-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N7WLx7qemQuSa+SNVQFVgpi/57XGDJ9mRHor7DLP256C4g0zpEv8auxZdZdhaL5y ayjEoyizAHc89qdc595XQw== 0000950146-00-000546.txt : 20000509 0000950146-00-000546.hdr.sgml : 20000509 ACCESSION NUMBER: 0000950146-00-000546 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20000508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INS & ANNUITY CO CENTRAL INDEX KEY: 0000103005 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 333-56297 FILM NUMBER: 622228 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-02512 FILM NUMBER: 622229 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032734808 MAIL ADDRESS: STREET 1: AETNA LIFE & CASUALTY STREET 2: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE ANNUITY ACCOUNT B OF AETNA VARIABLE ANNUITY LIFE IN DATE OF NAME CHANGE: 19791108 485APOS 1 FORM N-4 As filed with the Securities and Exchange Registration No. 333-56297 Commission on May 8, 2000 Registration No. 811-2512 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 - -------------------------------------------------------------------------------- POST-EFFECTIVE AMENDMENT NO. 15 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 and Amendment to REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 - -------------------------------------------------------------------------------- Variable Annuity Account B of Aetna Life Insurance and Annuity Company Aetna Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 Depositor's Telephone Number, including Area Code: (860) 273-4686 Julie E. Rockmore, Counsel Aetna Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 (Name and Address of Agent for Service) - -------------------------------------------------------------------------------- It is proposed that this filing will become effective: _____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485 X on July 14, 2000 pursuant to paragraph (a)(1) of Rule 485 ----- VARIABLE ANNUITY ACCOUNT B CROSS REFERENCE SHEET
FORM N-4 LOCATION - PROSPECTUS DATED ITEM NO. PART A (PROSPECTUS) JULY 14, 2000 1 Cover Page........................................... Cover Page 2 Definitions.......................................... Not Applicable 3 Synopsis............................................. Contract Overview; Fee Table 4 Condensed Financial Information...................... Condensed Financial Information; Appendix V - Condensed Financial Information 5 General Description of Registrant, Depositor, and Portfolio Companies.................................. Other Topics - The Company; Variable Annuity Account B; Appendix IV - Description of Underlying Funds 6 Deductions and Expenses.............................. Fees 7 General Description of Variable Annuity Contracts.... Contract Overview 8 Annuity Period....................................... The Income Phase 9 Death Benefit........................................ Death Benefit 10 Purchases and Contract Value......................... Purchase and Rights; Your Account Value 11 Redemptions.......................................... Your Right to Cancel; Systematic Distribution Options 12 Taxes................................................ Taxation 13 Legal Proceedings.................................... Other Topics - Legal Matters and Proceedings 14 Table of Contents of the Statement of Additional Information.......................................... Contents of the Statement of Additional Information
LOCATION - STATEMENT OF FORM N-4 PART B (STATEMENT OF ADDITIONAL INFORMATION ITEM NO. ADDITIONAL INFORMATION) DATED JULY 14, 2000 15 Cover Page........................................... Cover Page 16 Table of Contents.................................... Table of Contents 17 General Information and History...................... General Information and History 18 Services............................................. General Information and History; Independent Auditors 19 Purchase of Securities Being Offered................. Offering and Purchase of Contracts 20 Underwriters......................................... Offering and Purchase of Contracts 21 Calculation of Performance Data...................... Performance Data; Average Annual Total Return Quotations 22 Annuity Payments..................................... Income Phase Payments 23 Financial Statements................................. Financial Statements
Part C (Other Information) -------------------------- Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement. VARIABLE ANNUITY ACCOUNT B Aetna Life Insurance and Annuity Company Supplement Dated July 14, 2000 to July 14, 2000 Prospectus GENERAL DESCRIPTION OF GET J Series J of the Aetna GET Fund (GET J) is an investment option that may be available during the accumulation phase of the contract. Aetna Life Insurance and Annuity Company (the Company, we, our) makes a guarantee, as described below, when you direct money into GET J. Aeltus Investment Management, Inc. serves as investment adviser to GET J. We will offer GET J shares only during its offering period, which is scheduled to run from June 15, 2000 through the close of business on September 13, 2000. GET J may not be available under your contract, your plan or in your state. Please read the GET J prospectus for a more complete description of GET J, including its charges and expenses. INVESTMENT OBJECTIVE OF GET J GET J seeks to achieve maximum total return, without compromising a minimum targeted return, by participating in favorable equity market performance during the guarantee period. GET J's guarantee period runs from September 14, 2000 through September 13, 2005. During the offering period, all GET J assets will be invested in short-term instruments, and during the guarantee period will be invested in a combination of fixed income and equity securities. THE GET FUND GUARANTEE The guarantee period for GET J will end on September 13, 2005 which is GET J's maturity date. The Company guarantees that the value of an accumulation unit of the GET J subaccount under the contract on the maturity date (as valued after the close of business on September 13, 2005) will not be less than its value as determined after the close of business on the last day of the offering period. If the value on the maturity date is lower than it was on the last day of the offering period, we will transfer funds from our general account to the GET J subaccount to make up the difference. This means that if you remain invested in GET J until the maturity date, at the maturity date you will receive no less than the value of your separate account investment directed to GET J as of the last day of the offering period, less any maintenance fees or any amounts you transfer or withdraw from the GET J subaccount. The value of dividends and distributions made by GET J throughout the guarantee period is taken into account in determining whether, for purposes of the guarantee, the value of your GET J investment on the maturity date is no less than its value as of the last day of the offering period. The guarantee does not promise that you will earn the fund's minimum targeted return referred to in the investment objective. If you withdraw or transfer funds from GET J before the maturity date, we will process the transactions at the actual unit value next determined after we receive your order. The guarantee will not apply to these amounts or to amounts deducted as a maintenance fee, if applicable. MATURITY DATE Before the maturity date, we will send a notice to each contract holder who has amounts in GET J. This notice will remind you that the maturity date is approaching and that you must choose other investment options for your GET J amounts. If you do not make a choice, on the maturity date we will transfer your GET J amounts to another available series of the GET Fund that is accepting deposits. If no GET Fund series is available, we will transfer your GET J amounts to the fund or funds designated by the Company. X.GETJ56297-00 July 2000 The following information supplements the "Fee Table" contained in the prospectus: MAXIMUM FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT In addition to the amounts currently listed under the heading "Fee Table" in the prospectus, we will make a daily deduction of a GET J Guarantee Charge, equal on an annual basis to the percentage shown below, from the amounts allocated to the GET J investment option: GET J Guarantee Charge (deducted daily during the Guarantee Period) ................... 0.50% Maximum Total Separate Account Expenses (including the optional 0.50% Premium Bonus Option Charge(1))..................................................................... 2.40%(2)
(1) If you elect the premium bonus option, the premium bonus option charge is assessed during the first seven account years. After the seventh account year, or if you do not elect the premium bonus option, the maximum total separate expenses you would pay is 1.90%. (2) The total separate account expenses that apply to your contract may be lower. Please refer to the "Fee Table" section of your prospectus. The following information supplements the "Fund Expense Table" contained in the prospectus: Aetna GET Fund Series J Annual Expenses (As a percentage of the average net assets)
Investment Total Fund Annual Expenses Advisory Fees(3) Other Expenses(4) (after expense reimbursement)(5) ---------------- ----------------- ------------------------------- Aetna GET Fund Series J 0.60% 0.15% 0.75%
For more information regarding expenses paid out of assets of the fund, see the GET J prospectus. - ----------------------- (3) The Investment Advisory Fee will be 0.25% during the offering period and 0.60% during the guarantee period. (4) "Other Expenses" include an annual fund administrative fee of 0.075% of the average daily net assets of GET J and any additional direct fund expenses. (5) The investment adviser is contractually obligated through GET J's maturity date to waive all or a portion of its investment advisory fee and/or its administrative fee and/or to reimburse a portion of the fund's other expenses in order to ensure that GET J's Total Fund Annual Expenses do not exceed 0.75% of the fund's average daily net assets. It is not expected that GET J's actual expenses without this waiver or reimbursement will exceed this amount. The following information supplements the "Hypothetical Examples" contained in the prospectus. HYPOTHETICAL EXAMPLES--AETNA GET FUND SERIES J Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the GET J investment option under the contract (until GET J's maturity date) and assume a 5% annual return on the investment.(6)
> THESE EXAMPLES ARE PURELY Example A Example B HYPOTHETICAL. > THEY SHOULD NOT BE If you withdraw your entire If at the end of the periods CONSIDERED A REPRESENTATION account value at the end of shown you (1) leave your OF PAST OR FUTURE EXPENSES the periods shown, you would entire account value invested OR EXPECTED RETURNS. pay the following expenses, or (2) select an income phase > ACTUAL EXPENSES AND/OR including any applicable early payment option, you would RETURNS MAY BE MORE OR LESS withdrawal charge: pay the following expenses THAN THOSE SHOWN BELOW. (no early withdrawal charge is reflected): 1 Year 3 Years 5 Years 1 Year 3 Years 5 Years -------- --------- --------- -------- --------- -------- Aetna GET Fund Series J $ $ $ $ $ $
- ----------------------- (6) The examples shown above reflect an annual mortality and expense risk charge of 1.25%, an annual contract administrative expense charge of 0.15%, an annual GET J guarantee charge of 0.50%, an annual premium bonus option charge of 0.50%, a $30 annual maintenance fee that has been converted to a percentage of assets equal to 0.022%, and all charges and expenses of the GET J Fund. Example A reflects an early withdrawal charge of 7% of the purchase payments at the end of year 1, 6% at the end of year 3, and 4% at the end of year 5. (The expenses that you would pay under your contract may be lower. Please refer to the "Fee Table" section of your prospectus.) The following information supplements "Appendix IV--Description of Underlying Funds" contained in the prospectus: Aetna GET Fund (Series J) INVESTMENT OBJECTIVE Seeks to achieve maximum total return without compromising a minimum targeted return (Targeted Return) by participating in favorable equity market performance during the guarantee period, from September 14, 2000 through September 13, 2005, the maturity date. POLICIES Prior to September 14, 2000, assets are invested entirely in short-term instruments. After that date, assets are allocated between equities and fixed income securities. Equities consist primarily of common stocks. Fixed income securities consist primarily of short- to intermediate-duration U.S. Government securities and may also consist of mortgage backed securities and corporate obligations. The investment adviser uses a proprietary computer model to determine the percentage of assets to allocate between the fixed and the equity components. As the value of the equity component declines, more assets are allocated to the fixed component. RISKS The principal risks of investing in Series J are those generally attributable to stock and bond investing. The success of Series J's strategy depends on the investment adviser's skill in allocating assets between the equity and fixed components and in selecting investments within each component. Because Series J invests in both stocks and bonds, it may underperform stock funds when stocks are in favor and underperform bond funds when bonds are in favor. The risks associated with investing in stocks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The principal risk associated with investing in bonds is that interest rates may rise, which generally causes bond prices to fall. If at the inception of, or any time during, the guarantee period interest rates are low, Series J assets may be largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. The effect of low interest rates on Series J would likely be more pronounced at the beginning of the guarantee period as the initial allocation of assets would include more fixed income securities. In addition, if during the guarantee period the equity markets experienced a major decline, Series J assets may become largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. Use of the fixed component reduces Series J's ability to participate as fully in upward equity market movements, and therefore represents some loss of opportunity, or opportunity cost, compared to a portfolio that is fully invested in equities. Investment Adviser: Aeltus Investment Management, Inc. X.GETJ56297-00 July 2000 VARIABLE ANNUITY ACCOUNT B Aetna Life Insurance and Annuity Company Supplement Dated July 14, 2000 to July 14, 2000 Prospectus GENERAL DESCRIPTION OF GET K Series K of the Aetna GET Fund (GET K) is an investment option that may be available during the accumulation phase of the contract. Aetna Life Insurance and Annuity Company (the Company, we, our) makes a guarantee, as described below, when you direct money into GET K. Aeltus Investment Management, Inc. serves as investment adviser to GET K. We will offer GET K shares only during its offering period, which is scheduled to run from September 14, 2000 through the close of business on December 13, 2000. GET K may not be available under your contract, your plan or in your state. Please read the GET K prospectus for a more complete description of GET K, including its charges and expenses. INVESTMENT OBJECTIVE OF GET K GET K seeks to achieve maximum total return, without compromising a minimum targeted return, by participating in favorable equity market performance during the guarantee period. GET K's guarantee period runs from December 14, 2000 through December 13, 2005. During the offering period, all GET K assets will be invested in short-term instruments, and during the guarantee period will be invested in a combination of fixed income and equity securities. THE GET FUND GUARANTEE The guarantee period for GET K will end on December 13, 2005 which is GET K's maturity date. The Company guarantees that the value of an accumulation unit of the GET K subaccount under the contract on the maturity date (as valued after the close of business on December 13, 2005) will not be less than its value as determined after the close of business on the last day of the offering period. If the value on the maturity date is lower than it was on the last day of the offering period, we will transfer funds from our general account to the GET K subaccount to make up the difference. This means that if you remain invested in GET K until the maturity date, at the maturity date you will receive no less than the value of your separate account investment directed to GET K as of the last day of the offering period, less any maintenance fees or any amounts you transfer or withdraw from the GET K subaccount. The value of dividends and distributions made by GET K throughout the guarantee period is taken into account in determining whether, for purposes of the guarantee, the value of your GET K investment on the maturity date is no less than its value as of the last day of the offering period. The guarantee does not promise that you will earn the fund's minimum targeted return referred to in the investment objective. If you withdraw or transfer funds from GET K before the maturity date, we will process the transactions at the actual unit value next determined after we receive your order. The guarantee will not apply to these amounts or to amounts deducted as a maintenance fee, if applicable. MATURITY DATE Before the maturity date, we will send a notice to each contract holder who has amounts in GET K. This notice will remind you that the maturity date is approaching and that you must choose other investment options for your GET K amounts. If you do not make a choice, on the maturity date we will transfer your GET K amounts to another available series of the GET Fund that is accepting deposits. If no GET Fund series is available, we will transfer your GET K amounts to the fund or funds designated by the Company. X.GETK56297-00 July 2000 The following information supplements the "Fee Table" contained in the prospectus: MAXIMUM FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT In addition to the amounts currently listed under the heading "Fee Table" in the prospectus, we will make a daily deduction of a GET K Guarantee Charge, equal on an annual basis to the percentage shown below, from the amounts allocated to the GET K investment option: GET K Guarantee Charge (deducted daily during the Guarantee Period) .................. 0.50% Maximum Total Separate Account Expenses (including the optional 0.50% Premium Bonus Option Charge(1)) ...................................................................... 2.40%(2)
(1) If you elect the premium bonus option, the premium bonus option charge is assessed during the first seven account years. After the seventh account year, or if you do not elect the premium bonus option, the maximum total separate account expenses you would pay is 1.90%. (2) The total separate account expenses that apply to your contract may be lower. Please refer to the "Fee Table" section of your prospectus. The following information supplements the "Fund Expense Table" contained in the prospectus: Aetna GET Fund Series K Annual Expenses (As a percentage of the average net assets)
Investment Total Fund Annual Expenses Advisory Fees(3) Other Expenses(4) (after expense reimbursement)(5) ---------------- ----------------- ------------------------------- Aetna GET Fund Series K 0.60% 0.15% 0.75%
For more information regarding expenses paid out of assets of the fund, see the GET K prospectus. - ----------------------- (3) The Investment Advisory Fee will be 0.25% during the offering period and 0.60% during the guarantee period. (4) "Other Expenses" include an annual fund administrative fee of 0.075% of the average daily net assets of GET K and any additional direct fund expenses. (5) The investment adviser is contractually obligated through GET K's maturity date to waive all or a portion of its investment advisory fee and/or its administrative fee and/or to reimburse a portion of the fund's other expenses in order to ensure that GET K's Total Fund Annual Expenses do not exceed 0.75% of the fund's average daily net assets. It is not expected that GET K's actual expenses without this waiver or reimbursement will exceed this amount. The following information supplements the "Hypothetical Examples" contained in the prospectus. HYPOTHETICAL EXAMPLES--AETNA GET FUND SERIES K Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the GET K investment option under the contract (until GET K's maturity date) and assume a 5% annual return on the investment.(6)
> THESE EXAMPLES ARE PURELY Example A Example B HYPOTHETICAL. > THEY SHOULD NOT BE If you withdraw your entire If at the end of the periods CONSIDERED A REPRESENTATION account value at the end of shown you (1) leave your OF PAST OR FUTURE EXPENSES the periods shown, you would entire account value invested OR EXPECTED RETURNS. pay the following expenses, or (2) select an income phase > ACTUAL EXPENSES AND/OR including any applicable early payment option, you would RETURNS MAY BE MORE OR LESS withdrawal charge: pay the following expenses THAN THOSE SHOWN BELOW. (no early withdrawal charge is reflected): 1 Year 3 Years 5 Years 1 Year 3 Years 5 Years -------- --------- --------- -------- --------- -------- Aetna GET Fund Series K $ $ $ $ $ $
- ----------------------- (6) The examples shown above reflect an annual mortality and expense risk charge of 1.25%, an annual contract administrative expense charge of 0.15%, an annual GET K guarantee charge of 0.50%, an annual premium bonus charge of 0.50%, a $30 annual maintenance fee that has been converted to a percentage of assets equal to 0.022%, and all charges and expenses of the GET K Fund. Example A reflects an early withdrawal charge of 7% of the purchase payments at the end of year 1, 6% at the end of year 3, and 4% at the end of year 5. (The expenses that you would pay under your contract may be lower. Please refer to the "Fee Table" section of your prospectus.) The following information supplements "Appendix IV--Description of Underlying Funds" contained in the prospectus: Aetna GET Fund (Series K) INVESTMENT OBJECTIVE Seeks to achieve maximum total return without compromising a minimum targeted return (Targeted Return) by participating in favorable equity market performance during the guarantee period, from December 14, 2000 through December 13, 2005, the maturity date. POLICIES Prior to December 14, 2000, assets are invested entirely in short-term instruments. After that date, assets are allocated between equities and fixed income securities. Equities consist primarily of common stocks. Fixed income securities consist primarily of short- to intermediate-duration U.S. Government securities and may also consist of mortgage backed securities and corporate obligations. The investment adviser uses a proprietary computer model to determine the percentage of assets to allocate between the fixed and the equity components. As the value of the equity component declines, more assets are allocated to the fixed component. RISKS The principal risks of investing in Series K are those generally attributable to stock and bond investing. The success of Series K's strategy depends on the investment adviser's skill in allocating assets between the equity and fixed components and in selecting investments within each component. Because Series K invests in both stocks and bonds, it may underperform stock funds when stocks are in favor and underperform bond funds when bonds are in favor. The risks associated with investing in stocks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The principal risk associated with investing in bonds is that interest rates may rise, which generally causes bond prices to fall. If at the inception of, or any time during, the guarantee period interest rates are low, Series K assets may be largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. The effect of low interest rates on Series K would likely be more pronounced at the beginning of the guarantee period as the initial allocation of assets would include more fixed income securities. In addition, if during the guarantee period the equity markets experienced a major decline, Series K assets may become largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. Use of the fixed component reduces Series K's ability to participate as fully in upward equity market movements, and therefore represents some loss of opportunity, or opportunity cost, compared to a portfolio that is fully invested in equities. Investment Adviser: Aeltus Investment Management, Inc. X.GETK56297-00 July 2000 Contract Prospectus - July 14, 2000 - -------------------------------------------------------------------------------- [Begin sidebar] The Funds o Aetna Balanced VP, Inc. o Aetna Income Shares d/b/a Aetna Bond VP o Aetna Growth VP o Aetna Variable Fund d/b/a Aetna Growth and Income VP o Aetna Index Plus Large Cap VP o Aetna International VP o Aetna Variable Encore Fund d/b/a Aetna Money Market VP o Aetna Real Estate Securities VP* o Aetna Small Company VP o Aetna Technology VP o AIM V.I. Capital Appreciation Fund o AIM V.I. Government Securities Fund o AIM V.I. Growth Fund o AIM V.I. Growth and Income Fund o AIM V.I. Value Fund o Alliance Variable Products--Growth and Income Portfolio o Alliance Variable Products--Premier Growth Portfolio o Alliance Variable Products--Quasar Portfolio o Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio o Fidelity Variable Insurance Products Fund (VIP) Growth Portfolio o Fidelity Variable Insurance Products Fund (VIP) High Income Portfolio o Fidelity Variable Insurance Products Fund II (VIP II) Contrafund[RegTM] Portfolio o Janus Aspen Aggressive Growth Portfolio o Janus Aspen Balanced Portfolio o Janus Aspen Growth Portfolio o Janus Aspen Worldwide Growth Portfolio o MFS Total Return Series [o Mitchell Hutchins Series Trust Growth and Income Portfolio] [o Mitchell Hutchins Series Trust Small Cap Portfolio] [o Mitchell Hutchins Series Trust Tactical Allocation Portfolio] o Oppenheimer Aggressive Growth Fund/VA o Oppenheimer Main Street Growth & Income Fund/VA o Oppenheimer Strategic Bond Fund/VA o Portfolio Partners, Inc. (PPI) MFS Capital Opportunities Portfolio (formerly PPI MFS Value Equity Portfolio) o Portfolio Partners, Inc. (PPI) MFS Emerging Equities Portfolio o Portfolio Partners, Inc. (PPI) MFS Research Growth Portfolio o Portfolio Partners, Inc. (PPI) Scudder International Growth Portfolio [End sidebar] The Contract. The contract described in this prospectus is a group or individual Aetna Variable Annuity deferred variable annuity contract issued by Aetna Life Insurance and Annuity Company (the Company, we, us). It is issued to you, the contract holder, as either a nonqualified deferred annuity, including contracts offered to a custodian for an Individual Retirement Account as described in Section 408(a) of the Internal Revenue Code of 1986, as amended (Tax Code); a qualified individual retirement annuity (IRA); a qualified Roth IRA; or as a qualified contract for use with certain employer sponsored retirement plans. The Contract is not available as a SIMPLE IRA under Tax Code Section 408(p). - -------------------------------------------------------------------------------- Why Reading this Prospectus Is Important. This prospectus contains facts about the contract and its investment options that you should know before purchasing. This information will help you decide if the contract is right for you. Please read this prospectus carefully. Table of Contents . . . page 3 - -------------------------------------------------------------------------------- Premium Bonus Option. We will credit a premium bonus to your account for each purchase payment you make during the first account year if you elect the premium bonus option. There is an annual charge for this option during the first seven account years, and in certain circumstances this charge may be more than the amount of the premium bonus. See "Premium Bonus Option-- Suitability." The premium bonus option may not be available in all states. Investment Options. The contract offers variable investment options and fixed interest options. When we establish your account you instruct us to direct account dollars to any of the available options. Variable Investment Options. These options are called subaccounts. The subaccounts are within Variable Annuity Account B (the separate account), a separate account of the Company. Each subaccount invests in one of the mutual funds listed on this page. Earnings on amounts invested in a subaccount will vary depending upon the performance of its underlying fund. You do not invest directly in or hold shares of the funds. Risks Associated with Investing in the Funds. The funds in which the subaccounts invest have various risks. Information about the risks of investing in the funds is located in the "Investment Option" section on page 18, in Appendix IV--Description of Underlying Funds and in each fund prospectus. Read this prospectus in conjunction with the fund prospectuses, and retain the prospectuses for future reference. Getting Additional Information. You may obtain the July 14, 2000, Statement of Additional Information (SAI) about the separate account by indicating your request on your application or calling us at 1-800-238-6219. You may also obtain an SAI for any of the funds by calling that number. The SEC also makes available to the public reports and information about the separate account and the funds. Certain reports and information, including this prospectus and SAI, are available on the EDGAR Database on the Securities and Exchange Commission (SEC) web site, www.sec.gov, or at the SEC Public Reference Room in Washington, D.C. You may call 1-202-942-8090 to get information about the operations of the Public Reference Room. You may obtain copies of reports and other information about the separate account and the funds, after paying a duplicating fee, by sending an e-mail request to publicinfo@sec.gov or by writing to the SEC Public Reference Section, Washington, D.C. 20549-0102. The SAI table of contents is listed on page 55 of this prospectus. The SAI is incorporated into this prospectus by reference. Additional Disclosure Information. Neither the SEC nor any state securities commission has approved or disapproved the securities offered through this prospectus or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. We do not intend for this prospectus to be an offer to sell or a solicitation of an offer to buy these securities in any state that does not permit their sale. We have not authorized anyone to provide you with information that is different than that contained in this prospectus. *Effective May 15, 2000, transfers or deposits are not allowed into the subaccount investing in this fund except those made pursuant to standing instructions (e.g., dollar cost averaging, account rebalancing) in effect prior to this date. See "Important Information Regarding the Aetna Real Estate Securities VP Subaccount." Prospectus - July 14, 2000 (continued) - -------------------------------------------------------------------------------- Fixed Interest Options. > ALIAC Guaranteed Account (the Guaranteed Account) > Fixed Account Except as specifically mentioned, this prospectus describes only the investment options offered through the separate account. However, we describe the fixed interest options in appendices to this prospectus. There is also a separate Guaranteed Account prospectus. Availability of Options. Some funds or fixed interest options may be unavailable through your contract or in your state. Important Information Regarding the Aetna Real Estate Securities VP Subaccount Subaccount to be Closed to New Investments. Effective May 15, 2000, the Aetna Real Estate Securities VP subaccount is no longer available for new investments. We will only accept deposits into the subaccount investing in this fund if they are made pursuant to standing instructions (e.g., dollar cost averaging, account rebalancing, etc.) in effect before the close of business on May 12, 2000. Fund Shares to be Substituted with Shares of Aetna Money Market VP. Plan of Substitution. On or before September 1, 2000, subject to applicable regulatory approvals and the requisite vote of shareholders of the applicable fund, any existing balance in Aetna Real Estate Securities VP will be invested in (substituted with) shares of Aetna Money Market VP. You will not incur any fees or charges as a result of the substitution. In addition, on and after September 1, 2000, all investment allocations then being directed to the Aetna Real Estate Securities VP subaccount will be redirected to the Aetna Money Market VP subaccount. We do not believe that the substitution will create any tax liability. Transfer Rights. At any time prior to the date of substitution, you may transfer your accumulated values from the subaccounts investing in substituted funds into any other investment option available under your contract and no transfer fees or other charges will be imposed. From and after the date of substitution, you may, if you had values transferred from a subaccount as a result of a substitution, transfer among any of the remaining investment options in accordance with the terms of your contract and free of any transfer fees and charges. Any such transfer will not be counted as one of the free transfers permitted under your contract, provided that the transfer occurs prior to, or within 90 days after, the substitution. Surrender Rights. If you had shares substituted and elect to make a surrender under the contract (if permitted by applicable tax law) within 30 days after the date of the substitution, we will waive any early withdrawal charge on amounts transferred as a result of the substitution. This offer to waive the early withdrawal charge will not apply to amounts transferred after April 10, 2000 from the other investment options to the Aetna Real Estate Securities VP subaccount. If you exercise this surrender right, you may incur income tax liability and a tax penalty. See the "Taxation" section of this prospectus for a discussion of tax consequences resulting from surrender. You should seek qualified tax advice before exercising your surrender rights. The contract is not a deposit with, obligation of or guaranteed or endorsed by any bank, nor is it insured by the FDIC. The contract is subject to investment risk, including the possible loss of the principal amount of your investment. TABLE OF CONTENTS - -------------------------------------------------------------- Contract Overview ........................................ 4 Contract Design New York Contracts Contract Facts Questions: Contacting the Company (sidebar) Sending Forms and Written Requests in Good Order (sidebar) Sending Additional Purchase Payments (sidebar) Contract Phases: The Accumulation Phase, The Income Phase - --------------------------------------------------------------
Fee Table .................................. 8 Condensed Financial Information ............ 14 Purchase and Rights ........................ 14 Right to Cancel ............................ 16 Premium Bonus Option ....................... 16 Investment Options ......................... 18 Transfers Among Investment Options ......... 19 Transfers Between Option Packages .......... 22 Fees ....................................... 23 Your Account Value ......................... 28 Withdrawals ................................ 30 Systematic Distribution Options ............ 32 Death Benefit .............................. 33 The Income Phase ........................... 38 Taxation ................................... 42 Other Topics ............................... 50
The Company -- Variable Annuity Account B -- Contract Distribution -- Payment of Commissions -- Payment Delay or Suspension -- Performance Reporting -- Voting Rights -- Contract Modifications -- Transfer of Ownership: Assignment -- Involuntary Terminations -- Legal Matters and Proceedings Contents of the Statement of Additional Information ......... 55 Appendix I -- New York Contracts ............................ 56 Appendix II -- ALIAC Guaranteed Account ..................... 62 Appendix III -- Fixed Account ............................... 65 Appendix IV -- Description of Underlying Funds .............. 66 Appendix V -- Condensed Financial Information ............... 87
3 [Begin sidebar] Questions: Contacting the Company. To answer your questions, contact your sales representative or write or call our Home Office at: Aetna Financial Services Annuity Services 151 Farmington Avenue Hartford, CT 06156-1258 1-800-238-6219 Sending Forms and Written Requests in Good Order. If you are writing to change your beneficiary, request a withdrawal or for any other purpose, contact us or your sales representative to learn what information is required for the request to be in "good order." We can only act upon requests that are received in good order. Sending Additional Purchase Payments. Use one of the following addresses when sending additional purchase payments. If using the U.S. Postal Service: ALIAC Attn: New Business Unit P.O. Box 30670 Hartford, CT 06150-0670 If using express mail: Fleet Bank/ALIAC #30670 Lockbox-CT/EH F03E 99 Founders Plaza, 3rd Floor East Hartford, CT 06108 Express mail packages should not be sent to the P.O. Box address. [End sidebar] Contract Overview - -------------------------------------------------------------------------------- The following is intended as a summary. Please read each section of this prospectus for additional detail. - -------------------------------------------------------------------------------- Contract Design - -------------------------------------------------------------------------------- The contract described in this prospectus is a group or individual deferred variable annuity contract. It is intended to be a retirement savings vehicle that offers a variety of investment options to help meet long-term financial goals. The term "contract" in this prospectus refers to individual contracts and to certificates issued under group contracts. - -------------------------------------------------------------------------------- New York Contracts - -------------------------------------------------------------------------------- Some of the fees, features and benefits of the contract are different if it is issued in the State of New York. For details regarding the New York contracts, see Appendix I. - -------------------------------------------------------------------------------- Contract Facts - -------------------------------------------------------------------------------- Option Packages. There are three option packages available under the contract. You select an option package at the time of application. Each option package is distinct. The differences are summarized as follows:
- ------------------------------------------------------------------------------------------------------------ Option Package I Option Package II Option Package III - ------------------------------------------------------------------------------------------------------------ Mortality and Expense Risk Charge(1): 0.80% 1.10% 1.25% - ------------------------------------------------------------------------------------------------------------ Death Benefit(2) The greater of: The greatest of: The greatest of: on Death of the (1) The sum of (1) The sum of (1) The sum of Annuitant(3): all purchase all purchase all purchase payments, adjusted payments, adjusted payments, adjusted for amounts for amounts for amounts withdrawn or withdrawn or withdrawn or applied to an applied to an applied to an income phase income phase income phase payment option as payment option as payment option as of the claim date; or of the claim date; or of the claim date; (2) The account value (2) The account value or on the claim date. on the claim date; (2) The account value or on the claim date; (3) The "step-up value" or on the claim date. (3) The "step-up value" on the claim date; or (4) The "roll-up value" on the claim date.(4) - ------------------------------------------------------------------------------------------------------------ Minimum Initial Non- Non- Non- Purchase Payment(5): Qualified: Qualified: Qualified: Qualified: Qualified: Qualified: $15,000 $1,500 $5,000 $1,500 $5,000 $1,500 - ------------------------------------------------------------------------------------------------------------ Free Withdrawals(6): 10% of your account 10% of your account 10% of your account value each account value each account value each account year, non-cumulative. year, non-cumulative. year, cumulative to a maximum 30%. - ------------------------------------------------------------------------------------------------------------ Nursing Home Waiver -- Waiver Not of Early With- Available Available Available drawal Charge(7): - ------------------------------------------------------------------------------------------------------------
(1) See "Fee Table" and "Fees." (2) See "Death Benefit." If a death benefit is payable based on account value, step-up value or roll-up value, the death benefit will not include any premium bonus credited to the account after or within 12 months of the date of death. See "Premium Bonus Option--Forfeiture." (3) When a contract holder who is not the annuitant dies, the amount of the death benefit is not the same as shown above under each option package. See "Death Benefit." Therefore, contract holders who are not also the annuitant should seriously consider whether Option Packages II and III are suitable for their circumstances. (4) See Appendix I for details regarding the death benefit under Option Package III for contracts issued in New York. (5) See "Purchase and Rights." (6) See "Fees." (7) See "Fees" and Appendix I for contracts issued in New York. 4 Premium Bonus Option. At the time of application you may elect the premium bonus option. Once elected it may not be revoked. If you elect this option we will credit your account with a 4% premium bonus for each purchase payment you make during the first account year. The premium bonus will be included in your account value and allocated among the investment options you have selected in the same proportion as the purchase payment. See "Premium Bonus Option." In exchange for the premium bonus, during the first seven account years you will pay an annual premium bonus option charge equal to 0.50% of your account value allocated to the subaccounts. We may also deduct this charge from amounts allocated to the fixed interest options. See "Fee Table" and "Fees." In each of the following circumstances all or part of a premium bonus credited to your account will be forfeited: > If you exercise your free look privilege and cancel your contract. See "Premium Bonus Option--Forfeiture" and "Right to Cancel." > If a death benefit is payable based on account value, step-up value or roll-up value, but only the amount of any premium bonus credited to the account after or within 12 months of the date of death. See "Premium Bonus Option--Forfeiture" and "Death Benefit--Premium Bonus." > If all or part of a purchase payment for which a premium bonus was credited is withdrawn during the first seven account years. See "Premium Bonus Option--Forfeiture" and "Withdrawals." If you expect to make purchase payments to your contract after the first account year, the premium bonus option may not be right for you. Also, if you anticipate that you will need to make withdrawals from your account during the first seven account years, you may not want to elect the premium bonus option. See "Premium Bonus Option--Suitability." Your sales representative can help you decide if the premium bonus option is right for you. Transferability. You may transfer from one option package to another. > Transfers must occur on an account anniversary. > A written request for the transfer must be received by us within 60 days of an account anniversary. > Certain minimum account values must be met. See "Transfers Between Option Packages." Free Look/Right to Cancel. You may cancel your contract within ten days (some states require more than ten days) of receipt. See "Right to Cancel." Death Benefit. Your beneficiary may receive a financial benefit in the event of your death prior to the income phase. The amount of the death benefit will depend upon the option package selected. See "Death Benefit." Any death benefit during the income phase will depend upon the income phase payment option selected. See "The Income Phase." Withdrawals. During the accumulation phase you may withdraw all or part of your account value. Certain fees, taxes and early withdrawal penalties may apply. In addition, the Tax Code restricts full and partial withdrawals in some circumstances. See "Withdrawals." Amounts withdrawn from the Guaranteed Account may be subject to a market value adjustment. See Appendix I. 5 Systematic Distribution Options. These are made available for you to receive periodic withdrawals from your account, while retaining the account in the accumulation phase. See "Systematic Distribution Options." Fees and Expenses. Certain fees and expenses are deducted from the value of your contract. The fees and expenses deducted may vary depending upon the option package you select. See "Fee Table" and "Fees." Taxation. You will generally not pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements (e.g., IRAs or 403(b) plans) also defer payment of taxes on earnings until they are withdrawn. If you are considering funding a tax-qualified retirement arrangement with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your decision with your financial representative. Taxes will generally be due when you receive a distribution. Tax penalties may apply in some circumstances. See "Taxation." 6 - -------------------------------------------------------------------------------- Contract Phases - -------------------------------------------------------------------------------- [graphic] Payments to Your Account Step 1 (down arrow) Aetna Life Insurance and Annuity Company (a) (down arrow) Step 2 (b) (down arrow) Variable Annuity Fixed Account B Interest Options Variable Investment Options The Subaccounts A B Etc. (down arrow) Step 3 (down arrow) Mutual Mutual Fund A Fund B [end graphic] I. The Accumulation Phase (accumulating dollars under your contract) STEP 1: You provide us with your completed application and initial purchase payment. We establish an account for you and credit that account with your initial purchase payment. If you elected the premium bonus option we will also credit your account with a premium bonus. STEP 2: You direct us to invest your purchase payment and the premium bonus, if applicable, in one or more of the following investment options: (a) Fixed Interest Options; or (b) Variable Investment Options. (The variable investment options are the subaccounts of Variable Annuity Account B. Each one invests in a specific mutual fund.) STEP 3: Each subaccount you select purchases shares of its assigned fund. II. The Income Phase (receiving income phase payments from your contract) When you want to begin receiving payments from your contract, you may select from the options available. The contract offers several income phase payment options (see "The Income Phase"). In general, you may: > Receive income phase payments for a specified period of time or for life; > Receive income phase payments monthly, quarterly, semi-annually or annually; > Select an income phase payment option that provides for payments to your beneficiary; or > Select income phase payments that are fixed or vary depending upon the performance of the variable investment options you select. 7 [Begin sidebar] In this Section: > Maximum Transaction Fees > Maximum Fees Deducted from Investments in the Separate Account > Fees Deducted by the Funds > Hypothetical Examples Also see the "Fees" section for: > How, When and Why Fees are Deducted > Reduction, Waiver and/or Elimination of Certain Fees > Premium and Other Taxes [End sidebar] Fee Table - -------------------------------------------------------------------------------- The tables and examples in this section show the fees that may affect your account value during the accumulation phase. See "The Income Phase" for fees that may apply after you begin receiving payments under the contract. The fees shown do not reflect any premium tax that may apply. These tables and examples apply to contracts issued outside of the State of New York. See Appendix I for tables and examples for contracts issued in New York. Maximum Transaction Fees Early Withdrawal Charge. (As a percentage of payments withdrawn.)
- -------------------------------------------------------------------------------- All Contracts, Except Roth IRA Contracts Issued Before July 14, 2000: - -------------------------------------------------------------------------------- Early Years From Receipt Withdrawal of Purchase Payment Charge ------------------- ---------- Less than 2 7% 2 or more but less than 4 6% 4 or more but less than 5 5% 5 or more but less than 6 4% 6 or more but less than 7 3% 7 or more 0% - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Roth IRA Contracts Issued Before July 14, 2000: - -------------------------------------------------------------------------------- Early Withdrawal Completed Account Years Charge ----------------------- ---------- Less than 1 5% 1 or more but less than 2 4% 2 or more but less than 3 3% 3 or more but less than 4 2% 4 or more but less than 5 1% 5 or more 0% - --------------------------------------------------------------------------------
Annual Maintenance Fee............................................... $30.00(1) Transfer Charge....................................................... $0.00(2) (1) The annual maintenance fee will be waived if your account value is $50,000 or greater on the date this fee is due. See "Fees--Annual Maintenance Fee." (2) During the accumulation phase we currently allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. See "Transfers" for additional information. 8 Maximum Fees Deducted from Investments in the Separate Account Amount During the Accumulation Phase (Daily deductions, equal to the following percentages on an annual basis, from amounts invested in the subaccounts.)
All Account o If You Do Not Elect the Premium Bonus Option Years > Option Package I-- Mortality and Expense Risk Charge 0.80% Administrative Expense Charge 0.15% ----- Total Separate Account Expenses 0.95% ===== > Option Package II-- Mortality and Expense Risk Charge 1.10% Administrative Expense Charge 0.15% ----- Total Separate Account Expenses 1.25% ===== > Option Package III-- Mortality and Expense Risk Charge 1.25% Administrative Expense Charge 0.15% ----- Total Separate Account Expenses 1.40% =====
After Account the 7th Years Account o If You Elect the Premium Bonus Option 1-7 Year > Option Package I-- Mortality and Expense Risk Charge 0.80% 0.80% Administrative Expense Charge 0.15% 0.15% Premium Bonus Option Charge 0.50% 0.00% ----- ----- Total Separate Account Expenses 1.45% 0.95% ===== ===== > Option Package II-- Mortality and Expense Risk Charge 1.10% 1.10% Administrative Expense Charge 0.15% 0.15% Premium Bonus Option Charge 0.50% 0.00% ----- ----- Total Separate Account Expenses 1.75% 1.25% ===== ===== > Option Package III-- Mortality and Expense Risk Charge 1.25% 1.25% Administrative Expense Charge 0.15% 0.15% Premium Bonus Option Charge 0.50% 0.00% ----- ----- Total Separate Account Expenses 1.90% 1.40% ===== =====
9 Fees Deducted by the Funds Using this information. The following table shows the investment advisory fees and other expenses charged annually by each fund. Fund fees are one factor that impacts the value of a fund share. To learn about additional factors impacting the share value, refer to the fund prospectus. How fees are deducted. The fund fees are not deducted from account values. Instead, they are deducted from the value of the fund shares on a daily basis, which in turn affects the value of each subaccount that purchases fund shares. Except as noted below, the following figures are a percentage of the average net assets of each fund, and are based on figures for the year ended December 31, 1999. Fund Expense Table
Total Fund Net Fund Annual Annual Expenses Expenses Investment Without Total After Advisory Other Waivers or Waivers and Waivers Fund Name Fees(1) Expenses Reductions Reductions or Reductions - --------- ------- -------- ---------- ---------- ------------- Aetna Balanced VP, Inc. 0.50% 0.09% 0.59% -- 0.59% Aetna Bond VP 0.40% 0.09% 0.49% -- 0.49% Aetna Growth VP(2) 0.60% 0.11% 0.71% 0.00% 0.71% Aetna Growth and Income VP 0.50% 0.08% 0.58% -- 0.58% Aetna Index Plus Large Cap VP(2) 0.35% 0.10% 0.45% 0.00% 0.45% Aetna International VP(2) 0.85% 0.77% 1.62% 0.47% 1.15% Aetna Money Market VP 0.25% 0.09% 0.34% -- 0.34% Aetna Real Estate Securities VP(2) 0.75% 0.74% 1.49% 0.54% 0.95% Aetna Small Company VP(2) 0.75% 0.13% 0.88% 0.00% 0.88% Aetna Technology VP(2)(3) 0.95% 0.25% 1.20% 0.05% 1.15% AIM V.I. Capital Appreciation Fund 0.62% 0.11% 0.73% -- 0.73% AIM V.I. Government Securities Fund 0.50% 0.40% 0.90% -- 0.90% AIM V.I. Growth Fund 0.63% 0.10% 0.73% -- 0.73% AIM V.I. Growth and Income Fund 0.61% 0.16% 0.77% -- 0.77% AIM V.I. Value Fund 0.61% 0.15% 0.76% -- 0.76% Alliance Growth and Income Portfolio 0.63% 0.08% 0.71% -- 0.71% Alliance Premier Growth Portfolio 1.00% 0.05% 1.05% -- 1.05% Alliance Quasar Portfolio(4) 1.00% 0.19% 1.19% 0.24% 0.95% Fidelity VIP Equity-Income Portfolio(5) 0.48% 0.09% 0.57% -- 0.57% Fidelity VIP Growth Portfolio(5) 0.58% 0.08% 0.66% -- 0.66% Fidelity VIP High Income Portfolio(5) 0.58% 0.11% 0.69% -- 0.69% Fidelity VIP II Contrafund[RegTM] Portfolio(5) 0.58% 0.09% 0.67% -- 0.67% Janus Aspen Aggressive Growth Portfolio(6) 0.65% 0.02% 0.67% 0.00% 0.67% Janus Aspen Balanced Portfolio(6) 0.65% 0.02% 0.67% 0.00% 0.67% Janus Aspen Growth Portfolio(6) 0.65% 0.02% 0.67% 0.00% 0.67% Janus Aspen Worldwide Growth Portfolio(6) 0.65% 0.05% 0.70% 0.00% 0.70% MFS Total Return Series(7) 0.75% 0.15% 0.90% 0.00% 0.90% [Mitchell Hutchins Growth and Income Portfolio(9) 0.70% 0.78% 1.48% -- 1.48%] [Mitchell Hutchins Small Cap Portfolio(9) 1.00% 3.05% 4.05% -- 4.05%] [Mitchell Hutchins Tactical Allocation Portfolio(9) 0.50% 0.49% 0.99% -- 0.99%] Oppenheimer Aggressive Growth Fund/VA 0.66% 0.01% 0.67% -- 0.67% Oppenheimer Main Street Growth & Income Fund/VA 0.73% 0.05% 0.78% -- 0.78% Oppenheimer Strategic Bond Fund/VA 0.74% 0.04% 0.78% -- 0.78% PPI MFS Capital Opportunities Portfolio(8) 0.65% 0.25% 0.90% 0.00% 0.90% PPI MFS Emerging Equities Portfolio(8) 0.67% 0.13% 0.80% 0.00% 0.80% PPI MFS Research Growth Portfolio(8) 0.70% 0.15% 0.85% 0.00% 0.85% PPI Scudder International Growth Portfolio(8) 0.80% 0.20% 1.00% 0.00% 1.00%
10 Footnotes to the "Fund Expense Table" (1) Certain of the fund advisers reimburse the company for administrative costs incurred in connection with administering the funds as variable funding options under the contract. These reimbursements are generally paid out of the Investment Advisory Fees and are not charged to investors. For the AIM Funds, the reimbursements may be paid out of fund assets in an amount up to 0.25% annually. Any such reimbursements paid from the AIM Funds' assets are included in the "Other Expenses" column. (2) The investment adviser is contractually obligated through December 31, 2000 to waive all or a portion of its investment advisory fee and/or its administrative services fee and/or to reimburse a portion of other expenses in order to ensure that the fund's "Total Fund Annual Expenses Without Waivers or Reductions" do not exceed the percentage reflected under "Net Fund Annual Expenses After Waivers or Reductions." (3) Aetna Technology VP commenced operations on May 1, 2000. Amounts reflected in "Other Expenses" and "Total Fund Annual Expenses Without Waivers or Reductions" are estimated amounts for the current fiscal year based on expenses for comparable funds. Actual expenses may vary from those shown. (4) The investment manager has agreed to waive its fees and reimburse the Quasar Variable Portfolio to limit total expenses to 0.95% of daily net assets until at least May 1, 2001. (5) A portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, through arrangements with certain funds', or the investment adviser on behalf of certain funds', custodian, credits realized as a result of uninvested cash balances were used to reduce a portion of each applicable fund's expenses. These credits are not included under Total Waivers and Reductions. If these credits had been included, the amounts shown under Net Fund Annual Expenses After Waivers or Reductions presented in the table would have been 0.56% for Fidelity VIP Equity-Income Portfolio; 0.65% for Fidelity VIP Growth Portfolio; and 0.65% for Fidelity VIP II Contrafund[RegTM] Portfolio. (6) Expenses are based upon expenses for the fiscal year ended December 31, 1999, restated to reflect a reduction in the management fee for Aggressive Growth, Balanced, Growth and Worldwide Growth Portfolios. All expenses are shown without the effect of expense offset arrangements. (7) The series has an expense offset arrangement which reduces the series' custodian fee based upon the amount of cash maintained by the series with its custodian and dividend disbursing agent. The series may enter into other such arrangements and directed brokerage arrangements, which would also have the effect of reducing the series' expenses. The "Other Expenses" shown above do not take into account these expense reductions, and are therefore higher than the actual expenses of the series. Had these fee reductions been taken into account, Net Fund Annual Expenses After Waivers or Reductions would be lower and would equal 0.89% for the series. (8) The investment adviser has agreed to reimburse the portfolios for expenses and/or waive its fees, so that, through at least April 30, 2001, the aggregate of each portfolio's expenses will not exceed the combined investment advisory fees and other expenses shown under the Net Fund Annual Expenses After Waivers or Reductions column above. (9) The "Other Expenses" include an annual 0.25% fee imposed under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. This plan provides that each portfolio pays to the distributor of the portfolios a distribution fee at an annual rate of 0.25% of its average daily net assets attributable to its Class I shares. The distributor of the portfolios uses the distribution fee to pay insurance companies whose separate accounts purchase Class I shares for distribution-related services that the insurance companies provide with respect to the Class I shares. 11 Hypothetical Example: If You Do Not Elect the Premium Bonus Option Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the contract and assume a 5% annual return on the investment. For the purpose of these examples, we deducted total annual fund expenses and the maximum contract charges, except the premium bonus option charge (i.e., a mortality and expense risk charge of 1.25%, an administrative expense charge of 0.15% and an annual maintenance fee of $30 (converted to a percentage of assets equal to 0.022%)). The total annual fund expenses used are those shown in the column "Total Fund Annual Expenses Without Waiver or Reductions" in the Fund Expense Table.
- -------------------------------------------- EXAMPLE A EXAMPLE B > These examples are purely hypothetical. --------- --------- > They should not be considered a If you withdraw your entire account If at the end of the periods shown you representation of past or future expenses value at the end of the periods shown, (1) leave your entire account value or expected returns. you would pay the following expenses, invested or (2) select an income phase > Actual expenses and/or returns may be including any applicable early payment option, you would pay the more or less than those shown in these withdrawal charge*: following expenses (no early with- examples. drawal charge is reflected):** - -------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ------ ------- ------- -------- ------ ------- ------- -------- Aetna Balanced VP, Inc. Aetna Bond VP Aetna Growth VP Aetna Growth and Income VP Aetna Index Plus Large Cap VP Aetna International VP Aetna Money Market VP Aetna Real Estate Securities VP Aetna Small Company VP Aetna Technology VP AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund AIM V.I. Growth Fund AIM V.I. Growth and Income Fund AIM V.I. Value Fund Alliance Growth and Income Portfolio Alliance Premier Growth Portfolio Alliance Quasar Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP High Income Portfolio Fidelity VIP II Contrafund[RegTM] Portfolio Janus Aspen Aggressive Growth Portfolio Janus Aspen Balanced Portfolio Janus Aspen Growth Portfolio Janus Aspen Worldwide Growth Portfolio MFS Total Return Series [Mitchell Hutchins Growth & Income Portfolio] [Mitchell Hutchins Small Cap Portfolio] [Mitchell Hutchins Tactical Allocation Portfolio] Oppenheimer Aggressive Growth Fund/VA Oppenheimer Main Street Growth & Income Fund/VA Oppenheimer Strategic Bond Fund/VA PPI MFS Capital Opportunities Portfolio PPI MFS Emerging Equities Portfolio PPI MFS Research Growth Portfolio PPI Scudder International Growth Portfolio
- ----------------- * This example reflects deduction of an early withdrawal charge using the early withdrawal charge schedule that applies to all contracts, including Roth IRA contracts issued after July 13, 2000. ** This example does not apply during the income phase if you selected a nonlifetime income phase payment option with variable payments and take a lump-sum withdrawal after payments start. In this case the lump-sum payment is treated as a withdrawal during the accumulation phase and may be subject to an early withdrawal charge (refer to Example A). 12 Hypothetical Example: If You Elect the Premium Bonus Option Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the contract and assume a 5% annual return on the investment. For the purpose of these examples, we deducted total annual fund expenses and the maximum contract charges (i.e., a mortality and expense risk charge of 1.25%, an administrative expense charge of 0.15%, an annual maintenance fee of $30 (converted to a percentage of assets equal to 0.022%) and the premium bonus option charge of 0.50% during the first seven account years). The total annual fund expenses used are those shown in the column "Total Fund Annual Expenses Without Waiver or Reductions" in the Fund Expense Table.
- -------------------------------------------- EXAMPLE A EXAMPLE B > These examples are purely hypothetical. --------- --------- > They should not be considered a If you withdraw your entire account If at the end of the periods shown you representation of past or future expenses value at the end of the periods shown, (1) leave your entire account value or expected returns. you would pay the following expenses, invested or (2) select an income phase > Actual expenses and/or returns may be including any applicable early payment option, you would pay the more or less than those shown in these withdrawal charge*: following expenses (no early examples. withdrawal charge is reflected):** - -------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ------ ------- ------- -------- ------ ------- ------- -------- Aetna Balanced VP, Inc. Aetna Bond VP Aetna Growth VP Aetna Growth and Income VP Aetna Index Plus Large Cap VP Aetna International VP Aetna Money Market VP Aetna Real Estate Securities VP Aetna Small Company VP Aetna Technology VP AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund AIM V.I. Growth Fund AIM V.I. Growth and Income Fund AIM V.I. Value Fund Alliance Growth and Income Portfolio Alliance Premier Growth Portfolio Alliance Quasar Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP High Income Portfolio Fidelity VIP II Contrafund[RegTM] Portfolio Janus Aspen Aggressive Growth Portfolio Janus Aspen Balanced Portfolio Janus Aspen Growth Portfolio Janus Aspen Worldwide Growth Portfolio MFS Total Return Series [Mitchell Hutchins Growth & Income Portfolio] [Mitchell Hutchins Small Cap Portfolio] [Mitchell Hutchins Tactical Allocation Portfolio] Oppenheimer Aggressive Growth Fund/VA Oppenheimer Main Street Growth & Income Fund/VA Oppenheimer Strategic Bond Fund/VA PPI MFS Capital Opportunities Portfolio PPI MFS Emerging Equities Portfolio PPI MFS Research Growth Portfolio PPI Scudder International Growth Portfolio
- ----------------- * This example reflects deduction of an early withdrawal charge using the early withdrawal charge schedule that applies to all contracts, including Roth IRA contracts issued after July 13, 2000. ** This example does not apply during the income phase if you selected a nonlifetime income phase payment option with variable payments and take a lump-sum withdrawal after payments start. In this case the lump-sum payment is treated as a withdrawal during the accumulation phase and may be subject to an early withdrawal charge (refer to Example A). 13 Condensed Financial Information - -------------------------------------------------------------------------------- Understanding Condensed Financial Information. In Appendix V of this prospectus, we provide condensed financial information about the Variable Annuity Account B (the separate account) subaccounts you may invest in through the contract. The numbers show the year-end unit values of each subaccount from the time purchase payments were first received in the subaccounts under the contract. Purchase and Rights - -------------------------------------------------------------------------------- How to Purchase > Individual Contracts. In some states, where group contracts are not available, you may purchase the contract directly from us by completing an application and delivering it and your initial purchase payment to us. Upon our approval we will issue you a contract and set up an account for you under the contract. > Group Contracts. In most states we have distributors, usually broker-dealers or banks, who hold the contract as a group contract (see "Distribution"). You may purchase an interest (or, in other words, participate) in the group contract by contacting a distributor and completing an application and delivering it with your initial purchase payment to that distributor. Upon our approval, we will set up an account for you under the group contract and issue you a certificate showing your rights under the contract. > Joint Contracts (generally spouses). For a nonqualified contract, you may participate in a group contract as a joint contract holder. References to "contract holder" in this prospectus mean both contract holders under joint contracts. Tax law prohibits the purchase of qualified contracts by joint contract holders. Maximum Issue Age. The maximum issue age for you and the annuitant (if you are not the annuitant) on the date we establish your account is 90. Your Rights Under the Contract > Individual Contracts. You have all contract rights. > Group Contracts. The holder of the group contract has title to the contract and, generally, only the right to accept or reject any modifications to the contract. You have all other rights to your account under the contract. > Joint Contracts. Joint contract holders have equal rights under the contract with respect to their account. All rights under the contract must be exercised by both joint contract holders with the exception of transfers among investment options. See the "Death Benefit" section for the rights of the surviving joint contract holder upon the death of a joint contract holder prior to the income phase start date. Purchase Payment Methods. The following purchase payment methods are allowed: > One lump sum; > Periodic payments; or > Transfer or rollover from a pre-existing retirement plan or account. 14 We reserve the right to reject any purchase payments to a prospective or existing account without advance notice. If you are considering making periodic payments beyond the first contract year, the premium bonus option may not be right for you. See "Premium Bonus Option--Suitability." Purchase Payment Amounts. The minimum initial purchase payment depends upon the option package selected at issue and must be met without consideration of any premium bonus.
- ------------------------------------------------------------------------------------------ Option Option Option Package I Package II Package III - ------------------------------------------------------------------------------------------ Minimum Non- Non- Non- Initial Qualified: Qualified:* Qualified: Qualified:* Qualified: Qualified:* Purchase ---------- ----------- ---------- ----------- ---------- ----------- Payment $15,000 $1,500 $5,000 $1,500 $5,000 $1,500 - ------------------------------------------------------------------------------------------
* The Tax Code imposes a maximum limit on annual payments which may be excluded from your gross income. Additional purchase payments must be at least $50 (we may change this amount from time to time.) A purchase payment of more than $1,000,000 will be allowed only with our consent. Reduction of Purchase Payment Amounts. In certain circumstances we may reduce the minimum initial or additional purchase payment amount we will accept under a contract. Whether such a reduction is available will be based on consideration of each of the following factors: > The size and type of the prospective group, if any, to which the reduction would apply; > The method and frequency of purchase payments to be made under the contract; and > The amount of compensation to be paid to distributors and their registered representative on each purchase payment. Any reduction of the minimum initial or additional purchase payment amount will not be unfairly discriminatory against any person. We will make any such reduction according to our own rules in effect at the time the purchase payment is received. We reserve the right to change these rules from time to time. Acceptance or Rejection of Your Application. We must accept or reject your application within two business days of receipt. If the application is incomplete, we may hold any forms and accompanying purchase payment(s) for five business days. We may hold purchase payments for longer periods, pending acceptance of the application, only with your permission. If the application is rejected, the application and any purchase payments will be returned to you. Allocating Purchase Payments to the Investment Options. We will allocate your purchase payments among the investment options you select. Allocations must be in whole percentages and there may be limits on the number of investment options you may select. When selecting investment options you may find it helpful to review the "Investment Options" section. 15 Right to Cancel - -------------------------------------------------------------------------------- When and How to Cancel. You may cancel your contract within ten days of receipt (some states require more than ten days) by returning it to our Home Office along with a written notice of cancellation. Refunds. We will issue you a refund within seven days of our receipt of your contract and written notice of cancellation. Unless your state requires otherwise or unless you purchased an IRA, your refund will equal the purchase payments made plus any earnings or minus any losses attributable to those purchase payments allocated among the subaccounts. Any premium bonus credited to your account will be forfeited and your refund will reflect any earnings or losses attributable to the premium bonus. In other words, you will bear the entire investment risk for amounts allocated among the subaccounts during this period and the amount refunded could be less than the amount paid. If your state requires or if you purchased an IRA, we will refund all purchase payments made. If the purchase payments for your canceled contract came from a rollover from another contract issued by us or one of our affiliates where an early withdrawal charge was reduced or eliminated, the purchase payments will be restored to your prior contract. Premium Bonus Option - -------------------------------------------------------------------------------- Election. At the time of application you may elect the premium bonus option. Once elected it may not be revoked. The premium bonus option may not be available under all contracts or in all states. Premium Bonus Amount. If you elect this option we will credit your account with a 4% premium bonus for each purchase payment you make during the first account year. The premium bonus will be included in your account value and allocated among the investment options you have selected in the same proportion as the purchase payment. The amount of the premium bonus we credit to an account may be reduced if the premium bonus option charge is reduced or eliminated. Premium Bonus Option Charge. In exchange for the premium bonus, during the first seven account years you will pay an annual premium bonus option charge equal to 0.50% of your account value allocated to the subaccounts. We may also deduct this charge from amounts allocated to the fixed interest options. Under certain contracts, the premium bonus option charge may be reduced or eliminated. See "Fees--Reduction or Elimination of Certain Fees." After the seventh account year you will no longer pay the premium bonus option charge. We will administer the elimination of this charge by decreasing the number of accumulation units and increasing the accumulation unit values of the subaccounts in which you are then invested. The elimination of this charge and the adjustment of the number of accumulation units and accumulation unit values will not affect your account value. See "Your Account Value." Forfeiture. In each of the following circumstances all or part of a premium bonus credited to your account will be forfeited: > If you exercise your free look privilege and cancel your contract. See "Right to Cancel." 16 > If a death benefit is payable based on account value, step-up value or roll-up value, but only the amount of any premium bonus credited to the account after or within 12 months of the date of death. See "Death Benefit-- Premium Bonus." > If all or part of a purchase payment for which a premium bonus was credited is withdrawn during the first seven account years. The amount of the premium bonus forfeited will be in the same percentage as the amount withdrawn subject to an early withdrawal charge is to the total purchase payments made during the first account year. See "Withdrawals." The following hypothetical example illustrates how the forfeiture of premium bonus is calculated when you withdraw all or part of a purchase payment for which a premium bonus was credited during the first seven account years.
- ----------------------------------------------------------------------------------------------------------------------- Purchase Premium Account Withdrawal Date Payment Bonus Value Amount Explanation - ----------------------------------------------------------------------------------------------------------------------- July 14, 2000 $100,000 $4,000 $104,000 -- You make a $100,000 initial purchase payment and we credit your account with a 4% ($4,000) premium bonus. Your beginning account value equals $104,000. - ----------------------------------------------------------------------------------------------------------------------- July 14, 2003 -- -- $120,000 $30,000 Assume that your account value grows to $120,000 over the next three years and you request a $30,000 withdrawal. $18,000 of that $30,000 will be subject to an early withdrawal charge ($30,000 minus $12,000 (the 10% free withdrawal amount, see "Fees--Free Withdrawals")) and you would pay a $1,080 early withdrawal charge (6% of $18,000). Additionally, because $18,000 is 18% of the $100,000 purchase payment made in the first account year, 18% of your $4,000 premium bonus, or $720, would be forfeited.* - -----------------------------------------------------------------------------------------------------------------------
- --------------------------- *This example assumes that either Option Package I or II has been in effect since you purchased the contract. If Option Package III has been in effect since inception, none of the withdrawal would be subject to an early withdrawal charge because the 30% cumulative free withdrawal amount ($36,000) would be greater than the amount of the withdrawal. See "Fees--Free Withdrawals." Therefore, the withdrawal would not result in forfeiture of any of the premium bonus. See Appendix I for details about forfeiture of the premium bonus under contracts issued in New York. Suitability. If you expect to make purchase payments to your account after the first account year, the premium bonus option may not be right for you. Your account will not be credited with a premium bonus for purchase payments made after the first account year yet we will assess the premium bonus option charge against your account value which is increased by these additional purchase payments. Consequently, the amount of the premium bonus option charge you would pay over time may be more than the amount of the premium bonus we credited to your account. Also, if you anticipate that you will need to make withdrawals from your account during the first seven account years, you may not want to elect the premium bonus option. When you make such a withdrawal you may forfeit part of your premium bonus, and the amount of the premium bonus option charge you have paid may be more than the amount of the premium bonus not forfeited. Your sales representative can help you decide if the premium bonus option is right for you. 17 Investment Options - -------------------------------------------------------------------------------- The contract offers variable investment options and fixed interest options. Variable Investment Options. These options are called subaccounts. The subaccounts are within Variable Annuity Account B (the separate account), a separate account of the Company. Each subaccount invests in a specific mutual fund. You do not invest directly in or hold shares of the funds. > Mutual Fund (fund) Descriptions. We provide brief descriptions of the funds in Appendix IV. Investment results of the funds are likely to differ significantly and there is no assurance that any of the funds will achieve their respective investment objectives. Shares of the funds will rise and fall in value and you could lose money by investing in the funds. Shares of the funds are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, the Federal Deposit Insurance Corporation or any other government agency. Unless otherwise noted, all funds are diversified as defined under the Investment Company Act of 1940. Refer to the fund prospectuses for additional information. Fund prospectuses may be obtained, free of charge, from our Home Office at the address and phone number listed in "Contract Overview--Questions: Contacting the Company" or by contacting the SEC Public Reference Room. Fixed Interest Options. If available in your state, the ALIAC Guaranteed Account (the Guaranteed Account) or the Fixed Account. The Guaranteed Account offers certain guaranteed minimum interest rates for a stated period of time. Amounts must remain in the Guaranteed Account for specific periods to receive the quoted interest rates, or a market value adjustment will be applied. The market value adjustment may be positive or negative. The Fixed Account guarantees payment of the minimum interest rate specified in the contract. The Fixed Account is only available in certain states. For a description of these options, see Appendices II and III and the Guaranteed Account prospectus. - -------------------------------------------------------------------------------- Selecting Investment Options o Choose options appropriate for you. Your sales representative can help you evaluate which investment options may be appropriate for your financial goals. o Understand the risks associated with the options you choose. Some subaccounts invest in funds that are considered riskier than others. Funds with additional risks are expected to have values that rise and fall more rapidly and to a greater degree than other funds. For example, funds investing in foreign or international securities are subject to risks not associated with domestic investments, and their investment performance may vary accordingly. Also, funds using derivatives in their investment strategy may be subject to additional risks. o Be informed. Read this prospectus, the fund prospectuses, the Guaranteed Account and Fixed Account appendices and the Guaranteed Account prospectus. - -------------------------------------------------------------------------------- Limits on Availability of Options. Some funds or fixed interest options may be unavailable through your contract or in your state. We may add, withdraw or substitute funds, subject to the conditions in your contract and compliance with regulatory requirements. 18 Limits on How Many Investment Options You May Select. Although there is currently no limit, we reserve the right to limit the number of investment options you may select at any one time or during the life of the contract. For purposes of determining any limit, each subaccount and each guaranteed term of the Guaranteed Account, or an investment in the Fixed Account in certain contracts, will be considered an investment option. Limits Imposed by the Underlying Fund. Orders for the purchase of fund shares may be subject to acceptance by the fund. We reserve the right to reject, without prior notice, any allocation of a purchase payment to a subaccount if the subaccount's investment in the corresponding fund is not accepted by the fund for any reason. Additional Risks of Investing in the Funds (Mixed and Shared Funding) "Shared funding" occurs when shares of a fund, which the subaccounts buy for variable annuity contracts, are also bought by other insurance companies for their variable annuity contracts. "Mixed funding" occurs when shares of a fund, which the subaccounts buy for variable annuity contracts, are bought for variable life insurance contracts issued by us or other insurance companies. > Shared--bought by more than one company. > Mixed--bought for annuities and life insurance. It is possible that a conflict of interest may arise due to mixed and/or shared funding, which could adversely impact the value of a fund. For example, if a conflict of interest occurred and one of the subaccounts withdrew its investment in a fund, the fund may be forced to sell its securities at disadvantageous prices, causing its share value to decrease. Each fund's Board of Directors or Trustees will monitor events to identify any conflicts which may arise and to determine what action, if any, should be taken to address such conflicts. Transfers Among Investment Options - -------------------------------------------------------------------------------- You may transfer amounts among the available subaccounts. During the accumulation phase we allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. During the income phase we allow you four free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. Transfers from the Guaranteed Account are subject to certain restrictions and may be subject to a market value adjustment. Transfers from the Fixed Account are subject to certain restrictions and transfers into the Fixed Account from any of the other investment options are not allowed. Transfers must be made in accordance with the terms of your contract. Transfer Requests. Requests may be made in writing, by telephone or, where applicable, electronically. Limits on Frequent Transfers. The contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the market. Such frequent trading can disrupt management of a fund and raise its expenses. This in turn can have an adverse effect on fund performance. 19 Accordingly, organizations or individuals that use market-timing investment strategies and make frequent transfers should not purchase the contract. We reserve the right to restrict, in our sole discretion and without prior notice, transfers initiated by a market-timing organization or individual or other party authorized to give transfer instructions on behalf of multiple contract holders. Such restrictions could include: (1) not accepting transfer instructions from an agent acting on behalf of more than one contract holder; and (2) not accepting preauthorized transfer forms from market timers or other entities acting on behalf of more than one contract holder at a time. We further reserve the right to impose, without prior notice, restrictions on transfers that we determine, in our sole discretion, will disadvantage or potentially hurt the rights or interests of other contract holders. Additionally, orders for the purchase of fund shares may be subject to acceptance by the fund. We reserve the right to reject, without prior notice, any transfer request to a subaccount if the subaccount's investment in the corresponding fund is not accepted for any reason. Value of Your Transferred Dollars. The value of amounts transferred into or out of subaccounts will be based on the subaccount unit values next determined after we receive your transfer request in good order at our Home Office or, if you are participating in the dollar cost averaging or account rebalancing programs, after your scheduled transfer or reallocation. Telephone and Electronic Transactions: Security Measures. To prevent fraudulent use of telephone and electronic transactions (including, but not limited to, internet transactions), we have established security procedures. These include recording calls on our toll-free telephone lines and requiring use of a personal identification number (PIN) to execute transactions. You are responsible for keeping your PIN and account information confidential. If we fail to follow reasonable security procedures, we may be liable for losses due to unauthorized or fraudulent telephone or other electronic transactions. We are not liable for losses resulting from telephone or electronic instructions we believe to be genuine. If a loss occurs when we rely on such instructions, you will bear the loss. The Dollar Cost Averaging Program. Dollar cost averaging is an investment strategy whereby you purchase fixed dollar amounts of an investment at regular intervals, regardless of price. Under this program a fixed dollar amount is automatically transferred from certain subaccounts, the Guaranteed Account or Fixed Account to any of the other subaccounts. A market value adjustment will not be applied to dollar cost averaging transfers from a guaranteed term of the Guaranteed Account during participation in the dollar cost averaging program. If such participation is discontinued, we will automatically transfer the remaining balance in that guaranteed term to another guaranteed term of the same duration, unless you initiate a transfer into another investment option. In either case a market value adjustment will apply. See Appendix II for more information about dollar cost averaging from the Guaranteed Account. If dollar cost averaging is stopped with respect to amounts invested in the Fixed Account, the remaining balance will be transferred to the money market subaccount. Dollar cost averaging neither ensures a profit nor guarantees against loss in a declining market. You should consider your financial ability to continue purchases through periods of low price levels. There is no additional charge for this program and transfers made under this program do not count as 20 transfers when determining the number of free transfers that may be made each calendar year. For additional information about this program, contact your sales representative or call us at the number listed in "Contract Overview--Questions: Contacting the Company." In certain states purchase payments allocated to the Fixed Account may require participation in the dollar cost averaging program. Dollar cost averaging is not available if you elect to participate in the account rebalancing program. The Account Rebalancing Program. Account rebalancing allows you to reallocate your account value to match the investment allocations you originally selected. Only account values invested in the subaccounts may be rebalanced. We automatically reallocate your account value annually (or more frequently as we allow). Account rebalancing neither ensures a profit nor guarantees against loss in a declining market. There is no additional charge for this program and transfers made under this program do not count as transfers when determining the number of free transfers that may be made each calendar year. You may participate in this program by completing the account rebalancing section of your application or by contacting us at the address and/or number listed in "Contract Overview--Questions: Contacting the Company." Account rebalancing is not available if you elect to participate in the dollar cost averaging program. 21 Transfers Between Option Packages - -------------------------------------------------------------------------------- You may transfer from one option package to another. > Transfers must occur on an account anniversary. > A written request for the transfer must be received by us within 60 days of an account anniversary. > The following minimum account values need to be met:
- ----------------------------------------------------------------------------------- Transfers to Transfers to Option Package I Option Packages II or III - ----------------------------------------------------------------------------------- Minimum Account Value Non- Non- Qualified: Qualified: Qualified: Qualified: ---------- ---------- ---------- ---------- $15,000 $1,500 $5,000 $1,500 - -----------------------------------------------------------------------------------
> You will receive a new contract schedule page upon transfer. > Only one option package may be in effect at any time.
- ----------------------------------------------------------------------------------------------------------------------------- Transfers to Transfers to Transfers to Option Package I Option Package II Option Package III - ----------------------------------------------------------------------------------------------------------------------------- Death Benefit(1): Death Benefit(1): Death Benefit(1): o The sum of all purchase payments o The sum of all purchase payments o The sum of all purchase payments made, adjusted for amounts made, adjusted for amounts made, adjusted for amounts withdrawn or applied to an income withdrawn or applied to an income withdrawn or applied to an income phase payment option as of the phase payment option as of the phase payment option as of the claim date, will continue to be claim date, will continue to be claim date, will continue to be calculated from the account calculated from the account calculated from the account effective date. effective date. effective date. o The "step-up value" under Option o If transferring from Option Package o If transferring from Option Package Packages II and III will terminate on I, the "step-up value" will be I, the "step-up value" will be the new schedule effective date. calculated beginning on the new calculated beginning on the new o The "roll-up value" under Option schedule effective date. schedule effective date. Package III will terminate on the o If transferring from Option Package o If transferring from Option Package new schedule effective date. III, the "step-up value" will continue II, the "step-up value" will continue to be calculated from the date to be calculated from the date calculated under Option calculated under Option Package II. Package III. o The "roll-up value" will be calculated o The "roll-up value" under Option beginning on the new schedule Package III will terminate on the effective date. new schedule effective date. - ----------------------------------------------------------------------------------------------------------------------------- Nursing Home Waiver(2): Nursing Home Waiver(2): Nursing Home Waiver(2): o The availability of the waiver of the o If transferring from Option Package o If transferring from Option Package early withdrawal charge under the I, the waiting period under I, the waiting period under the Nursing Home Waiver will terminate the Nursing Home Waiver will begin Nursing Home Waiver will begin to on the new schedule effective date. to be measured from the new be measured from the new schedule schedule effective date. effective date. o If transferring from Option Package o If transferring from Option Package III, the waiting period will have II, the waiting period will have been been satisfied on the new schedule satisfied on the new schedule effective date. effective date. - ----------------------------------------------------------------------------------------------------------------------------- Free Withdrawals(3): Free Withdrawals(3): Free Withdrawals(3): o If transferring from Option Package o If transferring from Option Package o The cumulative to 30% available III, any available free withdrawal III, any available free withdrawal free withdrawal amount will begin to amount in excess of 10% will be lost amount in excess of 10% will be lost be calculated as of the new schedule as of the new schedule effective date. as of the new schedule effective effective date. date. - -----------------------------------------------------------------------------------------------------------------------------
(1) See "Death Benefit." (2) See "Fees--Nursing Home Waiver." (3) See "Fees--Free Withdrawals." 22 [Begin sidebar] Types of Fees There are four types of fees or deductions that may affect your account. TRANSACTION FEES o Early Withdrawal Charge o Annual Maintenance Fee o Transfer Charge FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT o Mortality and Expense Risk Charge o Administrative Expense Charge o Premium Bonus Option Charge FEES DEDUCTED BY THE FUNDS o Investment Advisory Fees o Other Expenses PREMIUM AND OTHER TAXES [End sidebar] Fees - -------------------------------------------------------------------------------- The following repeats and adds to information provided in the "Fee Table" section. Please review both sections for information on fees. TRANSACTION FEES Early Withdrawal Charge Withdrawals of all or a portion of your account value may be subject to a charge. Amount. A percentage of the purchase payments that you withdraw. The percentage will be determined by the early withdrawal charge schedule that applies to your account. Early Withdrawal Charge Schedules (The following schedules apply to contracts issued outside of the State of New York. See Appendix I for the schedule that applies to New York contracts.)
- -------------------------------------------------------------------------------- All Contracts, Except Roth IRA Contracts Issued Before July 14, 2000: - -------------------------------------------------------------------------------- Early Years From Receipt Withdrawal of Purchase Payment Charge ------------------- ---------- Less than 2 7% 2 or more but less than 4 6% 4 or more but less than 5 5% 5 or more but less than 6 4% 6 or more but less than 7 3% 7 or more 0% - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Roth IRA Contracts Issued Before July 14, 2000: - -------------------------------------------------------------------------------- Early Withdrawal Completed Account Years Charge ----------------------- ---------- Less than 1 5% 1 or more but less than 2 4% 2 or more but less than 3 3% 3 or more but less than 4 2% 4 or more but less than 5 1% 5 or more 0% - --------------------------------------------------------------------------------
Purpose. This is a deferred sales charge. It reimburses us for some of the sales and administrative expenses associated with the contract. If our expenses are greater than the amount we collect for the early withdrawal charge, we may use any of our corporate assets, including potential profit that may arise from the mortality and expense risk charge, to make up any difference. First In, First Out. The early withdrawal charge is calculated separately for each purchase payment withdrawn. For purposes of calculating your early withdrawal charge, we consider that your first purchase payment to the account (first in) is the first you withdraw (first out). Examples: Where the early withdrawal charge is based on the number of years since the purchase payment was received, if your initial purchase payment was made three years ago, we will deduct an early withdrawal charge equal to 6% of the portion of that purchase payment withdrawn. For certain Roth IRA contracts where the early withdrawal charge is based on the number of completed account years, if your initial purchase payment was made three years ago, we will deduct an early withdrawal charge equal to 2% of the portion of that purchase payment withdrawn. 23 In each case the next time you make a withdrawal we will access the early withdrawal charge, if any, against the portion of the first purchase payment you did not withdraw and/or subsequent purchase payments to your account in the order they were received. Earnings may be withdrawn after all purchase payments have been withdrawn. There is no early withdrawal charge for withdrawal of earnings. Free Withdrawals. There is no early withdrawal charge if, during each account year, the amount withdrawn is 10% or less of your account value on the later of the date we established your account or the most recent anniversary of that date. Under Option Package III, any unused percentage of the 10% free withdrawal amount shall carry forward into successive account years, up to a maximum 30% of your account value. The free withdrawal amount will be adjusted for amounts withdrawn under a systematic distribution option or taken as a required minimum distribution during the account year. Waiver. The early withdrawal charge is waived for purchase payments withdrawn if the withdrawal is: > Used to provide income phase payments to you; > Paid due to the annuitant's death during the accumulation phase in an amount up to the sum of purchase payments made, minus the total of all partial withdrawals, amounts applied to an income phase payment option and deductions made prior to the annuitant's death; > Paid upon a full withdrawal where your account value is $2,500 or less and no part of the account has been withdrawn during the prior 12 months; > Taken because of the election of a systematic distribution option (see "Systematic Distribution Options"); > Applied as a rollover to certain Roth IRAs issued by us or an affiliate; > If approved in your state, taken under a qualified contract, when the amount withdrawn is equal to the minimum distribution required by the Tax Code for your account calculated using a method permitted under the Tax Code and agreed to by us (including required minimum distributions using the ECO systematic distribution option (see "Systematic Distribution Options")); or > Paid upon termination of your account by us (see "Other Topics -- Involuntary Terminations"). Nursing Home Waiver. Under Option Packages II and III, you may withdraw all or a portion of your account value without an early withdrawal charge if: > More than one account year has elapsed since the schedule effective date; > The withdrawal is requested within three years of the annuitant's admission to a licensed nursing care facility (in Oregon there is no three year limitation period and in New Hampshire non-licensed facilities are included); and > The annuitant has spent at least 45 consecutive days in such nursing care facility. We will not waive the early withdrawal charge if the annuitant was in a nursing care facility for at least one day during the two week period immediately preceding or following the schedule effective date. It will also not apply to contracts where prohibited by state law. See Appendix I for contracts issued in New York. 24 Annual Maintenance Fee Maximum Amount. $30.00 When/How. Each year during the accumulation phase we deduct this fee from your account value. We deduct it on your account anniversary and at the time of full withdrawal. It is deducted proportionally from each investment option. Purpose. This fee reimburses us for our administrative expenses relating to the establishment and maintenance of your account. Elimination. We will not deduct the annual maintenance fee if your account value is $50,000 or more on the date this fee is to be deducted. Transfer Charge Amount. During the accumulation phase we currently allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. Purpose. This charge reimburses us for administrative expenses associated with transferring your dollars among investment options. FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT Mortality and Expense Risk Charge Maximum Amount. During the accumulation phase the amount of this charge, on an annual basis, is equal to the following percentages of your account value invested in the subaccounts:
- ------------------------------------------------------------------ Option Package I Option Package II Option Package III - ------------------------------------------------------------------ 0.80% 1.10% 1.25% - ------------------------------------------------------------------
During the income phase this charge, on an annual basis, is equal to 1.25% of amounts invested in the subaccounts. When/How. We deduct this charge daily from the subaccounts corresponding to the funds you select. We do not deduct this charge from any fixed interest option. Purpose. This charge compensates us for the mortality and expense risks we assume under the contract. > The mortality risks are those risks associated with our promise to make lifetime income phase payments based on annuity rates specified in the contract. > The expense risk is the risk that the actual expenses we incur under the contract will exceed the maximum costs that we can charge. If the amount we deduct for this charge is not enough to cover our mortality costs and expenses under the contract, we will bear the loss. We may use any excess to recover distribution costs relating to the contract and as a source of profit. We expect to make a profit from this charge. 25 Administrative Expense Charge Maximum Amount. During the accumulation phase the amount of this charge, on an annual basis, is equal to the following percentages of your account value invested in the subaccounts:
- ------------------------------------------------------------------ Option Package I Option Package II Option Package III - ------------------------------------------------------------------ 0.15% 0.15% 0.15% - ------------------------------------------------------------------
There is currently no administrative expense charge during the income phase. We reserve the right, however, to charge an administrative expense charge of up to 0.25% during the income phase. When/How. If imposed, we deduct this charge daily from the subaccounts corresponding to the funds you select. We do not deduct this charge from the fixed interest options. If we are imposing this charge when you enter the income phase, the charge will apply to you during the entire income phase. Purpose. This charge helps defray our administrative expenses that cannot be covered by the mortality and expense risk charges described above. This charge is not intended to exceed the average expected cost of administering the contract. We do not expect to make a profit from this charge. Premium Bonus Option Charge. Maximum Amount. 0.50%, but only if you elect the premium bonus option. When/How. We deduct this charge daily from the subaccounts corresponding to the funds you select. We may also deduct this charge from amounts allocated to the fixed interest options. This charge is deducted for the first seven account years during the accumulation phase and, if applicable, the income phase. Purpose. This charge compensates us for the cost associated with crediting the premium bonus to your account on purchase payments made during the first account year. REDUCTION OR ELIMINATION OF CERTAIN FEES When sales of the contract are made to individuals or a group of individuals in a manner that results in savings of sales or administrative expenses, we may reduce or eliminate the early withdrawal charge, annual maintenance fee, mortality and expense risk charge, administrative expense charge or premium bonus option charge. Our decision to reduce or eliminate any of these fees will be based on one or more of the following: > The size and type of group to whom the contract is issued; > The amount of expected purchase payments; > A prior or existing relationship with the Company, such as being an employee or former employee of the Company or one of our affiliates, receiving distributions or making transfers from other contracts issued by us or one of our affiliates or transferring amounts held under qualified retirement plans sponsored by us or one of our affiliates; > The type and frequency of administrative and sales services provided; or > The level of annual maintenance fee and early withdrawal charges. 26 In the case of an exchange of another contract issued by us or one of our affiliates where the early withdrawal charge has been waived, the early withdrawal charge for certain contracts offered by this prospectus may be determined based on the dates purchase payments were received in the prior contract. The reduction or elimination of any of these fees will not be unfairly discriminatory against any person and will be done according to our rules in effect at the time the contract is issued. We reserve the right to change these rules from time to time. The right to reduce or eliminate any of these fees may be subject to state approval. FEES DEDUCTED BY THE FUNDS Maximum Amount. Each fund's advisory fee and expenses are different. They are set forth in "Fee Table--Fees Deducted by the Funds" and described in more detail in each fund prospectus. When/How. A fund's fees and expenses are not deducted from your account value. Instead, they are reflected in the daily value of fund shares which, in turn, will affect the daily value of the subaccounts. Purpose. These fees and expenses help to pay the fund's investment adviser and operating expenses. PREMIUM AND OTHER TAXES Maximum Amount. Some states and municipalities charge a premium tax on annuities. These taxes currently range from 0% to 4%, depending upon the jurisdiction. When/How. We reserve the right to deduct premium taxes from your account value or from purchase payments to the account at any time, but not before there is a tax liability under state law. For example, we may deduct premium taxes at the time of a complete withdrawal or we may reflect the cost of premium taxes in our income phase payment rates when you commence income phase payments. In addition, we reserve the right to assess a charge for any federal taxes due against the separate account. See "Taxation." 27 Your Account Value - -------------------------------------------------------------------------------- During the accumulation phase your account value at any given time equals: > The current dollar value of amounts invested in the subaccounts; plus > The current dollar values of amounts invested in the fixed interest options, including interest earnings to date. Subaccount Accumulation Units. When you select a fund as an investment option, your account dollars invest in "accumulation units" of the Variable Annuity Account B subaccount corresponding to that fund. The subaccount invests directly in the fund shares. The value of your interests in a subaccount is expressed as the number of accumulation units you hold multiplied by an "accumulation unit value," as described below, for each unit. Accumulation Unit Value (AUV). The value of each accumulation unit in a subaccount is called the accumulation unit value or AUV. The AUV varies daily in relation to the underlying fund's investment performance. The value also reflects deductions for fund fees and expenses, the mortality and expense risk charge, the administrative expense charge and premium bonus option charge (if any). We discuss these deductions in more detail in "Fee Table" and "Fees." Valuation. We determine the AUV every normal business day after the close of the New York Stock Exchange. At that time we calculate the current AUV by multiplying the AUV last calculated by the "net investment factor" of the subaccount. The net investment factor measures the investment performance of the subaccount from one valuation to the next. Current AUV = Prior AUV x Net Investment Factor Net Investment Factor. The net investment factor for a subaccount between two consecutive valuations equals the sum of 1.0000 plus the net investment rate. Net Investment Rate. The net investment rate is computed according to a formula that is equivalent to the following: > The net assets of the fund held by the subaccount as of the current valuation; minus > The net assets of the fund held by the subaccount at the preceding valuation; plus or minus > Taxes or provisions for taxes, if any, due to subaccount operations (with any federal income tax liability offset by foreign tax credits to the extent allowed); divided by > The total value of the subaccount's units at the preceding valuation; minus > A daily deduction for the mortality and expense risk charge and the administrative expense charge, if any, and any other fees deducted from investments in the separate account, such as the premium bonus option charge and guarantee charges for the Aetna GET fund. See "Fees." The net investment rate may be either positive or negative. 28 Hypothetical Illustration. As a hypothetical illustration assume that your initial purchase payment to a qualified contract is $5,000 and you direct us to invest $3,000 in Fund A and $2,000 in Fund B. Also assume that on the day we receive the purchase payment the applicable AUVs after the next close of business of the New York Stock Exchange are $10 for Subaccount A and $20 for Subaccount B. Your account is credited with 300 accumulation units of Subaccount A, and 100 accumulation units of Subaccount B. Step 1: You make an initial purchase payment of $5,000. [graphic] $5,000 Purchase Payment Step 1 (down arrow) Aetna Life Insurance and Annuity Company Step 2 (down arrow) Variable Annuity Account B Subaccount A Subaccount B Etc. 300 100 accumulation accumulation units units (down arrow) Step 3 (down arrow) Fund A Fund B [end graphic] Step 2: A. You direct us to invest $3,000 in Fund A. The purchase payment purchases 300 accumulation units of Subaccount A ($3,000 divided by the current $10 AUV). B. You direct us to invest $2,000 in Fund B. The purchase payment purchases 100 accumulation units of Subaccount B ($2,000 divided by the current $20 AUV). Step 3: The separate account purchases shares of the applicable funds at the then current market value (net asset value or NAV). Each fund's subsequent investment performance, expenses and charges, and the daily charges deducted from the subaccount, will cause the AUV to move up or down on a daily basis. Purchase Payments to Your Account. If all or a portion of your initial purchase payment is directed to the subaccounts, it will purchase subaccount accumulation units at the AUV next computed after our acceptance of your application as described in "Purchase and Rights." Subsequent purchase payments or transfers directed to the subaccounts will purchase subaccount accumulation units at the AUV next computed following our receipt of the purchase payment or transfer request in good order. The value of subaccounts may vary day to day. 29 [Begin sidebar] Taxes, Fees and Deductions Amounts withdrawn may be subject to one or more of the following: > Early Withdrawal Charge (see "Fees--Early Withdrawal Charge") > Annual Maintenance Fee (see "Fees--Annual Maintenance Fee") > Premium Bonus Option Charge (See "Premium Bonus Option--Premium Bonus Option Charge") > Market Value Adjustment for amounts held in the Guaranteed Account (see Appendix I and the Guaranteed Account prospectus) > Tax Penalty (see "Taxation") > Tax Withholding (see "Taxation") To determine which may apply to you, refer to the appropriate sections of this prospectus, contact your sales representative or call us at the number listed in "Contract Overview--Questions: Contacting the Company." [End sidebar] Withdrawals - -------------------------------------------------------------------------------- You may withdraw all or a portion of your account value at any time during the accumulation phase. If you participate in the contract through a 403(b) plan, certain restrictions apply. See "Restrictions on Withdrawals From 403(b) Plan Accounts." Steps for Making A Withdrawal > Select the withdrawal amount. (1) Full Withdrawal: You will receive, reduced by any required withholding tax, your account value allocated to the subaccounts, the Guaranteed Account (plus or minus any applicable market value adjustment) and the Fixed Account, minus any applicable early withdrawal charge, annual maintenance fee and forfeited premium bonus. (2) Partial Withdrawal (Percentage or Specified Dollar Amount): You will receive, reduced by any required withholding tax, the amount you specify, subject to the value available in your account. However, the amount actually withdrawn from your account will be adjusted by any applicable early withdrawal charge, any positive or negative market value adjustment for amounts withdrawn from the Guaranteed Account and any forfeited premium bonus. See Appendices II and III and the Guaranteed Account prospectus for more information about withdrawals from the Guaranteed Account and the Fixed Account. > Select investment options. If you do not specify this, we will withdraw dollars proportionally from each of your investment options. > Properly complete a disbursement form and deliver it to our Home Office. Restrictions on Withdrawals From 403(b) Plan Accounts Under Section 403(b) contracts the withdrawal of salary reduction contributions and earnings on such contributions is generally prohibited prior to the participant's death, disability, attainment of age 59-1/2, separation from service or financial hardship. See "Taxation." Calculation of Your Withdrawal. We determine your account value every normal business day after the close of the New York Stock Exchange. We pay withdrawal amounts based on your account value as of the next valuation after we receive a request for withdrawal in good order at our Home Office. Delivery of Payment. Payments for withdrawal requests will be made in accordance with SEC requirements. Normally, your withdrawal amount will be sent no later than seven calendar days following our receipt of your properly- completed disbursement form in good order. Reinstating a Full Withdrawal. Within 30 days after a full withdrawal, if allowed by law and the contract, you may elect to reinstate all or a portion of your withdrawal. We must receive any reinstated amounts within 60 days of the withdrawal. We reserve the right, however, to accept a reinstatement election received more than 30 days after the withdrawal and accept proceeds received more than 60 days after the withdrawal. We will credit your account for the amount reinstated based on the subaccount values next computed following our receipt of your request and the amount to be reinstated. We will credit the amount reinstated proportionally for annual maintenance fees and early 30 withdrawal charges imposed at the time of withdrawal. We will deduct from the amount reinstated any annual maintenance fee which fell due after the withdrawal and before the reinstatement. We will reinstate in the same investment options and proportions in place at the time of withdrawal. If you withdraw amounts from a series of the Aetna GET Fund and then elect to reinstate them, we will reinstate them in a GET Fund series that is then accepting deposits, if one is available. If one is not available, we will reallocate your GET amounts among other investment options in which you invested, on a pro rata basis. The reinstatement privilege may be used only once. Special rules apply to reinstatement of amounts withdrawn from the Guaranteed Account (see Appendix II and the Guaranteed Account prospectus). We will not credit your account for market value adjustments or any premium bonus forfeited that we deducted at the time of your withdrawal. Seek competent advice regarding the tax consequences associated with reinstatement. 31 [Begin sidebar] Features of a Systematic Distribution Option A systematic distribution option allows you to receive regular payments from your contract without moving into the income phase. By remaining in the accumulation phase, you retain certain rights and investment flexibility not available during the income phase. [End sidebar] Systematic Distribution Options - -------------------------------------------------------------------------------- The following systematic distribution options may be available: > SWO--Systematic Withdrawal Option. SWO is a series of automatic partial withdrawals from your account based on a payment method you select. Consider this option if you would like a periodic income while retaining investment flexibility for amounts accumulated in the account. > ECO--Estate Conservation Option. ECO offers the same investment flexibility as SWO, but is designed for those who want to receive only the minimum distribution that the Tax Code requires each year. Under ECO we calculate the minimum distribution amount required by law, generally at age 70-1/2, and pay you that amount once a year. ECO is not available under nonqualified contracts. An early withdrawal charge will not be deducted from and a market value adjustment will not be applied to any part of your account value paid under an ECO. > LEO--Life Expectancy Option. LEO provides for annual payments for a number of years equal to your life expectancy or the life expectancy of you and a designated beneficiary. It is designed to meet the substantially equal periodic payment exception to the 10% premature distribution penalty under Tax Code section 72. See "Taxation." Other Systematic Distribution Options. We may add additional systematic distribution options from time to time. You may obtain additional information relating to any of the systematic distribution options from your sales representative or by calling us at the number listed in "Contract Overview-- Questions: Contacting the Company." Systematic Distribution Option Availability. If allowed by applicable law, we may discontinue the availability of one or more of the systematic distribution options for new elections at any time and/or to change the terms of future elections. Eligibility for a Systematic Distribution Option. To determine if you meet the age and account value criteria and to assess terms and conditions that may apply, contact your sales representative or the Company at the number listed in "Contract Overview--Questions: Contacting the Company." Terminating a Systematic Distribution Option. You may revoke a systematic distribution option at any time by submitting a written request to our Home Office. ECO, once revoked, may not, unless allowed under the Tax Code, be elected again. Charges and Taxation. When you elect a systematic distribution option your account value remains in the accumulation phase and subject to the charges and deductions described in the "Fees" and "Fee Table" sections. Taking a withdrawal under a systematic distribution option may have tax consequences. If you are concerned about tax implications, consult a qualified tax adviser before electing an option. 32 [Begin sidebar] This section provides information about the death benefit during the accumulation phase. For death benefit information applicable to the income phase, see "The Income Phase." Terms to Understand: Account Year/Account Anniversary: A period of 12 months measured from the date we established your account and each anniversary of this date. Account anniversaries are measured from this date. Annuitant(s): The person(s) on whose life or life expectancy(ies) the income phase payments are based. Beneficiary(ies): The person(s) or entity(ies) entitled to receive a death benefit under the contract. Claim Date: The date proof of death and the beneficiary's right to receive the death benefit are received in good order at our Home Office. Contract Holder (You/Your): The contract holder of an individually owned contract or the certificate holder of a group contract. The contract holder and annuitant may be the same person. Schedule Effective Date: The date an option package and benefits become effective. The initial schedule effective date equals the date we established your account. Thereafter, this date can occur only on an account anniversary. [End sidebar] Death Benefit - -------------------------------------------------------------------------------- During the Accumulation Phase Who Receives the Death Benefit? If you would like certain individuals or entities to receive the death benefit when it becomes payable, you may name them as your beneficiaries. However, if you are a joint contract holder and you die, the beneficiary will automatically be the surviving joint contract holder. In this circumstance any other beneficiary you named will be treated as the primary or contingent beneficiary, as originally named, of the surviving joint contract holder. The surviving joint contract holder may change the beneficiary designation. If you die and no beneficiary exists, the death benefit will be paid in a lump sum to your estate. Designating Your Beneficiary. You may designate a beneficiary on your application or by contacting your sales representative or us as indicated in "Contract Overview--Questions: Contacting the Company." When is a Death Benefit Payable? During the accumulation phase a death benefit is payable when the contract holder or the annuitant dies. If there are joint contract holders, the death benefit is payable when either one dies. Death Benefit Amount. The death benefit depends upon the option package in effect on the date the annuitant dies.
- -------------------------------------------------------------------------------- Option Package I Option Package II Option Package III - -------------------------------------------------------------------------------- Death Benefit The greater of: The greatest of: The greatest of: on Death of (1) The sum of (1) The sum of (1) The sum of the Annuitant: all purchase all purchase all purchase payments, payments, payments, adjusted for adjusted for adjusted for amounts amounts amounts withdrawn or withdrawn or withdrawn or applied to an applied to an applied to an income phase income phase income phase payment option payment option payment option as of the claim as of the claim as of date; or date; or the claim date; or (2) The account (2) The account (2) The account value* on the value* on the value* on the claim date. claim date; or claim date; or (3) The "step-up (3) The "step-up value"* (as value"* (as described below) described below) on the claim date. on the claim date; or (4) The "roll-up value"* (as described below) on the claim date.** - --------------------------------------------------------------------------------
* For purposes of calculating the death benefit, the account value, step-up value and roll-up value will be reduced by the amount of any premium bonus credited to your account after or within 12 months of the date of death. See "Premium Bonus Option--Forfeiture." ** See Appendix I for details about the Option Package III death benefit for contracts issued in New York. 33 Step-up Value. On the schedule effective date, the step-up value is equal to the greater of: > The account value; or > The step-up value, if any, calculated on the account anniversary prior to the schedule effective date, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option during the prior account year. Thereafter, once each year on the anniversary of the schedule effective date until the anniversary immediately preceding the annuitant's 85th birthday or death, whichever is earlier, the step-up value is equal to the greater of: > The step-up value most recently calculated, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option during the prior account year; or > The account value on that anniversary of the schedule effective date. On each anniversary of the schedule effective date after the annuitant's 85th birthday, the step-up value shall be equal to the step-up value on the anniversary immediately preceding the annuitant's 85th birthday, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since that anniversary. On the claim date, the step-up value shall equal the step-up value on the anniversary of the schedule effective date immediately preceding the annuitant's death, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since that anniversary. For purposes of calculating the death benefit, the step-up value will be reduced by the amount of any premium bonus credited to your account after or within 12 months of the date of death. See "Premium Bonus Option--Forfeiture." Roll-up Value. On the schedule effective date, the roll-up value is equal to the account value. Thereafter, once each year on the anniversary of the schedule effective date until the anniversary immediately preceding the annuitant's 76th birthday or death, whichever is earlier, the roll-up value is equal to the roll-up value most recently calculated multiplied by a factor of 1.05, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option during the prior account year. The roll-up value may not exceed 200% of the account value on the schedule effective date, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since that date. On each anniversary of the schedule effective date after the annuitant's 76th birthday, the roll-up value shall be equal to the roll-up value on the anniversary immediately preceding the annuitant's 76th birthday, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since that anniversary. On the claim date, the roll-up value shall equal the roll-up value on the anniversary of the schedule effective date immediately preceding the annuitant's death, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since that anniversary. For purposes of calculating the death benefit, the roll-up value will be reduced by the amount of any premium bonus credited to your account after or within 12 months of the date of death. See "Premium Bonus Option--Forfeiture." 34 The "roll-up value" is not available on contracts issued in the State of New York. See Appendix I for details about the Option Package III death benefit for contracts issued in New York. Adjustment. For purposes of determining the death benefit, the adjustment for purchase payments made will be dollar for dollar. The adjustment for amounts withdrawn or applied to an income phase payment option will be proportionate, reducing the sum of all purchase payments made, the step-up value and the roll-up value in the same proportion that the account value was reduced on the date of the withdrawal or application to an income phase payment option. Death Benefit Greater than the Account Value. Notwithstanding which option package is selected, on the claim date, if the amount of the death benefit is greater than the account value, the amount by which the death benefit exceeds the account value will be deposited and allocated to the money market subaccount available under the contract, thereby increasing the account value available to the beneficiary to an amount equal to the death benefit. Prior to the election of a method of payment of the death benefit by the beneficiary, the account value will remain in the account and continue to be affected by the investment performance of the investment option(s) selected. The beneficiary has the right to allocate or transfer any amount to any available investment option (subject to a market value adjustment, as applicable). The amount paid to the beneficiary will equal the adjusted account value on the day the payment is processed. Death Benefit Amounts in Certain Cases If a Spousal Beneficiary Continues the Account Following the Death of the Contract Holder/Annuitant. If a spousal beneficiary continues the account at the death of a contract holder who was also the annuitant, the spousal beneficiary becomes the annuitant. The option package in effect at the death of the contract holder will also apply to the spousal beneficiary, unless later changed by the spousal beneficiary. The amount of the death benefit payable at the death of a spousal beneficiary who has continued the account shall be determined under the option package then in effect, except that: (1) In calculating the sum of all purchase payments, adjusted for amounts withdrawn or applied to an income phase payment option, the account value on the claim date following the original contract holder's/ annuitant's death shall be treated as the spousal beneficiary's initial purchase payment; (2) In calculating the step-up value, the step-up value on the claim date following the original contract holder's/annuitant's death shall be treated as the spousal beneficiary's initial step-up value; and (3) In calculating the roll-up value, the roll-up value on the claim date following the original contract holder's/annuitant's death shall be treated as the initial roll-up value. If the Contract Holder is not the Annuitant. Under nonqualified contracts only the death benefit described above under Option Packages I, II and III will not apply if a contract holder (including a spousal beneficiary who has continued the account) who is not also the annuitant dies. In these 35 circumstances the amount paid will be equal to the account value on the date the payment is processed, plus or minus any market value adjustment. An early withdrawal charge may apply to any full or partial payment of this death benefit. Because the death benefit in these circumstances equals the account value, plus or minus any market value adjustment, a contract holder who is not also the annuitant should seriously consider whether Option Packages II and III are suitable for their circumstances. If the spousal beneficiary who is the annuitant continues the account at the death of the contract holder who was not the annuitant, the annuitant will not change. The option package in effect at the death of the contract holder will also apply to the spousal beneficiary, unless later changed by the spousal beneficiary, and the death benefit payable at the spousal beneficiary's death shall be determined under the option package then in effect. Guaranteed Account. For amounts held in the Guaranteed Account, see Appendix II for a discussion of the calculation of the death benefit. Death Benefit--Methods of Payment For Qualified Contracts. Under a qualified contract if the annuitant dies the beneficiary may choose one of the following three methods of payment: > Apply some or all of the account value, plus or minus any market value adjustment, to any of the income phase payment options (subject to the Tax Code distribution rules (see "Taxation Minimum Distribution Requirements")); > Receive, at any time, a lump-sum payment equal to all or a portion of the account value, plus or minus any market value adjustment; or > Elect SWO, ECO or LEO (described in "Systematic Distribution Options"), provided the election would satisfy the Tax Code minimum distribution rules. Payments from a Systematic Distribution Option. If the annuitant was receiving payments under a systematic distribution option and died before the Tax Code's required beginning date for minimum distributions, payments under the systematic distribution option will stop. The beneficiary, or contract holder on behalf of the beneficiary, may elect a systematic distribution option provided the election is permitted under the Tax Code minimum distribution rules. If the annuitant dies after the required beginning date for minimum distributions, payments will continue as permitted under the Tax Code minimum distribution rules, unless the option is revoked. Distribution Requirements. Subject to Tax Code limitations, a beneficiary may be able to defer distribution of the death benefit. Death benefit payments must satisfy the distribution rules in Tax Code Section 401(a)(9). See "Taxation." For Nonqualified Contracts. (1) If you die and the beneficiary is your surviving spouse, or if you are a non-natural person and the annuitant dies and the beneficiary is the annuitant's surviving spouse, then the beneficiary becomes the successor contract holder. In this circumstance the Tax Code does not require distributions under the contract until the successor contract holder's death. 36 As the successor contract holder, the beneficiary may exercise all rights under the account and has the following options: (a) Continue the contract in the accumulation phase; (b) Elect to apply some or all of the account value, plus or minus any market value adjustment, to any of the income phase payment options; or (c) Receive at any time a lump-sum payment equal to all or a portion of the account value, plus or minus any market value adjustment. If you die and are not the annuitant, an early withdrawal charge will apply if a lump sum is elected. (2) If you die and the beneficiary is not your surviving spouse, he or she may elect option 1(b) or option 1(c) above (subject to the Tax Code distribution rules). See "Taxation--Minimum Distribution Requirements." In this circumstance the Tax Code requires any portion of the account value, plus or minus any market value adjustment, not distributed in installments over the beneficiary's life or life expectancy, beginning within one year of your death, must be paid within five years of your death. See "Taxation." (3) If you are a natural person but not the annuitant and the annuitant dies, the beneficiary may elect option 1(b) or 1(c) above. If the beneficiary does not elect option 1(b) within 60 days from the date of death, the gain, if any, will be included in the beneficiary's income in the year the annuitant dies. Payments from a Systematic Distribution Option. If the contract holder or annuitant dies and payments were made under SWO, payments will stop. A beneficiary, however, may elect to continue SWO. Taxation. In general, payments received by your beneficiary after your death are taxed to the beneficiary in the same manner as if you had received those payments. Additionally, your beneficiary may be subject to tax penalties if he or she does not begin receiving death benefit payments within the time-frame required by the Tax Code. See "Taxation." 37 [Begin sidebar] We may have used the following terms in prior prospectuses: Annuity Phase--Income Phase Annuity Option--Income Phase Payment Option Annuity Payment--Income Phase Payment [End sidebar] The Income Phase - -------------------------------------------------------------------------------- During the income phase you stop contributing dollars to your account and start receiving payments from your accumulated account value. Initiating Payments. At least 30 days prior to the date you want to start receiving payments you must notify us in writing of all of the following: > Payment start date; > Income phase payment option (see the income phase payment options table in this section); > Payment frequency (i.e., monthly, quarterly, semi-annually or annually); > Choice of fixed, variable or a combination of both fixed and variable payments; and > Selection of an assumed net investment rate (only if variable payments are elected). Your account will continue in the accumulation phase until you properly initiate income phase payments. Once an income phase payment option is selected it may not be changed. What Affects Payment Amounts? Some of the factors that may affect the amount of your income phase payments include your age, gender, account value, the income phase payment option selected, the number of guaranteed payments (if any) selected and whether you select fixed, variable or a combination of both fixed and variable payments and, for variable payments, the assumed net investment rate selected. Fixed Payments. Amounts funding fixed income phase payments will be held in the Company's general account. The amount of fixed payments does not vary with investment performance over time. Variable Payments. Amounts funding your variable income phase payments will be held in the subaccount(s) you select. Not all subaccounts available during the accumulation phase may be available during the income phase. Payment amounts will vary depending upon the performance of the subaccounts you select. For variable income phase payments, you must select an assumed net investment rate. Assumed Net Investment Rate. If you select variable income phase payments, you must also select an assumed net investment rate of either 5% or 3-1/2%. If you select a 5% rate, your first income phase payment will be higher, but subsequent payments will increase only if the investment performance of the subaccounts you selected is greater than 5% annually, after deduction of fees. Payment amounts will decline if the investment performance is less than 5%, after deduction of fees. If you select a 3-1/2% rate, your first income phase payment will be lower and subsequent payments will increase more rapidly or decline more slowly depending upon changes to the net investment rate of the subaccounts you selected. For more information about selecting an assumed net investment rate, call us for a copy of the SAI. See "Contract Overview--Questions: Contacting the Company." Minimum Payment Amounts. The income phase payment option you select must result in: 38 > A first income phase payment of at least $50; or > Total yearly income phase payments of at least $250. If your account value is too low to meet these minimum payment amounts, you will receive one lump-sum payment. Unless prohibited by law, we reserve the right to increase the minimum payment amount based on increases reflected in the Consumer Price Index-Urban (CPI-U) since July 1, 1993. Restrictions on Start Dates and the Duration of Payments. Income phase payments may not begin during the first account year, or, unless we consent, later than the later of: (a) The first day of the month following the annuitant's 85th birthday; or (b) The tenth anniversary of the last purchase payment made to your account. Income phase payments will not begin until you have selected an income phase payment option. Failure to select an income phase payment option by the later of the annuitant's 85th birthday or the tenth anniversary of your last purchase payment may have adverse tax consequences. You should consult with a qualified tax adviser if you are considering delaying the selection of an income phase payment option before the later of these dates. For qualified contracts only, income phase payments may not extend beyond: (a) The life of the annuitant; (b) The joint lives of the annuitant and beneficiary; (c) A guaranteed period greater than the annuitant's life expectancy; or (d) A guaranteed period greater than the joint life expectancies of the annuitant and beneficiary. When income phase payments start the age of the annuitant plus the number of years for which payments are guaranteed may not exceed 95. See "Taxation" for further discussion of rules relating to income phase payments. Charges Deducted. > If variable income phase payments are selected, we make a daily deduction for mortality and expense risks from amounts held in the subaccounts. Therefore, if you choose variable income phase payments and a nonlifetime income phase payment option, we still make this deduction from the subaccounts you select, even though we no longer assume any mortality risks. The amount of this charge, on an annual basis, is equal to 1.25% of amounts invested in the subaccounts. See "Fees--Mortality and Expense Risk Charge." > There is currently no administrative expense charge during the income phase. We reserve the right, however, to charge an administrative expense charge of up to 0.25% during the income phase. If imposed, we deduct this charge daily from the subaccounts corresponding to the funds you select. If we are imposing this charge when you enter the income phase, the charge will apply to you during the entire income phase. See "Fees--Administrative Expense Charge." 39 > If you elected the premium bonus option and variable income phase payments, we may also deduct the premium bonus option charge. We deduct this charge daily during the first seven account years from the subaccounts corresponding to the funds you select. If fixed income phase payments are selected, this charge may be reflected in the income phase payment rates. See "Fees--Premium Bonus Option Charge." Death Benefit during the Income Phase. The death benefits that may be available to a beneficiary are outlined in the income phase payment options table below. If a lump-sum payment is due as a death benefit, we will make payment within seven calendar days after we receive proof of death acceptable to us and the request for the payment in good order at our Home Office. If continuing income phase payments are elected, the beneficiary may not elect to receive a lump sum at a future date unless the income phase payment option specifically allows a withdrawal right. We will calculate the value of any death benefit at the next valuation after we receive proof of death and a request for payment. Such value will be reduced by any payments made after the date of death. Beneficiary Rights. A beneficiary's right to elect an income phase payment option or receive a lump-sum payment may have been restricted by the contract holder. If so, such rights or options will not be available to the beneficiary. Partial Entry into the Income Phase. You may elect an income phase payment option for a portion of your account dollars, while leaving the remaining portion invested in the accumulation phase. Whether the Tax Code considers such payments taxable as income phase payments or as withdrawals is currently unclear; therefore, you should consult with a qualified tax adviser before electing this option. The same or different income phase payment option may be selected for the portion left invested in the accumulation phase. Taxation. To avoid certain tax penalties, you or your beneficiary must meet the distribution rules imposed by the Tax Code. Additionally, when selecting an income phase payment option, the Tax Code requires that your expected payments will not exceed certain durations. See "Taxation" for additional information. Payment Options. The following table lists the income phase payment options and accompanying death benefits available during the income phase. We may offer additional income phase payment options under the contract from time to time. Once income phase payments begin the income phase payment option selected may not be changed. Terms to understand: Annuitant(s): The person(s) on whose life expectancy(ies) the income phase payments are based. Beneficiary(ies): The person(s) or entity(ies) entitled to receive a death benefit under the contract. 40
- ----------------------------------------------------------------------------------------------------------------------------- Lifetime Payment Options - ----------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as the annuitant lives. It is possible that only one payment will be made if the annuitant dies prior to the second payment's due date. Life Income Death Benefit--None: All payments end upon the annuitant's death. - ----------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as the annuitant lives, with payments guaranteed for your choice of 5 to 30 years or as otherwise specified in the contract. Life Income-- Death Benefit--Payment to the Beneficiary: If the annuitant dies before we have made all the Guaranteed guaranteed payments, we will continue to pay the beneficiary the remaining payments, unless the Payments beneficiary elects to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. - ----------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as either annuitant lives. It is possible that only one payment will be made if both annuitants die before the second payment's due date. Continuing Payments: When you select this option you choose for: (a) 100%, 66-2/3% or 50% of the payment to continue to the surviving annuitant after the first Life Income-- death; or Two Lives (b) 100% of the payment to continue to the annuitant on the second annuitant's death, and 50% of the payment to continue to the second annuitant on the annuitant's death. Death Benefit--None: All payments end upon the death of both annuitants. - ----------------------------------------------------------------------------------------------------------------------------- Length of Payments: For as long as either annuitant lives, with payments guaranteed from 5 to 30 years or as otherwise specified in the contract. Continuing Payments: 100% of the payment to continue to the surviving annuitant after the first Life Income-- death. Two Lives-- Death Benefit--Payment to the Beneficiary: If both annuitants die before we have made all the Guaranteed guaranteed payments, we will continue to pay the beneficiary the remaining payments, unless the Payments beneficiary elects to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. - ----------------------------------------------------------------------------------------------------------------------------- Life Income-- Length of Payments: For as long as the annuitant lives. Cash Refund Death Benefit--Payment to the Beneficiary: Following the annuitant's death, we will pay a lump Option (limited sum payment equal to the amount originally applied to the income phase payment option (less availability-- any applicable premium tax) and less the total amount of income payments paid. fixed payments only) - ----------------------------------------------------------------------------------------------------------------------------- Life Income-- Length of Payments: For as long as either annuitant lives. Two Lives--Cash Continuing Payments: 100% of the payment to continue after the first death. Refund Option Death Benefit--Payment to the Beneficiary: When both annuitants die we will pay a lump-sum (limited payment equal to the amount applied to the income phase payment option (less any applicable availability--fixed premium tax) and less the total amount of income payments paid. payments only) - -----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- Nonlifetime Payment Option - -------------------------------------------------------------------------------------------------------------------------------- Length of Payments: You may select payments for 5 to 30 years (15 to 30 years if you elected the premium bonus option). In certain cases a lump-sum payment may be requested at any time (see below). Nonlifetime-- Death Benefit--Payment to the Beneficiary: If the annuitant dies before we make all the Guaranteed guaranteed payments, we will continue to pay the beneficiary the remaining payments, unless the Payments beneficiary elects to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. We will not impose any early withdrawal charge. - -------------------------------------------------------------------------------------------------------------------------------- Lump-Sum Payment: If the "Nonlifetime--Guaranteed Payments" option is elected with variable payments, you may request at any time that all or a portion of the present value of the remaining payments be paid in one lump sum. Any such lump-sum payments will be treated as a withdrawal during the accumulation phase and we will charge any applicable early withdrawal charge. See "Fees--Early Withdrawal Charge." Lump-sum payments will be sent within seven calendar days after we receive the request for payment in good order at the Home Office. - --------------------------------------------------------------------------------------------------------------------------------
Calculation of Lump-Sum Payments: If a lump-sum payment is available under the income phase payment options above, the rate used to calculate the present value of the remaining guaranteed payments is the same rate we used to calculate the income phase payments (i.e., the actual fixed rate used for fixed payments or the 3-1/2% or 5% assumed net investment rate used for variable payments). 41 [Begin sidebar] In this Section INTRODUCTION CONTRACT TYPE WITHDRAWALS AND OTHER DISTRIBUTIONS o Taxation of Distributions o 10% Penalty Tax o Withholding for Federal Income Tax Liability MINIMUM DISTRIBUTION REQUIREMENTS o 50% Excise Tax o Minimum Distribution of Death Benefit Proceeds (403(b) Plans and 408(b) and 408A IRAs) o Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts) RULES SPECIFIC TO CERTAIN PLANS o 403(b) Plans o 408(b) and 408A IRAs TAXATION OF NONQUALIFIED CONTRACTS TAXATION OF THE COMPANY When consulting a tax adviser, be certain that he or she has expertise in the Tax Code sections applicable to your tax concerns. [End sidebar] Taxation - -------------------------------------------------------------------------------- INTRODUCTION This section discusses our understanding of current federal income tax laws affecting the contract. You should keep the following in mind when reading it: > Your tax position (or the tax position of the beneficiary, as applicable) determines federal taxation of amounts held or paid out under the contract; > Tax laws change. It is possible that a change in the future could affect contracts issued in the past; > This section addresses federal income tax rules and does not discuss federal estate and gift tax implications, state and local taxes or any other tax provisions; > We do not make any guarantee about the tax treatment of the contract or any transaction involving the contract; and > Contract holder means the contract holder of an individually owned contract or the certificate holder of a group contract. - -------------------------------------------------------------------------------- We do not intend this information to be tax advice. For advice about the effect of federal income taxes or any other taxes on amounts held or paid out under the contract, consult a tax adviser. For more comprehensive information contact the Internal Revenue Service (IRS). - -------------------------------------------------------------------------------- Taxation of Gains Prior to Distribution. You generally will not pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements under Tax Code sections 403(b), 408(b) and 408A also generally defer payment of taxes on earnings until they are withdrawn. (See "Taxation of Distributions" later in this "Taxation" section for a discussion of how distributions under the various types of arrangements are taxed.) If you are considering funding one of these tax-qualified retirement arrangements with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your decision with your financial representative. Additionally, although earnings under the contract are generally not taxed until withdrawn, the IRS has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of investment control over the assets. In these circumstances income and gains from the separate account assets would be currently includible in the variable contract owner's gross income. The Treasury announced that it will issue guidance regarding the extent to which owners could direct their investments among subaccounts without being treated as owners of the underlying assets of the separate account. It is possible that the Treasury's position, when announced, may adversely affect the tax treatment of existing contracts. The Company therefore reserves the right to modify the contract as necessary to attempt to prevent the contract holder from being considered the federal tax owner of a pro rata share of the assets of the separate account. Diversification. Tax Code section 817(h) requires that in a nonqualified contract the investments of the funds be "adequately diversified" in accordance 42 with Treasury Regulations in order for the contract to qualify as an annuity contract under federal tax law. The separate account, through the funds, intends to comply with the diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5, which affects how the funds' assets may be invested. CONTRACT TYPE The contract is designed for use on a non-tax qualified basis as a nonqualified contract or with certain retirement arrangements that qualify under Tax Code sections 403(b), 408(b) or 408A. Tax Rules. The tax rules vary according to whether the contract is a nonqualified contract or used with a qualified retirement arrangement. If used with a qualified retirement arrangement, you need to know the Tax Code section under which your arrangement qualifies. Contact your plan sponsor, sales representative or the Company to learn which Tax Code section applies to your arrangement. The Contract. Contract holders are responsible for determining that contributions, distributions and other transactions satisfy applicable laws. Legal counsel and a tax adviser should be consulted regarding the suitability of the contract. If the contract is purchased in conjunction with a retirement plan, the plan is not a part of the contract and we are not bound by the plan's terms or conditions. WITHDRAWALS AND OTHER DISTRIBUTIONS Certain tax rules apply to distributions from the contract. A distribution is any amount taken from the contract including withdrawals, income phase payments, rollovers, exchanges and death benefit proceeds. We report the taxable portion of all distributions to the IRS. Taxation of Distributions Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable to the extent that the amount received exceeds the investment in the contract. A partial withdrawal is taxable to the extent that the account value immediately before the withdrawal exceeds the investment in the contract. In other words, a partial withdrawal is treated first as a withdrawal of taxable earnings. For income phase payments a portion of each payment which represents the investment in the contract is not taxable. An exclusion ratio is calculated to determine the nontaxable portion. For fixed income phase payments in general, there is no tax on the portion of each payment which represents the same ratio that the investment in the contract bears to the total dollar amount of the expected payments as defined in Tax Code section 72(c). The entire annuity payment will be taxable once the recipient has recovered the investment in the contract. For variable income phase payments, an equation is used to establish a specific dollar amount of each payment that is not taxed. The dollar amount is determined by dividing the investment in the contract by the total number of expected periodic payments. The entire payment will be taxable once the recipient has recovered the investment in the contract. 43 All deferred nonqualified annuity contracts that are issued by the Company (or its affiliates) to the same contract holder during any calendar year are treated as one annuity contract for purposes of determining the amount includible in gross income under Tax Code section 72(e). In addition, the Treasury Department has specific authority to issue regulations that prevent the avoidance of Tax Code section 72(e) through the serial purchase of annuity contracts or otherwise. 403(b) Plans. All distributions from these plans are taxed as received unless either of the following is true: > The distribution is rolled over to another plan of the same type or to a traditional IRA in accordance with the Tax Code; or > You made after-tax contributions to the plan. In this case, depending upon the type of distribution, the amount will be taxed according to the rules detailed in the Tax Code. 408(b) IRAs. All distributions from a traditional IRA are taxed as received unless either one of the following is true: > The distribution is rolled over to another traditional IRA or, if the IRA contains only amounts previously rolled over from a 401(a), 401(k) or 403(b) plan, the distribution is transferred to another plan of the same type; or > You made after-tax contributions to the plan. In this case the distribution will be taxed according to rules detailed in the Tax Code. 408A Roth IRAs. A qualified distribution from a Roth IRA is not taxed when it is received. A qualified distribution is a distribution: > Made after the five-taxable year period beginning with the first taxable year for which a contribution was made; and > Made after you attain age 59-1/2, die, become disabled as defined in the Tax Code or for a qualified first-time home purchase. If a distribution is not qualified, it will be taxable to the extent of the accumulated earnings. A partial distribution will first be treated as a return of contributions which is not taxable and then as taxable accumulated earnings. Taxation of Death Benefit Proceeds. In general, payments received by your beneficiaries after your death are taxed in the same manner as if you had received those payments. 10% Penalty Tax Under certain circumstances the Tax Code may impose a 10% penalty tax on the taxable portion of any distribution from a nonqualified contract or from a contract used with a 403(b), 408(b) or 408A arrangement. Nonqualified Contracts. The 10% penalty tax applies to the taxable portion of a distribution from a nonqualified annuity unless certain exceptions apply, including one or more of the following: (a) You have attained age 59-1/2; (b) You have become disabled as defined in the Tax Code; (c) You have died; 44 (d) The distribution is made in substantially equal periodic payments (at least annually) over your life or life expectancy or the joint lives or joint life expectancies of you and your beneficiary; or (e) The distribution is allocable to investment in the contract before August 14, 1982. 403(b) Plans. The 10% penalty tax applies to the taxable portion of a distribution from a 403(b) plan, unless certain exceptions apply, including one or more of the following: (a) You have attained age 59-1/2; (b) You have become disabled as defined in the Tax Code; (c) You have died; (d) You have separated from service with the plan sponsor at or after age 55; (e) The distribution is rolled over into another plan of the same type or to an IRA in accordance with the Tax Code; (f) You have separated from service with the plan sponsor and the distribution is made in substantially equal periodic payments (at least annually) over your life or life expectancy or the joint lives or joint life expectancies of you and your beneficiary; or (g) The distribution is equal to unreimbursed medical expenses that qualify for deduction as specified in the Tax Code. 408(b) and 408A IRAs. In general, except for (d), the exceptions for 403(b) plans also apply to distributions from an IRA, including a distribution from a Roth IRA that is not a qualified distribution or a rollover to a Roth IRA that is not a qualified rollover contribution. The penalty tax is also waived on a distribution made from an IRA to pay for health insurance premiums for certain unemployed individuals or used for a qualified first-time home purchase or for higher education expenses. Withholding for Federal Income Tax Liability Any distributions under the contract are generally subject to withholding. Federal income tax liability rates vary according to the type of distribution and the recipient's tax status. Nonqualified Contracts. Generally, you or a beneficiary may elect not to have tax withheld from distributions. 403(b) Plans. Generally, distributions from these plans are subject to a mandatory 20% federal income tax withholding. However, withholding will not be required if you elect a direct rollover of the distributions or in the case of certain distributions described in the Tax Code. 408(b) and 408A IRAs. Generally, you or a beneficiary may elect not to have tax withheld from distributions. Non-resident Aliens. If you or your beneficiary are non-resident aliens, then any withholding is governed by Tax Code section 1441 based on the individual's citizenship, the country of domicile and treaty status. MINIMUM DISTRIBUTION REQUIREMENTS To avoid certain tax penalties, you and any beneficiary must meet the minimum distribution requirements imposed by the Tax Code. The requirements do not apply to either nonqualified contracts or Roth IRA 45 contracts, except with regard to death benefits. These rules may dictate one or more of the following: > Start date for distributions; > The time period in which all amounts in your account(s) must be distributed; or > Distribution amounts. Start Date. Generally, you must begin receiving distributions by April 1 of the calendar year following the calendar year in which you attain age 70-1/2 or retire, whichever occurs later, unless: > You are a 5% owner or the contract is an IRA, in which case such distributions must begin by April 1 of the calendar year following the calendar year in which you attain age 70-1/2; or > Under 403(b) plans, if the Company maintains separate records of amounts held as of December 31, 1986. In this case distribution of these amounts generally must begin by the end of the calendar year in which you attain age 75 or retire, if later. However, if you take any distributions in excess of the minimum required amount, then special rules require that some or all of the December 31, 1986 balance be distributed earlier. Time Period. We must pay out distributions from the contract over one of the following time periods: > Over your life or the joint lives of you and your beneficiary; or > Over a period not greater than your life expectancy or the joint life expectancies of you and your beneficiary. 50% Excise Tax If you fail to receive the minimum required distribution for any tax year, a 50% excise tax is imposed on the required amount that was not distributed. Minimum Distribution of Death Benefit Proceeds (403(b) Plans and 408(b) and 408A IRAs) The following applies to 403(b), 408(b) and 408A arrangements. Different distribution requirements apply if your death occurs: > After you begin receiving minimum distributions under the contract; or > Before you begin receiving such distributions. If your death occurs after you begin receiving minimum distributions under the contract, distributions must be made at least as rapidly as under the method in effect at the time of your death. Tax Code section 401(a)(9) provides specific rules for calculating the minimum required distributions at your death. The rules differ, depending upon: > Whether your minimum required distribution was calculated each year based on your single life expectancy or the joint life expectancies of you and your beneficiary; or > Whether life expectancy was recalculated. The rules are complex and any beneficiary should consult with a tax adviser before electing the method of calculation to satisfy the minimum distribution requirements. 46 If your death occurs before you begin receiving minimum distributions under the contract, your entire balance must be distributed by December 31 of the calendar year containing the fifth anniversary of the date of your death. For example, if you die on September 1, 2000, your entire balance must be distributed to the beneficiary by December 31, 2005. However, if distributions begin by December 31 of the calendar year following the calendar year of your death, then payments may be made over either of the following time-frames: > Over the life of the beneficiary; or > Over a period not extending beyond the life expectancy of the beneficiary. Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, distributions must begin on or before the later of the following: > December 31 of the calendar year following the calendar year of your death; or > December 31 of the calendar year in which you would have attained age 70-1/2. Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution under these rules, a spousal beneficiary may elect to treat the account as his or her own IRA and defer taking a distribution until his or her age 70-1/2. The surviving spouse is deemed to have made such an election if the surviving spouse makes a rollover to or from the account or fails to take a distribution within the required time period. Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts) Death of the Contract Holder. The following requirements apply to nonqualified contracts at your death. Different distribution requirements apply if your death occurs: > After you begin receiving income phase payments under the contract; or > Before you begin receiving such distributions. If your death occurs after you begin receiving income phase payments, distributions must be made at least as rapidly as under the method in effect at the time of your death. If your death occurs before you begin receiving income phase payments, your entire balance must be distributed within five years after the date of your death. For example, if you die on September 1, 2000, your entire balance must be distributed by August 31, 2005. However, if distributions begin within one year of your death, then payments may be made over one of the following time-frames: > Over the life of the beneficiary; or > Over a period not extending beyond the life expectancy of the beneficiary. Spousal Beneficiaries. If the beneficiary is your spouse, the account may be continued with the surviving spouse as the new contract holder. Death of Annuitant. If the contract holder is a non-natural person and the annuitant dies, the same rules apply as outlined above for death of a contract holder. If the contract holder is a natural person but not the annuitant and the annuitant dies, the beneficiary must elect an income phase payment option within 60 days of the date of death, or any gain under the contract will be includible in the beneficiary's income in the year the annuitant dies. 47 RULES SPECIFIC TO CERTAIN PLANS 403(b) Plans Under Tax Code section 403(b), contributions made by public school systems or nonprofit healthcare organizations and other Tax Code section 501(c)(3) tax exempt organizations to purchase annuity contracts for their employees are generally excludable from the gross income of the employee. Assignment or Transfer of Contracts. Adverse tax consequences to the plan and/or to you may result if your beneficial interest in the contract is assigned or transferred to any person except to an alternate payee under a qualified domestic relations order in accordance with Tax Code section 414(p) or to the Company as collateral for a loan. Exclusions from Gross Income. In order to be excludable from gross income, total annual contributions made by you and your employer to a 403(b) plan cannot exceed the lesser of the following limits set by the Tax Code: > The first limit, under Tax Code section 415, is generally the lesser of 25% of your compensation or $30,000. Compensation means your compensation from the employer sponsoring the plan and, for years beginning after December 31, 1997, includes any elective deferrals under Tax Code section 402(g) and any amounts not includible in gross income under Tax Code sections 125 or 457; > The second limit, which is the exclusion allowance under Tax Code section 403(b), is usually calculated according to a formula that takes into account your length of employment, any pretax contributions you and your employer have already made under the plan and any pretax contributions to certain other retirement plans; or > An additional limit specifically limits your salary reduction contributions to generally no more than $10,000 annually (subject to indexing). Your own limit may be higher or lower, depending upon certain conditions. The first two limits apply to your contributions as well as to any contributions made by your employer on your behalf. Purchase payments to your account(s) will be excluded from your gross income only if the plan meets certain nondiscrimination requirements. Restrictions on Distributions. Tax Code section 403(b)(11) restricts the distribution under Tax Code section 403(b) contracts of: (1) Salary reduction contributions made after December 31, 1988; (2) Earnings on those contributions; and (3) Earnings during such period on amounts held as of December 31, 1988. Distribution of those amounts may only occur upon your death, attainment of age 59-1/2, separation from service, disability or financial hardship. Income attributable to salary reduction contributions and credited on or after January 1, 1989, may not be distributed in the case of hardship. 408(b) and 408A IRAs Tax Code section 408(b) permits eligible individuals to contribute to a traditional IRA on a pre-tax (deductible) basis. Employers may establish Simplified Employee Pension (SEP) plans and contribute to a traditional IRA owned by the employee. Tax Code section 408A permits eligible individuals to contribute to a Roth IRA on an after-tax (nondeductible) basis. 48 Assignment or Transfer of Contracts. Adverse tax consequences may result if you assign or transfer your interest in the contract to persons other than your spouse incident to a divorce. Eligibility. Eligibility to contribute to a traditional IRA on a pre-tax basis or to establish a Roth IRA or to roll over or transfer from a traditional IRA to a Roth IRA depends upon your adjusted gross income. Rollovers and Transfers. Rollovers and direct transfers are permitted from a 401, 403(a) or a 403(b) arrangement to a traditional IRA. Distributions from these arrangements are not permitted to be transferred or rolled over to a Roth IRA. A Roth IRA can accept transfers/rollovers only from a traditional IRA, subject to ordinary income tax, or from another Roth IRA. TAXATION OF NONQUALIFIED CONTRACTS In General. Tax Code section 72 governs taxation of annuities in general. Under a nonqualified contract if you are a natural person you generally are not taxed on increases in the account value until distribution occurs by withdrawing all or part of such account value. The taxable portion of a distribution is taxable as ordinary income. Non-Natural Holders of a Nonqualified Contract. If you are not a natural person, a nonqualified contract generally is not treated as an annuity for income tax purposes and the income on the contract for the taxable year is currently taxable as ordinary income. Income on the contract is any increase over the year in the surrender value, adjusted for purchase payments made during the year, amounts previously distributed and amounts previously included in income. There are some exceptions to this rule and a non-natural person should consult with its tax adviser prior to purchasing the contract. A non-natural person exempt from federal income taxes should consult with its tax adviser regarding treatment of income on the contract for purposes of the unrelated business income tax. When the contract holder is not a natural person, a change in annuitant is treated as the death of the contract holder. Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of ownership of a nonqualified contract, the designation of an annuitant, payee or other beneficiary who is not also the contract holder, the selection of certain annuity dates or the exchange of a contract may result in certain tax consequences. The assignment, pledge or agreement to assign or pledge any portion of the account value generally will be treated as a distribution. Anyone contemplating any such designation, transfer, assignment, selection or exchange should contact a tax adviser regarding the potential tax effects of such a transaction. TAXATION OF THE COMPANY We are taxed as a life insurance company under the Tax Code. Variable Annuity Account B is not a separate entity from us. Therefore, it is not taxed separately as a "regulated investment company" but is taxed as part of the Company. We automatically apply investment income and capital gains attributable to the separate account to increase reserves under the contracts. Because of this, under existing federal tax law we believe that any such income and gains will 49 not be taxed to the extent that such income and gains are applied to increase reserves under the contracts. In addition, any foreign tax credits attributable to the separate account will be first used to reduce any income taxes imposed on the separate account before being used by the Company. In summary, we do not expect that we will incur any federal income tax liability attributable to the separate account and we do not intend to make any provision for such taxes. However, changes in federal tax laws and/or their interpretation may result in our being taxed on income or gains attributable to the separate account. In this case we may impose a charge against the separate account (with respect to some or all of the contracts) to set aside provisions to pay such taxes. We may deduct this amount from the separate account, including from your account value invested in the subaccounts. Other Topics - -------------------------------------------------------------------------------- The Company We issue the contract described in this prospectus and are responsible for providing each contract's insurance and annuity benefits. We are a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of Aetna Inc. Through a merger our operations include the business of Aetna Variable Annuity Life Insurance Company (formerly known as Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). We are engaged in the business of issuing life insurance and annuities. Our principal executive offices are located at: 151 Farmington Avenue Hartford, Connecticut 06156 Variable Annuity Account B We established Variable Annuity Account B (the separate account) in 1976 as a segregated asset account to fund our variable annuity contracts. The separate account is registered as a unit investment trust under the Investment Company Act of 1940 (the "40 Act"). It also meets the definition of "separate account" under the federal securities laws. The separate account is divided into subaccounts. The subaccounts invest directly in shares of a pre-assigned fund. Although we hold title to the assets of the separate account, such assets are not chargeable with the liabilities of any other business that we conduct. Income, gains or losses of the separate account are credited to or charged against the assets of the separate account without regard to other income, gains or losses of the Company. All obligations arising under the contract are obligations of the Company. Contract Distribution We serve as the principal underwriter for the securities sold by this prospectus. We are registered as a broker-dealer with the SEC and a member of the 50 National Association of Securities Dealers, Inc. (NASD). As principal underwriter we will enter into arrangements with one or more registered broker-dealers, including at least one affiliate of the Company, to offer and sell the contract described in this prospectus. We may also enter into these arrangements with banks that may be acting as broker-dealers without separate registration under the Securities Exchange Act of 1934 pursuant to legal and regulatory exceptions. In this prospectus we refer to the registered broker-dealers and the banks described above as "distributors." We and one or more of our affiliates may also sell the contract directly. All individuals offering and selling the contract must be registered representatives of a broker-dealer, or employees of a bank exempt from registration under the Securities Exchange Act of 1934, and must be licensed as insurance agents to sell variable annuity contracts. Occasionally we may enter into arrangements with independent entities to help find broker-dealers or banks interested in distributing the contract or to provide training, marketing and other sales-related functions or administrative services. We will reimburse such entities for expenses related to and may pay fees to such entities in return for these services. We may offer customers of certain broker-dealers special guaranteed rates in connection with the Guaranteed Account offered through the contract and may negotiate different commissions for these broker-dealers. We may also contract with independent third party broker-dealers who will act as wholesalers by assisting us in selecting broker-dealers or banks interested in acting as distributors. These wholesalers may also provide training, marketing and other sales related functions for the Company and the distributors and may provide certain administrative services in connection with the contract. We may pay such wholesalers compensation based on payments to contracts purchased through distributors that they select. We may also designate third parties to provide services in connection with the contracts such as reviewing applications for completeness and compliance with insurance requirements and providing the distributors with approved marketing material, prospectuses or other supplies. These parties will also receive payments for their services based on purchase payments, to the extent such payments are allowed by applicable securities laws. We will pay all costs and expenses related to these services. Payment of Commissions We pay distributors and their registered representatives who sell the contract commissions and service fees. Distributors will be paid commissions up to an amount currently equal to 7% of purchase payments or as a combination of a certain percentage of purchase payments at time of sale and a trail commission as a percentage of assets. Under the latter arrangement commission payments may exceed 7% of purchase payments over the life of the contract. Some sales personnel may receive various types of non-cash compensation as special sales incentives, including trips and educational and/or business seminars. However, any such compensation will be paid in accordance with NASD rules. In addition, we may provide additional compensation to the Company's supervisory and other management personnel if the overall amount of investments in funds advised by the Company or its affiliates increases over time. 51 We pay these commissions, fees and related distribution expenses out of any early withdrawal charges assessed or out of our general assets, including investment income and any profit from investment advisory fees and mortality and expense risk charges. No additional deductions or charges are imposed for commissions and related expenses. Payment Delay or Suspension We reserve the right to suspend or postpone the date of any payment of benefits or values under any one of the following circumstances: > On any valuation date when the New York Stock Exchange is closed (except customary weekend and holiday closings) or when trading on the New York Stock Exchange is restricted; > When an emergency exists as determined by the SEC so that disposal of the securities held in the subaccounts is not reasonably practicable or it is not reasonably practicable to fairly determine the value of the subaccount's assets; or > During any other periods the SEC may by order permit for the protection of investors. The conditions under which restricted trading or an emergency exists shall be determined by the rules and regulations of the SEC. Performance Reporting We may advertise different types of historical performance for the subaccounts including: > Standardized average annual total returns; and > Non-standardized average annual total returns. Standardized Average Annual Total Returns. We calculate standardized average annual total returns according to a formula prescribed by the SEC. This shows the percentage return applicable to $1,000 invested in the subaccounts over the most recent one, five and ten-year periods. If the investment option was not available for the full period, we give a history from the date money was first received in that option under the separate account. Standardized average annual total returns reflect deduction of all recurring charges during each period (i.e., mortality and expense risk charges, annual maintenance fees, administrative expense charges, if any, and any applicable early withdrawal charges), but currently do not include deduction of any premium bonus option charge. To the extent permitted by applicable law, we may include the premium bonus and any corresponding premium bonus charge in standardized average annual total returns in the future. Non-Standardized Average Annual Total Returns. We calculate non-standardized average annual total returns in a similar manner as that stated above, except we do not include the deduction of any applicable early withdrawal charge. Some non-standardized returns may also exclude the effect of a maintenance fee. If we reflected these charges in the calculation, they would decrease the level of performance reflected by the calculation. Non-standardized returns may also include performance from the fund's inception date, if that date is earlier than the one we use for standardized returns. Non-standardized calculations do not include the premium bonus or premium bonus option charge. We may also advertise ratings, rankings or other information related to the Company, the subaccounts or the funds. For further details regarding performance reporting and advertising, you may request a Statement of Additional Information (SAI) by calling us at the number listed in "Contract Overview--Questions: Contacting the Company." 52 Voting Rights Each of the subaccounts holds shares in a fund and each is entitled to vote at regular and special meetings of that fund. Under our current view of applicable law, we will vote the shares for each subaccount as instructed by persons having a voting interest in the subaccount. If you are a contract holder under a group contract, you have a fully vested interest in the contract and may instruct the group contract holder how to direct the Company to cast a certain number of votes. We will vote shares for which instructions have not been received in the same proportion as those for which we received instructions. Each person who has a voting interest in the separate account will receive periodic reports relating to the funds in which he or she has an interest, as well as any proxy materials and a form on which to give voting instructions. Voting instructions will be solicited by a written communication at least 14 days before the meeting. The number of votes (including fractional votes) you are entitled to direct will be determined as of the record date set by any fund you invest in through the subaccounts. > During the accumulation phase the number of votes is equal to the portion of your account value invested in the fund, divided by the net asset value of one share of that fund. > During the income phase the number of votes is equal to the portion of reserves set aside for the contract's share of the fund, divided by the net asset value of one share of that fund. Contract Modifications We may change the contract as required by federal or state law or as otherwise permitted in the contract. In addition, we may, upon 30 days' written notice to the group contract holder, make other changes to a group contract that would apply only to individuals who become participants under that contract after the effective date of such changes. If a group contract holder does not agree to a change, we reserve the right to refuse to establish new accounts under the contract. Certain changes will require the approval of appropriate state or federal regulatory authorities. Transfer of Ownership: Assignment We will accept assignments or transfers of ownership of a nonqualified contract or a qualified contract where such assignments or transfers are not prohibited, with proper notification. The date of any assignment or transfer of ownership will be the date we receive the notification at our Home Office. An assignment or transfer of ownership may have tax consequences and you should consult with a tax adviser before assigning or transferring ownership of the contract. An assignment of a contract will only be binding on the Company if it is made in writing and sent to the Company at our Home Office. We will use reasonable procedures to confirm that the assignment is authentic, including verification of signature. If we fail to follow our own procedures, we will be liable for any losses to you directly resulting from such failure. Otherwise, we are not responsible for the validity of any assignment. The rights of the contract holder and the interest of the annuitant and any beneficiary will be subject to the rights of any assignee we have on our records. 53 Involuntary Terminations We reserve the right to terminate any account with a value of $2,500 or less immediately following a partial withdrawal. However, an IRA may only be closed out when payments to the contract have not been received for a 24-month period and the paid-up annuity benefit at maturity would be less than $20 per month. If such right is exercised, you will be given 90 days' advance written notice. No early withdrawal charge will be deducted for involuntary terminations. We do not intend to exercise this right in cases where the account value is reduced to $2,500 or less solely due to investment performance. Legal Matters and Proceedings We are aware of no material legal proceedings pending which involve the separate account as a party or which would materially affect the separate account. The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. In recent years, several life insurance and annuity companies have been named as defendants in lawsuits, including class action lawsuits, relating to life insurance and annuity pricing and sales practices. A purported class action complaint was filed in the Circuit Court of Lauderdale County, Alabama on March 28, 2000, by Loretta Shaner against the Company (the "Shaner Complaint"). The Shaner Complaint seeks unspecified compensatory damages from the Company and unnamed affiliates of the Company. The Shaner Complaint claims that the Company's sale of deferred annuity products for use as investments in tax-deferred contributory retirement plans (e.g., IRAs) is improper. This litigation is in the preliminary stages. The Company intends to defend the action vigorously. The Company also is a party to other litigation and arbitration proceedings in the ordinary course of its business, none of which is expected to have a material adverse effect on the Company. 54 Contents of the Statement of Additional Information - -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) contains more specific information on the separate account and the contract, as well as the financial statements of the separate account and the Company. The following is a list of the contents of the SAI. General Information and History .................................... 2 Variable Annuity Account B ......................................... 2 Offering and Purchase of Contracts ................................. 3 Performance Data ................................................... 3 General .......................................................... 3 Average Annual Total Return Quotations ........................... 4 Income Phase Payments .............................................. 7 Sales Material and Advertising ..................................... 8 Independent Auditors ............................................... 9 Financial Statements of the Separate Account ....................... S-1 Financial Statements of Aetna Life Insurance and Annuity Company and Subsidiaries ....................................................... F-1
You may request an SAI by calling the Company at the number listed in "Contract Overview--Questions: Contacting the Company." 55 Appendix I New York Contracts - -------------------------------------------------------------------------------- Some of the fees, features and benefits of the contract are different if it is issued in the State of New York. This Appendix contains the sections of the prospectus that contain those differences and should be read in conjunction with the rest of the prospectus. 1. The following table replaces the table in the "Contract Overview" section: - -------------------------------------------------------------------------------- Contract Facts - -------------------------------------------------------------------------------- Option Packages: There are three option packages available under the contract. You select an option package at the time of application. Each option package is distinct. The differences are summarized as follows:
- ---------------------------------------------------------------------------------------------------- Option Package I Option Package II Option Package III - ---------------------------------------------------------------------------------------------------- Mortality and Expense Risk Charge(1): 0.80% 1.10% 1.25% - ---------------------------------------------------------------------------------------------------- Death Benefit(2) The greater of: The greatest of: The greatest of: on Death of the (1) The sum of all (1) The sum of all (1) The sum of all Annuitant(3): purchase payments, purchase payments, purchase payments, adjusted for amounts adjusted for amounts adjusted for amounts withdrawn or withdrawn or withdrawn or applied to an income applied to an income applied to an income phase payment phase payment phase payment option as of the claim option as of the claim option as of the claim date; or date; or date; or (2) The account value on (2) The account value on (2) The account value on the claim date. the claim date; the claim date; or or (3) The "step-up value" (3) The "step-up value" on the claim on the claim date. date.(4) - ---------------------------------------------------------------------------------------------------- Minimum Initial Non- Non- Non- Payment/Account Qualified: Qualified: Qualified: Qualified: Qualified: Qualified: Value(5): $15,000 $1,500 $5,000 $1,500 $5,000 $1,500 - ---------------------------------------------------------------------------------------------------- 10% of your account value 10% of your account 10% of your account value each account value each account each account year, Free Withdrawals(6): year, non-cumulative. year, non-cumulative. cumulative to a maximum 30%. - ---------------------------------------------------------------------------------------------------- Nursing Home Waiver--Waiver of Not Available Not Available Not Available Early Withdrawal Charge(7): - ----------------------------------------------------------------------------------------------------
(1) See "Fee Table" and "Fees." (2) See "Death Benefit." If a death benefit is payable based on account value or step-up value, the death benefit will not include any premium bonus credited to the account after or within 12 months of the date of death. See Item 4 "Premium Bonus Option-- Forfeiture" in this Appendix. (3) When a contract holder who is not the annuitant dies, the amount of the death benefit is not the same as shown above under each option package. See "Death Benefit." Therefore, contract holders who are not also the annuitant should seriously consider whether Option Packages II and III are suitable for their circumstances. (4) The death benefit is the same under Option Packages II and III for contracts issued in New York. Therefore, contract holders of contracts issued in New York should seriously consider whether Option Package III is suitable for their circumstances. (5) See "Purchase and Rights." (6) See "Fees." (7) See "Fees." 56 2. The following early withdrawal charge schedule replaces the early withdrawal charge schedules in the Fee Table: Early Withdrawal Charge. (As a percentage of payments withdrawn.)
- ------------------------------------------------------------------- All Contracts - ------------------------------------------------------------------- Years From Receipt of Purchase Payment Early Withdrawal Charge -------------------------------------- ----------------------- Less than 1 7% 1 or more but less than 2 6% 2 or more but less than 3 5% 3 or more but less than 4 4% 4 or more but less than 5 3% 5 or more but less than 6 2% 6 or more but less than 7 1% 7 or more 0% - -------------------------------------------------------------------
57 3. The following Hypothetical Examples replace the Hypothetical Examples at the end of the "Fee Table": Hypothetical Example: If You Do Not Elect the Premium Bonus Option Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the contract and assume a 5% annual return on the investment. For the purpose of these examples, we deducted total annual fund expenses and the maximum contract charges, except the premium bonus option charge (i.e., a mortality and expense risk charge of 1.25%, an administrative expense charge of 0.15% and an annual maintenance fee of $30 (converted to a percentage of assets equal to 0.022%)). The total annual fund expenses used are those shown in the column "Total Fund Annual Expenses Without Waiver or Reductions" in the Fund Expense Table.
- -------------------------------------------- EXAMPLE A EXAMPLE B > These examples are purely hypothetical. --------- --------- > They should not be considered a If you withdraw your entire account If at the end of the periods shown you representation of past or future expenses value at the end of the periods shown, (1) leave your entire account value or expected returns. you would pay the following expenses, invested or (2) select an income phase > Actual expenses and/or returns may be including any applicable early payment option, you would pay the more or less than those shown in these withdrawal charge: following expenses (no early with- examples. drawal charge is reflected):* - -------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ------ ------- ------- -------- ------ ------- ------- -------- Aetna Balanced VP, Inc. Aetna Bond VP Aetna Growth VP Aetna Growth and Income VP Aetna Index Plus Large Cap VP Aetna International VP Aetna Money Market VP Aetna Real Estate Securities VP Aetna Small Company VP Aetna Technology VP AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund AIM V.I. Growth Fund AIM V.I. Growth and Income Fund AIM V.I. Value Fund Alliance Growth and Income Portfolio Alliance Premier Growth Portfolio Alliance Quasar Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP High Income Portfolio Fidelity VIP II Contrafund[RegTM] Portfolio Janus Aspen Aggressive Growth Portfolio Janus Aspen Balanced Portfolio Janus Aspen Growth Portfolio Janus Aspen Worldwide Growth Portfolio MFS Total Return Series [Mitchell Hutchins Growth & Income Portfolio ] [Mitchell Hutchins Small Cap Portfolio ] [Mitchell Hutchins Tactical Allocation Portfolio ] Oppenheimer Aggressive Growth Fund/VA Oppenheimer Main Street Growth & Income Fund/VA Oppenheimer Strategic Bond Fund/VA PPI MFS Capital Opportunities Portfolio PPI MFS Emerging Equities Portfolio PPI MFS Research Growth Portfolio PPI Scudder International Growth Portfolio
- ----------------- * This example does not apply during the income phase if you selected a nonlifetime income phase payment option with variable payments and take a lump-sum withdrawal after payments start. In this case the lump-sum payment is treated as a withdrawal during the accumulation phase and may be subject to an early withdrawal charge (refer to Example A). 58 Hypothetical Example: If You Elect the Premium Bonus Option Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 in the contract and assume a 5% annual return on the investment. For the purpose of these examples, we deducted total annual fund expenses and the maximum contract charges (i.e., a mortality and expense risk charge of 1.25%, an administrative expense charge of 0.15%, an annual maintenance fee of $30 (converted to a percentage of assets equal to 0.022%) and the premium bonus option charge of 0.50% during the first seven account years). The total annual fund expenses used are those shown in the column "Total Fund Annual Expenses Without Waiver or Reductions" in the Fund Expense Table.
- -------------------------------------------- EXAMPLE A EXAMPLE B > These examples are purely hypothetical. --------- --------- > They should not be considered a If you withdraw your entire account If at the end of the periods shown you representation of past or future expenses value at the end of the periods shown, (1) leave your entire account value or expected returns. you would pay the following expenses, invested or (2) select an income phase > Actual expenses and/or returns may be including any applicable early payment option, you would pay the more or less than those shown in these withdrawal charge: following expenses (no early with- examples. drawal charge is reflected):* - -------------------------------------------- 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ------ ------- ------- -------- ------ ------- ------- -------- Aetna Balanced VP, Inc. Aetna Bond VP Aetna Growth VP Aetna Growth and Income VP Aetna Index Plus Large Cap VP Aetna International VP Aetna Money Market VP Aetna Real Estate Securities VP Aetna Small Company VP Aetna Technology VP AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund AIM V.I. Growth Fund AIM V.I. Growth and Income Fund AIM V.I. Value Fund Alliance Growth and Income Portfolio Alliance Premier Growth Portfolio Alliance Quasar Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP High Income Portfolio Fidelity VIP II Contrafund[RegTM] Portfolio Janus Aspen Aggressive Growth Portfolio Janus Aspen Balanced Portfolio Janus Aspen Growth Portfolio Janus Aspen Worldwide Growth Portfolio MFS Total Return Series [Mitchell Hutchins Growth & Income Portfolio ] [Mitchell Hutchins Small Cap Portfolio ] [Mitchell Hutchins Tactical Allocation Portfolio ] Oppenheimer Aggressive Growth Fund/VA Oppenheimer Main Street Growth & Income Fund/VA Oppenheimer Strategic Bond Fund/VA PPI MFS Capital Opportunities Portfolio PPI MFS Emerging Equities Portfolio PPI MFS Research Growth Portfolio PPI Scudder International Growth Portfolio
- ----------------- * This example does not apply during the income phase if you selected a nonlifetime income phase payment option with variable payments and take a lump-sum withdrawal after payments start. In this case the lump-sum payment is treated as a withdrawal during the accumulation phase and may be subject to an early withdrawal charge (refer to Example A). 59 4. The following replaces the "Forfeiture" subsection in the "Premium Bonus Option" section: Forfeiture. In each of the following circumstances all or part of a premium bonus credited to your account will be forfeited: > If you exercise your free look privilege and cancel your contract. See "Right to Cancel." > If a death benefit is payable based on account value, step-up value or roll-up value, but only the amount of any premium bonus credited to the account after or within 12 months of the date of death. See "Death Benefit-- Premium Bonus." > If all or part of a purchase payment for which a premium bonus was credited is withdrawn during the first seven account years. The amount of the premium bonus forfeited will be calculated by: (1) Determining the amount of the premium bonus that is subject to forfeiture according to the following table:
- ------------------------------------------------------------------ Completed Account Years Amount of Premium at the Time of the Withdrawal Bonus Subject to Forfeiture - ------------------------------------------------------------------ Less than 1 100% 1 or more but less than 2 100% 2 or more but less than 3 100% 3 or more but less than 4 100% 4 or more but less than 5 100% 5 or more but less than 6 75% 6 or more but less than 7 50% 7 or more 0% - ------------------------------------------------------------------
(2) And multiplying that amount by the same percentage as the amount withdrawn subject to the early withdrawal charge is to the total of all purchase payments made to the account during the first account year. The following hypothetical example illustrates how the forfeiture of premium bonus is calculated when you withdraw all or part of a purchase payment for which a premium bonus was credited during the first seven account years.
- ----------------------------------------------------------------------------------------------------------------------- Purchase Premium Account Withdrawal Date Payment Bonus Value Amount Explanation - ----------------------------------------------------------------------------------------------------------------------- July 14, 2000 $100,000 $4,000 $104,000 -- You make a $100,000 initial purchase payment and we credit your account with a 4% ($4,000) premium bonus. Your beginning account value equals $104,000. - ----------------------------------------------------------------------------------------------------------------------- July 14, 2003 -- -- $120,000 $30,000 Assume that your account value grows to $120,000 over the next three years and you request a $30,000 withdrawal. $18,000 of that $30,000 will be subject to an early withdrawal charge ($30,000 minus $12,000 (the 10% free withdrawal amount, see "Fees--Free Withdrawals")) and you would pay a $720 early withdrawal charge (4% of $18,000). Additionally, 100% of the premium bonus is subject to forfeiture according to the table above, and because $18,000 is 18% of the $100,000 purchase payment made in the first account year, 18% of your $4,000 premium bonus, or $720, would be forfeited.* - -----------------------------------------------------------------------------------------------------------------------
- ----------------- *This example assumes that either Option Package I or II has been in effect since you purchased the contract. If Option Package III has been in effect since inception, none of the withdrawal would be subject to an early withdrawal charge because the 30% cumulative free withdrawal amount ($36,000) would be greater than the amount of the withdrawal. See "Fees--Free Withdrawals." Therefore, the withdrawal would not result in forfeiture of any of the premium bonus. 60 5. The following replaces the "Death Benefit Amount" subsection in the "Death Benefit" section: Death Benefit Amount. The death benefit depends upon the option package in effect on the date the annuitant dies.
- ------------------------------------------------------------------------------------- Option Package I Option Package II Option Package III** - ------------------------------------------------------------------------------------- Death Benefit The greater of: The greatest of: The greatest of: on Death of (1) The sum of (1) The sum of (1) The sum of the Annuitant: all purchase all purchase all purchase payments, payments, payments, adjusted for adjusted for adjusted for amounts amounts amounts withdrawn or withdrawn or withdrawn or applied to an applied to an applied to an income phase income phase income phase payment option payment option payment option as of the claim as of the claim as of date; or date; or the claim date; or (2) The account (2) The account (2) The account value* on the value* on the value* on the claim date. claim date; or claim date; or (3) The "step-up (3) The "step-up value"* (as value"* (as described below) described below) on the claim date. on the claim date.** - -------------------------------------------------------------------------------------
* For purposes of calculating the death benefit, the account value and step-up value will be reduced by the amount of any premium bonus credited to your account after or within 12 months of the date of death. See "Premium Bonus Option-- Forfeiture." ** For contracts issued in the state of New York, the benefit payable upon the death of the annuitant under Option Package III is the same as that described under Option Package II. Therefore, contract holders of contracts issued in New York should seriously consider whether Option Package III is suitable for their circumstances. 61 Appendix II ALIAC Guaranteed Account - -------------------------------------------------------------------------------- The ALIAC Guaranteed Account (the Guaranteed Account) is a fixed interest option available during the accumulation phase under the contract. This appendix is only a summary of certain facts about the Guaranteed Account. Please read the Guaranteed Account prospectus carefully before investing in this option. In General. Amounts invested in the Guaranteed Account earn specified interest rates if left in the Guaranteed Account for specified periods of time. If you withdraw or transfer those amounts before the specified periods elapse, we may apply a market value adjustment (described below) which may be positive or negative. When deciding to invest in the Guaranteed Account, contact your sales representative or the Company to learn: > The interest rate(s) we will apply to amounts invested in the Guaranteed Account. We change the rate(s) periodically. Be certain you know the rate we guarantee on the day your account dollars are invested in the Guaranteed Account. Guaranteed interest rates will never be less than an annual effective rate of 3%. > The period of time your account dollars need to remain in the Guaranteed Account in order to earn the rate(s). You are required to leave your account dollars in the Guaranteed Account for a specified period of time in order to earn the guaranteed interest rate(s). Deposit Period. During a deposit period, we offer a specific interest rate for dollars invested for a certain guaranteed term. For a specific interest rate and guaranteed term to apply, account dollars must be invested in the Guaranteed Account during the deposit period for which that rate and term are offered. Interest Rates. We guarantee different interest rates, depending upon when account dollars are invested in the Guaranteed Account. For guaranteed terms one year or longer, we may apply more than one specified interest rate. The interest rate we guarantee is an annual effective yield. That means the rate reflects a full year's interest. We credit interest daily at a rate that will provide the guaranteed annual effective yield over one year. Guaranteed interest rates will never be less than an annual effective rate of 3%. The interest rate guarantees are based on the Company's claims-paying ability. Guaranteed Terms. The guaranteed term is the period of time account dollars must be left in the Guaranteed Account in order to earn the guaranteed interest rate. For guaranteed terms one year or longer, we may offer different rates for specified time periods within a guaranteed term. We offer different guaranteed terms at different times. We also may offer more than one guaranteed term of the same duration with different interest rates. Check with your sales representative or the Company to learn what terms are being offered. The Company also reserves the right to limit the number of guaranteed terms or the availability of certain guaranteed terms. Fees and Other Deductions. If all or a portion of your account value in the Guaranteed Account is withdrawn or transferred, you may incur one or more of the following: > Market Value Adjustment (MVA)--as described in this appendix and in the Guaranteed Account prospectus; > Tax penalties and/or tax withholding--see "Taxation;" > Early withdrawal charge--see "Fees;" or > Maintenance fee--see "Fees." We do not make deductions from amounts in the Guaranteed Account to cover mortality and expense risks. Rather, we consider these risks when determining the interest rate to be credited. Market Value Adjustment (MVA). If your account value is withdrawn or transferred from the Guaranteed Account before the guaranteed term is completed, an MVA may apply. The MVA reflects investment value changes caused by changes in interest rates occurring since the date of deposit. The MVA may be positive or negative. If interest rates at the time of withdrawal or transfer have increased since the date of deposit, the value of the investment decreases and the MVA will be negative. This could result in your receiving less than the amount 62 you paid into the Guaranteed Account. If interest rates at the time of withdrawal or transfer have decreased since the date of deposit, the value of the investment increases and the MVA will be positive. MVA Waiver. For withdrawals or transfers from a guaranteed term before the guaranteed term matures, the MVA may be waived for: > Transfers due to participation in the dollar cost averaging program; > Withdrawals taken due to your election of SWO or ECO (described in "Systematic Distribution Options"), if available; > Withdrawals for minimum distributions required by the Tax Code and for which the early withdrawal charge is waived; and > Withdrawals due to your exercise of the right to cancel your contract (described in "Right to Cancel"). Death Benefit. When a death benefit is paid under the contract within six months of the date of death, only a positive aggregate MVA amount, if any, is applied to the account value attributable to amounts withdrawn from the Guaranteed Account. This provision does not apply upon the death of a spousal beneficiary or joint contract holder who continued the account after the first death. If a death benefit is paid more than six months from the date of death, a positive or negative aggregate MVA amount, as applicable, will be applied. Partial Withdrawals. For partial withdrawals during the accumulation phase, amounts to be withdrawn from the Guaranteed Account will be withdrawn proportionally from each group of deposits having the same length of time until the maturity date ("Guaranteed Term Group"). Within a guaranteed term group, the amount will be withdrawn first from the oldest deposit period, then from the next oldest and so on until the amount requested is satisfied. Guaranteed Terms Maturity. As a guaranteed term matures, assets accumulating under the Guaranteed Account may be (a) transferred to a new guaranteed term, (b) transferred to other available investment options, or (c) withdrawn. Amounts withdrawn may be subject to an early withdrawal charge, taxation and, if you are under age 59-1/2, tax penalties may apply. If no direction is received from you at our Home Office by the maturity date of a guaranteed term, the amount from the maturing guaranteed term will be transferred to a new guaranteed term of a similar length. If the same guaranteed term is no longer available, the next shortest guaranteed term available in the current deposit period will be used. If no shorter guaranteed term is available, the next longer guaranteed term will be used. If you do not provide instructions concerning the maturity value of a maturing guaranteed term, the maturity value transfer provision applies. This provision allows transfers or withdrawals without an MVA if the transfer or withdrawal occurs during the calendar month immediately following a guaranteed term maturity date. This waiver of the MVA only applies to the first transaction regardless of the amount involved in the transaction. Under the Guaranteed Account each guaranteed term is counted as one funding option. If a guaranteed term matures and is renewed for the same term, it will not count as an additional investment option for purposes of any limitation on the number of investment options. Subsequent Purchase Payments. Purchase payments received after your initial purchase payment to the Guaranteed Account will be allocated in the same proportions as the last allocation, unless you properly instruct us to do otherwise. If the same guaranteed term(s) are not available, the next shortest term will be used. If no shorter guaranteed term is available, the next longer guaranteed term will be used. Dollar Cost Averaging. The Company may offer more than one guaranteed term of the same duration and credit one with a higher rate contingent upon use only with the dollar cost averaging program. If amounts are applied to a guaranteed term which is credited with a higher rate using dollar cost averaging and the dollar cost averaging is discontinued, the amounts will be transferred to another guaranteed term of the same duration and an MVA will apply. Transfer of Account Dollars. Generally, account dollars invested in the Guaranteed Account may be transferred among guaranteed terms offered through the Guaranteed Account and/or to other investment options offered through the contract. However, transfers may not be made during the deposit period in which your account 63 dollars are invested in the Guaranteed Account or for 90 days after the close of that deposit period. We will apply an MVA to transfers made before the end of a guaranteed term. The 90-day wait does not apply to (1) amounts transferred on the maturity date or under the maturity value transfer provision; (2) amounts transferred from the Guaranteed Account before the maturity date due to the election of an income phase payment option; (3) amounts distributed under the ECO or SWO (see "Systematic Distribution Options"); and (4) amounts transferred from an available guaranteed term in connection with the dollar cost averaging program. Transfers after the 90-day period are permitted from guaranteed term(s) to other guaranteed term(s) available during a deposit period or to other available investment options. Transfers of the Guaranteed Account values on or within one calendar month of a term's maturity date are not counted as one of the 12 free transfers of accumulated values in the account. Reinvesting Amounts Withdrawn from the Guaranteed Account. If amounts are withdrawn and then reinvested in the Guaranteed Account, we apply the reinvested amount to the current deposit period. This means the guaranteed annual interest rate and guaranteed terms available on the date of reinvestment will apply. We reinvest amounts proportionately in the same way as they were allocated before withdrawal. Your account value will not be credited for any negative MVA that was deducted at the time of withdrawal. The Income Phase. The Guaranteed Account cannot be used as an investment option during the income phase. However, you may notify us at least 30 days in advance to elect a fixed or variable payment option and to transfer your Guaranteed Account dollars to the general account or any of the subaccounts available during the income phase. Transfers made due to the election of a lifetime income phase payment option will be subject to only a positive aggregate MVA. Distribution. The Company is the principal underwriter of the contract. The Company is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. From time to time the Company may offer customers of certain broker-dealers special guaranteed rates in connection with the Guaranteed Account offered through the contract and may negotiate different commissions for these broker-dealers. 64 Appendix III Fixed Account - -------------------------------------------------------------------------------- General Disclosure. > The Fixed Account is an investment option available during the accumulation phase under the contract. > Amounts allocated to the Fixed Account are held in the Company's general account which supports insurance and annuity obligations. > Interests in the Fixed Account have not been registered with the SEC in reliance on exemptions under the Securities Act of 1933, as amended. > Disclosure in this prospectus regarding the Fixed Account may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of the statements. > Disclosure in this appendix regarding the Fixed Account has not been reviewed by the SEC. > Additional information about this option may be found in the contract. Interest Rates. > The Fixed Account guarantees that amounts allocated to this option will earn the minimum interest rate specified in the contract. We may credit a higher interest rate from time to time, but the rate we credit will never fall below the guaranteed minimum specified in the contract. Amounts applied to the Fixed Account will earn the interest rate in effect at the time money is applied. Amounts in the Fixed Account will reflect a compound interest rate as credited by us. The rate we quote is an annual effective yield. Interest rate guarantees are based on the Company's claims-paying ability. > Our determination of credited interest rates reflects a number of factors, including mortality and expense risks, interest rate guarantees, the investment income earned on invested assets and the amortization of any capital gains and/or losses realized on the sale of invested assets. Under this option, we assume the risk of investment gain or loss by guaranteeing the amounts you allocate to this option and promising a minimum interest rate and income phase payment. Dollar Cost Averaging. Amounts you invest in the Fixed Account must be transferred into the other investment options available under the contract over a period not to exceed 12 months. If you discontinue dollar cost averaging, the remaining balance amounts in the Fixed Account will be transferred into the money market subaccount available under the contract, unless you direct us to transfer the balance into other available options. Withdrawals. Under certain emergency conditions we may defer payment of any withdrawal for a period of up to 6 months or as provided by federal law. Charges. We do not make deductions from amounts in the Fixed Account to cover mortality and expense risks. We consider these risks when determining the credited rate. If you make a withdrawal from amounts in the Fixed Account, an early withdrawal charge may apply. See "Fees." Transfers. During the accumulation phase you may transfer account dollars from the Fixed Account to any other available investment option. We may vary the dollar amount that you are allowed to transfer, but it will never be less than 10% of your account value held in the Fixed Account. By notifying the Home Office at least 30 days before income phase payments begin, you may elect to have amounts transferred to one or more of the subaccounts available during the income phase to provide variable payments. 65 Appendix IV Description of Underlying Funds - -------------------------------------------------------------------------------- The investment results of the mutual funds (funds) are likely to differ significantly and there is no assurance that any of the funds will achieve their respective investment objectives. Shares of the funds will rise and fall in value and you could lose money by investing in the funds. Investments in the funds are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Except as noted, all funds are diversified, as defined under the Investment Company Act of 1940. Aetna Balanced VP, Inc. Investment Objective Seeks to maximize investment return, consistent with reasonable safety of principal by investing in a diversified portfolio of one or more of the following asset classes: stocks, bonds, and cash equivalents, based on the investment adviser's judgment of which of those sectors or mix thereof offers the best investment prospects. Policies Under normal market conditions, allocates assets among the following asset classes: equities such as common and preferred stocks; and debt, such as bonds, mortgage-related and other asset-backed securities, U.S. Government securities, and money market instruments. Typically maintains approximately 60% of total assets in equities and 40% of total assets in debt (including money market instruments), although those percentages may vary from time to time. Risks Principal risks are those generally attributable to stock and bond investing. The success of the fund's strategy depends on the investment adviser's skill in allocating fund assets between equities and debt and in choosing investments within those categories. Risks attributable to stock investing include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of smaller companies tend to be less liquid and more volatile than stocks of larger companies and can be particularly sensitive to expected changes in interest rates, borrowing costs and earnings. Fixed-income investments are subject to the risk that interest rates will rise, which generally causes bond prices to fall. Also, economic and market conditions may cause issuers to default or go bankrupt. Values of high-yield bonds are even more sensitive to economic and market conditions than other bonds. Prices of mortgage-related securities, in addition to being sensitive to changes in interest rates, also are sensitive to changes in the prepayment patterns on the underlying instruments. Investment Adviser: Aeltus Investment Management, Inc. Aetna Income Shares d/b/a Aetna Bond VP Investment Objective Seeks to maximize total return, consistent with reasonable risk, through investments in a diversified portfolio consisting primarily of debt securities. It is anticipated that capital appreciation and investment income will both be major factors in achieving total return. Policies Under normal market conditions, invests at least 65% of total assets in high-grade corporate bonds, mortgage-related and other asset-backed securities, and securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. High-grade securities are rated at least A by Standard & Poor's Corporation (S&P) or Moody's Investors Service, Inc. (Moody's), or if unrated, considered by the investment adviser to be of comparable quality. May also invest up to 15% of total assets in high-yield bonds, and up to 25% of total assets in foreign debt securities. Risks Principal risks are those generally attributable to debt investing, including increases in interest rates and loss of principal. Generally, when interest rates rise, bond prices fall. Bonds with longer maturities tend to be more 66 sensitive to changes in interest rates. For all bonds there is a risk that the issuer will default. High-yield bonds generally are more susceptible to the risk of default than higher rated bonds. Prices of mortgage-related securities, in addition to being sensitive to changes in interest rates, also are sensitive to changes in the prepayment patterns on the underlying instruments. Foreign securities have additional risks. Some foreign securities tend to be less liquid and more volatile than their U.S. counterparts. In addition, accounting standards and market regulations tend to be less standardized in certain foreign countries. These risks are usually higher for securities of companies in emerging markets. Securities of foreign companies may be denominated in foreign currency. Exchange rate fluctuations may reduce or eliminate gains or create losses. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Fund d/b/a Aetna Growth and Income VP Investment Objective Seeks to maximize total return through investments in a diversified portfolio of common stocks and securities convertible into common stock. It is anticipated that capital appreciation and investment income will both be major factors in achieving total return. Policies Under normal market conditions, invests at least 65% of total assets in common stocks that the investment adviser believes have significant potential for capital appreciation or income growth. Tends to emphasize stocks of larger companies. Also invests assets across other asset classes (including stocks of small and medium-sized companies, international stock, real estate securities and fixed income securities). May invest principally in common stocks having significant potential for capital appreciation, or may purchase common stocks principally for their income potential through dividends and option writing, or may acquire securities having a mix of these characteristics. Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Although the investment adviser emphasizes large cap stocks, to the extent the Fund is diversified across asset classes, it may not perform as well as less diversified funds when large cap stocks are in favor. Additionally, stocks of medium-sized and smaller companies tend to be more volatile and less liquid than stocks of larger companies. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Encore Fund d/b/a Aetna Money Market VP Investment Objective Seeks to provide high current return, consistent with preservation of capital and liquidity, through investment in high-quality money market instruments. Policies Invests only in a diversified portfolio of high-quality fixed income securities denominated in U.S. dollars, with short remaining maturities. These securities include U.S. Government securities, such as U.S. Treasury bills and securities issued or sponsored by U.S. government agencies. They also may include corporate debt securities, commercial paper, asset-backed securities and certain obligations of U.S. and foreign banks, each of which must be highly rated by independent rating agencies or, if unrated, considered by the investment adviser to be of comparable quality. Maintains a dollar-weighted average portfolio maturity of 90 days or less. Risks It is possible to lose money by investing in the fund. There is no guaranty the fund will achieve its investment objective. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 67 A weak economy, strong equity markets and changes by the Federal Reserve in its monetary policies all could affect short-term interest rates and therefore the value and yield of the fund's shares. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Growth VP Investment Objective Seeks growth of capital through investment in a diversified portfolio consisting primarily of common stocks and securities convertible into common stocks believed to offer growth potential. Policies Under normal market conditions, invests at least 65% of total assets in common stocks and securities convertible into common stock. Tends to emphasize stocks of larger companies, although may invest in companies of any size. Uses internally developed quantitative computer models to evaluate the financial characteristics of approximately 1,000 companies. The investment adviser analyzes these characteristics in an attempt to identify companies it believes have strong growth characteristics or demonstrate a positive trend in earnings estimates, but whose full value is not reflected in the stock price. Focuses on companies that the investment adviser believes have strong, sustainable and improving earnings growth, and established market positions in a particular industry. Risks Principal risks are those generally attributable to stock investing. They include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Growth-oriented stocks typically sell at relatively high valuations as compared to other types of stocks. If a growth stock does not exhibit the consistent level of growth expected, its price may drop sharply. Historically, growth-oriented stocks have been more volatile than value-oriented stocks. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP Investment Objective Seeks to outperform the total return performance of the Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market level of risk. Policies Invests at least 80% of net assets in stocks included in the S&P 500 (other than Aetna Inc. common stock). The investment adviser attempts to achieve the objective by overweighting those stocks in the S&P 500 that the investment adviser believes will outperform the index, and underweighting (or avoiding altogether) those stocks that the investment adviser believes will underperform the index. In determining stock weightings, uses internally developed quantitative computer models to evaluate various criteria, such as the financial strength of each company and its potential for strong, sustained earnings growth. At any one time, the fund's portfolio generally includes approximately 400 of the stocks included in the S&P 500. Although the fund will not hold all the stocks in the S&P 500, the investment adviser expects that there will be a close correlation between the performance of the fund and that of the S&P 500 in both rising and falling markets. Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The success of the fund's strategy depends significantly on the investment adviser's skill in determining which securities to overweight, underweight or avoid altogether. Investment Adviser: Aeltus Investment Management, Inc. 68 Aetna Variable Portfolios, Inc.--Aetna International VP Investment Objective Seeks long-term capital growth primarily though investment in a diversified portfolio of common stocks principally traded in countries outside of the United States. The fund will not target any given level of current income. Policies Under normal market conditions, invests at least 65% of total assets in securities principally traded in three or more countries outside of the United States. These securities may include common stocks as well as securities convertible into common stock. Diversifies the fund by investing in a mix of stocks that the investment adviser believes have the potential for long-term growth, as well as stocks that appear to be trading below their perceived value. Allocates assets among several geographic regions and individual countries, investing primarily in those areas that the investment adviser believes have the greatest potential for growth as well as stable exchange rates. Invests primarily in established foreign securities markets, although may invest in emerging markets as well. Uses internally developed quantitative computer models to evaluate the financial characteristics of over 2,000 companies in an attempt to select companies with long-term sustainable growth characteristics. Employs currency hedging strategies to protect from adverse effects on the U.S. dollar. Risks Principal risks are those generally attributable to stock investing which include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of foreign companies tend to be less liquid and more volatile than their U.S. counterparts. Accounting standards and market regulations tend to be less standardized in certain foreign countries, and economic and political climates tend to be less stable. Stocks of foreign companies may be denominated in foreign currency. Exchange rate fluctuations may reduce or eliminate gains or create losses. Hedging strategies intended to reduce this risk may not perform as expected. Investments in emerging markets are subject to the same risks applicable to foreign investments generally, although those risks may be increased due to conditions in such countries. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Small Company VP Investment Objective Seeks growth of capital primarily through investment in a diversified portfolio of common stocks and securities convertible into common stocks of companies with smaller market capitalizations. Policies Under normal market conditions, invests at least 65% of total assets in common stocks and securities convertible into common stock of small-capitalization companies, defined as: the 2,000 smallest of the 3,000 largest U.S. companies (as measured by market capitalization); all companies not included above that are included in the Standard & Poor's SmallCap 600 Index or the Russell 2000 Index; and companies with market capitalizations lower than any companies included in the first two categories. For purposes of the 65% policy, the largest company in this group in which the fund intends to invest currently has a market capitalization of approximately $1.5 billion. Invests in stocks that the investment adviser believes have the potential for long-term growth, as well as those that appear to be trading below their perceived value. Uses internally developed quantitative computer models to evaluate financial characteristics of over 2,000 companies in an attempt to identify companies whose perceived value is not reflected in the stock price. Considers the potential of each company to create or take advantage of unique product opportunities, its potential to achieve long-term sustainable growth and the quality of its management. Risks Principal risks are those generally attributable to stock investing which include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of smaller companies carry higher risks than stocks of larger companies. This is because smaller companies may 69 lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In many instances, the frequency and volume of trading in small cap stocks are substantially less than of stocks of larger companies. As a result, the stocks of smaller companies may be subject to wider price fluctuations and/or may be less liquid. When selling a large quantity of a particular stock, the fund may have to sell at a discount from quoted prices or may have to make a series of small sales over an extended period of time due to the more limited trading volume of smaller company stocks. Stocks of smaller companies can be particularly sensitive to expected changes in interest rates, borrowing costs and earnings. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Technology VP Investment Objective Seeks long-term capital appreciation. Policies Primarily invests in common stocks and securities convertible into common stock of companies in the information technology industry sector. These companies include companies that the subadviser considers to be principally engaged in the development, production, or distribution of products or services related to the processing, storage, transmission, or presentation of information or data. A particular company will be considered to be principally engaged in the information technology industries if, at the time of investment, the investment adviser determines that at least 50% of the company's assets, gross income, or net profits are committed to, or derived from, those industries. A company will also be considered to be principally engaged if the subadviser considers that the company has the potential for capital appreciation primarily as a result of particular products, technology, patents, or other market advantages in those industries. In selecting stocks, the subadviser looks at a company's valuation relative to its potential long-term growth rate. May look to see whether a company offers a new or improved product, service or business operation; whether it has experienced a positive change in its financial or business condition; whether the market for its goods or services has expanded or experienced a positive change; and whether there is a potential catalyst for positive change in the company's business or stock price. May sell a security if the subadviser determines that the company has become overvalued due to price appreciation or has experienced a change in its business fundamentals, if the company's growth rate slows substantially, or if the subadviser believes that another investment offers a better opportunity. Risks Principal risks are those generally attributable to stock investing which include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of smaller companies tend to be less liquid and more volatile than stocks of larger companies. Further, stocks of smaller companies also can be particularly sensitive to expected changes in interest rates, borrowing costs and earnings. Because the fund's investments are concentrated in the information technology industries, the Fund may be subject to more abrupt swings in value than a fund which invests in a broader range of industries. Investments in information technology companies may be highly volatile. The fund may experience difficulty in establishing or closing out positions in these securities at prevailing market prices. Also, there may be less publicly available information about small companies or less market interest in their securities as compared to larger companies, and it may take longer for the prices of the securities to reflect the full value of their issuers' earnings potential or assets. Investment Adviser: Aeltus Investment Management, Inc. Subadviser: Elijah Asset Management, LLC AIM V.I. Capital Appreciation Fund Investment Objective Seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. 70 Policies The portfolio managers focus on companies they believe are likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. The fund may also invest up to 20% of its total assets in foreign securities. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the fund may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. This is especially true with respect to common stocks of smaller companies, whose prices may go up and down more than common stocks of larger, more-established companies. Also, since common stocks of smaller companies may not be traded as often as common stocks of larger, more-established companies, it may be difficult or impossible for the fund to sell securities at a desirable price. Investment Adviser: A I M Advisors, Inc. AIM V.I. Government Securities Fund Investment Objective Seeks to achieve a high level of current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the United States Government. Policies The portfolio managers focus on securities that they believe have favorable prospects for current income, consistent with their concern for safety of principal. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the fund may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. As a result, the fund may not achieve its investment objective. The prices of foreign securities may be affected by other factors, including, currency exchange rate, political and economic conditions, regulations and foreign markets. These factors may affect the prices of securities issued by foreign companies located in developing countries more than those in countries with mature economies. Risks The prices of debt securities change in response to many factors. Debt securities are particularly vulnerable to credit risk and interest rate fluctuations. Interest rate increases can cause the price of a debt security to decrease. The longer a debt security's duration, the more sensitive it is to this risk. The prices of high-coupon U.S. Government agency mortgage-backed securities fall more slowly when interest rates rise than do prices of other fixed-rate securities. Some of the securities purchased by the fund are not guaranteed by the U.S. Government. The agency or instrumentality issuing such security may default or otherwise be unable to honor a financial obligation. Investment Adviser: A I M Advisors, Inc. AIM V.I. Growth Fund Investment Objective Seeks growth of capital primarily by investing in seasoned and better capitalized companies considered to have strong earnings momentum. 71 Policies The portfolio managers focus on companies that have experienced above-average growth in earnings and have excellent prospects for future growth. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. The fund may also invest up to 20% of its total assets in foreign securities. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the fund may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. The fund may participate in the initial public offering (IPO) market. Because of the fund's small asset base any investment the fund may make in IPOs may significantly increase the fund's total returns. As the fund's assets grow, the impact of IPO investments will decline, which may reduce the fund's total returns. Investment Adviser: A I M Advisors, Inc. AIM V.I. Growth and Income Fund Investment Objective Seeks growth of capital with a secondary objective of current income. Policies The fund seeks to meet these objectives by investing at least 65% of its net assets in income-producing securities, including dividend-paying common stocks and convertible securities. The portfolio managers purchase securities of established companies that have long-term above-average growth in earnings and dividends, and growth companies that they believe have the potential for above-average growth in earnings and dividends. The portfolio managers consider whether to sell a particular security when they believe the security no longer has that potential or the capacity to generate income. The fund may also invest up to 20% of its total assets in foreign securities. The fund may engage in active and frequent trading of portfolio securities to achieve its investment objectives. If the fund does trade in this way, it may incur increased transaction costs and brokerage commissions, both of which can lower the actual return on your investment. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the fund may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. The values of the convertible securities in which the fund may invest also will be affected by market interest rates, the risk that the issuer may default on interest or principal payments and the value of the underlying common stock into which these securities may be converted. Specifically, since these types of convertible securities pay fixed interest and dividends, their values may fall if market interest rates rise and rise if market interest rates fall. Additionally, an issuer may have the right to buy back certain of the convertible securities at a time and at a price that is unfavorable to the fund. Investment Adviser: A I M Advisors, Inc. 72 AIM V.I. Value Fund Investment Objective Seeks to achieve long-term growth of capital by investing primarily in equity securities judged by the fund's investment adviser to be undervalued relative to the investment adviser's appraisal of the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities or relative to the equity market generally. Income is a secondary objective. Policies The fund also may invest in preferred stocks and debt instruments that have prospects for growth of capital. The fund may also invest up to 25% of its total assets in foreign securities. The portfolio managers focus on undervalued equity securities of (1) out-of-favor cyclical growth companies; (2) established growth companies that are undervalued compared to historical relative valuation parameters; (3) companies where there is early but tangible evidence of improving prospects that are not yet reflected in the price of the company's equity securities; and (4) companies whose equity securities are selling at prices that do not reflect the current market value of their assets and where there is reason to expect realization of this potential in the form of increased equity values. The portfolio managers consider whether to sell a particular security when they believe the company no longer fits into any of the above categories. In anticipation of or in response to adverse market conditions, for cash management purposes, or for defensive purposes, the fund may temporarily hold all or a portion of its assets in cash, money market instruments, shares of affiliated money market funds, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. If the seller of a repurchase agreement in which the fund invests defaults on its obligation or declares bankruptcy, the fund may experience delays in selling the securities underlying the repurchase agreement. As a result, the fund may incur losses arising from decline in the value of those securities, reduced levels of income and expenses of enforcing its rights. Investment Adviser: A I M Advisors, Inc. Alliance Variable Products--Growth and Income Portfolio Investment Objective Seeks reasonable current income and reasonable opportunity for appreciation through investments primarily in dividend-paying common stocks of good quality. Policies Invests primarily in dividend-paying common stocks of large, well-established "blue-chip" companies. May invest in fixed-income and convertible securities and in securities of foreign issuers. Restricts its investments in foreign securities to issues of high quality. Risks Principal risks include market risk, interest rate risk, and credit risk. Market risk is the risk that the value of the Portfolio's investments will fluctuate as the stock or bond markets fluctuate and that prices overall will decline over shorter or longer-term periods. Interest rate risk is the risk that changes in interest rates will affect the value of the Portfolio's investments in debt securities, such as bonds, notes, and asset-backed securities, or other income-producing securities. Increases in interest rates may cause the value of a Portfolio's investments to decline. Credit risk is the risk that the issuer or the guarantor of a debt security, or the counterparty to a derivatives contract, will be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. Investment in foreign securities are subject to increased credit risk because of the difficulties of 73 requiring foreign entities to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. Investments in foreign securities have foreign risk and currency risk. Foreign risk includes the risk that investments in foreign securities may experience more rapid and extreme changes in value than if they invested solely in securities of U.S. companies; foreign companies usually are not subject to the same degree of regulation as U.S. companies; differing reporting, accounting, and auditing standards; and the risk that political changes or diplomatic developments could adversely affect the Portfolio's investments in a foreign country. Currency risk is the risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the value of the Portfolio's investments. Investment Adviser: Alliance Capital Management L.P. Alliance Variable Products--Premier Growth Portfolio Investment Objective Seeks growth of capital by pursuing aggressive investment policies. Policies Invests primarily in equity securities of U.S. companies. Focuses on a relatively small number of intensively researched companies selected from a research universe of more than 600 companies that have strong management, superior industry positions, excellent balance sheets, and superior earnings growth prospects. Normally, invests in about 40-50 companies, with the 25 most highly regarded of these companies usually constituting approximately 70% of the Portfolio's net assets. During market declines, while adding to positions in favored stocks, the Portfolio becomes somewhat more aggressive, gradually reducing the number of companies represented in its portfolio. Conversely, in rising markets, while reducing or eliminating fully-valued positions, the Portfolio becomes somewhat more conservative, gradually increasing the number of companies represented in its portfolio. Through this approach, the investment adviser seeks to gain positive returns in good markets while providing some measure of protection in poor markets. May also invest up to 20% of its net assets in convertible securities. Risks Among the principal risks is market risk. This is the risk that the value of the Portfolio's investments will fluctuate as the stock or bond markets fluctuate and that prices overall will decline over shorter or longer-term periods. Because the Portfolio invests in a smaller number of securities than many other equity funds, you investment has the risk that changes in the value of a single security may have a more significant effect, either negative or positive, on the Portfolio's net asset value. Investment Adviser: Alliance Capital Management L.P. Alliance Variable Products--Quasar Portfolio Investment Objective Seeks growth of capital by pursuing aggressive investment policies. Current income is incidental to the Portfolio's objective. Policies Generally invests in a widely diversified portfolio of equity securities spread among many industries that offer the possibility of above-average earnings growth. Currently emphasizes investment in small-cap companies. Invests in well-known and established companies and in new and unseasoned companies. Can invest in the equity securities of any company and industry and in any type of security with potential for capital appreciation. When selecting securities, the investment adviser considers the economic and political outlook, the values of specific securities relative to other investments, trends in the determinants of corporate profits, and management capabilities and practices. May also invest in non-convertible bonds, preferred stocks, and foreign securities. 74 Risks Among the principal risks is market risk. This is the risk that the value of the Portfolio's investments will fluctuate as the stock or bond markets fluctuate and that prices overall will decline over shorter or longer-term periods. Investments in smaller companies tend to be more volatile than investments in large-cap or mid-cap companies. To the extent the Portfolio invests in non-convertible bonds, preferred stocks, and foreign stocks, the investment has interest rate risk, credit risk, foreign risk, and currency risk. Interest rate risk is the risk that changes in interest rates will affect the value of the Portfolio's investments in debt securities, such as bonds, notes, and asset-backed securities, or other income-producing securities. Increases in interest rates may cause the value of a Portfolio's investments to decline. Credit risk is the risk that the issuer or the guarantor of a debt security, or the counterparty to a derivatives contract, will be unable or unwilling to make timely payments of interest or principal, or to otherwise honor its obligations. Investment in foreign securities are subject to increased credit risk because of the difficulties of requiring foreign entities to honor their contractual commitments, and because a number of foreign governments and other issuers are already in default. Investments in foreign securities have foreign risk and currency risk. Foreign risk includes the risk that investments in foreign securities may experience more rapid and extreme changes in value than if they invested solely in securities of U.S. companies; foreign companies usually are not subject to the same degree of regulation as U.S. companies; differing reporting, accounting, and auditing standards; and the risk that political changes or diplomatic developments could adversely affect the Portfolio's investments in a foreign country. Currency risk is the risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the value of the Portfolio's investments Investment Adviser: Alliance Capital Management L.P. Fidelity Variable Insurance Products Fund--Equity Income Portfolio Investment Objective Seeks reasonable income. Also considers the potential for capital appreciation. Seeks a yield which exceeds the composite yield on the securities comprising the S&P 500. Policies Normally invests at least 65% of total assets in income-producing equity securities. May also invest in other types of equity securities and debt securities, including lower-quality debt securities. May invest in securities of both foreign and domestic issuers. Emphasis on above-average income-producing equity securities tends to lead to investments in large cap "value" stocks. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, or other factors that affect security values. Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities (those of less than investment-grade quality) can be more volatile due to increased sensitivity to adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. "Value" stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. "Value" stocks may not ever realize their full value. Investment Adviser: Fidelity Management & Research Company 75 Fidelity Variable Insurance Products Fund--Growth Portfolio Investment Objective Seeks capital appreciation. Policies Normally invests primarily in common stocks of companies the investment adviser believes have above-average growth potential. Companies with high growth potential tend to be companies with higher than average price/ earning (P/E) ratios and are often called "growth" stocks. May invest in securities of both foreign and domestic issuers. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, or other factors that affect security values. Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. "Growth" stocks tend to be sensitive to changes in their earnings and more volatile than other types of stocks. Investment Adviser: Fidelity Management & Research Company Fidelity Variable Insurance Products Fund--High Income Portfolio Investment Objective Seeks a high level of current income while also considering growth of capital. Policies Normally invests at least 65% of total assets in income-producing debt securities, preferred stocks and convertible securities, with an emphasis on lower-quality debt securities. May also invest in non-income producing securities, including defaulted securities and common stocks. Currently intends to limit common stocks to 10% of total assets. May invest in securities of both foreign and domestic issuers. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, interest rates or other factors that affect security values. Risks Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities (those of less than investment-grade quality) can be more volatile due to increased sensitivity to adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. Investment Adviser: Fidelity Management & Research Company Subadvisers: Fidelity Management & Research (U.K.) Inc.; Fidelity Management & Research Far East Inc.; Fidelity Investments Japan Limited 76 Fidelity Variable Insurance Products Fund II--Contrafund Portfolio Investment Objective Seeks long-term capital appreciation. Policies Normally invests primarily in common stocks of companies whose value the investment adviser believes is not fully recognized by the public. May invest in securities of both foreign and domestic issuers. May tend to buy "growth" stocks or "value" stocks, or a combination of both types. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, interest rates or other factors that affect security values. Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. "Growth" stocks tend to be sensitive to changes in their earnings and more volatile than other types of stocks. "Value" stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. "Value" stocks may not ever realize their full value. Investment Adviser: Fidelity Management & Research Company Subadvisers: Fidelity Management & Research (U.K.) Inc.; Fidelity Management & Research Far East Inc.; Fidelity Investments Japan Limited Janus Aspen Series--Aggressive Growth Portfolio Investment Objective Seeks long-term growth of capital. Policies A nondiversified portfolio that invests primarily in common stocks selected for their growth potential and normally invests at least 50% of its equity assets in medium-sized companies. Medium-sized companies are those whose market capitalizations at the time of investment fall within the range of companies in the Standard and Poor's (S&P) MidCap 400 Index. The market capitalizations within the Index will vary, but as of December 31, 1999, they ranged from approximately $170 million to $37 billion. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. In addition, a nondiversified portfolio has the ability to take larger positions in a smaller number of issuers. Because the appreciation or depreciation of a single stock may have a greater impact on the net asset value of a nondiversified portfolio, its share price can be expected to fluctuate more than a diversified portfolio. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more dependent on the ability of the issuer to 77 meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Balanced Portfolio Investment Objective Seeks long-term capital growth, consistent with preservation of capital and balanced by current income. Policies Normally invests 40-60% of its assets in securities selected primarily for their growth potential and 40-60% of its assets in securities selected primarily for their income potential. Will normally invest at least 25% of its assets in fixed-income securities. Assets may shift between the growth and income components of the Portfolio based on the portfolio manager's analysis of relevant market, financial and economic conditions. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest a significant portion of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. The income component of the Portfolio's holdings includes fixed-income securities which generally will decrease in value when interest rates rise. Another risk associated with fixed-income securities is the risk that an issuer of a bond will be unable to make principal and interest payments when due (i.e. credit risk). Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more susceptible to credit risk. They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies Generally invests primarily in common stocks of larger, more established companies selected for their growth potential, although it can invest in companies of any size. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High- 78 yield/high-risk securities are generally more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Worldwide Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies Invests primarily in common stocks of companies of any size throughout the world. Normally invests in issuers from at least five different countries, including the United States. May at times invest in fewer than five countries or even in a single country. May hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/ high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation MFS Total Return Series Investment Objective Seeks primarily to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital. Its secondary objective is to provide a reasonable opportunity for growth of capital and income. Policies Under normal market conditions, invests at least 40%, but no more than 75%, of net assets in common stocks and related securities (referred to as equity securities); bonds, warrants or rights convertible into stock; and depositary receipts for those securities. Invests at least 25% of net assets in non-convertible fixed income securities. May vary the percentage of assets invested in any one type of security (within the limits described above). May invest in foreign securities and may have exposure to foreign currencies through its investment in these securities. Generally, seeks to purchase equity securities that the investment adviser believes are undervalued in the market relative to their long-term potential focusing on companies with relatively large market capitalization (i.e., market capitalizations of $5 billion or more). Fixed income securities include U.S. government securities, mortgage-backed and asset-backed securities, and corporate bonds. The series has engaged and may engage in active and frequent trading to achieve its principal investment strategies. Risks In allocating investments, the series could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The value of securities held by the series may decline due to changing economic, political or market conditions, or disappointing earnings results. If anticipated events do not occur or are delayed, or if investor perceptions about 79 undervalued securities do not improve, the market price of these securities may not rise or may fall. Fixed income securities are subject to interest rate risk (the risk that when interest rates rise, the prices of fixed income securities will generally fall) and credit risk (the risk that the issuer of a fixed income security will not be able to pay principal and interest when due). Securities with longer maturities are affected more by interest rate risk. Investing in foreign securities involves risks relating to political social and economic developments abroad, as well as risks resulting from the differences between the regulations to which U.S. and foreign issuers are subject. Fixed income securities traded in the over-the-counter market may be harder to purchase or sell at a fair price. The inability to purchase or sell these fixed income securities at a fair price could have a negative impact on the series' performance. Frequent trading may result in the realization and distribution to shareholders of higher capital gains as compared to a series with less active trading policies. Frequent trading also increases transaction costs, which could detract from the series' performance. Investment Adviser: Massachusetts Financial Services Company [Mitchell Hutchins Series Trust Growth and Income Portfolio (Class I shares) Investment Objective Has an investment objective of current income and capital growth. Policies Invests primarily in dividend-paying stocks of companies that its investment adviser believes have potential for rapid earnings growth. Also invests, to a lesser extent, in bonds when the investment adviser believes those investments offer opportunities for capital appreciation because interest rates may fall or credit factors or ratings affecting particular issuers may improve. May invest in securities of foreign issuers that are denominated in U.S. dollars and traded in U.S. markets. In selecting stocks for the fund, the adviser uses its own Factor Valuation Model to identify companies that appear undervalued. The model ranks companies based on "value" factors such as dividends, cash flows, earnings and book values, as well as on "growth" factors, such as earnings momentum and industry performance forecasts. The adviser then applies fundamental analysis to select specific stocks from among those in the top 20% identified by the model. Risks The prices of common stocks and other equity securities generally fluctuate more than those of other investments. They reflect changes in the issuing company's financial condition and changes in the overall market. The fund could lose all of its investment in a company's stock. The Fund is subject, to a lesser extent, to interest rate risk, which means that the value of the fund's bond investments generally will fall when interest rates rise. Because interest rate risk is the primary risk presented by U.S. government and other very high quality bonds, changes in interest rates may actually have a greater effect on the value of those bonds than on lower quality bonds. An investment in the fund also presents credit risk. Credit risk is the risk that the issuer of a bond will not make principal or interest payments when they are due. Even if an issuer does not default on a payment, a bond's value may decline if the market believes that the issuer has become less able, or less willing, to make payments on time. Foreign securities involve risks that normally are not associated with securities of U.S. issuers. These include risks relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices. When securities are denominated in foreign currencies, they also are subject to currency risk. (i.e., the risk that the value of a foreign currency in which one or more of a fund's investments are denominated will fall in relation to the U.S. dollar). Investment Adviser: Mitchell Hutchins Asset Management Inc.] [Mitchell Hutchins Series Trust Small Cap Portfolio (Class I shares) Investment Objective Has an investment objective of long-term capital appreciation. Policies Invests primarily in stocks of small capitalization ("small cap") companies, which are defined as companies that 80 have market capitalizations of up to $1 billion at the time of purchase. May invest, to a lesser extent, in stocks of larger companies, preferred stocks, and bonds, including convertible securities. Invests in bonds when its investment adviser believes those investments offer opportunities for capital appreciation because interest rates may fall or credit factors or ratings affecting particular issuers may improve. May invest in securities of foreign issuers that are denominated in U.S. dollars and traded in U.S. markets. In selecting stocks for the fund, the adviser uses its own Factor Valuation Model to identify companies that appear undervalued. The model ranks companies based on "value" factors such as dividends, cash flows, earnings and book values, as well as on "growth" factors, such as earnings momentum and industry performance forecasts. The adviser then applies fundamental analysis to select specific stocks from among those of small cap companies identified by the model. Risks The prices of common stocks and other equity securities generally fluctuate more than those of other investments. They reflect changes in the issuing company's financial condition and changes in the overall market. The fund may lose a substantial part, or even all, of its investment in a company's stock. Securities of small cap companies generally involve greater risk than securities of larger companies because small cap companies may be more vulnerable to adverse business or economic developments. Small cap companies also may have limited product lines, markets or financial resources, and may be dependent on a relatively small management group. Securities of small cap companies may be less liquid and more volatile than securities of larger companies or the market averages in general. In addition, small cap companies may not be well-known to the investing public, may not have institutional ownership and may have only cyclical, static or moderate growth prospects. The value of bonds can be expected to fall when interest rates rise and to rise when interest rates fall. Interest rate risk is the risk that interest rates will rise, so that the value of the fund's investments in bonds will fall. Because interest rate risk is the primary risk presented by U.S. government and other very high quality bonds, changes in interest rates may actually have a greater effect on the value of those bonds than on lower quality bonds. An investment in the fund also presents credit risk. Credit risk is the risk that the issuer of a bond will not make principal or interest payments when they are due. Even if an issuer does not default on a payment, a bond's value may decline if the market believes that the issuer has become less able, or less willing, to make payments on time. Foreign securities involve risks that normally are not associated with securities of U.S. issuers. These include risks relating to political, social and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices. When securities are denominated in foreign currencies, they also are subject to currency risk. (i.e., the risk that the value of a foreign currency in which one or more of a fund's investments are denominated will fall in relation to the U.S. dollar). Investment Adviser: Mitchell Hutchins Asset Management Inc.] [Mitchell Hutchins Series Trust Tactical Allocation Portfolio (Class I shares) Investment Objective Has an investment objective of total return, consisting of long-term capital appreciation and current income. Policies Allocates its assets between a stock portion that is designed to track the performance of the S&P 500 Composite Stock Price Index and a fixed income portion that consists of either five-year U.S. Treasury notes or U.S. Treasury bills with remaining maturities of 30 days. The investment adviser reallocates assets in accordance with the recommendations of its own Tactical Allocation Model on the first business day of each month. The Model attempts to track the performance of the S&P 500 Index in periods of strong market performance. The Model attempts to take a more defensive posture by reallocating assets to bonds or cash when the Model signals a potential bear market, prolonged downturn in stock prices or significant loss in value. The Model can recommend stock allocations of 100%, 75%, 50%, 25% or 0%. If the Model recommends a stock allocation of less than 100%, it also recommends a fixed income allocation for the remainder of the fund's assets. The Model uses a bond risk premium determination to decide whether to recommend five-year U.S. Treasury notes or 30-day U.S. Treasury bills. When the Model recommends a more than 50% fixed income allocation, the fund must invest in other high quality bonds or money market instruments to the extent needed to limit the fund's investments in U.S. Treasury obligations to no more than 55% of its assets. This limit is imposed by Internal Revenue Code diversification requirements for segregated asset accounts used to fund variable annuity or variable life contracts. 81 Risks The prices of common stocks and other equity securities generally fluctuate more than those of other investments. They reflect changes in the issuing company's financial condition and changes in the overall market. The fund may lose a substantial part, or even all, of its investment in a company's stock. The value of bonds can be expected to fall when interest rates rise and to rise when interest rates fall. Interest rate risk is the risk that interest rates will rise, so that the value of the fund's investments in bonds will fall. Because interest rate risk is the primary risk presented by U.S. government and other very high quality bonds, changes in interest rates may actually have a greater effect on the value of those bonds than on lower quality bonds. In addition, the adviser may not be successful in choosing the best allocation among market sectors. A fund that allocates its assets among market sectors is more dependent on the adviser's ability to successfully assess the relative values in each sector than are funds that do not do so. The adviser's Tactical Allocation Model may not correctly predict the times to shift the fund's assets from one type of investment to another. Investment Adviser: Mitchell Hutchins Asset Management Inc.] Oppenheimer Aggressive Growth Fund/VA Investment Objective Seeks to achieve long-term capital appreciation by investing in "growth-type" companies. Policies The Fund invests mainly in equity securities, such as common stocks, preferred stocks and convertible securities. It invests primarily in U.S. companies, but can also buy foreign stocks. The Fund emphasizes investments in companies that the Manager believes have potential for increased stock prices relative to the overall stock market. Growth companies can include established companies entering a growth cycle in their business, as well as newer companies. The Fund can invest in securities of issuers of all market capitalizations, but currently focuses on companies with market capitalizations of $5 billion. The Fund can also use hedging instruments and certain derivative instruments in an effort to manage investment risks. Risks The fund's investments in stocks are subject to changes in their value from a number of factors. They include stock market movements and events affecting particular industries. Stocks of growth companies may provide greater opportunities for capital appreciation, but may be more volatile than other stocks. The Fund invests mainly in small and medium-size companies, which tend to have more volatile stock prices than large companies. Investment Adviser: OppenheimerFunds, Inc. Oppenheimer Main Street Growth & Income Fund/VA Investment Objective Seeks a high total return (which includes growth in the value of its shares as well as current income) from equity and debt securities. Policies Invests in equity securities, such as common stocks, preferred stocks and convertible securities in the U.S. while the Fund can purchase foreign securities and debt securities. Currently, it does not emphasize those investments. Although the fund can invest in securities of issuers of all market capitalization ranges, it currently focuses on companies with large capitalizations. The fund can also use hedging instruments and certain derivative investments to try to manage investment risks. 82 Risks The fund's investments in stocks and bonds are subject to changes in their value from a number of factors. They include changes in general stock and bond market movements, or the change in value of particular stocks or bonds because of an event affecting the issuer. Changes in interest rates can also affect stock and bond prices. Because the Fund currently focuses its investments in stocks of U.S. issuers, it will be affected primarily by changes in the U.S. Stock Market. Investment Adviser: OppenheimerFunds, Inc. Oppenheimer Strategic Bond Fund/VA Investment Objective Seeks a high level of current income principally derived from interest on debt securities and seeks to enhance such income by writing covered call options on debt securities. Policies Invests mainly in debt securities of issuers in three market sectors: foreign governments and companies, U.S. government securities and lower-rated high-yield securities of U.S. companies. Under normal market conditions, the fund invests in each of those three market sectors. However, the fund is not obligated to do so, and the amount of its assets in each of the three sectors will vary over time. The fund can invest up to 100% of its assets in any one sector at any time, if the manager believes that in doing so the fund can achieve its objective without undue risk. The fund's foreign investments can include debt securities of issuers in developed markets as well as emerging markets, which have special risks. The fund can also use hedging instruments and certain derivative investments to try to enhance income or try to manage investment risks. Risks The fund's investments in debt securities are subject to changes in their value from a number of factors. They include changes in general bond market movements in the U.S. and abroad, or the change in value of particular bonds because of an event affecting the issuer. The fund can focus significant amounts of its investments in foreign debt securities. Therefore, it will be subject to the risks that economic, political or other events can have on the values of securities of issuers in particular foreign countries. These risks are heightened in the case of emerging market debt securities. Changes in interest rates can also affect securities prices. Investment Adviser: OppenheimerFunds, Inc. Portfolio Partners, Inc. (PPI) MFS Capital Opportunities Portfolio (formerly known as PPI MFS Value Equity Portfolio) Investment Objective Seeks capital appreciation. Policies Invests primarily (at least 65% of total assets) in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts. Focuses on companies believed to have favorable growth prospects and attractive valuations based on current and expected earnings or cash flow. Investments may include securities traded in the over-the-counter markets. May invest in foreign securities (including emerging market securities) and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. Also may invest in debt securities issued by both U.S. and foreign companies, including non-investment grade debt securities. 83 Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. In addition, securities of growth companies may be more volatile because such companies usually invest a high portion of their earnings in their businesses and may lack the dividends of value companies, which can cushion the security prices in a declining market. o Over the Counter Risk: Equity securities that are traded over the counter may be more volatile than exchange listed securities, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. o Foreign Markets Risk: Investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Emerging Markets Risk: Emerging markets are generally defined as countries in the initial stages of their industrialization cycles with low per capita income. Investments in emerging markets securities involve all of the risks of investment in foreign securities, and also have additional risks. o Currency Risk: Exposure to foreign currencies may cause the value of the portfolio to decline in the event that the U.S. dollar strengthens against these currencies, or in the event that foreign governments intervene in the currency markets. o Interest Rate Risk: Investment in debt securities involves risks relating to interest rate movement. If interest rates go up, the value of debt securities held by the portfolio will decline. o Credit Risk: Investment in non-investment grade debt securities involves credit risk because issuers of non-investment grade securities are more likely to have difficulty making timely payments of interest or principal. Investment Adviser: Aetna Life Insurance and Annuity Company Subadviser: Massachusetts Financial Services Company Portfolio Partners, Inc. (PPI) MFS Emerging Equities Portfolio Investment Objective Seeks long-term growth of capital. Policies Invests primarily (at least 80% of total assets) in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts, of emerging growth companies. Emerging growth companies are companies believed to be either early in their life cycle but which have the potential to become major enterprises, or major enterprises whose rates of earnings growth are expected to accelerate. Investments may include securities traded in the over-the-counter markets. May also invest in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of foreign currency at a future date. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. o Emerging Growth Risk: The portfolio's performance is particularly sensitive to changes in the value of emerging growth companies. Investments in emerging growth companies may be subject to more abrupt or erratic market movements and may involve greater risks than investments in other companies. o Over the Counter Risk: Equity securities that are traded over the counter may be more volatile than exchange listed securities, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. 84 o Foreign Markets Risk: Investment in foreign securities involves risks related to political, social and economic developments abroad. These risks result from differences between the regulations to which U.S. and foreign issuers and Markets are subject. o Currency Risk: Exposure to foreign currencies may cause the value of the portfolio to decline if the U.S. dollar strengthens against these currencies or if foreign governments intervene in the currency markets. Investment Adviser: Aetna Life Insurance and Annuity Company Subadviser: Massachusetts Financial Services Company Portfolio Partners, Inc. (PPI) MFS Research Growth Portfolio Investment Objective Seeks long-term growth of capital and future income. Policies Invests primarily (at least 65% of total assets) in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts. Focuses on companies believed to have favorable prospects for long-term growth, attractive valuations based on current and expected earnings or cash flow, dominant or growing market share and superior management. May invest in companies of any size. Investments may also include securities traded on securities exchanges or in the over-the-counter markets. May invest in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of foreign currency at a future date. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. In addition, securities of growth companies may be more volatile because such companies usually invest a high portion of their earnings in their businesses and may lack the dividends of value companies, which can cushion the security prices in a declining market. o Over-the-Counter Risk: Equity securities that are traded over-the-counter may be more volatile than exchange-listed securities, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. o Foreign Markets Risk: Investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Currency Risk: Exposure to foreign currencies may cause the value of the portfolio to decline if the U.S. dollar strengthens against these currencies or if foreign governments intervene in the currency markets. Investment Adviser: Aetna Life Insurance and Annuity Company Subadviser: Massachusetts Financial Services Company Portfolio Partners, Inc. (PPI) Scudder International Growth Portfolio Investment Objective Seeks long-term growth of capital. Policies Invests primarily (at least 65% of total assets) in the equity securities of foreign companies believed to have high growth potential. Normally invests in securities of at least three different countries other than the U.S. Will invest in securities in both developed and developing markets. Seeks to invest in those companies believed to be best able to capitalize on the growth and changes taking place within and between various regions of the world. Typically, these are companies with leading or rapidly developing business franchises, strong financial positions, 85 and high quality management capable of defining and implementing strategies to take advantage of local, regional or global markets. Also may invest in debt securities issued by both U.S. and foreign companies, including non-investment grade debt securities. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. o Foreign Markets Risk: Investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Currency Risk: Exposure to foreign currencies may cause the value of the portfolio to decline in the event that the U.S. dollar strengthens against these currencies, or in the event that foreign governments intervene in the currency markets. o Emerging Growth Risk: The portfolio's performance is particularly sensitive to changes in the value of emerging growth companies. Investments in emerging growth companies may be subject to more abrupt or erratic market movements and may involve greater risks than investments in other companies. o Interest Rate Risk: Investment in debt securities involves risks relating to interest rate movement. If interest rates go up, the value of debt securities held by the portfolio will decline. o Credit Risk: Investment in non-investment grade debt securities involves credit risk because issuers of non-investment grade securities are more likely to have difficulty making timely payments of interest or principal. Investment Adviser: Aetna Life Insurance and Annuity Company Subadviser: Scudder Kemper Investments, Inc. 86 Appendix V Condensed Financial Information - -------------------------------------------------------------------------------- (Selected data for accumulation units outstanding throughout each period) ================================================================================ The condensed financial information presented below for each of the periods in the two-year period ended December 31, 1999 (as applicable), is derived from the financial statements of the separate account, which have been audited by ________ , independent auditors. The financial statements and the independent auditors' report thereon for the year ended December 31, 1999 are included in the Statement of Additional Information.
0.95% Total Charges ------------------- 1999 1998 ---- ---- AETNA BALANCED VP, INC. Value at beginning of period $10.337 $9.555(1) Value at end of period $11.632 $10.337 Number of accumulation units outstanding at end of period 417,961 5,235 AETNA BOND VP Value at beginning of period $10.319 $10.157(3) Value at end of period $10.145 $10.319 Number of accumulation units outstanding at end of period 708,744 16,582 AETNA GROWTH VP Value at beginning of period $10.489 $8.387(3) Value at end of period $14.022 $10.489 Number of accumulation units outstanding at end of period 453,570 8,460 AETNA GROWTH AND INCOME VP Value at beginning of period $9.886 $7.862(3) Value at end of period $11.498 $9.886 Number of accumulation units outstanding at end of period 1,093,630 125,488 AETNA INDEX PLUS LARGE CAP VP Value at beginning of period $10.716 $8.469(3) Value at end of period $13.193 $10.716 Number of accumulation units outstanding at end of period 2,135,759 31,054 AETNA INTERNATIONAL VP Value at beginning of period $9.149 $8.583(1) Value at end of period $13.715 $9.149 Number of accumulation units outstanding at end of period 75,017 587 AETNA MONEY MARKET VP Value at beginning of period $10.199 $10.122(3) Value at end of period $10.615 $10.199 Number of accumulation units outstanding at end of period 2,174,383 103,626 AETNA REAL ESTATE SECURITIES VP Value at beginning of period $8.903 $8.690(1) Value at end of period $8.446 $8.903 Number of accumulation units outstanding at end of period 36,876 10,325 AETNA SMALL COMPANY VP Value at beginning of period $9.357 $8.799(1) Value at end of period $12.128 $9.357 Number of accumulation units outstanding at end of period 163,679 13,538 AIM V.I. CAPITAL APPRECIATION FUND Value at beginning of period $10.245 $7.522(3) Value at end of period $14.675 $10.245 Number of accumulation units outstanding at end of period 190,831 10,913 AIM V.I. GROWTH FUND Value at beginning of period $10.779 $7.856(3) Value at end of period $14.438 $10.779 Number of accumulation units outstanding at end of period 300,327 11,163 AIM V.I. GROWTH AND INCOME FUND Value at beginning of period $10.663 $7.948(3) Value at end of period $14.179 $10.663 Number of accumulation units outstanding at end of period 370,289 3,666 1.25% Total Charges 1.40% Total Charges ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- AETNA BALANCED VP, INC. Value at beginning of period $10.323 $9.276(2) $10.316 $9.581(1) Value at end of period $11.581 $10.323 $11.555 $10.316 Number of accumulation units outstanding at end of period 403,187 17,681 237,246 9,447 AETNA BOND VP Value at beginning of period $10.305 $10.119(3) $10.298 $10.188(1) Value at end of period $10.101 $10.305 $10.078 $10.298 Number of accumulation units outstanding at end of period 806,343 30,949 300,240 3,930 AETNA GROWTH VP Value at beginning of period $10.475 $8.359(3) $10.468 $8.899(1) Value at end of period $13.961 $10.475 $13.930 $10.468 Number of accumulation units outstanding at end of period 536,727 8,297 114,036 2,298 AETNA GROWTH AND INCOME VP Value at beginning of period $9.872 $7.672(3) $9.866 $8.961(1) Value at end of period $11.447 $9.872 $11.422 $9.866 Number of accumulation units outstanding at end of period 1,317,642 55,707 407,605 47,020 AETNA INDEX PLUS LARGE CAP VP Value at beginning of period $10.702 $8.964(2) $10.694 $9.134(3) Value at end of period $13.136 $10.702 $13.107 $10.694 Number of accumulation units outstanding at end of period 2,394,661 94,255 926,393 4,957 AETNA INTERNATIONAL VP Value at beginning of period $9.137 $8.497(1) $9.131 $8.663(4) Value at end of period $13.655 $9.137 $13.625 $9.131 Number of accumulation units outstanding at end of period 79,291 4,529 28,091 718 AETNA MONEY MARKET VP Value at beginning of period $10.186 $10.086(2) $10.179 $10.120(1) Value at end of period $10.569 $10.186 $10.546 $10.179 Number of accumulation units outstanding at end of period 1,313,322 44,014 707,569 47,079 AETNA REAL ESTATE SECURITIES VP Value at beginning of period $8.891 $8.833(1) $8.885 $8.648(1) Value at end of period $8.409 $8.891 $8.391 $8.885 Number of accumulation units outstanding at end of period 34,137 2,082 6,188 19 AETNA SMALL COMPANY VP Value at beginning of period $9.345 $7.219(3) $9.338 $8.739(4) Value at end of period $12.074 $9.345 $12.048 $9.338 Number of accumulation units outstanding at end of period 114,138 7,787 39,754 396 AIM V.I. CAPITAL APPRECIATION FUND Value at beginning of period $10.231 $7.914(3) $10.224 $9.078(1) Value at end of period $14.611 $10.231 $14.579 $10.224 Number of accumulation units outstanding at end of period 317,266 17,420 156,884 857 AIM V.I. GROWTH FUND Value at beginning of period $10.764 $8.120(3) $10.757 $9.702(4) Value at end of period $14.375 $10.764 $14.343 $10.757 Number of accumulation units outstanding at end of period 722,832 14,904 228,578 1,498 AIM V.I. GROWTH AND INCOME FUND Value at beginning of period $10.649 $8.179(3) $10.641 $8.830(3) Value at end of period $14.117 $10.649 $14.086 $10.641 Number of accumulation units outstanding at end of period 938,411 9,968 259,387 7,172
87 Condensed Financial Information (continued) - --------------------------------------------------------------------------------
0.95% Total Charges ------------------- 1999 1998 ---- ---- AIM V.I. VALUE FUND Value at beginning of period $10.616 $7.820(3) Value at end of period $13.659 $10.616 Number of accumulation units outstanding at end of period 895,401 27,668 FIDELITY VIP EQUITY-INCOME PORTFOLIO Value at beginning of period $9.911 $8.459(3) Value at end of period $10.438 $9.911 Number of accumulation units outstanding at end of period 735,175 48,260 FIDELITY VIP GROWTH PORTFOLIO Value at beginning of period $10.265(5) Value at end of period $12.649 Number of accumulation units outstanding at end of period 84,394 FIDELITY VIP HIGH INCOME PORTFOLIO Value at beginning of period $8.949 $8.626(1) Value at end of period $9.586 $8.949 Number of accumulation units outstanding at end of period 590,621 40,909 FIDELITY VIP II CONTRAFUND[RegTM] PORTFOLIO Value at beginning of period $10.535 $8.083(3) Value at end of period $12.966 $10.535 Number of accumulation units outstanding at end of period 1,126,347 42,196 JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO Value at beginning of period $11.042 $7.183(3) Value at end of period $24.654 $11.042 Number of accumulation units outstanding at end of period 1,018,787 18,318 JANUS ASPEN BALANCED PORTFOLIO Value at beginning of period $10.945 $9.175(3) Value at end of period $13.742 $10.945 Number of accumulation units outstanding at end of period 1,721,022 114,603 JANUS ASPEN GROWTH PORTFOLIO Value at beginning of period $10.938 $7.907(3) Value at end of period $15.599 $10.938 Number of accumulation units outstanding at end of period 1,611,327 138,459 JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO Value at beginning of period $9.576 $7.245(3) Value at end of period $15.599 $9.576 Number of accumulation units outstanding at end of period 1,828,183 63,712 MFS TOTAL RETURN SERIES Value at beginning of period $10.171 $9.712(1) Value at end of period $10.385 $10.171 Number of accumulation units outstanding at end of period 321,447 11,625 MITCHELL HUTCHINS SERIES TRUST GROWTH AND INCOME PORTFOLIO Value at beginning of period $9.816(7) Value at end of period $10.960 Number of accumulation units outstanding at end of period 10,141 MITCHELL HUTCHINS SERIES TRUST SMALL CAP PORTFOLIO Value at beginning of period Value at end of period Number of accumulation units outstanding at end of period MITCHELL HUTCHINS SERIES TRUST TACTICAL ALLOCATION PORTFOLIO Value at beginning of period $9.451(7) Value at end of period $10.651 Number of accumulation units outstanding at end of period 101,508 OPPENHEIMER AGGRESSIVE GROWTH FUND/VA Value at beginning of period $9.362 $7.289(3) Value at end of period $17.027 $9.362 Number of accumulation units outstanding at end of period 102,852 730 OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA Value at beginning of period $9.080 $6.913(3) Value at end of period $10.946 $9.080 Number of accumulation units outstanding at end of period 341,458 27,241 OPPENHEIMER STRATEGIC BOND FUND/VA Value at beginning of period $9.823 $9.550(1) Value at end of period $10.005 $9.823 Number of accumulation units outstanding at end of period 247,095 21,480 PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO Value at beginning of period $10.193 $9.507(1) Value at end of period $15.023 $10.193 Number of accumulation units outstanding at end of period 207,410 10,086 PPI MFS EMERGING EQUITIES PORTFOLIO Value at beginning of period $10.371 $7.999(3) Value at end of period $15.499 $10.371 Number of accumulation units outstanding at end of period 360,244 11,391 1.25% Total Charges 1.40% Total Charges ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- AIM V.I. VALUE FUND Value at beginning of period $10.601 $8.093(3) $10.594 $9.664(4) Value at end of period $13.599 $10.601 $13.569 $10.594 Number of accumulation units outstanding at end of period 1,538,846 29,486 492,467 9,219 FIDELITY VIP EQUITY-INCOME PORTFOLIO Value at beginning of period $9.897 $8.314(3) $9.891 $9.412(4) Value at end of period $10.392 $9.897 $10.369 $9.891 Number of accumulation units outstanding at end of period 1,507,320 59,609 471,012 9,907 FIDELITY VIP GROWTH PORTFOLIO Value at beginning of period $10.231(5) $10.793(6) Value at end of period $12.628 $12.618 Number of accumulation units outstanding at end of period 124,948 35,352 FIDELITY VIP HIGH INCOME PORTFOLIO Value at beginning of period $8.936 $8.411(1) $8.930 $8.987(4) Value at end of period $9.544 $8.936 $9.523 $8.930 Number of accumulation units outstanding at end of period 712,099 19,661 244,927 48,476 FIDELITY VIP II CONTRAFUND[RegTM] PORTFOLIO Value at beginning of period $10.521 $8.746(2) $10.514 $8.946(1) Value at end of period $12.909 $10.521 $12.881 $10.514 Number of accumulation units outstanding at end of period 1,682,680 29,543 604,942 3,861 JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO Value at beginning of period $11.027 $6.858(3) $11.020 $9.497(4) Value at end of period $24.546 $11.027 $24.492 $11.020 Number of accumulation units outstanding at end of period 994,780 21,356 368,330 944 JANUS ASPEN BALANCED PORTFOLIO Value at beginning of period $10.930 $8.301(3) $10.923 $9.275(2) Value at end of period $13.681 $10.930 $13.651 $10.923 Number of accumulation units outstanding at end of period 2,130,090 27,397 778,170 9,108 JANUS ASPEN GROWTH PORTFOLIO Value at beginning of period $10.923 $7.596(3) $10.915 $9.157(1) Value at end of period $15.531 $10.923 $15.497 $10.915 Number of accumulation units outstanding at end of period 2,407,010 35,759 647,596 6,648 JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO Value at beginning of period $9.563 $8.027(2) $9.557 $8.519(1) Value at end of period $15.531 $9.563 $15.497 $9.557 Number of accumulation units outstanding at end of period 2,118,680 39,602 583,969 7,974 MFS TOTAL RETURN SERIES Value at beginning of period $10.157 $9.772(1) $10.150 $9.737(1) Value at end of period $10.339 $10.157 $10.317 $10.150 Number of accumulation units outstanding at end of period 675,246 12,838 307,463 27,534 [MITCHELL HUTCHINS SERIES TRUST GROWTH AND INCOME PORTFOLIO Value at beginning of period $10.189(7) $10.056(7) Value at end of period $10.937 $10.925 Number of accumulation units outstanding at end of period 60,271 3,629] [MITCHELL HUTCHINS SERIES TRUST SMALL CAP PORTFOLIO Value at beginning of period $11.067(8) $9.764(6) Value at end of period $11.828 $11.816 Number of accumulation units outstanding at end of period 14,182 404] [MITCHELL HUTCHINS SERIES TRUST TACTICAL ALLOCATION PORTFOLIO Value at beginning of period $9.852(7) $9.567(9) Value at end of period $10.629 $10.618 Number of accumulation units outstanding at end of period 541,487 49,695] OPPENHEIMER AGGRESSIVE GROWTH FUND/VA Value at beginning of period $9.350 $6.300(3) $9.343 $8.309(4) Value at end of period $16.952 $9.350 $16.915 $9.343 Number of accumulation units outstanding at end of period 139,615 12,609 58,765 407 OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA Value at beginning of period $9.067 $6.647(3) $9.061 $8.449(1) Value at end of period $10.898 $9.067 $10.874 $9.061 Number of accumulation units outstanding at end of period 737,210 41,656 255,253 1,468 OPPENHEIMER STRATEGIC BOND FUND/VA Value at beginning of period $9.810 $9.566(3) $9.803 $9.768(4) Value at end of period $9.961 $9.810 $9.939 $9.803 Number of accumulation units outstanding at end of period 321,797 13,169 118,824 10 PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO Value at beginning of period $10.180 $9.302(1) $10.173 $9.421(4) Value at end of period $14.957 $10.180 $14.924 $10.173 Number of accumulation units outstanding at end of period 361,089 9,561 99,417 161 PPI MFS EMERGING EQUITIES PORTFOLIO Value at beginning of period $10.357 $6.702(3) $10.350 $8.599(1) Value at end of period $15.431 $10.357 $15.397 $10.350 Number of accumulation units outstanding at end of period 421,059 13,509 173,671 12,479
88 Condensed Financial Information (continued) - --------------------------------------------------------------------------------
0.95% Total Charges 1.25% Total Charges ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- PPI MFS RESEARCH GROWTH PORTFOLIO Value at beginning of period $10.113 $8.805(1) $10.099 $9.089(1) Value at end of period $12.424 $10.113 $12.370 $10.099 Number of accumulation units outstanding at end of period 208,889 4,604 434,221 36,363 PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO Value at beginning of period $9.248 $8.553(1) $9.236 $8.395(3) Value at end of period $14.511 $9.248 $14.448 $9.236 Number of accumulation units outstanding at end of period 292,270 46,182 180,822 25,860 1.40% Total Charges ------------------- 1999 1998 ---- ---- PPI MFS RESEARCH GROWTH PORTFOLIO Value at beginning of period $10.092 $8.886(1) Value at end of period $12.343 $10.092 Number of accumulation units outstanding at end of period 145,910 6,259 PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO Value at beginning of period $9.229 $8.841(1) Value at end of period $14.416 $9.229 Number of accumulation units outstanding at end of period 122,089 2,368
- ----------------- (1) Funds were first received in this option during November 1998. (2) Funds were first received in this option during September 1998. (3) Funds were first received in this option during October 1998. (4) Funds were first received in this option during December 1998. (5) Funds were first received in this option during September 1999. (6) Funds were first received in this option during October 1999. (7) Funds were first received in this option during May 1999. (8) Funds were first received in this option during July 1999. (9) Funds were first received in this option during June 1999. 89 - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY - -------------------------------------------------------------------------------- Statement of Additional Information dated July 14, 2000 AETNA VARIABLE ANNUITY This Statement of Additional Information is not a prospectus and should be read in conjunction with the current prospectus for Variable Annuity Account B (the "separate account") dated July 14, 2000. A free prospectus is available upon request from the local Aetna Life Insurance and Annuity Company office or by writing to or calling: Aetna Financial Services Annuity Services 151 Farmington Avenue Hartford, Connecticut 06156-1258 1-800-238-6219 Read the prospectus before you invest. Unless otherwise indicated, terms used in this Statement of Additional Information shall have the same meaning as in the prospectus. TABLE OF CONTENTS
Page General Information and History...................................................... 2 Variable Annuity Account B........................................................... 2 Offering and Purchase of Contracts................................................... 3 Performance Data..................................................................... 3 General.......................................................................... 3 Average Annual Total Return Quotations........................................... 4 Income Phase Payments................................................................ 7 Sales Material and Advertising....................................................... 8 Independent Auditors................................................................. 9 Financial Statements of the Separate Account......................................... S-1 Financial Statements of Aetna Life Insurance and Annuity Company and Subsidiaries ... F-1
GENERAL INFORMATION AND HISTORY Aetna Life Insurance and Annuity Company (the Company, we, us, our) issues the contract described in the prospectus and is responsible for providing each contract's insurance and annuity benefits. We are a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of Aetna Inc. Through a merger, our assets include the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company organized in 1954). Our Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. As of December 31, 1999, the Company and its subsidiary life company had $53 billion invested through their products, including $39 billion in their separate accounts (of which the Company, or it subsidiary Aeltus Investment Management, Inc., oversees the management of $24 billion). The Company is ranked among the top 2% of all U.S. life insurance companies rated by A.M. Best Company based on assets as of December 31, 1998. In addition to serving as the principal underwriter and the depositor for the separate account, the Company is a registered investment adviser under the Investment Advisers Act of 1940 and a registered broker-dealer under the Securities Exchange Act of 1934. We provide investment advice to several of the registered management investment companies offered as variable investment options under the contracts funded by the separate account (see "Variable Annuity Account B" below). Other than the mortality and expense risk charge and administrative expense charge described in the prospectus, all expenses incurred in the operations of the separate account are borne by the Company. See "Fees" in the prospectus. We receive reimbursement for certain administrative costs from some advisers of the funds used as funding options under the contract. These fees generally range up to 0.425%. The assets of the separate account are held by the Company. The separate account has no custodian. However, the funds in whose shares the assets of the separate account are invested each have custodians, as discussed in their respective prospectuses. From this point forward, the term "contract(s)" refers only to those offered through the prospectus. VARIABLE ANNUITY ACCOUNT B Variable Annuity Account B is a separate account established by the Company for the purpose of funding variable annuity contracts issued by the Company. The separate account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940, as amended. Purchase payments to accounts under the contract may be allocated to one or more of the subaccounts. Each subaccount invests in the shares of only one of the funds listed below. We may make additions to, deletions from or substitutions of available investment options as permitted by law and subject to the conditions of the contract. The availability of the funds is subject to applicable regulatory authorization. Not all funds are available in all jurisdictions or under all contracts. The funds currently available under the contract are as follows: Aetna Balanced VP, Inc. Fidelity Variable Insurance Products Fund (VIP) Growth Aetna Income Shares d/b/a Aetna Bond VP Portfolio Aetna Growth VP Fidelity Variable Insurance Products Fund (VIP ) High Income Aetna Variable Fund d/b/a Aetna Growth and Income VP Portfolio Aetna Index Plus Large Cap VP Fidelity Variable Insurance Products Fund II (VIP II) Aetna International VP Contrafund [Reg TM] Portfolio Aetna Variable Encore Fund d/b/a Aetna Money Market VP Janus Aspen Aggressive Growth Portfolio Aetna Real Estate Securities VP* Janus Aspen Balanced Portfolio Aetna Small Company VP Janus Aspen Growth Portfolio Aetna Technology VP Janus Aspen Worldwide Growth Portfolio AIM V.I. Capital Appreciation Fund MFS Total Return Series AIM V.I. Government Securities Mitchell Hutchins Series Trust Growth & Income Portfolio AIM V.I. Growth Fund Mitchell Hutchins Series Trust Small Cap Portfolio AIM V.I. Growth and Income Fund Mitchell Hutchins Series Trust Tactical Allocation Portfolio AIM V.I. Value Fund Oppenheimer Aggressive Growth Fund/VA Alliance Variable Products -- Growth and Income Portfolio Oppenheimer Main Street Growth & Income Fund/VA Alliance Variable Products -- Premier Growth Portfolio Oppenheimer Strategic Bond Fund/VA Alliance Variable Products -- Quasar Portfolio Portfolio Partners, Inc. (PPI) MFS Capital Opportunities Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio Portfolio Portfolio Partners, Inc. (PPI) MFS Emerging Equities Portfolio Portfolio Partners, Inc. (PPI) MFS Research Growth Portfolio Portfolio Partners, Inc. (PPI) Scudder International Growth Portfolio
*Effective May 15, 2000, transfers or deposits are not allowed into the subaccount investing in this fund except those made pursuant to standing instructions (e.g., dollar cost averaging, account rebalancing) in effect prior to this date. Complete descriptions of each of the funds, including their investment objectives, policies, risks and fees and expenses, are contained in the prospectuses and statements of additional information for each of the funds. OFFERING AND PURCHASE OF CONTRACTS The Company is both the depositor and the principal underwriter for the securities sold under the prospectus. We offer the contracts through life insurance agents licensed to sell variable annuities who are registered representatives of the Company or of other registered broker-dealers who have sales agreements with the Company. The offering of the contracts is continuous. A description of the manner in which the contracts are purchased can be found in the prospectus under the sections entitled "Purchase and Rights" and "Your Account Value." PERFORMANCE DATA GENERAL From time to time we may advertise different types of historical performance for the subaccounts of the separate account available under the contract. We may advertise the "standardized average annual total returns," calculated in a manner prescribed by the Securities and Exchange Commission (the "standardized return"), as well as "non-standardized returns," both of which are described below. The standardized and non-standardized total return figures are computed according to a formula in which a hypothetical initial purchase payment of $1,000 is applied to the various subaccounts under the contract, and then related to the ending redeemable values over one, five and ten year periods (or fractional periods thereof). The redeemable value is then divided by the initial investment and this quotient is taken to the Nth root (N represents the number of years in the period) and 1 is subtracted from the result which is then expressed as a percentage, carried to at least the nearest hundredth of a percent. The standardized figures use the actual returns of the fund since the date contributions were first received in the fund under the separate account, adjusted to reflect the deduction of the maximum recurring charges under the contract during each period (i.e., Option Package III: 1.25% mortality and expense risk charge, $30 annual maintenance fee, 0.15% administrative charge, and early withdrawal charge of 7% of purchase payments grading down to 0% after 7 years). These charges will be deducted on a pro rata basis in the case of fractional periods. The 3 maintenance fee is converted to a percentage of assets based on the average account size under the contract described in the prospectus. The total return figures shown below will be lower than the standardized figures for Option Packages I and II because of the lower mortality and expense risk charge under those Option Packages (0.80% and 1.10% respectively). We may also advertise standardized returns and non-standardized returns using the fees and charges applicable to Option Packages I and II. The non-standardized figures will be calculated in a similar manner, except that they will not reflect the deduction of any applicable early withdrawal charge, and in some advertisements will also exclude the effect of the annual maintenance fee. The deduction of the early withdrawal charge and the annual maintenance fee would decrease the level of performance shown if reflected in these calculations. The non-standardized figures may also include monthly, quarterly, year-to-date and three-year periods, and may include returns calculated from the fund's inception date and/or the date contributions were first received in the fund under the separate account. The non-standardized returns shown in the tables below reflect the deduction of the maximum recurring charges under the contract except the early withdrawal charge (i.e., Option Package III: 1.25% mortality and expense risk charge, $30 annual maintenance fee, and 0.15% administrative charge). We may also advertise returns based on lower charges that may apply to contracts under Option Packages I and II. Standardized and non-standardized calculations do not currently include the premium bonus or reflect the deduction of the corresponding premium bonus charge; but, to the extent permitted by applicable law, we may include the premium bonus and corresponding charge in the standardized and non-standardized average annual total returns in the future. Investment results of the funds will fluctuate over time, and any presentation of the subaccounts' total return quotations for any prior period should not be considered as a representation of how the subaccounts will perform in any future period. Additionally, the account value upon redemption may be more or less than your original cost. AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized The tables below reflect the average annual standardized and non-standardized total return quotation figures for the periods ended December 31, 1999 for the subaccounts under the contract. The standardized returns assume the maximum charges under the contract (i.e., Option Package III) as described under "General" above. The non-standardized returns assume the same charges but do not include the early withdrawal charges. We may also advertise returns based on lower charges that may apply to particular contracts under option packages I and II. For the subaccounts funded by the Portfolio Partners portfolios, two sets of performance returns are shown for each subaccount: one showing performance based solely on the performance of the Portfolio Partners portfolio from November 28, 1997 the date the portfolio commenced operations; and one quotation based on (a) performance through November 26, 1997 of the fund it replaced under many contracts and (b) after November 26, 1997 based on the performance of the Portfolio Partners portfolio. For those subaccounts where results are not available for the full calendar period indicated, performance for such partial periods is shown in the column labeled "Since Inception." For standardized performance, the "Since Inception" column shows the average annual return since the date contributions were first received in the fund under the separate account. For non-standardized performance, the "Since Inception" column shows the average annual total return since the fund's inception date. 4
----------------------------------------------------------------- Date Contributions First Received STANDARDIZED Under the Separate Account - ------------------------------------------------------------------------------------------------------------------------------------ Since SUBACCOUNT 1 Year 5 Year 10 Year Inception* - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Balanced VP, Inc.(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Bond VP(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth VP 05/30/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth and Income VP(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Index Plus Large Cap VP 10/31/1996 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna International VP 05/05/1998 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Money Market VP(1)(2) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Real Estate Securities VP 05/06/1998 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Small Company VP 05/30/1997 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Capital Appreciation Fund 10/02/1998 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth Fund 10/02/1998 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth and Income Fund 10/02/1998 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Value Fund 10/02/1998 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Equity-Income Portfolio 12/30/1994 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Growth Portfolio 12/30/1994 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP High Income Portfolio 06/30/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP II Contrafund [Reg TM] Portfolio 06/30/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Aggressive Growth Portfolio 10/31/1994 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Balanced Portfolio 01/31/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Growth Portfolio 07/29/1994 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Worldwide Growth Portfolio 04/28/1995 - ------------------------------------------------------------------------------------------------------------------------------------ MFS Total Return Series 05/31/1996 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Growth & Income Portfolio 05/05/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Small Cap Portfolio 07/02/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Tactical Allocation Portfolio 05/17/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Aggressive Growth Fund/VA 05/30/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Main Street Growth & Income Fund/VA 05/30/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Strategic Bond Fund/VA 05/30/1997 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Capital Opportunities Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman AMT Growth/PPI MFS Capital Opportunities(3) 11/30/1992 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Emerging Equities Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Cap/PPI MFS Emerging Equities(3) 09/30/1993 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Research Growth Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ American Century VP Capital Appreciation/PPI MFS Research Growth(3) 08/31/1992 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI Scudder International Growth Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Portfolio Class A/PPI Scudder International Growth(3) 08/31/1992 - ------------------------------------------------------------------------------------------------------------------------------------
Please refer to the discussion preceding the tables for an explanation of the charges included and methodology used in calculating the standardized and non-standardized figures. These figures represent historical performance and should not be considered a projection of future performance. * Reflects performance from the date contributions were first received in the fund under the separate account. (1) These funds have been available through the separate account for more than ten years. (2) The current yield for the subaccount for the seven-day period ended December 31, 1999 (on an annualized basis) was 4.38%. Current yield more closely reflects current earnings than does total return. The current yield reflects the deduction of all charges under the contract that are deducted from the total return quotations shown above except the maximum 7% early withdrawal charge. (3) The fund first listed was replaced with the applicable Portfolio Partners Portfolio after the close of business on November 26, 1997. The performance shown is based on the performance of the replaced fund until November 26, 1997 and the performance of the applicable Portfolio Partners Portfolio after that date. The replaced fund may not have been available under all contracts. The "Date Contributions First Received Under the Separate Account" refers to the applicable date for the replaced fund. If no date is shown, contributions were first received in the replaced fund under the separate account more than ten years ago. 5
-------------------------------------------------------------------- Fund NON-STANDARDIZED Inception Date - ------------------------------------------------------------------------------------------------------------------------------------ Since SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception** - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Balanced VP, Inc.(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Bond VP(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth and Income VP(1) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth VP 12/13/1996 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Index Plus Large Cap VP 09/16/1996 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna International VP 12/22/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Money Market VP(1)(2) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Real Estate Securities VP 12/15/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Small Company VP 12/27/1996 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Capital Appreciation Fund 05/05/1993 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Government Securities Fund - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth and Income Fund 05/02/1994 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth Fund 05/05/1993 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Value Fund 05/05/1993 - ------------------------------------------------------------------------------------------------------------------------------------ Alliance Growth and Income Fund - ------------------------------------------------------------------------------------------------------------------------------------ Alliance Premier Growth Fund - ------------------------------------------------------------------------------------------------------------------------------------ Alliance Quasar Fund - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Equity-Income Portfolio(1) - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Growth Portfolio(1) - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP High Income Portfolio(1) - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP II Contrafund [Reg TM] Portfolio 01/03/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Aggressive Growth Portfolio 09/13/1993 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Balanced Portfolio 09/13/1993 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Growth Portfolio 09/13/1993 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Worldwide Growth Portfolio 09/13/1993 - ------------------------------------------------------------------------------------------------------------------------------------ MFS Total Return Series 01/03/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Growth & Income Portfolio 01/04/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Small Cap Portfolio 05/03/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Mitchell Hutchins Tactical Allocation Portfolio 01/04/1999 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Aggressive Growth Fund/VA(1) - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Main Street Growth & Income Fund/VA 07/05/1995 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Strategic Bond Fund/VA 05/03/1993 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Capital Opportunities Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman AMT Growth/PPI MFS Capital Opportunities(3) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Emerging Equities Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Cap/PPI MFS Emerging Equities(3) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS Research Growth Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ American Century VP Capital Appreciation/PPI MFS Research Growth(3) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ PPI Scudder International Growth Portfolio 11/28/1997 - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Portfolio Class A/PPI Scudder International Growth(3) - ------------------------------------------------------------------------------------------------------------------------------------
Please refer to the discussion preceding the tables for an explanation of the charges included and methodology used in calculating the standardized and non-standardized figures. These figures represent historical performance and should not be considered a projection of future performance. ** Reflects performance from the fund's inception date. (1) These funds have been in operation for more than ten years. (2) The current yield for the subaccount for the seven-day period ended December 31, 1999 (on an annualized basis) was 4.38%. Current yield more closely reflects current earnings than does total return. The current yield reflects the deduction of all charges under the contract that are deducted from the total return quotations shown above. As in the table above, the maximum 7% early withdrawal charge is not reflected. (3) The fund first listed was replaced with the applicable Portfolio Partners Portfolio after the close of business on November 26, 1997. The performance shown is based on the performance of the replaced fund until November 26, 1997, and the performance of the applicable Portfolio Partners Portfolio after that date. The replaced fund may not have been available under all contracts. The "Fund Inception Date" refers to the applicable date for the replaced fund. If no date is shown, the replaced fund has been in operation for more than ten years. 6 INCOME PHASE PAYMENTS When you begin receiving payments under the contract during the income phase (see "The Income Phase" in the prospectus), the value of your account is determined using accumulation unit values as of the tenth valuation before the first income phase payment is due. Such value (less any applicable premium tax) is applied to provide income phase payments to you in accordance with the income phase payment option and investment options elected. The annuity option tables found in the contract show, for each option, the amount of the first income phase payment for each $1,000 of value applied. Thereafter, variable income phase payments fluctuate as the annuity unit value(s) fluctuates with the investment experience of the selected investment option(s). The first income phase payment and subsequent income phase payments also vary depending upon the assumed net investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a higher first income phase payment, but income phase payments will increase thereafter only to the extent that the investment performance of the subaccounts you selected is greater than 5% annually, after deduction of fees. Income phase payments would decline if the performance was less than 5%. Use of the 3.5% assumed rate causes a lower first income phase payment, but subsequent income phase payments would increase more rapidly or decline more slowly as changes occur in the performance of the subaccounts selected. When the income phase begins, the annuitant is credited with a fixed number of annuity units (which does not change thereafter) in each of the designated investment options. This number is calculated by dividing (a) by (b), where (a) is the amount of the first income phase payment based on a particular investment option, and (b) is the then current annuity unit value for that investment option. As noted, annuity unit values fluctuate from one valuation to the next (see "Your Account Value" in the prospectus); such fluctuations reflect changes in the net investment factor for the appropriate subaccount(s) (with a ten valuation lag which gives the Company time to process income phase payments) and a mathematical adjustment which offsets the assumed net investment rate of 3.5% or 5% per annum. The operation of all these factors can be illustrated by the following hypothetical example. These procedures will be performed separately for the investment options selected during the income phase. EXAMPLE: Assume that, at the date income phase payments are to begin, there are 3,000 accumulation units credited under a particular contract and that the value of an accumulation unit for the tenth valuation prior to retirement was $13.650000. This produces a total value of $40,950. Assume also that no premium tax is payable and that the annuity table in the contract provides, for the income phase payment option elected, a first monthly variable income phase payment of $6.68 per $1000 of value applied; the annuitant's first monthly income phase payment would thus be $40.950 multiplied by $6.68, or $273.55. 7 Assume then that the value of an annuity unit upon the valuation on which the first income phase payment was due was $13.400000. When this value is divided into the first monthly income phase payment, the number of annuity units is determined to be 20.414. The value of this number of annuity units will be paid in each subsequent month. If the net investment factor with respect to the appropriate subaccount is 1.0015000 as of the tenth valuation preceding the due date of the second monthly income phase payment, multiplying this factor by .9999058* (to take into account the assumed net investment rate of 3.5% per annum built into the number of annuity units determined above) produces a result of 1.0014057. This is then multiplied by the annuity unit value for the prior valuation (assume such value to be $13.504376) to produce an annuity unit value of $13.523359 for the valuation occurring when the second income phase payment is due. The second monthly income phase payment is then determined by multiplying the number of annuity units by the current annuity unit value, or 20.414 times $13.523359, which produces an income phase payment of $276.07. *If an assumed net investment rate of 5% is elected, the appropriate factor to take into account such assumed rate would be .9998663. SALES MATERIAL AND ADVERTISING We may include hypothetical illustrations in our sales literature that explain the mathematical principles of dollar cost averaging, compounded interest, tax deferred accumulation, and the mechanics of variable annuity contracts. We may also discuss the difference between variable annuity contracts and other types of savings or investment products such as personal savings accounts and certificates of deposit. We may distribute sales literature that compares the percentage change in accumulation unit values for any of the subaccounts to established market indices such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average or to the percentage change in values of other management investment companies that have investment objectives similar to the subaccount being compared. We may publish in advertisements and reports, the ratings and other information assigned to us by one or more independent rating organizations such as A.M. Best Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors Service, Inc. The purpose of the ratings is to reflect our financial strength and/or claims-paying ability. We may also quote ranking services such as Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable Insurance Products Performance Analysis Service (VIPPAS), which rank variable annuity or life subaccounts or their underlying funds by performance and/or investment objective. We may categorize the underlying funds in terms of the asset classes they represent and use such categories in marketing materials for the contracts. We may illustrate in advertisements the performance of the underlying funds, if accompanied by performance which also shows the performance of such funds reduced by applicable charges under the separate account. We may also show in advertisements the portfolio holdings of the underlying funds, updated at various intervals. From time to time, we will quote articles from newspapers and magazines or other publications or reports such as The Wall Street Journal, Money magazine, USA Today and The VARDS Report. 8 We may provide in advertising, sales literature, periodic publications or other materials information on various topics of interest to current and prospective contract holders. These topics may include the relationship between sectors of the economy and the economy as a whole and its effect on various securities markets, investment strategies and techniques (such as value investing, market timing, dollar cost averaging, asset allocation, constant ratio transfer and account rebalancing), the advantages and disadvantages of investing in tax-deferred and taxable investments, customer profiles and hypothetical purchase and investment scenarios, financial management and tax and retirement planning, and investment alternatives to certificates of deposit and other financial instruments, including comparison between the contract and the characteristics of and market for such financial instruments. INDEPENDENT AUDITORS ________________, CityPlace II, Hartford, Connecticut 06103-4103, are the independent auditors for the separate account and for the Company. The services provided to the separate account include primarily the examination of the separate account's financial statements and the review of filings made with the SEC. 9 Financial Statements [To be filed by amendment.] 10 Form No. SAI. 56297-00 ALIAC Ed. July 2000 VARIABLE ANNUITY ACCOUNT B PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements: (1) Included in Part A: Condensed Financial Information (2) Included in Part B: * Financial Statements of Variable Annuity Account B: - Statement of Assets and Liabilities as of December 31, 1999 - Statement of Operations for the year ended December 31, 1999 - Statements of Changes in Net Assets for the years ended December 31, 1999 and 1998 - Condensed Financial Information for the year ended December 31, 1999 - Notes to Financial Statements - Independent Auditors' Report Financial Statements of the Depositor: - Independent Auditors' Report - Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 - Consolidated Balance Sheets as of December 31, 1999 and 1998 - Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 1999, 1998 and 1997 - Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 - Notes to Consolidated Financial Statements *To be filed by amendment (b) Exhibits (1) Resolution of the Board of Directors of Aetna Life Insurance and Annuity Company establishing Variable Annuity Account B(1) (2) Not applicable (3.1) Broker-Dealer Agreement(2) (3.2) Alternative Form of Wholesaling Agreement and Related Selling Agreement(3) (4.1) Variable Annuity Contract (GM-VA-98)(2) (4.2) Variable Annuity Contract Certificate (GMC-VA-98)(2) (4.3) Endorsement (EVAGET98) to Variable Annuity Contract GM-VA-98 and Variable Annuity Contract Certificate GMC-VA-98(4) (4.4) Endorsement (EGET-99) to Variable Annuity Contract GM-VA-98 and Variable Annuity Contract Certificate GMC-VA-98(5) (4.5) Endorsement (EVA-PB-00) to Variable Annuity Contract GM-VA-98 and Variable Annuity Contract Certificate GMC-VA-98 (4.6) Form of Endorsement (EVA-PB-00(NY)) (5) Variable Annuity Contract Application(9.5.89-6(9/98))(6) (6.1) Certificate of Incorporation of Aetna Life Insurance and Annuity Company(7) (6.2) Amendment of Certificate of Incorporation of Aetna Life Insurance and Annuity Company(8) (6.3) By-Laws as amended September 17, 1997 of Aetna Life Insurance and Annuity Company(9) (7) Not applicable (8.1) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and AIM dated June 30, 1998(6) (8.2) Service Agreement between Aetna Life Insurance and Annuity Company and AIM effective June 30, 1998(6) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Alliance Capital dated March 1, 2000(10) (8.3) Service Agreement between Aetna Life Insurance and Annuity Company and Alliance Capital dated March 1, 2000(10) (8.4) Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998(2) (8.5) Amendment dated November 9, 1998 to Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998(11) (8.6) Second Amendment dated December 31, 1999 to Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998 and amended on November 9, 1998(12) (8.7) Third Amendment dated February 11, 2000 to Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998 and amended on November 9, 1998 and December 31, 1999(13) (8.8) Fourth Amendment dated May 1, 2000 to Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998 and amended on November 9, 1998, December 31, 1999 and February 11, 2000(13) (8.9) Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998(2) (8.10) Amendment dated November 4, 1998 to Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998(11) (8.11) Second Amendment dated February 11, 2000 to Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998 and November 14, 1998(13) (8.12) Third Amendment dated May 1, 2000 to Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998, November 14, 1998 and February 11, 2000(13) (8.13) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(8) (8.14) Fifth Amendment dated as of May 1, 1997 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(14) (8.15) Sixth Amendment dated November 6, 1997 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997(15) (8.16) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and November 6, 1997(2) (8.17) Eighth Amendment dated December 1, 1999 to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997, November 6, 1997 and May 1, 1998(12) (8.18) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(8) (8.19) Fifth Amendment, dated as of May 1, 1997, to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(14) (8.20) Sixth Amendment dated as of January 20, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997(16) (8.21) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and January 20, 1998(2) (8.22) Eighth Amendment dated December 1, 1999 to Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997, January 20, 1998 and May 1, 1998(12) (8.23) Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995(17) (8.24) Amendment dated January 1, 1997 to Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995(14) (8.25) Service Contract between Fidelity Distributors Corporation and Aetna Life Insurance and Annuity Company dated May 2, 1997(11) (8.26) Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997(18) (8.27) Amendment dated October 12, 1998 to Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997(11) (8.28) Second Amendment dated December 1, 1999 to Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997 and amended on October 12, 1998(12) (8.29) Service Agreement between Janus Capital Corporation and Aetna Life Insurance and Annuity Company dated December 8, 1997(18) (8.30) Fund Participation Agreement among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(2) (8.31) Fourth Amendment dated May 1, 1998 to the Fund Participation Agreement by and among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(6) (8.32) Fifth Amendment dated May 1, 1998 to Fund Participation Agreement by and among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(19) (8.33) Fifth Amendment dated July 1, 1999 to Fund Participation Agreement by and among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997, November 28, 1997 and May 1, 1998(20) (8.34) Fund Participation Agreement dated May 1, 1999 between Aetna Life Insurance and Annuity Company, Mitchell Hutchins Series Trust, and Mitchell Hutchins Asset Management, Inc.(21) (8.35) Service Agreement dated May 1, 1999 between Mitchell Hutchins Asset Management, Inc. and Aetna Life Insurance and Annuity Company(21) (8.36) Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc.(22) (8.37) First Amendment dated December 1, 1999 to Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc. dated March 11, 1997(12) (8.38) Service Agreement effective as of March 11, 1997 between Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity Company(22) (9) Opinion and Consent of Counsel* (10) Consent of Independent Auditors* (11) Not applicable (12) Not applicable (13) Schedule for Computation of Performance Data(6) (14.1) Powers of Attorney(13) (14.2) Authorization for Signatures(3) *To be filed by amendment 1. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 22, 1996. 2. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. 3. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. 4. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-56297), as filed on September 14, 1998. 5. Incorporated by reference to Post-Effective Amendment No. 13 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 7, 1999. 6. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-56297), as filed on August 4, 1998. 7. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-60477), as filed on April 15, 1996. 8. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. 9. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-91846), as filed on October 30, 1997. 10. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 333-87305), as filed on April , 26, 2000. 11. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998. 12. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. 13. Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. 14. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997. 15. Incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 9, 1998. 16. Incorporated by Reference to Post-Effective Amendment No. 7 to Registration Statement on Form S-6 (File No. 33-75248), as filed on February 24, 1998. 17. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-88720), as filed on June 28, 1996. 18. Incorporated by reference to Post-Effective Amendment No. 10 to Registration Statement on Form N-4 (File No. 33-75992), as filed on December 31, 1997. 19. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 333-56297), as filed on February 16, 1999. 20. Incorporated by reference to Post-Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-56297), as filed on November 23, 1999. 21. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 25, 1999. 22. Incorporated by reference to Post-Effective Amendment No. 27 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 16, 1997. Item 25. Directors and Officers of the Depositor - ------------------------------------------------
Name and Principal Business Address* Positions and Offices with Depositor - ------------------ ------------------------------------ Thomas J. McInerney Director and President Shaun P. Mathews Director and Senior Vice President Catherine H. Smith Director, Chief Financial Officer and Senior Vice President Deborah Koltenuk Vice President, Corporate Controller, and Assistant Treasurer Therese M. Squillacote Vice President and Chief Compliance Officer Kirk P. Wickman Senior Vice President, General Counsel and Corporate Secretary
* The principal business address of all directors and officers listed is 151 Farmington Avenue, Hartford, Connecticut 06156. Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant - ---------------------------------------------------------------------------- Incorporated herein by reference to Item 24 of Post-Effective Amendment No. 38 to the Registration Statement on Form N-1A (File No. 33-41694), as filed on February 23, 2000. Item 27. Number of Contract Owners - ---------------------------------- As of March 31, 2000, there were 101,788 individuals holding interests in variable annuity contracts funded through Variable Annuity Account B. Item 28. Indemnification - ------------------------ Section 21 of Public Act No. 97-246 of the Connecticut General Assembly (the "Act") provides that a corporation may provide indemnification of or advance expenses to a director, officer, employee or agent only as permitted by Sections 33-770 to 33-778, inclusive, of the Connecticut General Statutes, as amended by Sections 12 to 20, inclusive, of this Act. Reference is hereby made to Section 33-771(e) of the Connecticut General Statutes ("CGS") regarding indemnification of directors and Section 33-776(d) of CGS regarding indemnification of officers, employees and agents of Connecticut corporations. These statutes provide in general that Connecticut corporations incorporated prior to January 1, 1997 shall, except to the extent that their certificate of incorporation expressly provides otherwise, indemnify their directors, officers, employees and agents against "liability" (defined as the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding) when (1) a determination is made pursuant to Section 33-775 that the party seeking indemnification has met the standard of conduct set forth in Section 33-771 or (2) a court has determined that indemnification is appropriate pursuant to Section 33-774. Under Section 33-775, the determination of and the authorization for indemnification are made (a) by the disinterested directors, as defined in Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in the case of indemnification of an officer, agent or employee of the corporation, by the general counsel of the corporation or such other officer(s) as the board of directors may specify. Also, Section 33-772 provides that a corporation shall indemnify an individual who was wholly successful on the merits or otherwise against reasonable expenses incurred by him in connection with a proceeding to which he was a party because he was a director of the corporation. Pursuant to Section 33-771(d), in the case of a proceeding by or in the right of the corporation or with respect to conduct for which the director, officer, agent or employee was adjudged liable on the basis that he received a financial benefit to which he was not entitled, indemnification is limited to reasonable expenses incurred in connection with the proceeding against the corporation to which the individual was named a party. The statute does specifically authorize a corporation to procure indemnification insurance on behalf of an individual who was a director, officer, employer or agent of the corporation. Consistent with the statute, Aetna Inc. has procured insurance from Lloyd's of London and several major United States and international excess insurers for its directors and officers and the directors and officers of its subsidiaries, including the Depositor. Item 29. Principal Underwriter - ------------------------------ (a) In addition to serving as the principal underwriter and depositor for the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also acts as the principal underwriter, only, for Aetna Variable Encore Fund, Aetna Variable Fund, Aetna Generation Portfolios, Inc., Aetna Income Shares, Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.), Aetna GET Fund, and Aetna Variable Portfolios, Inc. and as the principal underwriter and investment adviser for Portfolio Partners, Inc. (all management investment companies registered under the Investment Company Act of 1940 (1940 Act)). Additionally, Aetna acts as the principal underwriter and depositor for Variable Life Account B of Aetna, Variable Life Account C of Aetna, Variable Annuity Account C of Aetna and Variable Annuity Account G of Aetna (separate accounts of Aetna registered as unit investment trusts under the 1940 Act). Aetna is also the principal underwriter for Variable Annuity Account I of Aetna Insurance Company of America (AICA) (a separate account of AICA registered as a unit investment trust under the 1940 Act). (b) See Item 25 regarding the Depositor. (c) Compensation as of December 31, 1999:
(1) (2) (3) (4) (5) Name of Net Underwriting Compensation on Principal Underwriter Discounts and Commissions Redemption or Brokerage Annuitization Commissions Compensation* Aetna Life Insurance $1,170,405 $60,339,195 and Annuity Company
* Compensation shown in column 5 includes deductions for mortality and expense risk guarantees and contract charges assessed to cover costs incurred in the sales and administration of the contracts issued under Variable Annuity Account B. Item 30. Location of Accounts and Records - ----------------------------------------- All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the rules under it relating to the securities described in and issued under this Registration Statement are located at the home office of the Depositor as follows: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 Item 31. Management Services - ---------------------------- Not applicable Item 32. Undertakings - --------------------- Registrant hereby undertakes: (a) to file a post-effective amendment to this registration statement on Form N-4 as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen months old for as long as payments under the variable annuity contracts may be accepted; (b) to include as part of any application to purchase a contract offered by a prospectus which is part of this registration statement on Form N-4, a space that an applicant can check to request a Statement of Additional Information; and (c) to deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-4 promptly upon written or oral request. (d) The Company hereby represents that it is relying upon and will comply with the provisions of Paragraphs (1) through (4) of the SEC Staff's No-Action Letter dated November 28, 1988 with respect to language concerning withdrawal restrictions applicable to plans established pursuant to Section 403(b) of the Internal Revenue Code. See American Counsel of Life Insurance; SEC No-Action Letter, [1988 WL 235221, *13 (S.E.C.]. (e) Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (f) Aetna Life Insurance and Annuity Company represents that the fees and charges deducted under the contracts covered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Variable Annuity Account B of Aetna Life Insurance and Annuity Company has duly caused this Post-Effective Amendment to its Registration Statement on Form N-4 (File No. 333-56297) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hartford, State of Connecticut, on the 8th day of May, 2000. VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY (Registrant) By: AETNA LIFE INSURANCE AND ANNUITY COMPANY (Depositor) By: Thomas J. McInerney* -------------------------------------------- Thomas J. McInerney President As required by the Securities Act of 1933, this Post-Effective Amendment No. 15 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- Thomas J. McInerney* Director and President ) - ------------------- ) Thomas J. McInerney (principal executive officer) ) ) Catherine H. Smith* Director and Chief Financial Officer ) May - ------------------- ) 8, 2000 Catherine H. Smith ) ) Shaun P. Mathews* Director ) - ------------------- ) Shaun P. Mathews ) ) Deborah Koltenuk* Vice President, Corporate Controller, ) - ------------------- ) Deborah Koltenuk and Assistant Treasurer ) By: /s/ J. Neil McMurdie ---------------------------------------------- J. Neil McMurdie *Attorney-in-Fact VARIABLE ANNUITY ACCOUNT B Exhibit Index Exhibit No. Exhibit - ---------- ------- 99-B.4.5 Endorsement (EVA-PB-00) to Variable Annuity Contract GM-VA-98 and Variable Annuity Contract Certificate GMC-VA-98 ------------ 99-B.4.6 Form of Endorsement (EVA-PB-00(NY)) * 99-B.9 Opinion and Consent of Counsel * 99-B.10 Consent of Independent Auditors * *To be filed by amendment EX-99.B.4.5 2 PREMIUM BONUS ENDORSEMENT Ex-99.B.4.5 Aetna Life Insurance and Annuity Company PREMIUM BONUS ENDORSEMENT The Contract and Certificate, if applicable, are hereby endorsed by adding the following: 1) Right to Cancel. On the Contract and Certificate cover page, add the following to the Right to Cancel provision: If the Right to Cancel is exercised, any Premium Bonus credited to the Account will be forfeited. In those states which require the return of account value, the amount returned will reflect any losses or earnings attributable to the Premium Bonus. 2) On Schedule - Accumulation Period, add the following to the chart under the heading Separate Account, Charges to Separate Account: Premium Bonus Charge [0.50%]. 3) On Schedule - Annuity Period, add the following under the heading Separate Account - Variable Annuity Payment, Charges to Separate Account: Premium Bonus Charge If an Annuity Payout Option is selected during the first seven Account Years, an additional daily charge is deducted at an annual effective rate of [0.50%] for the Premium Bonus Charge. If a fixed Annuity Payout Option is chosen, this charge may be reflected in the payment rates. This charge will remain in effect for seven years from the Account Effective Date. 4) In Section I. Definitions, replace Account Value with the following: Account Value: As of the most recent Valuation Date, the Account Value is equal to the total of the Purchase Payment(s) made to the Account; (a) Plus any Premium Bonus amount; (b) Plus or minus the investment experience for the amount, if any, allocated to one or more of the Subaccounts; (c) Plus interest added to the amount, if any, allocated to the Guaranteed Account; (d) Plus any additional amount deposited to the Account (see Section IV - OPTION PACKAGES); (e) Less the amount of any Maintenance Fee deducted; (f) Less any additional fee(s), charges, or taxes, if applicable, deducted; (g) Less any amount(s) withdrawn; and (h) Less any amount(s) applied to an Annuity Payout Option. 5) In Section I. Definitions, add the following: Premium Bonus: A percentage of an applicable Purchase Payment that is credited to an Account by Aetna. This amount is in addition to the Purchase Payment. A Premium Bonus will only be credited on Purchase Payments received during the first Account Year. The Premium Bonus percentage may vary depending on the amount of the Premium Bonus Charge. Premium Bonus Charge: The Premium Bonus Charge is equal to [0.50%], on an annual basis, of the Account Value allocated to the Separate Account. We may also deduct this charge from amounts allocated to the Guaranteed Account or the General Account. The Premium Bonus Charge is deducted daily at a rate that will yield the annual charge. The Premium Bonus Charge will remain in effect for seven years from the Account Effective Date and will be deducted during the Accumulation Period and, if applicable, the Annuity Period. EVA-PB-00 6) In Section III. Purchase Payment, Account Value, and Withdrawal Provisions, add the following: Premium Bonus Option: For each Purchase Payment made during the first Account Year, Aetna will credit a Premium Bonus of [4%] to the Account. The Premium Bonus will be allocated to the Subaccount(s) or Guaranteed Term(s) selected in the same proportion as the Purchase Payment. The Premium Bonus Option may be elected only at the time of purchase. The election is irrevocable. Forfeiture of Premium Bonus: The Premium Bonus will be forfeited in the following circumstances: (a) If the Right to Cancel is exercised; (b) If a death benefit is payable based upon the Account Value, Step-up Value, or Roll-up Value, but only if the Premium Bonus was credited to the Account after or within 12 months of the date of death. (c) If all or part of a Purchase Payment for which a Premium Bonus is credited is withdrawn during the first seven Account Years. The amount of the Premium Bonus forfeited will be in the same percentage as the amount withdrawn subject to the Deferred Sales Charge is to the total of all Purchase Payments made to the Account during the first Account Year. Aetna will deduct any forfeited Premium Bonus on a pro rata basis from the Subaccount(s) and/or the Guaranteed Term(s) in which the Account Value is invested at the time of the withdrawal. 7) In Section III. Purchase Payment, Account Value, and Withdrawal Provisions, add the following to Death Benefit Amount: For purposes of calculating the death benefit, the Account Value, the Step-up Value, and the Roll-up Value as applicable, will be reduced by the amount of the Premium Bonus credited to the Account after or within 12 months of the date of death. 8) In Section V. Annuity Payout Provisions, replace Annuity Payout Option 1 - Payments for a specified period with the following: Annuity Payout Option 1 - Payments for a specified period: Payments are made for a specified number of years. The number of years must be at least 15 and not more than 30. Endorsed and made a part of the Contract on the Effective Date. /s/ Thomas J. McInerney President Aetna Life Insurance and Annuity Company EVA-PB-00 EX-99.B.4.6 3 FORM OF ENDORESEMENT Aetna Life Insurance and Annuity Company PREMIUM BONUS ENDORSEMENT The Contract and Certificate, if applicable, are hereby endorsed by adding the following: 1) Right to Cancel. On the Contract and Certificate cover page, add the following to the Right to Cancel provision: If the Right to Cancel is exercised, any Premium Bonus credited to the Account will be forfeited. 2) On Schedule - Accumulation Period, add the following to the chart under the heading Separate Account, Charges to Separate Account: Premium Bonus Charge 0.50%. 3) On Schedule - Accumulation Period, under the heading Separate Account and Guaranteed Account add the following to Minimum Account Value: At time of Purchase, the Premium Bonus amount is not included for purposes of meeting the Minimum Account Value. 4) On Schedule - Annuity Period, add the following under the heading Separate Account - Variable Annuity Payment, Charges to Separate Account: Premium Bonus Charge If an Annuity Payout Option is selected during the first seven Account Years, an additional daily charge is deducted at an annual effective rate of 0.50% for the Premium Bonus Charge. If a fixed Annuity Payout Option is chosen, this charge may be reflected in the payment rates. This charge will remain in effect for seven years from the Account Effective Date. 5) In Section I. Definitions, replace Account Value with the following: Account Value: As of the most recent Valuation Date, the Account Value is equal to the total of the Purchase Payment(s) made to the Account; (a) Plus any Premium Bonus amount; (b) Plus or minus the investment experience for the amount, if any, allocated to one or more of the Subaccounts; (c) Plus interest added to the amount, if any, allocated to the Guaranteed Account; (d) Plus any additional amount deposited to the Account (see Section IV - OPTION PACKAGES); (e) Less the amount of any Maintenance Fee deducted; (f) Less any additional fee(s), charges, or taxes, if applicable, deducted; (g) Less any amount(s) withdrawn; and (h) Less any amount(s) applied to an Annuity Payout Option. 6) In Section I. Definitions, add the following: Premium Bonus: A percentage of an applicable Purchase Payment that is credited to an Account by Aetna. This amount is in addition to the Purchase Payment. A Premium Bonus will only be credited on Purchase Payments received during the first Account Year. The Premium Bonus percentage may vary depending on the amount of the Premium Bonus Charge. Premium Bonus Charge: The Premium Bonus Charge is equal to 0.50%, on an annual basis, of the Account Value allocated to the Separate Account. We may also deduct this charge from amounts allocated to the Guaranteed Account or the General Account. The Guaranteed Rates, after any deduction of the Premium Bonus Charge, will not be less than 3.0%. The Premium Bonus Charge is deducted daily at a rate that will yield the annual charge. The Premium Bonus Charge will remain in effect for seven years from the Account Effective Date and will be deducted during the Accumulation Period and, if applicable, the Annuity Period. EVA-PB-00(NY) 7) In Section III. Purchase Payment, Account Value, and Withdrawal Provisions, add the following: Premium Bonus Option: For each Purchase Payment made during the first Account Year, Aetna will credit a Premium Bonus of 4% to the Account. The Premium Bonus will be allocated to the Subaccount(s) or Guaranteed Term(s) selected in the same proportion as the Purchase Payment. The Premium Bonus Option may be elected only at the time of purchase. The election is irrevocable. Forfeiture of Premium Bonus: The Premium Bonus will be forfeited in the following circumstances: (a) If the Right to Cancel is exercised; (b) If a death benefit is payable based upon the Account Value or Step-up Value, but only if the Premium Bonus was credited to the Account after or within 12 months of the date of death. (c) If all or part of a Purchase Payment for which a Premium Bonus is credited is withdrawn during the first seven Account Years. For each withdrawal, the amount of the Premium Bonus to be forfeited will be calculated by: (i) Determining the amount of the Premium Bonus that is subject to forfeiture according to the following table:
Completed Account Years Amount of Premium at the Time of the Withdrawal Bonus Subject to Forfeiture ----------------------------------------------------- -- ---------------------------------------------------- Less than 1 100% 1 or more but less than 2 100% 2 or more but less than 3 100% 3 or more but less than 4 100% 4 or more but less than 5 100% 5 or more but less than 6 75% 6 or more but less than 7 50% 7 or more 0%
(ii) And multiplying that amount by the same percentage as the amount withdrawn subject to the Deferred Sales Charge is to the total of all Purchase Payments made to the Account during the first Account Year. Aetna will deduct any forfeited Premium Bonus on a pro rata basis from the Subaccount(s) and/or the Guaranteed Term(s) in which the Account Value is invested at the time of the withdrawal. 8) In Section III. Purchase Payment, Account Value, and Withdrawal Provisions, add the following to Death Benefit Amount: For purposes of calculating the death benefit, the Account Value and the Step-up Value as applicable, will be reduced by the amount of the Premium Bonus credited to the Account after or within 12 months of the date of death. 9) In Section V. Annuity Payout Provisions, replace Annuity Payout Option 1 - Payments for a specified period with the following: Annuity Payout Option 1 - Payments for a specified period: Payments are made for a specified number of years. The number of years must be at least 15 and not more than 30.. Endorsed and made a part of the Contract on the Effective Date. Thomas J. McInerney President Aetna Life Insurance and Annuity Company -----END PRIVACY-ENHANCED MESSAGE-----