-----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, DdaTPyTdvijAYsx47EBblZ6xnNGqehSczGl61vaeOqto6E4/lOz/klwYZe9ckjzn s4QzOX/U1Mt6xBDitTzhCQ== 0000950146-97-000628.txt : 19970423 0000950146-97-000628.hdr.sgml : 19970423 ACCESSION NUMBER: 0000950146-97-000628 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970422 EFFECTIVENESS DATE: 19970422 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE & ANNUITY CO CENTRAL INDEX KEY: 0000785986 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-76018 FILM NUMBER: 97584905 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE STREET 2: C/O AETNA LIFE INSURANCE & ANNUITY CO CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032732193 485BPOS 1 As filed with the Securities and Exchange Commission on April 22, 1997 Registration No. 33-76018 Registration No. 811-4536 - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------ FORM S-6 POST-EFFECTIVE AMENDMENT NO. 7 TO REGISTRATION STATEMENT FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 - ------------------------------------------------------------------------------ Variable Life Account B of Aetna Life Insurance and Annuity Company Aetna Life Insurance and Annuity Company 151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56 - ------------------------------------------------------------------------------ Susan E. Bryant, Counsel Aetna Life Insurance and Annuity Company 151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56 (Name and Complete Address of Agent for Service) - ------------------------------------------------------------------------------ It is proposed that this filing will become effective: [X] on May 1, 1997 pursuant to paragraph (b) of Rule 485 Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has registered an indefinite number of securities under the Securities Act of 1933. Registrant filed a Rule 24f-2 Notice for the fiscal year ended December 31, 1996 on February 28, 1997. VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY Post-Effective Amendment No. 7 to Registration Statement on Form S-6 Cross Reference Sheet Form N-8B-2 Item No. Part I (Prospectus) - ----------- ------------------- 1 Cover Page; The Separate Account; The Company 2 Cover Page; The Separate Account; The Company 3 Not Applicable 4 Cover Page; Additional Information - Distribution of the Policies 5 Cover Page; The Separate Account; The Company 6 The Separate Account; The Company 7 Not Applicable 8 Financial Statements 9 Additional Information - Legal Matters 10 Charges and Fees; Policy Choices; Policy Values; Policy Rights; Additional Information - Right to Instruct Voting of Fund Shares; Policy Choices 11 Allocation of Premiums; Policy Choices 12 Cover Page; Allocation of Premiums - The Funds 13 Charges and Fees; Additional Information - Distribution of the Policies 14 Policy Summary; Miscellaneous Policy Provisions 15 Policy Summary; Allocation of Premiums; Policy Choices - Premium Payments; Policy Values 16 Policy Summary; Allocation of Premiums - The Funds; Policy Values Form N-8B-2 Item No. Part I (Prospectus) - ----------- ------------------- 17 Policy Rights 18 Policy Choices; Policy Rights - Policy Loans: Preferred and Nonpreferred; Tax Matters 19 Additional Information - Reports to Policy Owners; Records and Accounts 20 Not Applicable 21 Policy Rights - Policy Loans 22 Not Applicable 23 Directors and Officers 24 Not Applicable 25 The Separate Account; The Company 26 Charges and Fees 27 The Company 28 Directors and Officers 29 The Company 30 Not Applicable 31 Not Applicable 32 Not Applicable 33 Not Applicable 34 Not Applicable 35 Additional Information - The Registration Statement 36 Not Applicable 37 Not Applicable 38 Additional Information - Distribution of the Policies Form N-8B-2 Item No. Part I (Prospectus) - ----------- ------------------- 39 See Item 25 40 See Item 26 41 See Item 27 42 See Item 28 43 Financial Statements 44 Policy Values; Financial Statements 45 Not Applicable 46 The Separate Account; Policy Values 47 The Separate Account Policy Choices; Policy Values 48 Not Applicable 49 Not Applicable 50 The Separate Account 51 Not Applicable Cover Page; Policy Choices 52 The Separate Account; Charges and Fees - Fund Additions, Deletions or Substitutions 53 Tax Matters 54 Not Applicable 55 Illustrations of Death Benefit, Total Account Values and Cash Surrender Values 56 Not Applicable 57 Not Applicable 58 Not Applicable 59 Financial Statements Variable Life Account B Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 (800) 334-7586 Prospectus Dated May 1, 1997 The Flexible Premium Variable Life Insurance Policy The policies offered in connection with this Prospectus are AetnaVest Plus, a variable universal life insurance policy ("Policy") offered by Aetna Life Insurance and Annuity Company (the "Company"). This Policy is intended to provide life insurance benefits, and is designed to allow flexible premium payments, a choice of underlying funding options, and a choice of two death benefit options. Your policy's cash value may vary with the investment performance of the underlying funding options you choose. Although policy values may vary, the Policy can be guaranteed to stay in force through the Guaranteed Death Benefit Provision. Policy cash value may be used to continue your policy in force, may be borrowed within certain limits, and may be fully or partially surrendered (subject to a surrender charge). You may also choose to select one of the annuity settlement options upon Maturity of the Policy, or, prior to Maturity of the Policy, you may apply the value of your Policy (minus any applicable surrender charges and the amount necessary to repay any loans in full), to one of the annuity settlement options. Upon death of the Insured, the beneficiary will be paid (a) the value of the Death Benefit Option in one lump sum, or (b) under one of the annuity settlement options. The Policy has a Free-Look Period during which you may return it to the Company's Home Office for a refund. The refund may be more or less than the premiums paid. (See "Right to Examine the Policy.") It may not be advantageous to replace existing insurance or supplement an existing flexible premium variable life insurance policy with an AetnaVest Plus Policy. This Prospectus is intended to describe the variable options used to fund this Policy through Variable Life Account B (the "Separate Account"). The variable funding options currently available through the Separate Account are as follows: Aetna Variable Fund; Aetna Income Shares; Aetna Variable Encore Fund; Aetna Investment Advisers Fund, Inc.; Aetna Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio and Aetna Legacy Variable Portfolio; Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio; Alger American Fund--Alger American Small Capitalization Portfolio; American Century Variable Portfolios, Inc.--American Century VP Capital Appreciation (formerly "TCI Growth"); Fidelity's Variable Insurance Products Fund--Equity-Income Portfolio; Fidelity's Variable Insurance Products Fund II--Contrafund Portfolio; Janus Aspen Series--Aggressive Growth Portfolio, Balanced Portfolio, Growth Portfolio, Short-Term Bond Portfolio and Worldwide Growth Portfolio; and Scudder Variable Life Investment Fund--International Portfolio Class A Shares (collectively, the "Funds"). Unless specifically mentioned, this Prospectus only describes the variable investment options. Not all Funds may be available under all Policies or in all jurisdictions. The Statement of Additional Information ("SAI") for any of the Funds may be obtained by calling (800) 334-7586. Please read this Prospectus carefully and retain it for future reference. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE FUNDS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. THIS PROSPECTUS AND OTHER INFORMATION ABOUT VARIABLE LIFE ACCOUNT B REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE FOUND IN THE SEC'S WEB SITE AT http://www.sec.gov. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ii Table of Contents Definitions v Policy Summary 1 The Separate Account 1 Allocation of Premiums 2 The Funds 2 Mixed and Shared Funding 4 Fixed Account 4 Charges and Fees 5 Premium Load 5 Charges and Fees Assessed Against the Total Account Value 5 Charges and Fees Associated with the Variable Funding Options 6 Charges Assessed Against the Underlying Funds 7 Surrender Charge 8 Surrender Charges on Full and Partial Surrenders 8 Policy Choices 9 Death Benefit 9 Guaranteed Death Benefit Provision 9 Premium Payments 10 Transfers and Allocations to the Funding Options 11 Telephone Transfers 11 Automated Transfers (Dollar Cost Averaging) 12 Policy Values 12 Total Account Value 12 Accumulation Unit Value 13 Maturity Value 13 Cash Surrender Value 13 Policy Rights 13 Partial Surrenders 13 No-Lapse Coverage Provision 14 Reinstatement of a Lapsed Policy 14 Policy Loans: Preferred and Nonpreferred 15 Policy Changes 16 Right to Examine the Policy 16 Death Benefit 17 Policy Settlement 17 Settlement Options 17 Calculation of Settlement Payments 19 Special Plans 20 The Company 20 Directors and Officers 21 Additional Information 23 Reports to Policy Owners 23 Right to Instruct Voting of Fund Shares 23 Disregard of Voting Instructions 24 State Regulation 24 Legal Matters 24 The Registration Statement 25 Distribution of the Policies 25 Records and Accounts 25 iii Independent Auditors 25 Tax Matters 26 General 26 Federal Tax Status of the Company 26 Life Insurance Qualification 26 General Rules 27 Modified Endowment Contracts 27 Diversification Standards 28 Investor Control 28 Other Tax Considerations 28 Miscellaneous Policy Provisions 29 The Policy 29 Payment of Benefits 29 Age and Sex 29 Incontestability 29 Suicide 29 Coverage Beyond Maturity 30 Protection of Proceeds 30 Nonparticipation 30 Illustrations of Death Benefit, Total Account Values and Cash Surrender Values 31 Financial Statements of the Separate Account S-1 Financial Statements of the Company F-1 iv Definitions Accumulation Unit: A unit used to measure the value of a Policyowner's interest in each applicable funding option used to calculate the value of the variable portion of the Policy before election of a Settlement Option. Additional Premiums: Any premium paid in addition to Planned Premiums. Amount at Risk: The Death Benefit before subtraction of outstanding loans, if any, divided by 1.0036748, minus the Total Account Value. Annuitant: A person who receives annuity payments. Annuity: A series of payments for life or for a definite period. Attained Age: The Issue Age of the insured increased by the number of Policy Years elapsed. Basic Premium: The amount of premium which must be paid to assure that the Policy remains in force for at least five years after issue, assuming there have been no loans or surrenders. Cash Surrender Value: The amount a Policy Owner can receive in cash by surrendering the Policy. This equals the Total Account Value minus the applicable surrender charge and the amount necessary to repay any loans in full. Cost of Insurance: The portion of the Monthly Deduction attributable to the basic insurance coverage, not including riders, supplemental benefits or monthly expense charges. Death Benefit: The amount payable to the beneficiary in accordance with the Death Benefit Option elected, upon the death of the Insured, after deduction of the amount necessary to repay any loans in full, and overdue deductions. Death Benefit Option: Either of two methods for determining the Death Benefit. Fixed Account: The fixed interest option offered under the Policy that guarantees principal and a minimum interest rate of 4.5% per year. Fixed Account Value: The non-loaned portion of this Policy's Total Account Value attributable to the non-variable portion of the Policy. The Fixed Account Value is held in the General Account. Fund(s): One or more of the underlying funding options available under the Policy (as described in this Prospectus). Each of the Funds is an open-end management investment company (mutual fund) whose shares are available to fund the benefits provided by the Policy. General Account: The Company's general asset account, in which assets attributable to the non-variable portion of Policies are held, i.e., the Loan Account Value, and the Fixed Account Value. v Grace Period: The 61-day period beginning on the Monthly Deduction Day on which the Policy's Cash Surrender Value is insufficient to cover the current Monthly Deduction. The Policy will lapse without value at the end of the 61-day period unless a sufficient payment described in the notification letter is received by the Company. Guaranteed Death Benefit Premium: A specified premium that, if paid, will keep the Policy in force to attained age 80 or 100, even if the cash value is insufficient to cover current monthly deductions. Home Office: The Company's principal executive offices, located at 151 Farmington Avenue, Hartford, Connecticut 06156. Insured: The person on whose life the Policy is issued. Issue Age: The Insured's age on his/her birthday on or prior to the Policy's Issue Date. Issue Date: The effective date of initial coverage. The Date of Issue and the effective date for any change in coverage will be the Date of Coverage Change shown in Supplemental Policy Specifications which will be sent to you. Coverage is conditional on payment of the first premium, if required, and issue of the Policy as provided in the application. Loan Account Value: The sum of all unpaid loans (Preferred and Nonpreferred). The amount necessary to repay all loans in full is the Loan Account Value plus any interest accrued since the last Policy anniversary. Such interest is payable in order to discharge any policy indebtedness. Maturity Date: The Issue Date anniversary on which the Insured reaches Attained Age 100 and the Policy is considered matured. Maturity Value: The Total Account Value on the Maturity Date, less the amount necessary to repay any loans in full if the Guaranteed Death Benefit Provision is not in effect. Otherwise, the greater of the Total Account Value and the Specified Amount on the Maturity Date, less the amount necessary to repay any loans in full. Monthly Deduction: The Monthly Deduction from the Total Account Value which includes the Cost of Insurance, charges for supplemental riders or benefits, and an administrative expense charge. Monthly Deduction Day: The day that the Monthly Deduction is actually taken. Net Premium: The premium paid, less the premium load. Nonpreferred Loan: Loans taken in the first ten Policy Years, and beginning in the eleventh Policy Year, loans taken in excess of the Preferred Loan Amount. Planned Premium: The amount of premium the Policy Owner chooses to pay the Company on a scheduled basis. This is the amount for which the Company sends a bill. vi Policy: The life insurance contract described in this Prospectus, under which flexible premium payments are permitted and the Death Benefit and contract values may vary with the investment performance of the funding option(s) selected. Policy Owner: The owner of the Policy, referred to as "you." Policy Year: Each twelve-month period, beginning on the Issue Date, during which the Policy is in effect. Preferred Loan Amount: A portion of the maximum loan amount available beginning in the eleventh Policy Year, for a loan, at no net cost to the Policy Owner. The preferred loan is the amount taken. Separate Account: Variable Life Account B (and Variable Annuity Account B when referring to a Settlement Option). Separate Account Value: The portion of the Total Account Value attributable to Variable Life Account B. Settlement Option(s): Several ways in which a beneficiary may receive Annuity payments due from a Death Benefit, or which the Insured may choose to receive Annuity payments from the Cash Surrender Value of the Policy. Settlement Option Units: A measure of the net investment results of the investment options used to calculate the amount of the Settlement Option payments. Specified Amount: The amount (at least $100,000), originally chosen by the Policy Owner, used in determining the Death Benefit. It is initially equal to the Death Benefit. The Specified Amount may be increased or decreased as described in this Prospectus. Surrender Charge: The amount retained by the Company, upon the full or partial surrender of the Policy. Total Account Value: The sum of the Fixed Account Value, Separate Account Value and the Loan Account Value. Valuation Period: The period of time from when the Company determines the Accumulation Unit Value and Settlement Option Unit Value of a variable investment option until the next time it determines such unit value. Currently, the calculation occurs after the close of business of the New York Stock Exchange on any normal business day, Monday through Friday, that the New York Stock Exchange is open. Valuation Reserve: A reserve established pursuant to the insurance laws of Connecticut to measure voting rights during the settlement option period and the value of a commutation right, if available, under Settlement Option 2 when elected on a variable basis. Variable Life Account B: A Separate Account of the Company established for the purpose of segregating assets attributable to the variable portion of life insurance contracts from other assets of the Company. It is organized as a unit investment trust. vii Policy Summary This is a flexible premium variable universal life insurance policy. This Policy provides that cash values may be either fixed or variable or a combination of fixed and variable. At the time of purchase, you must choose between the two Death Benefit Options and decide if you want the Guaranteed Death Benefit Provision. The amount payable under either option will be determined as of the date of the Insured's death. Under Option 1, the Death Benefit will be the greater of the Specified Amount, or the applicable percentage of the Total Account Value. Under Option 2, the Death Benefit will be the greater of the Specified Amount plus the Total Account Value, or the applicable percentage of the Total Account Value. (See "Death Benefit.") The Policy also offers a Guaranteed Death Benefit Provision (not available in New York) which ensures that the Policy will stay in force even if the cash value is insufficient to cover the current monthly deductions due to fund performance. Sufficient premiums must be paid in order to maintain a Guaranteed Death Benefit to Age 80 or 100. (See "Guaranteed Death Benefit Provision.") At the time of purchase, you must also choose the amount of premium you intend to pay. You may vary premium payments to some extent and still keep your Policy in force. However, sufficient premiums must be paid to continue the Policy in force. Premium reminder notices will be sent for planned premiums and for premiums required to continue this Policy in force. If this Policy lapses it may be reinstated. (See "Reinstatement of a Lapsed Policy.") Finally, you must choose how to allocate Net Premiums. Net Premiums allocated to the Separate Account must be allocated to one or more Funds, and allocations must be in whole percentages. The variable portion of this Policy is supported by the Funds you choose. The cash value in each Fund is not guaranteed and will vary with the investment performance of that Fund. If the Fixed Account is selected, the Fixed Account Value will accumulate at rates of interest we determine. Such rates will not be less than 4.5% a year. Proceeds as described in this Policy will be paid upon surrender, maturity, or death of the Insured. The Separate Account The Separate Account established for the purpose of providing Variable Options to fund the Policy is Variable Life Account B. Amounts allocated to the Separate Account are invested in the Funds. Each of the Funds is an open-end management investment company whose shares are purchased by the Separate Account to fund the benefits provided by the Policy. The Funds currently available under the Separate Account, including their investment objectives and their investment advisers, are described briefly in this Prospectus. Complete descriptions of the Funds' investment objectives and restrictions and other material information relating to an investment in the Funds are contained in the prospectuses for each of the Funds which are delivered with this Prospectus. Variable Life Account B was established pursuant to a June 18, 1986 resolution of the Board of Directors of the Company. Under Connecticut Insurance Law, the income, gains or losses of the Separate Account are credited without regard to the other income, gains or losses of the Company. These assets are held for 1 the Company's variable life insurance policies. Any and all distributions made by the Funds with respect to shares held by the Separate Account will be reinvested in additional shares at net asset value. The assets maintained in the Separate Account will not be charged with any liabilities arising out of any other business conducted by the Company. The Company is, however, responsible for meeting the obligations of the Policy to the Policyowner. No stock certificates are issued to the Separate Account for shares of the Funds held in the Separate Account. Ownership of Fund shares is documented on the books and records of the Funds and of the Company for the Separate Account. The Separate Account is registered with the Securities and Exchange Commission ("SEC") as a unit investment trust under the Investment Company Act of 1940 and meets the definition of separate account under the federal securities laws. Such registration does not involve any approval or disapproval by the SEC of the Separate Account or the Company's management or investment practices or policies. The Company does not guarantee the Separate Account's investment performance. Allocation of Premiums You may allocate all or a part of your Net Premiums to the Funds currently available through the Separate Account in connection with this Policy or to the Fixed Account (part of the Company's General Account). Not all Funds are available under all Policies or in all jurisdictions. In addition, the Company may add, withdraw or substitute Funds, subject to the conditions in the Contract and in compliance with regulatory requirements. We reserve the right to limit the total number of Funds you may elect to 17 over the lifetime of the Policy. The investment results of the Funds, whose investment objectives are described below, are likely to differ significantly. You should consider carefully, and on a continuing basis, which Fund or combination of Funds is best suited to your long-term investment objectives. Except where otherwise noted, all of the Funds are diversified, as defined in the Investment Company Act of 1940. The Funds [bullet] Aetna Variable Fund seeks to maximize total return through investments in a diversified portfolio of common stocks and securities convertible into common stocks.(1) [bullet] Aetna Income Shares seeks to maximize total return, consistent with reasonable risk, through investments in a diversified portfolio consisting primarily of debt securities.(1) [bullet] Aetna Variable Encore Fund seeks to provide high current return, consistent with preservation of capital and liquidity, through investment in high-quality money market instruments. An investment in this Fund is neither insured nor guaranteed by the U.S. Government.(1) [bullet] Aetna Investment Advisers Fund, Inc. is a managed fund which seeks to maximize investment return consistent with reasonable safety of principal by investing in one or more of the following asset classes: stocks, bonds and cash equivalents based on the Company's judgment of which of those sectors or mix thereof offers the best investment prospects.(1) [bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio seeks to provide capital appreciation by allocating its investments among equities and fixed income securities. The Portfolio is managed for investors who generally have an investment horizon exceeding 15 years, and who have a high level of risk tolerance. See the Fund's prospectus for a discussion of the risks involved.(1) 2 [bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads Variable Portfolio seeks to provide total return (i.e., income and capital appreciation, both realized and unrealized) by allocating its investments among equities and fixed income securities. The Portfolio is managed for investors who generally have an investment horizon exceeding 10 years and who have a moderate level of risk tolerance.(1) [bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy Variable Portfolio seeks to provide total return consistent with preservation of capital by allocating its investments among equities and fixed income securities. The Portfolio is managed for investors who generally have an investment horizon exceeding five years and who have a low level of risk tolerance.(1) [bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio seeks to outperform the total return performance of publicly traded common stocks represented by the S&P 500.(1) [bullet] Alger American Fund--Alger American Small Capitalization Portfolio seeks long-term capital appreciation. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in equity securities of companies that, at the time of purchase of such securities, have total market capitalization within the range of companies included in the Russell 2000 Growth Index ("Russell Index") and the S&P SmallCap 600 Index ("S&P Index"), updated quarterly. As of March 31, 1997, the range of market capitalization of the companies in the Russell Index was $10 million to $1.94 billion; the range of market capitalization of the companies in the S&P Index at that date was $32 million to $2.58 billion. The combined range was $10 million to $2.58 billion.(2) [bullet] American Century Variable Portfolios, Inc.--American Century VP Capital Appreciation (formerly TCI Portfolios, Inc.--TCI Growth) seeks capital growth. The Fund seeks to achieve its objective by investing in common stocks (including securities convertible into common stocks) and other securities that meet certain fundamental and technical standards of selection and, in the opinion of the Fund's investment manager, have better than average potential for appreciation.(3) [bullet] Fidelity Investments' Variable Insurance Products Fund--Equity-Income Portfolio seeks reasonable income by investing primarily in income-producing equity securities. In choosing these securities, the Fund will also consider the potential for capital appreciation.(4) [bullet] Fidelity Investments' Variable Insurance Products Fund II--Contrafund Portfolio seeks maximum total return over the long term by investing its assets mainly in equity securities of companies that are undervalued or out-of-favor.(4) [bullet] Janus Aspen Series--Aggressive Growth Portfolio is a non-diversified portfolio that seeks long-term growth of capital. The Portfolio pursues its investment objective by normally investing at least 50% of its equity assets in securities issued by medium-sized companies. Medium-sized companies are those whose market capitalizations fall within the range of companies in the S&P MidCap 400 Index, which as of December 30, 1996 included companies with capitalizations between approximately $192 million and $6.5 billion, but which is expected to change on a regular basis.(5) [bullet] Janus Aspen Series--Balanced Portfolio seeks long-term capital growth consistent with preservation of capital and balanced by current income. The Portfolio pursues its investment objective by, under normal circumstances, investing 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.(5) [bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital consistent with the preservation of capital. The Portfolio pursues its investment objective by investing in common stocks of a large number of issuers of any size.(5) 3 [bullet] Janus Aspen Series--Short-Term Bond Portfolio seeks as high a level of current income as is consistent with preservation of capital. The Portfolio pursues its investment objective by investing primarily in short- and intermediate-term fixed income securities.(5) [bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth of capital consistent with the preservation of capital. The Portfolio pursues its investment objective primarily through investments in common stocks of foreign and domestic issuers.(5) [bullet] Scudder Variable Life Investment Fund-International Portfolio Class A Shares seeks long term growth of capital primarily through diversified holdings of marketable foreign equity investments.(6) Investment Advisers of the Funds: (1) Aetna Life Insurance and Annuity Company (adviser); Aeltus Investment Management, Inc. (sub-adviser) (2) Fred Alger Management, Inc. (3) American Century Investment Management, Inc. (4) Fidelity Management & Research Company (5) Janus Capital Corporation (6) Scudder, Stevens & Clark, Inc. Some of the above Funds may use instruments known as derivatives as part of their investment strategies, as described in their respective prospectuses. The use of certain derivatives such as inverse floaters and principal only debt instruments may involve higher risk of volatility to a Fund. The use of leverage in connection with derivatives can also increase risk of losses. See the current prospectuses of the Funds for a discussion of the risks associated with an investment in those Funds. More comprehensive information, including a discussion of potential risks, and more complete information about their investment policies and restrictions is found in the current prospectus for each Fund which is distributed with and accompanies this Prospectus. You should read the Fund prospectuses and consider carefully, and on a continuing basis, which Fund or combination of Funds is best suited to your long-term investment objectives. Additional prospectuses and Statements of Additional Information for each of the Funds can be obtained from the Company's Home Office at the address and telephone number listed on the cover of this Prospectus. Mixed and Shared Funding Shares of the Funds are available to insurance company separate accounts which fund variable annuity contracts and variable life insurance policies, including the Policy described in this Prospectus. Because Fund shares are offered to separate accounts of both affiliated and unaffiliated insurance companies, it is conceivable that, in the future, it may not be advantageous for variable life insurance separate accounts and variable annuity separate accounts to invest in these Funds simultaneously, since the interests of such Policyowners or contractholders may differ. Although neither the Company nor the Funds currently foresees any such disadvantages either to variable life insurance or to variable annuity Policyholders, each Fund's Board of Trustees/Directors has agreed to monitor events in order to identify any material irreconcilable conflicts which may possibly arise and to determine what action, if any, should be taken in response thereto. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a Fund. This might force that Fund to sell portfolio securities at disadvantageous prices. Fixed Account Interests in the Fixed Account have not been registered with the SEC in reliance upon exemptions under the Securities Act of 1933, as amended. However, disclosure in this Prospectus regarding the Fixed Account may be subject to certain generally applicable provisions of the federal securities laws 4 relating to the accuracy and completeness of the statements. Disclosure in this Prospectus relating to the Fixed Account has not been reviewed by the SEC. The Fixed Account is a fixed funding option available under the Policy. The Company guarantees a minimum interest rate on amounts in the Fixed Account and assumes the risk of investment gain or loss. The investment gain or loss of the Separate Account or any of the Funds does not affect the Fixed Account Value. The Fixed Account is secured by the general assets of the Company. The general assets of the Company include all assets of the Company other than those held in separate accounts sponsored by the Company or its affiliates. The Company will invest the assets of the Fixed Account in those assets chosen by the Company, as allowed by applicable law. Investment income of such Fixed Account assets will be allocated by the Company between itself and those policies participating in the Fixed Account. Amounts held in the Fixed Account are guaranteed and will be credited with interest at rates of not less than 4.5% per year. Credited interest rates reflect the Company's return on Fixed Account invested assets and the amortization of any realized gains and/or losses which the Company may incur on these assets. Charges & Fees Premium Load A deduction, currently 3.5% of each premium payment (guaranteed to be no higher than 6%), will be made to cover the premium load. This load represents average applicable state premium taxes (ranging up to 4%) as well as administrative expenses and federal income tax liabilities. Charges and Fees Assessed Against the Total Account Value A Monthly Deduction is made from the Total Account Value. The Monthly Deduction includes the Cost of Insurance and any charges for supplemental riders or benefits. The Cost of Insurance depends on the Attained Age, risk class of the Insured, the Specified Amount of the Policy and in all states except Massachusetts and Montana, sex of the Insured. Once a Policy is issued, Monthly Deductions, including Cost of Insurance charges, will be charged as of the Issue Date, even if the Issue Date is earlier than the date the application is signed (see "Premium Payments"). If the Policy's issuance is delayed due to underwriting requirements, the charges will not be assessed until the underwriting is complete and the application for the policy is approved. Cost of Insurance charges will be in amounts based on the Specified Amount of the Policy issued, even if the temporary insurance coverage received during the underwriting period is for a lesser amount. If we decline an application, we will refund the full premium payment made. The Monthly Deduction also includes a monthly administrative expense charge of $20 during the first Policy Year and $7 during subsequent Policy Years. This charge is for items such as premium billing and collection, policy value calculation, confirmations and periodic reports and will not exceed our costs. The Monthly Deduction is deducted proportionately from each funding option, if more than one is used. This is accomplished by liquidating Accumulation Units and withdrawing the value of the liquidated Accumulation Units from each funding option in the same proportion as their respective values 5 have to your Fixed Account and Separate Account Values. The Monthly Deduction is made as of the same day each month, beginning with the Issue Date. Charges and Fees Associated with the Variable Funding Options The Company deducts a daily charge from the assets of Variable Life Account B for mortality and expense risks assumed by it in connection with the Policy. This charge is currently equal to an annual rate of 0.70% of the average daily net assets of the Separate Account. The mortality and expense risk charge is assessed to compensate the Company for assuming certain mortality and expense risks under the Policies. The Company reserves the right to increase the mortality and expense risk charge if it believes that circumstances have changed so that current charges are no longer adequate. In no event will the charge exceed 0.90% of average daily net assets on an annual basis. The mortality risk assumed is that insureds, as a group, may live for a shorter period of time than estimated and, therefore, the cost of insurance charges specified in the Policy will be insufficient to meet actual claims. The expense risk assumed is that other expenses incurred in issuing and administering the Policies and operating the Separate Account will be greater than the charges assessed for such expenses. The Company also deducts a daily administrative charge equivalent on an annual basis to 0.30% of the average daily net assets of Variable Life Account B to compensate the Company for expenses associated with the administration and maintenance of the Policy. These types of expenses are described above in connection with the monthly administrative charge. The daily administrative charge and the monthly administrative charge work together to cover the Company's administrative expenses. In later years of the Policy, the revenue collected from the daily asset-based charge grows with the Total Account Value to cover increased expenses from Account-based transactional expenses. The charge is guaranteed not to exceed 0.50% of the average daily net assets of the Separate Account on an annual basis. 6 Charges Assessed Against the Underlying Funds The following table illustrates the investment advisory fees, other expenses and total expenses paid by each of the Funds as a percentage of average net assets based on figures for the year ended December 31, 1996:
Investment Advisory Fees(1) Other Expenses Total Fund (after expense (after expense Annual reimbursement) reimbursement) Expenses ---------------- ---------------- ------------ Aetna Variable Fund(2) 0.50% 0.06% 0.56% Aetna Income Shares(2) 0.40% 0.08% 0.48% Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35% Aetna Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58% Aetna Ascent Variable Portfolio(2) 0.60% 0.15% 0.75% Aetna Crossroads Variable Portfolio(2) 0.60% 0.15% 0.75% Aetna Legacy Variable Portfolio(2) 0.60% 0.15% 0.75% Aetna Variable Index Plus Portfolio(2) 0.35% 0.15% 0.50% Alger American Small Capitalization Portfolio 0.85% 0.03% 0.88% American Century VP Capital Appreciation (formerly "TCI Growth")(3) 1.00% 0.00% 1.00% Fidelity VIP Equity-Income Portfolio(4) 0.51% 0.07% 0.58% Fidelity VIP II Contrafund Portfolio(4) 0.61% 0.13% 0.74% Janus Aspen Aggressive Growth Portfolio(5) 0.72% 0.04% 0.76% Janus Aspen Balanced Portfolio(5) 0.79% 0.15% 0.94% Janus Aspen Growth Portfolio(5) 0.65% 0.04% 0.69% Janus Aspen Short-Term Bond Portfolio(5) 0.47% 0.19% 0.66% Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.14% 0.80% Scudder International Portfolio Class A Shares 0.86% 0.19% 1.05%
(1) Certain of the unaffiliated 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 paid out of the investment advisory fees and are not charged to investors. (2) The Company provides administrative services to the Fund and assumes the Fund's ordinary recurring direct costs under an Administrative Services Agreement. The new Administrative Services Agreement became effective on may 1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio, and Aetna Legacy Variable Portfolio. Therefore, for these Funds the "Other Expenses" shown are not based on actual figures for the year ended December 31, 1996, but reflect the fee payable under that Agreement. The Administrative Services Agreement was in effect for Aetna Variable Index Plus Portfolio since its inception. Effective August 1, 1996, Investment Advisory Fees were increased for Aetna Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc., Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio, and Aetna Legacy Variable Portfolio. The Advisory Fees shown above are not based on actual figures for the year ended December 31, 1996, but reflect the increased Investment Advisory Fees. (3) The Portfolio's investment adviser pays all expenses of the Portfolio except brokerage commissions, taxes, interest, fees and expenses of the non-interested person directors (including counsel fees) and extraordinary expenses. These expenses have historically represented a very small percentage (less than 0.01%) of total net assets in a fiscal year. (4) A portion of the brokerage commissions that certain funds pay was used to reduce expenses. In addition, certain funds have entered into arrangements with their custodian and transfer agent whereby interest earned on uninvested cash balances was used to reduce custodian and transfer agent expenses. Including these reductions, the total operating expenses would have been 0.56% for Equity-Income Portfolio and 0.71% for Contrafund Portfolio. (5) The fees and expenses shown above are based on gross expenses of the Shares before expense offset arrangements for the fiscal year ended December 31, 1996. The information for each Portfolio is net of fee waivers or reductions from Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth, and Worldwide Growth Portfolios reduce the management fee to the level of the corresponding Janus retail fund. Other waivers, if applicable, are first applied against the management fee and then against other expenses. Without such waivers or reductions, the Management Fee, Other Expenses and Total Fund Annual Expenses would have been 0.79%, 0.04% and 0.83% for Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07% for Balanced Portfolio; 0.79%, 0.04% and 0.83% for Growth Portfolio; 0.65%, 0.19% and 0.84% for Short-Term Bond Portfolio; and 0.77%, 0.14% and 0.91% for Worldwide Growth Portfolio, respectively. Janus Capital may modify or terminate the waivers or reductions at any time upon at least 90 days' notice to the Portfolio's Board of Trustees. For further details on each Fund's expenses, please refer to that Fund's prospectus. 7 Surrender Charge If you surrender your Policy (in whole or in part) a surrender charge may apply, as described below. This charge is imposed in part as a deferred sales charge and in part to enable the Company to recover certain first year administrative costs. The maximum portion of the Surrender Charge applied to reimburse the Company for sales and promotional expense is 30% of the first year's Basic Premium. (Any surrenders may result in tax implications, see "Tax Matters.") The initial Surrender Charge, as specified in your Policy, is based on the Specified Amount. It also depends on the Insured's age, risk class and in most states, sex of the Insured (except for group arrangements described under "Special Plans"). Once determined, the Surrender Charge will remain the same for five years following the Issue Date. Thereafter, it declines monthly so that beginning sixteen years after the Issue Date (assuming no increases in the Specified Amount) the Surrender Charge will be zero. If you increase the Specified Amount, a new Surrender Charge will be applicable, in addition to the then existing Surrender Charge. This charge will be determined based on the Insured's Attained Age, risk class, and in most states, sex of the Insured. The Surrender Charge applicable to the increase will be 70% of the Surrender Charge on a new policy whose Specified Amount equals the amount of the increase, and will cover administrative expenses. The additional Surrender Charge will also remain constant for five years from the start of the Policy Year in which the increase occurs, and will decrease to zero by the beginning of the sixteenth year. If you decrease the Specified Amount while the Surrender Charge applies, the Surrender Charge will remain the same. Based on its actuarial determination, the Company does not anticipate that the Surrender Charge will cover all sales and administrative expenses which the Company will incur in connection with the Policy. Any such shortfall, including but not limited to payment of sales and distribution expenses, would be charged to and paid by the Company. Surrender Charges on Full and Partial Surrenders Full Surrender: All applicable Surrender Charges are imposed. Partial Surrender: A proportional percentage of all Surrender Charges is imposed. The proportional percentage is the amount of the net partial surrender divided by the sum of the Fixed Account Value and the Separate Account Value less full Surrender Charges. When a partial surrender is made, any applicable remaining Surrender Charges will be reduced in the same proportion. A transaction charge of $25 or 2% of the amount of the net surrender payment, whichever is less, will be made against the Total Account Value. (See "Partial Surrenders.") Note: The surrender charge will vary between 41% and 100% of one year's basic annual premium, depending on the Insured's age, risk class and in most states, sex of the Insured. 8 Policy Choices When you buy a Policy, you make four important choices: 1) Which one of the two Death Benefit Options you would like; 2) Whether you want the Guaranteed Death Benefit Provision, and to what age; 3) The amount of premium you intend to pay; and 4) The way your premiums will be allocated to the Funds and/or the Fixed Account. Each of these choices is described in detail below. Death Benefit At the time of purchase, you must choose between the two available Death Benefit Options. The amount payable under either option will be determined as of the date of the Insured's death. Under Option 1, the Death Benefit will be the greater of the Specified Amount (a minimum of $100,000 on the date of this Prospectus), or the applicable percentage of the Total Account Value. The percentage is 250% through age 40 and decreases yearly to 100% at age 100. Option 1 generally provides a level Death Benefit. Under Option 2, the Death Benefit will be the greater of the Specified Amount (a minimum of $100,000 on the date of this Prospectus), plus the Total Account Value, or the applicable percentage (described above) of the Total Account Value. Option 2 provides a varying Death Benefit which increases or decreases over time, depending on the amount of premium paid and the investment performance of the underlying funding options you choose. Under both Option 1 and Option 2, the Death Benefit may be affected by partial surrenders. The Death Benefit for both options will be reduced by the amount necessary to repay any loans in full. Guaranteed Death Benefit Provision The Guaranteed Death Benefit Provision assures that, as long as the Guaranteed Death Benefit Premium test, as described below, is met the Policy will stay in force even if the cash value is insufficient to cover the current Monthly Deductions. The Guaranteed Death Benefit Provision must be selected on the application. It may not be available to all risk classes and is only available in those states where it has been approved. (Note: not available in New York.) The Guaranteed Death Benefit Provision is available to age 80 or to age 100. We will test annually to determine if the cumulative (or sum of all) premiums paid to date are sufficient to support the Guaranteed Death Benefit Provision. In order for the Guaranteed Death Benefit Provision to be in effect, the cumulative premiums paid less partial surrenders must be greater than or equal to the required monthly Guaranteed Death Benefit Premium times the number of months elapsed since the Policy's Issue Date. However, if these premiums are deficient, the Policy Owner will be notified and given two months to pay the amount deficient. If the Guaranteed Death Benefit Provision to age 100 had been in place, and the amount deficient is not received within the two-month period: (1) the Guaranteed Death Benefit Provision to age 80 will be substituted, but only if the cumulative premium test is satisfied based on the Guaranteed Death Benefit Premium to age 80; or (2) the Guaranteed Death Benefit Provision to age 100 will terminate. 9 If the Guaranteed Death Benefit Provision to age 80 had been in place and the amount deficient is not received within the two-month period, the Guaranteed Death Benefit Provision will terminate. If a Guaranteed Death Benefit Provision is terminated it may not be reinstated. Increases, decreases, partial surrenders, and option changes may affect the Guaranteed Death Benefit Premium. These events and loans may also affect the Policy's ability to remain in force even if the cumulative annual Guaranteed Death Benefit Provision test has been met. Premium Payments During the first five Policy Years, payment of the Basic Premium assures that the Policy will remain in force, as long as there are no surrenders or loans taken during that time. The Basic Premium is stated in the Policy. If Basic Premiums are not paid, or there are surrenders or loans taken during the first five Policy Years, the Policy will lapse if the Cash Surrender Value is less than the next Monthly Deduction. Basic Premiums are current if premiums paid, minus loans and minus partial surrenders, are greater than or equal to the Basic Premium (expressed as a monthly amount) multiplied by the number of months the Policy has been in force. After the first five Policy Years, your Policy will not lapse as long as the Policy's Cash Surrender Value is sufficient to cover the next Monthly Deduction. Planned Premiums are those premiums you choose to pay on a scheduled basis. We will bill you annually, semiannually, or quarterly, or at any other agreed-upon frequency. Pre-authorized automatic monthly check payments may also be arranged. Additional Premiums are any premiums you pay in addition to Planned Premiums. Payment of Basic Premiums, Planned Premiums, or Additional Premiums in any amount will not, except as noted above, guarantee that your Policy will remain in force. Conversely, failure to pay Planned Premiums or Additional Premiums will not necessarily cause your Policy to lapse. Not paying your Planned Premiums can, however, cause the Guaranteed Death Benefit Provision to terminate. (See "Guaranteed Death Benefit Provision.") You may increase your Planned Premium at any time by submitting a written notice to us or by paying Additional Premiums, except that: [bullet] We may require evidence of insurability if the Additional Premium or the New Planned Premium during the current Policy Year would increase the difference between the Death Benefit and the Total Account Value. If satisfactory evidence of insurability is requested and not provided, we will refund the increase in premium without interest and without participation of such amounts in the underlying funding options. [bullet] In no event may the total of all premiums paid exceed the then-current maximum premium limitations established by federal law for a Policy to qualify as life insurance. (See "Tax Matters.") If, at any time, a premium is paid which would result in total premiums exceeding such maximum premium limitation, we will only accept that portion of the premium which will make total premiums equal the maximum. Any part of the premium in excess of that amount will be returned or applied as otherwise agreed and no further premiums will be accepted until allowed by the then-current maximum premium limitations prescribed by law. [bullet] If you make a sufficient premium payment when you apply for a Policy, and have answered favorably certain questions relating to the Insured's health, a "temporary insurance agreement" in the amount applied for (subject to stated maximum) will be provided. 10 [bullet] After the first premium payment, all premiums must be sent directly to our Home Office and will be deemed received when actually received at the Home Office. Your premium payments will be allocated as you have directed, and amounts allocated to the Funds will be credited to your Policy at the Accumulation Unit value for the Valuation Period in which each payment is received in the Home Office. [bullet] You may reallocate your future premium payments at any time free of charge. Any reallocation will apply to premium payments made after you have received written verification from us. Under limited circumstances, we may backdate a Policy, upon request, by assigning an Issue Date earlier than the date the application is signed but no earlier than six months prior to state approval of the Policy. Backdating may be desirable, for example, so that you can purchase a particular Policy Specified Amount for lower cost of insurance rates based on a younger insurance age. For a backdated Policy, you must pay the minimum premium payable for the period between the Issue Date and the date the initial premium is invested in the Separate Account. Backdating of your Policy will not affect the date on which your premium payments are credited to the Separate Account and you are credited with Accumulation Units. You cannot be credited with Accumulation Units until your net premium is actually deposited in the Separate Account. (See "Policy Values--Total Account Value.") Transfers and Allocations to Funding Options At purchase, you must decide how to allocate your Net Premiums among the Funds and/or the Fixed Account. Net Premiums must be allocated in whole percentages. Before the Maturity Date, you may transfer Policy values from one Fund to another at any time, or from Variable Life Account B to the Fixed Account. And, within the 45 days after each Policy anniversary, you may also transfer a portion of the Fixed Account Value to one or more Funds before the Maturity Date. This type of transfer is allowed only once in the 45-day period after the Policy anniversary and will be effective as of the next Valuation Period after your request is received in good order at the Company's Home Office. The amount of such transfer cannot exceed the greater of (a) 25% of the Fixed Account Value, or (b) $500. If the Fixed Account Value is less than or equal to $500, you may transfer all or a portion of the Fixed Account Value. We may increase this limit from time to time. Any transfer among the Funds or to the Fixed Account will result in the crediting and cancellation of Accumulation Units based on the Accumulation Unit values determined for the Valuation Period in which a written request is received by us at our Home Office. (See "Accumulation Unit Value.") You should carefully consider current market conditions and each Fund's investment policies and related risks before allocating money to the Funds. Telephone Transfers You may request a transfer of Account Values either in writing or by telephone. In order to make telephone transfers, a written telephone transfer authorization form must be completed by the Policyowner and returned to the Company at its Home Office. Once the form is processed, the Policyowner may request a transfer by telephoning the Company at 800-334-7586. All transfers must be in accordance with the terms of the Policy. Transfer instructions are currently accepted for each Valuation Period. Once instructions have been accepted and processed, they may not be rescinded; however, new telephone instructions may be given on the following day. If the transfer instructions are not in good order, the Company will not execute the transfer and You will be notified. We will use reasonable procedures, such as requiring identifying information from callers, recording telephone instructions, and providing written confirmation of transactions, in order to confirm that telephone 11 instructions are genuine. Any telephone instructions which We reasonably believe to be genuine will be Your responsibility, including losses arising from any errors in the communication of instructions. As a result of this procedure, the Policyowner will bear the risk of loss. If the Company does not use reasonable procedures, as described above, it may be liable for losses due to unauthorized instructions. Automated Transfers (Dollar Cost Averaging) Dollar Cost Averaging describes a system of investing a uniform sum of money at regular intervals over an extended period of time. Dollar Cost Averaging is based on the economic fact that buying a security with a constant sum of money at fixed intervals results in acquiring more of the item when prices are low and less of it when prices are high. You may establish automated transfers of Fund Account Values on a monthly or quarterly basis from the Aetna Variable Encore Fund to any other investment option through Written Request or other method acceptable to the Company. You must have a minimum of $5,000 allocated to the Aetna Variable Encore Fund in order to enroll in the Dollar Cost Averaging program. The minimum automated transfer amount is $50 per month. There is no additional charge for the program. You may start or stop participation in the Dollar Cost Averaging program at any time, but you must give the Company at least 30 days notice to change any automated transfer instructions that are currently in place. The Company reserves the right to suspend or modify automated transfer privileges at any time. Before participating in the Dollar Cost Averaging program, You should consider the risks involved in switching between investments available under the Policy. Dollar Cost Averaging requires regular investments regardless of fluctuating price levels, and does not guarantee profits or prevent losses. Therefore, You should carefully consider market conditions and each Fund's investment policies and related risks before electing to participate in the Dollar Cost Averaging program. Policy Values Total Account Value Once your Policy has been issued, each Net Premium allocated to a variable funding option of the Separate Account is credited in the form of Accumulation Units of the funding option based on that funding option's Accumulation Unit value. Each Net Premium will be credited to your Policy at the Accumulation Unit value(s) determined for the Valuation Period in which it is received and accepted by us at our Home Office following the Issue Date of the Policy. The number of Accumulation Units credited is determined by dividing the Net Premium by the value of an Accumulation Unit next computed after we receive the premium. Shares in the Funds are purchased by the Separate Account at the net asset value determined by the Fund for the Valuation Period in which the Net Premium is received by the Company. Since each Fund has a unique Accumulation Unit value, a Policy Owner who has elected a combination of funding options will have Accumulation Units credited to each funding option. The Total Account Value of your Policy is determined by: (a) multiplying the total number of Accumulation Units credited to the Policy for each applicable Fund by its appropriate current Accumulation Unit value; (b) if you have elected a combination of Funds, totaling the resulting values; and (c) adding any values attributable to the Fixed Account and any values attributable to the Loan Account Value. 12 The number of Accumulation Units credited to a Policy will not be changed by any subsequent change in the value of an Accumulation Unit. The number is increased by subsequent contributions to or transfers into that funding option, and decreased by charges and withdrawals from that funding option. The Fixed Account Value reflects amounts allocated to the General Account through payment of premiums or transfers from the Separate Account. The Fixed Account Value is guaranteed; however, there is no assurance that the Separate Account Value of the Policy will equal or exceed the Net Premiums paid and allocated to the Separate Account. You will be advised at least annually as to the number of Accumulation Units which remain credited to the Policy, the current Accumulation Unit values, the Separate Account Value, the Fixed Account Value, and the Total Account Value. Accumulation Unit Value The value of an Accumulation Unit for any Valuation Period is determined by multiplying the value of an Accumulation Unit for the immediately preceding Valuation Period by the net investment factor for the current period for the appropriate Fund. The net investment factor equals the net investment rate plus 1.0000000. The net investment rate is determined separately for each Fund as follows. The net investment rate equals (a) the net assets of the Fund held in Variable Life Account B at the end of a Valuation Period, minus (b) the net assets of the Fund held in Variable Life Account B at the beginning of that Valuation Period, plus or minus (c) taxes or provisions for taxes, if any, attributable to the operation of Variable Life Account B, divided by (d) the value of the Accumulation Units held by Variable Life Account B at the beginning of the Valuation Period, minus (e) a daily charge for mortality and expense risk, and administrative expenses. (See "Charges and Fees Associated with the Variable Funding Options.") Maturity Value The Maturity Value of the Policy is the Total Account Value on the Maturity Date, less the Loan Account Value and any unpaid accrued interest. Cash Surrender Value The Cash Surrender Value of your Policy is the amount you can receive in cash by surrendering the Policy. All or part of the Cash Surrender Value may be applied to one or more of the Settlement Options. (See "Surrender Charge.") Policy Rights Partial Surrenders A partial surrender may be made at any time after the first Policy Year. The amount of a partial surrender may not exceed the Cash Surrender Value on the date the request is received and may not be less than $500. Partial surrenders may only be made prior to election of a Settlement Option. For an Option 1 Policy (see "Death Benefit"), a partial surrender will reduce the Total Account Value, Death Benefit, and Specified Amount. The Specified Amount and Total Account Value will be reduced by equal amounts and will reduce any past increases in the reverse order in which they occurred. 13 For an Option 2 Policy (see "Death Benefit"), a partial surrender will reduce the Total Account Value and the Death Benefit, but it will not reduce the Specified Amount. Payment of any amount due from the Separate Account Values on a full or partial surrender will be made within seven calendar days after we receive your written request at our Home Office in form satisfactory to us. Payment may be postponed when the New York Stock Exchange has been closed and for such other periods as the SEC may require. Payment from the Fixed Account Values may be deferred up to 6 months, except when used to pay premiums to the Company. The Specified Amount remaining in force after a partial surrender may not be less than $100,000. Any request for a partial surrender that would reduce the Specified Amount below this amount will not be granted. In addition, if, following the partial surrender and the corresponding decrease in the Specified Amount, the Policy would not comply with the maximum premium limitations required by federal tax law, the decrease may be limited to the extent necessary to meet the federal tax law requirements. If, at the time of a partial surrender, your Total Account Value is attributable to more than one funding option, the Surrender Charge, transaction charge and the amount paid to you upon the surrender will be taken proportionately from the Accumulation Unit values in each funding option. No-Lapse Coverage Provision This Policy will not terminate during the five-year period after its Issue Date or the Issue Date of any increase if, on each Monthly Deduction Day within that period, the sum of premiums paid equals or exceeds: 1) the sum of the Basic Premiums for each Policy month from the Issue Date, including the current month; plus 2) any partial surrenders; plus 3) any increase in Loan Account Value since the Policy's Issue Date or the Issue Date of any increase. If, on each Monthly Deduction Day within the five-year period, the sum of premiums paid is less than the sum of the items 1, 2, and 3 above, and the Cash Surrender Value is insufficient to cover the current Monthly Deduction, the Grace Period provision will apply. (See "Grace Period.") After the five-year period expires, and depending on the investment performance of the Funds, the Total Account Value may be insufficient to keep this Policy in force, and payment of an additional premium may be necessary, unless the Guaranteed Death Benefit Provision has been elected. Reinstatement of a Lapsed Policy A lapse occurs if your Monthly Deduction is greater than the Cash Surrender Value and no payment to cover the deduction is made within the 61 days of our notifying you. This may happen after the first five Policy Years, or during the first five Policy Years if your Basic Premiums are not current. You can apply for reinstatement within five years after the date of termination and before the Maturity Date. To reinstate your Policy we will require satisfactory evidence of insurability and an amount sufficient to pay for the current Monthly Deduction plus two additional Monthly Deductions. If the Policy is reinstated within five years of this Policy's Issue Date or while the No-Lapse Coverage Provision (see "No-Lapse Coverage Provision") would be in effect if this Policy had not lapsed, all values including the Loan Account Value will be reinstated to the point they were on the date of lapse. However, the Guaranteed Death Benefit Provision will not be reinstated. If the Policy is reinstated after the No-Lapse Coverage Provision (see "No-Lapse Coverage Provision") has expired, this Policy will be reinstated on the Monthly Deduction Day following our approval. This Policy's Total Account Value at reinstatement will be the Net Premium paid less the Monthly 14 Deduction due that day. Any Loan Account Value will not be reinstated, and the Guaranteed Death Benefit will not be reinstated. If the Policy's Cash Surrender Value less any Loan Account Value plus accrued interest is not sufficient to cover the full Surrender Charge at the time of lapse, the remaining portion of the Surrender Charge will also be reinstated at the time of Policy reinstatement. Policy Loans: Preferred and Nonpreferred Unless otherwise required by state law, the maximum loan amount is 90% of the Cash Surrender Value at the time of a loan. Loans taken during the first ten Policy Years are considered nonpreferred loans. Beginning in the eleventh Policy Year, up to 10% of the maximum loan amount available at the beginning of a Policy Year can be taken as a preferred loan during that Policy Year. Amounts borrowed that are in excess of the maximum loan amount available for a preferred loan will be considered a nonpreferred loan. An amount equal to what you receive for a loan, together with any interest added to the loan for due and unpaid interest, as described below, will be added to the Loan Account Value. If you are using more than one underlying funding option, the amount of the loan will be withdrawn in proportion to the value of each funding option. Interest on loans will accrue at an annual rate which will be the greater of: 1) The monthly average (i.e., the Composite Yield on Corporate Bonds as published by Moody's Investors Service, Inc.) for the calendar month which ends two months before the month in which the Policy Anniversary occurs, or 2) 5.5%. Increases or decreases to the current interest rate will occur only when the new Policy Year's annual interest rate is greater or lower than the prior Policy Year's annual interest rate by at least 0.5%. We will notify you of the current interest rate charged for a loan at the time a loan is made. If your Policy has a loan outstanding, we will notify you of any change in the interest rate before the new rate becomes effective. Interest is payable once a year on each anniversary of the loan, or earlier upon surrender, payment of proceeds, or maturity of a Policy. Any interest not paid when due becomes part of the loan and bears interest. An amount equal to what you receive for a loan, together with any accrued but not paid interest, will be added to the Loan Account Value. We will credit interest on the Loan Account Value. The Loan Account Value for nonpreferred loans will be credited interest, during any Policy Year, at an annual rate that is the interest rate charged on the loan minus 2%. However, in no case will the credited interest rate be less than 4.5% annually. The Loan Account Value on preferred loans will be credited interest at a rate equal to the interest rate charged. In no case will the credited interest rate be less than 5.5% annually. If a policy loan is requested, the amount to be borrowed will be withdrawn by the Company from the funding options and Fixed Account Value in proportion to the value of the Policy attributable to each funding option and the Fixed Account. Repayments on the loan will be allocated among the funding options in the same proportion the loan was taken from the funding options. The Loan Account Value will be reduced by the amount of any loan repayment. 15 Policy Changes You may make changes to your Policy, as described below, by submitting a written request to our Home Office in form satisfactory to us. Increases: Beginning in the second Policy Year, you may increase the Specified Amount of your Policy subject to the following conditions: [bullet] Satisfactory evidence of insurability may be required. [bullet] The Cash Surrender Value at the time of an increase must be at least three times the sum of (a) the most recent Monthly Deduction from the Total Account Value and (b) the amount of the increase, divided by 1000, times the applicable Cost of Insurance Rate. [bullet] An increase in the Specified Amount will increase the Surrender Charge. [bullet] The Basic Monthly Premium will be increased when the Specified Amount is increased. The Policy will not terminate within five years of the Issue Date of the increase if the conditions of this provision and the No-Lapse Coverage Provision are met. [bullet] Increases through the fifth year are limited to four times the initial Specified Amount. [bullet] Increases in the Specified Amount will increase the Guaranteed Death Benefit Provision amount and will affect the Guaranteed Death Benefit Premium. Decreases: Beginning in the sixth Policy Year decreases will be allowed, however: [bullet] No decrease may reduce the Specified Amount to less than the minimum for this type of policy. (See Death Benefit.) [bullet] Any decrease will cause a decrease in the Guaranteed Death Benefit Provision. Death Benefit Option Change: A Death Benefit Option change will be allowed, subject to the following conditions: [bullet] The change will take effect on the Monthly Deduction Day on or next following the date on which the Company receives your written request. [bullet] There will be no change in the Surrender Charge, and evidence of insurability may be required. [bullet] We will not allow a change in the Death Benefit Option if the Specified Amount will be reduced below the minimum Specified Amount. [bullet] Changes from Option 1 to Option 2 are allowed beginning in the sixth Policy Year. The new Specified Amount will equal the Specified Amount less the Total Account Value at the time of the change.* [bullet] Changes from Option 2 to Option 1 are allowed after the first Policy Year. The new Specified Amount will equal the Specified Amount plus the Total Account Value as of the time of the change.* *Changes in the Death Benefit Option also affect the Guaranteed Death Benefit Provision amount and the Guaranteed Death Benefit Premium. Right to Examine the Policy The Policy has a free-look period during which you may examine the Policy. If for any reason you are dissatisfied, it may be returned to our Home Office for a refund. It must be returned within ten days (state variations may apply) after you receive the Policy and the written notice of withdrawal right, or within 45 days after you sign the application for the Policy, whichever occurs latest. If you 16 return (cancel) the Policy, we will pay a refund of (1) the difference between payments made and amounts allocated to the Separate Account, plus (2) the value of the amount allocated to the Separate Account as of the date the returned Policy is received by us, plus (3) any fees imposed on the amounts allocated to the Separate Account. If state law does not permit such a refund, then the refund will equal premiums paid, without interest. Refunds will usually occur within seven days of notice of cancellation, although a refund of premiums paid by check may be delayed until the check clears your bank. Death Benefit The Death Benefit under the Policy will be paid in a lump sum within seven days after we receive due proof of the Insured's death (a certified copy of the death certificate), unless you or the beneficiary have elected that it be paid under one or more of the Settlement Options. (See "Settlement Options.") Payment of the Death Benefit may be delayed if the Policy is being contested. While the Insured is living, you may elect a Settlement Option for the beneficiary and deem it irrevocable. You may revoke or change a prior election. The beneficiary may make or change an election within 90 days of the death of the Insured, unless you have made an irrevocable election. A beneficiary who has elected Settlement Option 1 may elect another option within two years after the Insured's death. All or a part of the Death Benefit may be applied under one or more of the Settlement Options, or such options as we may choose to make available in the future. If the Policy is assigned as collateral security, we will pay any amount due the assignee in one lump sum. Any excess Death Benefit due will be paid as elected. Policy Settlement Proceeds in the form of Settlement Options are payable by the Company upon the Insured's death, upon Maturity of the Policy, or upon election of one of the following Settlement Options or any we make available (after any applicable Surrender Charges have been deducted). A written request may be made to elect, change, or revoke a Settlement Option before payments begin under any Settlement Option. This request must be in form satisfactory to us, and will take effect upon its filing at our Home Office. If no Settlement Option has been elected by the Policy Owner when the Death Benefit becomes payable to the beneficiary, that beneficiary may make the election. The first variable Settlement Option payment will be as of the tenth Valuation Period following our receipt of the properly completed election form. Settlement Options Option 1 -- Payment of interest on the sum left with us; Option 2 -- Payments for a stated number of years, at least three but no more than thirty; Option 3 -- Payments for the lifetime of the Annuitant. If also chosen, we will guarantee payments for 60, 120, 180, or 240 months; 17 Option 4 -- Payments during the joint lifetimes of two Annuitants. At the death of either, payments will continue to the survivor. When this option is chosen, a choice must be made of: a) 100% of the payment to continue to the survivor; b) 66-2/3% of the payment to continue to the survivor; c) 50% of the payment to continue to the survivor; d) Payments for a minimum of 120 months, with 100% of the payment to continue to the survivor; e) 100% of the payment to continue to the survivor if the survivor is the Annuitant, and 50% of the payment to continue to the survivor if the survivor is the Second Annuitant. In most states, no election may be made that would result in a first payment of less than $25 or that would result in total yearly payments of less than $120. If the value of the Policy is insufficient to elect an option for the minimum amount specified, a lump-sum payment must be elected. Proceeds applied under Option 1 will be held by us in the General Account. Proceeds in the General Account will be used to make payments on a fixed-dollar basis. We will add interest to such proceeds at an annual rate of not less than 3%. We may add interest daily at any higher rate. Under Option 1, the Annuitant may later tell the Company to (a) pay to him or her a portion or all of the sum held by the Company; or (b) apply a portion or all of the sum held by the Company to another Settlement Option. Proceeds applied under Options 2, 3 and 4 will be held (a) in the General Account; or (b) in Variable Annuity Account B, invested in one or more of the available investment options, or (c) a mix of (a) and (b). Proceeds held in Variable Annuity Account B will be used to make payments on a variable basis. If payments are to be funded on a variable basis (by the Funds), the first and subsequent payments will vary depending on the Assumed Net Investment Rate. This rate will be 3% per year, unless a 5% annual rate is chosen. The Assumed Net Investment Rate is chosen by the payee. Selection of a 5% rate causes a higher first payment, but subsequent payments will increase only to the extent the actual net investment rate exceeds 5% on an annualized basis, and they will decline if the rate is less than 5%. Use of the 3% Assumed Net Investment Rate causes a lower first payment, but subsequent payments will increase more rapidly or decline more slowly as changes occur in the actual net investment rate. The investment performance of the underlying funding option(s) must equal such assumed rate, plus enough to cover the mortality and expense risk and administrative fee charges, if future payments on a variable basis are to remain level. If payments on a variable basis are not to decrease, gross return on the assets of the underlying funding option must be: a) 4.75% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge in effect at the time Settlement Option payments start, if an Assumed Net Investment Rate of 3% is chosen; or b) 6.25% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge in effect at the time Settlement Option payments start, if an Assumed Net Investment Rate of 5% is chosen. Option 2, 3 or 4 may be chosen on a fixed-dollar basis. However, if the guaranteed payments are less than the payments which would be made from the purchase of the Company's current single premium immediate annuity, the larger payment will be made instead. 18 As to funds held under Option 1, the Annuitant may elect to make a withdrawal or to change options. Under Option 2, if payments are made on a variable basis, the current value may be withdrawn at any time. Amounts held in the Fixed Account may not be withdrawn under Option 2. No withdrawals or changes of option may be made under Options 3 and 4. When an Annuitant dies while receiving payments under Option 2, 3 or 4, the present value of any remaining guaranteed payments will either be paid in one sum to the Annuitant's beneficiary, or upon election by that beneficiary, any remaining guaranteed payments will continue to that beneficiary. If no beneficiary exists, the present value of any remaining guaranteed payments will be paid in one sum to the Annuitant's estate. If the Annuitant dies while receiving payments under Option 1, the current value of the Option will be paid in one sum to the beneficiary, or to the Annuitant's estate. If the Annuitant's beneficiary dies (and there is no contingent beneficiary), while receiving payments, the current value of the account (Option 1), or the present value of any remaining guaranteed payments will be paid in one sum to the estate of that beneficiary. The interest rate used to determine the first payment will be used to calculate the present value. Calculation of Settlement Payments When you have chosen payment on a variable basis, the first payment is calculated as follows: a) the portion of the proceeds applied to make payments on the variable basis; divided by b) 1,000; times c) the payment rate per $1000 of proceeds for the option chosen as shown in the policy. Such amount, or portion, of the variable payment will be divided by the Settlement Option Unit value (described below), as of the tenth Valuation Period before the due date of the first payment, to determine the number of Settlement Option Units. Each future payment is equal to the number of Settlement Option Units, times the Settlement Option Unit value as of the tenth Valuation Period prior to the due date of the payment. For any Valuation Period, the Fund(s) Settlement Option Unit value is equal to: a) The Settlement Option Unit value for the previous Valuation Period; times b) The Net Return Factor (as defined below) for the Valuation Period; times c) A factor to reflect the Assumed Net Investment Rate. The factor for 3.5% per year is 0.9999058; for 5% per year, it is 0.9998663. The Net Return Factor equals: 1) The net assets of the applicable fund held in Variable Annuity Account B at the end of a Valuation Period; minus 2) The net assets of the applicable fund held in Variable Annuity Account B at the beginning of that Valuation Period; plus or minus 3) Taxes or provision for taxes, if any, attributable to the operations of Variable Annuity Account B; divided by 4) The value of Settlement Option Units and other accumulation units held in Variable Annuity Account B at the beginning of the Valuation Period; minus 5) A daily charge at an annual rate of 1.25% for annuity mortality and expense risk and the then-current daily administrative expense charge. 19 The number of Settlement Option Units remains fixed. However, the dollar value of the Settlement Option Unit values and the payment may increase or decrease due to investment gain or loss. Payments will not be affected by changes in the mortality or expense results or administrative expense charges. Special Plans Where allowed by law, the Company may reduce or eliminate certain charges for Policies issued under special circumstances that result in lower expenses to the Company (i.e., group arrangements with a sponsoring employer). The amount of any reduction, the charges to be reduced, and the criteria for applying a reduction will reflect the reduced sales effort, costs and differing mortality experience appropriate to the circumstances giving rise to the reduction. The charges will be reduced in accordance with the Company's practice in effect when the Policies are issued. Reductions will not be unfairly discriminatory against any person, including the purchasers to whom the reduction applies and all other owners of the Policies. The Company offers Policies on a unisex and simplified underwriting basis to certain group or sponsored arrangements. A "group arrangement" includes a program under which an employer purchases individual Policies covering a group of individuals on a group basis. A "sponsored arrangement" includes a program under which an employer permits group solicitation of its employees for the purchase of the Policies on an individual basis. Under both arrangements, the employer pays all or part of the premium. The benefits and values of these Policies do not vary based on the sex of the insured in order to be used by employers in employee benefit plans where sex discrimination is prohibited by federal or state laws. The Company recommends that any employer proposing to offer the Policies to employees under either arrangement consult its attorney before doing so. The Company Aetna Life Insurance and Annuity Company (the "Company") is a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company organized in 1954). The Company is engaged in the business of issuing life insurance policies and annuity contracts in all states of the United States. The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc. and an indirect wholly owned subsidiary of Aetna Inc. The Company is registered as an investment adviser under the Investment Advisers Act of 1940. It is also registered as a broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. 20 Directors & Officers
Name and Address* Position with Company Business Experience During Past 5 Years - ------------------ --------------------- --------------------------------------- Daniel P. Kearney Director, President and Chairman, President (since December 1993), Aetna Life Executive Committee (Principal Insurance and Annuity Company; Executive Vice Executive Officer) President (since December 1993), and Group Executive, Financial Division (February 1991--December 1993), Aetna Life and Casualty Company. Christopher J. Burns Director and Senior Vice President, Chief Operations officer (since November President 1996), Aetna Investment Services, Inc.; Senior Vice President, Sales & Service (since February 1996), and Senior Vice President, Life (March 1991-- February 1996), Aetna Life Insurance and Annuity Company. Laura R. Estes Director and Senior Vice Senior Vice President, Manage/Design Products and President Services (since February 1996), and Senior Vice President, Pensions (March 1991--February 1996), Aetna Life Insurance and Annuity Company. J. Scott Fox Director and Senior Vice Senior Vice President, Operations (since March President 1997), Aetna Life Insurance and Annuity Company; Managing Director, Chief Operating Officer, Chief Financial Officer, Treasurer (April 1994--March 1997), Aeltus Investment Management, Inc.; Managing Director and Treasurer (March 1987--September 1993), Equitable Capital Management Corporation. Timothy A. Holt Director, Senior Vice President Senior Vice President, Strategy & Finance, and Chief and Chief Financial Officer Financial Officer (since February 1996), Aetna Life Insurance and Annuity Company; Vice President, Portfolio Management/Investment Group (August 1992--February 1996), Aetna Life and Casualty Company. 21 Name and Address* Position with Company Business Experience During Past 5 Years - ------------------ --------------------- --------------------------------------- Gail P. Johnson Director and Vice President Vice President, Service and Retain Customers (since February 1996); Vice President, Defined Benefit Services (September 1994--February 1996); Vice President, Plan Services, Pensions and Financial Services (December 1992-- September 1994); Managing Director, Business Strategy (July 1991--December 1992). John Y. Kim Director and Senior Vice President (since December 1995), Aeltus Investment President Management, Inc.; Chief Investment Officer (since May 1994), Aetna Life and Casualty Company; Managing Director (September 1993-- April 1994), Mitchell Hutchins Institutional Investors (New York, New York); Vice President and Senior Portfolio Manager (October 1991--August 1993), Aetna Services, Inc. (formerly Aetna Life and Casualty Company). Shaun P. Mathews Director and Vice President Vice President, Products Group (since February 1996); Senior Vice President, Strategic Markets and Products (February 1993--February 1996); Senior Vice President, Mutual Funds (March 1991-- February 1993), Aetna Life Insurance and Annuity Company. Glen Salow Director and Vice President Vice President, Information Technology (since February 1996), Vice President, Information Technology, Investments and Financial Services (February 1995-- February 1996); Vice President, Investment Systems (1992--1995), AIT--Aetna Life Insurance and Annuity Company; Senior Vice President (December 1986--August 1992), Lehman Brothers. Creed R. Terry Director and Vice President Vice President, Select and Manage Markets (since February 1996), Market Strategist (August 1995--February 1996), Aetna Life Insurance and Annuity Company; President (1991--1995), Chemical Technology Corporation (a subsidiary of Chemical Bank). 22 Name and Address* Position with Company Business Experience During Past 5 Years - ------------------ --------------------- --------------------------------------- Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and Secretary (since and Secretary November 1996), Aetna Life Insurance and Annuity Company; Vice President and Counsel (June 1992-- November 1996), Aetna Life Insurance Company. Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and Financial Corporate Controller Reporting (April 1996 to July 1996), Aetna Life Insurance Company; Vice President, Investment Planning and Financial Reporting (October 1994 to April 1996) Aetna Life Insurance Company, The Aetna Casualty and Surety Company and The Standard Fire and Insurance Company. Frederick D. Kelsven Vice President and Chief Director of Compliance (January 1985 to September Compliance Officer 1996), Nationwide Life Insurance Company. *The address of all Directors and Officers listed is 151 Farmington Avenue, Hartford, Connecticut. These individuals may also be directors and/or officers of other affiliates of the Company. Directors, officers and employees of the Company are covered by a blanket fidelity bond in the amount of $60 million issued by Aetna Casualty and Surety Company.
Additional Information Reports to Policy Owners Within 30 days after each Policy Anniversary and before proceeds are applied to a Settlement Option, we will send you a report containing the following information: 1) A statement of changes in the Total Account Value and Cash Surrender Value since the prior report or since the Issue Date, if there has been no prior report. This includes a statement of monthly deductions and investment results and any interest earnings for the report period; 2) Cash Surrender Value, Death Benefit, and any Loan Account Value as of the Policy Anniversary; 3) A projection of the Total Account Value, Loan Account Value and Cash Surrender Value as of the succeeding Policy Anniversary. If you have Policy values funded in either Separate Account you will receive such additional periodic reports as may be required by the SEC. Some state laws require additional reports; these requirements vary from state to state. Right to Instruct Voting of Fund Shares In accordance with our view of present applicable law, we will vote the shares of each of the Funds held in each Separate Account. The votes will be cast at meetings of the shareholders of the Fund and will be based on instructions received from Policy Owners. However, if the Investment Company Act 23 of 1940 or any regulations thereunder should be amended or if the present interpretation thereof should change, and as a result we determine that we are permitted to vote the shares of the Fund in our own right, we may elect to do so. The number of votes each Policy Owner is entitled to direct with respect to a Fund will be determined by dividing the portion of Total Account Value attributable to a Fund, if any, by the net asset value of one share in the Fund. During the settlement option period, the number of votes is determined by dividing the Valuation Reserve attributable in the Fund, if any, by the net asset value of one share of the Fund. Fractional votes will be counted. Where the value of the Total Account Value or the Valuation Reserve relates to more than one Fund, the calculation of votes will be performed separately for each Fund. The number of shares which a person has a right to vote will be determined as of a date to be chosen by us, but not more than 90 days before the meeting of the Fund. Voting instructions will be solicited by written communication at least 14 days before such meeting. Fund shares for which no timely instructions are received, and Fund shares which are not otherwise attributable to Policy Owners, will be voted by us in the same proportion as the voting instructions which are received for all Policies participating in each Fund through Variable Life Account B. Policy Owners having a voting interest will receive periodic reports relating to the Fund, proxy material and a form for giving voting instructions. Disregard of Voting Instructions We may, when required by state insurance regulatory authorities, disregard voting instructions if the instructions require that the shares be voted so as to cause a change in the sub-classification or investment objectives of a Fund or to approve or disapprove an investment advisory contract for a Fund. In addition, we may disregard voting instructions in favor of changes initiated by a Policy Owner in the investment policy or the investment adviser of the Fund if we reasonably disapprove of such changes. A change would be disapproved only if the proposed change is contrary to state law or prohibited by state regulatory authorities or we determined that the change would have an adverse effect on the Separate Accounts in that the proposed investment policy for a Fund may result in overly speculative or unsound investments. In the event we do disregard voting instructions, a summary of that action and the reasons for such action will be included in the next annual report to Policy Owners. State Regulation We are subject to regulation and supervision by the Insurance Department of the state of Connecticut, which periodically examines our affairs. We are also subject to the insurance laws and regulations of all jurisdictions where we are authorized to do business. The Policies have been approved by the Insurance Department of the state of Connecticut and in other jurisdictions. We are required to submit annual statements of our operations, including financial statements, to the insurance departments of the various jurisdictions in which we do business, for the purposes of determining solvency and compliance with local insurance laws and regulations. Legal Matters The Company knows of no material legal proceedings pending to which the Separate Account is a party or which would materially affect the Separate Account. 24 The legal validity of the securities described in the prospectus has been passed on by Counsel for the Company. The Registration Statement A Registration Statement under the Securities Act of 1933 has been filed with the Securities and Exchange Commission relating to the offering described in this Prospectus. This Prospectus does not include all the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The omitted information may be obtained at the SEC's principal office in Washington, D.C., upon payment of the SEC's prescribed fees. The Policies are offered for sale in all jurisdictions where we are authorized to do business except Guam, Puerto Rico, and the Virgin Islands. Distribution of the Policies The Company will serve as underwriter of the securities offered hereunder as defined by the federal securities laws. The Company is registered as a broker-dealer with the SEC and is a member of the National Association of Securities Dealers, Inc. ("NASD"). The Company will contract with one or more registered broker-dealers including broker-dealers affiliated with it ("Distributors") to offer and sell the Policies. The Company may also offer and sell policies directly. All persons selling the Policies will be registered representatives of the Distributors, and will also be licensed as insurance agents to sell variable life insurance. The maximum commission payable by the Company to salespersons and their supervising broker-dealers for policy distribution is 55% of the Guaranteed Death Benefit Premium to age 80, or, in the event of an increase in the Specified Amount, 55% of the Guaranteed Death Benefit Premium to age 80, attributable to the increase. In particular circumstances, we may also pay certain of these professionals for their administrative expenses. In addition, some sales personnel may receive various types of non-cash compensation as special sales incentives, including trips and educational and/or business seminars. Supervisory and other management personnel of the Company may receive compensation that will vary based on the relative profitability to the Company of the funding options you select. Funding options that invest in Funds advised by the Company or its affiliates are generally more profitable to the Company. The Company may also contract with independent third party broker-dealers who will act as wholesalers by assisting the Company in finding broker-dealers to offer and sell the Policies. These parties may also provide training, marketing and other sales related functions for the Company and other broker-dealers and may provide certain administrative services to the Company in connection with the Policies. The Company may pay such parties compensation based on premium payments for the Policies purchased through broker-dealers selected by the wholesaler. Records and Accounts All records and accounts relating to the Separate Accounts and the Funds will be maintained by the Company. All reports required to be made and information required to be given will be provided by the Company. Independent Auditors KPMG Peat Marwick LLP, City Place 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. 25 Tax Matters General The following is a discussion of the federal income tax considerations relating to the Policy. This discussion is based on the Company's understanding of federal income tax laws as they now exist and are currently interpreted by the Internal Revenue Service ("IRS"). These laws are complex, and tax results may vary among individuals. A person or persons contemplating the purchase of or the exercise of elections under the Policy described in this Prospectus should seek competent tax advice. Federal Tax Status of the Company The Company is taxed as a life insurance company in accordance with the Internal Revenue Code of 1986, as amended ("Code"). For federal income tax purposes, the operations of the Separate Account form a part of the Company's total operations and are not taxed separately, although operations of the Separate Account are treated separately for accounting and financial statement purposes. Both investment income and realized capital gains of the Separate Account (i.e., income, capital gains and dividends distributed to the Separate Account by the Funds) are reinvested without tax since the Code does not impose a tax on the Separate Account for these amounts. The Company reserves the right, however, to make a deduction for such taxes should they be imposed with respect to such items in the future. Life Insurance Qualification Section 7702 of the Code includes a definition of life insurance for tax purposes. These rules generally place limits on the amount of premiums payable under the contract and the level of cash surrender value. In no event may the total of all premiums paid exceed the then-current maximum premium limitations established by federal law for a Policy to qualify as life insurance. If, at any time, a premium is paid which would result in total premiums exceeding such maximum premium limitation, we will only accept that portion of the premium which will make total premiums equal the maximum. Any part of the premium in excess of that amount will be returned or applied as otherwise agreed and no further premiums will be accepted until allowed by the then-current maximum premium limitations prescribed by law. The Secretary of the Treasury has been granted authority to prescribe regulations to carry out the purposes of Section 7702, and proposed regulations governing mortality charges were issued in 1991. The Company believes that the Policy meets the statutory definition of life insurance. As such, and assuming the diversification standards of Section 817(h) (discussed below) are satisfied, then except in limited circumstances (a) death benefits paid under the Policy should generally be excluded from the gross income of the beneficiary for federal income tax purposes under Section 101(a)(1) of the Code, and (b) a Policyowner should not generally be taxed on the cash value under a Policy, including increments thereof, prior to actual receipt. The principal exceptions to these rules are corporations that are subject to the alternative minimum tax, and thus may be subject to tax on increments in the Policy's Total Account Value, and Policyowners who acquire a Policy in a "transfer for value" and thus can become subject to tax on the portion of the Death Benefit which exceeds the total of their cost of acquisition and subsequent premium payments. The Company intends to comply with any future final regulations issued under Sections 7702 and 817(h) of the Code, and therefore reserves the right to make such changes as it deems necessary to ensure such compliance. Any such changes will apply uniformly to affected Policyowners and will be made only after advance written notice. 26 General Rules Upon the surrender or cancellation of any Policy, whether or not it is a Modified Endowment Contract, the Policyowner will be taxed on the Surrender Value only to the extent that it exceeds the gross premiums paid less prior untaxed withdrawals. The amount of any unpaid Policy Loans will, upon surrender, be added to the Surrender Value and will be treated for this purpose as if it had been received. Assuming the Policy is not a Modified Endowment Contract, the proceeds of any Partial Surrenders are generally not taxable unless the total amount received due to such surrenders exceeds total premiums paid less prior untaxed Partial Surrender amounts. However, Partial Surrenders made within the first 15 Policy Years may be taxable in certain limited instances where the Surrender Value plus any unpaid Policy debt exceeds the total premiums paid less the untaxed portion of any prior Partial Surrenders. This result may occur even if the total amount of any Partial Surrenders does not exceed total premiums paid to that date. Loans received under the Policy will ordinarily be considered indebtedness of the Policy Owner, and assuming the Policy is not considered a Modified Endowment Contract, Policy Loans will not be treated as current distributions subject to tax. Generally, amounts of loan interest paid by individuals will be considered nondeductible "personal interest." Modified Endowment Contracts A class of contracts known as "Modified Endowment Contracts" has been created under Section 7702A of the Code. The tax rules applicable to loan proceeds and proceeds of a Partial Surrender of any Policy that is considered to be a Modified Endowment Contract will differ from the general rules noted above. A contract will be considered a Modified Endowment Contract if it fails the "7-pay test." A Policy fails the 7-pay test if, at any time in the first seven Policy Years, the amount paid into the Policy exceeds the amount that would have been paid had the Policy provided for the payment of seven (7) level annual premiums. In the event of a distribution under the Policy, the Company will notify the Policy Owner if the Policy is a Modified Endowment Contract. Each Policy is subject to testing under the 7-pay test during the first seven Policy Years and at any time a material change takes effect. A material change, for these purposes, includes the exchange of a life insurance policy for another life insurance policy or the conversion of a term life insurance policy into a whole life or universal life insurance policy. In addition, an increase in the future benefits provided constitutes a material change unless the increase is attributable to (1) the payment of premiums necessary to fund the lowest Death Benefit payable in the first seven Policy Years or (2) the crediting of interest or other earnings with respect to such premiums. A reduction in death benefits during the first seven Policy Years may also cause a Policy to be considered a Modified Endowment Contract. If the Policy is considered to be a Modified Endowment Contract, the proceeds of any Partial Surrenders and any Policy Loans will be currently taxable to the extent that the Policy's Total Account Value immediately before payment exceeds gross premiums paid (increased by the amount of loans previously taxed and reduced by untaxed amounts previously received). These rules may also apply to Policy Loans or Partial Surrender proceeds received during the two-year period prior to the time that a Policy becomes a Modified Endowment Contract. If the Policy becomes a Modified Endowment Contract, it may be aggregated with other Modified Endowment Contracts purchased by you from the Company (and its affiliates) during any one calendar year for purposes of determining the taxable portion of withdrawals from the Policy. 27 A penalty tax equal to 10% of the amount includable in income will apply to the taxable portion of the proceeds of any Policy Surrender or Policy Loan received by any Policy Owner of a Modified Endowment Contract who is not an individual. The penalty tax will also apply where taxable Policy Loans are received by an individual who has not reached the age of 59-1/2. Taxable policy distributions made to an individual who has not reached the age of 59-1/2 will also be subject to the penalty tax unless those distributions are attributable to the individual becoming disabled, or are part of a series of equal periodic payments made not less frequently than annually for the life or life expectancy of such individual (i.e., an annuity). Diversification Standards Section 817(h) of the Code provides that separate account investments (or the investments of a mutual fund, the shares of which are owned by separate accounts of insurance companies) underlying the Policy must be "adequately diversified" in accordance with Treasury regulations in order for the Policy to qualify as life insurance. The Treasury Department has issued regulations prescribing the diversification requirements in connection with variable contracts. The Separate Account, through the Funds, intends to comply with these requirements. Investor Control In certain circumstances, owners of variable contracts may be considered the owners for federal income tax purposes of the assets of the separate account used to support their contracts. In those circumstances, income and gains from separate account assets would be includable in the variable contractowner's gross income. In several rulings published prior to the enactment of Section 817(h), the IRS stated that a variable contractowner will be considered the owner of separate account assets if the contractowner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury Department has also announced, in connection with the issuance of regulations under Section 817(h) concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor (i.e., you), rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular Funds without being treated as owners of the underlying assets." As of the date of this Prospectus, no such guidance has been issued. The ownership rights under the Policy are similar to, but different in certain respects from those described by the IRS in pre-Section 817(h) rulings in which it was determined that Policy Owners were not owners of separate account assets. For example, a Policy Owner has additional flexibility in allocating premium payments and account values. While the Company does not believe that these differences would result in a Policy Owner being treated as the owner of a pro rata portion of the assets of the Separate Account, there is no regulation or ruling of the IRS that confirms this conclusion. In addition, the Company does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. The Company therefore reserves the right to modify the Policy as necessary to attempt to prevent a Policy Owner from being considered the owner of a pro rata share of the assets of the Separate Account. Other Tax Considerations Business-owned life insurance may be subject to certain additional rules. Section 264(a)(1) of the Code generally prohibits employers from deducting premiums on policies covering officers, employees or other financially interested parties where the employer is a beneficiary under the Policy. Additions to the Policy's Total Account Value may also be subject to tax under the corporation alternative minimum tax provisions. 28 In addition, Section 264(a)(4) of the Code limits the Policy Owner's deduction for interest on loans taken against life insurance covering the lives of officers, employees, or other financially interested in the Policy Owner's trade or business. Under current tax law, interest may generally be deducted on an aggregate total of $50,000 of loans per covered life only with respect to life insurance policies covering each officer, employee or others who may have a financial interest in the Policy Owner's trade or business. Depending on the circumstances, the exchange of a policy, a change in the Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a change in Ownership or an assignment of the Policy may have federal income tax consequences. In addition, federal, state and local transfer, estate, inheritance and other tax consequences of policy ownership, premium payments and receipt of policy proceeds depend on the circumstances of each Policy Owner or beneficiary. Misc. Policy Provisions The Policy The Policy which you receive and the application you make when you purchase the Policy are the whole contract. A copy of the application is attached to the Policy when it is issued to you. An application for changes, once approved by us, will become part of the Policy. Application forms are completed by the applicant and forwarded to the Company for acceptance. Upon acceptance, the Policy is prepared, executed by duly authorized officers of the Company, and forwarded to the Policy Owner. Payment of Benefits All benefits are payable at our Home Office. We may require submission of the Policy before we grant loans, make changes or pay benefits. Age and Sex If age or sex is misstated on the application, the amount payable on death will be that which would have been purchased by the most recent monthly deduction at the correct age and sex. (If the application is taken in a state or under an agreement where unisex rates are used, the Insured's sex is inapplicable.) Incontestability We will not contest coverage under the Policy after the Policy has been in force during the lifetime of the Insured for a period of two years from the Policy Issue Date. Our right to contest coverage is not affected by the Guaranteed Death Benefit Provision. For coverage which takes effect on a later date (e.g., an increase in coverage), we will not contest such coverage after it has been in force during the lifetime of the Insured more than two years from its effective date. Suicide In most states, if the Insured commits suicide within two years from the Issue Date, the only benefit paid will be the sum of: a) premiums paid less amounts allocated to the Separate Account; and 29 b) the Separate Account Value on the date of suicide, plus the portion of the Monthly Deduction from the Separate Account Value, minus c) the amount necessary to repay any loans in full and any interest earned on the Loan Account Value transferred to the Separate Account Value, and any surrenders from the Fixed Account. If the Insured commits suicide within two years from the effective date of any increase in coverage, we will pay as a benefit only the Monthly Deduction for the increase, in lieu of the face amount of the increase. All amounts described in (a) and (c) above will be calculated as of the date of death. Coverage Beyond Maturity You may, by written request, in the 30 days before the Maturity Date of this Policy, elect to continue coverage beyond the Maturity Date. At Age 100, the Separate Account Value will be transferred to the Fixed Account. If coverage beyond maturity is elected, we will continue to credit interest to the Total Account Value of this Policy. Monthly Deductions will be calculated with a Cost of Insurance rate equal to zero (this provision is not available in New York). At this time, uncertainties exist regarding the tax treatment of the Policy should it continue beyond the Maturity Date. You should therefore consult with your tax advisor prior to making this election. (See "Tax Matters.") Protection of Proceeds To the extent provided by law, the proceeds of the Policy are subject neither to claims by a beneficiary's creditors nor to any legal process against any beneficiary. Nonparticipation The Policy is not entitled to share in the divisible surplus of the Company. No dividends are payable. 30 ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND CASH SURRENDER VALUES The tables on the following pages illustrate how the Death Benefit, Total Account Values, and Cash Surrender Values of a Policy change with the investment experience of the Funds. The tables show how the Death Benefit, Total Account Values, and Cash Surrender Values of a Policy issued to an insured of a given age and a given premium would vary over time if the investment return on the assets held in each Fund were a uniform, gross, annual rate of 0%, 6%, and 12%, respectively. Tables I through IV illustrate Policies issued to males, age 45, in the preferred nonsmoker rate class and Policies issued on a unisex basis according to the Special Plans section of this Prospectus for both males and females, age 45, in the preferred nonsmoker rate class. Tables V through VIII illustrate Policies issued on a unisex basis, age 45, in the preferred nonsmoker rate class for contracts issued in states where unisex rates are required. The Death Benefit, Total Account Values, and Cash Surrender Values would be different from those shown if the gross annual investment rates of return averaged 0%, 6%, and 12%, respectively, over a period of years, but fluctuated above and below those averages for individual Policy Years. The second column of each table shows the accumulated values of the premiums paid at an assumed interest rate of 5%. The third through fifth columns illustrate the Death Benefit of a Policy over the designated period. The sixth through eighth columns illustrate the Total Account Values, while the ninth through the eleventh columns illustrate the Cash Surrender Values of each Policy over the designated period. Tables I, II, V and VI assume that the maximum Cost of Insurance allowable under the Policy are charged in all Policy Years. These tables also assume that the maximum allowable mortality and expense risk charge of 0.90% on an annual basis, the maximum allowable administrative expense charge of 0.50% on an annual basis, and the maximum allowable premium load of 6% are assessed in each Policy Year. Tables III, IV, VII and VIII assume that the current scale of Cost of Insurance Rates applies during all Policy Years. These tables also assume that the current mortality and expense risk charge of 0.70% on an annual basis, the current administrative expense charge of 0.30% on an annual basis, and the current premium load of 3.5% are assessed. The amounts shown for Death Benefit, Cash Surrender Values, and Total Account Values reflect the fact that the net investment return is lower than the gross return on the assets held in each Fund as a result of expenses paid by each Fund and other charges levied by the Separate Account. The investment advisory fees and other Fund expenses vary by Fund from 0.35% to 1.05%. A weighted average has been used for the illustrations assuming that the Policyowner has invested in the Funds as follows: 56% in Aetna Variable Fund; 6% in Aetna Income Shares; 4% in Aetna Variable Encore Fund; 7% in Aetna Investment Advisers Fund; 0% in the Aetna Ascent Variable Portfolio; 0% in the Aetna Crossroads Variable Portfolio; 0% in the Aetna Legacy Variable Portfolio; 5% in the Alger American Small Capitalization Portfolio; 4% in American Century VP Capital Appreciation; 1% in Fidelity's Contrafund Portfolio; 1% in Fidelity's Equity-Income Portfolio; 3% in Janus Aspen Growth Portfolio; 3% in Janus Aspen Aggressive Growth Portfolio; 4% in Janus Aspen Worldwide Growth Portfolio; 1% in Janus Aspen Balanced Portfolio; 0% in Janus Aspen Short-Term Bond Portfolio; and 5% in the Scudder International Portfolio. The hypothetical values shown in the tables do not reflect any Separate Account charges for federal income taxes, since we are not currently making such charges. However, such charges may be made in the future, and in that event, the gross annual investment rate of return would have to exceed 0%, 6%, or 12% by an amount sufficient to cover the tax charges in order to produce the Death Benefit, Total Account Values, and Cash Surrender Values illustrated. 31 The tables illustrate the Policy Values that would result based upon the hypothetical investment rates of return if premiums were paid as indicated, if all Net Premiums are allocated to Variable Life Account B and if no Policy loans have been made. The tables are also based on the assumptions that the Policy Owner has not requested an increase or decrease in the Specified Amount of the Policy, and no partial surrenders have been made. Upon request, we will provide an illustration based upon the proposed Insured's age, sex of Insured (if necessary), and underwriting classification, the Specified Amount or premium requested, the proposed frequency of premium payments and any available riders requested. A fee of $25 is charged for each such illustration. The hypothetical gross annual investment return assumed in such an illustration will not exceed 12%. 32 AetnaVest Plus Policy Table I FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES $6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 7056 500000 500000 500000 4333 4652 4972 661 980 1300 2 14465 500000 500000 500000 8616 9529 10482 4944 5857 6810 3 22244 500000 500000 500000 12687 14474 16417 9015 10802 12745 4 30412 500000 500000 500000 16544 19484 22813 12872 15812 19141 5 38989 500000 500000 500000 20173 24546 29703 16501 20874 26031 6 47994 500000 500000 500000 23572 29655 37135 20237 26320 33800 7 57450 500000 500000 500000 26712 34784 45136 23744 31816 42168 8 67379 500000 500000 500000 29569 39907 53742 26968 37306 51141 9 77803 500000 500000 500000 32122 45000 62999 29888 42766 60765 10 88750 500000 500000 500000 34337 50026 72945 32470 48159 71078 15 152258 500000 500000 500000 39456 73139 135414 39425 73108 135383 20 233313 500000 500000 500000 30711 88529 228407 30711 88529 228407 25 336762 500000 500000 500000 0 84468 376269 0 84468 376269 30 468793 500000 500000 674775 0 35221 630631 0 35221 630631 20 (Age 65) 233313 500000 500000 500000 30711 88529 228407 30711 88529 228407
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 33 AetnaVest Plus Policy Table II FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES $4,080.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4284 500000 500000 500000 1894 2063 2234 0 0 0 2 8782 500000 500000 500000 3777 4238 4722 105 566 1050 3 13505 500000 500000 500000 5488 6362 7318 1816 2690 3646 4 18465 500000 500000 500000 7020 8424 10024 3348 4752 6352 5 23672 500000 500000 500000 8358 10402 12834 4686 6730 9162 6 29139 500000 500000 500000 9496 12284 15750 6161 8949 12415 7 34880 500000 500000 500000 10404 14033 18749 7436 11065 15781 8 40908 500000 500000 500000 11052 15610 21808 8451 13009 19207 9 47238 500000 500000 500000 11417 16978 24908 9183 14744 22674 10 53884 500000 500000 500000 11459 18086 28010 9592 16219 26143 15 92443 500000 500000 500000 5765 18023 42405 5734 17992 42374 20 141655 0 500000 500000 0 1420 49095 0 1420 49095 25 204463 0 0 500000 0 0 29511 0 0 29511 30 284624 0 0 0 0 0 0 0 0 0 20 (Age 65) 141655 0 500000 500000 0 1420 49095 0 1420 49095
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 34 AetnaVest Plus Policy Table III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES $6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 7056 500000 500000 500000 4911 5252 5595 1239 1580 1923 2 14465 500000 500000 500000 9825 10822 11861 6153 7150 8189 3 22244 500000 500000 500000 14582 16558 18701 10910 12886 15029 4 30412 500000 500000 500000 19159 22442 26150 15487 18770 22478 5 38989 500000 500000 500000 23530 28454 34245 19858 24782 30573 6 47994 500000 500000 500000 27672 34574 43031 24337 31239 39696 7 57450 500000 500000 500000 31600 40822 52600 28632 37854 49632 8 67379 500000 500000 500000 35327 47215 63050 32726 44614 60449 9 77803 500000 500000 500000 38866 53773 74493 36632 51539 72259 10 88750 500000 500000 500000 42208 60496 87032 40341 58629 85165 15 152258 500000 500000 500000 56322 97305 171555 56291 97274 171524 20 233313 500000 500000 500000 64173 138757 309852 64173 138757 309852 25 336762 500000 500000 628735 63047 184616 542013 63047 184616 542013 30 468793 500000 500000 986422 46279 233513 921889 46279 233513 921889 20 (Age 65) 233313 500000 500000 500000 64173 138757 309852 64173 138757 309852
(1) Assumes no Policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 35 AetnaVest Plus Policy Table IV FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES $4,080.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4284 500000 500000 500000 2398 2587 2776 0 0 0 2 8782 500000 500000 500000 4834 5366 5922 1162 1694 2250 3 13505 500000 500000 500000 7145 8180 9308 3473 4508 5636 4 18465 500000 500000 500000 9306 11004 12929 5634 7332 9257 5 23672 500000 500000 500000 11290 13808 16782 7618 10136 13110 6 29139 500000 500000 500000 13070 16560 20861 9735 13225 17526 7 34880 500000 500000 500000 14660 19272 25205 11692 16304 22237 8 40908 500000 500000 500000 16070 21951 29854 13469 19350 27253 9 47238 500000 500000 500000 17313 24607 34852 15079 22373 32618 10 53884 500000 500000 500000 18378 27225 40229 16511 25358 38362 15 92443 500000 500000 500000 21332 40029 74882 21301 39998 74851 20 141655 500000 500000 500000 18044 49741 126667 18044 49741 126667 25 204463 500000 500000 500000 5119 51951 206276 5119 51951 206276 30 284624 0 500000 500000 0 36444 334430 0 36444 334430 20 (Age 65) 141655 500000 500000 500000 18044 49741 126667 18044 49741 126667
(1) Assumes no Policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 36 AetnaVest Plus Policy Table V FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) UNISEX ISSUE AGE 45 $6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 6678 500000 500000 500000 4030 4329 4629 520 819 1119 2 13690 500000 500000 500000 8024 8879 9773 4514 5369 6263 3 21052 500000 500000 500000 11820 13492 15311 8310 9982 11801 4 28783 500000 500000 500000 15406 18155 21269 11896 14645 17759 5 36900 500000 500000 500000 18782 22868 27688 15272 19358 24178 6 45423 500000 500000 500000 21940 27620 34607 18752 24432 31419 7 54372 500000 500000 500000 24850 32385 42049 22013 29548 39212 8 63769 500000 500000 500000 27499 37142 50052 25013 34656 47566 9 73635 500000 500000 500000 29858 41864 58652 27723 39729 56517 10 83995 500000 500000 500000 31898 46518 67885 30114 44734 66101 15 144102 500000 500000 500000 36654 67948 125827 36625 67919 125798 20 220814 500000 500000 500000 28864 82375 211752 28864 82375 211752 25 318722 500000 500000 500000 0 78791 346325 0 78791 346325 30 443679 500000 500000 619183 0 34385 578676 0 34385 578676 20 (Age 65) 220814 500000 500000 500000 28864 82375 211752 28864 82375 211752
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 37 AetnaVest Plus Policy Table VI FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) UNISEX ISSUE AGE 45 $3,900.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4095 500000 500000 500000 1757 1917 2078 0 0 0 2 8395 500000 500000 500000 3516 3950 4405 6 440 895 3 12909 500000 500000 500000 5113 5935 6833 1603 2425 3323 4 17650 500000 500000 500000 6534 7851 9354 3024 4341 5844 5 22627 500000 500000 500000 7776 9692 11974 4266 6182 8464 6 27854 500000 500000 500000 8829 11441 14689 5641 8253 11501 7 33342 500000 500000 500000 9662 13059 17475 6825 10222 14638 8 39104 500000 500000 500000 10256 14517 20318 7770 12031 17832 9 45154 500000 500000 500000 10580 15776 23191 8445 13641 20156 10 51506 500000 500000 500000 10602 16788 26061 8818 15004 24277 15 88364 500000 500000 500000 5352 16751 39448 5323 16722 39419 20 135405 0 500000 500000 0 1843 46070 0 1843 46070 25 195442 0 0 500000 0 0 28974 0 0 28974 30 272067 0 0 0 0 0 0 0 0 0 20 (Age 65) 135405 0 500000 500000 0 1843 46070 0 1843 46070
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 38 AetnaVest Plus Policy Table VII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) UNISEX ISSUE AGE 45 $6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 6678 500000 500000 500000 4598 4920 5242 1088 1410 1732 2 13690 500000 500000 500000 9205 10142 11120 5695 6632 7610 3 21052 500000 500000 500000 13672 15528 17543 10162 12018 14033 4 28783 500000 500000 500000 17974 21058 24541 14464 17548 21031 5 36900 500000 500000 500000 22095 26720 32160 18585 23210 28650 6 45423 500000 500000 500000 26009 32493 40437 22821 29305 37249 7 54372 500000 500000 500000 29733 38397 49461 26896 35560 46624 8 63769 500000 500000 500000 33272 44444 59321 30786 41958 56835 9 73635 500000 500000 500000 36645 50657 70125 34510 48522 67990 10 83995 500000 500000 500000 39842 57036 81971 38058 55252 80187 15 144102 500000 500000 500000 53421 91986 161757 53392 91957 161728 20 220814 500000 500000 500000 61210 131389 291946 61210 131389 291946 25 318722 500000 500000 591680 60334 174583 510069 60334 174583 510069 30 443679 500000 500000 929111 44689 219942 868328 44689 219942 868328 20 (Age 65) 220814 500000 500000 500000 61210 131389 291946 61210 131389 291946
(1) Assumes no Policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 39 AetnaVest Plus Policy Table VIII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) UNISEX ISSUE AGE 45 $3,900.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
Premiums Death Benefit Accumulated Gross Annual Investment Total Account Value Cash Surrender Value at Return of Annual Investment Return of Annual Investment Return of 5% Interest --------------------------------- -------------------------------- --------------------------------- Policy Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% - ----------- -------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4095 500000 500000 500000 2257 2436 2616 0 0 0 2 8395 500000 500000 500000 4555 5059 5586 1045 1549 2076 3 12909 500000 500000 500000 6743 7723 8791 3233 4213 5281 4 17650 500000 500000 500000 8795 10402 12225 5285 6892 8715 5 22627 500000 500000 500000 10694 13077 15893 7184 9567 12383 6 27854 500000 500000 500000 12409 15715 19789 9221 12527 16601 7 33342 500000 500000 500000 13958 18330 23953 11121 15493 21116 8 39104 500000 500000 500000 15344 20924 28417 12858 18438 25931 9 45154 500000 500000 500000 16585 23511 33233 14450 21376 31098 10 51506 500000 500000 500000 17668 26078 38425 15884 24294 36641 15 88364 500000 500000 500000 20914 38788 71988 20885 38759 71959 20 135405 500000 500000 500000 18456 48941 122371 18456 48941 122371 25 195442 500000 500000 500000 6799 52148 199568 6799 52148 199568 30 272067 0 500000 500000 0 39091 323150 0 39091 323150 20 (Age 65) 135405 500000 500000 500000 18456 48941 122371 18456 48941 122371
(1) Assumes no Policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the Death Benefits, Total Account Values, and Cash Surrender Values would be less than those illustrated. These investment results are illustrative only and should not be considered a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors including the Policy Owner's allocations, and the Fund's rates of return. The Total Account Value and Cash Surrender Value for a Policy would be different from those shown if the actual investment rates of return averaged 0%, 6%, and 12% over a period of years, but fluctuated above or below those averages for individual Policy Years. No representations can be made that these rates of return will definitely be achieved for any one year or sustained over a period of time. 40 FINANCIAL STATEMENTS VARIABLE LIFE ACCOUNT B Index Statement of Assets and Liabilities .................................. S-2 Statements of Operations and Changes in Net Assets ................... S-4 Condensed Financial Information ...................................... S-5 Notes to Financial Statements ........................................ S-8 Independent Auditors' Report ......................................... S-12 S-1 Variable Life Account B Statement of Assets and Liabilities - December 31, 1996 ASSETS: Investments, at net asset value: (Note 1) Aetna Variable Fund; 2,867,163 shares (cost $85,576,983) .................................................. $ 92,871,626 Aetna Income Shares; 1,044,098 shares (cost $13,369,967) .................................................. 13,179,787 Aetna Variable Encore Fund; 689,138 shares (cost $8,985,791) .............................................. 9,092,185 Aetna Investment Advisers Fund, Inc.; 1,044,556 shares (cost $14,407,610) ................................. 15,791,541 Aetna Ascent Variable Portfolio; 43,217 shares (cost $529,733) ............................................ 545,378 Aetna Crossroads Variable Portfolio; 10,326 shares (cost $123,882) ........................................ 123,692 Aetna Legacy Variable Portfolio; 1,241 shares (cost $13,943) .............................................. 13,963 Alger American Small Capitalization Portfolio; 319,875 shares (cost $12,914,026) .......................... 13,086,083 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio; 632,915 shares (cost $12,213,929) .............................................. 13,310,213 Growth Portfolio; 162,252 shares (cost $4,757,662) ...................................................... 5,052,529 Overseas Portfolio; 28,255 shares (cost $494,386) ....................................................... 532,327 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio; 83,295 shares (cost $1,275,209) ................................................ 1,410,186 Contrafund Portfolio; 417,373 shares (cost $6,180,807) .................................................. 6,911,690 Janus Aspen Series: Aggressive Growth Portfolio; 529,766 shares (cost $9,413,853) ........................................... 9,662,927 Balanced Portfolio; 242,000 shares (cost $3,331,182) .................................................... 3,574,345 Growth Portfolio; 462,582 shares (cost $6,608,169) ...................................................... 7,174,647 Short-Term Bond Portfolio; 383,937 shares (cost $3,801,075) ............................................. 3,827,848 Worldwide Growth Portfolio; 510,038 shares (cost $9,042,860) ............................................ 9,915,136 Scudder Variable Life Investment Fund - International Portfolio; 801,151 shares (cost $9,370,711) ............................................... 10,615,255 TCI Portfolios, Inc. - Growth Fund; 633,059 shares (cost $6,629,436) ...................................... 6,482,525 ------------- NET ASSETS (cost $209,041,214) .............................................................................. $ 223,173,883 ============= Net assets represented by: Policyholders' account values: (Notes 1 and 5) Aetna Variable Fund: Policyholders' account values ........................................................................... $ 92,871,626 Aetna Income Shares: Policyholders' account values ........................................................................... 13,179,787 Aetna Variable Encore Fund: Policyholders' account values ........................................................................... 9,092,185 Aetna Investment Advisers Fund, Inc.: Policyholders' account values ........................................................................... 15,791,541 Aetna Ascent Variable Portfolio: Policyholders' account values ........................................................................... 545,378 Aetna Crossroads Variable Portfolio: Policyholders' account values ........................................................................... 123,692 Aetna Legacy Variable Portfolio: Policyholders' account values ........................................................................... 13,963 Alger American Small Capitalization Portfolio: Policyholders' account values ........................................................................... 13,086,083 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: Policyholders' account values ........................................................................... 13,310,213 Growth Portfolio: Policyholders' account values ........................................................................... 5,052,529 Overseas Portfolio: Policyholders' account values ........................................................................... 532,327 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: Policyholders' account values ........................................................................... 1,410,186 Contrafund Portfolio: Policyholders' account values ........................................................................... 6,911,690
S-2 Variable Life Account B Statement of Assets and Liabilities - December 31, 1996 (continued): Janus Aspen Series: Aggressive Growth Portfolio: Policyholders' account values ............................................................................ $ 9,662,927 Balanced Portfolio: Policyholders' account values ............................................................................ 3,574,345 Growth Portfolio: Policyholders' account values ............................................................................ 7,174,647 Short-Term Bond Portfolio: Policyholders' account values ............................................................................ 3,827,848 Worldwide Growth Portfolio: Policyholders' account values ............................................................................ 9,915,136 Scudder Variable Life Investment Fund - International Portfolio: Policyholders' account values ............................................................................ 10,615,255 TCI Portfolios, Inc. - Growth Fund: Policyholders' account values ............................................................................ 6,482,525 ------------- $223,173,883 =============
See Notes to Financial Statements S-3 Variable Life Account B Statements of Operations and Changes in Net Assets
Year Ended December 31, 1996 1995 ------------- ------------- INVESTMENT INCOME: Income: (Notes 1, 3 and 5) Dividends ........................................................ $ 13,813,478 $ 12,965,237 Expenses: (Notes 2 and 5) Valuation Period Deductions ...................................... (1,905,137) (1,149,801) ------------- ------------- Net investment income ............................................... 11,908,341 11,815,436 ------------- ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on sales of investments: (Notes 1, 4 and 5) Proceeds from sales ............................................... 29,656,908 28,828,178 Cost of investments sold .......................................... 26,434,292 25,993,679 ------------- ------------- Net realized gain ............................................... 3,222,616 2,834,499 Net unrealized gain (loss) on investments: (Note 5) Beginning of year ................................................. 4,391,574 (4,407,131) End of year ....................................................... 14,132,669 4,391,574 ------------- ------------- Net change in unrealized gain ................................... 9,741,095 8,798,705 ------------- ------------- Net realized and unrealized gain on investments ..................... 12,963,711 11,633,204 ------------- ------------- Net increase in net assets resulting from operations ................ 24,872,052 23,448,640 ------------- ------------- FROM UNIT TRANSACTIONS: Variable life premium payments ...................................... 101,416,302 44,310,537 Sales and administrative charges deducted by the Company ............ (3,032,151) (1,381,985) Premiums allocated to the fixed account ............................. (3,127,437) (3,260,098) ------------- ------------- Net premiums allocated to the variable account .................. 95,256,714 39,668,454 Transfers to the Company for monthly deductions ..................... (15,491,673) (11,297,188) Redemptions by contract holders ..................................... (4,154,465) (3,238,332) Transfers on account of policy loans ................................ (3,783,533) (2,076,373) Other ............................................................... (40,991) 41,863 ------------- ------------- Net increase in net assets from unit transactions (Note 5) ...... 71,786,052 23,098,424 ------------- ------------- Change in net assets ................................................ 96,658,104 46,547,064 NET ASSETS: Beginning of year ................................................... 126,515,779 79,968,715 ------------- ------------- End of year ......................................................... $ 223,173,883 $ 126,515,779 ============= =============
S-4 Variable Life Account B Condensed Financial Information - Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------- Value Increase(Decrease) Units Per Unit in Value of Outstanding Reserves Beginning End of Accumulation at End At End of Year Year Unit of Year of Year - -------------------------------------------------------------------------------------------------------------------------------- Aetna Variable Fund: Aetna Vest $28.351 $34.932 23.21% 1,517,474.5 $53,008,643 Aetna Vest II 15.831 19.507 23.21% 794,275.5 15,493,624 Aetna Vest Plus 13.301 16.389 23.21% 1,323,444.4 21,689,765 Aetna Vest Estate Protector 10.000 11.675 16.75% (2) 11,748.7 137,170 Corporate Specialty Market 12.016 14.805 23.21% 171,723.7 2,542,424 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Income Shares: Aetna Vest $21.305 $21.850 2.56% 279,436.3 6,105,721 Aetna Vest II 14.324 14.691 2.56% 67,932.7 997,974 Aetna Vest Plus 11.470 11.764 2.56% 132,814.7 1,562,403 Aetna Vest Estate Protector 10.000 10.452 4.52% (2) 17.0 177 Corporate Specialty Market 11.071 11.354 2.56% 397,512.3 4,513,512 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Variable Encore Fund: Aetna Vest $15.891 $16.577 4.32% 165,067.7 2,736,269 Aetna Vest II 11.616 12.117 4.32% 17,257.4 209,105 Aetna Vest Plus 10.917 11.388 4.32% 277,635.4 3,161,633 Aetna Vest Estate Protector 10.000 10.333 3.33% (2) 55,176.3 570,162 Corporate Specialty Market 10.444 10.895 4.32% 221,672.3 2,415,016 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Investment Advisers Fund, Inc.: Aetna Vest $15.390 $17.547 14.02% 106,202.5 1,863,538 Aetna Vest II 15.561 17.742 14.02% 228,951.9 4,062,177 Aetna Vest Plus 13.050 14.880 14.02% 393,635.7 5,857,138 Corporate Specialty Market 11.361 12.954 14.02% 309,462.5 4,008,688 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Ascent Variable Portfolio: Aetna Vest $10.000 $11.828 18.28% (2) 3,460.3 40,930 Aetna Vest II 10.000 11.828 18.28% (2) 2,054.0 24,295 Aetna Vest Plus 10.000 11.828 18.28% (2) 40,593.4 480,153 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Crossroads Variable Portfolio: Aetna Vest $10.000 $11.474 14.74% (2) 99.8 1,145 Aetna Vest Plus 10.000 11.474 14.74% (2) 10,665.0 122,368 Aetna Vest Estate Protector 10.000 11.487 14.87% (2) 15.6 179 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Legacy Variable Portfolio: Aetna Vest Plus $10.000 $11.118 11.18% (2) 1,255.9 13,963 - -------------------------------------------------------------------------------------------------------------------------------- Alger American Small Capitalization Portfolio: Aetna Vest $15.562 $16.051 3.14% 77,047.6 1,236,667 Aetna Vest II 15.563 16.052 3.14% 52,282.1 839,239 Aetna Vest Plus 15.555 16.043 3.14% 381,746.1 6,124,522 Aetna Vest Estate Protector 10.000 9.982 (0.18%) (2) 21,147.3 211,085 Corporate Specialty Market 12.799 13.201 3.14% 354,114.8 4,674,570 - -------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund : Equity-Income Portfolio: Aetna Vest $10.000 $10.871 8.71% (2) 6,532.8 71,015 Aetna Vest II 10.000 10.871 8.71% (2) 2,200.1 23,916 Aetna Vest Plus 10.000 10.871 8.71% (2) 118,798.4 1,291,404 Aetna Vest Estate Protector 10.000 10.883 8.83% (2) 10,991.4 119,619 Corporate Specialty Market 11.058 12.512 13.14% 943,466.6 11,804,259 - -------------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: Corporate Specialty Market $9.911 $11.255 13.56% 448,921.8 5,052,529 - -------------------------------------------------------------------------------------------------------------------------------- Overseas Portfolio: Corporate Specialty Market $10.029 $11.241 12.09% 47,354.8 532,327 - -------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: Corporate Specialty Market $10.596 $12.022 13.46% 117,298.4 1,410,186 - -------------------------------------------------------------------------------------------------------------------------------- Contrafund Portfolio: Aetna Vest $10.000 $11.525 15.25% (2) 17,996.4 207,415 Aetna Vest II 10.000 11.525 15.25% (2) 3,659.1 42,173 Aetna Vest Plus 10.000 11.525 15.25% (2) 80,966.3 933,168 Aetna Vest Estate Protector 10.000 11.538 15.38% (2) 10,537.3 121,585 Corporate Specialty Market 10.322 12.396 20.10% 452,333.3 5,607,349 - -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series: Aggressive Growth Portfolio: Aetna Vest $15.114 $16.153 6.87% 55,921.6 903,288 Aetna Vest II 15.114 16.153 6.87% 35,775.8 577,877 Aetna Vest Plus 15.114 16.153 6.87% 221,641.2 3,580,130 S-5 Aetna Vest Estate Protector 10.000 9.797 (2.03%) (2) 15,306.0 149,948 Corporate Specialty Market 11.340 12.120 6.87% 367,315.7 4,451,684 - --------------------------------------------------------------------------------------------------------------------------------
S-6 Variable Life Account B Condensed Financial Information - Year Ended December 31, 1996 (continued):
- ------------------------------------------------------------------------------------------------------------------------------- Value Increase(Decrease) Units Per Unit in Value of Outstanding Reserves Beginning End of Accumulation at End At End of Year Year Unit of Year of Year - ------------------------------------------------------------------------------------------------------------------------------- Balanced Portfolio: Aetna Vest $12.142 $13.966 15.02% 6,502.2 $ 90,808 Aetna Vest II 12.237 14.075 15.02% 4,206.4 59,204 Aetna Vest Plus 12.136 13.960 15.02% 124,211.8 1,733,938 Aetna Vest Estate Protector 10.000 11.101 11.01% (2) 3,134.9 34,800 Corporate Specialty Market 10.643 12.242 15.02% 135,240.2 1,655,595 - ------------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: Aetna Vest $12.704 $14.898 17.27% 30,969.1 461,370 Aetna Vest II 12.692 14.884 17.27% 65,830.7 979,838 Aetna Vest Plus 12.674 14.863 17.27% 234,144.3 3,480,132 Aetna Vest Estate Protector 10.000 10.857 8.57% (2) 1,608.1 17,459 Corporate Specialty Market 10.430 12.232 17.27% 182,790.8 2,235,848 - ------------------------------------------------------------------------------------------------------------------------------- Short-Term Bond Portfolio: Aetna Vest $10.967 $11.289 2.94% 595.3 6,721 Aetna Vest II 10.955 11.277 2.94% 751.0 8,469 Aetna Vest Plus 10.925 11.247 2.94% 17,621.2 198,177 Corporate Specialty Market 10.094 10.468 3.71% (1) 345,277.1 3,614,481 - ------------------------------------------------------------------------------------------------------------------------------- Worldwide Growth Portfolio: Aetna Vest $12.809 $16.364 27.75% 75,637.0 1,237,686 Aetna Vest II 12.813 16.368 27.75% 50,270.3 822,823 Aetna Vest Plus 12.797 16.348 27.75% 279,744.3 4,573,155 Aetna Vest Estate Protector 10.000 11.811 18.11% (2) 10,429.7 123,180 Corporate Specialty Market 10.964 13.459 22.76% (3) 234,655.4 3,158,292 - ------------------------------------------------------------------------------------------------------------------------------- Scudder Variable Life Investment Fund - International Portfolio: Aetna Vest $12.798 $14.543 13.63% 164,419.0 2,391,112 Aetna Vest II 12.719 14.453 13.63% 48,351.0 698,823 Aetna Vest Plus 12.648 14.373 13.63% 360,050.5 5,174,856 Aetna Vest Estate Protector 10.000 10.898 8.98% (2) 4,363.0 47,548 Corporate Specialty Market 10.598 12.043 13.63% 191,221.6 2,302,916 - ------------------------------------------------------------------------------------------------------------------------------- TCI Portfolios, Inc. - Growth Fund: Aetna Vest $13.248 $12.534 (5.39%) 84,078.3 1,053,865 Aetna Vest II 13.307 12.590 (5.39%) 29,273.6 368,568 Aetna Vest Plus 13.126 12.419 (5.39%) 361,778.0 4,492,803 Aetna Vest Estate Protector 10.000 9.511 (4.89%) (2) 29.2 278 Corporate Specialty Market 12.005 11.358 (5.39%) 49,922.3 567,011 - -------------------------------------------------------------------------------------------------------------------------------
Notes to Condensed Financial Information: (1) - Reflects less than a full year of performance activity. Funds were first received in this option during February 1996. (2) - Available for investment less than 1 year, contract commenced operations during March 1996. (3) - Reflects less than a full year of performance activity. Funds were first received in this option during March 1996. See Notes to Financial Statements S-7 Variable Life Account B Notes to Financial Statements - December 31, 1996 1. Summary of Significant Accounting Policies Variable Life Account B ("Account") is a separate account established by Aetna Life Insurance and Annuity Company and is registered under the Investment Company Act of 1940 as a unit investment trust. The Account is sold exclusively for use with variable life insurance product contracts as defined under the Internal Revenue Code of 1986, as amended. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Account. a. Valuation of Investments Investments in the following Funds are stated at the closing net asset value per share as determined by each fund on December 31, 1996: Aetna Variable Fund Janus Aspen Series: Aetna Income Shares [bullet] Aggressive Growth Portfolio Aetna Variable Encore Fund [bullet] Balanced Portfolio Aetna Investment Advisers Fund, Inc. [bullet] Growth Portfolio Aetna Ascent Variable Portfolio [bullet] Short-Term Bond Portfolio Aetna Crossroads Variable Portfolio [bullet] Worldwide Growth Portfolio Aetna Legacy Variable Portfolio Scudder Variable Life Alger American Small Investment Fund - Capitalization Portfolio International Portfolio Fidelity Investments Variable Insurance TCI Portfolios, Inc. - Growth Products Fund: Fund [bullet] Equity-Income Portfolio [bullet] Growth Portfolio [bullet] Overseas Portfolio Fidelity Investments Variable Insurance Products Fund II: [bullet] Asset Manager Portfolio [bullet] Contrafund Portfolio b. Other Investment transactions are accounted for on a trade date basis and dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by specific identification. c. Federal Income Taxes The operations of the Account form a part of, and are taxed with, the total operations of Aetna Life Insurance and Annuity Company ("Company") which is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended. 2. Valuation Period Deductions Deductions by the Account for mortality and expense risk charges are made in accordance with the terms of the policies and are paid to the Company. S-8 Variable Life Account B Notes to Financial Statements - December 31, 1996 (continued): 3. Dividend Income On an annual basis the Funds distribute substantially all of their taxable income and realized capital gains to their shareholders. Distributions paid to the Account are automatically reinvested in shares of the Funds. The Account's proportionate share of each Fund's undistributed net investment income (distributions in excess of net investment income) and accumulated net realized gain (loss) on investments is included in net unrealized gain (loss) on investments in the Statements of Operations and Changes in Net Assets. 4. Purchases and Sales of Investments The cost of purchases and proceeds from sales of investments other than short-term investments for the years ended December 31, 1996 and December 31, 1995 aggregated $113,349,117 and $29,656,908 and $71,231,087 and $28,828,178, respectively. S-9 Variable Life Account B Notes to Financial Statements - December 31, 1996 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets - Year Ended December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------ Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Variable Fund: $ 9,712,578 $ (991,737) $ 5,373,083 $ 4,466,494 $ 906,589 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Income Shares: 810,294 (121,325) 1,564,483 1,544,041 20,442 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Variable Encore Fund: 477,308 (71,555) 9,490,775 9,560,169 (69,394) PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Investment Advisers Fund, Inc.: 1,201,085 (127,990) 1,717,127 1,435,761 281,366 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Ascent Variable Portfolio: 18,222 (1,210) 127,981 124,671 3,310 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Crossroads Variable Portfolio: 2,462 (91) 1,317 1,263 54 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Legacy Variable Portfolio: 671 (36) 503 486 17 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Capitalization Portfolio: 33,925 (93,143) 2,003,029 1,400,608 602,421 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 19,619 (57,181) 625,427 574,716 50,711 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: 85,627 (30,149) 243,345 245,938 (2,593) PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Overseas Portfolio: 14,172 (4,004) 478,644 450,003 28,641 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 62,788 (13,383) 981,022 966,124 14,898 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Contrafund Portfolio: 10,199 (36,829) 353,531 314,886 38,645 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Series: Aggressive Growth Portfolio: 79,809 (68,571) 1,171,119 858,482 312,637 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Balanced Portfolio: 70,301 (23,444) 452,062 367,517 84,545 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: 140,964 (46,593) 808,709 590,651 218,058 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Short-Term Bond Portfolio: 84,482 (17,596) 424,360 415,377 8,983 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Growth Portfolio: 105,214 (49,874) 1,127,422 777,300 350,122 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Variable Life Investment Fund - International Portfolio: 173,534 (85,922) 1,752,475 1,537,715 214,760 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ TCI Portfolios, Inc. - Growth Fund: 710,224 (64,504) 960,494 802,090 158,404 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Total Variable Life Account B $ 13,813,478 $ (1,905,137) $ 29,656,908 $ 26,434,292 $ 3,222,616 ====================================================================================================================================
S-10
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Net Gain (Loss) Net Increase(Decrease) Net Assets --------------------- Change in In Net Assets --------------------------- Beginning End Unrealized from Unit Beginning End of Year of Year Gain (Loss) Transactions of Year of Year - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Variable Fund: $ 65,391 $ 7,294,643 $ 7,229,252 $ 5,056,913 $ 70,958,031 $ 92,871,626 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Income Shares: 189,278 (190,180) (379,458) 2,798,667 10,051,167 13,179,787 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Variable Encore Fund: 138,935 106,394 (32,541) 3,268,179 5,520,188 9,092,185 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Investment Advisers Fund, Inc.: 1,031,584 1,383,931 352,347 4,815,033 9,269,700 15,791,541 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Ascent Variable Portfolio: 0 15,645 15,645 509,411 0 545,378 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Crossroads Variable Portfolio: 0 (191) (191) 121,458 0 123,692 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Legacy Variable Portfolio: 0 20 20 13,291 0 13,963 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Capitalization Portfolio: 595,950 172,057 (423,893) 7,688,994 5,277,779 13,086,083 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 28,202 1,096,283 1,068,081 11,810,807 418,176 13,310,213 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: (36,211) 294,867 331,078 3,470,007 1,198,559 5,052,529 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Overseas Portfolio: 21,923 37,941 16,018 (102,302) 579,802 532,327 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 47,435 134,978 87,543 298,650 959,690 1,410,186 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Contrafund Portfolio: 10,253 730,883 720,630 5,090,135 1,088,910 6,911,690 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Series: Aggressive Growth Portfolio: 376,606 249,074 (127,532) 5,949,433 3,517,151 9,662,927 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Balanced Portfolio: 60,589 243,163 182,574 2,648,699 611,670 3,574,345 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: 196,848 566,478 369,630 3,974,072 2,518,516 7,174,647 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Short-Term Bond Portfolio: 6,078 26,773 20,695 3,383,696 347,588 3,827,848 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Growth Portfolio: 227,523 872,277 644,754 7,436,957 1,427,963 9,915,136 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Scudder Variable Life Investment Fund- International Portfolio: 431,463 1,244,544 813,081 2,808,258 6,691,544 10,615,255 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ TCI Portfolios, Inc. - Growth Fund: 999,727 (146,911) (1,146,638) 745,694 6,079,345 6,482,525 PolicyHolders' account values - ------------------------------------------------------------------------------------------------------------------------------------ Total Variable Life Account B $ 4,391,574 $ 14,132,669 $ 9,741,095 $ 71,786,052 $126,515,779 $223,173,883 ====================================================================================================================================
S-11 Independent Auditors' Report The Board of Directors of Aetna Life Insurance and Annuity Company and Policyholders of Variable Life Account B: We have audited the accompanying statement of assets and liabilities of Aetna Life Insurance and Annuity Company Variable Life Account B (the "Account") as of December 31, 1996, and the related statements of operations and changes in net assets for each of the years in the two-year period then ended, and condensed financial information for the year ended December 31, 1996. These financial statements and condensed financial information are the responsibility of the Account's management. Our responsibility is to express an opinion on these financial statements and condensed financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and condensed financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1996, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and condensed financial information referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company Variable Life Account B as of December 31, 1996, the results of its operations and the changes in its net assets for each of the years in the two-year period then ended, and condensed financial information for the year ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Hartford, Connecticut February 14, 1997 S-12 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBIDIARIES Index to Consolidated Financial Statements Page Independent Auditors' Report F-2 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 F-3 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4 Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 F-1 Independent Auditors' Report The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: We have audited the accompanying consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 4, 1997 F-2 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Income (millions) Years Ended December 31, -------------------------------- 1996 1995 1994 ---- ---- ---- Revenue: Premiums $133.6 $212.7 $191.6 Charges assessed against policyholders 396.5 318.9 279.0 Net investment income 1,045.6 1,004.3 917.2 Net realized capital gains 19.7 41.3 1.5 Other income 45.4 42.0 10.3 ------- ------- ------- Total revenue 1,640.8 1,619.2 1,399.6 ------- ------- ------- Benefits and expenses: Current and future benefits 968.6 997.2 921.5 Operating expenses 342.2 310.8 225.7 Amortization of deferred policy acquisition costs 69.8 48.0 31.5 Severance and facilities charges 61.3 -- -- ------- ------- ------- Total benefits and expenses 1,441.9 1,356.0 1,178.7 ------- ------- ------- Income before income taxes 198.9 263.2 220.9 Income taxes 57.8 87.3 75.6 ------- ------- ------- Net income $141.1 $175.9 $145.3 ======= ======= ======= See Notes to Consolidated Financial Statements. F-3 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Balance Sheets (millions, except share data) December 31, ------------------------- 1996 1995 ---- ---- Assets - ------ Investments: Debt securities, available for sale: (amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8 Equity securities, available for sale: Non-redeemable preferred stock (cost: $107.6 and $51.3) 119.0 57.6 Investment in affiliated mutual funds (cost: $77.3 and $173.4) 81.1 191.8 Common stock (cost: $0.0 and $6.9) 0.3 8.2 Short-term investments 34.8 15.1 Mortgage loans 13.0 21.2 Policy loans 399.3 338.6 --------- --------- Total investments 13,553.0 13,353.3 Cash and cash equivalents 459.1 568.8 Accrued investment income 159.0 175.5 Premiums due and other receivables 26.6 37.3 Deferred policy acquisition costs 1,515.3 1,341.3 Reinsurance loan to affiliate 628.3 655.5 Other assets 33.7 26.2 Separate Account assets 15,318.3 10,987.0 --------- --------- Total assets $31,693.3 $27,144.9 ========= ========= Liabilities and Shareholder's Equity - ------------------------------------- Liabilities: Future policy benefits $3,617.0 $3,594.6 Unpaid claims and claim expenses 28.9 27.2 Policyholders' funds left with the Company 10,663.7 10,500.1 --------- --------- Total insurance reserve liabilities 14,309.6 14,121.9 Other liabilities 354.7 257.2 Income taxes: Current 20.7 26.2 Deferred 80.5 169.6 Separate Account liabilities 15,318.3 10,987.0 --------- --------- Total liabilities 30,083.8 25,561.9 --------- --------- Shareholder's equity: Common stock, par value $50 (100,000 shares authorized; 55,000 shares issued and outstanding) 2.8 2.8 Paid-in capital 418.0 407.6 Net unrealized capital gains 60.5 132.5 Retained earnings 1,128.2 1,040.1 --------- --------- Total shareholder's equity 1,609.5 1,583.0 --------- --------- Total liabilities and shareholder's equity $31,693.3 $27,144.9 ========= ========= See Notes to Consolidated Financial Statements. F-4 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions) Years Ended December 31, ----------------------------------- 1996 1995 1994 ---- ---- ---- Shareholder's equity, beginning of year $1,583.0 $1,088.5 $1,246.7 Capital contributions 10.4 -- -- Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5) Net income 141.1 175.9 145.3 Other changes (49.5) -- -- Common stock dividends declared (3.5) (2.9) -- -------- -------- -------- Shareholder's equity, end of year $1,609.5 $1,583.0 $1,088.5 ======== ======== ======== See Notes to Consolidated Financial Statements. F-5 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Cash Flows (millions)
Years Ended December 31, ------------------------------------- 1996 1995 1994 ---- ---- ---- Cash Flows from Operating Activities: Net income $141.1 $175.9 $145.3 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Decrease (increase) in accrued investment income 16.5 (33.3) (17.5) Decrease in premiums due and other receivables 1.6 25.4 1.3 Increase in policy loans (60.7) (89.9) (46.0) Increase in deferred policy acquisition costs (174.0) (177.0) (105.9) Decrease in reinsurance loan to affiliate 27.2 34.8 27.8 Net increase in universal life account balances 243.2 393.4 164.7 (Decrease) increase in other insurance reserve liabilities (211.5) 79.0 75.1 Net increase in other liabilities and other assets 3.1 13.0 52.5 Decrease in income taxes (26.7) (4.5) (10.3) Net accretion of discount on investments (68.0) (66.4) (77.9) Net realized capital gains (19.7) (41.3) (1.5) Other, net 1.1 -- (1.0) -------- -------- -------- Net cash (used for) provided by operating activities (126.8) 309.1 206.6 -------- -------- -------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 5,182.2 4,207.2 3,593.8 Equity securities 190.5 180.8 93.1 Mortgage loans 8.7 10.7 -- Limited partnership -- 26.6 -- Investment maturities and collections of: Debt securities available for sale 885.2 583.9 1,289.2 Short-term investments 35.0 106.1 30.4 Cost of investment purchases in: Debt securities available for sale (6,534.3) (6,034.0) (5,621.4) Equity securities (118.1) (170.9) (162.5) Short-term investments (54.7) (24.7) (106.1) Mortgage loans -- (21.3) -- Limited partnership -- -- (25.0) Other, net (17.6) -- -- -------- -------- -------- Net cash used for investing activities (423.1) (1,135.6) (908.5) -------- -------- -------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8 Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7) Additional capital contributions 10.4 -- -- Dividends paid to shareholder (3.5) (2.9) -- -------- -------- -------- Net cash provided by financing activities 440.2 772.0 789.1 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2 Cash and cash equivalents, beginning of year 568.8 623.3 536.1 -------- -------- -------- Cash and cash equivalents, end of year $459.1 $568.8 $623.3 ======== ======== ======== Supplemental cash flow information: Income taxes paid, net $85.5 $92.8 $85.9 ======== ======== ======== See Notes to Consolidated Financial Statements.
F-6 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries (collectively, the "Company") is a provider of financial services and life insurance products in the United States. The Company has two business segments: financial services and individual life insurance. Financial services products include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and non-qualified annuity contracts. These contracts may be deferred or immediate ("payout annuities"). Financial services also include investment advisory services, financial planning and pension plan administrative services. Individual life insurance products include universal life, variable universal life, traditional whole life and term insurance. Basis of Presentation The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna"). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Certain reclassifications have been made to 1995 and 1994 financial information to conform to the 1996 presentation. Future Application of Accounting Standards Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996. This statement provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. Transactions covered by this statement would include securitizations, sales of partial interests in assets, repurchase agreements and securities lending. This statement requires that after a transfer of financial assets, an entity would recognize any assets it controls and liabilities it has incurred. An entity would not recognize assets when control has been surrendered or liabilities have been satisfied. Portions of this statement are effective for each of 1997 and 1998 financial statements and early adoption is not permitted. The Company does not expect adoption of this statement to have a material effect on its financial position or results of operations. F-7 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. Investments All of the Company's debt and equity securities are classified as available for sale and carried at fair value. These securities are written down (as realized capital losses) for other than temporary declines in value. Unrealized capital gains and losses related to available for sale other than amounts allocable to experience rated contractholders, are reflected in shareholder's equity, net of related taxes. Fair values for debt and equity securities are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. Purchases and sales of debt and equity securities are recorded on the trade date. The investment in affiliated mutual funds primarily represents an investment in the Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the Company, and is carried at fair value. Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves. Sales of mortgage loans are recorded on the closing date. Short-term investments, consisting primarily of money market instruments and other debt issues purchased with a maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. F-8 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through net realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are recorded in net realized capital gains or losses. Hedge designation requires specific asset or liability identification, a probability at inception of high correlation with the position underlying the hedge, and that high correlation be maintained throughout the hedge period. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, hedge accounting ceases at that date and excess gains and losses on the hedging instrument are reflected in net realized capital gains or losses. Swap agreements which are designated as interest rate risk management instruments at inception are accounted for using the accrual method. Accordingly, the difference between amounts paid and received on such agreements is reported in net investment income. There is no recognition in the Consolidated Balance Sheets for changes in the fair value of the agreement. Deferred Policy Acquisition Costs Certain costs of acquiring insurance business are deferred. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain expenses of underwriting and issuing contracts, and certain agency expenses. For fixed ordinary life contracts, such costs are amortized over expected premium-paying periods (up to 20 years). For universal life and certain annuity contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the life of the contracts (up to 20 years). Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses. Insurance Reserve Liabilities Future Policy Benefits include reserves for universal life, immediate annuities with life contingent payouts and traditional life insurance contracts. Reserves for universal life contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon. Reserves for immediate annuities with life contingent payouts and traditional life insurance contracts are computed on the basis of assumed investment yield, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.25% to 12.00%. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Aetna experience and are periodically reviewed against both industry standards and experience. F-9 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Policyholders' Funds Left With the Company include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 4.00% to 7.00%), net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. Premiums, Charges Assessed Against Policyholders, Benefits and Expenses For universal life and certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in charges assessed against policyholders. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue. Life insurance premiums, other than premiums for universal life and certain annuity contracts, are recorded as premium revenue when due. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments begin under contracts with life contingent payouts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity, reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Statements of Income. Separate Accounts Assets held under variable universal life and variable annuity contracts are segregated in Separate Accounts and are invested, as designated by the contractholder or participant under a contract, in shares of Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, the Aetna Series Fund Inc., or the Aetna Generation Funds (collectively, "Funds"), which are managed by the Company, or other selected mutual funds not managed by the Company. Separate Accounts assets and liabilities are carried at fair value except for those relating to a guaranteed interest option. Since the Company bears the investment risk where the contract is held to maturity, the assets of the Separate Account supporting the guaranteed interest option are carried at an amortized cost of $515.6 million for 1996 (fair value $523.0 million) and $322.2 million for 1995 (fair value $343.9 million). Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to 8.38% in 1995. F-10 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Separate Accounts assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Statements of Income (with the exception of realized capital gains and losses on the sale of assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. Income Taxes The Company is included in the consolidated federal income tax return of Aetna. The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. F-11 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments Debt securities available for sale as of December 31, 1996 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (millions) U.S. government and government agencies and authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4 States, municipalities and political subdivisions 6.0 1.2 -- 7.2 U.S. corporate securities: Financial 2,143.4 43.1 9.7 2,176.8 Food & fiber 198.2 4.6 1.3 201.5 Healthcare & consumer products 735.9 20.2 6.3 749.8 Media & broadcast 274.9 7.0 2.8 279.1 Natural resources 187.7 4.5 0.4 191.8 Transportation & capital goods 521.9 22.0 1.8 542.1 Utilities 448.8 14.8 2.8 460.8 Other 141.5 3.0 -- 144.5 --------- --------- --------- --------- Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4 Foreign Securities: Government 758.6 36.0 5.7 788.9 Utilities 187.8 16.1 -- 203.9 Other 945.5 30.9 6.3 970.1 --------- --------- --------- --------- Total foreign securities 1,891.9 83.0 12.0 1,962.9 Residential mortgage-backed securities: Pass-throughs 792.2 78.3 3.1 867.4 Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0 --------- --------- --------- --------- Total residential mortgage- backed securities 3,020.0 173.2 16.8 3,176.4 Commercial/Multifamily mortgage- backed securities 1,008.7 24.8 5.6 1,027.9 Other asset-backed securities 887.8 10.7 2.2 896.3 --------- --------- --------- --------- Total Debt Securities $12,539.1 $ 432.6 $ 66.2 $12,905.5 ========= ========= ========= =========
F-12 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Debt securities available for sale as of December 31, 1995 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (millions) U.S. government and government agencies and authorities $ 539.5 $ 47.5 $ -- $ 587.0 States, municipalities and political subdivisions 41.4 12.4 -- 53.8 U.S. Corporate securities: Financial 2,764.4 110.3 2.1 2,872.6 Food & fiber 310.8 20.8 0.6 331.0 Healthcare & consumer products 766.0 59.2 0.2 825.0 Media & broadcast 191.7 10.0 -- 201.7 Natural resources 186.9 12.6 0.2 199.3 Transportation & capital goods 602.4 46.7 0.2 648.9 Utilities 454.4 27.8 1.0 481.2 Other 119.9 10.2 -- 130.1 --------- --------- --------- --------- Total U.S. corporate securities 5,396.5 297.6 4.3 5,689.8 Foreign securities: Government 316.4 26.1 2.0 340.5 Utilities 236.3 32.9 269.2 Other 749.9 60.5 3.5 806.9 --------- --------- --------- --------- Total foreign securities 1,302.6 119.5 5.5 1,416.6 Residential mortgage-backed securities: Pass-throughs 556.7 99.2 1.8 654.1 Collateralized mortgage obligations 2,383.9 167.6 2.2 2,549.3 --------- --------- --------- --------- Total residential mortgage- backed securities 2,940.6 266.8 4.0 3,203.4 Commercial/multifamily mortgage- backed securities 741.9 32.3 0.2 774.0 Other asset-backed securities 961.2 35.5 0.5 996.2 --------- --------- --------- --------- Total Debt Securities $11,923.7 $ 811.6 $ 14.5 $12,720.8 ========= ========= ========= =========
F-13 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) At December 31, 1996 and 1995, net unrealized appreciation of $366.4 million and $797.1 million, respectively, on available for sale debt securities included $288.5 million and $619.1 million, respectively, related to experience rated contracts, which were not reflected in shareholder's equity but in Future Policy Benefits and Policyholders' Funds Left With the Company. The amortized cost and fair value of debt securities for the year ended December 31, 1996 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid. Amortized Fair Cost Value --------- ----- (millions) Due to mature: One year or less $ 424.4 $ 425.7 After one year through five years 2,162.4 2,194.2 After five years through ten years 2,467.4 2,509.6 After ten years 2,568.4 2,675.4 Mortgage-backed securities 4,028.7 4,204.3 Other asset-backed securities 887.8 896.3 --------- --------- Total $12,539.1 $12,905.5 ========= ========= The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Collateral, primarily cash, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. At December 31, 1996 and 1995, the Company had loaned securities (which are reflected as invested assets) with a market value of approximately $444.7 million and $264.5 million, respectively. At December 31, 1996 and 1995, debt securities carried at $7.6 million and $7.4 million, respectively, were on deposit as required by regulatory authorities. The carrying value of non-income producing investments was $0.9 million and $0.1 million at December 31, 1996 and 1995, respectively. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 1996. F-14 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Included in the Company's total debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
1996 1995 ---- ---- Fair Amortized Fair Amortized Value Cost Value Cost ----- ---- ----- ---- (millions) Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9 ======== ======== ======== ======== Percentage of total: Supporting experience rated products 84.2% 85.3% Supporting remaining products 15.8% 14.7% -------- -------- 100.0% 100.0% ======== ========
(1) At December 31, 1996 and 1995, approximately 71% and 81%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, FHLMC. There are various categories of CMOs which are subject to different degrees of risk from changes in interest rates and, for nonagency-backed CMOs, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of the Company's CMO holdings were in planned amortization class ("PAC") and sequential structure tranches, which are subject to less prepayment and extension risk than other types of CMO instruments. At December 31, 1996 and 1995, approximately 3% of the Company's CMO holdings were in the interest-only ("IOs") and principal-only ("POs") tranches, which are subject to more prepayment and extension risks than other types of CMO instruments. Remaining CMO holdings are in other tranches that have prepayment and extension risks which fall between the degree of risk associated with PACs and sequentials, and IOs and POs. F-15 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Investments in available for sale equity securities were as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ---------- ---------- ----- (millions) 1996 Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4 ======= ======= ======= ======= 1995 Equity Securities $ 231.6 $ 27.2 $ 1.2 $ 257.6 ======= ======= ======= ======= 3. Financial Instruments Estimated Fair Value The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 1996 and 1995 were as follows:
1996 1995 ------------------ ----------------- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- (millions) Assets: Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9 Liabilities: Investment contract liabilities: With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $ 1,001.2 Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, such as estimates of timing and amount of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument. In evaluating the Company's management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. F-16 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Financial Instruments (Continued) The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates which reflect the rates at which similar loans would be made to similar borrowers. The rates reflect management's assessment of the credit quality and the remaining duration of the loans. Investment contract liabilities (included in Policyholders' Funds Left With the Company): With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the Company for similar contracts. Without a fixed maturity: Fair value is estimated as the amount payable to the contractholder upon demand. However, the Company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. Off-Balance-Sheet and Other Financial Instruments (including Derivative Financial Instruments) The Company uses off-balance-sheet and other financial instruments primarily to manage portfolio risks, including interest rate, prepayment/call, credit, price, and liquidity risks. In 1996, Treasury futures contracts were used to manage interest rate risk in the Company's bond portfolio and stock index futures contracts were used to manage price risk in the Company's equity portfolio. In 1996 and 1995, interest rate swaps and forward commitments to enter into interest rate swaps, respectively, were also used to manage interest rate risk in the Company's bond portfolio. Futures Contracts: Futures contracts represent commitments to either purchase or sell underlying assets at a specified future date. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Cash settlements are made daily based on changes in the prices of the underlying assets. There were no futures contracts open as of December 31, 1996 and 1995. F-17 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Financial Instruments (Continued) Interest Rate Swaps: Under interest rate swaps, the Company agrees with other parties to exchange interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made. A single net payment is usually made by one counterparty at each due date or upon termination of the contract. The Company would be exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, however, the Company controls its exposure to credit risk through credit approvals, credit limits and regular monitoring procedures. The credit exposure of interest rate swaps is represented by the fair value (market value) of contracts with a positive fair value (market value) at the reporting date. There were no interest rate swap agreements open as of December 31, 1996. At December 31, 1995, the Company had an open forward swap agreement with a notional amount of $100.0 million and a fair value of $0.1 million. During 1995, the Company received $0.4 million for writing call options on underlying securities. The Company did not write any call options in 1996. As of December 31, 1996 and 1995, there were no option contracts outstanding. The Company also had investments in certain debt instruments with derivative characteristics, including those whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the debt securities portfolio, as of December 31, 1996 was as follows: Amortized Fair Cost Value ---- ----- (millions) Residential collateralized mortgage obligations $ 2,227.8 $ 2,309.0 Principal-only strips (included above) 44.5 53.3 Interest-only strips (included above) 10.3 22.8 Other structured securities with derivative characteristics (1) 126.3 129.2 (1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. F-18 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 4. Net Investment Income Sources of net investment income were as follows: 1996 1995 1994 ---- ---- ---- (millions) Debt securities $ 945.3 $ 891.5 $ 823.9 Preferred stock 5.9 4.2 3.9 Investment in affiliated mutual funds 14.3 14.9 5.2 Mortgage loans 2.2 1.4 1.4 Policy loans 18.4 13.7 11.5 Reinsurance loan to affiliate 44.1 46.5 51.5 Cash equivalents 29.4 38.9 29.5 Other 2.1 8.4 6.7 -------- -------- -------- Gross investment income 1,061.7 1,019.5 933.6 Less investment expenses (16.1) (15.2) (16.4) -------- -------- -------- Net investment income $1,045.6 $1,004.3 $ 917.2 ======== ======== ======== Net investment income includes amounts allocable to experience rated contractholders of $787.6 million, $744.2 million and $677.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Interest credited to contractholders is included in Current and Future Benefits. 5. Dividend Restrictions and Shareholder's Equity The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the Company dividended $2.9 million in the form of two of its subsidiaries, Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement Services, Inc. (the Company's former parent). The amount of dividends that may be paid to the shareholder in 1997 without prior approval by the Insurance Commissioner of the State of Connecticut is $71.1 million. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and shareholder's capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net income was $57.8 million, $70.0 million and $64.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was $713.6 million and $670.7 million as of December 31, 1996 and 1995, respectively. As of December 31, 1996 the Company does not utilize any statutory accounting practices which are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. F-19 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital gains on investments were as follows: 1996 1995 1994 ---- ---- ---- (millions) Debt securities $ 11.1 $ 32.8 $ 1.0 Equity securities 8.6 8.3 0.2 Mortgage loans -- 0.2 0.3 -------- -------- ------- Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5 ======== ======= ======= After tax realized capital gains $ 13.0 $ 25.8 $ 1.0 ======== ======= ======= Net realized capital gains of $53.1 million and $61.1 million for 1996 and 1995, respectively, and net realized capital losses of $29.1 million for 1994, allocable to experience rated contracts, were deducted from net realized capital gains (losses) and an offsetting amount was reflected in policyholder funds' left with the Company. Net unamortized gains were $53.3 million and $7.3 million at December 31, 1996 and 1995, respectively. Changes to the mortgage loan valuation reserve and writedowns on debt securities for other than temporary declines in value are included in net realized capital gains (losses) and amounted to $(3.3) million, $3.1 million and $1.1 million, of which $(3.2) million, $2.2 million and $0.8 million were allocable to experience rated contractholders, for the years ended December 31, 1996, 1995 and 1994, respectively. There was no valuation reserve for mortgage loans at December 31, 1996 or at December 31, 1995. Proceeds from the sale of available for sale debt securities and the related gross gains and losses were as follows: 1996 1995 1994 ---- ---- ---- (millions) Proceeds on Sales $5,182.2 $4,207.2 $3,593.8 Gross gains 24.3 44.6 26.6 Gross losses 13.2 11.8 25.6 F-20 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations (Continued) Changes in shareholder's equity related to changes in unrealized capital gains (losses), (excluding those related to experience rated contractholders), were as follows: 1996 1995 1994 ---- ---- ---- (millions) Debt securities $ (100.1) $ 255.9 $ (242.1) Equity securities (10.5) 27.3 (13.3) Limited partnership -- 1.8 (1.8) -------- -------- -------- (110.6) 285.0 (257.2) Deferred income taxes (See Note 8) (38.6) (36.5) 46.3 -------- -------- -------- Net change in unrealized capital gains (losses) $ (72.0) $ 321.5 $ (303.5) ======== ======== ======== Net unrealized capital gains allocable to experience rated contracts of $245.2 million and $43.3 million at December 31, 1996 and $515.0 million and $104.1 million at December 31, 1995 are reflected on the Consolidated Balance Sheets in Policyholders' Funds Left With the Company and Future Policy Benefits, respectively, and are not included in shareholder's equity. Shareholder's equity included the following unrealized capital gains (losses), which are net of amounts allocable to experience rated contractholders, at December 31: 1996 1995 1994 ---- ---- ---- (millions) Debt securities Gross unrealized capital gains $101.7 $179.3 $ 27.4 Gross unrealized capital losses (23.8) (1.3) (105.2) ------ ------ -------- 77.9 178.0 (77.8) Equity securities Gross unrealized capital gains 16.3 27.2 6.5 Gross unrealized capital losses (0.8) (1.2) (7.9) ------ ------ -------- 15.5 26.0 (1.4) Limited Partnership -- -- -- Gross unrealized capital gains -- -- -- Gross unrealized capital losses -- -- (1.8) ------ ------ -------- -- -- (1.8) Deferred income taxes (See Note 8) 32.9 71.5 108.0 ------ ------ -------- Net unrealized capital gains (losses) $ 60.5 $132.5 $(189.0) ====== ====== ======== F-21 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 7. Severance and Facilities Charges Severance and facilities charges during 1996, as described below, included the following (pretax):
Vacated Asset Leased Corporate (Millions) Severance Write-Off Property Other Allocation Total - -------------------------------------------------------------------------------------------- Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1 Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2 Corporate Allocation -- -- -- -- 14.0 14.0 --------------------------------------------------------------- Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $ 14.0 $ 61.3 - --------------------------------------------------------------------------------------------
In the third quarter of 1996, the Company recorded a $30.7 million after tax ($47.3 million pretax) charge principally related to actions taken or expected to be taken to improve its cost structure relative to its competitors. The severance portion of the charge is based on a plan to eliminate 702 positions (primarily customer service, sales and information technology support staff). The facilities portion of the charge is based on a plan to consolidate sales/service field offices. In addition to the above charge, Aetna recorded a facilities and severance charge in the second quarter of 1996, primarily as a result of actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by Aetna's property-casualty operations. The cost allocated to the Company associated with this charge was $9.1 million after tax ($14.0 million pretax). The activity during 1996 within the severance and facilities reserve (pretax, in millions) and the number of positions eliminated related to such actions were as follows: Reserve Positions --------------------------------------------------------------------------- Beginning of year $ -- -- Severance and facilities charges 47.3 702 Corporate Allocation 14.0 -- Actions taken (1) (13.4) (178) ------------------------------- End of year $ 47.9 524 --------------------------------------------------------------------------- (1) Includes $8.0 million of severance-related actions and $4.1 million of corporate allocation-related actions. The Company's severance actions are expected to be substantially completed by March 31, 1998. The corporate allocation actions and the vacating of the leased office space are expected to be substantially completed in 1997. F-22 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes The Company is included in the consolidated federal income tax return and combined Connecticut and New York state income tax returns of Aetna. Aetna allocates to each member an amount approximating the tax it would have incurred were it not a member of the consolidated group, and credits the member for the use of its tax saving attributes used in the consolidated returns. Income taxes for the years ended December 31, consist of: 1996 1995 1994 ---- ---- ---- (millions) Current taxes (benefits): Income Taxes: Federal $ 50.9 $ 82.9 $ 78.7 State 3.7 3.2 4.4 Net realized capital gains (losses) 25.3 28.5 (33.2) ------ ------ ------ 79.9 114.6 49.9 ------ ------ ------ Deferred taxes (benefits): Income Taxes: Federal (3.5) (14.4) (8.0) Net realized capital gains (losses) (18.6) (12.9) 33.7 ------ ------ ------ (22.1) (27.3) 25.7 ------ ------ ------ Total $ 57.8 $ 87.3 $ 75.6 ====== ====== ====== Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes for the following reasons: 1996 1995 1994 ---- ---- ---- (millions) Income before income taxes $198.9 $263.2 $220.9 Tax rate 35% 35% 35% ------ ------ ------ Application of the tax rate 69.6 92.1 77.3 ------ ------ ------ Tax effect of: State income tax, net of federal benefit 2.4 2.1 2.9 Excludable dividends (8.7) (9.3) (8.6) Other, net (5.5) 2.4 4.0 ------ ------ ------ Income taxes $ 57.8 $ 87.3 $ 75.6 ====== ====== ====== F-23 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below: 1996 1995 ---- ---- (millions) Deferred tax assets: Insurance reserves $ 344.6 $ 290.4 Unrealized gains allocable to experience rated contracts 100.8 216.7 Investment losses 7.5 7.3 Postretirement benefits other than pensions 27.0 7.7 Deferred compensation 25.0 18.9 Pension 7.6 5.7 Other 29.3 9.2 ------- ------- Total gross assets 541.8 555.9 Deferred tax liabilities: Deferred policy acquisition costs 482.1 433.0 Market discount 6.8 4.4 Net unrealized capital gains 133.7 288.2 Other (0.3) (0.1) ------- ------- Total gross liabilities 622.3 725.5 ------- ------- Net deferred tax liability $ 80.5 $ 169.6 ======= ======= Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. Valuation allowances are provided when it is not considered more likely than not that deferred tax assets will be realized. As of December 31, 1996 and 1995, no valuation allowances were required for unrealized capital gains and losses. The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was approximately $17.2 million at December 31, 1996. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes the conditions under which such taxes would become payable are remote. F-24 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) The Internal Revenue Service ("Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1990. Discussions are being held with the Service with respect to proposed adjustments. Management believes there are adequate defenses against, or sufficient reserves to provide for, any such adjustments. The Service has commenced its examinations for the years 1991 through 1994. 9. Benefit Plans Employee Pension Plans - The Company, in conjunction with Aetna, has noncontributory defined benefit pension plans covering substantially all employees. The plans provide pension benefits based on years of service and average annual compensation (measured over 60 consecutive months of highest earnings in a 120-month period). Contributions are determined using the Projected Unit Credit Method and, for qualified plans subject to ERISA requirements, are limited to the amounts that are tax-deductible. As of December 31, 1996, Aetna's accrued pension cost has been allocated to its subsidiaries, including the Company, under an allocation based on eligible salaries. Data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets is not available. The accumulated benefit obligation and plan assets are recorded by Aetna. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. Allocated pretax charges to operations for the pension plan (based on the Company's total salary cost as a percentage of Aetna's total salary cost) were $4.3 million, $6.1 million and $5.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. Employee Postretirement Benefits - In addition to providing pension benefits, Aetna currently provides health care and life insurance benefits, subject to certain caps, for retired employees. A comprehensive medical and dental plan is offered to all full-time employees retiring at age 50 with 15 years of service or at age 65 with 10 years of service. Retirees are generally required to contribute to the plans based on their years of service with Aetna. The costs to the Company associated with the Aetna postretirement plans for 1996, 1995 and 1994 were $1.8 million, $1.4 million and $1.0 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $77.7 million of accrued liabilities, primarily related to the pension and postretirement benefit plans described above, that had been previously recorded by Aetna. The after tax amount of this transfer (approximately $50.5 million) is reported as a reduction in retained earnings. Agent Pension Plans - The Company, in conjunction with Aetna, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. F-25 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 9. Benefit Plans (Continued) Agent Postretirement Benefits - The Company, in conjunction with Aetna, also provides certain postretirement health care and life insurance benefits for certain agents. The costs to the Company associated with the agents' postretirement plans for 1996, 1995 and 1994 were $0.7 million, $0.8 million and $0.7 million, respectively. Incentive Savings Plan - Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna or certain other investments, are matched, up to 5% of compensation, by Aetna. Pretax charges to operations for the incentive savings plan were $5.4 million, $4.9 million and $3.3 million in 1996, 1995 and 1994, respectively. Stock Plans - Aetna has a stock incentive plan that provides for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to certain key employees. Executive and middle management employees may be granted options to purchase common stock of Aetna at or above the market price on the date of grant. Options generally become 100% vested three years after the grant is made, with one-third of the options vesting each year. Aetna does not recognize compensation expense for stock options granted at or above the market price on the date of grant under its stock incentive plans. In addition, executives may be granted incentive units which are rights to receive common stock or an equivalent value in cash. The incentive units may vest within a range from 0% to 175% at the end of a four year period based on the attainment of performance goals. The costs to the Company associated with the Aetna stock plans for 1996, 1995 and 1994, were $8.1 million, $6.3 million and $1.7 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $1.1 million of deferred tax benefits related to stock options. This amount is reported as an increase in retained earnings. 10. Related Party Transactions The Company is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance contracts, the Separate Accounts pay the Company a daily fee which, on an annual basis, ranges, depending on the product, from .10% to 1.90% of their average daily net assets. The Company also receives fees from the variable life and annuity mutual funds and The Aetna Series Fund for serving as investment adviser. Under the advisory agreements, the Funds pay the Company a daily fee which, on an annual basis, ranges, depending on the fund, from .25% to .85% of their average daily net assets. The Company also receives fees (expressed as a percentage of the average daily net assets) from the variable life and annuity mutual funds and The Aetna Series Fund for providing administration services, and from The Aetna Series Fund for providing shareholder services and promoting sales. The amount of compensation and fees received from the Separate Accounts and Funds, included in Charges Assessed Against Policyholders, amounted to $185.4 million, $128.1 million and $104.6 million in 1996, 1995 and 1994, respectively. The Company may waive advisory fees at its discretion. F-26 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Related Party Transactions (Continued) The Company acts as an investment adviser for its affiliated mutual funds. Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly owned subsidiary of HOLDCO and an affiliate of the Company, has been acting as Subadvisor of all affiliated mutual funds and of most of the General Account assets. Fees paid by the Company to Aeltus, included in both Charges Assessed Against Policyholders and Net Investment Income, on an annual basis, range from .06% to .55% of the average daily net assets under management. For the year ended December 31, 1996, the Company paid $16.0 million in such fees. The Company may, from time to time, make reimbursements to a Fund for some or all of its operating expenses. Reimbursement arrangements may be terminated at any time without notice. Since 1981, all domestic individual non-participating life insurance of Aetna and its subsidiaries has been issued by the Company. Effective December 31, 1988, the Company entered into a reinsurance agreement with Aetna Life Insurance Company ("Aetna Life") in which substantially all of the non-participating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. A $108.0 million commission, paid by the Company to Aetna Life in 1988, was capitalized as deferred policy acquisition costs. An additional $6.1 million commission, paid by the Company to Aetna Life in 1996, was capitalized as deferred policy acquisition costs. The Company maintained insurance reserves of $628.3 million and $655.5 million as of December 31, 1996 and 1995, respectively, relating to the business assumed. In consideration for the assumption of this business, a loan was established relating to the assets held by Aetna Life which support the insurance reserves. The loan is being reduced in accordance with the decrease in the reserves. The fair value of this loan was $625.3 million and $663.5 million as of December 31, 1996 and 1995, respectively, and is based upon the fair value of the underlying assets. Premiums of $25.3 million, $28.0 million and $32.8 million and current and future benefits of $39.5 million, $43.0 million and $43.8 million were assumed in 1996, 1995 and 1994, respectively. Investment income of $44.1 million, $46.5 million and $51.5 million was generated from the reinsurance loan to affiliate in 1996, 1995 and 1994, respectively. Net income of approximately $8.1 million, $18.4 million and $25.1 million resulted from this agreement in 1996, 1995 and 1994, respectively. On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company also is responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $28.9 million and $28.0 million were maintained for this contract as of December 31, 1996 and 1995, respectively. Effective February 1, 1992, the Company increased its retention limit per individual life to $2.0 million and entered into a reinsurance agreement with Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0 million on any new individual life business, on a yearly renewable term basis. Premium amounts related to this agreement were $5.2 million, $3.2 million and $1.3 million for 1996, 1995 and 1994, respectively. F-27 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Related Party Transactions (Continued) The Company received a capital contribution of $10.4 million in cash from HOLDCO in 1996. The Company received no capital contributions in 1995 or 1994. The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the Company dividended $2.9 million in the form of two of its subsidiaries, Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement Services, Inc. (the Company's former parent). Premiums due and other receivables include $2.8 million and $5.7 million due from affiliates in 1996 and 1995, respectively. Other liabilities include $10.7 million and $12.4 million due to affiliates for 1996 and 1995, respectively. Substantially all of the administrative and support functions of the Company are provided by Aetna and its affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of service provided. 11. Reinsurance The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverables deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. F-28 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 11. Reinsurance (Continued) The following table includes premium amounts ceded/assumed to/from affiliated companies as discussed in Note 10 above. Ceded to Assumed Direct Other from Other Net Amount Companies Companies Amount ------ --------- --------- ------ (millions) 1996 Premiums: Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7 Accident and Health Insurance 6.3 6.3 -- -- Annuities 84.3 -- 0.6 84.9 ======= ======= ======= ======= Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6 ======= ======= ======= ======= 1995 Premiums: Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2 Accident and Health Insurance 7.5 7.5 -- -- Annuities 164.0 -- 0.5 164.5 ======= ======= ======= ======= Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7 ======= ======= ======= ======= 1994 Premiums: Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1 Accident and Health Insurance 9.3 9.3 -- -- Annuities 137.3 -- 0.2 137.5 ======= ======= ======= ======= Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6 ======= ======= ======= ======= 12. Commitments and Contingent Liabilities Commitments Through the normal course of investment operations, the Company commits to either purchase or sell securities or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 1996, the Company had commitments to purchase investments of $17.9 million. The fair value of the investments at December 31, 1996 approximated $18.3 million. F-29 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 12. Commitments and Contingent Liabilities (Continued) Litigation The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. F-30 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 13. Segment Information (1) The Company's operations are reported through two major business segments: Financial Services and Individual Life Insurance. Summarized financial information for the Company's principal operations was as follows: (Millions) 1996 1995 1994 - -------------------------------------------------------------------------------- Revenue: Financial Services $ 1,195.1 $ 1,211.3 $ 1,013.5 Individual Life Insurance 445.7 407.9 386.1 --------------------------------- Total revenue $ 1,640.8 $ 1,619.2 $ 1,399.6 - -------------------------------------------------------------------------------- Income before income taxes: (2) Financial Services $ 129.9 $ 160.1 $ 122.5 Individual Life Insurance 83.0 103.1 98.4 --------------------------------- Total income before income taxes $ 212.9 $ 263.2 $ 220.9 - -------------------------------------------------------------------------------- Net income: (2) Financial Services $ 94.3 $ 113.8 $ 85.5 Individual Life Insurance 55.9 62.1 59.8 --------------------------------- Net income $ 150.2 $ 175.9 $ 145.3 - -------------------------------------------------------------------------------- Assets under management: (3) Financial Services $27,268.1 $22,534.4 $18,122.9 Individual Life Insurance 2,830.5 2,590.9 2,220.5 - -------------------------------------------------------------------------------- Total assets under management $30,098.6 $25,125.3 $20,343.4 - -------------------------------------------------------------------------------- (1) The 1996 results include severance and facilities charges of $30.7 million, after tax. Of this charge $21.5 million related to the Financial Services segment and $9.2 million related to the Individual Life Insurance segment. (2) Excludes any effect of the corporate facilities and severance charge recorded in 1996 which is not directly allocable to the Financial Services and Individual Life Insurance segments. (Refer to Note 7). (3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1 million and $(386.4) million at December 31, 1996, 1995 and 1994, respectively. F-31 PART II INFORMATION NOT REQUIRED IN PROSPECTUS UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING PURSUANT TO RULE 484 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. REPRESENTATIONS, PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 REGISTRANT MAKES THE FOLLOWING REPRESENTATION: Aetna Life Insurance and Annuity Company represents that the fees and charges deducted under the policies 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. CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 7 TO REGISTRATION STATEMENT This Post-Effective Amendment No. 7 to Registration Statement No. 33-76018 is comprised of the following papers and documents: [bullet] The facing sheet. [bullet] One Prospectus for the AetnaVest Plus Variable Life Insurance Policy prospectus consisting of 86 pages [bullet] The undertaking to file reports [bullet] The undertaking pursuant to Rule 484 [bullet] Representations pursuant to Section 26(e)(2)(A) of the Investment Company Act of 1940 [bullet] The signatures [bullet] Written consents of the following persons: A. Actuarial Opinion and Consent B. Consent of Independent Auditors C. Consent of Counsel The following Exhibits: 1. Exhibits required by paragraph A of instructions to exhibits for Form N-8B-2: (1) Resolution establishing Variable Life Account B(1) (2) Not applicable (3)(i) Master General Agent Agreement(1) (3)(ii) Life Insurance General Agent Agreement(1) (3)(iii) Broker Agreement(1) (3)(iv) Life Insurance Broker-Dealer Agreement(1) (4) Not applicable (5)(i) Form of AetnaVest Plus Policy (38899-93) (5)(ii) Disability Benefit Rider (70174-93) to AetnaVest Plus Policy (38899-93) (5)(iii) Unisex Amendment Rider (70211-95US) for use with Aetna Vest Plus Policy (38899-93) (6)(i) Certificate of Incorporation and By-Laws of Aetna Life Insurance and Annuity Company, Depositor(2) (6)(ii) Amendment of Certificate of Incorporation of Aetna Life Insurance and Annuity Company(3) (7) Not applicable (8)(i) Fund Participation Agreement (Amended and Restated) between Aetna Life Insurance and Annuity Company, Alger American Fund and Fred Alger Management, Inc. dated as of March 31, 1995(4) (8)(ii) 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(3) (8)(iii) 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(3) (8)(iv) Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995(5) (8)(v) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Janus Aspen Series dated April 19, 1994 and amended March 1, 1996(4) (8)(vi) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Scudder Variable Life Investment Fund dated April 27, 1992, and amended February 19, 1993 and August 13, 1993(4) (8)(vii) Amendment dated as of February 20, 1996 to Fund Participation Agreement between Aetna Life Insurance and Annuity Company and Scudder Variable Life Investment Fund dated April 27, 1992 as amended February 19, 1993 and August 13, 1993(5) (8)(viii) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Investors Research Corporation and TCI Portfolios, Inc. dated July 29, 1992 and amended December 22, 1992 and June 1, 1994(4) (9) Not applicable (10) Form of Application for AetnaVest Plus Policy(6) 2. Opinion of Counsel(7) 3. Not applicable 4. Not applicable 5. See Item (27) below 6. Copy of Power of Attorney(8) (27) Financial Data Schedule 1. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form S-6 (File No. 33-76004), as filed electronically on February 16, 1996. 2. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-60477), as filed electronically on April 15, 1996. 3. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed electronically on February 11, 1997. 4. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed electronically on April 12, 1996. 5. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-88720), as filed electronically on June 28, 1996. 6. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-6 (File No. 33-76018), as filed on April 25, 1994. 7. Incorporated by reference to Registrant's Rule 24f-2 Notice for the fiscal year ended December 31, 1996, as filed electronically on February 28, 1997. 8. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form S-2 (File No. 33-60477), as filed electronically on April 4, 1997. In addition, a certified copy of the resolution adopted by the Depositor's Board of Directors authorizing filings pursuant to a power of attorney as required by Rule 478 under the Securities Act of 1933 is incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed electronically on April 12, 1996. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, Variable Life Account B of Aetna Life Insurance and Annuity Company, certifies that it meets all of the requirements for effectiveness of this Post-Effective Amendment No. 7 to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 7 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, and the seal of the Depositor to be hereunto affixed and attested, all in the City of Hartford, and State of Connecticut, on the 22nd day of April, 1997. VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY (Registrant) (SEAL) ATTEST: /s/Kirk P. Wickman ------------------- Kirk P. Wickman Secretary By: AETNA LIFE INSURANCE AND ANNUITY COMPANY (Depositor) By: Daniel P. Kearney* --------------------------- Daniel P. Kearney Principal Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 7 to the Registration Statement No. 33-76018 has been signed below by the following persons in the capacities indicated and on the dates indicated.
Signature Title Date - --------- ----- ---- Daniel P. Kearney* Director and President ) - ------------------------------------ (Principal Executive Officer) ) Daniel P. Kearney ) ) Christopher J. Burns* Director ) April - ------------------------------------ Christopher J. Burns ) 22, 1997 ) Laura R. Estes* Director ) - ------------------------------------ Laura R. Estes ) ) J. Scott Fox* Director ) - ------------------------------------ J. Scott Fox ) ) Timothy A. Holt* Director ) - ------------------------------------ Timothy A. Holt ) ) Gail P. Johnson* Director ) - ------------------------------------ Gail P. Johnson ) ) John Y. Kim* Director ) - ------------------------------------ John Y. Kim ) ) Shaun P. Mathews* Director ) - ------------------------------------ Shaun P. Mathews ) ) Glen Salow* Director ) - ------------------------------------ Glen Salow ) ) Creed R. Terry* Director ) - ------------------------------------ Creed R. Terry ) ) Deborah Koltenuk* Vice President and Treasurer, ) - ------------------------------------ Corporate Controller ) Deborah Koltenuk
By: /s/Julie E. Rockmore ------------------------------------ *Julie E. Rockmore Attorney-in-Fact VARIABLE LIFE ACCOUNT B EXHIBIT INDEX Exhibit No. Exhibit Page - ----------- ------- ---- 99-1.1 Resolution establishing Variable Life Account B * 99-1.3(i) Master General Agent Agreement * 99-1.3(ii) Life Insurance General Agent Agreement * 99-1.3(iii) Broker Agreement * 99-1.3(iv) Life Insurance Broker-Dealer Agreement * 99-1.5(i) Form of AetnaVest Plus Policy (38899-93) -------- 99-1.5(ii) Disability Benefit Rider (70174-93) to AetnaVest Plus Policy (38899-93) -------- 99-1.5(iii) Unisex Amendment Rider (70211-95US) for use with AetnaVest Plus Policy (38899-93) -------- 99-1.6(i) Certificate of Incorporation and By-Laws of * Aetna Life Insurance and Annuity Company, Depositor 99-1.6(ii) Amendment of Certificate of Incorporation of Aetna * Life Insurance and Annuity Company 99-1.8(i) Fund Participation Agreement (Amended and Restated) * between Aetna Life Insurance and Annuity Company, Alger American Fund and Fred Alger Management, Inc. dated as of March 31, 1995 99-1.8(ii) 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 *Incorporated by reference Exhibit No. Exhibit Page - ----------- ------- ---- 99-1.8(iii) 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 99-1.8(iv) Service Agreement between Aetna Life Insurance * and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995 99-1.8(v) Fund Participation Agreement between Aetna Life * Insurance and Annuity Company and Janus Aspen Series dated April 19, 1994 and amended March 1, 1996 99-1.8(vi) Fund Participation Agreement between Aetna Life * Insurance and Annuity Company and Scudder Variable Life Investment Fund dated April 27, 1992 and amended February 19, 1993 and August 13, 1993 99-1.8(vii) Amendment dated as of February 20, 1996 to Fund * Participation Agreement between Aetna Life Insurance and Annuity Company and Scudder Variable Life Investment Fund dated April 27, 1992 as amended February 19, 1993 and August 13, 1993 99-1.8(viii) Fund Participation Agreement between Aetna Life * Insurance and Annuity Company, Investors Research Corporation and TCI Portfolios, Inc. dated July 29, 1992 and amended December 22, 1992 and June 1, 1994 99-1.10 Form of Application for AetnaVest Plus Policy * 99-2 Opinion of Counsel * 99-6 Copy of Power of Attorney * 27 Financial Data Schedule -------- *Incorporated by reference EX-99.1.5(I) 2 AETNA LIFE INSURANCE AND ANNUITY COMPANY Hartford, Connecticut 06156 (A STOCK COMPANY) While this Policy is in force, Aetna will pay Proceeds subject to all of this Policy's provisions. Other rights and benefits are provided as described in this Policy. The provisions of this and the following pages are part of this Policy. THIS POLICY IS A LEGAL CONTRACT BETWEEN YOU AND AETNA PLEASE READ YOUR POLICY CAREFULLY RIGHT OF POLICY EXAMINATION This Policy may be returned to Aetna or its representative within 10 days after its receipt. Return this Policy to Aetna, Individual Life Insurance, at 151 Farmington Avenue, Hartford, Connecticut 06156. Upon its return, this Policy will be deemed void from its beginning. The amount refunded will be: 1. the difference between payments made and amounts allocated to Variable Life Account B; plus 2. the value of amounts allocated to Variable Life Account B on the date the returned contract is received by Aetna; plus 3. any charges made under this Policy's terms on the amounts allocated to Variable Life Account B. Signed for Aetna on its Date of Issue. /s/ George N. Gingold /s/ G. G. Benanav Secretary President ------------------------------- Registrar FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY [bullet] FLEXIBLE PREMIUMS PAYABLE UNTIL MATURITY DATE OR DEATH [bullet] PROCEEDS PAYABLE UPON THE FIRST EVENT TO OCCUR - SURRENDER, MATURITY OR DEATH [bullet] NON-PARTICIPATING - NO DIVIDENDS PAYABLE The amount or duration of the death benefit may be fixed or variable. The death benefit is payable as described in the Death Benefit Options and Proceeds sections of this Policy. Values in each Fund held in a Separate Account may increase or decrease daily. Such values are not guaranteed as to dollar amount. Refer to the Policy Values section of this Policy for more information. Table of Contents - ------------------------------------------------------------------------------ Page No. Policy Specifications..................................PS1 Policy Summary...........................................1 Definitions..............................................1 Attained Age........................................1 Date of Issue.......................................1 Death Benefit.......................................1 Fixed Account Value.................................1 Fund(s).............................................2 General Account.....................................2 Home Office.........................................2 Loan Account Value..................................2 Maturity Date.......................................2 Minimum Specified Amount............................2 Monthly Deduction Day...............................2 Net Premium.........................................2 Policy Month........................................2 Policy Year/Policy Anniversary......................2 Proceeds............................................2 Separate Account....................................3 Separate Account Value..............................3 Specified Amount....................................3 Subsequent Application(s)...........................3 Total Account Value.................................3 Valuation Date......................................3 Valuation Period....................................3 Variable Annuity Account B..........................3 Variable Life Account B.............................3 We, Our, Us, Company................................3 Written Request.....................................3 You, Your...........................................3 General Provisions.......................................4 The Contract........................................4 Owner...............................................4 Beneficiary.........................................4 Changes in Owner and Beneficiary....................4 Assignment..........................................4 Non-Participating...................................5 Policy Settlement...................................5 Age and/or Sex......................................5 Change of Address...................................5 Annual Report.......................................5 Projection of Benefits..............................5 Proceeds............................................5 Coverage Beyond Maturity............................6 Right to Defer Payment..............................6 Suicide and Incontestability.............................7 Suicide Exclusion...................................7 Incontestability....................................7 Premiums and Reinstatement...............................8 General.............................................8 Planned Premiums....................................8 Additional Premiums.................................8 Allocation of Premium...............................8 Changes in Allocation Percentages...................9 No Lapse Coverage...................................9 Grace Period........................................9 Reinstatement......................................10 Death Benefit Options...................................10 General............................................10 Option 1...........................................10 Option 2...........................................10 Death Benefit Based on a Percentage................11 Guaranteed Death Benefit Provision......................11 General............................................11 Guaranteed Death Benefit to Age 80.................11 Guaranteed Death Benefit to Age 100................12 Changes to the Guaranteed Death Benefit............12 Policy Values...........................................12 Basis of Calculation...............................12 Interest Credited..................................12 Fixed Account Value................................12 Separate Account Value.............................13 Charges to Policy Values...........................14 Transfers Within Accounts..........................14 Monthly Deductions.................................14 Cost of Insurance..................................15 Cost of Insurance Rate.............................15 Nonforfeiture Provisions................................15 Continuation of Coverage...........................15 Surrender Value....................................15 Surrender Charge...................................16 Partial Surrender..................................16 Paid-Up Nonforfeiture Option.......................16 Policy Loans............................................17 General............................................17 Preferred Loans....................................17 Loan Interest Rate Charged.........................18 Loan Interest Rate Credited........................18 Repayment..........................................19 Changes in Insurance Coverage...........................19 General............................................19 Increase in Specified Amount.......................19 Decrease in Specified Amount.......................20 Change in Death Benefit Option.....................20 Change from Option 1 to 2..........................20 Change from Option 2 to 1..........................20 Change of Fund(s).......................................21 Separate Account........................................21 Settlement Options......................................21 Conditions.........................................21 Income Options.....................................22 Option 1 - Interest................................22 Option 4 - Life Income for Two Payees..............25 Terms of Options...................................27 - ------------------------------------------------------------------------------ Any riders and a copy of the application(s) are at the end of this Policy. 38899-93 Betterment of Payments.............................27 Separate Account...................................27 Fund(s) Settlement Option Units of Variable Annuity Account B..................................28 Fund(s) Settlement Option Unit Value of Variable Annuity Account B..................................28 Withdrawal and Death of the Payee..................29 - ------------------------------------------------------------------------------ Any riders and a copy of the application(s) are at the end of this Policy. 38899-93 Policy Summary It is important that You understand Your insurance policy. We have tried to use understandable language throughout this Policy. However, should You have any questions after You have read it, please call the representative who sold this Policy to You or call Us. This summary is not a substitute for the detailed policy provisions. This is a flexible premium variable life insurance policy. This Policy provides that cash values may be either fixed or variable or a combination of fixed and variable. You may allocate Net Premiums to the General Account, Variable Life Account B, or both Accounts. Net Premiums allocated to Variable Life Account B must be allocated to one or more Funds. Shares of these Funds support the benefits provided by the variable portion of this Policy. The cash value in each Fund is not guaranteed and will vary with the investment performance of that Fund. If the General Account is selected, the cash value in that Account will accumulate at rates of interest We determine. Such rates will not be less than 4.5% a year. Proceeds as described in this Policy will be paid upon surrender, maturity, or death of the Insured. Sufficient premiums must be paid to continue this Policy in force. Premium reminder notices will be sent for planned premiums and for premiums required to continue this Policy in force. This Policy may be reinstated. Other rights and benefits are explained in this Policy. Definitions Attained Age Issue age of the insured as shown in the Policy Specifications, increased by the number of Policy Years elapsed. Issue age is the Insured's age on his/her birthday nearest this Policy's Date of Issue. Date of Issue The effective date for initial coverage is the Date of Issue shown in the Policy Specifications. The Date of Issue and the effective date for any change in coverage will be the Date of Coverage Change shown in the supplemental Policy Specifications which will be sent to You. Coverage is conditional on payment of the first premium, if any, and issue of this Policy as provided in the application. Death Benefit The amount described in the Death Benefit Option provision which is payable on the date of death, subject to all provisions contained in this Policy. Fixed Account Value The non-loaned portion of this Policy's Total Account Value attributable to the non-variable portion of this Policy. The Fixed Account Value is held in the General Account. 38899-93 Page 1 Fund(s) One or more of the open-end management investment companies (mutual funds whose shares pay for the benefits provided by the variable portion of this Policy). Shares of the Funds held pursuant to this Policy are held in Variable Life Account B except that shares of the Funds referenced in the Settlement Options section of this Policy are held in Variable Annuity Account B. The Fund(s) held in Variable Life Account B may differ from the Fund(s) held in Variable Annuity Account B. General Account The account which holds the assets of the Company which are attributable to the non-variable portion of this Policy. The Fixed Account Value and the Loan Account Value are held in the General Account. Home Office Our main office, located at 151 Farmington Avenue, Hartford, Connecticut 06156. Loan Account Value The sum of all unpaid loans. The amount necessary to repay all loans in full is the Loan Account Value plus any accrued interest. The Loan Account Value is held in the General Account. Maturity Date The Policy Anniversary on which the Insured reaches Attained Age 100. Minimum Specified Amount The Specified Amount for this Policy cannot be decreased below this amount. The Minimum Specified Amount for this Policy is shown in the Policy Specifications. Monthly Deduction Day The first Monthly Deduction Day is the Date of Issue. Monthly Deduction Days occur each month thereafter on the same day of the month as the Date of Issue. Net Premium The Net Premium is equal to the premium paid, less the Premium Load shown in the Policy Specifications. Policy Month The Policy Month begins each month on the same day of the month as the Date of Issue. Policy Year/Policy Anniversary The first Policy Year is the 12 month period beginning on the Date of Issue. Your Policy Anniversary is equal to the Date of Issue plus 1 year, 2 years, etc. Proceeds The amount We will pay upon the death of the Insured, the Maturity Date, or upon surrender of this Policy as described in the Proceeds provision. 38899-93 Page 2 Separate Account Variable Life Account B; or, when referring to a settlement option as described in the Settlement Option provisions of this Policy, Variable Annuity Account B. Separate Account Value The portion of this Policy's Total Account Value attributable to the variable portion of this Policy. This Policy's Separate Account Value is held in Variable Life Account B. Specified Amount The Specified Amount is shown in the Policy Specifications or in the Supplemental Policy Specifications, if later changed. Subsequent Application(s) Any application after the initial application initiated by You or by Us. Total Account Value The sum of the Fixed Account Value, the Separate Account Value, and the Loan Account Value. This Policy's cash value. Valuation Date Any day on which the New York Stock Exchange is open for trading. Valuation Period The period of time commencing, usually at 4:00 p.m. Eastern Time on each Valuation Date and ending at 4:00 p.m. Eastern Time on the next Valuation Date. Variable Annuity Account B A Separate Account which segregates assets attributable to the variable portion of annuity contracts and life insurance settlement options from other assets of the Company. Its assets are invested in shares of the Funds. Variable Annuity Account B holds all or a portion of the Policy's Proceeds if a variable settlement option is elected. Variable Life Account B A Separate Account which segregates assets attributable to the variable portion of life insurance from other assets of the Company. Its assets are invested in shares of the Funds. We, Our, Us, Company Refers to Aetna Life Insurance and Annuity Company, its successors, or assigns. Written Request A request in writing, in a form satisfactory to Us and received by Us at the Home Office. You, Your Refers to the Owner(s) of this Policy. 38899-93 Page 3 General Provisions The Contract This Policy, the initial application on the Insured, any Subsequent Applications and any riders constitute the entire contract. Copies of all applications are attached to and made a part of this Policy. Only the President, Executive Vice President, or the Corporate Secretary may agree to a change in this Policy, and then only in writing. All statements made by or for the insured are representations and not warranties. No statement will be used to void this Policy or defend against a claim unless it is contained in the initial application or Subsequent Applications. Owner Unless otherwise stated in the application or later changed, this Policy is owned by the Insured. During the lifetime of the Insured all rights granted by this Policy or allowed by Us belong to the Owner. If this Policy is owned jointly, any exercise of rights granted by this Policy must be made jointly. Beneficiary The individual or entity that will receive any Proceeds on death is the Beneficiary. The Beneficiary is stated in the application, unless later changed. If no designated Beneficiary is living at the time of the death of the Insured, all benefits will be paid to the Owner or the Owner's executors, administrators, or assigns. Changes in Owner and Beneficiary Unless this Policy states otherwise, the Owner or Beneficiary, or both, may be changed. This may be done as often as desired by the Owner of record during the lifetime of the Insured and before the Maturity Date. To change the Owner or Beneficiary, Your Written Request must be sent to Us. When We give Our written acceptance, the change will take effect as of the date Your Written Request was signed. The change will be subject to any action We take before Our written acceptance of the change. Assignment A copy of an assignment must be on file at the Home Office. Until We receive such notice, We will not be required to take notice of, or be responsible for, any transfer of interest in this Policy by assignment, agreement, or otherwise. We will not be responsible for the validity of any assignment. 38899-93 Page 4 Non-Participating No dividends will be paid. Policy Settlement All amounts payable by Us will be paid by the Home Office. The Loan Account Value plus any accrued interest will be deducted from the amount payable at settlement. We may require return of this Policy. Age and/or Sex If the Insured's age and/or sex is misstated, the Death Benefit will be that which would have been purchased by the most recent monthly deduction at the correct age and/or sex. Change of Address You must notify Us at the Home Office of a change in Your mailing address. Annual Report We will send You a report at least once during each Policy Year. The report will show the Total Account Value, the Surrender Value and the Death Benefit on the date of the report. It will also show since the last report at least the following information: 1. Gross premiums paid; 2. the cost of insurance and the cost of riders; 3. interest and investment return credited to the Total Account Value; 4. the amount of any surrenders or partial surrenders; 5. the amount of surrender charges made; 6. a summary of loan activity; 7. any other information required by the State in which this Policy was delivered. Projection of Benefits We will provide a projection of illustrative future death benefits and Total Account Values at any time upon Written Request. We reserve the right to charge a fee of $25 for this service. Proceeds Proceeds on death of the Insured will equal: 1. The Death Benefit; less 2. the Loan Account Value plus any accrued interest. Proceeds on death are payable after receipt at the Home Office of due proof of death of the Insured. 38899-93 Page 5 Unless the Guaranteed Death Benefit to Age 100 is in effect, Proceeds on maturity of this Policy will equal: 1. The Total Account Value on the Maturity Date; less 2. the Loan Account Value plus any accrued interest. Proceeds on surrender of this Policy will equal the Surrender Value as described in the Surrender Value provision. All Proceeds are subject to adjustment under the Age and/or Sex, Incontestability, Suicide Exclusion and Grace Period provisions. Coverage Beyond Maturity In the 30 days prior to the Maturity Date of this Policy, You may, by Written Request, elect to continue coverage beyond the Maturity Date. Any extra benefit riders will be terminated on the Maturity Date. If elected, the following will apply: [bullet] We will continue to credit interest to the Total Account Value of this Policy as described in the Interest Credited provision. [bullet] After the Insured reaches Attained Age 100 the Separate Account Value of this Policy will be transferred to the Fixed Account. [bullet] Monthly Deductions will be calculated with a Cost of Insurance rate equal to zero. [bullet] Proceeds payable on death will be as described in the Proceeds provision of this Policy, under Proceeds payable on death. All rights and benefits as described within the provisions of this Policy will be available during the lifetime of the Insured. Right to Defer Payment Payments of any Separate Account Value will be made within 7 days after Our receipt of Your Written Request. However, payment may be postponed when the New York Stock Exchange is closed or when the Securities and Exchange Commission declares an emergency. For payment from the Separate Account Value in such instances, We may defer payment of: 1 Surrender or partial surrender values; 2. any Proceeds on death in excess of the current Specified Amount; or 3. any portion of the Loan Value. 38899-93 Page 6 Payment of any Fixed Account Value may be deferred for up to six months, except when used to pay premiums to Us. Suicide and Incontestability Suicide Exclusion If the Insured dies by suicide, while sane or insane, within two years from the Date of Issue of this Policy, We will pay: 1. Premiums paid less amounts allocated to Variable Life Account B; plus 2. the Separate Account Value; plus 3. the portion of the monthly deductions that have been deducted from the Separate Account Value; less 4. the sum of: (a) the Loan Account Value transferred from the Fixed Account Value; plus (b) the interest due on the Loan Account Value; plus (c) the value of any partial surrenders transferred from the Fixed Account Value; plus (d) any interest earned on the Loan Account Value transferred to the Separate Account Value. If the Insured dies by suicide, while sane or insane, within 2 years from the Date of Issue of any increase in coverage, We will pay only the monthly deductions for the increase. If the Insured dies by suicide, while sane or insane, more than 2 years from the Date of Issue of this Policy but within 2 years from the Date of Issue of any increase in coverage, We will pay: 1. The Proceeds on death for any coverage in effect more than 2 years from the Date of Issue of this Policy; plus 2. the monthly deductions for the increase in coverage. All amounts will be calculated as of the date of death. Incontestability With respect to statements made in the initial application or any Subsequent Application for the Insured: [bullet] We will not contest this Policy after it has been in force during the lifetime of the Insured for 2 years from its Date of Issue. 38899-93 Page 7 With respect to statements made in any Subsequent Applications for the Insured: [bullet] We will not contest coverage relating to Subsequent Applications after coverage has been in force during the lifetime of the Insured for 2 years from the Date of Issue of such coverage or from the effective date of any reinstatement. If this Policy is contested, Your rights or the Beneficiary's rights may be affected. Premiums and Reinstatement General Sufficient premiums must be paid to continue this Policy in force until the Maturity Date. The first premium is due on the Date of Issue. Premium due dates are measured from the Date of Issue. Any premiums after the first premium are payable only at Our Home Office. Send Your check or money order, payable to Aetna, to the Home Office. Please be sure to write Your Policy number on Your check. A receipt signed by an officer of the Company will be given upon request. We may apply limits for Planned Premiums and Additional Premiums as necessary to preserve the status of this Policy as a life insurance policy under federal tax law. We may require satisfactory evidence of insurability if payment of the new Planned Premium or an Additional Premium during the current Policy Year would increase the difference between the Death Benefit and the Total Account Value. Planned Premiums Planned Premium is the premium amount You intend to pay and the amount that will be billed. Premium reminder notices for Planned Premiums will be sent at frequencies of 3, 6 or 12 months, or at any other frequency to which We agree. Planned premiums as of the Date of Issue are shown in the Policy Specifications. You may change the amount and frequency of Planned Premiums by Your Written Request. Additional Premiums Additional Premiums are premium payments in excess of planned premiums. Additional Premiums may be paid at any time while this Policy is in force and before the Maturity Date. Allocation of Premium Each Net Premium will be credited to Variable Life Account B (and each of the selected Funds) and/or the General Account in the percentages indicated in the Policy Specifications. If these percentages are changed in accordance with the Changes in Allocation Percentages provisions of this Policy, We will send a letter to You confirming the change. 38899-93 Page 8 Changes in Allocation Percentages Allocation percentages may be changed at any time by Your request to Us. Percentages may be changed in whole percentages. The change will be effective as of the date of the next premium payment after You notify Us. No Lapse Coverage This Policy will not terminate within the 5 year period after its Date of Issue if on each Monthly Deduction Day within that period the sum of premiums paid within that period equals or exceeds: 1. The sum of the Basic Monthly Premiums for each Policy Month from the start of the period, including the current month; plus 2. Any partial surrenders; plus 3. Any increase in the Loan Account Value since the start of the period. If on each Monthly Deduction Date within the 5 year period the sum of premiums paid is less than the sum of items 1, 2 and 3 above and there is insufficient Cash Surrender Value, the Grace Period provision will apply. After the 5 year period expires, the Total Account Value may be insufficient to keep this Policy in force. Payment of an additional premium may be necessary. The Basic Monthly Premium is shown in the Policy Specifications. Grace Period If the Total Account Value less the Surrender Charge less the Loan Account Value is not sufficient to allow a Monthly Deduction on the Monthly Deduction Day, We will allow You 61 days of grace for payment of an amount sufficient to cover the Monthly Deduction. We may require payment of the amount necessary to keep this Policy in force for the current Policy Month plus two additional Policy Months. Written notice will be mailed to Your last known address, according to Our records, not less than 61 days before termination of this Policy. This notice will also be mailed to the last known address of any assignee of record. During the days of grace this Policy will stay in force. If the Insured's death occurs during the days of grace, We will deduct an amount sufficient to cover the overdue Monthly Deduction(s) from the Death Benefit. If payment is not made within 61 days after the Monthly Deduction Day, the Policy will terminate without value at the end of the Grace Period unless this Policy is continued under the No Lapse Coverage provision or the Guaranteed Death Benefit provision. 38899-93 Page 9 Reinstatement If this Policy terminates as provided in the Grace Period provision, We may allow it to be reinstated within 5 years after the date of termination and before the Maturity Date. To reinstate this Policy, we will require: 1. satisfactory evidence of insurability on the Insured; and 2. payment of an amount sufficient to cover the current monthly deduction plus two additional Policy Months. If this Policy is reinstated within 5 years of this Policy's Date of Issue or while the No Lapse Coverage provision would be in effect if this Policy had not lapsed, all values including Loan Account Value will be reinstated to the point they were on the date of lapse. If this Policy is reinstated after the No Lapse Coverage provision has expired, this Policy will be reinstated on the Monthly Deduction Day following Our approval. This Policy's Total Account Value at reinstatement will be the Net Premium paid less the monthly deduction for that day. Any Loan Account Value will not be reinstated. If this Policy's Total Account Value less any Loan Account Value including accrued interest was not sufficient to cover the full Surrender charge at the time of lapse, the remaining portion of the Surrender Charge will also be reinstated at the time of this Policy's reinstatement. Extra benefit riders will be reinstated only with Our consent. The Guaranteed Death Benefit Provision will not be reinstated. Death Benefit Options General The Proceeds payable upon the Insured's death will be as provided under one of the following Death Benefit options. The option for this Policy as of the Date of Issue is shown in the Policy Specifications. If You have changed the Death Benefit option, the option is shown in the supplemental Policy Specifications which were sent to You. Option 1 The Specified Amount shown in the Policy Specifications includes the Total Account Value. Under this option, the Death Benefit will be the greater of: (a) the Specified Amount on the date of death or (b) a percentage of the Total Account Value, as described in the table below. Option 2 The Specified Amount is in addition to the Total Account Value. Under this option, the Death Benefit will be the greater of: (a) the Specified Amount plus the Total Account Value on the date of death; or (b) a percentage of the Total Account Value, as described in the table below. 38899-93 Page 10 Death Benefit Based on a Percentage As determined below, Item (b) under either Death Benefit option will not be less than a percentage of the Total Account Value on the date of death.
- ------------------------------------------------------------------------------------------------------------------------------- TOTAL TOTAL TOTAL TOTAL ATTAINED ACCOUNT ATTAINED ACCOUNT ATTAINED ACCOUNT ATTAINED ACCOUNT % AGE VALUE % AGE VALUE % AGE VALUE % AGE VALUE - ------------------------------------------------------------------------------------------------------------------------------- 0-40 250% 41 243 51 178% 61 128% 71 113% 42 236 52 171 62 126 72 111 43 229 53 164 63 124 73 109 44 222 54 157 64 122 74 107 45 215 55 150 65 120 75-90 105 46 209 56 146 66 119 91 104 47 203 57 142 67 118 92 103 48 197 58 138 68 117 93 102 49 191 59 134 69 116 94 101 50 185 60 130 70 115 95+ 100 - -------------------------------------------------------------------------------------------------------------------------------
Guaranteed Death Benefit Provision General The Guaranteed Death Benefit provision is applicable only if one of the following is chosen on the initial application for this Policy: 1. the Guaranteed Death Benefit to Age 80; or 2. the Guaranteed Death Benefit to Age 100. The Monthly Premium for these options is shown in the Policy Specifications. Guaranteed Death Benefit to Age 80 Your Policy will remain in force until Attained Age 80 even if the cash value is insufficient to cover the current Monthly Deductions due to fund performance; provided that on each Policy Anniversary the result of premiums paid, less any partial surrenders is equal to or greater than the Monthly Premium multiplied by the number of Policy Months elapsed since the Date of Issue. On the Policy Anniversary, if We determine that this condition has not been satisfied, We will notify You. You will have 2 Policy Months from Your Policy Anniversary to pay the amount required to keep the Guaranteed Death Benefit to Age 80 in force. If the required payment is not made within this time period, the Guaranteed Death Benefit to Age 80 will be terminated. If Guaranteed Death Benefit Premiums to Age 80 have been paid, but loans taken have caused this Policy to enter the Grace Period, this provision will not keep this Policy in force beyond the Grace Period. Your Guaranteed Death Benefit Premium will continue to be due and payable at the current premium mode if the conditions of the Grace Period are met. 38899-93 Page 11 Guaranteed Death Benefit to Age 100 Your Policy will remain in force until Attained Age 100 even if the cash value is insufficient to cover the current Monthly Deductions due to fund performance; provided that on each Policy Anniversary the result of premiums paid; less any partial surrenders is equal to or greater than the Monthly Premium multiplied by the number of Policy Months elapsed since the Date of Issue. On the Policy Anniversary, if We determine that this condition has not been satisfied, We will notify You. You will have 2 Policy Months from Your Policy Anniversary to pay the amount required to keep the Guaranteed Death Benefit to Age 100 in force. If the required payment is not made within this time period, the Guaranteed Death Benefit to Age 100 will be terminated. If Guaranteed Death Benefit Premiums to Age 100 have been paid, but loans taken have caused this Policy to enter the Grace Period, this provision will not keep this Policy in force beyond the Grace Period. Your Guaranteed Death Benefit Premium will continue to be due and payable at the current premium mode if the conditions of the Grace Period are met. Upon termination of the Guaranteed Death Benefit to Age 100, if it is determined that the condition for the Guaranteed Death Benefit to Age 80 has been satisfied, Your Policy will remain in force until Attained Age 80. The conditions set forth in the Guaranteed Death Benefit to Age 80 provision will be applicable. If the Guaranteed Death Benefit to Age 100 is in effect on the Maturity Date, Proceeds on maturity will equal the greater of the Total Account Value or the Specified Amount, less the Loan Account Value plus any accrued interest. Changes to the Guaranteed Death Benefit The Guaranteed Death Benefit to Age 80 and the Guaranteed Death Benefit to Age 100 cannot be reinstated after termination of the provision. Policy Values Basis of Calculation The values of this Policy equal or exceed those required by law in the state where this Policy is delivered. A detailed statement has been filed with the state which shows how to compute those values. Interest Credited We will credit interest on the Fixed Account Value at the guaranteed rate of 4.5% per year. This guaranteed rate equals 0.36748%, per month, compounded monthly. Interest earned by the Loan Account Value is described in the Loan Interest Credited provision. Fixed Account Value The Fixed Account Value for this Policy will be: 38899-93 Page 12 1. The value of the Net Premiums credited to the Fixed Account Value; less 2. the portion of monthly deductions from the Fixed Account Value; plus 3. interest credited; less 4. any transfers of value out of the Fixed Account Value; plus 5. any transfers from the Fund(s) to the Fixed Account Value; plus 6. any loan repayments credited to the Fixed Account Value. Separate Account Value The Separate Account Value of this Policy will be the sum of the Fund Account Values. A. Fund Account Value The portion of each Net Premium allocated to a Fund plus any interest earned on the Loan Account Value which is attributable to that Fund is credited to this Policy in the form of accumulation units. Accumulation units measure the net investment result of each Fund. The number of accumulation units credited is equal to that portion of Net Premium divided by the accumulation unit value for that Fund for the Valuation Period in which the premium is received. The Fund Account Value of each Fund will equal the accumulation unit value for that Fund multiplied by the number of accumulation units for that Fund credited to this Policy. B. Accumulation Unit Value A Fund Accumulation Unit Value is determined by multiplying the value of the Fund's accumulation unit for the immediately preceding Valuation Period by the net investment factor for the current period. The net investment factor equals the net investment rate plus 1.0. The net investment rate is determined separately for each Fund held in Variable Life Account B as follows: 1. The net assets of the Fund held in Variable Life Account B at the end of a Valuation Period; less 2. the net assets of the Fund held in Variable Life Account B at the beginning of that Valuation Period, adjusted by any taxes or provisions for taxes attributable to the operation of Variable Life Account B; divided by 3. the value of the Fund's accumulation units held in Variable Life Account B at the beginning of the Valuation Period; less 38899-93 Page 13 4. a daily charge at an annual rate not to exceed .90% of net assets of the Fund for mortality and expense risks and not to exceed .70% of net assets of the Fund for the Company's administrative expenses attributable to policies funded through Variable Life Account B. Charges to Policy Values Charges and deductions made according to this Policy's provisions will be deducted from the Separate Account Value and the Fixed Account Value in the same proportion that these Values bear to the sum of the Fixed Account Value and the Separate Account Value on the date of the deduction. The portion of the deduction attributable to the Separate Account Value will reduce each Fund Account Value proportionately. The value deducted from each Fund is determined by dividing the amount of the deduction attributable to the Fund by the Fund's accumulation unit value for the Valuation Period when the charge was made. The resulting number of Fund accumulation units will be deducted from the total accumulation units for that Fund. The portion of the deduction attributable to the Fixed Account Value will be deducted from that Value as a dollar amount. Transfers Within Accounts You may transfer all or part of each Fund Account Value to any other Fund or to the Fixed Account Value at any time. Within the forty-five days following the Policy Anniversary, You may request a transfer of a portion of the Fixed Account Value to one or more of the Funds. This type of transfer is allowed only once within these forty-five days and We must receive Your request at the Home Office within the forty-five days. The transfer will be effective on the Valuation Date that Your request is received by the Home Office. The amount of such transfer cannot exceed the greater (1) 25% of the Fixed Account Value, or (2) $500. Accumulation units for each Fund will be added to or subtracted from the total accumulation units for that Fund, based on each Fund's accumulation unit value at the end of the Valuation Date when request for such transfer is received by Us. A dollar amount will be added to or subtracted from the Fixed Account Value according to the terms of Your request for transfer. Monthly Deductions Monthly deductions begin on the Date of Issue and occur on each Monthly Deduction Day thereafter. The monthly deduction will be deducted from this Policy's values as described in the Charges to Policy Values provision. The monthly deduction is equal to: 1. the cost of insurance as calculated below; plus 2. the monthly expense charge, shown in the Policy Specifications. 38899-93 Page 14 Cost of Insurance The Cost of Insurance on any Monthly Deduction Day will be (1) multiplied by the result of (2) minus (3) where: (1) is the monthly Cost of Insurance Rate on that date divided by 1,000; (2) is the death benefit on that date divided by 1.0036748; (3) is the Total Account Value on that date before computing the monthly deductions for the cost of insurance for this Policy. Cost of Insurance Rate The monthly cost of insurance is based on the Insured's attained age, sex, and premium class. If the Insured is assigned a premium class which designates "smoker" and this classification changes, You may, by Written Request, reclassify the Insured any time after the first Policy Anniversary. Upon Our acceptance of the change, supplemental Policy Specifications will be sent to You. The monthly Cost of Insurance Rates may be adjusted by Us from time to time. Adjustments will be on a class basis and will be based on Our estimates for future factors such as mortality, investment income, expenses, and the length of time policies stay in force. Any adjustments will be made on a nondiscriminatory basis. The rate during any Policy Year will never exceed the rate shown for that year in the Table of Guaranteed Maximum Insurance Rates in the Policy Specifications. Those rates are based on the 1980 Commissioners Standard Ordinary Mortality Table, Male or Female, Smoker or Nonsmoker. If the Insured's Attained Age is 14 or less, rates are calculated using the 1980 Commissioners Standard Ordinary Mortality Table, Male or Female. Nonforfeiture Provisions Continuation of Coverage Coverage of this Policy will continue to the Maturity Date as long as the Surrender value is sufficient to cover each monthly deduction. If the Surrender Value is not sufficient to cover a monthly deduction, the Grace Period provision will apply except as provided under the Guaranteed Death Benefit provision. Surrender Value By Written Request, the Owner may surrender this Policy for its full surrender value at any time during the lifetime of the Insured and before the Maturity Date. All insurance coverage under this Policy will end on the date of the full surrender. Partial surrenders will also be allowed. The full Surrender Value will equal: 1. The Total Account Value on the date of surrender; less 2. the surrender charge; less 38899-93 Page 15 3. the Loan Account Value plus any accrued interest. Surrender Charge At the time of surrender, We will deduct a surrender charge from the Total Account Value. The applicable surrender charge for this Policy is shown in the Policy Specifications in the Table of Surrender Charges. Any increase in the Specified Amount will result in an additional surrender charge applicable to the increase. The charge will be effective on the Date of Issue for the increase. Supplemental Policy Specifications will be sent to You once the change is complete and will reflect the additional Surrender Charge in the Table of Surrender Charges. Any decrease in the Specified Amount will not reduce the original or any additional surrender charge. Partial Surrender Partial surrenders may be made at any time after the first Policy Year while this Policy is in force. A partial surrender charge will be included in the amount of the Total Account Value which is surrendered. The minimum amount of any partial surrender after any partial surrender charge is applied is $500. We will also charge an administrative fee of $25, or 2% of the Partial Surrender, whichever is less. The partial surrender charge will be in proportion to the surrender charge that would apply to a full surrender. The proportion will be computed as the amount of the net partial surrender divided by the sum of the Fixed Account Value and the Separate Account Value less the full surrender charge. When the partial surrender is made, any future surrender charge will be reduced in the same proportion. The partial surrender charge, and the net amount surrendered will reduce this Policy's values as described in the Charges to Policy Values provision. If the Death Benefit option for this policy is option 1, a partial surrender will reduce the Total Account Value, death benefit, and Specified Amount. The Specified Amount and total Account Value will be reduced by equal amounts. However, We will not allow a partial surrender if the Specified Amount will be reduced below the Minimum Specified amount. If the Death Benefit option for this Policy is option 2, a partial surrender will reduce the Total Account Value and the death benefit. The Specified Amount will not be reduced. A reduction in the Specified Amount will cause a reduction in the required premiums for the Guaranteed Death Benefit. Premiums required to maintain the Guaranteed Death Benefit will be based on the new Specified Amount. Paid-Up Nonforfeiture Option 38899-93 Page 16 By Written Request, You may elect, at any time prior to the Maturity Date, to continue this Policy as paid-up life insurance. The Surrender Value will be applied as a net single premium to determine the Specified Amount of the paid-up insurance. The cost of the paid-up insurance will be based on the maximum cost of insurance rates in this Policy and an interest rate of 4.5% compounded annually. However the Specified Amount of the paid-up insurance cannot exceed the Death Benefit under this Policy as of the effective date of the paid-up insurance. Any excess value will be refunded to You. The effective date of the paid-up insurance will be the Monthly Deduction Day which occurs on or immediately after the date Your request is received by Us. As of the effective date: [bullet] No further premium payments, monthly deductions, excess interest credits or changes in coverage may be made; and [bullet] all extra benefit riders will terminate. We will allow conversion, as provided in a benefit rider attached to this Policy, for spouse, primary insured and/or child coverage. Election to convert must be made within 31 days after the effective date of the paid-up insurance. Policy Loans General We will grant loans while this Policy is in force. The amount of the loan will not be more than the Loan Value. The Loan Value for this Policy is 90% of the sum of the Fixed Account Value and the Separate Account Value less the surrender charge applicable at the time of the loan. The amount of the loan will be transferred out of the Fixed Account and Separate Account Values as described in the Charges to Policy Values provision. The loan amount increases the Loan Account Value. The Loan Account Value plus accrued interest will reduce any Proceeds under this Policy. If the Loan Account Value exceeds the sum of the Separate Account Value and Fixed Account Value, less the Surrender Charge, the Grace Period provision will apply. Preferred Loans Beginning in the 11th Policy Year and on each Policy Anniversary thereafter, We will determine a Preferred Loan Amount for that Policy Year. A Preferred Loan Amount will equal 10% of the Loan Value on each Policy Anniversary. The interest rate charged on the Preferred Loan Amount will equal the interest rate earned by the portion of the Loan Account Value equal to the Preferred Loan Amount and credited proportionately to the Fixed Account Value and Separate Account Value. 38899-93 Page 17 Loan Account Value existing in the 11th Policy Year or later, which is equal to or less than the Preferred Loan Amount, will be treated as a Preferred Loan. Once any portion of the Loan Account Value is treated as a Preferred Loan, that portion will remain a Preferred Loan, regardless of the Preferred Loan Amount in subsequent Policy Years, until it is repaid. Loan Interest Rate Charged Interest, at an effective annual rate, will be charged on this Policy's Loan Account Value. The rate of interest may change and applies to this Policy's total Loan Account Value. Changes will be made only on a Policy Anniversary. Interest is due and payable on the next Policy Anniversary, the date this Policy ends or upon full repayment of the Loan Account Value. Any interest not paid when due will be added to the Loan Account Value on the Policy Anniversary and will itself bear interest on the same terms. The interest rate is based on a Monthly Average. The Monthly Average will be the Composite Yield on Corporate Bonds as published by Moody's Investors Service, Inc., or any successor to that service. If such average is no longer published, the average used will be determined by law or regulation of the insurance supervisory official of the state where this policy is delivered. In no event will the interest rate exceed the maximum rate imposed by law or regulation of the state where this policy is delivered. The interest rate charged during any Policy Year will not exceed the maximum rate for that year. The maximum rate will be the greater of: (1) the Monthly Average for the calendar month which ends 2 months before the month in which the Policy Anniversary occurs; or (2) 5.5%. We may increase the rate only when the maximum rate is at least .5% higher than the rate in effect for the prior Policy Year. We will reduce the rate only when the maximum rate is at least .5% lower than the rate in effect for the prior Policy Year. We will notify You of the current policy loan interest rate for this Policy at the time a policy loan is taken. If the Policy has Loan Account Value, We will notify You of any change in the interest rate before the new rate becomes effective. Loan Interest Rate Credited During Policy Years 1 through 10 Loan Account Value equal to the non-preferred loan will earn interest at the policy loan interest rate less 2%. Beginning with the 11th Policy Year interest earned by the portion of the Loan Account Value equal to the Preferred Loan will be credited at the policy loan interest rate. Loan Account Value equal to the non-preferred loan will earn interest at the policy loan interest rate less 2%. The interest earned by the Loan 38899-93 Page 18 Account Value will be credited to the Fixed Account Value and the Separate Account Value in the same proportion in which the loan amount was originally deducted from these values. Interest earned by the portion of the Loan Account Value equal to the Preferred Loan will never be less than 5.5%. Loan Account Value equal to the non-preferred loan will never earn less than 4.5%. We will notify You of the current policy loan interest rate for this Policy at the time a policy loan is taken. If the Policy has Loan Account Value, We will notify You of any change in the interest rate before the new rate becomes effective. Repayment The Loan Account Value may be repaid in full or in part at any time prior to the Maturity Date as long as this Policy is in force and the Insured is living. The amount necessary to repay all loans in full is the Loan Account Value plus any accrued interest. Loan repayments will be allocated to the Fixed Account Value and the Separate Account Value in the same proportion in which the loan was taken. The Loan Account Value will be reduced by the amount of any loan repayment. Changes in Insurance Coverage General For any change in coverage We will require Your Written Request. Supplemental Policy Specifications will be sent to You once the change is completed. Increase in Specified Amount Increases will not be allowed during the first Policy Year. Satisfactory evidence of insurability on the Insured will be required. The Date of Issue for any increase will be shown in the supplemental Policy Specifications. The Surrender Value immediately after an increase must be at least three times the sum of: (1) the most recent monthly deduction from the Total Account Value; and (2) the Specified Amount of the increase multiplied by the applicable cost of insurance rate divided by 1000. An increase in the Specified Amount will increase the surrender charge. The Basic Monthly Premium will be increased when the Specified Amount is increased. The 5 year period as described in the No Lapse Coverage provision will restart on the Date of Issue of the increase. 38899-93 Page 19 Increases during the second through the fifth Policy Year are limited to four times the initial Specified Amount. Increases in the Specified Amount will increase the Guaranteed Death Benefit Premium. The premium required to maintain the Guaranteed Death Benefit will be based on the new Specified Amount. Decrease in Specified Amount Decreases will not be allowed in the first 5 Policy Years. The amount of a decrease cannot reduce this Policy's Specified Amount below the Minimum Specified Amount. For a decrease in the Specified Amount, the Date of Issue will be the Monthly Deduction Date on or next following the date on which Your Written Request is received. The decrease will reduce any past increases in the reverse order in which they occurred. The Basic Monthly Premium will not be decreased if the Specified Amount is decreased. A decrease in the Specified Amount will reduce the Guaranteed Death Benefit Premium. The premium required to maintain the Guaranteed Death Benefit will be based on the new Specified Amount. Change in Death Benefit Option Any change in the Death Benefit option is subject to the following conditions: We will not allow a change in the Death Benefit option in the Specified Amount will be reduced below the Minimum Specified Amount. The change will take effect on the Monthly Deduction Day on or next following the date on which Your Written Request is received. There will be no change in the surrender charge. Evidence of insurability may be required. Change from Option 1 to 2 Changes from Option 1 to 2 will not be allowed in the first 5 Policy Years. The Specified Amount will be reduced to equal the Specified Amount less the Total Account Value at the time of the change. A reduction in the Specified Amount will reduce the Guaranteed Death Benefit Premium. The premium required to maintain the Guaranteed Death Benefit will be based on the new Specified Amount. Change from Option 2 to 1 Changes from Option 2 to 1 will not be allowed in the first Policy Year. The new Specified Amount will equal the Specified Amount plus the Total Account Value as of the date of the change. 38899-93 Page 20 An increase in the Specified Amount will increase the Guaranteed Death Benefit Premium. The premium required to maintain the Guaranteed Death Benefit will be based on the new Specified Amount. Change of Fund(s) The Company may: 1. Change the Fund(s) which may be invested in a Separate Account; and 2. replace the shares of Funds held in a Separate Account with shares of other Funds(s). Changes must be: 1. Approved by a majority vote of persons having an interest in the Separate Account and its Fund(s); or 2. deemed necessary by Us under the Investment Company Act of 1940; or 3. deemed necessary by Us to accomplish the purpose of the Separate Account. The investment policy of a Separate Account may not be changed without the approval of the Insurance Commissioner of the State of Connecticut. The approval process has been filed with the Commissioner. We will notify You of any change. Separate Account Variable Life Account B is a Separate Account established by Us in accordance with the laws of the State of Connecticut. Income, realized and unrealized gains and losses from the assets of Variable Life Account B will be credited to or charged against Variable Life Account B without regard to Our other income, gains, or losses. Variable Life Account B's liabilities arise from the variable life insurance policies that it supports. The assets of Variable Life Account B are available to cover the liabilities of the General Account only to the extent that Variable Life Account B's assets exceed its liabilities. The value of the assets of Variable Life Account B is determined whenever the policy benefits vary and at the end of every Valuation Period. Settlement Options Conditions All or part of the Proceeds of this Policy may be applied under one or more of the options described below or in any manner to which We agree. An election shall be made by Written Request filed with the Home Office. The payee of Proceeds may make this election if no prior election has been made. 38899-93 Page 21 Payments will be made at intervals of 1, 3, 6 or 12 months in equal amounts as elected. Payments under a settlement option may be made on a fixed dollar or variable basis. However, once payments begin on either the fixed or variable basis, the option may not be changed for one with payments on the alternate basis. Our consent to the election of an option is required if: 1. The payee is not a natural person receiving payments in his or her own right; 2. the payee is an assignee of this Policy; or 3. payments would be less than $25 each or totaling less than $120 in a year. Income Options The rates for these Income Options are based on the 1983 Blended Individual Annuity Mortality Table with 60% female and 40% male lives and a pivotal age of 55. For purposes of calculating payments, the Adjusted Ages of the payees will be used. The Adjusted Age is the payee's age on his or her birthday nearest the commencement date of the annuity and then reduced by one year for annuities commencing in the 1990's, reduced two years for annuities beginning during 2000-2009, and so on. Rates for ages and intervals not shown for any of the following income options will be furnished upon request. Option 1 - Interest Payment of interest on Proceeds left with Us. Proceeds held under this option may be left with Us after the death of the payee only with Our consent. By Written Request, the payee may later elect to: [bullet] Receive all or a portion of the amount held under this option; or [bullet] apply all or a portion of this amount to options 2, 3 or 4 as described below. Option 2 - Stated Period Payments for a stated number of years, not longer than 30 years. If payments for this option are made on a variable basis, the present value of any remaining payments may be withdrawn at any time. Rates for Fixed Payments with Guaranteed Interest Rate of 3.0%; and Rates for Variable Payments with Assumed Net Return Rate of 3.0%
- ------------------------------------------------------------------------------------------------------------------------------ PAYMENT PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------ YEARS OF YEARS OF STATED STATED PERIOD MONTHLY PERIOD MONTHLY - ------------------------------------------------------------------------------------------------------------------------------ 3 $28.99 15 $6.87 4 22.06 20 5.51 5 17.91 25 4.71 10 9.61 30 4.18 - ------------------------------------------------------------------------------------------------------------------------------ Rates for Variable Payments with Assumed Net Return Rate of 5%
38899-93 Page 22
- ------------------------------------------------------------------------------------------------------------------------------ PAYMENT PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------ YEARS OF YEARS OF STATED STATED PERIOD MONTHLY PERIOD MONTHLY - ------------------------------------------------------------------------------------------------------------------------------ 3 $29.80 15 $7.82 4 22.89 20 6.51 5 18.74 25 5.75 10 10.51 30 5.28 - ------------------------------------------------------------------------------------------------------------------------------
Option 3 - Life Income Payments for the lifetime of the payee. If also chosen, We will guarantee payments for 60, 120, 180, or 240 months. No payment will be due after death, except payment for any remaining fixed period. 38899-93 Page 23 Rates for Fixed Payments with Guaranteed Interest Rate of 3.0%; and Rates for Variable Payments with Assumed Net Return Rate of 3.0%
- --------------------------------------------------------------------------------------------------------------------------------- MONTHLY LIFE INCOME PER $1,000 PROCEEDS - --------------------------------------------------------------------------------------------------------------------------------- WITH FIXED PERIOD ------------------------------------------------------------------------------- WITHOUT AGE 10 YEARS 15 YEARS 20 YEARS FIXED PERIOD NEAREST --------------------------------------------------------------------------------------------------------------- BIRTHDAY Male Female Male Female Male Female Male Female - --------------------------------------------------------------------------------------------------------------------------------- 50 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.27 $3.90 51 4.30 3.95 4.23 3.92 4.14 3.88 4.34 3.97 52 4.37 4.01 4.30 3.98 4.20 3.93 4.43 4.03 53 4.45 4.08 4.37 4.04 4.26 3.99 4.51 4.10 54 4.54 4.15 4.45 4.11 4.32 4.04 4.60 4.18 55 4.62 4.22 4.53 4.18 4.39 4.11 4.70 4.25 56 4.72 4.30 4.61 4.25 4.45 4.17 4.80 4.34 57 4.82 4.38 4.69 4.32 4.51 4.23 4.91 4.42 58 4.92 4.47 4.78 4.40 4.58 4.30 5.03 4.52 59 5.03 4.56 4.87 4.48 4.65 4.37 5.15 4.61 60 5.14 4.66 4.96 4.57 4.71 4.44 5.28 4.72 61 5.27 4.76 5.06 4.66 4.78 4.51 5.43 4.83 62 5.39 4.87 5.16 4.75 4.84 4.58 5.58 4.95 63 5.53 4.98 5.26 4.85 4.90 4.65 5.74 5.08 64 5.66 5.10 5.36 4.95 4.96 4.72 5.91 5.21 65 5.81 5.22 5.46 5.05 5.02 4.79 6.10 5.36 66 5.96 5.36 5.56 5.16 5.08 4.86 6.30 5.51 67 6.12 5.50 5.66 5.26 5.13 4.93 6.51 5.67 68 6.28 5.65 5.77 5.37 5.18 5.00 6.73 5.85 69 6.44 5.80 5.86 5.49 5.23 5.06 6.97 6.04 70 6.61 5.97 5.96 5.60 5.27 5.12 7.23 6.25 71 6.79 6.14 6.05 5.71 5.31 5.18 7.51 6.47 72 6.96 6.32 6.14 5.83 5.34 5.23 7.80 6.71 73 7.14 6.50 6.23 5.94 5.37 5.28 8.12 6.98 74 7.32 6.69 6.31 6.04 5.40 5.32 8.46 7.26 75 7.50 6.89 6.38 6.14 5.42 5.35 8.82 7.57 - ---------------------------------------------------------------------------------------------------------------------------------
38899-93 Page 24 Rates for Variable Payments with Assumed Net Return Rate of 5%
- --------------------------------------------------------------------------------------------------------------------------------- MONTHLY LIFE INCOME PER $1,000 PROCEEDS - --------------------------------------------------------------------------------------------------------------------------------- WITH FIXED PERIOD ---------------------------------------------------------------------- WITHOUT AGE FOR 120 MONTH FOR 240 MONTHS FIXED PERIOD NEAREST --------------------------------------------------------------------------------------------------------------- BIRTHDAY MALE FEMALE MALE FEMALE MALE FEMALE - --------------------------------------------------------------------------------------------------------------------------------- 50 $5.41 $5.09 $5.24 $5.01 $5.48 $5.12 51 5.48 5.14 5.29 5.05 5.55 5.17 52 5.55 5.20 5.34 5.10 5.63 5.23 53 5.62 5.26 5.40 5.15 5.71 5.30 54 5.70 5.33 5.45 5.20 5.80 5.37 55 5.79 5.39 5.51 5.25 5.89 5.44 56 5.87 5.47 5.56 5.31 5.99 5.52 57 5.97 5.54 5.62 5.37 6.10 5.60 58 6.06 5.62 5.68 5.42 6.21 5.69 59 6.17 5.71 5.74 5.48 6.33 5.79 60 6.28 5.80 5.79 5.55 6.46 5.89 61 6.39 5.90 5.85 5.61 6.60 6.00 62 6.51 6.00 5.91 5.67 6.75 6.11 63 6.64 6.10 5.96 5.73 6.91 6.23 64 6.77 6.22 6.02 5.80 7.09 6.37 65 6.91 6.34 6.07 5.86 7.27 6.51 66 7.05 6.46 6.12 5.92 7.47 6.66 67 7.20 6.60 6.16 5.99 7.68 6.82 68 7.35 6.74 6.21 6.04 7.91 7.00 69 7.51 6.89 6.25 7.10 8.15 7.19 70 7.67 7.04 6.28 6.15 8.41 7.39 71 7.83 7.21 6.32 6.20 8.69 7.62 72 8.00 7.38 6.35 6.25 8.99 7.86 73 8.16 7.55 6.37 6.29 9.31 8.12 74 8.33 7.73 6.39 6.33 9.65 8.41 75 8.50 7.92 6.41 6.36 10.02 8.72 - ---------------------------------------------------------------------------------------------------------------------------------
Option 4 - Life Income for Two Payees Payments during the joint lifetimes of two payees. At the death of either, payments will continue to the survivor. When this option is chosen a choice must be made of: 1. 100% of the payment to continue to the survivor; 38899-93 Page 25 2. 66-2/3% of the payment to continue to the survivor; 3. 50% of the payment to continue to the survivor: 4. payments for a minimum of 120 months, with 100% of the payment to continue to the survivor; or 5. 100% of the payment to continue to the survivor if the survivor is the original payee, and 50% of the payment to continue to the survivor if the survivor is the second payee. No payment will become due after the death of the surviving payee. The following tables illustrate the applicable rates if number (3) of option 4 is chosen. Rates for Fixed Rate Payments with Guaranteed Interest Rate of 3.0%; and Rates for Variable Rate Payments with Assumed Net Return of 3.0% START
- ---------------------------------------------------------------------------------------------------------------------------- MONTHLY JOINT LIFE INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS - ---------------------------------------------------------------------------------------------------------------------------- AGE OF AGE OF FEMALE PAYEE MALE ------------------------------------------------------------------------------------------------------------- PAYEE 50 55 60 65 70 75 80 85 - -------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------ 50 $5.08 $4.26 $4.48 $4.75 $5.07 $5.46 $5.90 $6.36 55 4.27 4.47 4.71 5.01 5.37 5.80 6.30 6.83 60 4.49 4.71 4.99 5.32 5.73 6.22 6.80 7.42 65 4.76 5.01 5.32 5.70 6.17 6.75 7.44 8.19 70 5.07 5.36 5.71 6.15 6.70 7.40 8.23 9.16 75 5.41 5.74 6.15 6.66 7.32 8.15 9.16 10.34 80 5.77 6.15 6.62 7.22 7.99 8.99 10.24 11.73 85 6.12 6.54 7.08 7.77 8.67 9.86 11.40 13.27 - -------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------
Rates for Variable Rate Payments with Assumed Net Return Rate of 5% - ---------------------------------------------------------------------------------------------------------------------------- MONTHLY JOINT LIFE INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS - ---------------------------------------------------------------------------------------------------------------------------- AGE OF AGE OF FEMALE PAYEE MALE ------------------------------------------------------------------------------------------------------------- PAYEE 50 55 60 65 70 75 80 85 - -------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------ 50 $5.29 $5.46 $5.68 $5.95 $6.29 $6.73 $7.25 $7.82 55 5.48 5.66 5.89 6.18 6.56 7.03 7.60 8.24 60 5.71 5.91 6.16 6.49 6.90 7.42 8.06 8.78 65 6.01 6.23 6.51 6.87 7.33 7.93 8.67 9.50 70 6.36 6.61 6.93 7.34 7.87 8.56 9.43 10.43 75 6.78 7.05 7.42 7.89 8.51 9.33 10.35 11.57 80 7.23 7.54 7.96 8.51 9.23 10.20 11.44 12.95 85 7.68 8.05 8.53 9.16 10.00 11.14 12.64 14.51 - -------------- ------------- ------------- ------------- ------------- ------------- ------------ ------------- ------------
38899-93 Page 26 Terms of Options Proceeds applied under option 1 will be held by Us in the General Account. Proceeds applied under options 2, 3 and 4 will be held: 1 In the General Account if payments on a fixed dollar basis are elected; or 2. in Variable Annuity Account B using any of its Funds available under this Policy for settlement option purposes if payments on a variable basis are elected; or 3. in both the General Account and the Variable Annuity Account B. Proceeds in the General Account will be used to make payments on a fixed dollar basis. We will add interest to such Proceeds at an annual rate not less than 3.0%. We may add interest daily at any higher rate. As to option 1, we may from time to time offer higher interest rates with certain conditions on withdrawal which are currently published by Us. Proceeds in Variable Annuity Account B will be used to make payments on a variable basis. An assumed annual net return rate of 5% may be chosen for such payments. If not chosen, We will use an assumed net return rate of 3.0%. The assumed annual net return rate is the interest rate used to determine the amount of the first payment on a variable basis. Variable Annuity Account B must earn this rate plus enough to cover the mortality and expense risk and administrative fee charges if future payments on a variable basis are to remain level. If payments on a variable basis are not to decrease, We must earn a gross return on the assets of Variable Annuity Account B of: 1. 4.75% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge set at the time the settlement option payments started, if an assumed annual net return rate of 3.0% is chosen; or 2. 6.25% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge set at the time the settlement option payments started, if an assumed annual net return rate of 5% is chosen. Payments will not change due to changes in the mortality or expense results or administrative charges. Betterment of Payments If option 2, 3 or 4 is chosen, and if the guaranteed payments are less than those of Our current single premium immediate annuity on the same plan, those large amounts will be paid instead. Separate Account Payments on a variable basis will be made from the Proceeds held in Variable Annuity Account B. Variable Annuity Account B is a Separate Account established by Us in accordance with the laws of the State of Connecticut. Income, realized and unrealized gains and losses from the assets of Variable Annuity Account B will be credited to or charged against Variable Annuity Account B without regard to 38899-93 Page 27 Our other income, gains, or losses. Variable Annuity Account B's liabilities arise from the variable portion of annuity contracts and life insurance settlement options that it supports. The assets of Variable Annuity Account B are available to cover the liabilities of the General Account only to the extent that Variable Annuity Account B's assets exceed its liabilities. Fund(s) Settlement Option Units of Variable Annuity Account B If payment on a variable basis is chosen, the first payment is calculated as follows: 1. The portion of Proceeds applied to make payments on the variable basis; divided by 2. 1,000; multiplied by 3. the payment rate for the option chosen. This amount is divided by the Fund settlement option unit value on the tenth Valuation Period before the due date of the first payment to determine the number of Fund settlement option units. The number of Fund settlement option units remains fixed. Each future payment is equal to this number multiplied by the Fund settlement option unit value on the tenth Valuation Period prior to the due date of the payment. Fund(s) Settlement Option Unit Value of Variable Annuity Account B For any Valuation Period the Fund settlement option unit value is equal to: 1. The value for the previous Period; multiplied by 2. the net return factor(s) for the Period; multiplied by 3. a factor to reflect the assumed annual net return rate. The factor for 3.0% per year is .9999058 or, for 5% per year, .9998663. The dollar value of the Fund settlement option unit values and payments may increase or decrease due to investment gain or loss. Net Return Factor(s): The net return factor(s) are used to compute Variable Annuity Account B values and payments for any of its Funds. The net return factor for each Fund is equal to 1.0000000 plus the net return rate. The net return rate is equal to: 1. The value of the shares of the Fund held by Variable Annuity Account B at the end of a Valuation Period; less 38899-93 Page 28 2. the value of the shares of the Fund at the start of the Valuation Period; adjusted by any taxes (or provisions for taxes) on Variable Annuity Account B; divided by 3. the total value of the Fund settlement option units and other Fund accumulation units of Variable Annuity Account B at the start of the Valuation Period; less 4. a daily actuarial charge at an annual rate of 1.25% for annuity mortality and expense risks and profit; and a daily administrative charge which will not exceed .25% on an annual basis. A net return rate may be more or less than 0. The value of a share of the Fund is equal to the net assets of the Fund divided by the number of shares outstanding. The administrative charge may not be changed for amounts which have been used to purchase a settlement option. Withdrawal and Death of Payee As to funds held under option 1, withdrawals and change of option may be made if the payee makes the election. Under option 2, if payments are made on a variable basis, the present value of any remaining payments may be withdrawn at any time. Amounts in the General Account under option 2 may not be withdrawn. No withdrawals or changes of option may be made under options 3 and 4. Upon the death of the payee, the current value of the amount held under option 1 or the present value of any guaranteed payments not yet paid will be paid in one sum to the designated beneficiary. The designated beneficiary may elect to continue the remaining payments instead of receiving the lump sum amount. If no designated beneficiary exists, the present value of any remaining payments will be paid in one sum to the estate of the payee. The interest rate used to determine the first payment will be used to calculate the present value of any remaining payments. 38899-93 Page 29 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY [bullet] FLEXIBLE PREMIUMS PAYABLE UNTIL MATURITY DATE OR DEATH [bullet] PROCEEDS PAYABLE UPON THE FIRST EVENT TO OCCUR - SURRENDER, MATURITY OR DEATH [bullet] NON-PARTICIPATING - NO DIVIDENDS PAYABLE The amount or duration of the death benefit may be fixed or variable. The death benefit is payable as described in the Death Benefit Options and Proceeds sections of this Policy. Values in each Fund held in a Separate Account may increase or decrease daily. Such values are not guaranteed as to dollar amount. Refer to the Policy Values section of this Policy for more information. EX-99.1.5(II) 3 DISABILITY BENEFIT RIDER This Extra Benefit Rider is attached to and made a part of this Policy. It provides for waiver of the Benefit Amount in the event of Total Disability of the Insured. We will waive the Benefit Amount subject to the provisions of this Rider and this Policy. Definitions Total Disability, Disabled Total Disability is the inability due to sickness or injury to perform the substantial and material duties of any Occupation for remuneration or profit. Occupation For the first full 24 months of Total Disability, Occupation is the Insured's occupation when Total Disability starts. After 24 months, Occupation means any occupation for which the Insured is reasonably suited by education, training or experience. Premium Option The Premium Option is the Guaranteed Death Benefit to Age 80 or Guaranteed Death Benefit to Age 100, elected at issue, or the Basic Monthly Premium. If the Guaranteed Death Benefit to Age 100 and Guaranteed Death Benefit to Age 80 are not elected, the Basic Monthly Premium will apply. If elected, the Monthly Premium for the Guaranteed Death Benefit Option is shown in Your Policy Specifications. Benefit While this Policy is in force, We will waive the Benefit Amount for this Policy on each Monthly Deduction Day which occurs during the Total Disability of the Insured and before this Policy ends. Subject to the conditions of this Rider, this Benefit will apply retroactively to premium due dates since the start of the Total Disability. The Benefit Amount will be the greater of: (1) the Monthly Premium for this Policy's Premium Option; or (2) the monthly deduction for that day for this policy and all Extra Benefit Riders, if any, except this one. Conditions The following conditions apply: 1. the Total Disability of the Insured must start while this Rider is in force and before the Insured is Attained Age 60; 2. the Total Disability must be continuous for at least 180 days; 3. We must receive Notice and Proof as described in this Rider; 4. Premiums due more than 12 months before We receive Proof of Total Disability will not be waived unless Proof could not have reasonably been given sooner; 5. The Specified Amount of this Policy may not be increased during the Insured's Total Disability, except as specifically provided for under any Extra Benefit Rider attached to this policy. Notice and Proof of Disability We will require written Notice and Proof of the Total Disability. Notice and satisfactory Proof of the Total Disability of the Insured must be given to Us within 12 months of the commencement of the Insured's Total Disability. Failure to provide Notice and Proof will not reduce the claim for this Rider's Benefit if it is shown that Notice or Proof was provided as soon as reasonably possible. After a claim is approved and the Benefit is exercised, We may require further Proof at reasonable intervals. As part of the Proof, we may require that doctors of Our choice examine the Insured at Our expense. If the required Proof is not given or if the Insured recovers, no further Benefit Amount will be waived. Other Provisions Excluded Disabilities This Rider does not provide its Benefit for Total Disability which results from: 1. military (land, sea, or air) service by the Insured in time of war, declared or undeclared; 2. injury that is intentionally self-inflicted. Reinstatement If the Insured is Totally Disabled on the date this Policy terminates because of insufficient value, We will reinstate this Policy if: 1. the requirements of the Notice and Proof section of this Rider are met; and 2. the right to exercise this Rider's Benefit would otherwise have been granted. Incontestability We cannot contest this Rider, except for failure to pay required premiums, after it has been in force during the lifetime of the Insured for a period of two years from its Date of Issue with no Total Disability having occurred. Rider Premium The Rider Premium is shown in the Policy Specifications and will be calculated based on the original Premium Option at issue. Monthly Rider Cost The Monthly Rider Cost for this Rider is equal to the result of (a) multiplied by (b) where: (a) is the Rider Rate, as determined by the table below; and (b) is the Monthly Premium for this Policy's Premium Option. The monthly deduction for this Policy will be increased by the cost for this Rider. There is no cost for this Rider on any monthly deduction day for which benefits are due under this Rider. Rider Rate - ------------- ------------- -------------- ------------- ------------- --------- Age Rate Age Rate Age Rate - ------------- ------------- -------------- ------------- ------------- --------- Under 33 .02 48-49 .06 55-57 .10 33-39 .03 50-52 .07 58-59 .11 40-43 .04 53 .08 44-47 .05 54 .09 - ------------- ------------- -------------- ------------- ------------- --------- Policy Loans This Rider's Benefit does not include the payment of loan interest due during the period of Total Disability. Termination This Rider will terminate on the first of the following events to occur: 1. on the Policy Anniversary that the Insured becomes Attained Age 60, unless the Benefit Amount is currently being waived according to the terms of this Rider. After Attained Age 60 this Rider Premium will no longer be due; 2. on the date this policy ends; 3. on the next premium due date after We receive Your Written Request to terminate this Rider. Termination of this rider will not prejudice a claim for Total Disability which exists at that time. This Rider has no cash value. This Rider is attached to and made a part of this Policy. It is signed for Aetna on its Date of Issue. Aetna Life Insurance and Annuity Company /s/ George N. Gingold Secretary EX-99.1.5(III) 4 UNISEX AMENDMENT RIDER AETNA LIFE INSURANCE AND For Use With 38899-93 ANNUITY COMPANY The provisions below are modified as follows: Age and/or Sex Proceeds Cost of Insurance Rate All references to sex in these provisions are deleted. Cost of Insurance Rate The sentence in this provision is changed to: Those rates are based on the 1980 Commissioners Standard Ordinary Mortality Table, Table A, Nonsmoker. The last sentence of this provision is deleted. Settlement Options Option 3 - Life Income The following tables replace those described in this provision.
Rates for Fixed Payments with Guaranteed Interest Rate of 3.0% - ------------------------------------------------------------------------------------------------------------------------------------ MONTHLY LIFE INCOME PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------------ WITH FIXED PERIOD -------------------------------------------------------------------------------- ADJUSTED WITHOUT AGE 10 YEARS 15 YEARS 20 YEARS FIXED PERIOD - --------------------------- -------------------------- -------------------------- -------------------------- ----------------------- 50 $4.03 $3.99 $3.93 $4.05 51 4.09 4.05 3.99 4.12 52 4.16 4.11 4.04 4.19 53 4.23 4.18 4.10 4.27 54 4.31 4.25 4.16 4.35 55 4.39 4.32 4.22 4.44 56 4.47 4.40 4.29 4.53 57 4.56 4.48 4.35 4.62 58 4.65 4.56 4.42 4.72 59 4.75 4.64 4.49 4.83 60 4.86 4.73 4.55 4.95 61 4.97 4.83 4.62 5.07 62 5.08 4.92 4.69 5.20 63 5.20 5.02 4.76 5.34 64 5.33 5.12 4.83 5.49 65 5.47 5.22 4.89 5.65 66 5.61 5.33 4.96 5.82 67 5.75 5.44 5.02 6.01 68 5.91 5.54 5.08 6.20 69 6.07 5.65 5.14 6.41 70 6.23 5.76 5.19 6.64 71 6.41 5.86 5.24 6.88 72 6.59 5.97 5.28 7.14 73 6.77 6.06 5.32 7.43 74 6.96 6.16 5.35 7.73 75 7.14 6.25 5.38 8.06 - --------------------------- -------------------------- -------------------------- -------------------------- ----------------------- 70211-95US Page 1 Rates for Variable Payments with Assumed Net Return Rate of 5% - ------------------------------------------------------------------------------------------------------------------------------------ MONTHLY LIFE INCOME PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------------ WITH FIXED PERIOD ------------------------------------------------------------------------------ ADJUSTED WITHOUT AGE 10YEARS 15 YEARS 20 YEARS FIXED PERIOD - ---------------------------- -------------------------- --------------------------- ----------------------- ------------------------ 50 $5.22 $5.17 $5.11 $5.26 51 5.28 5.23 5.15 5.33 52 5.34 5.29 5.20 5.40 53 5.41 5.35 5.26 5.47 54 5.48 5.41 5.31 5.54 55 5.56 5.47 5.36 5.63 56 5.63 5.54 5.42 5.71 57 5.72 5.61 5.47 5.80 58 5.81 5.69 5.53 5.90 59 5.90 5.77 5.59 6.01 60 6.00 5.85 5.65 6.12 61 6.10 5.93 5.71 6.24 62 6.21 6.02 5.77 6.37 63 6.33 6.11 5.83 6.51 64 6.45 6.20 5.89 6.66 65 6.57 6.30 5.95 6.82 66 6.71 6.39 6.01 6.99 67 6.85 6.49 6.06 7.17 68 6.99 6.59 6.12 7.36 69 7.15 6.69 6.17 7.57 70 7.30 6.78 6.21 7.80 71 7.47 6.88 6.25 8.05 72 7.64 6.97 6.29 8.31 73 7.81 7.06 6.33 8.59 74 7.99 7.15 6.36 8.90 75 8.16 7.23 6.38 9.23 - ---------------------------- -------------------------- --------------------------- ----------------------- ------------------------
Option 4 - Joint Life Income Reducing for Survivor The following tables replace those described in this provision.
Rates for Fixed Rate Payments with Guaranteed Interest Rate of 3.0% - ------------------------------------------------------------------------------------------------------------------------------------ MONTHLY JOINT INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED AGE OF SECOND ANNUITANT AGE OF --------------------------------------------------------------------------------------------------------------- ANNUITANT 50 55 60 65 70 75 80 85 - -------------------- --------------- ------------- ------------- ------------- ------------- -------------- ------------- ---------- 50 $4.08 $4.27 $4.49 $4.76 $5.07 5.41 5.77 6.12 55 4.27 4.47 4.71 5.01 5.36 5.74 6.15 6.54 60 4.49 4.71 4.99 5.32 5.71 6.15 6.62 7.08 65 4.76 5.01 5.32 5.70 6.15 6.66 7.22 7.77 70 5.07 5.36 5.71 6.15 6.70 7.32 7.99 8.67 75 5.41 5.74 6.15 6.66 7.32 8.15 8.99 9.86 80 5.77 6.15 6.62 7.22 7.99 8.99 10.24 11.40 85 6.12 6.54 7.08 7.77 8.67 9.86 11.40 13.27 - -------------------- --------------- ------------- ------------- ------------- -------------- ------------- ------------- ----------
70211-95US Page 2
Rates for Variable Rate Payments with Assumed Net Return Rate of 5% - ------------------------------------------------------------------------------------------------------------------------------------ MONTHLY JOINT INCOME WITH 1/2 TO SURVIVOR PER $1,000 PROCEEDS - ------------------------------------------------------------------------------------------------------------------------------------ ADJUSTED AGE OF SECOND ANNUITANT AGE OF --------------------------------------------------------------------------------------------------------------- ANNUITANT 50 55 60 65 70 75 80 85 - -------------------- --------------- ------------- ------------- ------------- ------------- -------------- ------------- ---------- 50 $5.29 $5.48 $5.71 $6.01 $6.36 $6.78 $7.23 $7.68 55 5.48 5.66 5.91 6.23 6.61 7.05 7.54 8.05 60 5.71 5.91 6.16 6.51 6.93 7.42 7.96 8.53 65 6.01 6.23 6.51 6.87 7.34 7.89 8.51 9.16 70 6.36 6.61 6.93 7.34 7.87 8.51 9.23 10.00 75 6.78 7.05 7.42 7.89 8.51 9.33 10.20 11.14 80 7.23 7.54 7.96 8.51 9.23 10.20 11.44 12.64 85 7.68 8.05 8.53 9.16 10.00 11.14 12.64 14.51 - -------------------- --------------- ------------- ------------- ------------- ------------- -------------- ------------- ----------
This Amendment Rider is made a part of this Policy to which it is attached. It is effective on the Date of Issue of this Policy. It is issued by Aetna Life Insurance and Annuity Company. /s/ Lucille M. Nickerson Secretary 70211-95US Page 3 EX-99.14.1 5 ACTUARIAL OPINION AND CONSENT 151 Farmington Avenue Hartford, CT 06156 Deborah E. Prince, FSA, MAAA April 18, 1997 Product Manager Life Products Group, TN41 (860) 273-4389 Fax: (860) 273-4438 RE: AetnaVest Plus (File No. 33-76018) Dear Sir or Madam: This opinion is furnished in connection with registration by Aetna Life Insurance and Annuity Company on Form S-6 of its flexible premium variable universal life insurance product, (the "Policies") under the Securities Act of 1933. The prospectus included in the Registration Statement was prepared under my direction, and I am familiar with the Registration Statement, as amended, and Exhibits thereto. In my opinion, the illustrations of benefits under the Policies included in the prospectus under the caption "Illustrations of Death Benefits, Total Account Values and Surrender Values," based on the assumptions stated in the illustrations, are consistent with the provisions of the respective forms of the Policies. Also in my opinion the age selected in the illustrations is representative of the manner in which the Policies operate. I hereby consent to use of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Deborah E. Prince Deborah E. Prince Product Manager EX-99.14.2 6 CONSENT OF INDEPENDENT AUDITORS Consent of Independent Auditors The Board of Directors of Aetna Life Insurance and Annuity Company and Policyholders of Aetna Variable Life Account B: We consent to the use of our reports dated February 4, 1997 and February 14, 1997 included herein and to the reference to our Firm in the Prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Hartford, Connecticut April 22, 1997 EX-99.14.3 7 CONSENT OF COUNSEL 151 Farmington Avenue Hartford, CT 06156 Susan E. Bryant Counsel Law Division, RE4A Investments & Financial Services April 22,1997 (860) 273-7834 Fax: (860) 273-0356 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby consent to the use of my opinion dated February 28,1997 (incorporated herein by reference to the Rule 24f-2 Notice for the fiscal year ended December 31,1996 filed on behalf of Variable Life Account B of Aetna Life Insurance and Annuity Company on February 28, 1997) as an exhibit to this Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 (File No.33-76018 and 811-4536). Sincerely, /s/Susan E. Bryant Susan E. Bryant EX-27 8 FDS -- VARIABLE LIFE ACCOUNT B
6 0000785986 Variable Life Account B 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 209,041,214 223,173,883 0 0 0 223,173,883 0 0 0 0 0 0 0 0 0 0 0 0 0 223,173,883 13,813,478 0 0 1,905,137 11,908,341 3,222,616 9,741,095 24,872,052 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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