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PROSPECTUS
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
INDIVIDUAL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY
ACACIA NATIONAL LIFE INSURANCE COMPANY
51 LOUISIANA AVENUE, N.W., WASHINGTON, DC 20001
TELEPHONE: (202) 628-4506
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The flexible premium variable life insurance policy ("Policy") offered
by Acacia National Life Insurance Company ("ANLIC") and described in this
prospectus is designed to provide lifetime insurance protection and maximum
flexibility in connection with premium payments and death benefits, together
with the opportunity to allocate net premiums among investment alternatives
with different investment objectives. A policyowner may, subject to certain
restrictions, vary the frequency and amount of premium payments and increase or
decrease the level of life insurance benefits payable under the Policy. This
flexibility allows a policyowner to provide for changing insurance needs under
a single insurance policy.
The Policy provides for a death benefit payable at the Insured's
death. If net premiums are allocated to Acacia National Variable Life
Insurance Separate Account I ("Variable Account"), the amount of the death
benefit may, and the Policy Account Value will, reflect the investment
experience of the chosen Sub-accounts of the Variable Account, as well as the
frequency and amount of premiums, any partial surrenders, any loans, and the
charges assessed in connection with the Policy. The proceeds paid to the
Policy beneficiary will be reduced by any outstanding indebtedness and any due
and unpaid charges. The Policy will remain in force so long as the Cash
Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy. The policyowner bears the entire investment risk
for all amounts allocated to the Variable Account; no minimum Policy Account
Value is guaranteed.
After the Free Look Period, the policyowner may allocate net premiums
to one or more of the Sub-accounts of the Variable Account or to the General
Account. Each Sub-account of the Variable Account will invest solely in a
corresponding series ("Portfolio") of various mutual funds ("Funds"). The
accompanying prospectuses for the Funds describe the investment objectives and
the attendant risks of the Portfolios.
The Policy Account Value will reflect the Monthly Deductions and
certain other fees and charges such as the Mortality and Expense Risk Charge.
Also, a surrender charge may be imposed if, during the first 9 Policy Years or
within 9 years after a Face Amount increase, the Policy lapses, is surrendered
or if the Owner effects a partial surrender. Generally, during the first five
Policy Years, the Policy will remain in force as long as the Benchmark Premium
is paid or the Cash Surrender Value is sufficient to pay certain monthly
charges imposed in connection with the Policy. After the fifth Policy Year,
whether the Policy remains in force may depend upon whether the Cash Surrender
Value is sufficient to pay the monthly charges under the Policy or whether the
Guaranteed Death Benefit Premium ("GDBP") has been paid.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance or as a means to obtain additional protection if
the purchaser already owns life insurance. An ANLIC representative will be
able to explain the risks or disadvantages of replacement of life insurance.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR THE PORTFOLIOS.
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.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Policy Summary Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Allocation of Premium Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Change in Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Policy Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Free Look Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Charges Associated with the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Grace Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Policy Lapse and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Loan Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Illustrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Acacia National and the Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Acacia National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . 9
The Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Alger American Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Acacia Capital Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dreyfus Stock Index Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Neuberger and Berman Advisers Management Trust . . . . . . . . . . . . . . . . . . . . 13
Strong Variable Insurance Funds, Inc. and
Strong Discovery Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Van Eck Worldwide Insurance Trust . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investment Advisory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Resolving Material Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Addition, Deletion, or Substitution of Investments . . . . . . . . . . . . . . . . . . 19
Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Applicable Percentage Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Payment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Payment and Allocation of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Policy Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Allocation of Premiums and Policy Account Value26
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Policy Lapse and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Charges and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Partial Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Premium Expense Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Policy Account Value Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Investment Advisory Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Reduction of Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Policy Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Loan Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
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<TABLE>
<S> <C>
Surrender Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Partial Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Examination of the Policy Privilege (Free Look) . . . . . . . . . . . . . . . . . . . . . . . . 35
General Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Account Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
General Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Postponement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Change of Owner or Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Collateral Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Misstatement of Age or Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Optional Insurance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Federal Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Treatment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Special Rules for Pension and Profit Sharing Plans . . . . . . . . . . . . . . . . . . 42
Possible Charge for ANLIC's Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Policies Issued in Conjunction with Employee Benefit Plans . . . . . . . . . . . . . . . . . . 43
Legal Developments Regarding Unisex Actuarial Tables . . . . . . . . . . . . . . . . . . . . . 43
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Officers and Directors of ANLIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Distribution of the Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Policy Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Appendix A - Illustrations
Appendix B - Automatic Rebalancing and Dollar Cost Averaging Programs
Financial Statements
</TABLE>
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The Policy is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR
OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
DEFINITIONS
Age -- The age at the Insured's last birthday.
Attained Age -- The age of the Insured on the last Policy Anniversary.
Benchmark Premium -- A monthly premium listed in the Policy for the
original face amount and any increase made during the first sixty months that
the Policy is in force. During the first sixty months that the Policy is in
force, the Policy is guaranteed not to lapse provided the sum of the premiums
paid equals or exceeds the sum of the scheduled Benchmark Premiums since the
Policy date and any Increase date. Electing to have the Benchmark Premium
feature will reduce premium flexibility.
Beneficiary -- The Beneficiary is designated by the Owner in the
application. If changed, the Beneficiary is as shown in the latest change
filed with ANLIC. If no Beneficiary survives the Insured, the Owner or the
Owner's estate will be the Beneficiary. The interest of any Beneficiary is
subject to that of any assignee.
Cash Surrender Value -- The Policy Account Value minus any applicable
surrender charges, minus any outstanding indebtedness and due charges.
Due Proof of Death -- One of the following:
(a) A copy of a certified death certificate.
(b) A copy of a certified decree of a court of competent jurisdiction
as to the finding of death.
(c) A written statement by a medical doctor who attended the insured.
(d) Any other proof satisfactory to ANLIC.
Face Amount -- The minimum death benefit payable under the Policy so long as
the Policy remains in force. The death benefit proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges.
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Fixed Benefit Policy - For any increase in face amount, the Owner may request
a conversion of the amount of increase to a Fixed Benefit Policy.
Free Look Period -- The period of time in which the Owner may cancel the
Policy and receive a refund of the total premiums paid. The Owner may cancel
the Policy within 20 days of receipt of the Policy and free look notice, or 45
days after completion of Part 1 of the application, whichever is later. This
provision also applies in the event of an increase in coverage.
General Account -- The assets of ANLIC other than those allocated to the
Variable Account or any other separate account.
Grace Period -- The 62 days allowed from the mailing of the notice of the
start of the Grace Period until the date the policy will Lapse for non payment
of premium.
Guaranteed Death Benefit Premium ("GDBP") -- An annual premium listed in
the Policy, based on the Insured's age, sex, rate class and amount of insurance
coverage at the time of issue. Provided GDBP is paid and the Owner does not
elect to take any loans or partial surrenders, the Policy is guaranteed not to
lapse before the Insured's age 65 or for ten years from the effective date of
coverage, whichever is later.
Indebtedness -- The sum of all unpaid Policy loans and accrued interest on
loans.
Insured -- The person upon whose life the Policy is issued.
Loan Value -- The maximum amount that may be borrowed under the Policy. The
loan value equals 90% of the Policy's Cash Surrender Value.
Maturity Date -- The Insured's 95th birthday, if living.
Monthly Anniversary -- The same date in each succeeding month as the Policy
Date. For purposes of the Variable Account, whenever the Monthly Anniversary
falls on a date other than a Valuation Date, the Monthly Anniversary will be
deemed the next Valuation Date.
Owner -- The Policy Owner as defined below.
Planned Periodic Premium -- A scheduled premium of a level amount at a fixed
interval over a specified period of time.
Policy -- The Flexible Premium Variable Life Insurance Policy offered by
ANLIC and described in this Prospectus.
Policy Account Value -- The sum of the Policy's values in the Sub-accounts
and the General Account.
Policy Date -- The date set forth in the Policy that is used to determine
Policy years and Policy months. Policy anniversaries are measured from the
Policy Date.
Policy Month -- A month beginning on the Monthly Anniversary.
Policyowner ("Owner") -- The person so designated in the Application or as
subsequently changed. If a Policy has been absolutely assigned, the assignee
is the Owner. A collateral assignee is not the Owner.
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Portfolio -- A separate investment portfolio of a mutual fund in which the
Variable Account assets are invested.
Premium Expense Charge - A charge to cover all Premium Taxes imposed by the
states and any subdivision thereof.
Sub-account -- A sub-division of the Variable Account. Each Sub-account
invests exclusively in the shares of a specified Portfolio of a Fund.
Surrender Charge -- The amount deducted from the Policy Account Value upon
lapse or surrender of the Policy during the first 9 years that the original
Policy coverage is effective and during the first 9 years from the effective
date of an increase. The Surrender Charge is shown in the Policy.
Target Premium -- An annual premium amount based on the Insured's age, sex
and risk class that is used to calculate surrender charges and agent
compensation.
Valuation Date -- Each regular business day that ANLIC and the New York
Stock Exchange are open for business, excluding holidays, and any other day in
which there is sufficient trading in the Fund's portfolio securities to
materially affect the value of the assets in the Variable Account.
Valuation Period -- The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the close
of business on the next succeeding Valuation Date.
Variable Account -- Acacia National Variable Life Insurance Separate Account
I, a separate investment account established by ANLIC to receive and invest the
net premiums paid under the Policy.
POLICY SUMMARY DESCRIPTION
This is a brief analysis of the Policy provisions and how they relate
to your rights and benefits. Complete details are contained elsewhere in the
Prospectus and should be read carefully in conjunction with this summary
information.
THE CONTRACT
The Individual Flexible Premium Variable Life Insurance Policy
("Policy") offered by this Prospectus is issued by Acacia National Life
Insurance Company ("ANLIC"). The Policy allows for a flexible premium
schedule. Payments may be made with varied amounts and frequency within stated
limitations. While the Policy is in force, ANLIC will provide:
1) Death Benefit protection to the Maturity Date;
2) Surrender and loan value upon request;
3) Additional insurance benefits that you elect.
The primary purpose of the Policy is to provide life insurance
protection in the event of the Insured's death. It is not offered primarily as
an investment accumulation vehicle. The Owner should
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consider the need for life insurance protection with respect to the Insured and
compare such advantages with the purchase of other investment accumulation
products. Also, the Owner should ask ANLIC's representative if changing or
adding to current coverage is advantageous. Generally, replacement of existing
life insurance is not advantageous.
PREMIUMS
Despite the ability of the Owner to vary the timing and amount of
premium payments for the Policy, there are regular monthly charges that must be
funded for the Policy to continue in force. The Owner may choose to pay a lump
sum premium deposit or to regularly deposit premium payments to cover expenses
associated with the Policy. There is a stated maximum amount of premium which
may be paid for the Policy to assure that it will qualify as life insurance
under the Internal Revenue Code. Any premium paid above the maximum premium
limitation will be refunded. To help the Owner determine the amount of premium
needed to fund the current costs associated with the Policy, the Policy has a
stated Planned Periodic Premium schedule. The Owner may elect to pay the
scheduled Benchmark Premiums and if that is done, then the Policy is guaranteed
not to lapse during the first sixty months. Similarly, if the Owner pays the
Guaranteed Death Benefit Premium ("GDBP"), the Policy is guaranteed not to
lapse before the Insured's age 65 or for ten years from the effective date of
coverage whichever is later. The GDBP will not apply in the event the Owner
elects to take a Policy loan or partial surrender. Otherwise, the value
available to fund the Policy expenses will be a factor of the amount of premium
paid and whether premium is allocated to the General Account, which has minimum
guaranteed value, or to the Variable Account, where the value varies with
investment experience.
Provided the Benchmark Premiums or GDBP has not been paid, the Policy
will lapse when the Cash Surrender Value is insufficient to pay the next
monthly deduction and no payments are received during the sixty-two day Grace
Period. ANLIC will send a notice to the Owner at the start of the Grace Period
with instructions as to the amount of premium that must be paid to keep the
Policy in force. Each year the Owner will receive a report showing the
Policy's value, premiums received and monthly charges during the past year.
ALLOCATION OF PREMIUM PAYMENTS
A Premium Expense Charge is taken from each paid premium to cover the
cost for an amount ANLIC considers necessary to pay all premium taxes imposed
by the states and any subdivisions thereof. The premium net of the Premium
Expense Charge, may be allocated to either the General Account or the Variable
Account, or a combination of these accounts. If you allocate net premiums to
the Variable Account, then you must allocate them among one or more
Sub-accounts of the Variable Account. Each Sub-account invests its assets in a
Portfolio of a registered, open end management investment company ("Mutual
Fund" ). Each Portfolio is a separate investment series with its own stated
investment strategies and objectives.
Currently there are fourteen Sub-accounts available for the Policy which invest
in fourteen Mutual Fund Portfolios.
<TABLE>
<CAPTION>
PORTFOLIO NAME CATEGORY
<S> <C>
Alger American Growth Large Cap Growth
Alger American MidCap Growth Mid Cap Growth
Alger American Small Capitalization Small Cap Growth
Acacia Capital Corporation Calvert Responsibly
</TABLE>
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<TABLE>
<S> <C>
Invested Money Market Money Market
Acacia Capital Corporation Calvert Responsibly
Invested Balanced Managed Growth
Acacia Capital Corporation Calvert Responsibly
Invested Strategic Growth Strategic Growth
Dreyfus Stock Index Fund S & P 500 Index
Neuberger & Berman Advisors Management
Trust Limited Maturity Bond Government Bond
Neuberger & Berman Advisors Management
Trust Growth Large Cap Value
Strong Advantage Fund II Income
Strong Asset Allocation Fund II Balanced Fund
Strong International Stock Fund II International Growth
Strong Discovery Fund II Aggressive Growth
Van Eck Worldwide Insurance Trust
Gold and Natural Resources Fund Precious Metals
</TABLE>
THE DEATH BENEFITS
ANLIC will pay to the beneficiary the death benefits after receipt of
due proof that the Insured died prior to the Maturity Date while the Policy was
in force. If the Insured is living on the Maturity Date, ANLIC will pay the
Owner the Policy's Cash Surrender Value and the Policy will terminate. The
amount of death benefits ANLIC will pay depends on which death benefit option
is in effect on the date of death.
Under Type A Option, the death benefit equals the face amount of
coverage. Under the Type B Option, the death benefit equals the face amount
plus the Policy Account Value. Indebtedness is deducted from any amount
payable. Under both death benefit options, the death benefits will be
increased if the Policy Account Value, when multiplied by a specific percentage
as stated in the Policy, is greater than the amount selected under Option A or
B (See Death Benefits).
CHANGE IN DEATH BENEFITS
After the first Policy year, the Policy allows the Owner to adjust the
death benefit by changing the death benefit option or by increasing or
decreasing face amount (See Death Benefits). The minimum amount of an increase
in coverage is $25,000 and is subject to proof of continued insurability. Any
decrease in face amount of coverage must be at least $25,000 and may not result
in a death benefit amount below the $25,000 minimum required by ANLIC as stated
in the Policy. Changes in death benefit amounts will result in different
charges for the Policy. Any increase in death benefit will result in higher
cost of insurance charges for the Policy and will increase surrender charges.
For any decrease in death benefits, surrender charges will remain unchanged for
the Policy until the time of lapse or surrender. A decrease will also affect
the cost of insurance charges.
POLICY ACCOUNT VALUE
The Policy Account Value is the total value held in both the Variable
Account and the General Account without any deduction for Indebtedness.
The Policy Account Value in the Variable Account is the sum total of
all values held in the Sub-accounts. This value reflects the investment
performance of the Sub-accounts, net premiums paid, transfers, partial
surrenders, and charges and deductions. The Owner bears the entire investment
risk
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for amounts allocated to the Variable Account and consequently there is no
guaranteed minimum amount of value for premiums allocated to the Sub-accounts.
The General Account Value earns a minimum 4.5% of interest. Interest
credited to net premiums in the General Account will be declared by ANLIC in
advance and will vary from year to year in the complete discretion of ANLIC.
Interest rates will also vary depending on Policy indebtedness (See Loan
Privileges). The General Account Value will reflect net premiums allocated or
transferred to it, plus credited interest, less any amounts transferred or
withdrawn and less charges and deductions. (See General Account).
FREE LOOK PERIOD
The Free Look Period allows the Owner to review the Policy and to
reject it if, for any reason, the Policy is not satisfactory. The Free Look
Period lasts until twenty days after the Owner receives the Policy or 45 days
after completion of Part I of the application, if later. The Free Look Period
also applies after an increase in Face Amount [See Examination of the Policy
Privilege (Free Look)]. If exercised, the Policy will be considered void from
the beginning and all premiums paid will be refunded.
During the first fifteen days measured from the Policy Date, the net
premium allocated to Sub-accounts of the Variable Account will be automatically
allocated to the Sub-account that invests exclusively in the Calvert
Responsibly Invested Money Market Portfolio. Upon expiration of the fifteen
days, net premiums will be allocated in accordance with instructions in the
application. The Owner may change future allocations of premiums by notifying
ANLIC in writing. The Free Look Period also applies to the amount of any
increase in coverage.
TRANSFERS
The Owner may transfer amounts from the General Account to the
Sub-accounts. The minimum amount that may be transferred is $100. The maximum
amount allowed in any one Policy Year is 25% of the General Account Value as of
the last Policy Anniversary Date. During the first Policy year, the maximum
amount is 25% of the General Account Value on the date of the request.
Unlimited transfers are allowed from the Variable Account to the
General Account or between Sub-accounts. The Owner may also choose an automatic
transfer option called The Automatic Rebalancing Program or dollar cost
averaging under the Dollar Cost Averaging Program (See Automatic Rebalancing
and Dollar Cost Averaging).
CHARGES ASSOCIATED WITH THE POLICY
Premium Expense Charge - A deduction for certain charges will be made from each
premium payment. A charge of 2.25% of each premium will be deducted to
compensate ANLIC for expenses associated with state premium taxes for the
Policy.
Policy Account Value Charges - The Policy Account Value will be reduced by a
monthly deduction equal to the sum of the cost of insurance charge, the cost of
any optional insurance benefits added by rider, and a monthly administrative
charge equal to $27 per month for the first Policy year and $8 each month
thereafter. The monthly deduction may vary in amount from month to month. The
cost of insurance charge will vary based upon a number of factors, including
the amount of insurance applied for, the age, the issue age and the rate class
of the Insured.
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Surrender Charge - A surrender charge is imposed if the Policy is surrendered
or lapses any time before it has been in force for ten years. The surrender
charge is equal to the product of the surrender charge factor as stated in the
Policy times the Target Premium for the original Policy face amount or an
increase. The maximum surrender charge is 30% of premiums paid up to Target
Premium as stated in the Policy (See Surrender Privileges).
Partial Surrender Charge - During the surrender charge period for the Policy
and any increase in Policy face amount, there will be a charge for a partial
surrender equal to 8% of the amount withdrawn or $25, whichever is greater.
Charges against the Variable Account - A charge not to exceed an annual rate
of .90% of the average daily net assets of the Sub-accounts will be imposed for
ANLIC's assumption of certain mortality and expense risks assumed in connection
with the Policy. This charge will be reduced after the fifteenth Policy Year
(See Mortality and Expense Risk Charge).
No charges are currently made against the Variable Account for federal
or state income taxes. Should ANLIC determine that such taxes may lawfully be
imposed, ANLIC may make deductions from the Variable Account to pay for these
taxes (See Federal Tax Considerations).
In addition, because the Variable Account purchases shares of the
Portfolios, the value of the net assets in the Sub-accounts will reflect the
investment advisory or other expenses of the Portfolios.
GRACE PERIOD
The Grace Period is the period of time allowed from the mailing of the
notice that Premium is past due until the date the Policy will Lapse for non
payment of Premium. The Grace Period will be 62 days from the date a notice of
the start of the Grace Period is mailed. The Grace Period will start on any
Monthly Anniversary when the Cash Surrender Value is not large enough to cover
the next monthly deduction unless the sum of Benchmark Premiums or the GDBP has
been paid under conditions as stated below. On or about the first business day
of the Grace Period a notice of commencement of the Grace Period will be mailed
to the Owner at the mailing address on file with ANLIC.
If a Premium large enough to cover past due Policy charges and the
next two monthly deductions is not paid by the end of the 62 day Grace Period,
the Policy will Lapse. The Policy will terminate without value. Partial
premium payments made during the Grace Period will be refunded. If the Insured
dies during the Grace Period, any past due monthly deductions will be deducted
from the Death Benefit.
POLICY LAPSE AND REINSTATEMENT
During the first five years, the Policy will lapse if the sum of the
scheduled Benchmark Premiums or GDBP has not been paid and the Cash Surrender
Value is insufficient to cover the monthly deductions, provided no premium is
received during the Grace Period. After the first five years, provided the
GDBP has not been paid, the Policy will lapse at the end of the grace period
when no premium has been received and the Cash Surrender Value is insufficient
to cover the next monthly deduction (See Policy Lapse and Reinstatement). The
Owner may pay the GDBP for the Policy so that the Policy will not lapse prior
to the Insured's age 65 or for ten years from the effective date of coverage
whichever is later. The GDBP will not apply in the event the Owner elects to
take a Policy loan or partial surrender (See Loan Privileges and Surrender
Privileges).
Subject to certain conditions, including evidence of continued
insurability satisfactory to ANLIC
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and payment of the required premium, the Policy may be reinstated at any time
within five years from the date of lapse but prior to the stated Maturity Date
(See Policy Lapse and Reinstatement).
LOAN PRIVILEGE
The Owner may obtain Policy loans at any time the Policy has loan
value. The minimum loan request ANLIC allows is $1,000. The loan value of the
Policy equals 90% of the Cash Surrender Value. There is an interest rate of
6.45% per year charged for loans when the Policy Account Value is less than the
cumulative premiums paid. Otherwise, after the fifth Policy year the loan rate
charged will be 4.5% per year for the amount of the loan that equals or is less
than the amount that the Policy Account Value exceeds cumulative premiums paid.
The interest is due and payable at the end of each Policy Month. Loans and
interest may be repaid at any time prior to the Maturity Date. Loans may be
taxable transactions.
The Owner may allocate a Policy loan among the General Account and the
Sub-accounts. Unless you direct otherwise, loans will first be taken from the
General Account. When loan values are taken from the Variable Account, the
value equal to the portion of the Policy loan plus the projected interest until
the next Policy anniversary will be transferred from the designated
Sub-accounts to the General Account and credited with interest at a rate of
4.5% per year. Value from the General Account may be transferred to the
Sub-accounts upon repayment of the loan (See Loan Privileges).
SURRENDER
The Owner may totally surrender the Policy at any time for its Cash
Surrender Value. Subject to certain conditions, the Owner may also partially
surrender the Policy prior to the Maturity Date (See Surrender Privileges).
There will be a charge imposed for surrenders as reflected in the Cash
Surrender Value. There is also a charge for partial surrenders. If Death
Benefit Option A is in effect, partial surrenders will reduce the Policy's face
amount by 100% of the amount of the partial surrender request. For Death
Benefit Option B, there will be no reduction in face amount. (See Death
Benefits). Surrenders may be taxable transactions (See Federal Tax
Considerations). Payment of amounts from the General Account upon surrender
and refund of premium may be delayed under certain circumstances (See
Postponement of Payments).
TAX TREATMENT
ANLIC believes (based upon Notice 88-128 and the proposed Regulations
under Section 7702, issued on July 5, 1991) that a Policy issued on a Standard
Rate class basis generally should meet the Section 7702 definition of a life
insurance contract. With respect to a Policy issued on a Table Rating (i.e.,
substandard) basis, there is insufficient guidance to determine if such a
Policy would satisfy the Section 7702 definition of a life insurance contract,
particularly if the Owner pays the full amount of premiums permitted under such
a Policy. An Owner of a Policy issued on a Table Rating basis may, however,
adopt certain self-imposed limitations on the amount of premiums paid for such
a Policy which should cause the Policy to meet the Section 7702 definition of a
life insurance contract. Any Owner contemplating the adoption of such
limitations should do so only after consulting a tax adviser.
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Assuming that a Policy qualifies as a life insurance contract for
federal income tax purposes, an Owner should not be deemed to be in
constructive receipt of Policy Account Value under a Policy until there is a
distribution from the Policy. Moreover, death benefits payable under a Policy
should be completely excluded from the gross income of the Beneficiary. As a
result, the Beneficiary generally should not be taxed on these proceeds (See
Tax Status of the Policy).
Under certain circumstances, a Policy may be treated as a "Modified
Endowment Contract." If the Policy is a Modified Endowment Contract, then all
pre-death distributions, including Policy loans, will be treated first as a
distribution of taxable income and then as a return of basis or investment in
the contract. In addition, prior to age 59 1/2 any such distributions
generally will be subject to a 10% penalty tax (See Treatment of Policy
Benefits).
If the Policy is not a Modified Endowment Contract, distributions
generally will be treated first as a return of basis or investment in the
contract and then as disbursing taxable income. Moreover, loans will not be
treated as distributions. Finally, neither distributions nor loans from a
Policy that is not a Modified Endowment are subject to the 10% penalty tax (See
Distributions from Policies Not Classified as Modified Endowment Contracts).
ILLUSTRATIONS
Illustrations of how investment performance of the Sub-accounts may
cause Death Benefits, the Policy Account Value and the Cash Surrender Value to
vary are included in Appendix A, commencing on page A-1. Illustrations in this
Prospectus or used in connection with the purchase of the Policy are based on
hypothetical investment rates of return. These rates are not guaranteed. They
are illustrative only and should not be deemed a representation of past or
future performance. Actual rates of return may be more or less than those
reflected in the illustrations and, therefore, actual values will be different
than those illustrated.
ACACIA NATIONAL AND THE VARIABLE ACCOUNT
ACACIA NATIONAL LIFE INSURANCE COMPANY
Acacia National Life Insurance Company ("ANLIC") is a stock life
insurance company incorporated in the Commonwealth of Virginia on December 9,
1974. ANLIC is principally engaged in offering life insurance policies and
annuity contracts. ANLIC is admitted to do business in 46 states and the
District of Columbia and has applications pending in other states. The Company
is one of the members of "The Acacia Group(R)" of Companies.
Acacia Mutual Life Insurance Company ("Acacia Mutual") owns all the
outstanding stock of ANLIC. The principal offices of both ANLIC and Acacia
Mutual are at 51 Louisiana Avenue, N.W., Washington, D.C. 20001. Acacia Mutual
is a mutual life insurance company chartered by a Special Act of Congress in
1869 and is subject to the laws of the District of Columbia. It is the only
life insurance company operating today under a Federal Charter. Acacia Mutual
is licensed in 41 states and in the District of Columbia and offers a complete
line of life insurance products. While ANLIC is a wholly-owned subsidiary of
Acacia Mutual, the assets of Acacia Mutual do not support the obligations of
ANLIC under the Policy.
A number of the directors and officers of ANLIC are also either
directors or officers or both of Acacia Mutual. Acacia Mutual's employees
perform certain administrative functions for ANLIC for which Acacia Mutual is
reimbursed.
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Acacia Mutual also owns all of the outstanding stock of the Acacia
Financial Corporation, a holding company, which owns all of the stock of the
Calvert Group, Ltd., which in turn owns Calvert Asset Management Company, Inc.
Calvert Asset Management Company, Inc. is the investment adviser of Acacia
Capital Corporation, the shares of which are purchased for certain sub-accounts
of the Variable Account. The Advisors Group, Inc., owned by Acacia Financial
Corporation, is the principal underwriter for the Policies described in this
Prospectus as well as other variable policies to be issued by ANLIC. The
Advisors Group, Inc. sells shares of other mutual funds and other securities,
and may also sell variable annuity or variable life policies of other issuers.
THE VARIABLE ACCOUNT
Acacia National Variable Life Insurance Separate Account I ("Variable
Account") was established by ANLIC as a separate account on January 31, 1995.
The Variable Account will receive and invest the net premiums paid under this
Policy. Net premiums placed in the Variable Account constitute certain
reserves for benefits payable under the Policies, and these are actuarial
reserves for future benefits payable under the Policies. In addition, the
Variable Account may receive and invest net premiums for other flexible premium
variable life insurance policies issued by ANLIC.
Although the assets of the Variable Account are the property of ANLIC,
the Code of Virginia under which the Variable Account was established provides
that the assets in the Variable Account attributable to the Policies are
generally not chargeable with liabilities arising out of any other business
which ANLIC may conduct. The assets of the Variable Account shall, however, be
available to cover the liabilities of the General Account of ANLIC to the
extent that the Variable Account's assets exceed its liabilities arising under
the Policies supported by it. Thus while Owners neither hold legal title to,
nor have any beneficial ownership interest in Separate Account assets, because
the assets are legally segregated from other assets of ANLIC subject to the
claims of creditor, Owners have preferential rights to the ANLIC Variable
Account assets.
The Variable Account is currently divided into fourteen Sub-accounts.
Each Sub-account invests exclusively in shares of a single Portfolio of a
registered, open end management investment company ("Mutual Fund"). Income and
both realized and unrealized gains or losses from the assets of each
Sub-account of the Variable Account are credited to or charged against that
Sub-account without regard to income, gains or losses from any other
Sub-account of the Variable Account or arising out of any other business ANLIC
may conduct. Each Sub-account reinvests all dividends and income and capital
gain distributions declared by the Portfolio.
The Variable Account has been registered as a unit investment trust
under the Investment Company Act of 1940. Registration with the Securities and
Exchange Commission does not involve supervision of the management or
investment practices or policies of the Variable Account or ANLIC by the
Commission.
THE PORTFOLIOS
THE INVESTMENT OBJECTIVES OF EACH OF THE PORTFOLIOS ARE SUMMARIZED
BELOW. THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED
OBJECTIVE. MORE DETAILED INFORMATION ABOUT THE PORTFOLIOS, INCLUDING A
DESCRIPTION OF THE RISKS MAY BE FOUND IN THE PROSPECTUS FOR EACH OF THE
PORTFOLIOS WHICH MUST ACCOMPANY OR PRECEDE THIS PROSPECTUS. IN ADDITION, THE
VARIABLE ACCOUNT
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PURCHASES SHARES OF EACH PORTFOLIO SUBJECT TO THE TERMS PARTICIPATION
AGREEMENTS BETWEEN ANLIC AND THE FUNDS. A COPY OF THE AGREEMENTS HAVE BEEN
FILED AS EXHIBITS TO THE REGISTRATION STATEMENT FOR THE VARIABLE ACCOUNT. EACH
OF THE FUNDS HAS OR MAY HAVE ADDITIONAL PORTFOLIOS THAT ARE NOT AVAILABLE TO
THE VARIABLE ACCOUNT.
THE ALGER AMERICAN FUND
The Variable Account has three Sub-accounts that invest exclusively in
shares of the Alger American Fund. The Large-Cap Growth Sub-account, the
Mid-Cap Growth Sub-account and the Small-Cap Growth Sub-account invest in the
Alger American Growth Portfolio, the Alger American Mid Cap Growth Portfolio,
and the Alger American Small Capitalization Portfolio, respectively of the
Alger American Fund.
The Alger American Growth Portfolio seeks to provide long- term
capital appreciation by investing in equity securities, such as common or
preferred stocks, or securities convertible into or exchangeable for equity
securities, including warrants and rights, primarily of companies with total
market capitalization of $1 billion or greater. The Portfolio may invest up to
35% of its total assets in equity securities of companies that, at the time of
purchase, have total market capitalization of less than $1 billion and in
excess of that amount (up to 100% of its assets) during temporary defensive
periods. The Portfolio will invest primarily in companies whose securities are
traded on domestic stock exchanges or in the over-the-counter market. These
companies may still be in the developmental stage, may be older companies that
appear to be entering a new stage of growth progress owing to factors such as
management changes or development of new technology, products, or markets or
may be companies providing products or services with a high unit volume growth
rate. In order to afford the Portfolio the flexibility to take advantage of
new opportunities for investments in accordance with its investment objective,
it may hold up to 15% of its net assets in money market instruments and
repurchase agreements, and in excess of that amount (up to 100% of its assets)
during temporary defensive periods. This amount may be higher than that
maintained by other funds with similar investment objectives.
The Alger American Mid Cap Growth Portfolio seeks to provide long-term
capital appreciation by investing in equity securities, such as common or
preferred stocks, or securities convertible into or exchangeable for equity
securities, including warrants and rights. Except during temporary defensive
periods, the Portfolio invests at least 65% of its total assets in equity
securities of companies that, at the time of purchase of the securities, have
total market capitalization within the range of companies included in the S&P
MidCap 400 Index, updated quarterly. The S&P MidCap 400 Index is designed to
track the performance of medium capitalization companies. As of March 31,
1996, the range of market capitalization of these companies was $153 million to
$8.88 billion. The Portfolio may invest up to 35% of its total assets in
equity securities of companies that, at the time of purchase, have total market
capitalization outside the range of companies included in the S&P MidCap 400
Index and in excess of that amount (up to 100% of its assets) during temporary
defensive periods. This amount may be higher than that maintained by other
funds with similar investment objectives.
The Alger American Small Capitalization Portfolio seeks to provide
long-term capital appreciation by investing in equity securities, such as
common or preferred stocks, or securities convertible into or exchangeable for
equity securities, including warrants and rights. The Portfolio will invest in
companies whose securities are traded on domestic stock exchanges or in the
over-the-counter market. These companies may still be in the developmental
stage, maybe older companies that appear to be entering a new stage of growth
progress owing to factors such as management changes or development of new
technology, products, or markets or may be companies providing products or
services with a high unit
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volume growth rate. Except during temporary defensive periods, the Portfolio
invests at least 65% of its total assets in equity securities of companies
that, at the time of purchase, have "total market capitalization" within the
range of companies included in the Russell 2000 Growth Index, updated
quarterly. The Russell 2000 Growth Index is designed to track the performance
of small capitalization companies. As of march 31, 1996, the range of market
capitalization of these companies was $20 million to $3.04 billion. The
Portfolio may invest up to 35% of its total assets in equity securities of
companies that, at the time of purchase, have total market capitalization
outside the range of companies included in the Russell 2000 Growth Index and in
excess of that amount (up to 100% of its assets) during temporary defensive
periods. This amount may be higher than that maintained by other funds with
similar investment objectives.
Alger Management, Inc. serves as investment manager to the Alger
American Fund.
ACACIA CAPITAL CORPORATION
The Variable Account has three Sub-Accounts that invest exclusively in
shares of Acacia Capital Corporation. Acacia Capital Corporation is one of
eight registered investment companies in the Calvert Group, Ltd. Group of
Funds. The Calvert Group, Ltd. is an indirect wholly-owned subsidiary of
Acacia Mutual Life Insurance Company. Acacia National Life Insurance Company,
which is offering the Flexible Premium Adjustable Life Insurance Policy is also
a wholly owned subsidiary of Acacia Mutual Life Insurance Company. The Fund has
a number of Portfolios or classes of shares, each of which represents an
interest in a Portfolio of the Fund. Calvert Group, Ltd. is the sponsor of the
Fund.
The Money Market Sub-account, the Responsibly Balanced Growth
Sub-account, and the Strategic Growth Sub-account of the Variable Account
invest in shares of the Calvert Responsibly Invested Money Market Portfolio,
the Calvert Responsibly Invested Balanced Growth Portfolio and the Calvert
Responsibly Invested Strategic Growth Portfolio respectively of Acacia Capital
Corporation.
These Portfolios seek to achieve competitive returns while encouraging
responsible corporate conduct. The Portfolios look for enterprises that make a
significant contribution to society through their products and the way they do
business. Each proposed portfolio investment that is deemed financially viable
is then screened according to the stated social criteria of the particular
Portfolio. Investments must, in the Judgment of the Investment Advisor be
consistent with these criteria. It should be noted that the Portfolios' social
criteria tend to limit the availability of investment opportunities more than
is customary with other investment portfolios. (See the individual Portfolio
Prospectus' for a complete description of each social screen).
The Calvert Responsibly Invested Money Market Portfolio ("CRI Money
Market") seeks to provide the highest level of current income, consistent with
liquidity, safety and security of capital, by investing in money market
instruments, including repurchase agreements with recognized securities dealers
and banks secured by such instruments, selected in accordance with the
Portfolios' investment and social criteria. CRI Money Market attempts to
maintain a constant net asset value of $1.00 per share. There can be no
assurance that the Portfolio will maintain a constant net asset value of $1.00
per share. An investment in the Portfolio is neither Insured nor guaranteed by
the U.S. government.
Calvert Responsibly Invested Balanced Growth Portfolio ("CRI Balanced
Growth") seeks to achieve a total return above the rate of inflation through an
actively managed portfolio of stocks, bonds and money market instruments
(including repurchase agreements secured by such instruments) selected with a
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concern for the investment and social impact of each investment.
CRI Balanced Growth may invest up to 20% of its assets in
non-investment grade obligations commonly referred to as "junk bonds."
Investments in such securities involve special risks in addition to the risks
associated with investments in higher rated debt securities and Owners should
consider the risks associated with junk bonds before investing in the
Sub-account. These risks are described in the Prospectus of the Portfolio.
Calvert Responsibly Invested Strategic Growth ("CRI Strategic Growth")
seeks, with a concern for social impact, maximum long-term growth through
investments primarily in the equity securities of companies that have little or
no debt, high relative strength and substantial management ownership. The
Portfolio considers issuers of all sizes, industries, and geographic markets,
and does not seek interest income or dividends.
CRI Strategic Growth may invest up to 35% of its assets in debt
securities, excluding money market instruments. These debt securities may
consist of investment-grade and non-investment grade obligations. The latter
are commonly referred to as "junk bonds." Investments in such securities
involve special risks in addition to the risks associated with investments in
higher rated debt securities and Owners should consider the risks associated
with junk bonds before investing in the Sub-account. These risks are described
in the Prospectus of the Portfolio.
Calvert Asset Management Company, Inc. ("CAM") is the investment
advisor to all the Acacia Capital Corporation Portfolios. CAM is a wholly
owned subsidiary of Calvert Group, Ltd. which is in turn an indirect wholly
owned subsidiary of Acacia Mutual Life Insurance Company. Pursuant to its
investment advisory agreement, CAM manages the investment and reinvestment of
the assets of each Portfolio and is responsible for the overall business
affairs of each Portfolio. Calvert Administrative Services, an affiliate of
CAM, has been retained by Calvert Responsibly Invested Strategic Growth
Portfolio to provide administrative services and is entitled to receive a fee
from each of the Portfolios of a percentage of net assets per year.
On behalf of the CRI Balanced Growth Portfolio, CAM has entered into a
subadvisory agreement with United States Trust Company of Boston, a
Massachusetts chartered commercial bank with full trust powers. On behalf of
the CRI Strategic Growth Portfolio, CAM has entered into a subadvisory
agreement with Portfolio Advisory Services, Inc. of California. The
subadvisors manage the investment and reinvestment of the assets of the
Portfolio, although CAM may screen potential investments for compatibility with
the Portfolio's social criteria. CAM continuously monitors and evaluates the
performance of the subadvisors.
DREYFUS STOCK INDEX FUND
The Variable Account has one Sub-account that invests exclusively in
shares of the Dreyfus Stock Index Portfolio.
Dreyfus Stock Index Portfolio has as an investment objective to
provide investment results that correspond to the price and yield performance
of publicly traded common stocks in the aggregate, as represented by the
Standard & Poor's 500 composite Price Index which is composed of 100 selected
common stocks, most of which are listed on the New York Stock Exchange.
Standard & Poor's Corporation chooses the stocks to be included in the Index
solely on a statistical basis. The Portfolio attempts to be fully invested at
all times in the stocks that comprise the Index and stock index futures as
described below and, in any event, at least 80% of the Portfolio's net assets
will be so invested. Inclusion of a stock in the Index in no way implies an
opinion by Standard & Poor's Corporation as to its
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<PAGE> 17
attractiveness as an investment. The Portfolio uses the Index as the standard
performance comparison because it represents approximately 70% of the total
market value of all common stocks and is well known to investors. An
investment in the Portfolio involves risks similar to those of investing in
common stocks.
The Fund Administrator is Dreyfus Corporation ("Dreyfus"), a
wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned
subsidiary of Mellon Bank Corporation, a publicly owned multibank holding
company.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has two Sub-Accounts that invest exclusively in
shares of Portfolios of the Neuberger & Berman Advisers Management Trust
("Neuberger & Berman").
The Government Bond and Large Cap Value Sub-accounts of the Variable
Account invest in shares of the Limited Maturity Bond Portfolio and Growth
Portfolio, respectively, of Neuberger & Berman.
The Neuberger & Berman Limited Maturity Bond Portfolio. The
investment objective of the Limited Maturity Bond Portfolio is to provide the
highest current income consistent with low risk to principal and liquidity; and
secondarily, total return. Neuberger & Berman Limited Maturity Bond invests in
a diversified portfolio of fixed and variable rate debt securities and seeks to
increase income and preserve or enhance total return by actively managing
average portfolio maturity in light of market conditions and trends.
The Neuberger & Berman Limited Maturity Bond Investments invests in a
diversified portfolio of short-to-intermediate-term U.S. Government and Agency
securities and debt securities issued by financial institutions, corporations,
and others, of at least investment grade. These securities include
mortgage-backed and asset-backed securities, repurchase agreements with respect
to U.S. Government and Agency securities, and foreign investments. Neuberger
& Berman Limited Maturity Bond Investments may invest up to 5% of its net
assets in municipal securities when the Portfolio Manager believes such
securities may outperform other available issues. The Portfolio may purchase
and sell covered call and put options, interest-rate futures contracts, and
options on those futures contracts and may engage in lending portfolio
securities. The Portfolio's dollar-weighted average portfolio maturity may
range up to five years.
The Neuberger & Berman Growth Portfolio seeks capital appreciation,
without regard to income. Neuberger & Berman Growth Portfolio invests in
securities believed to have the maximum potential for long-term capital
appreciation. It does not seek to invest in securities that pay dividends or
interest, and any such income is incidental. The Portfolio expects to be
almost fully invested in common stocks, often of companies that may be
temporarily out of favor in the market. The Portfolios' aggressive growth
investment program involves greater risks and share price volatility than
programs that invest in more conservative securities. Moreover, the Portfolio
does not follow a Policy of active trading for short-term profits.
Accordingly, the Series may be more appropriate for investors with a
longer-range perspective. While the Portfolio uses the Neuberger & Berman
value-oriented investment approach, when the Portfolio Manager believes that
particular securities have greater potential for long-term capital
appreciation, the Portfolio may purchase such securities at prices with higher
multiples to measures of economic value (such as earnings). In addition, the
Portfolio focuses on companies with strong balance sheets and reasonable
valuations relative to their growth rates. It also diversifies its investments
into many companies and industries.
The Investment Adviser for the Limited Maturity Bond and Growth
Portfolios of AMT is Neuberger & Berman Management Incorporated ("N&B
Management"). The Investment Adviser retains Neuberger & Berman, L.P., without
cost to AMT, as subadvisor to furnish it with investment recommendations and
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research information. N&B Management provides investment management services
to each Portfolio that include, among other things, making and implementing
investment decisions and providing facilities and personnel necessary to
operate the Portfolio. N&B Management provides administrative services to each
Portfolio that include furnishing similar facilities and personnel for the
Portfolio. With the Portfolio's consent, N&B Management is authorized to
subcontract some of its responsibilities under its administration agreement
with the Portfolio to third parties.
STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG DISCOVERY FUND II
The Variable Account has four Sub-Accounts that invest exclusively in
shares of three Portfolios of the Strong Variable Insurance Funds, Inc. and one
Portfolio of the Strong Discovery Fund II.
The Income, Balanced, International and Aggressive Growth Sub-Accounts
of the Variable Account invest in shares of the Strong Advantage Fund II,
Strong Asset Allocation Fund II, and Strong International Stock Fund II
respectively of Strong Variable Insurance Funds, Inc. and Strong Discovery
Fund II.
The Aggressive Growth Sub-Account of the Variable Account invests
exclusively in shares of the Strong Discovery Fund II.
Strong Advantage Fund II seeks to provide current income with a very
low degree of share-price fluctuation. The Portfolio invests primarily in
ultra short-term investment-grade debt obligations. The Portfolio is designed
for investors who seek higher yields than money market funds generally offer
and who are willing to accept some modest principal fluctuation in order to
achieve that objective. Because its share price will vary, the Portfolio is
not an appropriate investment for those whose primary objective is absolute
principal stability. The Portfolio's investments include a combination of
high-quality money market instruments, as well as securities with longer
maturities and debt obligations of lower quality. Under normal market
conditions, it is anticipated that the Portfolio will maintain an average
effective Portfolio maturity of one year or less. When the Advisor determines
market conditions warrant a temporary defensive position, the Portfolio may
invest without limitation in cash and short-term fixed income securities.
Strong Advantage Fund II may invest up to 25% of its total assets in
non-investment grade obligations commonly referred to as "junk bonds" that are
rated in the fifth-highest category (e.g. BB by S&P) or in unrated securities
of comparable quality. Investments in such securities involve special risks in
addition to the risks associated with investments in higher rated debt
securities and Owners should consider the risks associated with junk bonds
before investing in the Sub-account. These risks are described in the
Prospectus of the Portfolio. In general, non-investment grade securities are
regarded as predominately speculative with respect to the capacity of the
issuer to pay interest and repay principal. However, because these securities
compose the tier immediately below investment-grade, they are considered the
least speculative non-investment grade securities.
Although the net asset value of the Fund is expected to fluctuate, the
Advisor actively manages the Fund's portfolio and adjusts its average portfolio
maturity according to the Advisor's interest rate outlook while seeking to
avoid or reduce, to the extent possible, any negative changes in net asset
value.
Strong Asset Allocation Fund II seeks high total return consistent
with reasonable risk over the long term. The Portfolio allocates its assets
globally among a diversified portfolio of equity securities, bonds, and
short-term fixed income securities. Under normal market conditions, the
Portfolio's net assets will be allocated according to a benchmark of 40%
equities, 40% bonds, and 20% short-term fixed income securities. The Advisor
intends to actively manage the Portfolio's assets, maintaining a balance over
time
15
<PAGE> 19
between investment opportunities and their associated potential risks. In
response to changing market and economic conditions, the Advisor may reallocate
the Portfolio's net assets among these asset categories. Those allocations
normally will be within these ranges. However, in pursuit of total return, the
Advisor may under-allocate or over-allocate the Portfolio's net assets in a
particular category. Furthermore, when the Advisor determines that market
conditions warrant adopting a temporary defensive position, the Portfolio may
invest without limitation in cash and short-term fixed income securities.
ASSET-ALLOCATION CATEGORIES
<TABLE>
<CAPTION>
Percentage of Fund Net Assets
-----------------------------
Category of Investment Benchmark Range
---------------------- --------- -----
<S> <C> <C>
Equities 40% 10-60%
Bonds 20% 20-60%
Short-Term Fixed Income Securities 20% 0-70%
</TABLE>
Equity securities in which the Portfolio may invest include common
stocks, preferred stocks, and securities that are convertible into common
stocks, such as warrants and convertible bonds. Bonds purchased by the
Portfolio will be primarily investment-grade debt obligations, although the
Portfolio may invest up to, but not including, 35% of its total assets in
non-investment-grade debt obligations. The latter are commonly referred to as
"junk bonds". Investments in such securities involve special risks in addition
to the risks associated with investments in higher rated debt securities and
Owners should consider the risks associated with junk bonds before investing in
the Sub-account. These risks are described in the Prospectus of the Portfolio.
The Portfolio also has the flexibility to take advantage of investment
opportunities around the world by investing in foreign securities. While the
Portfolio may invest without limitation in foreign securities, the Advisor does
not expect that, under normal market conditions, the Portfolio will invest more
than 40% of its total assets in foreign securities. Portfolio investments
involve risks not normally found when investing in securities of U.S. issuers.
Within the asset-allocation categories described above, the Advisor
will allocate the Portfolio's investments among countries, geographic regions,
and currencies in response to changing market and economic trends. In making
geographical allocations of investments, the Advisor will consider such factors
as the historical and prospective relationships among currencies and
governmental policies that influence currency-exchange rates, current and
anticipated interest rates, inflation levels, and business conditions within
various countries, as well as other macroeconomic, social, and political
factors. While there are no prescribed limits on the Portfolio's geographic
allocations, the Advisor anticipates that the Portfolio will generally invest
in issuers in industrialized countries and in major currencies, including the
United States, Canada, the countries of Western Europe, Japan, Australia, and
New Zealand. The Portfolio may also, however, invest in securities of issuers
in developing countries.
Strong International Stock Fund II seeks capital growth. The
Portfolio invests primarily in the equity securities of issuers located outside
the United States. The Portfolio will invest at least 65% of its total assets
in foreign equity securities, including common stocks, preferred stocks, and
securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds, that are issued by companies whose principal
headquarters are located outside the United States.
Under normal conditions, the Portfolio expects to invest at least 90%
of its total assets in foreign equity securities. The Portfolio may, however,
invest up to 35% of its total assets in equity securities of U.S. issuers or
debt obligations, including intermediate to long-term debt obligations of U.S.
issuers or
16
<PAGE> 20
foreign-government entities. When the Advisor determines that market
conditions warrant a temporary defensive position, the Portfolio may invest
without limitation in cash (U.S. dollars, foreign currencies, or multicurrency
units) and short-term fixed income securities. Although the debt obligations
in which it invests will be primarily investment-grade, the Portfolio may
invest up to 5% of its total assets in non-investment-grade debt obligations.
Investments in such securities involve special risks in addition to the risks
associated with investments in higher rated debt securities and Policy Owners
should consider the risks associated with junk bonds before investing the
Sub-account. These risks are described in the Prospectus of the Portfolio.
The Portfolio will normally invest in securities of issuers located in
at least three different countries. The Advisor expects that the majority of
the Portfolio's investments will be in issuers in the following markets:
Argentina, Australia, Brazil, Chile, Cambodia, the Czech Republic, France,
Germany, Hong Kong, Hungary, India, Indonesia, Italy, Japan, Malaysia, Mexico,
the Netherlands, New Zealand, Norway, Peru, the Philippines, Poland, Russia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, the
United Kingdom, and Vietnam. The Portfolio will also invest in other European,
Pacific Rim, and Latin American markets.
Strong Discovery Fund II seeks capital growth. The Portfolio invests
in securities that the Advisor believes represent growth opportunities. The
Portfolio normally emphasizes equity securities, although it has the
flexibility to invest in any type of security that the Advisor believes has the
potential for capital appreciation. The Portfolio may invest up to 100% of its
total assets in equity securities, including common stocks, preferred stocks,
and securities that are convertible into common or preferred stocks, such as
warrants and convertible bonds. The Portfolio may also invest up to 100% of
its total assets in debt obligations, including intermediate to long-term
corporate or U.S. government debt securities. When the Advisor determines that
market conditions warrant a temporary defensive position, the Portfolio may
invest, without limitation, in cash and short-term fixed income securities.
Although the debt obligations in which it invests will be primarily
investment-grade, the Portfolio may invest up to 5% of its total assets in
non-investment-grade debt obligations. Investments in which securities involve
special risks in addition to the risks associated with investments in higher
rated debt securities and Policy Owners should consider the risks associated
with junk bonds before investing in the Sub-account. These risks are described
in the Prospectus of the Portfolio.
The Portfolio may invest up to 15% of its total assets directly in the
securities of foreign issuers. It may also invest without limitation in
foreign securities in domestic markets through depositary receipts. However,
as a matter of Policy, the Advisor intends to limit total foreign exposure,
including both direct investments and depositary receipts, to no more than 25%
of the Fund's total assets.
The Advisor seeks to uncover emerging investment trends and attractive
growth opportunities. In its search for potential investments, the Advisor
attempts to identify companies that are poised for accelerated earnings growth
due to innovative products or services, new management, or favorable economic
or market cycles. These companies may be small, unseasoned firms in the early
stages of development, or they may be mature organizations. Whatever their
size, history, or industry, the Advisor believes their potential earnings
growth is not yet reflected in their market value and that, over time, the
market prices of these securities will move higher.
Strong Capital Management, Inc. is the investment advisor for all the
Strong Variable Insurance Funds Inc., and Strong Discovery Fund II Portfolios
pursuant to its investment advisory agreements, manages the investment and
reinvestment of the assets of each Portfolio, and is responsible for the
overall business affairs of each Portfolio.
17
<PAGE> 21
VAN ECK WORLDWIDE INSURANCE TRUST
The Variable Account has one Sub-account that invests exclusively in
shares of a Portfolio of the Van Eck Worldwide Insurance Trust ("Van Eck
Trust").
The Van Eck Gold and Natural Resources Sub-account of the Variable
Account invests in shares of the Van Eck Gold and Natural Resources Portfolio,
of Van Eck Trust.
Van Eck Gold and Natural Resources Portfolio. This Portfolio seeks
long-term capital appreciation by investing in equity and debt securities of
companies engaged in the exploration, development, production and distribution
of gold and other natural resources such as strategic and other metals,
minerals, forest products, oil, natural gas and coal. Current income is not an
investment objective. During normal market conditions, the Portfolio will have
at least 65% of its total assets invested in securities of companies engaged in
gold mining and natural resources activities. The Portfolio may also invest in
equity and debt securities of companies which themselves invest in companies
engaged in these activities. The Portfolio also has the right to invest up to
35% of its assets in the securities of non-precious metals and natural
resources companies.
The Portfolio may invest up to 35% of the value of its total assets
in: (a) securities of companies not in the gold mining/natural resources areas;
(b) high grade corporate debt securities; and (c) obligations issued or
guaranteed by the U.S. or foreign governments and repurchase agreements. The
Portfolio may invest up to 5% of its assets at the time of purchase in
warrants. The Portfolio may also invest up to 5% of its assets at the time of
purchase in preferred stocks and preferred stocks which may be converted into
common stock.
The Portfolio has reserved the right to invest up to 10% of its net
assets, taken at market value at the time of investment in gold bullion and
coins.
Since the Portfolio may substantially invest all of its assets in
securities of companies engaged in gold mining and natural resources
activities, the Portfolio may be subject to greater risks and market
fluctuations than other investment companies with less concentrated portfolios.
The Portfolio has no restrictions on the amount of its assets that may be
invested in securities of foreign issuers and thus the relative amount of such
investments will change from time to time. Investments by the Portfolio in
securities of gold mining shares, coins and gold bullion, foreign issuers,
foreign currencies, and options and futures may involve particular investment
risks.
The Investment Advisor for Van Eck Gold and Natural Resources
Portfolio is Van Eck Associates Corporation.
INVESTMENT ADVISORY FEES
Alger. Alger Management, Inc. serves as investment manager to the
Alger American Fund. It receives a management fee of 0.75% of the annual value
of the Alger American Growth Portfolio's average daily net assets. Alger
American Mid Cap Growth Portfolio pays Alger Management a fee of 0.80% of the
annual value of the Portfolio's average daily net assets. Alger American Small
Capitalization Portfolio pays Alger Management a fee computed daily and paid
monthly at an annual rate of 0.85% of the value of the Portfolio's average
daily net assets.
Calvert. For its services, Calvert Asset Management Company, Inc.
("CAM") is entitled to receive a fee based on a percentage of the average daily
net assets of each of the Portfolios. CAM is currently entitled to receive a
maximum fee of 0.50% of net assets from CRI Money Market Portfolio, 0.70% of
net
18
<PAGE> 22
assets of CRI Balanced Growth and 1.50% of net assets of Strategic Growth
Portfolio.
Dreyfus. Pursuant to the terms of an Administration Agreement, the
Fund pays Dreyfus a monthly fee at the annual rate of 0.15 of 1.00% of the
value of the Fund's average daily net assets.
Neuberger & Berman. For combined administrative and investment
management services, N&B Management is paid the following fees as a percentage
of the average daily net assets. For the Limited Maturity Bond Portfolio these
fees total 0.65% of the first $500 million of average daily net assets, 0.615%
of the next $500 million of average daily net assets, 0.60% of the next $500
million of average daily net assets, 0.575% of the next $500 million of average
daily net assets and 0.55% of the Portfolio's average daily net assets in
excess of $2 billion. For the Growth Portfolio these fees total 0.85% of the
first $250 million of average daily net assets, 0.825% of the next $250 million
of average daily net assets, 0.75% of the next $500 million of average daily
net assets and 0.725% of the Portfolio's average daily net assets in excess of
$1.5 billion.
Strong. For its services, Strong Capital Management, Inc. is entitled
to receive a fee based on a percentage of the average daily net assets of each
of the Portfolios. For its services to Strong Advantage Fund II, it is
entitled to receive an annual fee of 0.60% of the average daily net asset value
of the Fund. For its services to Strong Asset Allocation Fund II, it is
entitled to receive an annual fee of 0.85% of the Fund's average daily net
assets up to $35,000,000 and 0.80% of the Fund's average daily net assets in
excess of $35,000,000. For its services to Strong International Stock Fund II,
it is entitled to receive an annual fee of 1.00% of the average daily net asset
value of the Fund.
Strong Capital Management Inc. is the investment advisor for the
Strong Discovery Fund II. For its services, it is entitled to receive an
annual fee of 1.00% of the average daily net asset value of the Fund.
Van Eck. The investment adviser for Gold and Natural Resources
Portfolio is Van Eck Associates Corporation ("Van Eck Associates"). As
compensation for its services, Van Eck Associates receives a monthly fee at an
annual rate of 0.75% of the first $500 million of the average daily net assets
of the Portfolio, 0.65% of the next $250 million of the daily net assets of the
Portfolio, and 0.50% of the average daily net assets of the Portfolio in excess
of $750 million.
RESOLVING MATERIAL CONFLICTS
The Funds are used as the investment vehicle for variable life
insurance policies issued by ANLIC. In addition, the Funds are also available
to registered separate accounts of insurance companies other than ANLIC. As a
result, there is a possibility that a material conflict may arise between the
interest of Owners whose policies are allocated to the Variable Account and the
Owners of life insurance policies and variable annuities issued by such other
companies whose values are allocated to one or more other separate accounts
investing in any one of the Funds.
In addition, one or more of the Funds may sell shares to certain
retirement plans qualifying under Section 401 of the Code (including cash or
deferred arrangements under Section 401(k) of the Code). As a result, there is
a possibility that a material conflict may arise between the interests of
Owners of policies generally, or certain classes of Owners, and such retirement
plans or participants in such retirement plans.
In the event of a material conflict, ANLIC will take any necessary
steps, including removing the Variable Account from that Fund, to resolve the
matter. The Board of Directors or Trustees of the Funds intend to monitor
events in order to identify any material conflicts that may possibly arise and
to determine
19
<PAGE> 23
what action, if any, should be taken in response to those events or conflicts.
(See the individual fund prospectuses for more information.)
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
ANLIC cannot guarantee that shares of the Portfolios will always be
available for investment of premium or for transfers. ANLIC reserves the
right, subject to compliance with applicable law, to make additions, to,
deletions from, or substitutions for the shares that are held by the Variable
Account or that the Variable Account may purchase. ANLIC reserves the right to
eliminate the shares of any of the Portfolios of the Funds and to substitute
shares of another Portfolio of the Funds or of another open-end registered
investment company, if the shares of a Portfolio are no longer available for
investment, or if in its judgment further investment in any Portfolio should
become inappropriate in view of the purposes of the Variable Account. ANLIC
will not substitute any shares attributable to an Owner's interest in a
Sub-account of the Variable Account without notice and prior approval of the
Securities and Exchange Commission, to the extent required by the Investment
Company Act of 1940 or other applicable law. Nothing contained herein shall
prevent the Variable Account from purchasing other securities for other
Portfolios or classes of Policies, or from permitting a conversion between
Portfolios or classes of Policies on the basis of requests made by Owners.
ANLIC also reserves the right to establish additional Sub-accounts of
the Variable Account, each of which would invest in a new series or Portfolio
of the Funds, or in shares of another investment company, with a specified
investment objective. New Sub-accounts may be established when, in the sole
discretion of ANLIC, marketing needs or investment conditions warrant, and any
new Sub-accounts will be made available to existing Owners on a basis to be
determined by ANLIC. ANLIC may also eliminate one or more Sub-accounts if, in
its sole discretion, marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, ANLIC may, by
appropriate endorsement, make such changes in this and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
ANLIC to be in the best interest of persons having voting rights under the
Policies, the Variable Account may be operated as a management company under
the Investment Company Act of 1940, it may be deregistered under that Act in
the event such registration is no longer required, or it may be combined with
other ANLIC separate accounts.
POLICY BENEFITS
DEATH BENEFITS
As long as the Policy remains in force (See Policy Lapse and
Reinstatement -- Lapse), ANLIC will, upon proof of the Insured's death, pay the
death benefit proceeds of a Policy to the named Beneficiary in accordance with
the designated death benefit option. The amount of the death benefits payable
will be determined as of the end of the Valuation Period on the date of death,
and will not reflect subsequent Variable Account investment performance. The
proceeds may be paid in a lump sum or under one or more of the settlement
options set forth in the Policy. The death benefit proceeds will be reduced by
any outstanding indebtedness and any due and unpaid charges. These proceeds
will be increased by any additional insurance provided by rider and by the
monthly deduction for the month in which death occurred.
The Policy provides two death benefit options: Death Benefit Option A
("Option A") and Death Benefit Option B ("Option B"). The Owner designates the
death benefit option in the application. ANLIC guarantees that as long as the
Policy remains in force (See Policy Lapse and Reinstatement -- Lapse),
20
<PAGE> 24
under either option the death benefit will never be less than the current face
amount of the Policy. These proceeds will be reduced by any outstanding
indebtedness and any due and unpaid charges.
Option A. The death benefit is the greater of the current face amount
of the Policy or the applicable percentage of Policy Account Value on the date
of death. The applicable percentage is 250% for an Insured age 40 or below on
the Policy Anniversary prior to the date of death. For Insureds with an
attained age over 40 on a Policy Anniversary, the percentage declines as shown
in the Applicable Percentage Table (See Applicable Percentage Table).
Accordingly, under Option A, the death benefit will remain level unless the
applicable percentage of Policy Account Value exceeds the current face amount,
in which case the amount of the death benefit will vary as the Policy Account
Value varies.
Illustration of Option A. For purposes of this illustration, assume
that the Insured's attained age is between 30 and 40 and that there is no
outstanding indebtedness. Under Option A, a Policy with a $100,000 face amount
will generally pay $100,000 in death benefits. However, because the death
benefit must be equal to or be greater than 250% of Policy Account Value, any
time the Policy Account Value of the Policy exceeds $40,000 the death benefit
will exceed the $100,000 face amount. Each additional dollar added to the
Policy Account Value above $40,000 will increase the death benefit by $2.50.
Thus, if the Policy Account Value exceeds $40,000 and increases by $100 because
of investment performance or premium payments, the death benefit will increase
by $250. An Owner with a Policy Account Value of $50,000 will be entitled to a
death benefit of $125,000 ($50,000 x 250%); a Policy Account Value of $75,000
will yield a death benefit of $187,500 ($75,000 x 250%); a Policy Account Value
of $100,000 will yield a death benefit of $250,000 ($100,000 x 250%).
Similarly, so long as the Policy Account Value exceeds $40,000, each
dollar taken out of the Policy Account Value will reduce the death benefit by
$2.50. If, for example, the Policy Account Value is reduced from $75,000 to
$70,000 because of partial surrenders, charges or negative investment
performance, the death benefit will be reduced from $187,500 to $175,000. If
at any time, however, the Policy Account Value multiplied by the applicable
percentage is less than the face amount, the death benefit will equal the
current face amount of the Policy.
The applicable percentage becomes lower as the Insured's attained age
increases. If the attained age of the Insured in the illustration above were,
for example, 50 (rather than between 30 and 40), the applicable percentage
would be 185%. The death benefit would not exceed the $100,000 face amount
unless the Policy Account Value exceeded approximately $54,055 (rather than
$40,000), and each $1 then added to or taken from the Policy Account Value
would change the death benefit by $1.85 (rather than $2.50).
APPLICABLE PERCENTAGE TABLE
<TABLE>
<CAPTION>
ATTAINED AGE APPLICABLE PERCENTAGE ATTAINED AGE APPLICABLE PERCENTAGE
------------ --------------------- ------------ ---------------------
<S> <C> <C> <C>
41............ 243% 61............. 128%
42............ 236 62............. 126
43............ 229 63............. 124
44............ 222 64............. 122
45............ 215 65............. 120
46............ 209 66............. 119
47............ 203 67............. 118
48............ 197 68............. 117
49............ 191 69............. 116
50............ 185 70............. 115
</TABLE>
21
<PAGE> 25
<TABLE>
<S> <C> <C> <C>
51............ 178 71............. 113
52............ 171 72............. 111
53............ 164 73............. 109
54............ 157 74............. 107
55............ 150 75-90.......... 105
56............ 146 91............. 104
57............ 142 92............. 103
58............ 138 93............. 102
59............ 134 94............. 101
60............ 130 95 or older.... 100
</TABLE>
Option B. The death benefit is equal to the greater of the current
face amount plus the Policy Account Value of the Policy or the applicable
percentage of the Policy Account Value on the date of death. The applicable
percentage is 250% for an Insured age 40 or below on the Policy anniversary
prior to the date of death. For Insureds with an attained age over 40 on a
Policy anniversary, the percentage declines as shown in the Applicable
Percentage Table . Accordingly, under Option B the amount of the death benefit
will always vary as the Policy Account Value varies.
Illustration of Option B. For purposes of this illustration, assume
that the Insured is under the age of 40 and that there is no outstanding
indebtedness. Under Option B, a Policy with a face amount of $100,000 will
generally pay a death benefit of $100,000 plus the Policy Account Value. Thus,
for example, a Policy with a Policy Account Value of $20,000 will have a death
benefit of $120,000 ($100,000 + $20,000); a Policy Account Value of $40,000
will yield a death benefit of $140,000 ($100,000, + $40,000). The death
benefit, however, must be at least 250% of the Policy Account Value. As a
result, if the Policy Account Value of the Policy exceeds approximately
$66,667, the death benefit will be greater than the face amount plus the Policy
Account Value. Each additional dollar of the Policy Account Value above
$66,667 will increase the death benefit by $2.50. Thus, if the Policy Account
Value exceeds $66,667 and increases by $100 because of investment performance
or premium payments, the death benefit will increase by $250. An Owner with a
Policy Account Value of $75,000 will be entitled to a death benefit of $187,500
($75,000 X 250%); a Policy Account Value of $100,000 will yield a death benefit
of $250,000 ($100,000 X 250%); a Policy Account Value of $125,000 will yield a
death benefit of $312,500 ($125,000 X 250%).
Similarly, any time the Policy Account Value exceeds $66,667, each
dollar taken out of the Policy Account Value will reduce the death benefit by
$2.50. If, for example, the Policy Account Value is reduced from $75,000 to
$70,000 because of partial surrenders, charges, or negative investment
performance, the death benefit will be reduced from $187,500 to $175,000. If
at any time, however, the Policy Account Value multiplied by the applicable
percentage is less than the face amount plus the Policy Account Value, then the
death benefit will be the current face amount plus the Policy Account Value of
the Policy.
The applicable percentage becomes lower as the Insured's attained age
increases. If the attained age of the Insured in the illustration above were,
for example, 50 (rather than under 40), the applicable percentage would be
185%. The amount of the death benefit would be the sum of the Policy Account
Value plus $100,000 unless the Policy Account Value exceeded approximately
$117,647 (rather than $66,667), and each $1 then added to or taken from the
Policy Account Value would change the death benefit by $1.85 (rather than
$2.50).
Change in Face Amount. Subject to certain limitations, an Owner may
increase or decrease the face amount of a Policy. A change in face amount may
affect the cost of insurance rate and the net amount at risk, both of which may
affect an Owner's cost of insurance charge (See Charges and Deductions -- Cost
of Insurance). A change in face amount may affect whether the Policy is a
"modified endowment contract" for federal income tax purposes (See Federal Tax
Considerations).
22
<PAGE> 26
Decreases. Any decrease in the face amount will become effective on
the monthly anniversary date on or following receipt by ANLIC of a written
request. Generally, no decrease in the face amount will be permitted during
the first Policy year (other than a decrease indirectly resulting from a
partial surrender) but ANLIC may waive this restriction. The face amount
remaining in force after any requested decrease may not be less than $25,000.
If, following the decrease in face amount, the Policy would not comply with the
maximum premium limitations required by federal tax law (See Premiums --
Premium Limitations), the decrease may be limited (or, if the Policyholder so
elects, the Policy Account Value may be returned to the Owner) to the extent
necessary to meet these requirements. For purposes of determining the cost of
insurance charge, a decrease in the face amount will reduce the face amount in
the following order:
(a) The face amount provided by the most recent increase;
(b) The next most recent increase successively; and
(c) The face amount when the Policy was issued.
(See Charges and Deductions--Cost of Insurance)
Increases. For an increase in the face amount, a written application
must be submitted. ANLIC may also require that additional evidence of
insurability be submitted. The effective date of the increase will be the
monthly anniversary on or following receipt of the written request and approval
of the increase by ANLIC. The increase currently may not be less than $25,000
(ANLIC reserves the right to change the minimum required increase in face
amount). An increase need not be accompanied by an additional premium; ANLIC
may, however, deduct any charges associated with the increase from existing
Policy Account Value (See Charges and Deductions).
Change in Death Benefit Option. Generally, the death benefit option
in effect may be changed at any time by sending ANLIC a written request for
change. If the death benefit option is changed from Option B to Option A, the
face amount will be increased by an amount equal to the Policy Account Value on
the effective date of change. Changing from Option B to Option A does not
require evidence of insurability. The effective date of such a change will be
the monthly anniversary on or following receipt of the request. A change in
the death benefit option may affect whether the Policy will be treated as a
"modified endowment contract" for federal tax purposes (See Federal Tax
Considerations).
If the death benefit option is changed from Option A to Option B, the
face amount will be decreased by an amount equal to the Policy Account Value on
the effective date of the change. This change may not be made if it would
result in a face amount less than $25,000. Changing from Option A to Option B
may require evidence of insurability satisfactory to ANLIC. The effective date
of such a change will be the monthly anniversary on or following the date the
change is approved by ANLIC.
No charges will be imposed upon a change in death benefit option, nor
will such a change in and of itself result in an immediate change in the amount
of the Policy Account Value. If, however, prior to or accompanying a change in
the death benefit option there has been an increase in the face amount, the
method of calculating the insurance charge may change (See Charges and
Deductions--Cost of Insurance).
How Death Benefits May Vary in Amount. As long as the Policy remains
in force, ANLIC guarantees that the death benefit will never be less than the
current face amount of the Policy. These proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. The death benefit
may, however, vary with the Policy Account Value. Under Option A, the death
benefit will only vary whenever the Policy Account Value multiplied by the
applicable percentage exceeds the face amount of the Policy. The death benefit
under Option B will always vary with the Policy Account Value because the death
benefit equals either the face amount plus the Policy Account Value or the
applicable percentage
23
<PAGE> 27
of Policy Account Value.
How the Duration of the Policy May Vary. The duration of the Policy
depends upon the Policy's Cash Surrender Value. The Policy will remain in
force so long as the Cash Surrender Value is sufficient to pay the monthly
deduction (See Charges and Deductions--Policy Account Value Charges). Where,
however, the Cash Surrender Value is insufficient to pay the monthly deduction
or indebtedness exceeds Policy Account Value, and a grace period expires
without an adequate payment by the Owner, the Policy will lapse and terminate
without value. Special provisions apply if the Owner has paid either the GDBP
or Benchmark Premiums (See Policy Lapse and Reinstatement -- Lapse).
PAYMENT OF POLICY BENEFITS
Death benefits under the Policy will ordinarily be paid within seven
days after ANLIC receives due proof of death. Policy Account Value benefits
will ordinarily be paid within seven days of receipt of a written request.
Payments may be postponed in certain circumstances (See Postponement of
Payments). The Owner may decide the form in which the benefits will be paid.
During the Insured's lifetime, the Owner may arrange for the death benefits to
be paid in a lump sum or under one or more of the settlement options described
below. These choices are also available if the Policy is surrendered or
matures. If no election is made, ANLIC will pay the benefits in a lump sum
upon submission of due proof of death.
When death benefits are payable in a lump sum, the beneficiary may
select one or more of the settlement options. If death benefits become payable
under a settlement option and the beneficiary has the right to withdraw the
entire amount, the beneficiary may name and change contingent beneficiaries.
Settlement Options. Owners and beneficiaries may elect to have
benefits paid in a lump sum or in accordance with a wide variety of settlement
options offered under the Policy. Once a settlement option is in effect, there
will no longer be value in the Variable Account. ANLIC may make other
settlement options available in the future. For additional information
concerning these options, see the Policy itself.
Option A -- Interest for Life. Interest on the amount retained will
be paid during the lifetime of the payee. When the payee dies, the amount held
by ANLIC will be paid as agreed.
Option B -- Interest for a Fixed Period. Interest or compound
interest will be paid for a fixed period. The fixed period cannot exceed 30
years. At the end of the period the principal amount will be paid as agreed.
Option C -- Payments for a Fixed Period. The amount retained plus
interest will be paid in equal monthly installments for the period chosen. The
period chosen may not exceed 30 years.
Option D -- Payments of a Fixed Amount. The amount retained plus
interest will be paid in equal monthly installments until the fund has been
paid in full. The total payments in any year must be at least 5% of the amount
retained.
Option E -- Life Income. The amount retained plus interest will be
paid in equal installments for the guaranteed payment period elected and
continue for the life of the person on whose life the option is based.
Guaranteed payment periods may be elected for 10 or 20 years, or the period in
which the total payments will equal the amount retained.
Option F -- Joint and Survivor Life Income. The amount retained plus
interest will be paid during the joint lifetime of two persons and continue
during the lifetime of the survivor. Payments are guaranteed
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for 10 years.
Option G -- Additional Settlements. At the request of the Owner,
ANLIC will pay the amount retained in any manner acceptable to the Company.
PAYMENT AND ALLOCATION OF PREMIUMS
POLICY ISSUE
Premiums are payable at ANLIC's principal office, 51 Louisiana Avenue,
N.W., Washington, D.C. 20001, or to one of ANLIC's authorized agents. A
properly completed application must precede or accompany the initial premium.
No coverage will take effect unless (a) the application is approved; (b) the
first Planned Periodic Payment is paid; and (c) the Policy is accepted by the
Applicant. This must be during the lifetime of all persons proposed for
insurance. Also, their eligibility and health must remain as described in the
application.
The minimum face amount of a Policy is $25,000, under ANLIC's current
rules. ANLIC reserves the right to revise its rules from time to time to
specify a different minimum face amount at issue. A Policy will generally be
issued only to Insureds 80 years of age or under who supply satisfactory
evidence of insurability sufficient to ANLIC. ANLIC may, however, at its sole
discretion, issue a Policy to an individual above the age of 80. Acceptance is
subject to ANLIC's underwriting rules and ANLIC reserves the right to reject an
application for any reason. The Policy date is the date used to determine
Policy years and Policy months. If a premium is submitted with the
application, insurance coverage will begin as of the Policy Date. If a premium
is not paid with the application, the Policy Date will ordinarily be
approximately 15 days after underwriting approval. Insurance coverage will
begin on the later of the Policy date or the date the premium is received. A
Policy Date may also be any other date mutually agreeable to ANLIC and the
Owner. ANLIC will allocate net premiums on the later of the Policy Date or the
date the premium is received (See Allocation of Premiums and Policy Account
Value).
PREMIUMS
Subject to certain limitations, an Owner has flexibility in
determining the frequency and amount of premiums.
Premium Flexibility. Unlike conventional insurance policies, this
Policy frees the Owner from the requirement that premiums be paid in accordance
with a rigid and inflexible premium schedule. ANLIC requires the Owner to pay
an initial premium that, when reduced by the premium expense charges (See
Charges and Deductions -- Premium Expense Charges), will be sufficient to pay
the monthly deductions for the first two Policy Months.
Thereafter, subject to the minimum and maximum premium limitations
described below, an Owner may make unscheduled premium payments at any time in
any amount. The Policy, therefore, provides the Owner with the flexibility to
vary the frequency and amount of premium payments to reflect changing financial
conditions. The level of premium payments is an important factor in
determining whether the Policy will be treated as a "modified endowment
contract" for federal tax purposes (See Federal Tax Considerations).
Planned Periodic Premiums. Each Owner will determine a planned
periodic premium schedule that provides for the payment of a level premium at a
fixed interval over a specified period of time. The Owner is not required to
pay premiums in accordance with this schedule. Furthermore, the Owner has
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<PAGE> 29
considerable flexibility to alter the amount, frequency, and the time period
over which planned periodic premiums are paid.
The payment of a planned periodic premium will not guarantee that the
Policy remains in force. Instead, the duration of the Policy depends upon the
Policy Account Value. Thus, even if planned periodic premiums are paid by the
Owner, the Policy will nonetheless lapse at any time indebtedness exceeds
Policy Account Value or the Cash Surrender Value is insufficient to pay certain
monthly charges, and a grace period expires without a sufficient payment (See
Policy Lapse and Reinstatement--Lapse). Exceptions may occur if the Owner pays
an amount equal to or greater than either the scheduled Benchmark Premiums or
Guaranteed Death Benefit Premiums.
Benchmark Premiums. When the Owner pays the monthly Benchmark
Premiums as stated in the Policy and if the sum of the premiums paid equals or
exceeds the sum of the scheduled Benchmark Premiums for the face amount and any
increase, then the Policy is guaranteed not to lapse during the first five
years that the Policy is in force. Payment of only the Benchmark Premium will
reduce the flexibility of premium payments.
Guaranteed Death Benefit Premium ("GDBP"). The Owner may also elect
to pay a GDBP premium for the Policy or any increase in coverage. The GDBP
premium is stated in the Policy and is calculated based on the Insured's age,
sex and rate class at the time coverage is applied for. Provided GDBP is paid
and the Owner makes no loans or partial surrenders, the Policy is guaranteed
not to lapse before the Insured reaches age 65 or for ten years from the
effective date of coverage, whichever is later.
Premium Limitations. In no event may the total amount of all premiums
paid, both scheduled and unscheduled, exceed the current maximum premium
limitations which are required by federal tax laws. If at any time a premium
is paid which would result in total premiums exceeding the current maximum
premium limitation, ANLIC will only accept that portion of the premium which
will make total premiums equal the maximum limitation. Any part of the premium
in excess of that amount will be returned and no further premiums will be
accepted until allowed by the current maximum premium limitations set forth in
the Policy. Every premium payment, whether scheduled or unscheduled, must be
at least $25. Premium payments less than this minimum amount will be returned
to the Owner.
Payment of Premiums. Payments made by the Owner will be treated first
as payment of premium, not indebtedness unless the Owner indicates that the
payment should be treated otherwise. Charges will be deducted from each
premium payment as stated in the Policy (See Charges and Deductions--Premium
Expense Charges).
ALLOCATION OF PREMIUMS AND POLICY ACCOUNT VALUE
Net Premium. The net premium equals the premium paid less the premium
expense charge (See Charges and Deductions--Premium Expense Charges). (On the
Policy Date, the first monthly deduction is also taken.)
Allocation of Net Premiums. In the application for a Policy, the
Owner can allocate net premiums or portions thereof to the General Account or
to Sub-accounts of the Variable Account, or both. Notwithstanding the
allocation in the Application, the portion of the net premium allocated to
Sub-accounts of the Variable Account will initially be allocated to the
Sub-account of the Variable Account that invests exclusively in shares of the
Calvert Responsibly Invested Money Market Portfolio on the Policy Date or the
date the first premium is received by ANLIC, whichever is later. Net premiums
allocated to any Sub-account of the Variable Account will continue to be
allocated to that Sub-account until the end of the fifteenth day following the
Policy Date. Upon expiration of the fifteen day period, the value in this Sub-
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<PAGE> 30
account will automatically be transferred to Sub-accounts of the Variable
Account in accordance with the Owner's percentage allocation in the
application.
Net premiums paid after the expiration of the initial fifteen day
period will be allocated in accordance with the Owner's instructions in the
application as of the end of the Valuation Date in which they are received.
The minimum percentage of each premium that may be allocated to the General
Account or any Sub-account of the Variable Account is 5%; percentages must be
in whole numbers. The allocation for future net premiums may be changed
without charge at any time by providing ANLIC with written notification. No
charge is imposed for any reallocations. No more than ten different
Sub-accounts may be chosen to receive premium payments.
The value of amounts allocated to Sub-accounts of the Variable Account
will vary with the investment experience of these Sub-accounts and the Owner
bears the entire investment risk. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
estate planning requirements.
TRANSFERS
Transfers from the General Account
The Owner may transfer value from the General Account, up to a maximum
each Policy Year of 25% of the General Account Value as of the last Policy
Anniversary Date. The minimum amount that may be transferred is $100. During
the first Policy Year, the Owner may transfer a maximum of 25% of the General
Account Value on the transfer date.
Conversion Transfer Right
During the first two years following the Policy Date, the Owner may
request one transfer of the entire Policy Account Value in the Sub-accounts to
the General Account. For any increase in face amount, the Owner may request a
conversion of the amount of the increase to a Fixed Benefit Policy for the
amount of the increase or the minimum amount ANLIC currently issues, whichever
is greater. No evidence of insurability will be required. The new Policy will
have the same rate class, face amount and issue date as the rate class, amount
and effective date of the increase.
The Flexible Premium Fixed Benefit Policy's net premiums will be
allocated to ANLIC's General Account. ANLIC guarantees that value in the
General Account will accrue interest at an effective rate of at least 4.5%,
independent of the actual investment experience of the General Account.
Transfers from Sub-accounts
The Owner may transfer all or part of the amount in one of the
Sub-accounts to another Sub-account or to the General Account. The minimum
amount for such transfer is $50. The transfer will be made as of the date
ANLIC receives the written request.
Automatic Rebalancing and Dollar Cost Averaging Programs
The Owner may also elect from either the Automatic Rebalancing Program
or the Dollar Cost Averaging Program by filing a written authorization with
ANLIC. ANLIC reserves the right to alter, including the right to assess a
charge, or terminate these administrative programs upon 30 days advance written
notice.
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<PAGE> 31
Under the Automatic Rebalancing Program, the Owner may have automatic
transfers made on either a monthly, quarterly, semi-annual or annual basis, to
adjust the values among the Sub-accounts and the General Account to meet the
Owner's designated percentage account value proportions the Owner has on file
with ANLIC. The allocations are subject to a minimum 5% designated percentage
proportion per account.
Under the Dollar Cost Averaging Program, the Owner may elect to have a
specific dollar amount automatically transferred from the Money Market
Sub-account to designated Sub-accounts on either a monthly, quarterly,
semi-annual, or annual basis. The specific dollar amount is subject to a $50
minimum transfer amount pursuant to the Owner's election. If the periodic
transfer would reduce the value in the Money Market Sub-account below the
specific dollar amount, ANLIC reserves the right to include the entire
remaining value in the transfer. ANLIC also reserves the right to establish a
minimum Money Market Sub-account balance before we allow you to elect the
program.
Transfers and adjustments pursuant to these Programs will occur on the
Policy's Monthly Anniversary in the month in which the transaction is to take
place or the next succeeding business day if the Monthly Anniversary falls on a
day other than a Valuation Date.
Telephone Requests
At the time an application for a Policy is completed, or at any
subsequent time, an Owner may request a telephone transfer authorization form.
If the form is properly completed and on file with ANLIC, transfers may be made
pursuant to telephone instructions, subject to the above terms and the terms of
the authorization form. Otherwise, transfer requests must be in writing in a
form acceptable to ANLIC. Transfer requests made by telephone are processed
upon the date of receipt, if received prior to 4:00 p.m. EST. ANLIC may, at any
time, revoke or modify the transfer privilege.
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to
make a planned periodic premium payment will not itself cause the Policy to
lapse. Lapse will only occur where indebtedness exceeds the Policy Account
Value, or the Cash Surrender Value is insufficient to cover the monthly
deduction, and a grace period expires without a sufficient payment. If the
Policy Account Value less indebtedness is insufficient to cover the monthly
deduction, the Owner must pay during the grace period a premium, equal to the
sum of the monthly deductions for the first three Policy Months after
commencement of the grace period, and any premium taxes to avoid lapse (See
Charges and Deductions). ANLIC may, in its sole discretion, permit the payment
of a lesser amount. If indebtedness exceeds the Policy Account Value, the
Owner must pay all excess indebtedness during the grace period to avoid lapse.
The grace period will not begin if the Owner makes no loans or partial
surrenders and pays premiums equal to or greater than the GDBP. Also, the
Policy provides that during the first sixty months, if the Owner pays premiums
equal to or greater than the scheduled Benchmark Premiums, then the grace
period will not begin.
At the start of the grace period, ANLIC will notify the Owner of the
shortfall. The Owner will then have a grace period of 62 days, measured from
the date the notice is sent to the Owner, to make sufficient payments. ANLIC
may, in its sole discretion, extend the grace period beyond 62 days. Failure
to make a sufficient payment within the grace period will result in lapse of
the Policy. If a sufficient payment is made during the grace period, any net
premium paid will be allocated among the General Account and the Sub-accounts
of the Variable Account in accordance with the Owner's current instructions
(See Allocation of Premiums), and any monthly deductions due will be charged
ratably to the General Account and the Sub-accounts (See Policy Account Value
Charges--Monthly Deductions). If the Insured dies during the grace period, the
death benefit will equal the amount of the death benefit
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<PAGE> 32
immediately prior to the commencement of the grace period. These proceeds will
be reduced by any due and unpaid charges and any indebtedness.
ANLIC provides a special guarantee if the Owner elects to pay an
amount equal to or greater than the scheduled Benchmark Premiums as stated in
the Policy. The Owner may elect to pay the Benchmark Premiums as stated in the
Policy and the Policy is guaranteed not to lapse during the first sixty months
that the Policy is in force. The Owner may also pay GDBP for the Policy or
any increase in coverage. The GDBP is stated in the Policy and is calculated
based on the Insured's age, sex and rate class at the time coverage is applied
for. Provided the GDBP is paid, the Policy is guaranteed not to lapse before
the Insured reaches age 65 or for ten years from the effective date of
coverage, whichever is later. The GDBP does not apply if the Owner elects to
make a Policy loan or partial surrender.
Reinstatement. A lapsed Policy may be reinstated any time within 5
years after the date of lapse and before the maturity date by submitting the
following items to ANLIC:
1. A written application for reinstatement;
2. Evidence of insurability satisfactory to ANLIC; and
3. A premium that, after the deduction of premium taxes, is large
enough to cover the monthly deductions for at least three Policy Months
commencing with the effective date of reinstatement for the Policy and any
rider benefits. Any indebtedness on the date of lapse must be paid at the time
of reinstatement.
Upon approval of the application for reinstatement, the effective date
of reinstatement will be the monthly anniversary on or prior to the date of
approval.
ANLIC may contest the reinstatement of the Policy, and any rider
attached, for any statements made in the application for reinstatement, until
it has been in force during the lifetime of the Insured for two years from the
effective date of reinstatement.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
ANLIC for: (1) providing the insurance benefits set forth in the Policy and
any optional insurance benefits added by rider; (2) administering the Policy;
(3) assuming certain risks in connection with the Policy; and (4) incurring
expenses in distributing the Policy and any optional insurance benefit added by
rider. The nature and amount of these charges are described more fully below.
SURRENDER CHARGE
Surrender charges are designed partially to compensate ANLIC for the
cost of administering, issuing and selling the Policy, including agent sales
commissions, the cost of printing the prospectuses and sales literature, any
advertising costs, medical exams, review of applications, underwriting
decisions, processing and establishing the Policy records. ANLIC does not
anticipate that the surrender charge will cover all of these costs. ANLIC will
cover the short-fall from the general assets, which may include profits from
the mortality and expense risk charge.
Surrender charges will not exceed the maximum charges as specified in
the Policy. The surrender charge for the original face amount is determined by
multiplying a surrender charge factor by the actual premiums paid up to Target
Premium. Target Premium is an annual premium amount based on the
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<PAGE> 33
Insured's age, sex and risk class and is used solely for the basis of surrender
charges and commission payments. Target Premiums do not exceed the Securities
and Exchange Commission ("SEC") guideline annual premium. The surrender charge
factor depends on the number of years the Policy has been in force, as follows:
<TABLE>
<CAPTION>
Policy Year Surrender Factor
<S> <C>
1-7 30%
8 20%
9 10%
10 + 0%
</TABLE>
Paying less premium may reduce the surrender charge but will increase
the cost of insurance for the Policy and may cause the Policy to lapse.
Surrender charges for an increase in face amount will be based solely
on the Target Premium associated with the increase as stated in the Policy.
The maximum surrender charge for an increase in face amount is 30% of the
Target Premium for the increase during the seven years following the increase,
and then declines by 10% per year until it reaches 0% in the tenth year.
Surrender charges are computed separately for the original face amount and each
increase in face amount, and then combined. With respect to the first increase
in the face amount, the increase is the amount which the face amount, after the
increase, exceeds the original face amount. With respect to other increases,
the increase is the amount which the face amount, after the increase, exceeds
the highest face amount in effect at any time prior to the increase.
PARTIAL SURRENDER CHARGE
During the surrender charge period for the Policy and any increase,
there will be a charge for a partial surrender equal to 8% of the amount
withdrawn or $25, whichever is greater. Partial surrender charges will reduce
the surrender charge for the Policy and any increase.
PREMIUM TAXES
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from state to state. A deduction of
2.25% of the premium will be made from each premium payment. The deduction
represents an amount ANLIC considers necessary to pay all premium taxes imposed
by the states and any subdivisions thereof. Currently no charge is assessed
for federal taxes associated with the Policy. ANLIC reserves the right to
assess a charge based on changes to the federal tax treatment of the Policy.
POLICY ACCOUNT VALUE CHARGES
Monthly Deduction. Charges will be deducted monthly from the Policy
Account Value ("monthly deduction") to compensate ANLIC for underwriting and
start-up expenses in connection with issuing a Policy, for certain
administrative costs, for the cost of insurance and for optional benefits added
by rider. The monthly deduction will be deducted on the Policy Date and on
each Monthly Anniversary. It will be allocated among the General Account and
each Sub-account of the Variable Account in the same proportion that the value
in each Sub-account bears to the total Policy Account Value of the Policy less
indebtedness. For purposes of allocating the deduction among Sub-accounts,
values will be determined
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at the end of the prior Policy month. Because portions of the monthly
deduction, such as the cost of insurance, can vary from month to month, the
monthly deduction itself will vary in amount from month to month.
Cost of Insurance. Because the cost of insurance depends upon a
number of variables, the cost for each Policy month can vary from month to
month. ANLIC will determine the monthly cost of insurance charge by
multiplying the applicable cost of insurance rate or rates by the net amount at
risk for each Policy Month. The net amount at risk for a Policy Month is (a)
the death benefit at the beginning of the Policy Month divided by 1.00367481
(which reduces the net amount at risk, solely for purposes of computing the
cost of insurance, by taking into account assumed monthly earnings at an annual
rate of 4.5%), less (b) the Policy Account Value at the beginning of the Policy
Month.
The net amount at risk may be affected by changes in the Policy
Account Value or in the face amount of the Policy. In addition, if there is an
increase in the face amount and the rate class applicable to the increase is
different from that for the initial face amount, the net amount at risk will be
calculated separately for each rate class. If Option B is in effect, the net
amount at risk for each rate class will be determined by the relationship of
the initial face amount and the face amount increases for each rate class
compared to the total face amount. If Option A is in effect, for purposes of
determining the net amounts at risk for each rate class, value will first be
considered a part of the initial face amount. If the value is greater than the
initial face amount, it will then be considered a part of each increase in
order, starting with the first increase.
Because the method of calculating the net amount at risk is different
under Option A and Option B when more than one rate class is in effect, a
change in the death benefit option may result in a different net amount at risk
for each rate class than would have occurred had the death benefit option not
been changed. Since the cost of insurance is calculated separately for each
rate class, any change in the net amount at risk resulting from a change in the
death benefit option may affect the total cost of insurance paid by the Owner.
Cost of Insurance Rate. Cost of insurance rates will be based on the
sex, attained age and rate class of the Insured. The actual monthly cost of
insurance rates will be based on ANLIC's expectations as to future experience.
They will not, however, be greater than the guaranteed cost of insurance rates
set forth in the Policy. For standard risks, these guaranteed rates are based
on the 1980 Commissioners Standard Ordinary Mortality Table with smoker and
non-smoker distinction and the Insured's sex, plus attained age at the last
birthday. ANLIC also may guarantee that actual cost of insurance rates will
not be changed for a specified period of time (e.g., one year). Any change in
the cost of insurance rates will apply to all persons of the same insuring age,
sex, and rate class whose Policies have been in force for the same length of
time.
Rate Class. The rate class of an Insured may affect the cost of
insurance rate. ANLIC currently places Insureds into a standard and preferred
rate class or rate classes involving a higher mortality risk. In an otherwise
identical Policy, an Insured in the standard rate class will have a lower cost
of insurance rate than those in the rate class with the higher mortality risk.
The standard rate class is divided into two categories: smokers and
non-smokers. Non-smoking Insureds will generally incur a lower cost of
insurance than similarly situated Insureds who smoke.
The cost of insurance charge for each rate class will also depend on
the face amount of the Policy. At ANLIC's discretion, a Policy with a face
amount in excess of $100,000 may incur a lower cost for each thousand dollars
of net amount at risk than an otherwise identical Policy with a face amount
less
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<PAGE> 35
than that amount. Similar discounts in the cost of insurance charge occur when
the face amount exceeds $500,000. ANLIC may, at its sole discretion, reduce
the cost of insurance for other face amounts. Because the cost of insurance
rate varies with the face amount, any increase or decrease in face amount,
including those resulting from a change in the death benefit option and those
resulting from partial surrenders, may affect the cost of insurance. The cost
of insurance charge will not exceed the maximum rates based on the 1980
Commissioners Standard Ordinary Mortality Table ALB (Age Last Birthday) with
smoker and non-smoker distinction unless the Owner is in a sub-standard risk
class.
Monthly Administration Charge. ANLIC has primary responsibility for
the administration of the Policy and the Variable Account. Annual
administrative expenses include premium billing and collection, recordkeeping,
processing death benefit claims, cash surrenders and Policy changes, reporting
and overhead costs. As reimbursement for administrative expenses related to
the maintenance of each Policy and the Variable Account, ANLIC assesses a
monthly administration charge from each Policy. This charge is $27 per Policy
Month during the first Policy Year and $8 per Policy Month thereafter. ANLIC
does not anticipate that it will make any profit on this charge.
ANLIC may, in its sole discretion, purchase certain administrative
services from such sources as may be available. Such services will be acquired
on a basis which, in ANLIC's sole discretion, is the best able to perform such
services in a satisfactory manner even though the costs for such services may
be higher than would prevail elsewhere.
Optional Insurance Benefits Charges. The monthly deduction will
include charges for any optional insurance benefits added to the Policy by
rider (See Optional Insurance Benefits).
Mortality and Expense Risk Charge. ANLIC will deduct a charge from
the Variable Account not to exceed an annual rate of 0.90% of the average daily
net assets of the Variable Account. This charge will be reduced by 0.05% each
year beginning in the 16th Policy year until it reaches and remains at 0.45% of
the average daily net assets of the Variable Account at and after the 25th
Policy year. This deduction is guaranteed not to increase for the duration of
the Policy. Under ANLIC's current procedures, these amounts are paid to ANLIC
monthly. ANLIC may profit from this charge.
The mortality risk assumed by ANLIC is that Insureds may live for a
shorter time than projected because of inaccuracies in the projecting process,
and accordingly that an aggregate amount of death benefits greater than that
projected will be payable. The expense risk assumed is that expenses incurred
in issuing and administering the Policies will exceed the limits on
administrative charges set in the Policies, which are in excess of the amount
necessary to meet expenses currently. If the expenses do not increase to an
amount in excess of the limits, ANLIC may profit from this charge. Any
shortfall in meeting the distribution expenses will be met from ANLIC's general
corporate funds which may include profit from the mortality and expense risk
charge. ANLIC also assumes risks with respect to other contingencies,
including the pattern of transfers between the Variable Account and the General
Account which may cause ANLIC to incur greater costs than anticipated when
designing the Policies.
Taxes. Currently no charge is made to the Variable Account for
federal income taxes that may be attributable to the Variable Account. ANLIC
may, however, make such a charge in the future. Charges for other taxes, if
any, attributable to the Variable Account may also be made (See Federal Tax
Considerations).
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<PAGE> 36
INVESTMENT ADVISORY FEE
Because the Variable Account purchases shares of the Portfolios, the
net assets of the Variable Account will reflect the investment advisory fees
incurred by the Portfolios. The specific charges associated with each Fund are
described on page 18. The amount of this charge will depend on the Portfolio
or Portfolios selected by the Owner for premium allocation.
REDUCTION OF CHARGES
ANLIC may reduce monthly administration charges, other charges, and
the minimum initial face amount in special circumstances that result in lower
sales, administrative or mortality expenses. For example, special
circumstances may exist in connection with group or sponsored arrangements,
sales to Policyholders of ANLIC or Acacia Mutual, or sales to employees or
clients of members of The Acacia Group. The amounts of any reductions will
reflect the reduced sales effort and administrative costs resulting from, or
the different mortality experience expected as a result of, the special
circumstances. Reductions will not be unfairly discriminatory against any
person, including the affected Owners and Owners of all other policies funded
by the Variable Account.
POLICY RIGHTS
LOAN PRIVILEGES
Policy Loan. The Owner may borrow money from ANLIC using the Policy
as the only security for the loan. The maximum amount that may be borrowed at
any time is the loan value. The loan value equals 90% of the Policy's Cash
Surrender Value. Loans have priority over the claims of any assignee or other
person. The loan may be repaid all or in part at any time while the Insured is
living. Loans from certain Policies may be taxed as Distributions (See Federal
Tax Considerations).
Payments made by the Owner will be treated first as payment of premium
and not any outstanding Policy debt unless the Owner indicates that the payment
should be treated otherwise.
Allocation of Policy Loan. An Owner may allocate a Policy loan among
the General Account and the Sub-accounts of the Variable Account which have
Policy Account Value. If no such allocation is made, ANLIC will allocate the
loan first to the General Account and then among the accounts in the same
proportion that the value in each Sub-account bear to the Policy Account Value
less indebtedness at the end of the valuation period during which the request
is received.
The portion of the loan allocated to the Sub-accounts of the Variable
Account will normally be paid within seven days after receipt of a written
request. Postponement of loans may take place under certain circumstances (See
Postponement of Payments). ANLIC will not defer a loan used to pay premiums.
Interest. The interest rate charged on Policy loans accrues daily at
a rate equivalent to the annual rate of 6.45% a year. After the first five
years that the Policy is in force, the interest rate will equal 4.5% for any
new loan amount that is equal to or less than the Policy Account Value minus
cumulative premiums paid (that is, accumulated earnings in the Policy) and
6.45% for all other loan amounts. Interest payments are due at the end of each
Policy Year. If unpaid when due, interest will be added to the amount of the
loan but security for this capitalized interest will have already accrued in
the General Account under the following procedure.
Effect of Policy Loans. Value equal to the portion of the Policy loan
plus projected interest
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<PAGE> 37
allocated to each Sub-account will be transferred from the Sub-account to the
General Account, reducing the value in that Sub-account. The amount of
projected interest transferred will equal the amount of interest projected to
accrue until the following Policy Anniversary, discounted for the guaranteed
interest to be credited on the total amount transferred. If the total
indebtedness under the Policy exceeds the value in the General Account, value
in an amount equal to the excess indebtedness will be transferred from the
Sub-accounts of the Variable Account to the General Account as security for the
excess indebtedness. Under ANLIC's current procedures, it will transfer value
from the Sub-accounts of the Variable Account to secure indebtedness on the
Monthly Anniversary on or after the date indebtedness exceeds value in the
General Account. ANLIC will allocate the amount transferred to secure the
excess indebtedness among the Sub-accounts of the Variable Account in the same
proportion that the value in each Sub-account bears to the Policy Account Value
in all Sub-accounts. No charge will be imposed for these transfers.
On each Policy anniversary, the amount of interest projected to accrue
over the following Policy Year, discounted for projected earnings on the total
amount allocated to the General Account as security for the loan, will be
allocated among and transferred from the Sub-accounts in accordance with the
foregoing procedures.
Value in the General Account equal to indebtedness will be credited
with interest at 4.5% per year. NO ADDITIONAL INTEREST WILL BE CREDITED TO
THIS VALUE. The interest earned will be credited no less frequently than once
each Policy Month. Upon repayment of indebtedness, the portion of the
repayment allocated to a Sub-account in accordance with the repayment of
indebtedness provision will be transferred to the Sub-account and increase the
value in that Sub-account.
Indebtedness. Indebtedness equals the total of all Policy loans and
accrued interest on Policy loans plus any due and unpaid monthly deductions.
If indebtedness exceeds Policy Account Value less surrender charges, ANLIC
will notify the Owner and any assignee of record. If a sufficient payment
equal to excess indebtedness is not made to ANLIC within 62 days from the date
notice is sent, the Policy will lapse and terminate without value. The Policy,
however, may later be reinstated (See Policy Lapse and Reinstatement).
Repayment of Indebtedness. Indebtedness may be repaid any time before
the Maturity Date of the Policy (See Payment of Policy Benefits). If not
repaid, ANLIC may deduct indebtedness from any amount payable under the Policy.
As indebtedness is repaid, the value in the General Account securing the
indebtedness repaid may be allocated by the Owner among the General Account and
the Sub-accounts of the Variable Account. Any excess projected interest
resulting from the repayment will also be allocated to the General Account and
the Sub-accounts. If no allocation is made, ANLIC will allocate principal
repayments and interest payments among those accounts for transfer to the
General Account. The amount allocated to an account may not exceed the amount
originally transferred from such account, however, ANLIC will allocate the
repayment of indebtedness at the end of the Valuation Period during which the
repayment is received.
SURRENDER PRIVILEGES
The Owner may surrender the Policy for its Cash Surrender Value on any
Valuation Date during the lifetime of the Insured by sending a written request
to ANLIC. The amount available for surrender is the Cash Surrender Value at the
end of the Valuation Period during which the surrender request is received at
ANLIC's principal office. The Cash Surrender Value equals the Policy Account
Value less the surrender charge and indebtedness. Surrenders from the Variable
Account will generally be paid within
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seven days of receipt of the written request. Postponement of payments may,
however, occur in certain circumstances (See Postponement of Payments).
Surrenders may have adverse tax consequences (See Federal Tax Considerations).
A SURRENDER CHARGE IS IMPOSED IF THE POLICY IS SURRENDERED EITHER
PARTIALLY OR TOTALLY. For partial surrenders, the charge is 8% of the amount
withdrawn or $25, whichever is greater. Decreases in face amount do not
affect surrender charges, since surrender charges for coverage associated with
the decrease will be taken at the time of Policy lapse or surrender.
The Policy surrender charge is a product of a surrender charge factor
multiplied by the actual premium paid up to the Target Premium from the Policy
Date or the Increase Date of any increase in face amount, as applicable. The
factor varies by the year of surrender measured from the Policy Date or
increase date, as applicable. (The surrender charge will never exceed the
Policy Account Value.) Partial surrender charges reduce the surrender charge
for the Policy.
PARTIAL SURRENDER
After the first Policy Year, you may partially surrender the Policy on
any Valuation Date during the lifetime of the Insured by sending us a written
request. The amount of the partial surrender must not exceed the Cash
Surrender Value. You may place on file with us a written request for
systematic partial surrenders. The systematic partial surrenders may be
monthly, quarterly or annually in amounts of no less than $100.
Unless you request otherwise, the partial surrender will be allocated
among the General Account and each Sub-account of the Variable Account in the
same proportion that the Policy's value in the General Account, less
indebtedness, and the Policy's value in each Sub-account, bear to the total
Policy Account Value of the Policy, less indebtedness, on the Valuation Date we
receive the request.
Any partial surrender will reduce the Policy Account Value and the
face amount of a Policy with Death Benefit Option Type A . The amount of
reduction in the Policy Account Value will be equal to the amount of the
partial surrender. The amount of reduction in the face amount will be:
1. For Death Benefit Option Type A, 100% of the amount of the
partial surrender.
2. No amount for Death Benefit Option Type B.
The face amount remaining in force after a partial surrender may not
be less than the minimum face amount ANLIC allows.
Each partial surrender will reduce the face amount for Death Benefit
Option A in the following order:
1. Each increase in order, starting with the last increase; and
2. The face amount when the Policy was issued.
For a partial surrender, the amount paid will be deducted from the
Policy Account Value at the end of the Valuation Period during which the
request is received.
Thus, partial surrenders may affect the way in which the cost of
insurance charge is calculated and the amount of pure insurance protection
under the Policy (See Policy Account Value Charges--Cost of Insurance; Death
Benefits).
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EXAMINATION OF POLICY PRIVILEGE ("FREE LOOK")
The Owner may cancel the Policy within 20 days after the owner
receives it or within 45 days of completing Part I of the application,
whichever is later. The Owner should mail or deliver the Policy to either
ANLIC or the registered representative who sold the Policy. If the Policy is
canceled within the Free Look Period, ANLIC will refund the total premium paid.
A refund of premium paid by check may be delayed until the check has cleared
the Owner's bank. This privilege also applies to an increase for coverage under
the Policy (See Postponement of Payments).
GENERAL ACCOUNT
Owners may allocate net premiums and transfer value to the General
Account of ANLIC. Because of exemptive and exclusionary provisions, interests
in the General Account have not been registered as securities under the
Securities Act of 1933 and the General Account has not been registered as an
investment company under the Investment Company Act of 1940. Accordingly,
neither the General Account nor any interests therein are subject to the
provisions of these Acts and, as a result, the staff of the Securities and
Exchange Commission has not reviewed the disclosures in this Prospectus
relating to the General Account.
GENERAL DESCRIPTION
The General Account consists of all assets owned by ANLIC other than
those in the Variable Account and other separate accounts. Subject to
applicable law, ANLIC has sole discretion over the investment of the assets in
the General Account.
An Owner may elect to allocate net premiums to the General Account,
the Variable Account, or both. The Owner may also transfer value from the
Sub-accounts of the Variable Account to the General Account, or from the
General Account to the Sub-accounts of the Variable Account. The allocation or
transfer of funds to the General Account does not entitle an Owner to share in
the investment experience of the General Account. Instead, ANLIC guarantees
that value in the General Account will accrue interest at an effective annual
rate of at least 4.5%, independent of the actual investment experience of the
General Account. Any excess interest rate when declared will remain in effect
at least one year.
THE POLICY
This Prospectus describes a Flexible Premium Variable Life Insurance
Policy. This Prospectus is generally intended to serve as a disclosure
document for the aspects of the Policy involving the Variable Account. For
complete details regarding the General Account, see the Policy itself.
GENERAL ACCOUNT BENEFITS
If the Owner pays the same premiums as scheduled, allocates all net
premiums only to the General Account and makes no transfers, partial surrenders
or Policy loans, the minimum amount and duration of the death benefit will be
fixed and guaranteed. The Owner may select either Death Benefit Option Type A
or B under the Policy and may change the Policy's face amount subject to
satisfactory evidence of insurability.
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GENERAL ACCOUNT VALUE
Net premiums allocated to the General Account are credited to the
Policy. ANLIC bears the full investment risk for these amounts. ANLIC
guarantees that interest credited to each Owner's value in the General Account
will not be less than an annual rate of at least 4.5% per year. ANLIC may, AT
ITS SOLE DISCRETION, credit a higher rate of interest, although it is not
obligated to credit interest in excess of 4.5% per year, and might not do so.
ANY INTEREST CREDITED ON THE POLICY'S VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED RATE OF 4.5% PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF ANLIC. THE OWNER ASSUMES THE RISK THAT INTEREST CREDITED MAY NOT EXCEED THE
GUARANTEED MINIMUM RATE OF 4.5% PER YEAR. The value in the General Account
will be calculated on each Monthly Anniversary.
ANLIC guarantees that, at any time prior to the Maturity Date, the
value in the General Account will not be less than the amount of the net
premiums allocated or value transferred to the General Account, plus interest
at the rate of 4.5% per year, plus any excess interest which ANLIC credits and
any amounts transferred into the General Account, less the sum of all charges
allocable to the General Account and any amounts deducted from the General
Account in connection with partial surrenders or transfers to the Variable
Account.
GENERAL POLICY PROVISIONS
POSTPONEMENT OF PAYMENTS
General. Payment of any amount upon complete or partial surrender,
Policy loan, or benefits payable at death or Maturity may be postponed
whenever: (1) Acacia National or the New York Stock Exchange is closed such as
customary weekend and holiday closings, or trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission;
(2) the Commission by order permits postponement for the protection of Owners;
or (3) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Variable Account's net
assets. Transfers may also be postponed under these circumstances.
Payment by Check. Payments under the Policy of any amounts derived
from premiums paid by check may be delayed until such time as the check has
cleared the Owner's bank.
THE CONTRACT
The Policy, riders and attached copy of the application and any
supplemental applications are the entire contract. Only statements in the
application and any supplemental applications can be used to void the Policy or
defend a claim. The statements are considered representations and not
warranties. Only Officers of ANLIC can agree to change or waive any provisions
of the Policy. The change or waiver must be in writing and signed by an
officer of ANLIC.
SUICIDE
If the Insured, while sane or insane, commits suicide within two years
after the Policy date, ANLIC will pay only the premium(s) received, less any
partial surrenders and outstanding indebtedness. If the Insured, while sane or
insane, commits suicide within two years after the effective date of any
increase in face amount requiring evidence of insurability, ANLIC will not pay
the increase but will pay only an
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amount equal to the monthly deductions previously made for the increase.
INCONTESTABILITY
ANLIC cannot contest this Policy or any attached rider after it has
been in force for two years from its effective date. It cannot contest an
increase in face amount or in rider face amount after it has been in force for
two years from its effective date. Reinstatement of a Policy, and any rider
attached to the Policy, may be contested by ANLIC for any statements made in
the application for reinstatement any time within two years of the effective
date of reinstatement.
CHANGE OF OWNER OR BENEFICIARY
Generally, as long as the Policy is in force, the Owner or Beneficiary
may be changed by written request in a form acceptable to ANLIC. The Policy
need not be returned unless requested by ANLIC. The change will take effect as
of the date the request is signed, whether or not the Insured is living when
the request is received by ANLIC. ANLIC will not, however, be liable for any
payment made or action taken before acknowledgment of the request. A change of
Owner or Beneficiary may have tax consequences (See Federal Tax
Considerations).
COLLATERAL ASSIGNMENT
The Policy may be assigned as collateral. ANLIC will not be bound by
the assignment until a copy has been received by ANLIC and it assumes no
responsibility for determining whether an assignment is valid or the extent of
the assignee's interest. An Assignment may have tax consequences (See Federal
Tax Considerations).
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the benefits will
be those which the monthly deductions would have provided for the correct age
and sex.
REPORTS AND RECORDS
ANLIC will maintain all records relating to the Variable Account.
ANLIC will mail to Owners, at their last known address of record, any reports
required by applicable law or regulation. Each Owner will also be sent an
annual and semi-annual report for Portfolios of the Funds that hold or have
held Policy Value during the reporting period and a list of the portfolio
securities held in each Portfolio of the Funds, as required by the 1940 Act.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following optional
insurance benefits may be added to a Policy by rider. The cost of any optional
insurance benefits will be deducted as part of the monthly deduction (See
Charges and Deductions--Monthly Administration Charge).
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Accelerated Death Benefit Rider. Subject to certain terms and
conditions, a reduced death benefit will be paid in advance to the Owner of the
Policy if the Insured suffers from a terminal illness or injury. There is no
charge for this rider but it will be subject to ANLIC's underwriting
requirements. The tax consequences associated with the addition of and the
payout under an accelerated Death Benefit Rider are unclear. A qualified tax
advisor should be consulted before adding such a Rider to a Policy.
Other Insured Rider. Provides for level renewable term insurance on
the life of any family member. Under the terms of this rider, ANLIC will pay
the face amount of the rider to the Beneficiary upon receipt of proof of the
other Insured's death. Subject to certain restrictions, the face amount of the
rider may be increased or decreased. This rider may also be converted to a new
Policy on the family member within 31 days after the Insured's death.
Generally, the new Policy must meet the minimum face amount requirement, but
ANLIC, in its sole discretion, may waive this provision. Additional evidence
of insurability will not be required for conversion.
Children's Insurance Rider. Provides for level term insurance on the
Insured's children, as defined in the rider. Under the terms of the rider, the
death benefit will be payable to the named Beneficiary upon the death of any
Insured child. Upon receipt of proof of the Insured's death, the rider will
continue in force without additional monthly charges.
Guaranteed Insurability Rider. Provides that the Owner can purchase
additional insurance at certain future dates without evidence of insurability.
Under the terms of the rider the Owner may only increase the face amount of the
Policy on an option date. An option date falls on the Policy Anniversary
following certain birthdates and the Monthly Anniversary following the
occurrence of certain events such as marriage of the Insured. Each increase in
face amount will be subject to the maximum stated in the Policy. No evidence
of insurability is required for any increase made under this rider. Increases
may have tax consequences (See Federal Tax Considerations).
Accidental Death Benefit Rider. Provides additional insurance if the
Insured's death results from accidental bodily injury, as defined in the rider.
Under the terms of the rider, the additional benefits provided in a Policy will
be paid upon receipt of proof by ANLIC that death resulted directly and
independently of all other causes from accidental bodily injury; occurred while
the rider was in force; and occurred on or after the rider anniversary
following the Insured's 5th birthday. The rider will terminate on the earliest
of either the date of lapse, the rider anniversary following the Insured's 70th
birthday or the Maturity Date of the Policy.
Level Renewable Term Rider. Provides for level renewable term
insurance coverage to increase the face amount of the Policy. The Owner may
purchase additional insurance on a renewable term basis without evidence of
insurability up to Insured's age 70. The rider will terminate on the earliest
of either the date lapse, the rider anniversary following the Insured's 70th
birthday or the Maturity Date of the Policy.
Total Disability Rider. Provides for the payment of the total
disability amount by ANLIC as premiums while the Owner is disabled. Under the
terms of the rider, the total disability amount will be paid as a premium upon
receipt of proof adequate to ANLIC that: (1) the Insured is totally disabled as
defined in the rider; (2) the disability commenced while the rider was in
force; (3) the disability began on or after the rider anniversary following the
Insured's 15th birthday; and (4) total disability continued without
interruption for four months. The total disability amount is set forth in the
Policy. The amount may, under certain circumstances, be increased. Evidence
of insurability will generally be required for any increase. Because the total
disability amount is a fixed dollar amount while the monthly deduction varies
from month to month, the fixed dollar amount may be more or less than the
amount necessary to keep the Policy in force.
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Upon approval of the claim, ANLIC will begin crediting total
disability amounts, less premium expense charges, on the Monthly Anniversary
after the date disability began. No amount will be credited for a period of
more than 12 months before notice of disability is received by ANLIC unless it
is shown that notice was given as soon as reasonably possible. ANLIC will
continue to credit the net total disability amount while the Insured is totally
disabled and the Policy is in force. However, if the disability begins on or
after the rider Anniversary after the Insured's 60th birthday, payment will be
credited only for the later of two years or until the rider Anniversary after
the Insured's 65th birthday.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the federal
income tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon ANLIC's understanding of
the present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("Service"). No representation is made as to the
likelihood of continuation of the present federal income tax laws or of the
current interpretations by the Internal Revenue Service.
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986 ("Code"), as
amended, sets forth a definition of a life insurance contract for federal tax
purposes. Although the Secretary of the Treasury ("Treasury") is authorized to
prescribe regulations implementing Section 7702, and while proposed regulations
and other interim guidance have been issued, final regulations have not been
adopted. Guidance as to how Section 7702 is to be applied is limited. If a
Policy was determined not to be a life insurance contract for purposes of
Section 7702, such Policy would not provide the tax advantages normally
provided by a life insurance Policy.
With respect to a Policy issued on the basis of a standard rate class,
ANLIC believes (largely in reliance on IRS Notice 88-128 and the proposed
regulations under regulations under Section 7702, issued on July 5, 1991) that
such a Policy should meet the Section 7702 definition of a life insurance
contract, as long as the Owner does not pay the full amount of premiums
permitted under the Policy.
With respect to a Policy that is issued on a substandard basis (i.e.,
a premium class involving a higher than standard mortality risk), there is less
guidance, in particular as to how the mortality and other expense requirements
of Section 7702 are to be applied in determining whether such a Policy meets
the Section 7702 definition of a life insurance contract. Thus, it is not
clear whether or not such a Policy would satisfy Section 7702, particularly if
the Owner pays the full amount of premiums permitted under the Policy. An
Owner of a Policy issued on a substandard basis may, however, adopt certain
self-imposed limitations on the amount of premiums paid for such a Policy which
should cause the Policy to meet the Section 7702 definition of a life insurance
contract. An Owner contemplating the adoption of such limitations should do so
only after consulting a tax adviser.
If it is subsequently determined that the Policy does not satisfy
Section 7702, ANLIC may take whatever steps are appropriate and necessary to
attempt to cause such a Policy to comply with Section 7702. For these reasons,
ANLIC reserves the right to restrict Policy transactions as necessary to
attempt to qualify it as a life insurance contract under Section 7702.
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Section 817(h) of the Code requires that the investments of each of
the Sub-accounts must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code (discussed above). The Sub-accounts, through the
Fund, intend to comply with the diversification requirements prescribed in
Treasury Regulation Section 1.817.5, which affect how the Fund's assets are to
be invested. ANLIC believes that the Sub-accounts will, thus, meet the
diversification requirement.
In certain circumstances, Owners of variable life insurance contracts
may be considered the Owners, for federal income tax purposes, of the assets of
the Sub-accounts used to support their contracts. In those circumstances,
income and gains from the Sub-account assets would be includable in the Owner's
gross income. The IRS has stated in published rulings that a variable contract
Owner will be considered the Owner of Sub-account assets if the Contract Owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated
asset account may cause the investor (i.e., the Owner), rather than the
insurance company, to be treated as the Owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which Policyholders may direct their
investments to particular Sub-accounts without being treated as Owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that Policy Owners were not Owners of Sub-account assets. For
example, the Owner has additional flexibility in allocating premium payments
and Policy values and the investment objective of certain Portfolios may be
narrower. These differences could result in an Owner being treated as the
Owner of a pro rata portion of the assets of the Sub-accounts. In addition,
ANLIC does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. ANLIC therefore reserves the right to modify the Policy as necessary to
attempt to prevent an Owner from being considered the Owner of a pro rata share
of the assets of the Sub-accounts.
The following discussion assumes that the Policy will qualify as a
life insurance contract for federal income tax purposes.
TREATMENT OF POLICY BENEFITS
In General. ANLIC believes that the proceeds and Policy Account Value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance Policy for federal income tax purposes. Thus, the
Death Benefit under the Policy should be excluded from the gross income of the
Beneficiary under Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, a change in
the Policy's Death Benefit Option (i.e., a change from Death Benefit Option A
to Death Benefit Option B or vice versa), a Policy loan, a partial surrender, a
surrender, the addition of an Accelerated Death Benefit Rider, the receipt of
an Accelerated Death Benefit, a change in ownership, or an assignment of the
Policy may have federal income tax consequences. In addition, federal, state
and local taxes upon transfer, and other tax consequences of ownership or
receipt of Policy proceeds depend on the circumstances of each Owner or
Beneficiary.
A Policy may also be used in various arrangements, including
non-qualified deferred compensation or salary continuation plans, split dollar
insurance plans, executive bonus plans, retiree
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medical benefit plans and others. The tax consequences of such plans may vary
depending on the particular facts and circumstances of each individual
arrangement. Therefore, if you are contemplating the use of a Policy in any
arrangement the value of which depends in part on its tax consequences, you
should be sure to consult a qualified tax advisor regarding the tax attributes
of the particular arrangement.
Generally, the Owner will not be deemed to be in constructive receipt
of the Policy Account Value, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by a Policy depend on whether the Policy is classified as a
"Modified Endowment Contract." Whether a Policy is or is not a Modified
Endowment Contract, upon a complete surrender or lapse of a Policy or when
benefits are paid at a Policy's maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. Section 7702A establishes a class of
life insurance contracts designated as "Modified Endowment Contracts," which
applies to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified
Endowment Contract will depend on the individual circumstances of each Policy.
In general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven Policy Years exceed the sum of
the net level premiums which would have been paid on or before such time if the
Policy provided for paid-up future benefits after the payment of seven level
annual premiums. The determination of whether a Policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the Death Benefit and Policy Account Value at the time of such
change and the additional premiums paid in the seven years following the
material change. At the time a premium is credited, which would cause the
Policy to become a Modified Endowment Contract, ANLIC will notify the Owner
that unless a refund of the excess premium is requested by the Owner, the
Policy will become a Modified Endowment Contract. The Owner will have 30 days
after receiving such notification to request the refund. The excess premium
paid (with either the 4.5% required interest or positive Sub-account earnings,
if any) will be returned to the Owner upon receipt by ANLIC of the refund
request. The amount to be refunded will be deducted from the Policy Account
Value in the Sub-accounts and in the General Account in the same proportion as
the premium payment was allocated to such accounts. In the event that earnings
on such excess premium are not at least 4.5%, the premium plus an amount equal
to interest at an annual rate of 4.5% will be returned.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be fully described in the
limited confines of this summary. Therefore, a current or prospective Owner
should consult with a competent advisor to determine whether a Policy
transaction will cause the Policy to be treated as a Modified Endowment
Contract.
Distribution from Policies Classified as Modified Endowment Contracts.
Policies classified as Modified Endowment Contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and partial surrenders from such a Policy, are treated as ordinary
income subject to tax up to the amount equal to the excess (if any) of the
Policy Account Value immediately before the distribution over the investment in
the Policy (described below) at such time. Second, loans taken from or secured
by such a Policy are treated as distributions from such a Policy and taxed
accordingly. Past due loan interest that is added to the loan amount will be
treated as a loan. Third, a 10 percent additional income tax is imposed on the
portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distribution or loan is made
on or after the Owner attains age 59 1/2, is attributable to the Owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Owner or the joint lives (or
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joint life expectancies) of the Owner and the Owner's Beneficiary. If a Policy
becomes a modified endowment contract after it is issued, distributions made
during the Policy Year in which it becomes a modified endowment contract,
distributions in any subsequent Policy Year and distributions within two years
before the Policy becomes a modified endowment contract will be subject to the
tax treatment described above. This means that a distribution from a Policy
that is not a modified endowment contract could later become taxable as a
distribution from a modified endowment contract.
Distributions From Policies Not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment
Contract are generally treated as first recovering the investment in the Policy
(described below) and then, only after the return of all such investments in
the Policy, as distributing taxable income. An exception to this general rule
occurs in the case of a decrease in the Policy's Death Benefit or any other
change that reduces benefits under the Policy in the first 15 years after the
Policy is issued and that results in a cash distribution to the Owner in order
for the Policy to continue complying with the Section 7702 definition limits.
Such a cash distribution will be taxed in whole or in part as ordinary income
(to the extent of any gain in the Policy) under rules prescribed in Section
7702.
Loans from, or secured by a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon
surrender) nor loans from, or secured by a Policy that is not a Modified
Endowment Contract are subject to the 10 percent additional tax.
Policy Loan Interest. Interest paid on any loan under a Policy may
not be deductible. A qualified tax advisor should be consulted before
deducting any such interest.
Investment in the Policy. Investment in the Policy means: (1) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (2) the aggregate amount received under the Policy which is excluded from
gross income of the Owner (except that the amount of any loan from, or secured
by a Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (3) the amount of any
loan from, or secured by a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
Multiple Policies. All Modified Endowment Contracts that are issued
by ANLIC (or its affiliates) to the same Owner during any calendar year are
treated as one Modified Endowment Contract for purposes of determining the
amount includable in the gross income under Section 72(e) of the Code.
SPECIAL RULES FOR PENSION AND PROFIT-SHARING PLANS
If Policies are purchased by a trust forming part of a pension or
profit-sharing plan meeting the qualification requirements of Section 401(a) of
the Code, various special tax rules will apply. Because these rules are
extensive and complicated, it is not possible to describe all of them here.
Accordingly, counsel or other competent tax advisors familiar with qualified
plan matters should be consulted in connection with any such purchase.
Generally, a Plan Participant on whose behalf a Policy is purchased
will be treated as having annual imputed income based on a cost of insurance
factor multiplied by the Net Amount at Risk under the Policy. This imputed
income is reported by the employer to the employee and the Service annually and
included in the employee's gross income. In the event of the death of a Plan
Participant while covered by the plan, Insurance Proceeds paid to the
participant's Beneficiary generally will not be completely excludable from the
Beneficiary's gross income under Section 101(a) of the Code. Any Death
43
<PAGE> 47
Benefit in excess of the Policy Account Value will be excludable. The portion
of the Death Benefit equal to the Policy Account Value, however, generally will
be subject to federal income tax to the extent it exceeds the sum of $5,000
plus the Participant's "investment in the contract" as defined in the Code,
which will include the imputed income noted above. Special rules may apply in
certain circumstances (e.g., to Owner-employees or Participants who have
borrowed from the plan).
The Service has interpreted the plan qualification provisions of the
Code to require that non-retirement benefits, including death benefits, payable
under a qualified plan be "incidental to" retirement benefits provided by the
plan. These interpretations, which are primarily set forth in a series of
Revenue Rulings issued by the Service, should be considered in connection with
any purchase of life insurance policies to provide benefits under a qualified
plan.
POSSIBLE CHARGE FOR ANLIC'S TAXES
At the present time, ANLIC makes no charge for any federal, state or
local taxes (other than the charge for state premium taxes) that the Company
incurs that may be attributable to the Sub-accounts or to the Policies. ANLIC,
however, reserves the right in the future to make additional charges for any
such tax or other economic burden resulting from the application of the tax
laws that it determines to be properly attributable to the Sub-accounts or to
the Policies. The imposition of such additional charges will be made in
compliance with applicable laws and SEC regulations. If any tax charges are
made in the future, they will be accumulated daily and transferred from the
applicable Sub-account to ANLIC's General Account. Any investment earnings on
tax charges accumulated in a Sub-account will be retained by ANLIC.
POLICIES ISSUED IN CONJUNCTION WITH EMPLOYEE BENEFIT PLANS
Policies may be acquired in conjunction with employee benefit plans
("EBS Policies"), including the funding of qualified pension plans meeting the
requirements of Section 401 of the Code.
For EBS Policies, the maximum mortality rates used to determine the
monthly Cost of Insurance Charge are based on the Commissioner's 1980 Standard
Ordinary Mortality Tables. Under these Tables, mortality rates are the same
for male and female Insureds of a particular attained age and rate class (See
Cost of Insurance).
Illustrations reflecting the premiums and charges for EBS Policies
will be provided upon request to purchasers of such Policies.
There is no provision for misstatement of sex in the EBS Policies.
(See Misstatement of Age or Sex). Also, the rates used to determine the amount
payable under a particular Settlement Option will be the same for male and
female Insureds (See Settlement Options).
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an
employee's deferred compensation plan could not, under Title VII of the Civil
Rights Act of 1964, vary between men and women on the basis of sex. In that
case, the Court applied its decision only to benefits derived from
contributions made on or after August 1, 1983.
44
<PAGE> 48
Subsequent decisions of lower federal courts indicate that in other factual
circumstances the Title VII prohibition of sex-distinct benefits may apply at
an earlier date. In addition, legislative, regulatory, or decisional authority
of some states may prohibit use of sex-distinct mortality tables under certain
circumstances. The Policies offered by this Prospectus (other than Policies
issued in states which require "unisex" policies (currently Montana) and EBS
Policies (See Policies Issued in Conjunction with Employee Benefit Plans) are
based upon actuarial tables which distinguish between men and women and, thus,
the Policy provides different benefits to men and women of the same age.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of these authorities on any
employment-related insurance or benefits program before purchasing the Policy
and in determining whether an EBS Policy is appropriate.
VOTING RIGHTS
All of the assets held in the Sub-accounts of the Variable Account
will be invested in shares of corresponding Portfolios of the Funds. The Funds
do not hold routine annual shareholders' meetings. Shareholders' meetings will
be called whenever each Fund believes that it is necessary to vote to elect the
Board of Directors of the Fund and to vote upon certain other matters that are
required by the 1940 Act to be approved or ratified by the shareholders of a
mutual fund. ANLIC is the legal owner of Fund shares and as such has the right
to vote upon any matter that may be voted upon at a shareholders' meeting.
However, in accordance with its view of present applicable law, ANLIC will vote
the shares of the Funds at meetings of the shareholders of the appropriate Fund
or Owner in accordance with instructions received from Owners. Fund shares
held in each Sub-account for which no timely instructions from Owners are
received will be voted by ANLIC in the same proportion as those shares in that
Subaccount for which instructions are received.
Each Owner having a voting interest will be sent proxy material and a
form for giving voting instructions. Owners may vote, by proxy or in person,
only as to the Portfolios that correspond to the Sub-accounts in which their
Policy values are allocated. The number of shares held in each Sub-account
attributable to a Policy for which the Owner may provide voting instructions
will be determined by dividing the Policy's value in that account by the net
asset value of one share of the corresponding Owner as of the record date for
the shareholder meeting. Fractional shares will be counted. For each share of
an Owner for which Owners have no interest, ANLIC will cast votes, for or
against any matter, in the same proportion as Owners vote.
If required by state insurance officials, ANLIC may disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the investment objectives or policies of one or more of the
Owners, or to approve or disapprove an investment Policy or investment advice
of one or more of the Owners. In addition, ANLIC may disregard voting
instructions in favor of changes initiated by an Owner or a Fund's Board of
Directors provided that ANLIC's disapproval of the change is reasonable and is
based on a good faith determination that the change would be contrary to state
law or otherwise inappropriate, considering the Portfolio's objectives and
purposes, and the effect the change would have on ANLIC. If ANLIC does
disregard voting instructions, it will advise Owners of that action and its
reasons for such action in the next semi-annual report to Owners.
Shares of the Portfolios may be offered to variable life insurance and
variable annuity separate accounts of life insurance companies other than ANLIC
that are not affiliated with ANLIC. ANLIC understands that shares of these
Portfolios also will be voted by such other life insurance companies in
accordance with instructions from their Owners invested in such separate
accounts. This will dilute the effect of voting instructions of Owners of the
Policies.
45
<PAGE> 49
OFFICERS AND DIRECTORS OF ANLIC
<TABLE>
<CAPTION>
Name and Position(s) Principal Occupation
- -------------------- --------------------
With Acacia National Last Five Years
- -------------------- ---------------
<S> <C>
Charles T. Nason President and Chief Executive Officer since June 1988;
Chairman of the Board Acacia Mutual Life Insurance Company
President and Chief
Executive Officer
and Director
</TABLE>
OFFICERS AND DIRECTORS OF ANLIC (Continued)
<TABLE>
<CAPTION>
Name and Position(s) Principal Occupation
- -------------------- --------------------
With Acacia National Last Five Years
- -------------------- ---------------
<S> <C>
Robert-John H. Sands Senior Vice President and General Counsel
Senior Vice President, since 1991 Acacia Mutual Life Insurance Company
General Counsel and Director
Robert W. Clyde Executive Vice President, Marketing and
Executive Vice President, Sales since September 1994; Vice
Marketing and Sales President, Retail Long-Term Care
and Director September 1993 until August 1994, Vice President,
General Agency July 1991 until August 1993,
John Hancock Mutual Life.
Paul L. Schneider Senior Vice President, Chief Financial Officer since
Senior Vice President, March 1989; Acacia Mutual Life Insurance Company
Chief Financial Officer
Treasurer and Director
Stephen B. Couch Vice President and Chief Investment Officer
Vice President, Chief since April 1988, Acacia Mutual Life Insurance Company
Investment Officer and
Director
Haluk Ariturk Senior Vice President, Operations and Chief Actuary
Senior Vice President, since June 1989, Acacia Mutual Life Insurance Company
Operations and Chief
Actuary and Director
</TABLE>
The principal business address of each person listed is Acacia National Life
Insurance Company, 51 Louisiana Avenue, N.W., Washington, D.C. 20001.
DISTRIBUTION OF THE POLICIES
Applications for the Policies are solicited by agents who are licensed
by state insurance authorities to sell ANLIC's variable life insurance
policies, and who are also registered representatives of The Advisors
46
<PAGE> 50
Group, Inc. ("TAG") or registered representatives of broker/dealers who have
Selling Agreements with TAG or registered representatives of broker/dealers who
have Selling Agreements with such broker/dealers. TAG, whose address is 51
Louisiana Avenue, N.W., Washington, D.C. 20001, is a registered broker/dealer
under the Securities Exchange Act of 1934 ("1934 Act") and a member of the
National Association of Securities Dealers, Inc. ( "NASD"). TAG is an indirect
wholly-owned subsidiary of Acacia Mutual Life Insurance Company of Washington,
D.C. TAG acts as the principal underwriter, as defined in the 1940 Act, of the
Policies (as well as other variable life policies) pursuant to an Underwriting
Agreement with ANLIC. The Policies are offered and sold only in those states
where their sale is lawful.
The insurance underwriting and the determination of a proposed
Insured's Rate Class and whether to accept or reject an application for a
Policy is done by ANLIC. ANLIC will refund any premiums paid if a Policy
ultimately is not issued or will refund the applicable amount if the Policy is
returned under the Free Look provision.
Agents are compensated for sales of the Policies on a commission and
service fee basis and with other forms of compensation. Agent commissions will
not be more than 20% of the premiums paid up to Target Premium during the first
four Policy Years and 2% of the premiums paid up to Target Premium for later
years. Similar commissions will be paid to agents based on premiums paid and
the Increase Date. In addition, after the fourth Policy year agents will
receive .025% of the annual average Policy Account Value as a service fee.
Agents may also receive expense allowances or bonuses. The agent may be
required to return the commissions if a Policy is not continued.
ADMINISTRATION
ANLIC has contracted with Financial Administrative Services, Inc.
("FAS"), having its principal place of business at 95 Bridge Street, Haddam,
Connecticut for it to provide ANLIC with certain administrative services for
the Flexible Premium Variable Life Policies. Pursuant to the terms of a
Service Agreement, FAS will act as Recordkeeping Service Agent for the policies
and riders. FAS under the guidance and direction of ANLIC will perform
Administration functions including: issuance of policies for reinstatement,
term conversion, plan changes and guaranteed insurability options, generation
of billing and posting of premium, computation of valuations, calculation of
benefits payable, maintenance of administrative controls over all activities,
correspondence, and data, and providing management reports to ANLIC.
POLICY REPORTS
At least once each Policy Year a statement will be sent to the Owner
describing the status of the Policy, including setting forth the Face Amount,
the current Death Benefit, any Policy loans and accrued interest, the current
Policy Account Value, the General Account Value, indebtedness, the value in
each Sub-account, premiums paid since the last report, charges deducted since
the last report, any partial surrenders since the last report, and the current
Cash Surrender Value. At the present time, ANLIC plans to send these Policy
Statements on a quarterly basis. In addition, a statement will be sent to the
Owner showing the status of the Policy following the transfer of amounts from
one Sub-account to another, the taking out of a loan, a repayment of a loan, a
partial surrender and the payment of any premiums (excluding those paid by bank
draft which has not cleared). An Owner may request that a similar report be
prepared at other times. ANLIC may charge a reasonable fee for such requested
reports and may limit the scope and frequency of such requested reports.
An Owner will be sent a semi-annual report containing the financial
statements of the Funds as required by the 1940 Act.
47
<PAGE> 51
STATE REGULATION
ANLIC is subject to regulation and supervision by the Insurance
Department of the Commonwealth of Virginia which periodically examines its
affairs. It is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. A copy of the Policy form
has been filed with and, where required, approved by insurance officials in
each jurisdiction where the Policies are sold. ANLIC is required to submit
annual statements of its operations, including financial statements, to the
insurance departments of the various jurisdictions in which it does business
for the purposes of determining solvency and compliance with local insurance
laws and regulations.
EXPERTS
The statement of financial condition of Acacia National Life Insurance
Company as of December 31, 1995 and the statements of operations and changes in
surplus and cash flows for the year then ended as found in this Prospectus have
been included herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Actuarial matters included in the Prospectus have been examined by
Philip Barlow, FSA, an actuary of ANLIC, as stated in his opinion filed as an
exhibit to the Registration Statement.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice
on legal matters relating to certain aspects of federal securities laws
applicable to the issue and sale of the Policies. Matters of the State of
Virginia law pertaining to the Policies, including ANLIC's right to issue the
Policies and its qualification to do so under applicable laws and regulations
issued thereunder, have been passed upon by Ellen Jane Abromson, Esq.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and
Exchange Commission, under the Securities Act of 1933, as amended, with respect
to the Policy offered hereby. This Prospectus does not contain all the
information set forth in the registration statement and the amendments and
exhibits to the registration statement, to all of which reference is made for
further information concerning the Variable Account, Acacia National and the
Policy offered hereby. Statements contained in this prospectus as to the
contents of the Policy and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to such instruments
as filed.
48
<PAGE> 52
FINANCIAL STATEMENTS
49
<PAGE> 53
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
Contract Owners and Board of Directors
Acacia National Life Insurance Company
We have audited the accompanying statement of assets and liabilities of the
following subaccounts of the Acacia National Variable Life Insurance Separate
Account I: The Calvert Responsibly Invested Money Market Fund, Calvert
Responsibly Invested Strategic Growth, The Alger American Mid Cap Growth
Portfolio, Dreyfus Stock Index Portfolio, Neuberger & Bergman Growth Portfolio,
Strong International Stock Fund, Strong Discovery Fund II and Van Eck Gold
Natural Resources Portfolio as of December 31, 1995, and the related statement
of operations and changes in net assets for the period December 1, 1995
(inception) to December 31, 1995. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1995.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the following subaccounts of
the Acacia National Variable Life Insurance Separate Account I: The Calvert
Responsibly Invested Money Market Fund, Calvert Responsibly Invested Strategic
Growth, The Alger American Mid Cap Growth Portfolio, Dreyfus Stock Index
Portfolio, Neuberger & Bergman Growth Portfolio, Strong International Stock
Fund, Strong Discovery Fund II and Van Eck Gold Natural Resources Portfolio as
of December 31, 1995, and results of their operations and changes in net assets
for the period December 1, 1995 (inception) to December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P
Washington, D.C.
April 1, 1996
<PAGE> 54
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
NEUBERGER STRONG
CALVERT CALVERT ALGER DREYFUS & BERMAN INTERNATIONAL STRONG VAN ECK
MONEY MARKET STRATEGIC GROWTH MID CAP STOCK INDEX GROWTH STOCK DISCOVERY GOLD
------------ ---------------- ------- ----------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at market --- $18 $17 $1,814 $17 $23 $11 $918
============ ================ ======= =========== ========= ============ ========= =========
Number of shares --- 1.614 0.902 105.478 0.672 2.235 0.847 63.660
============ ================ ======= =========== ========= ============ ========= =========
Net Assets --- $18 $17 $1,814 $17 $23 $11 $918
============ ================ ======= =========== ========= ============ ========= =========
ACCUMULATION UNITS
NUMBER OF UNITS --- 1.708 1.743 182.389 1.781 2.280 1.166 93.138
============ ================ ======= =========== ========= ============ ========= =========
NET ASSET VALUE PER
ACCUMULATION UNIT
December 31, 1995 --- $10.29 $10.03 $9.95 $9.77 $10.10 $9.90 $9.86
============ ================ ======= =========== ========= ============ ========= =========
</TABLE>
See notes to financial statements.
2
<PAGE> 55
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) TO DECEMBER 31, 1995
----------------------------------------------------------------------------------------------
NEUBERGER STRONG
CALVERT CALVERT ALGER DREYFUS & BERMAN INTERNATIONAL STRONG VAN ECK
OPERATIONS: MONEY MARKET STRATEGIC GROWTH MID CAP STOCK INDEX GROWTH STOCK DISCOVERY GOLD
------------ ---------------- ------- ----------- --------- ------------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income
Dividends $3 --- --- $23 --- --- --- ---
Mortality and expense charge --- --- --- (1) --- --- --- (1)
------------ ---------------- ------- ----------- --------- ------------- --------- -------
NET INVESTMENT INCOME (LOSS) 3 --- --- 22 --- --- --- (1)
Net change in unrealized
appreciation of investments --- 1 --- 4 --- --- --- 3
------------ ---------------- ------- ----------- --------- ------------- --------- -------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 3 1 --- 26 --- --- --- 2
CAPITAL TRANSACTIONS:
Transfer of net premium 2,744 29 29 39 29 39 19 10
Policy account value charges (74) (12) (12) (15) (12) (16) (8) (3)
Sub-account transfers (2,673) --- --- 1,764 --- --- --- 909
------------ ---------------- ------- ----------- --------- ------------- --------- -------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (3) 17 17 1,788 17 23 11 916
------------ ---------------- ------- ----------- --------- ------------- --------- -------
TOTAL INCREASE IN NET ASSETS --- 18 17 1,814 17 23 11 918
NET ASSETS, AT INCEPTION --- --- --- --- --- --- --- ---
------------ ---------------- ------- ----------- --------- ------------- --------- -------
NET ASSETS, AT END OF THE YEAR --- $18 $17 $1,814 $17 $23 $11 $918
============ ================ ======= =========== ========= ============= ========= =======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 56
ACACIA NATIONAL VARIABLE LIFE INSURANCE SEPARATE ACCOUNT I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. NATURE OF OPERATIONS
The Acacia National Variable Life Insurance Separate Account I (the Account)
began operations on December 1, 1995 as a separate investment account within
Acacia National Life Insurance Company (the Company) to receive and invest net
premiums paid under a flexible premium variable life insurance policy (the
Policy). The Policy allows for a flexible premium schedule, as payments may be
made with varying amounts and frequency within stated limitations. The primary
purpose of the policy is to provide life insurance protection in the event of
the insured's death.
The Company is a member of the Acacia Group which includes Acacia Mutual Life
Insurance Company and its other wholly-owned subsidiaries: Acacia Financial
Corporation and its subsidiaries, Acacia Federal Savings Bank F.S.B., Calvert
Group, Ltd. and The Advisors Group, Inc.
Assets of the Account are the property of the Company. However, those assets
attributable to the policies are not chargeable with liabilities arising out of
any other business which the Company may conduct. The Account operates and is
registered as a unit investment trust under the Investment Company Act of 1940.
The net assets maintained in the Account attributable to the policies provide
the base for the periodic determination of the increased or decreased benefits
under the policies.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SEPARATE ACCOUNT ASSETS
The Account has fourteen separate sub-accounts which are invested as directed
by the contract owner. The fourteen sub-accounts of the Account are: The Alger
American Growth Portfolio, The Alger American Mid Cap Growth Portfolio, The
Alger American Small Capitalization Portfolio, The Calvert Responsibly Invested
Money Market Portfolio, Calvert Responsibly Invested Balanced Growth Portfolio,
Calvert Responsibly Invested Strategic Growth, Dreyfus Stock Index Portfolio,
The Neuberger & Berman Limited Maturity Bond Portfolio, The Neuberger & Berman
Growth Portfolio, Strong Advantage Fund II, Strong Assets Fund II, Strong
International Stock Fund II, Strong Discovery Fund II and Van Eck Gold and
Natural Resources Portfolio. The Account purchases shares of each of the
sub-accounts subject to the terms of the Participation Agreements between the
Company and the sub-accounts. Each sub-account has investment objectives and
policies and assets held separately. Shares of each sub-account are offered
at a price equal to their respective net asset values per share, without sales
charge, which represents their fair value. Calvert Asset Management Company,
Inc., an indirectly wholly owned subsidiary of Acacia Financial Corporation,
serves as an
4
<PAGE> 57
investment advisor to The Calvert Responsibly Invested Money Market Portfolio,
Calvert Responsibly Invested Balanced Growth Portfolio and Calvert Strategic
Growth mutual funds.
In addition to the fourteen separate sub-accounts, a contract owner may also
allocate net premiums to the General Account, which is part of the Company.
Because of exclusionary provisions, interests in the General Account have not
been registered as securities under the Securities Act of 1933 and the General
Account has not been registered as an investment company under the Investment
Company Act of 1940.
3. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Account in the preparation of the financial statements in
conformity with generally accepted accounting principles.
ADMINISTRATION
The Company has contracted with Financial Administrative Services, Inc. (FAS)
to provide the Company with certain administrative services for the Flexible
Premium Variable Life Policies. FAS will act as Recordkeeping Service Agent
for the policies and riders for an initial term of three years. FAS provides
administrative functions including: issuance of policies for reinstatement,
term conversions, plan changes and guaranteed insurability options, generation
of billing and posting of premium, computation of valuations, calculation of
benefits payable, maintenance of administrative controls over all activities,
correspondence and provide management reporting to the Company.
INVESTMENTS VALUATION
Investments are stated at market value which is the net asset value of each of
the respective funds.
ACCOUNTING FOR INVESTMENTS
Investment transactions are accounted for on the trade date. Dividend income
is recorded on the ex-dividend date. Average cost is the basis followed in
determining the cost of investments sold for financial statement purposes.
FEDERAL INCOME TAXES
The Company is taxed under federal law as a life insurance company under the
provisions of the 1986 Internal Revenue Code, as amended. The Account is a part
of the Company's total operations and is not taxed separately. Under existing
law, no taxes are payable on investment income or realized capital gains of the
Account credited to the policies. Accordingly, the Company does not intend to
make any charge to the Account for company income taxes. If such taxes are
incurred by the Company in the future, a charge to the Account may be assessed.
5
<PAGE> 58
4. POLICY CHARGES
The following charges are deducted by the Company from the Account's net assets
attributed to each policy:
Premium Expense Charge: Premiums are reduced by a charge equal to
2.25% of each premium to compensate the Company for expenses
associated with state premium taxes of the policy.
Policy Account Value Charges: The policy account value will be
reduced by a monthly deduction equal to the sum of the cost of
insurance charge, the cost of any optional insurance benefits added by
a rider and a monthly administrative charge equal to $27 per month for
the first policy year and $8 each month thereafter. The cost of
insurance will vary based upon a number of factors including the face
amount of the policy, issue age, attained age and rate class of the
insured.
Surrender Charges: A surrender charge will be assessed at 30% of
premiums received up to target premium, as defined in the prospectus,
for years 1-7 decreasing to 10% per year until reaching zero in year
10.
Partial Surrender Charges: During the surrender charge period for the
policy, there will be a charge for a partial surrender equal to 8% of
the amount withdrawn or $25, whichever is greater.
Mortality and Expense Charge: A charge not to exceed an annual rate
of .90% for years 1-15, decreasing .05% per year for years 16 and
thereafter until the annual rate reaches .45%, of the average daily
net asset value of the Account applicable to policies issued when each
rate was in effect. These charges are deducted by the Company in
return for its assumption of expenses arising from adverse mortality
experience and excess administrative expenses in connection with the
policies issued.
5. PURCHASES AND SALES
The following table shows the cost of purchases and proceeds from sales for the
period December 1, 1995 (inception) to December 31, 1995 for the sub-accounts.
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
<S> <C> <C>
The Alger American Mid Cap Growth Portfolio $ 17 ---
Calvert Responsibly Invested Money Market 2,673 $2,673
Calvert Responsibly Invested Strategic Growth 17 ---
Dreyfus Stock Index Fund 1,810 ---
Neuberger & Berman Growth Portfolio 17 ---
Strong International Stock Fund II 23 ---
Strong Discovery Fund II 11 ---
Van Eck Gold 915 ---
</TABLE>
6
<PAGE> 59
ACACIA NATIONAL LIFE INSURANCE COMPANY
------
AUDITED FINANCIAL STATEMENTS
as of December 31, 1995 and 1994
AND
REPORT THEREON
------
<PAGE> 60
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Acacia National Life Insurance Company
We have audited the accompanying statements of financial condition of Acacia
National Life Insurance Company as of December 31, 1995 and 1994, and the
related statements of operations and changes in surplus, and cash flows for the
years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acacia National Life Insurance
Company as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with accounting practices
prescribed or permitted by the Insurance Department of the Commonwealth of
Virginia, which are considered generally accepted accounting principles for
wholly-owned subsidiaries of mutual life insurance companies.
/s/ Coopers & Lybrand L.L.P.
Washington, D.C.
February 14, 1996
<PAGE> 61
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Debt securities $ 484,895 $ 455,445
Equity securities 2,272 1,252
Policy loans 6,701 6,340
Cash and cash equivalents 19,987 25,329
Accrued investment income 8,558 8,206
Other assets 1,151 2,653
--------- ---------
TOTAL ASSETS $ 523,564 $ 499,225
========= =========
LIABILITIES
Insurance and annuity reserves $ 447,081 $ 418,474
Deposit administration contracts and other
deposit reserves 24,683 27,659
Other policyowner funds 14,405 11,166
Policy claims 880 1,980
Interest maintenance reserve 2,213 2,114
Asset valuation reserve 4,645 3,998
Other liabilities 2,882 8,791
--------- ---------
TOTAL LIABILITIES 496,789 474,182
STOCKHOLDER'S EQUITY
Common stock, 1995 and 1994 par value of $105 and $100
respectively; 15,000 authorized, issued and outstanding 1,575 1,500
Additional paid-in capital 8,425 8,500
Surplus 16,775 15,043
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 26,775 25,043
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 523,564 $ 499,225
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE> 62
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN SURPLUS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
INCOME
Premiums and annuity considerations $ 41,281 $ 35,899
Net investment income 40,888 37,536
Supplementary contracts 9,388 5,583
Other fund deposits 4,172 4,345
--------- ---------
95,729 83,363
BENEFITS AND EXPENSES
Benefits for policyholders and beneficiaries:
Benefit payments and withdrawals 53,831 33,243
Increase in insurance and annuity reserves 31,851 33,404
(Decrease) increase in deposit administration funds (2,977) 3,862
--------- ---------
82,705 70,509
Commissions to managing directors
and account managers 2,045 2,035
Operating expenses allocated
from Acacia Mutual 7,223 7,427
Other operating expenses and taxes 915 611
--------- ---------
92,888 80,582
--------- ---------
NET GAIN FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES AND REALIZED CAPITAL GAINS 2,841 2,781
Federal income tax benefit 53 297
--------- ---------
NET GAIN FROM OPERATIONS BEFORE
REALIZED CAPITAL LOSSES 2,894 3,078
REALIZED CAPITAL LOSSES
Net realized capital losses (418) (1,350)
Capital (losses) gains taxes (228) 159
Transferred to interest maintenance reserve (433) (207)
--------- ---------
NET REALIZED CAPITAL LOSSES (1,079) (1,398)
--------- ---------
NET INCOME 1,815 1,680
Surplus, beginning of year 15,043 14,041
Increase in asset valuation reserve (647) (1,596)
Increase in net unrealized capital gains 564 918
--------- ---------
SURPLUS, END OF YEAR $ 16,775 $ 15,043
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 63
ACACIA NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Premiums and annuity considerations $ 41,430 $ 35,899
Other premiums considerations and deposits 9,388 5,583
Net investment income received 39,845 36,883
Annuity and other fund deposits 4,161 4,317
Benefits paid to policyholders (50,714) (29,693)
Commissions and other expenses paid (9,975) (10,219)
Surrender benefits and other fund withdrawals paid (1,551) (2,334)
Federal and state income tax paid (recovered) (9) 1,688
Net change in policy loans and premium notes (361) (111)
Other cash (used) provided (8,220) 2,778
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,994 44,791
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds 44,150 47,326
Stocks and other 1,569 300
Cost of investments acquired:
Bonds (72,499) (76,244)
Stocks (2,556) (1,561)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (29,336) (30,179)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,342) 14,612
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,329 10,717
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,987 $ 25,329
========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 64
ACACIA NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Acacia National Life Insurance Company (the Company), a wholly-owned subsidiary
of Acacia Mutual Life Insurance Company (Acacia Mutual), underwrites and
markets deferred and immediate annuities and life insurance products within the
United States. On December 1, 1995 operations began for the Acacia National
Variable Life Insurance Separate Account I which is a separate investment
account within the Company. Acacia Mutual and its wholly-owned subsidiaries
are collectively known as The Acacia Group (the Group). Other members of the
Group include Acacia Financial Corporation and its subsidiaries, Acacia Federal
Savings Bank, Calvert Group, Ltd. and The Advisors Group, Inc.
The Company, domiciled in Virginia, prepares its statutory financial statements
in accordance with accounting practices prescribed or permitted by the Virginia
State Insurance Department. Prescribed statutory accounting practices include
a variety of publications of the National Association of Insurance
Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Statutory accounting practices are regarded as generally accepted accounting
principles (GAAP) for mutual life insurance companies and their subsidiaries.
The Financial Accounting Standards Board (FASB) has indicated that the
financial statements of mutual life insurance companies and their stock life
insurance company subsidiaries financial statements prepared on the basis of
statutory accounting principles will no longer be considered to be in
conformity with GAAP for fiscal years ended after 1995. The effects of the
changes from existing statutory practices required upon adoption of GAAP have
not been determined at this time.
The Board of Directors amended the Articles of Incorporation of the Company
effective August 1, 1995 to increase the par value of each share of the
company's common stock from $100 to $105. The impact of this change increased
total common stock $75 thousand with a corresponding decrease to additional
paid-in capital.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5
<PAGE> 65
VALUATION OF ASSETS
Debt and equity securities are valued in accordance with rules prescribed by
the NAIC. Debt securities are generally stated at amortized cost, preferred
stocks at cost and common stocks at market value. Mortgage loans and policy
loans are recorded at their unpaid balance. Discount or premium on debt
securities is amortized using the interest method. Unrealized capital gains
and losses are reflected directly in surplus and are not included in net
income. Realized gains and losses are determined on a first-in, first-out
basis and are presented in the statements of operations, net of taxes and
excluding amounts transferred to the Interest Maintenance Reserve.
As prescribed by the NAIC, the Company maintains an Asset Valuation Reserve
(AVR). The purpose of the AVR is to stabilize surplus against fluctuations in
the value of stocks and declines in the value of bonds, mortgage loans and
other invested assets. Changes to the AVR are charged or credited directly to
surplus.
As also prescribed by the NAIC, the Company maintains an Interest Maintenance
Reserve, which represents the net accumulated unamortized realized capital
gains and losses attributable to changes in the general level of interest rates
on sales of fixed income investments, principally bonds and mortgage loans.
Such gains or losses are amortized into income using schedules prescribed by
the NAIC over the remaining period to expected maturity of the individual
securities sold.
CASH EQUIVALENTS
The Company considers overnight repurchase agreements, money market funds and
short-term investments with original maturities of less than three months at
the time of acquisition to be cash equivalents. Cash equivalents are carried
at cost.
POLICY RESERVES
Life policy reserves are computed by using the Commissioners Reserve Valuation
Method and the Commissioners Standard Ordinary Mortality table. Annuity
reserves are calculated using the Commissioners Annuity Reserve Valuation
Method and the maximum valuation interest rate; for annuities with life
contingencies, the prescribed valuation mortality table is used.
Policy claims in process of settlement include provision for reported claims
and claims incurred but not reported.
PREMIUMS AND RELATED EXPENSE
Premiums are recognized as income over the premium paying period of the
policies. Annuity considerations and fund deposits are included in revenue as
received. Commissions and other policy acquisition costs are expensed as
incurred.
6
<PAGE> 66
REINSURANCE
The Company cedes reinsurance to provide for greater diversification of
business, additional capacity for growth as well as a way for management to
control exposure to potential losses arising from large risks. A significant
portion of reinsurance is ceded to Acacia Mutual.
FEDERAL INCOME TAXES
The Company files a consolidated tax return with the Group. Under statutory
accounting practices, no provision is made for deferred federal income taxes
related to temporary differences between financial reporting and taxable
income. Such temporary differences arise primarily from Internal Revenue Code
requirements regarding the capitalization and amortization of deferred policy
acquisition costs, calculation of life insurance reserves and recognition of
realized gains or losses on bond sales.
RECLASSIFICATIONS
Certain reclassifications of 1994 amounts were made to conform with the 1995
financial statement presentation.
2. INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities $484,895 $525,694 $455,445 $446,148
Equity securities 2,272 2,573 1,252 1,296
Mortgage loans 47 45 107 99
Cash and cash equivalents 19,987 19,987 25,329 25,329
FINANCIAL LIABILITIES:
Investment-type insurance
contracts $381,515 $408,583 $358,536 $324,838
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
7
<PAGE> 67
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks and mortgage backed securities) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded and for private placements, fair values are estimated using values
obtained from independent pricing services. The fair values for equity
securities are based on quoted market prices.
CASH AND CASH EQUIVALENTS: The statement values reported in the Statements of
Financial Condition for these instruments approximate their fair values.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued. The statement values for supplementary contracts without life
contingencies approximate their fair values.
INVESTMENTS
The statement values and estimated fair values of the Company's investments in
debt securities are as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS) GROSS GROSS
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1995
- --------------------
U.S. government and agencies $ 78,649 $10,904 $ --- $ 89,553
Other government 3,300 20 --- 3,320
Mortgaged backed securities 129,879 4,857 (312) 134,424
Corporate 273,067 26,113 (783) 298,397
-------- ------- -------- --------
$484,895 $41,894 $(1,095) $525,694
======== ======= ======== ========
AT DECEMBER 31, 1994
- --------------------
U.S. government and agencies $ 75,629 $4,859 $ (2,829) $ 77,659
Other government 1,300 --- (96) 1,204
Mortgaged backed securities 136,650 668 (7,402) 129,916
Corporate 241,866 3,450 (7,947) 237,369
--------- ------ --------- --------
$ 455,445 $8,977 $(18,274) $446,148
========= ====== ========= ========
</TABLE>
8
<PAGE> 68
The amortized cost and estimated fair value of debt securities, by contractual
maturity at December 31, 1995 are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
($ IN THOUSANDS)
STATEMENT FAIR
VALUE VALUE
-------- -------
<S> <C> <C>
Maturities in 1996 $ 6,381 $ 6,499
In 1997 to 2000 99,480 109,484
In 2001 to 2005 158,542 171,929
After 2005 90,613 103,358
Mortgaged-backed securities 129,879 134,424
--------- ---------
$ 484,895 $ 525,694
========= =========
</TABLE>
Proceeds from dispositions of investments in debt securities during 1995 were
$44.2 million; gross gains of $770 thousand and gross losses of $1.2 million
were realized on those sales. Proceeds from the sales of investments in debt
securities during 1994 were $47.3 million; gross gains of $208 thousand and
gross losses of $1.5 million were realized on those sales.
Investment income is net of expenses of $969 thousand in 1995 and $901 thousand
in 1994.
INVESTMENT PORTFOLIO CREDIT RISK
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1995 and 1994, approximately $5.7
million and $13.6 million, respectively, in debt security investments (1.2% and
2.9%, respectively, of the total debt security portfolio) are considered "below
investment grade." Securities are classified as "below investment grade" by
utilizing rating criteria established by the NAIC.
4. REINSURANCE
The Company reinsures all life insurance risks over its retention limit of $10
thousand per policy under yearly renewable term insurance agreements with
Acacia Mutual and several other non-affiliated companies. The Company remains
obligated for amounts ceded in the event that reinsurers do not meet their
obligations. Reinsurance premiums are recorded as a reduction of premium
income. Commission and expense allowances are recorded as an increase in
income. Benefits are reported net of amounts received from reinsurers.
9
<PAGE> 69
Premiums and benefits have been reduced by amounts reinsured as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
1995 1994
-------- --------
<S> <C> <C>
Premiums ceded:
Acacia Mutual $3,488 $4,585
Others 535 486
------ ------
Total premium ceded $4,023 $5,071
====== ======
Death benefits reimbursed:
Acacia Mutual $2,018 $1,846
Other 2,213 378
------ ------
Total benefits reimbursed $4,231 $2,224
====== ======
Amounts recoverable on paid and unpaid losses:
Acacia Mutual $358 $567
Other 377 355
---- ----
Total amounts recoverable on paid
and unpaid losses $735 $922
==== ====
Policy reserves $3,486 $3,347
====== ======
</TABLE>
5. ANNUITY RESERVES AND DEPOSIT LIABILITIES
Annuity reserves and deposit liabilities withdrawal characteristics as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
($ IN THOUSANDS)
PERCENT
AMOUNT OF TOTAL
---------- ---------
<S> <C> <C>
Subject to discretionary withdrawal with adjust-
ment, at book value less surrender charge $202,015 50%
Subject to discretionary withdrawal without adjust-
ment, at book value (minimal or no charge) 193,905 48%
Not subject to discretionary withdrawal provision 8,837 2%
-------- ----
Total annuity actuarial reserves and deposit
fund liabilities $404,757 100%
======== ====
</TABLE>
10
<PAGE> 70
6. FEDERAL INCOME TAXES
Under a tax sharing agreement between the Company and other members of the
Group, Acacia Mutual reimburses or receives from the Company an amount
representing the taxes that would have been paid or refunded had the Company
filed a separate income tax return.
The statute of limitations has expired with respect to all tax years prior to
1992. There were no proposed adjustments from any examinations. In the
opinion of management adequate provision has been made for any additional taxes
which may become due with respect to open years.
Under the statutes in effect before the Deficit Reduction Act of 1984, a
portion of "net income" was not subject to current income taxation for stock
life insurance companies, but was accumulated for tax purposes in a memorandum
tax account. The 1984 Act prohibited any additions to the memorandum tax
account after 1983. The balance in this account for the Company was $6.6
million at December 31, 1995 and 1994. In the event that either cash
distributions from the Company to Acacia Mutual or the balance in the
memorandum tax account exceeds certain stated minimums, such amounts
distributed would become subject to federal income taxes at rates then in
effect.
7. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into an agreement whereby Acacia Mutual provides such
services and facilities as are necessary for the operation of the Company. Net
amounts payable to Acacia Mutual at December 31, 1995 and 1994 are $647
thousand and $6.0 million, respectively.
8. CONTINGENCIES
LITIGATION AND UNASSERTED CLAIMS
The Company is involved in various lawsuits that have arisen in the ordinary
course of business. Management believes that its defenses are meritorious and
the eventual outcome of these lawsuits will not have a material effect on the
Company's financial position.
The Company is also subject to insurance guaranty laws in the states in which
it does business. Periodically, the Company is assessed by various state
guaranty funds as part of those funds' activities to collect funds from solvent
insurance companies to cover certain losses to policyholders that resulted from
the insolvency or rehabilitation of other insurance companies. The Company has
established an estimated liability for guaranty fund assessments for those
insolvencies or rehabilitations that have actually occurred prior to that date.
Because of the many uncertainties regarding the amounts that will be assessed
against the Company, the ultimate assessments may vary from the estimated
liability included in the accompanying financial statements.
11
<PAGE> 71
Assessments accrued, net of expected premium tax effects, at December 31, 1995
and 1994 were $805 thousand and $625 thousand, respectively.
DIVIDEND RESTRICTIONS
Statutory requirements place limitations on the maximum amount of annual
dividends and other distributions which can be remitted by the Company to its
shareholder without prior approval of the appropriate state insurance
commissioner. The Company has total shareholder equity of $26.8 million at
December 31, 1995, of which approximately $2.7 million is available for payment
of dividends in 1996.
9. SUBSEQUENT EVENT
On December 20, 1995, the Company entered into an agreement with the insurance
commissioner of the Commonwealth of Pennsylvania and the National Organization
of Life and Health Insurance Guaranty Associations (NOLGHA) to assume certain
assets and liabilities relating to annuities previously underwritten by the
National American Life Insurance Company (NALICO), which is in rehabilitation.
Under the agreement, the Company will assume approximately $130.0 million of
liabilities, which principally consists of deferred annuities similar to the
Company's products. The Company will receive from NALICO approximately $110.0
million in assets, consisting principally of investment grade bonds and
short-term investments. Approximately $15.0 million in cash and promissory
notes will be contributed by NOLGHA, subject to final settlement and regulatory
approvals. The actual contribution from NOLGHA is contingent on a subsequent
valuation of the assets received from NALICO. This transaction is expected to
close during 1996. No amounts have been reflected in the Company's financial
statements to reflect this agreement.
12
<PAGE> 72
APPENDIX A - ILLUSTRATIONS
The following tables indicate how the account values and death
benefits vary with the investment experience of the Funds and differences
between the guaranteed and current costs of the Policy. The tables show how
the account values and death benefits of a Policy, issued to an Insured of a
certain age with regular annual premiums, differ over time if the investment
return on the assets of each Portfolio were a uniform, after-tax annual rate of
0%, 8% and 12%. The tables beginning on page A-2 illustrate a Policy issued
to a male, age 35, under a standard non-smoker rate class. The account values
and death benefits would be different from those shown if the gross annual
investment rates of return averaged 0%, 8% and 12% over a period of years but
fluctuated above and below those averages for individual Policy years. The
values also assume that no loans or partial surrenders are made by the Owner.
The second column of tables shows the accumulated value of
premiums paid at the stated 4.5% interest rate compounded annually after taxes.
The columns headed Guaranteed reflect that throughout the life of the Policy
the monthly charge for the cost of insurance is based on the maximum level
permitted under the Policy, a Premium expense charge of 2.25%, a monthly
administrative charge of $27 for the first Policy year and $8 each month
thereafter, and a daily charge for mortality and expense risks equal to an
annual rate of .90%. The columns headed Current assume that, throughout the
life of the Policy, the monthly cost of insurance is based on the current cost
of insurance rate, a Premium expense charge of 2.25%, a monthly administrative
charge of $27 for the first Policy year and $8 each month thereafter and a
daily charge for mortality and expense risks equal to an annual rate of .90%
for the first fifteen years. This charge is then reduced by .05% each year
until it reaches .45% in the 25th year and thereafter.
The amounts shown in the tables for account values and death
benefits reflect that the net investment return of the Portfolios is lower than
the gross return listed due to investment advisory and other fees of the Funds.
The Policy values reflect a daily maximum investment advisory fee and expenses
at an annual rate of .90% which represents an average charge for all the
Portfolios. After a deduction of these amounts, the illustrated gross
investment rates of 0%, 8%, and 12% correspond to approximate net annual rates
of -1.80%, 6.20% and 10.20% respectively.
The hypothetical values shown in the tables do not reflect any
charges for federal income taxes against the Variable Account, since ANLIC is
not currently making such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return would
have to exceed 0%, 8% and 12% by an amount to cover the tax charges to produce
the death benefits and account values illustrated (See Federal Tax
Considerations).
The tables illustrate the Policy values that would result based
upon hypothetical investment rates and premium payment schedules, if all net
premiums are allocated to the Variable Account and if no Policy loans, partial
surrenders or changes in benefits are applied for. Upon request, ANLIC will
provide a comparable illustration based upon the Insured's age, sex, rate
class, face amount or premium schedule requested, and additional benefits. For
unisex policies, ANLIC will supply such illustrations without regard to the
Insured's sex. ANLIC reserves the right to charge a fee not to exceed $25 for
this service.
<PAGE> 73
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NONSMOKER Opt A Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
0.00% Hypothetical Gross Annual Rate of Return
----------------------------------------------------------------------
Current Charges Guaranteed Charges
----------------------- ---------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @ 4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,026 475 250,000 1,026 475 250,000
2 36 3,927 2,240 1,689 250,000 2,227 1,676 250,000
3 37 6,024 3,402 2,851 250,000 3,378 2,827 250,000
4 38 8,215 4,513 3,962 250,000 4,477 3,926 250,000
5 39 10,505 5,572 5,021 250,000 5,522 4,971 250,000
6 40 12,898 6,572 6,021 250,000 6,509 5,958 250,000
7 41 15,398 7,512 6,960 250,000 7,435 6,884 250,000
8 42 18,011 8,392 8,024 250,000 8,300 7,933 250,000
9 43 20,742 9,207 9,024 250,000 9,101 8,917 250,000
10 44 23,596 9,957 9,957 250,000 9,833 9,833 250,000
11 45 26,578 10,635 10,635 250,000 10,492 10,492 250,000
12 46 29,694 11,236 11,236 250,000 11,074 11,074 250,000
13 47 32,950 11,760 11,760 250,000 11,577 11,577 250,000
14 48 36,353 12,200 12,200 250,000 11,994 11,994 250,000
15 49 39,909 12,552 12,552 250,000 12,321 12,321 250,000
16 50 43,625 12,812 12,812 250,000 12,554 12,554 250,000
17 51 47,509 12,967 12,967 250,000 12,680 12,680 250,000
18 52 51,567 13,004 13,004 250,000 12,686 12,686 250,000
19 53 55,807 12,907 12,907 250,000 12,553 12,553 250,000
20 54 60,239 12,662 12,662 250,000 12,266 12,266 250,000
25 59 85,574 8,599 8,599 250,000 7,920 7,920 250,000
30 64 117,145 0 0 0 0 0 0
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 0% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 74
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NON-SMOKER Opt B Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
0.00% Hypothetical Gross Annual Rate of Return
-----------------------------------------------------------------------
Current Charges Guaranteed Charges
----------------------- ----------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @ 4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,024 472 251,024 1,024 472 251,024
2 36 3,927 2,233 1,682 252,233 2,220 1,669 252,221
3 37 6,024 3,389 2,838 253,389 3,364 2,813 253,364
4 38 8,215 4,490 3,938 254,490 4,453 3,902 254,454
5 39 10,505 5,537 4,986 255,537 5,486 4,935 255,487
6 40 12,898 6,521 5,970 256,521 6,457 5,906 256,457
7 41 15,398 7,442 6,891 257,442 7,364 6,813 257,365
8 42 18,011 8,300 7,933 258,300 8,206 7,839 258,207
9 43 20,742 9,090 8,906 259,090 8,981 8,797 258,981
10 44 23,596 9,809 9,809 259,809 9,683 9,683 259,683
11 45 26,578 10,453 10,453 260,453 10,307 10,307 260,307
12 46 29,694 11,015 11,015 261,015 10,850 10,850 260,850
13 47 32,950 11,495 11,495 261,495 11,308 11,308 261,308
14 48 36,353 11,886 11,886 261,886 11,676 11,676 261,676
15 49 39,909 12,183 12,183 262,183 11,948 11,948 261,948
16 50 43,625 12,383 12,383 262,383 12,120 12,120 262,120
17 51 47,509 12,471 12,471 262,471 12,179 12,179 262,179
18 52 51,567 12,435 12,435 262,435 12,111 12,111 262,111
19 53 55,807 12,257 12,257 262,257 11,897 11,897 262,897
20 54 60,239 11,924 11,924 261,924 11,523 11,523 261,523
25 59 85,574 7,358 7,358 257,358 6,685 6,685 256,685
30 64 117,145 0 0 0 0 0 0
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 0% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 75
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NON-SMOKER Opt A Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
8.00% Hypothetical Gross Annual Rate of Return
----------------------------------------------------------------------
Current Charges Guaranteed Charges
----------------------- ---------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,138 587 250,000 1,138 587 250,000
2 36 3,927 2,562 2,010 250,000 2,549 1,998 250,000
3 37 6,024 4,043 3,492 250,000 4,017 3,466 250,000
4 38 8,215 5,585 5,033 250,000 5,544 4,993 250,000
5 39 10,505 7,189 6,638 250,000 7,131 6,580 250,000
6 40 12,898 8,853 8,301 250,000 8,776 8,225 250,000
7 41 15,398 10,575 10,024 250,000 10,479 9,928 250,000
8 42 18,011 12,363 11,995 250,000 12,243 11,876 250,000
9 43 20,742 14,212 14,028 250,000 14,068 13,884 250,000
10 44 23,596 16,125 16,125 250,000 15,953 15,953 250,000
11 45 26,578 18,100 18,100 250,000 17,895 17,895 250,000
12 46 29,694 20,134 20,134 250,000 19,895 19,895 250,000
13 47 32,950 22,231 22,231 250,000 21,953 21,953 250,000
14 48 36,353 24,388 24,388 250,000 24,067 24,067 250,000
15 49 39,909 26,605 26,605 250,000 26,235 26,235 250,000
16 50 43,625 28,889 28,889 250,000 28,464 28,464 250,000
17 51 47,509 31,234 31,234 250,000 30,749 30,749 250,000
18 52 51,567 33,635 33,635 250,000 33,083 33,083 250,000
19 53 55,807 36,083 36,083 250,000 35,456 35,456 250,000
20 54 60,239 38,574 38,574 250,000 37,860 37,860 250,000
25 59 85,574 51,376 51,376 250,000 50,047 50,047 250,000
30 64 117,145 62,824 62,824 250,000 60,372 60,372 250,000
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 8% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 76
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NON-SMOKER Opt B Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
8.00% Hypothetical Gross Annual Rate of Return
---------------------------------------------------------------------
Current Charges Guaranteed Charges
----------------------- ---------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @ 4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,135 584 251,135 1,135 584 251,135
2 36 3,927 2,554 2,003 252,554 2,541 1,990 252,541
3 37 6,024 4,027 3,476 254,027 4,000 3,449 254,000
4 38 8,215 5,555 5,004 255.555 5,514 4,963 255,514
5 39 10,505 7,142 6,591 257,142 7,083 6,532 257,083
6 40 12,898 8,781 8,230 258,781 8,703 8,152 258,703
7 41 15,398 10,472 9,921 260,472 10,374 9,823 260,374
8 42 18,011 12,219 11,852 262,219 12,097 11,730 262,097
9 43 20,742 14,017 13,833 264,017 13,870 13,686 263,870
10 44 23,596 15,867 15,867 265,867 15,690 15,690 265,690
11 45 26,578 17,764 17,764 267,764 17,553 17,553 267,553
12 46 29,694 19,703 19,703 269,703 19,457 19,457 269,457
13 47 32,950 21,684 21,684 271,684 21,398 21,398 271,398
14 48 36,353 23,703 23,703 273,703 23,371 23,371 273,371
15 49 39,909 25,753 25,753 275,753 25,370 25,370 275,370
16 50 43,625 27,837 27,837 277,837 27,397 27,397 277,397
17 51 47,509 29,944 29,944 279,944 29,441 29,441 279,441
18 52 51,567 32,059 32,059 282,059 31,486 31,486 281,486
19 53 55,807 34,166 34,166 284,166 33,514 33,514 283,514
20 54 60,239 36,250 36,250 286,250 35,508 35,508 285,508
25 59 85,574 45,588 45,588 295,588 44,210 44,210 294,210
30 64 117,145 49,451 49,451 299,451 46,970 46,970 296,970
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 8% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 77
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NONSMOKER Opt A Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
12.00% Hypothetical Gross Annual Rate of Return
----------------------------------------------------------------------
Current Charges Guaranteed Charges
----------------------- ---------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @ 4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,194 643 250,000 1,194 643 250,000
2 36 3,927 2,730 2,178 250,000 2,716 2,165 250,000
3 37 6,024 4,391 3,840 250,000 4,364 3,812 250,000
4 38 8,215 6,189 5,638 250,000 6,146 5,595 250,000
5 39 10,505 8,139 7,588 250,000 8,076 7,525 250,000
6 40 12,898 10,246 9,694 250,000 10,161 9,610 250,000
7 41 15,398 12,524 11,973 250,000 12,416 11,865 250,000
8 42 18,011 14,992 14,625 250,000 14,855 14,488 250,000
9 43 20,742 17,664 17,480 250,000 17,497 17,313 250,000
10 44 23,596 20,558 20,558 250,000 20,354 20,354 250,000
11 45 26,578 23,693 23,693 250,000 23,447 23,447 250,000
12 46 29,694 27,089 27,089 250,000 26,795 26,795 250,000
13 47 32,950 30,770 30,770 250,000 30,423 30,423 250,000
14 48 36,353 34,765 34,765 250,000 34,355 34,355 250,000
15 49 39,909 39,100 39,100 250,000 38,620 38,620 250,000
16 50 43,625 43,824 43,824 250,000 43,265 43,265 250,000
17 51 47,509 48,974 48,974 250,000 48,326 48,326 250,000
18 52 51,567 54,592 54,592 250,000 53,843 53,843 250,000
19 53 55,807 60,726 60,726 250,000 59,860 59,860 250,000
20 54 60,239 67,432 67,432 250,000 66,432 66,432 250,000
25 59 85,574 112,214 112,214 250,000 110,223 110,223 250,000
30 64 117,145 185,708 185,708 250,000 181,867 181,867 250,000
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 78
ACACIA NATIONAL LIFE
ALLOCATOR 2000 FLEXIBLE PREMIUM VARIABLE LIFE
Prepared for: John Doe Annual Premium: $1,838.00
Male Age 35 NON-SMOKER Opt B Face amount: 250,000
Riders: NONE
<TABLE>
<CAPTION>
12.00% Hypothetical Gross Annual Rate of Return
----------------------------------------------------------------------
Current Charges Guaranteed Charges
---------------------- ---------------------
End Premiums
of Accumul. Account Surrender Death (1) Account Surrender Death (1)
Year Age @4.5% Ann. Value Value Benefit (2) Value Value Benefit (2)
---- --- ----------- -------- --------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 35 1,920 1,191 640 251,191 1,191 640 251,191
2 36 3,927 2,721 2,170 252,721 2,708 2,157 252,708
3 37 6,024 4,373 3,822 254,373 4,345 3,794 254,346
4 38 8,215 6,157 5,605 256,157 6,113 5,562 256,113
5 39 10,505 8,084 7,533 258,084 8,021 7,470 258,021
6 40 12,898 10,161 9,610 260,161 10,075 9,524 260,075
7 41 15,398 12,399 11,847 262,399 12,288 11,737 262,289
8 42 18,011 14,183 14,445 263,813 14,673 14,306 264,674
9 43 20,742 17,414 17,231 267,414 17,243 17,059 267,243
10 44 23,596 20,219 20,219 270,219 20,009 20,009 270,009
11 45 26,578 23,239 23,239 273,239 22,984 22,984 272,984
12 46 29,694 26,488 26,488 276,488 26,184 26,184 276,184
13 47 32,950 29,986 29,986 279,986 29,626 29,626 279,626
14 48 36,353 33,752 33,752 283,752 33,326 33,326 283,326
15 49 39,909 37,803 37,803 287,803 37,303 37,303 287,303
16 50 43,625 42,174 42,174 292,174 41,590 41,590 291,590
17 51 47,509 46,887 46,887 296,887 46,207 46,207 296,207
18 52 51,567 51,961 51,961 301,961 51,172 51,172 301,172
19 53 55,807 57,421 57,421 307,421 56,507 56,507 306,507
20 54 60,239 63,291 63,291 313,219 62,234 62,234 312,234
25 59 85,574 99,889 99,889 349,889 97,752 97,752 347,752
30 64 117,145 150,469 150,469 400,469 146,299 146,299 396,299
</TABLE>
(1.) Assumes a $1,838 premium is paid at the beginning of each Policy Year.
Values would be different if premiums are paid with different frequency
or in different amounts.
(2.) Assumes you take no policy loans or partial surrenders. Excessive loans
may cause the Policy to lapse.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN
MAY BE MORE OR LESS THAN THOSE SHOWN AND DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY AN OWNER AND THE DIFFERENT INVESTMENT
RATE OF RETURN FOR THE FUND PORTFOLIOS. THE DEATH BENEFIT AND ACCOUNT VALUE
FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATE
OF RETURN AVERAGED 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW
THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY
ANLIC OR THE FUNDS THAT THIS HYPOTHETICAL INVESTMENT RATE OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR OVER A PERIOD OF TIME.
<PAGE> 79
APPENDIX B --
AUTOMATIC REBALANCING AND DOLLAR COST AVERAGING PROGRAMS
To assist the Owner in making a premium allocation decision among
Sub-accounts, ANLIC offers automatic transfer programs. These programs are
designed to meet individual needs of the Owner and are not guaranteed to
improve performance of the Policy.
The Owner may elect the Automatic Rebalancing Program which will
adjust values in the Sub-accounts to align with a specific percentage of total
value in the Variable Account. By placing a written allocation election form
on file with ANLIC, the Owner may have amounts automatically transferred from
the Sub-accounts on either a quarterly, semi-annual or annual basis.
The Owner chooses the percentages to be used under the Automatic
Rebalancing Program. To assist the Owner, TAG representatives offer a service
created by Ibbotson Associates to match the Owner's risk tolerance and
investment objectives with a model Sub-account percentage allocation formula.
To use this service, the Owner first completes a questionnaire about risk
tolerance and Policy performance objectives. The TAG representative uses the
completed responses to match the Owner's needs to one of ten different model
percentage allocation formulas designed by Ibbotson. The Owner may then elect
to follow the recommended percentage allocation formula, or select a different
formula.
Ibbotson Associates provides a valuable service to an Owner who
seeks to follow the science of asset allocation. Some research studies have
shown that the asset allocation decision is the single largest determinant of
Portfolio performance. Asset allocation combines the concepts of
asset-liability management, mean-variance optimization, simulation and economic
forecasting. Its objectives are to match asset classes and strategies to
achieve better returns, to reduce volatility and to attain specific goals such
as avoidance of interest rate or market risk.
As an alternative, ANLIC also offers the Owner the option to
elect the Dollar Cost Averaging Program. Dollar cost averaging is a long term
investment method that uses periodic premium allocations from the CRI Money
Market Sub-account to other Sub-accounts. Under the theory of dollar cost
averaging, the Owner may pursue a strategy of regular and systematic purchases
to take advantage of market value fluctuations. More Sub-account accumulation
units will be purchased when Sub-account unit values are low and fewer units
will be purchased when unit values are high. There is no guarantee that the
Dollar Cost Averaging Program will protect against market loss or improve
performance of the Policy.
The Dollar Cost Averaging Program provides a valuable service to
an Owner who is able to sustain a long term transfer schedule and who seeks to
avoid the volatility often associated with equity investments.
