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Description of Issuance, Transfer and Redemption Procedures for Policies
Offered by the Group VEL Account of First Allmerica Financial Life
Insurance Company
Pursuant to Rule 6e-3(T)(b)(12)(ii)
Under the Investment Company Act of 1940
The Group VEL Account of First Allmerica Financial Life Insurance Company
("Company") is registered under the Investment Company Act of 1940 ("1940 Act")
as a unit investment trust. Within the Group VEL Account are 55 Sub-Accounts.
Procedures apply equally to each Sub-Account and for purposes of this
description are defined in terms of the Group VEL Account, except where a
discussion of both the Group VEL Account and the individual Sub-Accounts is
necessary. Each Sub-Account invests in shares of a corresponding investment
division of the Allmerica Investment Trust ("Trust"), Fidelity Variable
Insurance Products Fund ("VIPF"), Fidelity Variable Insurance Products Fund II
("VIPF II"), T. Rowe Price International Series, Inc., Delaware Group Premium
Fund, Inc. ("DGPF"), AIM Variable Insurance Funds ("AIM"), The Alger American
Fund Portfolios ("Alger"), Alliance Variable Products Series Fund, Inc.
("Alliance"), or Franklin Templeton Insurance Products Trust ("Franklin"), each
of which is a "series" type of mutual fund registered under the 1940 Act
(collectively, "Underlying Funds"). The investment experience of a Sub-Account
of the Group VEL Account depends on the market performance of its corresponding
investment division of the Underlying Funds. Although flexible premium variable
life insurance policies funded through the Group VEL Account may also provide
for fixed benefits supported by the Company's General Account, this description
assumes that net premiums are allocated exclusively to the Group VEL Account and
that all transactions involve only the Sub-Accounts of the Group VEL Account,
except as otherwise explicitly stated herein.
I. "PUBLIC OFFERING PRICE": PURCHASE AND RELATED TRANSACTIONS --
SECTION 22(d) AND RULE 22c-1
This section outlines Policy provisions and administrative procedures
which might be deemed to constitute, either directly or indirectly, a
"purchase" transaction. Because of the insurance nature of the
policies, the procedures involved necessarily differ in certain
significant respects from the purchase procedures for mutual funds and
annuity plans. The chief differences revolve around the structure of
the cost of insurance charges and the insurance underwriting process.
Certain Policy provisions, such as reinstatement and loan repayment, do
not result in the issuance of a Policy but require certain payments by
the Policy Owner and involve a transfer of assets supporting Policy
reserve into the Group VEL Account.
a. INSURANCE CHARGES AND UNDERWRITING STANDARDS
Premium payments are not limited as to frequency and number,
but there are limitations as to amount. No premium payment may
be less than $100 without the Company's consent, and the total
of all premiums paid can never exceed the then current maximum
premiums determined by Internal Revenue Service rules. If at
any time a premium is paid which would result in total
premiums exceeding the current maximum premium limitations,
the Company will return the amount in excess of such maximums
to the Policy Owner.
The Policy will remain in force so long as the Policy value
less any outstanding debt is sufficient to pay certain monthly
charges in connection with the Policy. Cost of insurance
charges for the policies will not be the same for all Policy
Owners. The insurance principle of pooling and distribution of
mortality risks is based upon the assumption that each Policy
Owner pays a cost of insurance charge commensurate with the
Insured's mortality risk, which is actuarially determined
based upon factors such as age, health and occupation. In the
context of life insurance, a uniform mortality charge (the
"cost of insurance charge") for all Insureds would
discriminate unfairly in favor of those Insureds representing
greater mortality risks to the disadvantage of those
representing lesser risks. Accordingly, there will be a
different "price" for each actuarial category of Policy Owners
because different cost of insurance rates will apply.
Accordingly, while not all
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Policy Owners will be subject to the same cost of insurance
rate, there will be a single "rate" for all Policy Owners
in a given actuarial category. The policies will be offered
and sold pursuant to the Company's underwriting standards
and in accordance with state insurance laws. Such laws
prohibit unfair discrimination among Insureds, but recognize
that premiums must be based upon factors such as age, health
and occupation. Tables showing the maximum cost of insurance
charges will be delivered as part of the Policy.
b. ENROLLMENT FORM AND INITIAL PREMIUM PROCESSING
Upon receipt of a completed enrollment form from a prospective
Policy Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the
proposed Insured is insurable. This process may involve such
verification procedures as medical examinations and may
require that further information be provided by the proposed
Policy Owner before a determination can be made.
At the time of enrollment, the proposed insured will complete
an enrollment form, which lists the proposed amount of
insurance and indicates how much of that insurance is
considered eligible for simplified underwriting. If the
answers to the eligibility questions on the enrollment form
are satisfactory, the Company will provide immediate coverage
equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in
excess of the simplified underwriting amount will begin on the
date the enrollment form and medical examinations, if any, are
completed. If the proposed insured cannot answer the
eligibility questions satisfactorily, and if the proposed
insured is not a standard risk, insurance coverage will begin
only after the Company (1) approves the enrollment form, (2)
the Certificate is delivered and accepted, and (3) the first
premium is paid.
Pending completion of insurance underwriting and Certificate
issuance procedures, any initial premiums will be held in the
General Account. If the enrollment form is approved and the
Certificate is issued and accepted, the initial premium held
in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal
Office. IF THE CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE
RETURNED TO YOU WITHOUT INTEREST.
These processing procedures are designed to provide insurance,
starting with the date of the application, to the proposed
Policy Owner in connection with payment of the initial premium
and will not dilute any benefit payable to any existing Policy
Owner. Although a Policy cannot be issued until the
underwriting process has been completed, the proposed Policy
Owner will receive immediate insurance coverage, if he has
paid an initial premium and proves to be insurable. If the
initial premium is not paid with the application, variability
of benefits will commence within three days of underwriting
approval, subject to the restrictions indicated above.
The Company will require that the Policy be delivered within a
specific delivery period to protect itself against
anti-selection by the prospective Policy Owner resulting from
a deterioration of the health of the proposed Insured.
Generally, the period will not exceed the shorter of 30 days
from the date the Policy is issued and 75 days from the date
of Part 2 of the Application.
c. PREMIUM ALLOCATION
"Net premiums" are credited to the Policy as of the date the
premium payments are received by the Company, with the
possible exception of the first net premium. Net premiums are
equal to the gross premiums minus a premium expense charge.
The premium expense charge includes a charge for state and
local premium taxes paid by the
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Company, a charge to compensate the company for federal taxes
imposed for deferred acquisition costs ("DAC tax"), and a charge
for distribution expenses.
State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a
state. The Company guarantees that the charge for premium
taxes will not exceed 10%. The premium tax charge may change
when either the applicable jurisdiction changes or the tax
rate within the applicable jurisdiction changes. The DAC tax
deduction may range from zero to 1% of premiums, depending on
the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The
distribution charge may vary, depending upon such factors, for
example, as the type of the benefit plan, average number of
participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual
distribution expenses incurred by the Company. Upon request,
the Company may permit all or part of the Premium Expense
Charge to be deducted as part of the monthly deduction.
The Policy Owner may allocate net premiums among the Company's
General Account and up to twenty Sub-Accounts of the Group VEL
Account. The Policy Owner may change the allocation of net
premiums without charge at any time by providing written
notice to the Principal Office. The change will be effective
as of the date of receipt of the notice at the Principal
Office. The Policy Owner may transfer amounts among all of the
sub-Accounts and the General Account, subject to certain
restrictions, but at no time may have allocations in more than
twenty Sub-Accounts.
d. REPAYMENT OF LOAN
A loan made under this Policy may be repaid with an amount
equal to the original loan plus loan interest.
When a loan is made, the Company will transfer from each
Sub-Account of the Group VEL Account to the General Account an
amount of that Sub-Account's Policy value equal to the loan
amount allocated to the Sub-Account. Since the Company will
credit such assets with interest of at least 6% per year (7.5%
for preferred loans), which is below the 8% interest rate
charged on the loan, the Company will retain the difference
between these rates in order to cover certain expenses and
contingencies. Upon repayment of debt, the Company will reduce
the Policy value in the General Account attributable to the
loan and transfer assets supporting corresponding reserves to
the Sub-Accounts according to either Policy Owner's
instruction or, if none, the premium payment allocation
percentages then in effect. Loan repayments allocated to the
Group VEL Account cannot exceed Policy value previously
transferred from the Group VEL Account to secure the debt.
e. POLICY REINSTATEMENT
If the surrender value is insufficient to cover the next
monthly deduction plus loan interest accrued, or if Policy
debt exceeds the Policy value less surrender charges, the
Company will notify the Policy Owner and any assignee of
record. The Policy Owner will then have a grace period of 62
days, measured from the date the notice is mailed, to make
sufficient payments to prevent termination.
Failure to make a sufficient payment within the grace period
will result in termination of the Policy without any Policy
value. The death benefit payable during the grace period will
be reduced by any overdue charges. If the Insured dies during
the grace period, the death proceeds will still be payable,
but any monthly deductions due and unpaid through the Policy
month in which the Insured dies will be deducted from the
death proceeds.
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If the Policy has not been surrendered and the Insured is
alive, the terminated Policy may be reinstated anytime within
three years after the date of default by submitting the
following to the Company: (1) a written application for
reinstatement; (2) evidence of insurability satisfactory to
the Company; and (3) a premium that, after the deduction of
the premium expense charges, is large enough to cover the
Monthly Deductions for the three-month period beginning on the
date of reinstatement.
If the Policy provides for a surrender charge, the surrender
charge on the date of reinstatement is the surrender charge
that would have been in effect had the Policy remained in
force from the date of issue.
Policy Value on Reinstatement -- The Policy value on the date
of reinstatement is:
(a) the net premium paid to reinstate the Policy increased by
interest from the date the payment was received at the
Company's Principal Office; plus
(b) an amount equal to the Policy value less debt on the date of
default; minus
(c) the monthly deduction due on the date of reinstatement.
The Policy Owner may repay or reinstate any debt outstanding
on the date of default or foreclosure.
f. CORRECTION OF MISSTATEMENT OF AGE
If the Company discovers that the age of the Insured has been
misstated, the death benefit and any rider benefits will be
those which would be purchased by the most recent deduction
for the cost of insurance and the cost of rider benefits at
the correct age.
g. CONTESTABILITY
A Policy is contestable for two years, measured from the issue
date, for material misrepresentations made in the initial
application for the Policy. Policy changes may be contested
for two years after the effective date of a change, and a
reinstatement may be contested for two years after the
effective date of reinstatement. No statement will be used to
contest a Policy unless it is contained in an application.
h. REDUCTION IN COST OF INSURANCE RATE CLASSIFICATION
By administrative practice, the Company will reduce the cost
of insurance rate classification for an outstanding Policy if
new evidence of insurability demonstrates that the Policy
Owner qualifies for a lower classification. After the reduced
rating is determined, the Policy Owner will pay a lower
monthly cost of insurance charge each month. If new evidence
of insurability provided in connection with an increase in
Face Amount demonstrates that the Policy Owner is in a higher
risk classification, the higher cost of insurance rate will
apply only to the increase in Face Amount.
II. "REDEMPTION PROCEDURES": SURRENDER AND RELATED TRANSACTIONS
a. GENERAL
The policies provide for the payment of monies to a Policy
Owner or beneficiary upon presentation of a Policy. Generally,
except for the payments of death proceeds, the imposition of
cost of insurance and administrative charges, and the possible
effect of a surrender charge (if any), the payee will receive
a pro rata or proportionate share of the
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Group VEL Account's assets, within the meaning of the
1940 Act, in any transaction involving "redemption procedures."
The amount received by the payee will depend upon the particular
benefit for which the Policy is presented, including, for
example, the cash surrender value or death benefit. There are
also certain Policy provisions (e.g., partial withdrawals or
the loan privilege) under which the Policy will not be
presented to the Company but which will affect the Policy
Owner's benefits and may involve a transfer of the assets
supporting the Policy reserve out of the Group VEL Account.
Any combined transactions on the same day which counteract the
effect of each other will be allowed. The Company will assume
the Policy Owner is aware of the possible conflicting nature
of the transactions and desires their combined result. If a
transaction is requested which the Company will not allow
(e.g., a request for a decrease in Face Amount which lowers
the Face Amount below the stated minimum) the Company will
reject the whole transaction and not just the portion which
causes the disallowance. The Policy Owner will be informed of
the rejection and will have an opportunity to give new
instructions.
The Company will pay the net cash surrender value within seven
days after receipt, at its Principal Office, of the Policy and
a signed request for surrender. Computations with respect to
the investment experience of each Sub-Account will be made at
the close of trading of the New York Stock Exchange on each
day in which the degree of trading in the corresponding
portfolio might materially affect the net return of the
Sub-Account and on which the Company is open. This will enable
the Company to pay a net cash value on surrender based on the
next computed value after the surrender request is received.
For valuation purposes, the surrender is effective on the date
the Company receives the request at its Principal Office
(although insurance coverage ends the day the request is
mailed).
The Policy value (equal to the value of all accumulations in
the Group VEL Account) may increase or decrease from day to
day depending on the investment experience of the Group VEL
Account. Calculation of the Policy value for any given day
will reflect the actual premiums paid, expenses charged and
deductions taken. The Company will deduct a premium expense
charge from each premium payment. The balance (net premium) is
allocated to the Sub-Accounts of the Group VEL Account
according to Policy Owner's instructions. The Company will
also make monthly deductions from a Policy to cover such
expenses as the cost of insurance, administrative expenses,
mortality and expense risk, and acquisition and underwriting
costs. Other possible deductions from a Policy (which will
occur on a Policy-specific basis) may include a charge for
changing the Net Premium allocation instructions, for partial
withdrawals (if provided for under the Policy), for changing
the Face Amount, for changing the allocation of any Monthly
Deductions among the various Sub-Accounts, for a projection of
values, and for certain transfers.
b. TRANSACTION CHARGES ON PARTIAL WITHDRAWAL
After the first Policy year, partial withdrawals of surrender
value may be made. The minimum withdrawal is $500. Under
Option 1, the Face Amount is reduced by the amount of the
partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000. A
transaction charge which is the smaller of 2% of the amount
withdrawn or $25 will be assessed on each partial withdrawal.
III. Other Provisions
a. DEATH BENEFIT
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The Company will pay a death benefit to the beneficiary within
seven days after receipt, at its Principal Office, of the
Policy, due proof of death of the Insured, and all other
requirements necessary to make payment.
The death proceeds payable will depend on the option in effect
at the time of death. Under Option 1 and Option 3, the death
benefit is the greater of either the Face Amount of insurance
or the guideline minimum sum Insured. Under Option 2, the
death benefit is the greater of either the Face Amount of
insurance plus Policy value or the guideline minimum sum
Insured. The guideline minimum sum Insured is calculated by
multiplying the applicable percentage from the following table
for the Insured person's age (nearest birthday) at the
beginning of the Policy year of determination to the Policy
value.
GUIDELINE MINIMUM SUM INSURED
TABLE
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Policy Value
---------------- --------------
<S> <C>
40 and Under..................................250%
45............................................215%
50............................................185%
55............................................150%
60............................................130%
65............................................120%
70............................................115%
75............................................105%
80............................................105%
85............................................105%
90............................................105%
95............................................100%
</TABLE>
For the ages not listed, the progression between the listed ages
is linear.
The Company will make payment of the death proceeds out of its
General Account, and will transfer assets from the Group VEL
Account to the General Account in an amount equal to the
reserve in the Group VEL Account attributable to the Policy.
The excess, if any, of the death proceeds over the amount
transferred will be paid out of the General Account reserve
maintained for that purpose.
b. DEFAULT AND OPTIONS ON LAPSE
The duration of insurance coverage depends upon the Policy
value being sufficient to cover the monthly deductions plus
loan interest accrued. If the surrender value at the beginning
of a month is less than the deductions for that month plus
loan interest accrued, a grace period of 62 days will begin.
Written notice will be sent to the Policy Owner and any
assignee on the Company's records stating that such a grace
period has begun and giving the amount of premium payment
necessary to prevent termination. If sufficient payment is not
received during the grace period, the Policy will terminate
without value. Notice of such termination will be sent to the
owner and any assignee. If the Insured should die during the
grace period, an amount sufficient to cover the overdue
monthly deductions and other charges will be deducted from the
death proceeds.
c. POLICY LOAN
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The policies provide that in the first Policy year, a Policy
Owner may take a loan of up to 75% of "a minus b", where "a"
is Policy value less surrender charges and "b" is monthly
deductions plus interest on loans accrued to the end of the
Policy year. Thereafter, 90% of an amount equal to Policy
value less surrender charges may be borrowed. The Policy value
for this purpose will be that next computed after receipt, at
the Principal Office, of a loan request. Payment of the loan
amount will be made to the Policy Owner within seven days
after such receipt.
The amount of any outstanding loan plus accrued interest is
called "debt". When a loan is made, the portion of the assets
in the Group VEL Account (which is a portion of the surrender
value and which also constitutes a portion of the reserves for
the death benefit) equal to the debt created thereby is
transferred by the Company from the Group VEL Account to the
General Account. Allocation of the loan among Sub-Accounts
will be according to the Policy Owner's request. If this
allocation is not specified or not possible, the loan will be
allocated based on the proportion of the Policy value in the
General Account, less debt, and the Policy value in each
Sub-Account bears to the total Policy value, less debt. Policy
value in each Sub-Account equal to the Policy loan allocated
to such Sub-Account will be transferred to the General
Account, and the number of Accumulation Units equal to the
Policy value so transferred will be cancelled. Because of the
transfer, a portion of the Policy is not variable during the
loan period and, therefore, the death benefit and the
surrender value are permanently affected by any debt, whether
or not repaid in whole or in part. The Company credits the
Policy value in the General Account attributable to the loan
with a rate of return equal to an effective annual yield of 6%
(7.5% for preferred loans).
Interest is payable in arrears at the annual rate of 8%.
Interest is payable at the end of each Policy year or on a pro
rata basis for such shorter period as the loan may exist. Loan
interest is due on each Policy anniversary. If not paid when
due, it is added to the loan principal and is charged interest
at the same rate of 8%. If the resulting loan principal
exceeds the Policy value in the General Account, the Company
will transfer Policy value equal to the excess debt from the
Policy value in each Sub-Account to the General Account, as
security for the excess debt. The Company will allocate the
amount to be transferred among the Sub-Accounts in the same
proportion that the Policy value in each Sub-Account bears to
the total Policy values in all Sub-Accounts.
Failure to repay a loan will not necessarily terminate the
Policy. If the surrender value is not sufficient to cover the
monthly deductions for the cost of insurance and
administrative expenses, the Policy will go into a 62-day
grace period as described above.
d. TRNSFERS AMONG SUB-ACCOUNTS
Amounts may be transferred, upon request, at any time from any
Sub-Account of the Group VEL Account to one or more other
Sub-Accounts. Transfers from a Sub-Account of the Group VEL
Account will take effect as of the receipt of a written
request at the Principal Office. The minimum amount allowed
for a transfer is the lesser of $500 or the total value in the
Sub-Account. The first twelve transfers are free of charge;
however, the Company will make an administrative charge not to
exceed $25 for additional transfers in a Policy year.
Transfers resulting from Policy loans, the exercise of
conversion rights, and reallocation of Policy value within 20
days of issue, will not be subject to a transfer charge, and
will not be counted for purposes of the limitation on the
number of "free" transfers allowed in each Policy year. If a
Policy Owner elects to have automatic transfers made each
month, the first automatic transfer counts as one transfer
towards the twelve free transfers allowed in each Policy year;
each subsequent automatic transfer does not reduce the
remaining number of transfers which may be made without
charge.
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Transfer charges, if any, are allocated by Policy Owner
request to one or more Sub-Accounts. If an allocation is not
specified or not possible, the allocations will be based on
the proportion that the values in each of the Sub-Accounts of
the Group VEL Account bears to the total unloaned Policy
value.
e. RIGHT OF WITHDRAWAL PROCEDURES
The Policy provides that the Policy Owner may cancel it by
returning the Policy along with a written request for
cancellation to the Principal Office by the latest of (1) 45
days after the application was signed, or (2) 10 days (or such
longer period as may be required in a particular state) after
the Policy Owner receives the Policy. Upon returning the
Policy, the Policy Owner will receive within seven days a
refund equal to the sum of (1) the difference between the
premium, including fees, paid and any amount allocated to the
Group VEL Account, and (2) the value of the amounts allocated
to the Group VEL Account, and (3) any fees or charges imposed
on the amounts allocated to the Group VEL Account. Where
required by State law, the Policy Owner will receive a refund
equal to the sum of the premium payments made under the
Policy. The postmark date on the envelope containing the
Policy will determine whether the Policy has been surrendered
within the Company's withdrawal period.
A free look privilege also applies after a requested increase
in Face Amount. After an increase, the Company will mail or
deliver notice of the "Free Look" with respect to the
increase. The Policy Owner will have the right to cancel the
increase within 10 days, and receive a credit for charges
which would not have been deducted but for the increase. Such
charges with respect to the increase will be added to Policy
value unless the Policy Owner requests a refund of such
charges.
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