --------- ---------
3,401 3,423 3,079
Less investment expenses............................................ 202 285 274
- -----------------------------------------------------------------------------------------------------
Net investment income............................................... $ 3,199 $ 3,138 $ 2,805
- -----------------------------------------------------------------------------------------------------
-------------------------------
</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 $1.8 billion for
1996 and 1995, and $1.5 billion for 1994 . Net investment income for separate
accounts, which is not reflected in the Company's revenues, was $1.1 billion,
$885 million and $693 million for 1996, 1995 and 1994, respectively.
As of December 31, 1996, fixed maturities and mortgage loans on non-accrual
status, including policyholder share, were $160 million and $360 million,
including restructured investments of $88 million and $304 million,
respectively. As of December 31, 1995, fixed maturities and mortgage loans on
non-accrual status, including policyholder share, were $149 million and $523
million, including restructured investments of $105 million and $447 million,
respectively. If interest on these investments had been recognized in accordance
with their original terms, net income would have been increased by $15 million,
$18 million and $14 million in 1996, 1995 and 1994, respectively.
46
<PAGE>
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) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities....................................................... $ 11 $ (10) $ 4
Equity securities...................................................... 1 5 2
Mortgage loans......................................................... (12) (5) --
Real estate............................................................ 15 4 15
Other.................................................................. 22 (1) 6
--- --- ---
37 (7) 27
Income tax expenses (benefits)........................................... 17 (2) 12
- ----------------------------------------------------------------------------------------------------------------
Net realized investment gains (losses)................................... $ 20 $ (5) $ 15
- ----------------------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Realized investment gains and losses include impairments in the value of
investments, net of recoveries, of $40 million, $27 million and $33 million in
1996, 1995 and 1994, respectively.
Realized investment gains (losses) for separate accounts, which are not
reflected in the Company's revenues, were $305 million, $412 million and ($51)
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Realized investment gains (losses) attributable to policyholder contracts, which
also are not reflected in the Company's revenues, were $82 million and ($6)
million for the years ended December 31, 1996 and 1995, respectively. There were
no realized investment gains (losses) attributable to policyholder contracts for
the year ended December 31, 1994.
Sales of available-for-sale fixed maturities and equity securities, including
policyholder share, for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales................................................. $ 4,236 $ 1,667 $ 2,116
Gross gains on sales................................................ $ 146 $ 78 $ 73
Gross losses on sales............................................... $ (70) $ (53) $ (70)
- -----------------------------------------------------------------------------------------------------
</TABLE>
Prior to the SFAS No. 115 reclassification described in Note 2(B), $171
million of fixed maturities classified as held-to-maturity, including
policyholder share, were transferred to the available-for-sale category in 1995
with no material effect on Shareholder's Equity.
NOTE 5 -- 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, 1996, there were no permitted accounting practices utilized by the
Company that were materially different from those prescribed by the Department.
Capital stock of the Company at December 31, 1996 and 1995 consisted of
5,978,322 shares of common stock authorized, issued and outstanding (par value
$5.00).
The Company's statutory net income was $611 million, $390 million and $428
million for 1996, 1995 and 1994, respectively. Statutory surplus was $2.1
billion at December 31, 1996 and 1995. The Connecticut Insurance Holding Company
Act limits the amount of annual dividends or other distributions available to
shareholders of Connecticut insurance companies without the Department's prior
approval. During 1996, the Company paid a total of $600 million in dividends to
its Parent, of which $200 million received prior approval from the Department in
accordance with requirements. Under current law, the maximum dividend
distribution that may be made by the Company during 1997 without prior approval
is $629 million. The amount of restricted net assets as of December 31, 1996 was
approximately $3.5 billion.
47
<PAGE>
NOTE 6 -- INCOME TAXES
The Company's net deferred tax asset of $639 million and $403 million as of
December 31, 1996 and 1995, respectively, reflects management's belief that the
Company's taxable income in future years will be sufficient to realize the net
deferred tax asset based on the Company's earnings history and its future
expectations. 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, 1996
would result in a tax liability of $158 million only if distributed to the
shareholder 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 CIGNA's financial statements
in anticipation of the results of these audits.
In management's opinion, adequate tax liabilities have been established for
all years.
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) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other insurance and contractholder liabilities............................... $ 387 $ 324
Employee and retiree benefit plans........................................... 177 176
Investments, net............................................................. 228 225
Other........................................................................ 74 72
--- ---
Total deferred tax assets.................................................... 866 797
--- ---
Deferred tax liabilities:
Policy acquisition expenses.................................................. 21 25
Depreciation................................................................. 88 97
Unrealized appreciation on investments....................................... 118 272
--- ---
Total deferred tax liabilities............................................... 227 394
- -----------------------------------------------------------------------------------------------------
Net deferred income tax asset.................................................. $ 639 $ 403
- -----------------------------------------------------------------------------------------------------
--------------------
</TABLE>
Total income taxes for the year ended December 31 were less than the amount
computed using the nominal federal income tax rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at nominal rate.............................................. $ 305 $ 266 $ 271
Tax-exempt interest income............................................... (5) (6) (7)
Dividends received deduction............................................. (7) (7) (3)
Amortization of goodwill................................................. 4 4 4
Resolved federal tax audit issues........................................ -- -- (2)
Other.................................................................... 16 -- 2
- ----------------------------------------------------------------------------------------------------------
Total income taxes....................................................... $ 313 $ 257 $ 265
- ----------------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
NOTE 7 -- 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 plan sponsored by
CIGNA covering most domestic employees (the Plan) and by several separate
pension plans for various subsidiaries, agents and foreign employees.
48
<PAGE>
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 $26 million, $23 million and
$31 million in 1996, 1995 and 1994, respectively.
The Plan, and several separate pension plans for various subsidiaries and
agents, had deposits with the Company totalling approximately $2.2 billion and
$2.0 billion at December 31, 1996 and 1995, 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. CIGNA's contributions for
health care benefits depend upon a retiree's date of retirement, age, years of
service and other cost-sharing features, such as deductibles and coinsurance.
Under the terms of the benefit plans, benefit provisions and cost-sharing
features can be adjusted. In general, retiree health care benefits are not
funded by CIGNA, but are paid as covered expenses are incurred. Retiree life
insurance benefits are paid from plan assets or as covered expenses are
incurred.
In 1996, CIGNA amended its health care plan for certain current and future
retirees effective January 1, 1997, whereby health benefits will be provided
primarily through CIGNA's managed care networks in exchange for a fixed
reimbursement amount per retiree from Medicare. The effect of the plan amendment
was to reduce CIGNA's other postretirement benefit liability by $110 million.
The reduction of the liability is being amortized into income over the average
remaining employee service period, approximately 17 years, through a reduction
of the expense for postretirement benefits other than pensions allocated to the
Company.
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 $16 million for
1996, $20 million for 1995 and $28 million for 1994. The other postretirement
benefit liability included in Accounts Payable, Accrued Expenses and Other
Liabilities as of December 31, 1996 and 1995 was $424 million and $427 million,
including net intercompany payables of $40 million and $28 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.
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 10 for additional information regarding severance accrued
as part of cost reduction initiatives.
D) CAPITAL ACCUMULATION PLANS: CIGNA sponsors various capital accumulation
plans in which employee contributions on a pre-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 allocated expense for such plans totaled $16
million for 1996 and $14 million for each of 1995 and 1994.
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 characteristic of its reinsurers.
49
<PAGE>
Failure of reinsurers to indemnify the Company, as a result of reinsurer
insolvencies and disputes, could result in losses. As of December 31, 1996 and
1995 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) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 3,709 $ 3,374 $ 3,419
Assumed........................................................... 571 818 716
Ceded............................................................. (193) (391) (291)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 4,087 $ 3,801 $ 3,844
- -----------------------------------------------------------------------------------------------------
-------------------------------
LONG-DURATION CONTRACTS
Premiums and fees:
Direct............................................................ $ 1,228 $ 1,189 $ 1,068
Assumed........................................................... 165 127 126
Ceded............................................................. (166) (119) (78)
- -----------------------------------------------------------------------------------------------------
Net earned premiums and fees........................................ $ 1,227 $ 1,197 $ 1,116
- -----------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
The effects of reinsurance on written premiums and fees for short-duration
contracts were not materially different from the amounts shown in the above
table. Benefits, losses and settlement expenses for 1996, 1995 and 1994 were net
of reinsurance recoveries of $359 million, $442 million and $415 million,
respectively.
NOTE 9 -- LEASES AND RENTALS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $68 million, $60 million and $62 million in 1996, 1995 and 1994,
respectively.
As of December 31, 1996, future net minimum rental payments under
non-cancelable operating leases were $128 million, payable as follows: 1997 -
$42 million; 1998 - $31 million; 1999 - $27 million; 2000 - $13 million; 2001 -
$6 million; and $9 million thereafter.
NOTE 10 -- SEGMENT INFORMATION
The Company operates principally in three segments: Employee Life and Health
Benefits, Employee Retirement and Savings Benefits, and Individual Financial
Services. Other Operations consists principally of the results of the Company's
settlement annuity business.
50
<PAGE>
Summarized financial information with respect to the business segments for the
year ended and as of December 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Employee Life and Health Benefits................................ $ 4,510 $ 4,243 $ 4,194
Employee Retirement and Savings Benefits......................... 1,899 1,914 1,887
Individual Financial Services.................................... 1,950 1,800 1,546
Other Operations................................................. 200 181 173
- --------------------------------------------------------------------------------------------------
Total............................................................ $ 8,559 $ 8,138 $ 7,800
- --------------------------------------------------------------------------------------------------
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
Employee Life and Health Benefits................................ $ 287 $ 294 $ 323
Employee Retirement and Savings Benefits......................... 293 232 258
Individual Financial Services.................................... 298 252 237
Other Operations................................................. (8) (17) (44)
- --------------------------------------------------------------------------------------------------
Total............................................................ $ 870 $ 761 $ 774
- --------------------------------------------------------------------------------------------------
-------------------------------
IDENTIFIABLE ASSETS
Employee Life and Health Benefits................................ $ 7,065 $ 7,629 $ 7,197
Employee Retirement and Savings Benefits......................... 40,122 37,609 33,588
Individual Financial Services.................................... 17,930 16,189 12,612
Other Operations................................................. 2,398 2,569 2,111
- --------------------------------------------------------------------------------------------------
Total............................................................ $ 67,515 $ 63,996 $ 55,508
- --------------------------------------------------------------------------------------------------
-------------------------------
</TABLE>
During 1995, the Company recorded a $13 million pre-tax charge, included in
Other Operating Expenses, for cost reduction initiatives in the Employee Life
and Health Benefits segment. The charge consisted primarily of severance-related
expenses representing costs associated with nonvoluntary employee terminations
covering approximately 1,100 employees. The cash outlays associated with the
restructuring initiatives began in the third quarter of 1995 and will continue
through 1997, with $6 million paid in 1996. As of December 31, 1996, $7 million
of severance was paid to 625 terminated employees. The Company has funded, and
will continue to fund, these costs through liquid assets, and such funding has
not and will not have a material adverse effect on its liquidity.
NOTE 11 -- 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.
The industrial revenue bonds guaranteed directly by the Company have remaining
maturities of up to 19 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, 1996 and 1995 was $234
million and $266 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 are established when a default has occurred or
when the Company believes that a loss has been incurred. During 1994, losses for
industrial revenue bonds were $1 million. There were no such losses in 1996 and
1995.
51
<PAGE>
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, 1996 and 1995, the amount of minimum benefit
guarantees for separate account contracts was $4.9 billion and $5.1 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. No such reserves were required as of December 31, 1996 and
1995. 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
that could affect them. Some of the changes include initiatives to: change
certain federal corporate tax laws; restrict insurance pricing and the
application of underwriting standards; reform health care; and expand
regulation. Some of the more significant issues are discussed below.
In August 1996, Congress passed legislation that phases out over a three-year
period the tax deductibility of policy loan interest for most leveraged
corporate-owned life insurance (COLI) products. For 1996, 31% of revenues and
29% of operating income for the Individual Financial Services segment were from
leveraged COLI products that are affected by this legislation. The effect of the
legislation on this segment's income is not expected to be material through
1998. Beginning in 1999, the effect of the legislation is uncertain; however, it
could have a material adverse effect on the segment's income. The Company does
not expect this legislation to have a material effect on its consolidated
results of operations, liquidity or financial condition.
The Company expects proposals for federal and state legislation seeking some
health care insurance reforms. 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 is currently developing
standardized statutory accounting principles, which are scheduled to take effect
in 1999. The effect on the Company's statutory net income, surplus and liquidity
cannot be reasonably estimated at this time.
In recent years, the number of insurance companies that are impaired or
insolvent has increased. 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. The Company recorded pre-tax charges of $53.9 million, $37.0
million and $27.9 million for 1996, 1995 and 1994, respectively, for guaranty
fund assessments that can be reasonably estimated 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.
C) LITIGATION: The Company is routinely engaged in litigation incidental to
its business. 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 12 -- RELATED PARTY TRANSACTIONS
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 $1.7 billion at
December 31, 1996 and 1995.
The Company cedes long-term disability business to LINA. Reinsurance
recoverables from LINA at December 31, 1996 and 1995 were $917 million and $973
million, respectively.
52
<PAGE>
The Company had lines of credit available from affiliates totaling $600
million at both December 31, 1996 and 1995. 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 1996, 1995
and 1994. As of December 31, 1996 and 1995, there were no borrowings outstanding
under such lines.
The Company extended lines of credit to affiliates totalling $600 million at
December 31, 1996 and 1995. All loans are payable upon demand with interest
rates equivalent to CIGNA's average monthly short-term borrowing rate. There
were no amounts outstanding as of December 31, 1996 or 1995.
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. Withdrawals from the Account, up to the total amount of the
participant's investment in the Account, are allowed on a demand basis. As of
December 31, 1996 and 1995, the Company had a balance in the Account of $80
million and $212 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.
53
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS SUB-ACCOUNTS
--------------------------------------------------
CAPITAL DIVERSIFIED
APPRECIATION INCOME GROWTH VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable insurance
funds at value................... $ 300,215 $ 79,943 $ 396,937 $ 400,047
Receivable from Connecticut General
Life Insurance
Company.......................... 1,097 -- 135,631 1,645
Receivable for fund shares sold.... -- 52 -- --
----------- ----------- ----------- -----------
Total assets................... 301,312 79,995 532,568 401,692
----------- ----------- ----------- -----------
LIABILITIES:
Payable to Connecticut General Life
Insurance Company................ -- 52 -- --
Payable for fund shares
purchased........................ 1,097 -- 135,631 1,645
----------- ----------- ----------- -----------
Total liabilities.............. 1,097 52 135,631 1,645
----------- ----------- ----------- -----------
Net assets..................... $ 300,215 $ 79,943 $ 396,937 $ 400,047
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accumulation units outstanding..... 28,628 7,356 37,637 35,352
Net asset value per accumulation
unit............................. $ 10.486698 $ 10.868038 $ 10.546548 $ 11.316054
<CAPTION>
CIGNA
VARIABLE FIDELITY
PRODUCTS VIP
GROUP PORTFOLIO FIDELITY VIP II
SUB-ACCOUNT SUB-ACCOUNT PORTFOLIO SUB-ACCOUNTS
----------- ----------- ------------------------
MONEY EQUITY- ASSET INVESTMENT
MARKET INCOME MANAGER GRADE BOND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investment in variable insurance
funds at value................... $ 183,119 $ 298,186 $ 68,048 $ 40,821
Receivable from Connecticut General
Life Insurance
Company.......................... -- 475 -- --
Receivable for fund shares sold.... -- -- -- --
----------- ----------- ----------- -----------
Total assets................... 183,119 298,661 68,048 40,821
----------- ----------- ----------- -----------
LIABILITIES:
Payable to Connecticut General Life
Insurance Company................ -- -- -- --
Payable for fund shares
purchased........................ -- 475 -- --
----------- ----------- ----------- -----------
Total liabilities.............. -- 475 -- --
----------- ----------- ----------- -----------
Net assets..................... $ 183,119 $ 298,186 $ 68,048 $ 40,821
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Accumulation units outstanding..... 17,823 27,224 6,332 3,845
Net asset value per accumulation
unit............................. $10.274144 $ 10.953184 $ 10.747301 $ 10.615798
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
54
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OCC ACCUMULATION TRUST
MFS SERIES SUB-ACCOUNTS SUB-ACCOUNTS *
----------------------------------- ----------------------------------
TOTAL WORLD GLOBAL
RETURN UTILITIES GOVERNMENTS EQUITY MANAGED SMALL CAP
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment in variable insurance
funds at value................ $ 126,098 $ 5,819 $ 10,041 $ 16,055 $ 242,604 $ 170,376
Receivable from Connecticut
General Life Insurance
Company....................... -- -- -- -- -- --
Receivable for fund shares
sold.......................... -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- ----------
Total assets................ 126,098 5,819 10,041 16,055 242,604 170,376
---------- ---------- ----------- ---------- ---------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company........ -- -- -- -- -- --
Payable for fund shares
purchased..................... -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- ----------
Total liabilities........... -- -- -- -- -- --
---------- ---------- ----------- ---------- ---------- ----------
Net assets.................. $ 126,098 $ 5,819 $ 10,041 $ 16,055 $ 242,604 $ 170,376
---------- ---------- ----------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ----------
Accumulation units
outstanding................... 11,656 519 952 1,478 21,824 16,137
Net asset value per accumulation
unit.......................... $10.818148 $11.210158 $ 10.546056 $10.865525 $11.116268 $10.558285
<CAPTION>
TEMPLETON VARIABLE PRODUCTS
SERIES FUND SUB-ACCOUNTS
--------------------------------------
ASSET
ALLOCATION INTERNATIONAL STOCK
---------- ------------- ----------
<S> <C> <C> <C>
ASSETS:
Investment in variable insurance
funds at value................ $ 312,377 $ 373,559 $ 91,496
Receivable from Connecticut
General Life Insurance
Company....................... -- 594 --
Receivable for fund shares
sold.......................... -- -- --
---------- ------------- ----------
Total assets................ 312,377 374,153 91,496
---------- ------------- ----------
LIABILITIES:
Payable to Connecticut General
Life Insurance Company........ -- -- --
Payable for fund shares
purchased..................... -- 594 --
---------- ------------- ----------
Total liabilities........... -- 594 --
---------- ------------- ----------
Net assets.................. $ 312,377 $ 373,559 $ 91,496
---------- ------------- ----------
---------- ------------- ----------
Accumulation units
outstanding................... 28,005 33,071 8,246
Net asset value per accumulation
unit.......................... $11.154447 $ 11.295688 $11.095968
</TABLE>
- --------------------------
* Formerly Quest for Value Accumulation Trust
The Notes to Financial Statements are an integral part of these statements.
55
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (DATE DEPOSITS FIRST RECEIVED) TO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS SUB-ACCOUNTS
------------------------------------------------------
CAPITAL DIVERSIFIED
APPRECIATION INCOME GROWTH VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Inception date..................... May 6, 1996 May 22, 1996 May 22, 1996 May 6, 1996
INVESTMENT INCOME:
Dividends.......................... $ 321 $ 3,336 $ 833 $ 1,608
EXPENSES:
Mortality and expense risk and
administrative charges........... 385 88 282 468
------------ ------------ ------------ ------------
Net investment gain (loss)..... (64) 3,248 551 1,140
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Capital distributions from
portfolio sponsors............... -- -- 9,355 15,593
Net realized gain on share
transactions..................... 379 11 337 337
------------ ------------ ------------ ------------
Net realized gain.............. 379 11 9,692 15,930
Net unrealized gain (loss)......... 2,251 (1,549) (9,782) (3,822)
------------ ------------ ------------ ------------
Net realized and unrealized
gain (loss) on investments... 2,630 (1,538) (90) 12,108
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 2,566 $ 1,710 $ 461 $ 13,248
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
CIGNA
VARIABLE FIDELITY VIP
PRODUCTS PORTFOLIO FIDELITY VIP II
GROUP SUB-ACCOUNT PORTFOLIO SUB-ACCOUNTS
SUB-ACCOUNT ------------ --------------------------
------------ EQUITY- ASSET INVESTMENT
MONEY MARKET INCOME MANAGER GRADE BOND
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Inception date..................... May 6, 1996 May 6, 1996 July 1, 1996 May 6, 1996
INVESTMENT INCOME:
Dividends.......................... $ 2,053 $ -- $ -- $ --
EXPENSES:
Mortality and expense risk and
administrative charges........... 315 322 89 32
------------ ------------ ------------ ------------
Net investment gain (loss)..... 1,738 (322) (89) (32)
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Capital distributions from
portfolio sponsors............... -- -- -- --
Net realized gain on share
transactions..................... -- 350 344 4
------------ ------------ ------------ ------------
Net realized gain.............. -- 350 344 4
Net unrealized gain (loss)......... -- 5,635 1,319 (66)
------------ ------------ ------------ ------------
Net realized and unrealized
gain (loss) on investments... -- 5,985 1,663 (62)
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 1,738 $ 5,663 $ 1,574 $ (94)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
56
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (DATE DEPOSITS FIRST RECEIVED) TO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MFS SERIES SUB-ACCOUNTS OCC ACCUMULATION TRUST SUB-ACCOUNTS *
-------------------------------------------- ------------------------------------------
WORLD GLOBAL
TOTAL RETURN UTILITIES GOVERNMENTS EQUITY MANAGED SMALL CAP
------------- --------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Inception date.................. May 28, 1996 August 19, 1996 May 6, 1996 May 6, 1996 May 28, 1996 May 21, 1996
INVESTMENT INCOME:
Dividends....................... $ 1,859 $ 135 $ -- $ 56 $ -- $ --
EXPENSES:
Mortality and expense risk and
administrative charges........ 165 9 13 24 375 281
------------- --------------- ------------ ------------ ------------- -------------
Net investment gain
(loss).................... 1,694 126 (13) 32 (375) (281)
------------- --------------- ------------ ------------ ------------- -------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Capital distributions from
portfolio sponsors............ 808 350 -- 85 -- --
Net realized gain (loss) on
share transactions............ 61 (1) -- 7 174 26
------------- --------------- ------------ ------------ ------------- -------------
Net realized gain (loss).... 869 349 -- 92 174 26
Net unrealized gain............. 656 9 24 375 11,891 9,222
------------- --------------- ------------ ------------ ------------- -------------
Net realized and unrealized
gain on investments....... 1,525 358 24 467 12,065 9,248
------------- --------------- ------------ ------------ ------------- -------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............... $ 3,219 $ 484 $ 11 $ 499 $ 11,690 $ 8,967
------------- --------------- ------------ ------------ ------------- -------------
------------- --------------- ------------ ------------ ------------- -------------
<CAPTION>
TEMPLETON VARIABLE PRODUCTS
SERIES FUND SUB-ACCOUNTS
------------------------------------------
ASSET
ALLOCATION INTERNATIONAL STOCK
------------ ------------- -------------
<S> <C> <C> <C>
Inception date.................. May 6, 1996 May 21, 1996 May 22, 1996
INVESTMENT INCOME:
Dividends....................... $ -- $ -- $ --
EXPENSES:
Mortality and expense risk and
administrative charges........ 244 473 121
------------ ------------- -------------
Net investment gain
(loss).................... (244) (473) (121)
------------ ------------- -------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Capital distributions from
portfolio sponsors............ -- -- --
Net realized gain (loss) on
share transactions............ 249 156 (25)
------------ ------------- -------------
Net realized gain (loss).... 249 156 (25)
Net unrealized gain............. 8,859 22,647 4,870
------------ ------------- -------------
Net realized and unrealized
gain on investments....... 9,108 22,803 4,845
------------ ------------- -------------
INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............... $ 8,864 $ 22,330 $ 4,724
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- --------------------------
* Formerly Quest for Value Accumulation Trust
The Notes to Financial Statements are an integral part of these statements.
57
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM INCEPTION (DATE DEPOSITS FIRST RECEIVED) TO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS SUB-ACCOUNTS
-------------------------------------------------------------
CAPITAL DIVERSIFIED
APPRECIATION INCOME GROWTH VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Inception date..................... May 6, 1996 May 22, 1996 May 22, 1996 May 6, 1996
OPERATIONS:
Net investment gain (loss)......... $ (64) $ 3,248 $ 551 $ 1,140
Net realized gain.................. 379 11 9,692 15,930
Net unrealized gain (loss)......... 2,251 (1,549) (9,782) (3,822)
------------- ------------- ------------- -------------
Net increase (decrease) from
operations..................... 2,566 1,710 461 13,248
------------- ------------- ------------- -------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits, net of
premium load..................... 101,952 1,147 108,913 94,506
Participant transfers.............. 207,039 80,113 292,966 306,773
Participant withdrawals............ (11,342) (3,027) (5,403) (14,480)
------------- ------------- ------------- -------------
Net increase from participant
transactions................... 297,649 78,233 396,476 386,799
------------- ------------- ------------- -------------
Total increase in net assets... 300,215 79,943 396,937 400,047
NET ASSETS:
Beginning of period................ -- -- -- --
------------- ------------- ------------- -------------
End of period...................... $ 300,215 $ 79,943 $ 396,937 $ 400,047
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
PARTICIPANT ACCUMULATION UNIT
TRANSACTIONS (IN UNITS):
Participant deposits............... 9,708 109 10,164 8,581
Participant transfers.............. 20,023 7,532 27,995 28,109
Participant withdrawals............ (1,103) (285) (522) (1,338)
------------- ------------- ------------- -------------
Net increase in units from
participant transactions..... 28,628 7,356 37,637 35,352
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
CIGNA
VARIABLE FIDELITY VIP
PRODUCTS PORTFOLIO FIDELITY VIP II
GROUP SUB-ACCOUNT PORTFOLIO SUB-ACCOUNTS
SUB-ACCOUNT ------------- -----------------------------
------------- EQUITY- ASSET INVESTMENT
MONEY MARKET INCOME MANAGER GRADE BOND
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Inception date..................... May 6, 1996 May 6, 1996 July 1, 1996 May 6, 1996
OPERATIONS:
Net investment gain (loss)......... $ 1,738 $ (322) $ (89) $ (32)
Net realized gain.................. -- 350 344 4
Net unrealized gain (loss)......... -- 5,635 1,319 (66)
------------- ------------- ------------- -------------
Net increase (decrease) from
operations..................... 1,738 5,663 1,574 (94)
------------- ------------- ------------- -------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits, net of
premium load..................... 29,639 40,360 25,510 668
Participant transfers.............. 162,260 260,509 42,284 41,527
Participant withdrawals............ (10,518) (8,346) (1,320) (1,280)
------------- ------------- ------------- -------------
Net increase from participant
transactions................... 181,381 292,523 66,474 40,915
------------- ------------- ------------- -------------
Total increase in net assets... 183,119 298,186 68,048 40,821
NET ASSETS:
Beginning of period................ -- -- -- --
------------- ------------- ------------- -------------
End of period...................... $ 183,119 $ 298,186 $ 68,048 $ 40,821
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
PARTICIPANT ACCUMULATION UNIT
TRANSACTIONS (IN UNITS):
Participant deposits............... 2,928 3,789 2,464 61
Participant transfers.............. 15,929 24,210 3,993 3,905
Participant withdrawals............ (1,034) (775) (125) (121)
------------- ------------- ------------- -------------
Net increase in units from
participant transactions..... 17,823 27,224 6,332 3,845
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
58
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM INCEPTION (DATE DEPOSITS FIRST RECEIVED) TO
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MFS SERIES SUB-ACCOUNTS OCC ACCUMULATION TRUST SUB-ACCOUNTS *
-------------------------------------------- ------------------------------------------
TOTAL WORLD GLOBAL
RETURN UTILITIES GOVERNMENTS EQUITY MANAGED SMALL CAP
------------- --------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Inception date.................. May 28, 1996 August 19, 1996 May 6, 1996 May 6, 1996 May 28, 1996 May 21, 1996
OPERATIONS:
Net investment gain (loss)...... $ 1,694 $ 126 $ (13) $ 32 $ (375) $ (281)
Net realized gain (loss)........ 869 349 -- 92 174 26
Net unrealized gain............. 656 9 24 375 11,891 9,222
------------- --------------- ------------ ------------ ------------- -------------
Net increase from
operations................ 3,219 484 11 499 11,690 8,967
------------- --------------- ------------ ------------ ------------- -------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits, net of
premium load.................. 42,659 64 2,843 1,678 31,531 16,598
Participant transfers........... 82,784 5,527 7,813 14,816 207,398 150,455
Participant withdrawals......... (2,564) (256) (626) (938) (8,015) (5,644)
------------- --------------- ------------ ------------ ------------- -------------
Net increase from
participant
transactions.............. 122,879 5,335 10,030 15,556 230,914 161,409
------------- --------------- ------------ ------------ ------------- -------------
Total increase in net
assets.................... 126,098 5,819 10,041 16,055 242,604 170,376
NET ASSETS:
Beginning of period............. -- -- -- -- -- --
------------- --------------- ------------ ------------ ------------- -------------
End of period................... $ 126,098 $ 5,819 $ 10,041 $ 16,055 $ 242,604 $ 170,376
------------- --------------- ------------ ------------ ------------- -------------
------------- --------------- ------------ ------------ ------------- -------------
PARTICIPANT ACCUMULATION UNIT
TRANSACTIONS (IN UNITS):
Participant deposits............ 4,082 6 273 159 2,911 1,614
Participant transfers........... 7,818 537 739 1,409 19,660 15,075
Participant withdrawals......... (244) (24) (60) (90) (747) (552)
------------- --------------- ------------ ------------ ------------- -------------
Net increase in units from
participant
transactions.............. 11,656 519 952 1,478 21,824 16,137
------------- --------------- ------------ ------------ ------------- -------------
------------- --------------- ------------ ------------ ------------- -------------
<CAPTION>
TEMPLETON VARIABLE PRODUCTS
SERIES FUND SUB-ACCOUNTS
------------------------------------------
ASSET
ALLOCATION INTERNATIONAL STOCK
------------ ------------- -------------
<S> <C> <C> <C>
Inception date.................. May 6, 1996 May 21, 1996 May 22, 1996
OPERATIONS:
Net investment gain (loss)...... $ (244) $ (473) $ (121)
Net realized gain (loss)........ 249 156 (25)
Net unrealized gain............. 8,859 22,647 4,870
------------ ------------- -------------
Net increase from
operations................ 8,864 22,330 4,724
------------ ------------- -------------
ACCUMULATION UNIT TRANSACTIONS:
Participant deposits, net of
premium load.................. 8,075 60,621 8,496
Participant transfers........... 297,737 302,403 81,619
Participant withdrawals......... (2,299) (11,795) (3,343)
------------ ------------- -------------
Net increase from
participant
transactions.............. 303,513 351,229 86,772
------------ ------------- -------------
Total increase in net
assets.................... 312,377 373,559 91,496
NET ASSETS:
Beginning of period............. -- -- --
------------ ------------- -------------
End of period................... $ 312,377 $ 373,559 $ 91,496
------------ ------------- -------------
------------ ------------- -------------
PARTICIPANT ACCUMULATION UNIT
TRANSACTIONS (IN UNITS):
Participant deposits............ 771 5,685 798
Participant transfers........... 27,444 28,489 7,769
Participant withdrawals......... (210) (1,103) (321)
------------ ------------- -------------
Net increase in units from
participant
transactions.............. 28,005 33,071 8,246
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
- --------------------------
* Formerly Quest for Value Accumulation Trust
The Notes to Financial Statements are an integral part of these statements.
59
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION
CG Variable Life Insurance Separate Account II (the Account) is registered
as a Unit Investment Trust under the Investment Company Act of 1940, as amended.
The operations of the Account are part of the operations of Connecticut General
Life Insurance Company (CG Life). The assets and liabilities of the Account are
clearly identified and distinguished from other assets and liabilities of CG
Life. The assets of the Account are not available to meet the general
obligations of CG Life and are held for the exclusive benefit of the
participants.
The assets of the Account are divided into variable sub-accounts each of
which is invested in shares of one of seventeen portfolios (mutual funds) of
seven diversified open-end management investment companies, each portfolio with
its own investment objective. The variable sub-accounts are:
AIM VARIABLE INSURANCE FUNDS, INC.:--
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. Value 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
Investment Grade Bond Portfolio
MFS VARIABLE INSURANCE TRUST:--
MFS Total Return Series
MFS Utilities Series
MFS World Governments Series
OCC (FORMERLY QUEST FOR VALUE) ACCUMULATION TRUST:--
OCC Global Equity Portfolio
OCC Managed Portfolio
OCC Small Cap Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND:--
Templeton Asset Allocation Fund
Templeton International Fund
Templeton Stock Fund
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in conformity with generally
accepted accounting principles. The following is a summary of significant
accounting policies consistently followed in the preparation of the Account's
financial statements.
60
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. INVESTMENT VALUATION:--Investments held by the sub-accounts are valued
at their respective closing net asset values per share as determined by the
mutual funds as of December 31, 1996. The difference between cost and value is
reflected as unrealized gain (loss) in the Statements of Operations.
B. INVESTMENT TRANSACTIONS:--Investment transactions are recorded on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on sales of investments are determined by the last-in, first-out cost
basis of the investment sold. Dividend and capital gain distributions are
recorded on the ex-dividend date. Investment transactions are settled through CG
Life.
C. FEDERAL INCOME TAXES:--The operations of the Account form a part of, and
are taxed with, the total operations of CG Life, which is taxed as a life
insurance company. Under existing federal income tax law, investment income
(dividends) and capital gains attributable to the Account are not taxed.
3. INVESTMENTS
Total shares held and cost of investments at December 31, 1996 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SHARES COST OF
SUB-ACCOUNT HELD INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund......................................................... 15,451 $ 297,964
AIM V.I. Diversified Income Fund........................................................... 7,739 81,492
AIM V.I. Growth Fund....................................................................... 24,427 406,719
AIM V.I. Value Fund........................................................................ 22,886 403,869
CIGNA Variable Products Money Market Fund.................................................. 183,119 183,119
Fidelity Equity-Income Portfolio........................................................... 14,179 292,551
Fidelity Asset Manager Portfolio........................................................... 4,019 66,729
Fidelity Investment Grade Bond Portfolio................................................... 3,335 40,887
MFS Total Return Series.................................................................... 9,198 125,442
MFS Utilities Series....................................................................... 426 5,810
MFS World Governments Series............................................................... 949 10,017
OCC Global Equity Portfolio................................................................ 1,214 15,680
OCC Managed Portfolio...................................................................... 6,700 230,713
OCC Small Cap Portfolio.................................................................... 7,535 161,154
Templeton Asset Allocation Fund............................................................ 14,819 303,518
Templeton International Fund............................................................... 20,302 350,912
Templeton Stock Fund....................................................................... 3,999 86,626
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
3. INVESTMENTS (CONTINUED)
Total purchases and sales of shares for each of the mutual funds, for the
periods ended December 31, 1996, amounted to:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
SUB-ACCOUNT PERIOD * PURCHASES SALES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund.............. May 6, 1996 to December 31, 1996 $ 386,550 $ 88,965
AIM V.I. Diversified Income Fund................ May 22, 1996 to December 31, 1996 83,874 2,393
AIM V.I. Growth Fund............................ May 22, 1996 to December 31, 1996 446,351 39,969
AIM V.I. Value Fund............................. May 6, 1996 to December 31, 1996 458,646 55,115
CIGNA Variable Products Money Market Fund....... May 6, 1996 to December 31, 1996 278,659 95,540
Fidelity Equity-Income Portfolio................ May 6, 1996 to December 31, 1996 333,736 41,535
Fidelity Asset Manager Portfolio................ July 1, 1996 to December 31, 1996 102,703 36,318
Fidelity Investment Grade Bond Portfolio........ May 6, 1996 to December 31, 1996 46,977 6,094
MFS Total Return Series......................... May 28, 1996 to December 31, 1996 169,286 43,905
MFS Utilities Series............................ August 19, 1996 to December 31, 1996 6,123 312
MFS World Governments Series.................... May 6, 1996 to December 31, 1996 12,460 2,443
OCC Global Equity Portfolio..................... May 6, 1996 to December 31, 1996 16,391 718
OCC Managed Portfolio........................... May 28, 1996 to December 31, 1996 289,425 58,886
OCC Small Cap Portfolio......................... May 21, 1996 to December 31, 1996 165,091 3,963
Templeton Asset Allocation Fund................. May 6, 1996 to December 31, 1996 341,220 37,951
Templeton International Fund.................... May 21, 1996 to December 31, 1996 384,420 33,664
Templeton Stock Fund............................ May 22, 1996 to December 31, 1996 98,643 11,992
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Date deposits first received.
4. CHARGES AND DEDUCTIONS
CG Life assumes the risk that policyholders may live longer than expected
and also assumes a mortality risk in connection with the death benefits of the
contract. CG Life also assumes a risk that its actual administrative expenses
may be higher than amounts deducted for such expenses. CG Life charges each
variable sub-account, for mortality and expense risks, a daily deduction,
equivalent to .80% per year during the first twelve policy years and .55% per
year thereafter. The mortality and expense risk charges, for each sub-account,
are reported on the Statements of Operations.
CG Life deducts a premium load of 5% of each premium payment to cover state
taxes and federal income tax liabilities.
CG Life charges a monthly administrative fee of $15 in the first policy year
and $5 in subsequent policy years. This charge is for items such as premium
billing and collection, policy value calculation, confirmations and periodic
reports.
CG Life charges a monthly deduction for the cost of insurance and any
charges for supplemental riders. The cost of insurance charge depends on the
attained age, risk classification, gender classification (in accordance with
state law) and the current net amount at risk. On a monthly basis, the
administrative fee and the cost of insurance charge are deducted proportionately
from the value of each variable sub-account and/or the fixed account funding
option. The fixed account is part of the general account of CG Life and is not
included in these financial statements.
62
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
4. CHARGES AND DEDUCTIONS (CONTINUED)
Under certain circumstances, CG Life reserves the right to charge a transfer
fee of up to $25 for transfers between sub-accounts. For the periods ended
December 31, 1996, no transfer fees were deducted from the variable
sub-accounts.
The fees charged by CG Life for premium loads (deducted from premium
payments), administrative fees and the amount deducted for the cost of
insurance, both of which are included in participant withdrawals, for variable
sub-accounts for the periods noted, amounted to:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COSTS OF
PREMIUM ADMINISTRATIVE INSURANCE
SUB-ACCOUNT PERIOD * LOADS FEES DEDUCTIONS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation
Fund............................. May 6, 1996 to December 31, 1996 $ 5,303 $ 1,996 $ 9,346
AIM V.I. Diversified Income Fund... May 22, 1996 to December 31, 1996 61 239 2,788
AIM V.I. Growth Fund............... May 22, 1996 to December 31, 1996 5,698 604 4,799
AIM V.I. Value Fund................ May 6, 1996 to December 31, 1996 4,903 1,658 12,822
CIGNA Variable Products Money
Market Fund...................... May 6, 1996 to December 31, 1996 1,560 987 9,531
Fidelity Equity-Income Portfolio... May 6, 1996 to December 31, 1996 2,102 762 7,584
Fidelity Asset Manager Portfolio... July 1, 1996 to December 31, 1996 1,345 106 1,214
Fidelity Investment Grade Bond
Portfolio........................ May 6, 1996 to December 31, 1996 34 166 1,114
MFS Total Return Series............ May 28, 1996 to December 31, 1996 2,241 244 2,320
MFS Utilities Series............... August 19, 1996 to December 31, 1996 4 49 207
MFS World Governments Series....... May 6, 1996 to December 31, 1996 150 64 562
OCC Global Equity Portfolio........ May 6, 1996 to December 31, 1996 88 131 807
OCC Managed Portfolio.............. May 28, 1996 to December 31, 1996 1,618 809 5,919
OCC Small Cap Portfolio............ May 21, 1996 to December 31, 1996 872 400 3,971
Templeton Asset Allocation Fund.... May 6, 1996 to December 31, 1996 437 163 854
Templeton International Fund....... May 21, 1996 to December 31, 1996 3,162 985 9,515
Templeton Stock Fund............... May 22, 1996 to December 31, 1996 448 414 2,929
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Date deposits first received.
CG Life, upon full surrender of a policy, may charge a surrender charge.
This charge is in part a deferred sales charge and in part a recovery of certain
first year administrative costs. The amount of the surrender charge, if any,
will depend on the amount of the death benefit, the amount of premium payments
made during the first two policy years and the age of the policy. In no event
will the surrender charge exceed the maximum allowed by state or Federal law. No
surrender charge is imposed on a partial surrender, but an administrative fee of
$25 is imposed, allocated pro-rata among the variable sub-accounts (and, where
applicable, the fixed account) from which the partial surrender proceeds are
taken. No full surrender or partial surrender administrative charges were paid
to CG Life, attributable to the variable sub-accounts, for the periods ended
December 31, 1996.
5. DISTRIBUTION OF NET INCOME
The Account does not expect to declare dividends to participants from
accumulated net income. The accumulated net income is distributed to
participants as part of death benefits, surrenders, and transfers to other fixed
or variable sub-accounts.
63
<PAGE>
CG VARIABLE LIFE INSURANCE SEPARATE ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
6. DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code of 1986
(the Code), a variable life insurance policy will not be treated as life
insurance under Section 7702 of the Code for any period for which the
investments of the segregated asset account, on which the policy is based, are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury. CG Life believes, based on assurances from the
mutual fund managers, that the mutual funds satisfy the requirements of the
regulations.
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Connecticut General
Life Insurance Company and Participants of the
CG Variable Life Insurance Separate Account II
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the sub-accounts, AIM
Variable Insurance Funds, Inc.--AIM V.I. Capital Appreciation Fund, AIM V.I.
Diversified Income Fund, AIM V.I. Growth Fund, AIM V.I. Value 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, Investment Grade Bond
Portfolio; MFS Variable Insurance Trust--MFS Total Return Series, MFS Utilities
Series, MFS World Governments Series; OCC (formerly Quest for Value)
Accumulation Trust--OCC Global Equity Portfolio, OCC Managed Portfolio, OCC
Small Cap Portfolio; Templeton Variable Products Series Fund--Templeton Asset
Allocation Fund, Templeton International Fund, Templeton Stock Fund
(constituting the CG Variable Life Insurance Separate Account II, hereafter
referred to as "the Account") at December 31, 1996, the results of each of their
operations and the changes in each of their net assets for the periods since
inception (as indicated in the financial statements) through December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Account's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial 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 audit, which included confirmation of securities at December
31, 1996 by correspondence with the custodians, provides a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Hartford, Connecticut
February 20, 1997
65
<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.
66
<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 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.
67
<PAGE>
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. The mortality and expense risk charge is guaranteed
never to exceed an annual effective rate of 0.90%. 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 0.80% 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 -1.60%, 4.40% and 10.40%. 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 -1.35%,
4.65% and 10.65%. 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.
Considering guaranteed charges for mortality and expense
risks and the assumed Fund expenses, gross annual rates of
0%, 6% and 12% correspond to net investment experience at
constant annual rates of -1.70%, 4.30% and 10.30%.
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.
68
<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.
69
<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
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30% 10.30%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,298 500,000 500,000 500,000 3,196 3,460 3,725 0 0 0
2 12,911 500,000 500,000 500,000 6,231 6,960 7,724 335 1,065 1,829
3 19,854 500,000 500,000 500,000 9,035 10,429 11,952 3,140 4,534 6,056
4 27,145 500,000 500,000 500,000 11,604 13,859 16,426 5,708 7,963 10,530
5 34,800 500,000 500,000 500,000 13,918 17,224 21,151 8,022 11,329 15,256
6 42,838 500,000 500,000 500,000 15,968 20,512 26,146 11,251 15,798 21,430
7 51,278 500,000 500,000 500,000 17,716 23,677 31,401 14,178 20,140 27,864
8 60,139 500,000 500,000 500,000 19,133 26,683 36,917 16,775 24,325 34,559
9 69,444 500,000 500,000 500,000 20,182 29,484 42,688 19,003 28,305 41,508
10 79,214 500,000 500,000 500,000 20,820 32,024 48,702 20,820 32,024 48,702
15 135,900 500,000 500,000 500,000 16,900 39,331 82,853 16,900 38,331 82,853
20 208,246 -- 500,000 500,000 -- 30,982 124,520 -- 30,982 124,520
25 300,580 -- -- 500,000 -- -- 173,139 -- -- 173,139
30 418,425 -- -- 500,000 -- -- 229,603 -- -- 229,603
</TABLE>
All Amounts are in Dollars
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. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Expense Data" at pages 10-11 of this
Prospectus.
70
<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
CURRENT BASIS
<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 -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40% 10.40%
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 -1.35% 4.65% 10.65% -1.35% 4.65% 10.65% -1.35% 4.65% 10.65%
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 4,010 4,300 4,591 0 0 0
2 12,911 500,000 500,000 500,000 7,988 8,824 9,697 2,093 2,929 3,802
3 19,854 500,000 500,000 500,000 11,795 13,439 15,225 5,900 7,543 9,329
4 27,145 500,000 500,000 500,000 15,458 18,174 21,247 9,562 12,278 15,351
5 34,800 500,000 500,000 500,000 19,003 23,062 27,843 13,108 17,166 21,948
6 42,838 500,000 500,000 500,000 22,458 28,135 35,104 17,742 23,419 30,388
7 51,278 500,000 500,000 500,000 25,800 33,381 43,078 22,263 29,844 39,541
8 60,139 500,000 500,000 500,000 28,915 38,690 51,727 26,557 36,332 49,369
9 69,444 500,000 500,000 500,000 31,971 44,234 61,293 30,792 43,055 60,114
10 79,214 500,000 500,000 500,000 34,900 49,955 71,810 34,900 49,955 71,810
15 135,900 500,000 500,000 500,000 45,414 79,406 141,053 45,414 79,406 141,053
20 208,246 500,000 500,000 500,000 47,893 109,728 252,944 47,893 109,728 252,944
25 300,580 500,000 500,000 515,211 42,572 142,297 444,148 42,572 142,297 444,148
30 418,425 500,000 500,000 821,158 21,779 173,081 767,437 21,779 173,081 767,437
</TABLE>
All Amounts are in Dollars
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 0.80% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
71
<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
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30% 10.30%
- ------ ----------- -------- -------- ------------ -------- -------- ------------ -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,213 500,000 500,000 500,000 3,801 4,185 4,572 0 0 0
2 20,937 500,000 500,000 500,000 7,154 8,161 9,221 0 0 1,388
3 32,198 500,000 500,000 500,000 9,990 11,842 13,879 2,158 4,010 8,047
4 44,021 500,000 500,000 500,000 12,283 15,185 18,524 4,451 7,353 10,892
5 56,435 500,000 500,000 500,000 14,001 18,140 23,124 5,169 10,307 15,292
6 69,470 500,000 500,000 500,000 15,088 20,825 27,620 8,823 14,360 21,355
7 83,157 500,000 500,000 500,000 15,476 22,548 31,939 10,778 17,849 27,238
8 97,528 500,000 500,000 500,000 15,073 23,787 35,977 11,840 20,654 32,644
9 112,618 500,000 500,000 500,000 13,771 24,194 39,608 12,294 22,628 38,041
10 128,462 500,000 500,000 500,000 11,460 23,616 42,692 11,480 23,816 42,692
15 220,389 -- -- 500,000 -- -- 44,045 -- -- 44,045
20 337,714 -- -- -- -- -- -- -- -- --
25 487,454 -- -- -- -- -- -- -- -- --
30 678,563 -- -- -- -- -- -- -- -- --
</TABLE>
All Amounts are in Dollars
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. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Expense Data" at pages 10-11 of this
Prospectus.
72
<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
CURRENT BASIS
<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 -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40% 10.40%
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 -1.35% 4.65% 10.65% -1.35% 4.65% 10.65% -1.35% 4.65% 10.65%
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 6,380 6,847 7,316 608 1,075 1,544
2 20,937 500,000 500,000 500,000 12,478 13,814 15,210 4,646 5,982 7,377
3 32,198 500,000 500,000 500,000 18,205 20,812 23,649 10,372 12,980 15,817
4 44,021 500,000 500,000 500,000 23,655 27,939 32,796 15,823 20,107 24,963
5 56,435 500,000 500,000 500,000 28,787 35,157 42,684 20,955 27,325 34,852
6 69,470 500,000 500,000 500,000 33,737 42,609 53,543 27,471 36,344 47,277
7 83,157 500,000 500,000 500,000 38,532 50,337 65,510 33,832 45,637 60,811
8 97,528 500,000 500,000 500,000 43,154 58,334 78,696 40,021 55,201 75,563
9 112,618 500,000 500,000 500,000 47,441 66,457 93,087 45,874 64,890 91,520
10 128,462 500,000 500,000 500,000 51,317 74,640 108,761 51,317 74,640 108,761
15 220,389 500,000 500,000 500,000 64,077 116,768 213,886 64,077 116,768 213,886
20 337,714 500,000 500,000 500,000 60,464 158,064 391,033 60,464 158,064 391,033
25 487,454 500,000 500,000 737,613 23,449 188,047 702,489 23,449 188,047 702,489
30 678,563 500,000 500,000 1,273,695 0 199,619 1,213,043 0 199,619 1,213,043
</TABLE>
All Amounts are in Dollars
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 0.80% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
73
<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
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30% 10.30%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,682 500,000 500,000 500,000 2,239 2,431 2,623 0 0 0
2 9,598 500,000 500,000 500,000 4,390 4,915 5,488 0 0 245
3 14,760 500,000 500,000 500,000 8,390 7,391 8,484 1,170 2,170 3,263
4 20,180 500,000 500,000 500,000 8,229 9,843 11,682 3,008 4,622 6,461
5 25,871 500,000 500,000 500,000 9,899 12,263 15,072 4,678 7,942 9,851
6 31,846 500,000 500,000 500,000 11,389 14,635 18,660 7,212 10,458 14,484
7 38,120 500,000 500,000 500,000 12,692 16,949 22,462 9,980 13,816 19,330
8 44,708 500,000 500,000 500,000 13,793 19,183 26,484 11,206 17,095 24,395
9 51,626 500,000 500,000 500,000 14,686 21,308 30,721 13,622 20,263 29,677
10 58,889 500,000 500,000 500,000 15,309 23,313 35,199 15,309 23,313 35,199
15 101,030 500,000 500,000 500,000 15,102 31,321 62,312 15,102 31,321 62,312
20 154,813 500,000 500,000 500,000 7,425 33,431 99,893 7,425 33,431 99,993
25 223,456 -- 500,000 500,000 -- 19,403 149,593 -- 19,403 149,583
30 311,063 -- -- 500,000 -- -- 217,216 -- -- 217,216
</TABLE>
All Amounts are in Dollars
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. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Expense Data" at pages 10-11 of this
Prospectus.
74
<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
CURRENT BASIS
<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 -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40% 10.40%
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 -1.35% 4.65% 10.65% -1.35% 4.65% 10.65% -1.35% 4.65% 10.65%
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 2,911 3,124 3,338 0 0 0
2 9,598 500,000 500,000 500,000 5,851 6,465 7,106 631 1,244 1,886
3 14,760 500,000 500,000 500,000 8,703 9,911 11,224 3,482 4,691 6,004
4 20,180 500,000 500,000 500,000 11,468 13,468 15,731 6,247 8,248 10,510
5 25,871 500,000 500,000 500,000 14,147 17,142 20,668 8,926 11,921 15,447
6 31,846 500,000 500,000 500,000 16,694 20,889 26,032 12,518 16,712 21,856
7 38,120 500,000 500,000 500,000 19,113 24,715 31,873 15,981 21,582 28,740
8 44,708 500,000 500,000 500,000 21,406 28,624 38,242 19,318 26,536 36,154
9 51,626 500,000 500,000 500,000 23,623 32,672 45,249 22,578 31,627 44,204
10 58,889 500,000 500,000 500,000 25,764 36,864 52,962 25,764 36,864 52,962
15 101,030 500,000 500,000 500,000 34,257 59,233 104,388 34,257 59,233 104,388
20 154,813 500,000 500,000 500,000 37,635 82,924 186,861 37,635 82,924 186,861
25 223,456 500,000 500,000 500,000 36,721 109,359 324,974 36,721 109,359 324,974
30 311,063 500,000 500,000 600,635 28,907 137,572 561,341 28,907 137,572 561,341
</TABLE>
All Amounts are in Dollars
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 0.80% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
75
<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
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30% 10.30%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,450 500,000 500,000 500,000 2,980 3,266 3,555 0 0 0
2 15,272 500,000 500,000 500,000 5,755 6,517 7,318 0 0 719
3 23,485 500,000 500,000 500,000 8,280 9,703 11,263 1,681 3,104 4,664
4 32,109 500,000 500,000 500,000 10,570 12,834 15,426 3,971 6,235 8,827
5 41,165 500,000 500,000 500,000 12,613 15,895 19,818 6,014 9,296 13,219
6 50,673 500,000 500,000 500,000 14,386 18,856 24,441 9,107 13,577 19,161
7 60,656 500,000 500,000 500,000 15,830 21,651 29,260 11,871 17,692 25,300
8 71,138 500,000 500,000 500,000 16,868 24,193 34,221 14,228 21,554 31,582
9 82,145 500,000 500,000 500,000 17,394 26,361 39,238 16,074 25,041 37,918
10 93,702 500,000 500,000 500,000 17,331 28,057 44,246 17,331 28,057 44,246
15 160,755 500,000 500,000 500,000 6,980 27,230 68,271 6,960 27,230 68,271
20 246,333 0 0 500,000 0 0 83,532 0 0 83,532
25 355,555 0 0 500,000 0 0 51,651 0 0 51,651
30 494,953 0 0 0 0 0 0 0 0 --
</TABLE>
All Amounts are in Dollars
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. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Expense Data" at pages 10-11 of this
Prospectus.
76
<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
CURRENT BASIS
<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 -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40% 10.40%
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 -1.35% 4.65% 10.65% -1.35% 4.65% 10.65% -1.35% 4.65% 10.65%
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 4,661 5,002 5,344 0 0 322
2 15,272 500,000 500,000 500,000 9,180 10,156 11,176 2,581 3,557 4,577
3 23,485 500,000 500,000 500,000 13,463 15,372 17,447 6,864 8,773 10,848
4 32,109 500,000 500,000 500,000 17,572 20,713 24,272 10,973 14,114 17,673
5 41,165 500,000 500,000 500,000 21,478 26,157 31,678 14,879 19,558 25,079
6 50,673 500,000 500,000 500,000 25,271 31,797 39,824 19,992 26,518 34,545
7 60,656 500,000 500,000 500,000 28,958 37,649 48,796 24,998 33,690 44,837
8 71,138 500,000 500,000 500,000 32,536 43,723 58,685 29,896 41,083 56,046
9 82,145 500,000 500,000 500,000 35,888 49,909 69,476 34,568 48,589 68,156
10 93,702 500,000 500,000 500,000 38,978 56,179 81,236 38,978 56,179 81,236
15 160,755 500,000 500,000 500,000 50,570 89,311 159,981 50,570 89,311 159,981
20 246,333 500,000 500,000 500,000 54,132 125,067 290,267 54,132 125,067 290,267
25 355,555 500,000 500,000 538,962 38,985 155,678 513,297 38,985 155,678 513,297
30 494,953 500,000 500,000 934,385 0 168,795 889,890 0 168,795 889,890
</TABLE>
All Amounts are in Dollars
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 0.80% per year. See "Expense
Data" at pages 10-11 of this Prospectus.
77
<PAGE>
APPENDIX 3
TAX INFORMATION
The Office of Tax Analysis of the U.S. Department of the
Treasury published a "Report to the Congress on the Taxation
of Life Insurance Company Products" in March 1990. Page 4 of
this report is Table 1.1, a "Comparison of Tax Treatment of
Life Insurance Products and Other Retirement Savings Plans".
Because it is a convenient summary of the relevant tax
characteristics of these products and plans, it is reprinted
here, with footnotes to reflect exceptions to the general
rules.
------------------------
TABLE 1.1
COMPARISON OF TAX TREATMENT OF LIFE INSURANCE PRODUCTS AND
OTHER RETIREMENT SAVINGS PLANS
<TABLE>
<CAPTION>
CASH-VALUE
LIFE NON-QUALIFIED QUALIFIED
INSURANCE ANNUITIES IRA'S PENSION
--------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Annual Contribution Limits No No Yes Yes
Income Eligibility Limits No No Yes** No
Borrowing Treated as Distributions No* Yes Loans not Yes,
allowed beyond
$50,000
Income Ordering Rules (Income included in First No* Yes Yes Yes
Distribution)
Early Withdrawal Penalties No* Yes*** Yes*** Yes***
Minimum Distribution Rules by Age 70 1/2 No No Yes Yes
Maximum Annual Distribution Rules No No Yes Yes
Anti-discrimination Rules No No No Yes
</TABLE>
- ------------------------
Department of the Treasury March 1990
Office of Tax Analysis
*If the Policy is not a modified endowment contract.
**If amounts paid in to fund the IRA are deductible; once over the income
eligibility limits amounts paid into an IRA are permitted but not deductible.
***There are several exceptions to the application of the early withdrawal
penalties for annuities, IRAs and qualified pensions.
The foregoing information is not intended as tax advice. You
should consult with your own tax advisor for more complete
information.
78
<PAGE>
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