PROSPECTUS
MAY 1, 2004
Merrill Lynch Life Variable Annuity Separate Account C (the "Account")
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT (THE "CONTRACT")
issued by
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: Little Rock, Arkansas 72201
SERVICE CENTER: P.O. Box 44222
Jacksonville, Florida 32231-4222
4804 Deer Lake Drive East
Jacksonville, Florida 32246
PHONE: (800) 535-5549
offered through
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This Prospectus gives you information you need to know before you invest. Keep
it for future reference. Address all communications concerning the Contract to
our Service Center at the address above.
The variable annuity contract described here provides a variety of investment
features. It also provides options for income protection later in life.
It is important that you understand how the Contract works, and its benefits,
costs, and risks. First, some basics.
WHAT IS AN ANNUITY?
An annuity provides for the systematic liquidation of a sum of money at the
annuity date through a variety of annuity options. Each annuity option has
different protection features intended to cover different kinds of income needs.
Many of these annuity options provide income streams that can't be outlived.
WHAT IS A VARIABLE ANNUITY?
A variable annuity bases its benefits on the performance of underlying
investments. These investments may typically include stocks, bonds, and money
market instruments. The annuity described here is a variable annuity.
WHAT ARE THE RISKS IN OWNING A VARIABLE ANNUITY?
A variable annuity does not guarantee the performance of the underlying
investments. The performance can go up or down. It can even decrease the value
of money you've put in. You bear all of this risk. You could lose all or part of
the money you've put in.
HOW DOES THIS ANNUITY WORK?
We put your premium payments as you direct into one or more subaccounts of the
Account. In turn, we invest each subaccount's assets in corresponding portfolios
("Funds") of the following:
- MLIG VARIABLE INSURANCE TRUST
- Roszel/Lord Abbett Large Cap Value Portfolio
- Roszel/Levin Large Cap Value Portfolio
- Roszel/MLIM Relative Value Portfolio
- Roszel/Sound Large Cap Core Portfolio
- Roszel/INVESCO-NAM Large Cap Core Portfolio
- Roszel/Nicholas-Applegate Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Seneca Large Cap Growth Portfolio
- Roszel/Valenzuela Mid Cap Value Portfolio
- Roszel/Seneca Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Delaware Small-Mid Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/Credit Suisse International Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/MLIM Fixed-Income Portfolio
- MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- Domestic Money Market V.I. Fund
The value of your Contract at any point in time up to the annuity date is called
your contract value. Before the annuity date, you are generally free to direct
your contract value among the subaccounts as you wish. You may also withdraw all
or part of your contract value provided the remaining contract value after
withdrawal is at least $5,000. If you die before the annuity date, we pay a
death benefit to your beneficiary.
We've designed this annuity as a long-term investment. Any money you take out of
the Contract to the extent of gain is subject to tax, and if taken before age
59 1/2 may also be subject to a 10% Federal penalty tax. FOR THESE REASONS, YOU
NEED TO CONSIDER YOUR CURRENT AND SHORT-TERM INCOME NEEDS CAREFULLY BEFORE YOU
DECIDE TO BUY THE CONTRACT.
WHAT DOES THIS ANNUITY COST?
THIS ANNUITY DOES NOT IMPOSE ANY SALES CHARGES -- ON EITHER PURCHASES OR
WITHDRAWALS. However, we impose a number of other charges, including an
asset-based insurance charge. We provide more details on this charge, as well as
a description of all other charges, later in the Prospectus.
------------------------
This Prospectus contains information about the Contract and the Account that you
should know before you invest. A Statement of Additional Information contains
more information about the Contract and the Account. We have filed the Statement
of Additional Information, dated May 1, 2004, with the Securities and Exchange
Commission. We incorporate this Statement of Additional Information by
reference. If you want to obtain this Statement of Additional Information,
simply call or write us at the phone number or address noted above. There is no
charge to obtain it. The Table of Contents for this Statement of Additional
Information is found on page 46 of this Prospectus.
The Securities and Exchange Commission maintains a web site that contains the
Statement of Additional Information, material incorporated by reference, and
other information regarding registrants that file electronically with the
Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
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CURRENT PROSPECTUSES FOR THE MLIG VARIABLE INSURANCE TRUST AND THE MERRILL LYNCH
VARIABLE SERIES FUNDS, INC. MUST ACCOMPANY THIS PROSPECTUS. PLEASE READ THESE
DOCUMENTS CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE CONTRACTS OR
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
3
TABLE OF CONTENTS
PAGE
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DEFINITIONS................................................. 7
CAPSULE SUMMARY OF THE CONTRACT............................. 7
Premiums.................................................. 8
The Account............................................... 8
The Funds Available For Investment........................ 9
Fees, Charges and Credits................................. 9
Asset-Based Insurance Charge........................... 9
Additional Death Benefit Charge........................ 9
Contract Fee........................................... 9
Premium Taxes.......................................... 10
Fund Expenses.......................................... 10
Contract Value Credit.................................. 10
Transfers Among Subaccounts............................... 10
Withdrawals............................................... 10
Death Benefit............................................. 10
Annuity Payments.......................................... 11
Ten Day Right to Review................................... 11
Replacement of Contracts.................................. 11
FEE TABLE................................................... 12
YIELDS AND TOTAL RETURNS.................................... 13
MERRILL LYNCH LIFE INSURANCE COMPANY........................ 14
THE ACCOUNT................................................. 14
Segregation of Account Assets............................. 15
Number of Subaccounts; Subaccount Investments............. 15
INVESTMENTS OF THE ACCOUNT.................................. 15
General Information and Investment Risks.................. 15
MLIG Variable Insurance Trust............................. 16
Roszel/Lord Abbett Large Cap Value Portfolio........... 17
Roszel/Levin Large Cap Value Portfolio................. 17
Roszel/MLIM Relative Value Portfolio................... 17
Roszel/Sound Large Cap Core Portfolio.................. 17
Roszel/INVESCO-NAM Large Cap Core Portfolio............ 18
Roszel/Nicholas-Applegate Large Cap Growth Portfolio... 18
Roszel/Rittenhouse Large Cap Growth Portfolio.......... 18
Roszel/Seneca Large Cap Growth Portfolio............... 18
Roszel/Valenzuela Mid Cap Value Portfolio.............. 18
Roszel/Seneca Mid Cap Growth Portfolio................. 19
Roszel/NWQ Small Cap Value Portfolio................... 19
Roszel/Delaware Small-Mid Cap Growth Portfolio......... 19
Roszel/Lazard International Portfolio.................. 19
Roszel/Credit Suisse International Portfolio........... 19
Roszel/Lord Abbett Government Securities Portfolio..... 20
Roszel/MLIM Fixed-Income Portfolio..................... 20
MLIG Variable Insurance Trust Subadvisers................. 20
Merrill Lynch Variable Series Funds, Inc. ................ 21
Domestic Money Market V.I. Fund........................ 21
Purchases and Redemptions of Fund Shares; Reinvestment.... 21
Material Conflicts, Substitution of Investments and
Changes to the Account................................. 21
4
PAGE
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CHARGES, DEDUCTIONS AND CREDITS............................. 22
Asset-Based Insurance Charge.............................. 22
Additional Death Benefit Charge........................... 22
Contract Fee.............................................. 22
Other Charges............................................. 23
Transfer Charges....................................... 23
Tax Charges............................................ 23
Fund Expenses.......................................... 23
Premium Taxes.......................................... 23
Contract Value Credit..................................... 23
FEATURES AND BENEFITS OF THE CONTRACT....................... 24
Ownership of the Contract................................. 24
Issuing the Contract...................................... 25
Issue Age.............................................. 25
Information We Need To Issue the Contract.............. 25
Ten Day Right to Review................................ 25
Premiums.................................................. 25
Minimum and Maximum Premiums........................... 25
How to Make Payments................................... 25
Automatic Investment Feature........................... 26
Premium Investments.................................... 26
Accumulation Units........................................ 26
How Are My Contract Transactions Priced?............... 26
How Do We Determine The Number of Units?............... 27
Death of Annuitant Prior to Annuity Date.................. 27
Transfers Among Subaccounts............................... 27
General................................................ 27
Disruptive Trading..................................... 28
Dollar Cost Averaging Program............................. 29
What Is It?............................................ 29
Participating in the DCA Program....................... 29
Minimum Amounts........................................ 29
When Do We Make DCA Transfers?......................... 29
Rebalancing Program....................................... 30
Withdrawals and Surrenders................................ 30
When and How Withdrawals are Made...................... 30
Minimum Amounts........................................ 31
Systematic Withdrawal Program.......................... 31
Surrenders............................................. 31
Payments to Contract Owners............................... 31
Contract Changes.......................................... 32
Death Benefit............................................. 32
General................................................ 32
Calculation of Death Benefit........................... 33
Spousal Continuation...................................... 34
Annuity Payments.......................................... 34
Annuity Options........................................... 35
How We Determine Present Value of Future Guaranteed
Annuity Payments...................................... 35
Payments of a Fixed Amount............................. 35
Payments for a Fixed Period............................ 35
Life Annuity........................................... 36
5
PAGE
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Life Annuity With Payments Guaranteed for 5, 10, 15, or
20 Years.............................................. 36
Life Annuity With Guaranteed Return of Contract
Value................................................. 36
Joint and Survivor Life Annuity........................ 36
Joint and Survivor Life Annuity with Payments
Guaranteed for 5, 10, 15, or 20 Years................. 36
Individual Retirement Account Annuity.................. 36
Gender-Based Annuity Purchase Rates....................... 36
FEDERAL INCOME TAXES........................................ 37
Federal Income Taxes...................................... 37
Tax Status of the Contract................................ 37
Diversification Requirements........................... 37
Owner Control.......................................... 37
Required Distributions................................. 37
Taxation of Annuities..................................... 38
In General............................................. 38
Withdrawals and Surrenders............................. 38
Annuity Payments....................................... 38
Taxation of Death Benefit Proceeds..................... 39
Penalty Tax on Some Withdrawals........................... 39
Transfers, Assignments, Annuity Dates, or Exchanges of a
Contract............................................... 39
Withholding............................................... 39
Multiple Contracts........................................ 39
Possible Changes In Taxation.............................. 39
Possible Charge For Our Taxes............................. 40
Foreign Tax Credits....................................... 40
Taxation of Qualified Contracts........................... 40
Individual Retirement Annuities........................... 40
Traditional IRAs....................................... 40
Roth IRAs.............................................. 40
Other Tax Issues For IRAs and Roth IRAs................ 41
Tax Sheltered Annuities................................... 41
OTHER INFORMATION........................................... 41
Notices and Elections..................................... 41
Voting Rights............................................. 42
Reports to Contract Owners................................ 42
Selling the Contract...................................... 43
State Regulation.......................................... 43
Legal Proceedings......................................... 44
Experts................................................... 44
Legal Matters............................................. 44
Registration Statements................................... 44
ACCUMULATION UNIT VALUES.................................... 45
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... 46
APPENDIX A Premiums Compounded at 5% Explanation and
Example................................................... A-1
APPENDIX B Return of Premium GMDB........................... B-1
APPENDIX C Estate Enhancer Benefit Example.................. C-1
APPENDIX D Maximum Anniversary Value Example................ D-1
6
DEFINITIONS
accumulation unit: A unit of measure used to compute the value of your interest
in a subaccount prior to the annuity date.
annuitant: Annuity payments may depend upon the continuation of a person's life.
That person is called the annuitant.
annuity date: The date on which annuity payments begin.
attained age: The age of a person on the contract date plus the number of full
contract years since the contract date.
beneficiary(s): The person(s) designated by you to receive payment upon the
death of an owner prior to the annuity date.
contract anniversary: The yearly anniversary of the contract date.
contract date: The effective date of the Contract. This is usually the business
day we receive your initial premium at our Service Center.
contract value: The value of your interest in the Account.
contract year: The period from the contract date to the first contract
anniversary, and thereafter, the period from one contract anniversary to the
next contract anniversary.
Individual Retirement Account or Annuity ("IRA"): A retirement arrangement
meeting the requirements of Section 408 or 408A of the Internal Revenue Code
("IRC").
net investment factor: An index used to measure the investment performance of a
subaccount from one valuation period to the next.
nonqualified contract: A Contract issued in connection with a retirement
arrangement other than a qualified arrangement described in the IRC.
qualified contract: A Contract issued in connection with a retirement
arrangement described under Section 403(b) or 408 of the IRC.
tax sheltered annuity: A Contract issued in connection with a retirement
arrangement that receives favorable tax status under Section 403(b) of the IRC.
valuation period: The interval from one determination of the net asset value of
a subaccount to the next. Net asset values are determined as of the close of
business on each day the New York Stock Exchange is open.
CAPSULE SUMMARY OF THE CONTRACT
This capsule summary provides a brief overview of the Contract. More detailed
information about the Contract can be found in the sections of this Prospectus
that follow, all of which should be read in their entirety.
Contracts issued in your state may provide different features and benefits from
those described in this Prospectus. This Prospectus provides a general
description of the Contracts. Your actual Contract and any endorsements are the
controlling documents. If you would like to review a copy of the Contract or any
endorsements, contact our Service Center. The Contract is available as a
nonqualified contract or tax sheltered annuity or may be issued as an IRA or
purchased through an established IRA or Roth IRA custodial account with Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"). Federal law limits
maximum annual contributions to qualified contracts. Transfer amounts from tax
sheltered annuity plans that are not subject to the Employee Retirement Income
Security Act of 1974, as amended, will be accepted as premium payments,
7
as permitted by law. Other premium payments will not be accepted under a
Contract used as a tax sheltered annuity.
A VARIABLE ANNUITY PROVIDES FOR TAX DEFERRED GROWTH POTENTIAL. THE TAX
ADVANTAGES TYPICALLY PROVIDED BY A VARIABLE ANNUITY ARE ALREADY AVAILABLE WITH
TAX-QUALIFIED PLANS, INCLUDING IRAS AND ROTH IRAS. YOU SHOULD CAREFULLY CONSIDER
THE ADVANTAGES AND DISADVANTAGES OF OWNING A VARIABLE ANNUITY IN A TAX-
QUALIFIED PLAN, AS WELL AS THE COSTS AND BENEFITS OF THE CONTRACT (SUCH AS THE
ANNUITY INCOME AND DEATH BENEFITS), BEFORE YOU PURCHASE THE CONTRACT IN A
TAX-QUALIFIED PLAN.
We offer other variable annuity contracts that have different contract features,
minimum premium amounts, fund selections, and optional programs. These other
contracts also have different charges that would affect your subaccount
performance and contract values. To obtain more information about these other
contracts, contact our Service Center or your Financial Advisor.
It may not be to your advantage to own multiple contracts issued by us or an
affiliate because only contract value under this Contract is eligible to receive
Contract Value Credits if the contract value is $250,000 or greater (see
"Contract Value Credit").
For information concerning compensation paid for the sale of Contracts, see
"Other Information -- Selling the Contract."
PREMIUMS
Generally, before the annuity date you can pay premiums as often as you like.
The minimum initial premium is $75,000. Subsequent premiums generally must each
be $50 or more. The maximum premium that will be accepted without Company
approval is $1,000,000. We may refuse to issue a Contract or accept additional
premiums under your Contract if the total premiums paid under all variable
annuity contracts issued by us and our affiliate, ML Life Insurance Company of
New York, on your life (or the life of any older co-owner) exceed $1,000,000.
Under an automatic investment feature, you can make subsequent premium payments
systematically from your Merrill Lynch brokerage account. For more information,
see "Automatic Investment Feature".
THE ACCOUNT
As you direct, we will put premiums into the subaccounts corresponding to the
Funds in which we invest your contract value. For the first 14 days following
the contract date, we put all premiums into the ML Domestic Money Market V.I.
Subaccount. After the 14 days, we'll put the money into the subaccounts you've
selected. In Pennsylvania, however, we won't wait 14 days. Instead, we'll invest
your premium immediately in the subaccounts you've selected. Currently, you may
allocate premiums or contract value among the available subaccounts. Generally,
within certain limits you may transfer contract value periodically among
subaccounts.
8
THE FUNDS AVAILABLE FOR INVESTMENT
- FUNDS OF MLIG VARIABLE INSURANCE TRUST
- Roszel/Lord Abbett Large Cap Value Portfolio
- Roszel/Levin Large Cap Value Portfolio
- Roszel/MLIM Relative Value Portfolio
- Roszel/Sound Large Cap Core Portfolio
- Roszel/INVESCO-NAM Large Cap Core Portfolio
- Roszel/Nicholas-Applegate Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Seneca Large Cap Growth Portfolio
- Roszel/Valenzuela Mid Cap Value Portfolio
- Roszel/Seneca Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Delaware Small-Mid Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/Credit Suisse International Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/MLIM Fixed-Income Portfolio
- FUNDS OF MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
- Domestic Money Market V.I. Fund
We have closed the subaccounts investing in the following Funds to allocations
of premiums and transfers of contract value:
- The Roszel/Levin Large Cap Value Portfolio for Contracts issued on or
after June 18, 2003;
- The Roszel/Credit Suisse International Portfolio for Contracts issued on
or after August 1, 2003;
- The Roszel/Sound Large Cap Core Portfolio for Contracts issued on or
after October 17, 2003;
- The Roszel/Valenzuela Mid Cap Value Portfolio for Contracts issued on or
after February 3, 2004; and
- The Roszel/MLIM Relative Value Portfolio for Contracts issued on or after
March 16, 2004.
If you want detailed information about the investment objectives of the Funds,
see "Investments of the Account" and the prospectuses for the Funds.
FEES, CHARGES AND CREDITS
ASSET-BASED INSURANCE CHARGE
We currently impose an asset-based insurance charge of 1.85% annually to cover
certain risks. It will never exceed 1.85% annually.
The asset-based insurance charge compensates us for:
- costs associated with the establishment, administration, and distribution
of the Contract;
- mortality risks we assume for the annuity payment and death benefit
guarantees made under the Contract; and
- expense risks we assume to cover Contract maintenance expenses.
We deduct the asset-based insurance charge daily from the net asset value of the
subaccounts. This charge ends on the annuity date.
ADDITIONAL DEATH BENEFIT CHARGE
If you elected to combine the Estate Enhancer benefit with either the Maximum
Anniversary Value or Premiums Compounded at 5% guaranteed minimum death benefits
(see "Death Benefit"), you pay an additional annual charge. This charge equals
0.25% of the average of your contract values as of the end of each of the prior
four contract quarters. A pro rata amount of this charge is collected upon
termination of the rider or the Contract. We won't deduct this charge after the
annuity date.
CONTRACT FEE
We impose a $50 contract fee at the end of each contract year and upon a full
withdrawal to reimburse us for expenses related to maintenance of the Contract
only if the greater of contract value, or premiums less withdrawals, is less
than $75,000. Accordingly, if your withdrawals have not decreased your
investment in
9
the Contract below $75,000, we will not impose this annual fee. We may also
waive this fee in certain circumstances where you own more than three Contracts.
This fee ends after the annuity date.
PREMIUM TAXES
On the annuity date, we deduct a charge for any premium taxes imposed by a state
or local government. Premium tax rates vary from jurisdiction to jurisdiction.
They currently range from 0% to 5%. In some jurisdictions, we deduct a charge
for premium taxes from any withdrawal, surrender, or death benefit payment.
FUND EXPENSES
You will bear the costs of advisory fees and operating expenses deducted from
Fund assets.
CONTRACT VALUE CREDIT
If on the last business day of each month and upon termination of the Contract
your contract value is $250,000 or greater, we determine the amount of your
Contract Value Credit. We will add the sum of the Contract Value Credits
determined for each month within a calendar quarter (and termination period) to
your contract value on the last business day of each calendar quarter (and upon
termination of the Contract). The amount of Contract Value Credits, how they are
determined, and the circumstances under which they may be credited are described
under "Contract Value Credit".
YOU CAN FIND DETAILED INFORMATION ABOUT ALL FEES AND CHARGES IMPOSED ON THE
CONTRACT UNDER "CHARGES, DEDUCTIONS AND CREDITS".
TRANSFERS AMONG SUBACCOUNTS
Before the annuity date, you may transfer all or part of your contract value
among the subaccounts up to twelve times per contract year without charge.
However, you may not transfer contract value into the Roszel/Levin Large Cap
Value subaccount if your Contract was issued on or after June 18, 2003; the
Roszel/Credit Suisse International subaccount if your Contract was issued on or
after August 1, 2003; the Roszel/Sound Large Cap Core subaccount if your
Contract was issued on or after October 17, 2003; the Roszel/Valenzuela Mid Cap
Value subaccount if your Contract was issued on or after February 3, 2004; or
the Roszel/MLIM Relative Value subaccount if your Contract was issued on or
after March 16, 2004. You may make more than twelve transfers among available
subaccounts, but we may charge $25 per extra transfer. (See "Transfers Among
Subaccounts".) We may impose additional restrictions on transfers. (See
"Transfers Among Subaccounts -- Disruptive Trading.")
Two specialized transfer programs are available under the Contract. You cannot
use more than one such program at a time.
- We offer a Dollar Cost Averaging Program where money you've put in a
designated subaccount is systematically transferred monthly into other
subaccounts you select without charge. The program may allow you to take
advantage of fluctuations in Fund share prices over time. (See "Dollar
Cost Averaging Program".) (There is no guarantee that Dollar Cost
Averaging will result in lower average prices or protect against market
loss.)
- You may choose to participate in a Rebalancing Program where we
automatically reallocate your contract value quarterly, semi-annually, or
annually in each calendar year in order to maintain a particular
percentage allocation among the subaccounts that you select. (See
"Rebalancing Program".)
WITHDRAWALS
You can withdraw money from the Contract at any time during the contract year.
Additionally, under a Systematic Withdrawal Program, you may have automatic
withdrawals of a specified dollar amount made monthly, quarterly, semi-annually,
or annually. For more information, see "Systematic Withdrawal Program".
A withdrawal may have adverse tax consequences, including the imposition of a
penalty tax on withdrawals prior to age 59 1/2. Withdrawals from tax sheltered
annuities are restricted (see "Federal Income Taxes").
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DEATH BENEFIT
Regardless of investment performance, this Contract provides a guaranteed
minimum death benefit ("GMDB") if you die before the annuity date.
The death benefit equals the greatest of: premiums less adjusted withdrawals;
the contract value; or the Maximum Anniversary Value GMDB. If you previously
elected the Estate Enhancer benefit, any amount thereunder will be added to the
death benefit.
The Maximum Anniversary Value GMDB equals the greater of premiums less
"adjusted" withdrawals or the Maximum Anniversary Value. The Maximum Anniversary
Value equals the greatest anniversary value for the Contract. An anniversary
value is calculated through the earlier of the owner's attained age 80 or date
of death.
You can find more detailed information about the death benefit, the limitations
that apply, and how it is calculated under "Death Benefit".
The payment of a death benefit may have tax consequences (see "Federal Income
Taxes").
ANNUITY PAYMENTS
Annuity payments begin on the annuity date, and payments will continue according
to the annuity option selected. You can select an annuity date but that date
cannot be earlier than the first Contract Anniversary nor later than the first
day of the month following the annuitant's 95th birthday. If you do not select
an annuity date, the annuity date for non-qualified Contracts is the first day
of the month following the annuitant's 95th birthday. The annuity date for IRA
or tax sheltered annuity Contracts is generally when the owner/annuitant reaches
age 70 1/2. You may change the scheduled annuity date at any time before annuity
payments begin.
Details about the annuity options available under the Contract can be found
under "Annuity Options".
Annuity payments may have tax consequences (see "Federal Income Taxes").
TEN DAY RIGHT TO REVIEW
When you receive the Contract, review it carefully to make sure it is what you
intended to purchase. Generally, within 10 days after you receive the Contract,
you may return it for a refund. The Contract will then be deemed void. Some
states allow a longer period of time to return the Contract, particularly if the
Contract is replacing another contract. To receive a refund, return the Contract
to the Service Center or to the Financial Advisor who sold it. We will then
refund the greater of all premiums paid into the Contract or the contract value
as of the date you return the Contract. For Contracts issued in Pennsylvania,
we'll refund the contract value as of the date you return the Contract.
REPLACEMENT OF CONTRACTS
Generally, it is not advisable to purchase a Contract as a replacement for an
existing annuity contract. You should replace an existing contract only when you
determine that the Contract is better for you. You may have to pay a surrender
charge on your existing contract. Before you buy a Contract, ask your Financial
Advisor if purchasing a Contract could be advantageous, given the Contract's
features, benefits, and charges.
You should talk to your tax advisor to make sure that this purchase will qualify
as a tax-free exchange. If you surrender your existing contract for cash and
then buy the Contract, you may have to pay Federal income taxes, including
possible penalty taxes, on the surrender. Also, because we will not issue the
Contract until we have received the initial premium from your existing insurance
company, the issuance of the Contract may be delayed.
11
FEE TABLE
The following tables describe the fees and expenses that you will pay when
buying, owning, and surrendering the Contract. The first table describes the
fees and expenses that you will pay at the time that you buy the Contract,
surrender the Contract, or transfer contract value between the subaccounts.
State premium taxes may also be deducted.
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Premiums.............................. None
Contingent Deferred Sales Charge (as a % of premium
withdrawn)................................................ None
Transfer Fee(1)............................................. $25
The next table describes the fees and expenses that you will pay periodically
during the time that you own the Contract, not including Fund fees and expenses.
This table also includes the charges you would pay if you added optional riders
to your Contract.
PERIODIC CHARGES OTHER THAN FUND EXPENSES
Annual Contract Fee(2)...................................... $50
Separate Account Annual Expenses (as a % of average Separate
Account value)
Current and Maximum Asset-Based Insurance Charge(3).... 1.85%
Additional Death Benefit Charge(4).......................... 0.25%
The next table shows the minimum and maximum total operating expenses charged by
the Funds that you may pay periodically during the time that you own the
Contract. More detail concerning each Fund's fees and expenses is contained in
the prospectus for each Fund.
RANGE OF EXPENSES FOR THE FUNDS(5) MINIMUM MAXIMUM
---------------------------------- ------- -------
TOTAL ANNUAL FUND OPERATING EXPENSES (total of all expenses
that are deducted from Fund assets, including management
fees, 12b-1 fees, and other expenses)..................... .57% 9.10%
NET ANNUAL FUND OPERATING EXPENSES (total of all expenses
that are deducted from Fund assets, including management
fees, 12b-1 fees, and other expenses -- after any
contractual waivers or reimbursements of fees and
expenses)(6).............................................. .57% 1.15%
---------------
(1) There is no charge for the first 12 transfers in a contract year. We
currently do not, but may in the future, charge a $25 fee on all subsequent
transfers.
(2) The contract fee will be assessed annually at the end of each contract year
and upon a full withdrawal only if the greater of contract value, or
premiums less withdrawals, is less than $75,000.
(3) If your contract value is $250,000 or greater on specified dates, a Contract
Value Credit will be added to your contract value that effectively reduces
the rate of this charge. This potential reduction is not reflected in the
fee table.
(4) An additional annual charge is assessed if the Estate Enhancer benefit was
combined with either the Maximum Anniversary Value GMDB or Premiums
Compounded at 5% GMDB. The charge will be assessed at the end of each
contract year based on the average of your contract values as of the end of
each of the prior four contract quarters. We also impose a pro rata amount
of this charge upon surrender, annuitization, death, or termination of the
rider. We won't deduct this charge after the annuity date.
(5) The Fund expenses used to prepare this table were provided to us by the
Funds. We have not independently verified such information. The expenses
shown are those incurred for the year ended December 31, 2003 or estimated
for the current year. Current or future expenses may be greater or less than
those shown.
(6) The range of Net Annual Fund Operating Expenses takes into account
contractual arrangements for certain Funds that require the investment
adviser to reimburse or waive fund expenses above a specified threshold for
a limited period of time ending no earlier than December 31, 2004. For more
information about these arrangements, consult the prospectuses for the
Funds.
12
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Contract with the cost of investing in other variable annuity contracts. These
costs include Separate Account Annual Expenses, the Additional Death Benefit
Charge, and Annual Fund Operating Expenses.
The Example assumes that you invest $10,000 in the Contract for the time periods
indicated. The Example also assumes that your investment has a 5% return each
year and assumes the maximum and minimum fees and expenses of any of the Funds.
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
If you surrender, annuitize, or remain invested in the Contract at the end of
the applicable time period:
Assuming the maximum fees and expenses of any Fund, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$335 $2,530 $4,463 $8,349
Assuming the minimum fees and expenses of any Fund, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$276 $ 847 $1,444 $3,058
Because there is no contingent deferred sales charge, you would pay the same
expenses whether you surrender your Contract at the end of the applicable time
period or not, based on the same assumptions.
The Example does not reflect the $50 contract fee because, based on average
contract size and withdrawals, its effect on the examples shown would be
negligible. They assume that the Estate Enhancer benefit is elected and reflect
the annual charge of 0.25% of the average contract value at the end of the four
prior contract quarters. Contractual waivers and reimbursements are reflected in
the first year of the example, but not in subsequent years. See the "Charges and
Discussions" section in this Prospectus and the Fund prospectuses for a further
discussion of fees and charges.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR ANNUAL RATES OF RETURN OF ANY FUND. ACTUAL EXPENSES AND ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR THE PURPOSE OF THE
EXAMPLES.
Condensed financial information containing the accumulation unit value history
appears at the end of this Prospectus.
YIELDS AND TOTAL RETURNS
From time to time, we may advertise yields, effective yields, and total returns
for the subaccounts. These figures are based on historical earnings and do not
indicate or project future performance. We may also advertise performance of the
subaccounts in comparison to certain performance rankings and indices. More
detailed information on the calculation of performance information appears in
the Statement of Additional Information.
Effective yields and total returns for a subaccount are based on the investment
performance of the corresponding Fund. Fund expenses influence Fund performance.
The yield of the ML Domestic Money Market V.I. Subaccount refers to the
annualized income generated by an investment in the subaccount over a specified
7-day period. The yield is calculated by assuming that the income generated for
that 7-day period is generated each 7-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment is assumed to
be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a subaccount (besides the ML Domestic Money Market V.I. Subaccount)
refers to the annualized income generated by an investment in the subaccount
over a specified 30-day or one month period. The yield is calculated by assuming
the income generated by the investment during that 30-day or
13
one-month period is generated each period over 12 months and is shown as a
percentage of the investment.
The average annual total return of a subaccount refers to return quotations
assuming an investment has been held in each subaccount for 1, 5 and 10 years,
or for a shorter period, if applicable. The average annual total returns
represent the average compounded rates of return that would cause an initial
investment of $1,000 to equal the value of that investment at the end of each
period. These percentages exclude any deductions for premium taxes.
We may also advertise or present yield or total return performance information
computed on different bases, but this information will always be accompanied by
average annual total returns for the corresponding subaccounts. We may also
advertise total return performance information for the Funds. We may also
present total return performance information for a subaccount for periods before
the date the subaccount commenced operations. If we do, we'll base performance
of the corresponding Fund as if the subaccount existed for the same periods as
those indicated for the corresponding Fund, with a level of fees and charges
equal to those currently imposed under the Contracts. We may also present total
performance information for a hypothetical Contract assuming allocation of the
initial premium to more than one subaccount or assuming monthly transfers from
one subaccount to designated other subaccounts under a Dollar Cost Averaging
Program. We may also present total performance information for a hypothetical
Contract assuming participation in the Rebalancing Program. This information
will reflect the performance of the affected subaccounts for the duration of the
allocation under the hypothetical Contract. It will also reflect the deduction
of charges described above. This information may also be compared to various
indices.
Advertising and sales literature for the Contracts may also compare the
performance of the subaccounts and Funds to the performance of other variable
annuity issuers in general or to the performance of particular types of variable
annuities investing in mutual funds, with investment objectives similar to each
of the Funds corresponding to the subaccounts. Performance information may also
be based on rankings by services which monitor and rank the performance of
variable annuity issuers in each of the major categories of investment
objectives on an industry-wide basis. Advertising and sales literature for the
Contracts may also compare the performance of the subaccounts to various indices
measuring market performance. These unmanaged indices assume the reinvestment of
dividends, but do not reflect any deduction for the expense of operating or
managing an investment portfolio.
Advertising and sales literature for the Contracts may also contain information
on the effect of tax deferred compounding on subaccount investment returns, or
returns in general. The tax deferral may be illustrated by graphs and charts and
may include a comparison at various points in time of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a currently taxable basis.
MERRILL LYNCH LIFE INSURANCE COMPANY
We are a stock life insurance company organized under the laws of the State of
Washington on January 27, 1986. We changed our corporate location to Arkansas on
August 31, 1991. We are an indirect wholly owned subsidiary of Merrill Lynch &
Co., Inc., a corporation whose common stock is traded on the New York Stock
Exchange.
Our financial statements can be found in the Statement of Additional
Information. You should consider them only in the context of our ability to meet
any Contract obligation.
THE ACCOUNT
The Merrill Lynch Life Variable Annuity Separate Account C (the "Account")
offers through its subaccounts a variety of investment options. Each option has
a different investment objective.
14
We established the Account on November 16, 2001. It is governed by Arkansas law,
our state of domicile. The Account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940. The Account meets the definition of a separate account under the
Federal securities laws. The Account's assets are segregated from all of our
other assets.
SEGREGATION OF ACCOUNT ASSETS
Obligations to contract owners and beneficiaries that arise under the Contract
are our obligations. We own all of the assets in the Account. The Account's
income, gains, and losses, whether or not realized, derived from Account assets
are credited to or charged against the Account without regard to our other
income, gains or losses. The assets in each Account will always be at least
equal to the reserves and other liabilities of the Account. If the Account's
assets exceed the required reserves and other Contract liabilities, we may
transfer the excess to our general account. Under Arkansas insurance law the
assets in the Account, to the extent of its reserves and liabilities, may not be
charged with liabilities arising out of any other business we conduct nor may
the assets of the Account be charged with any liabilities of other separate
accounts.
NUMBER OF SUBACCOUNTS; SUBACCOUNT INVESTMENTS
There are 17 subaccounts currently available through the Account. We have closed
the subaccounts investing in the following Funds to allocations of premiums and
transfers of contract value:
- The Roszel/Levin Large Cap Value Portfolio for Contracts issued on or
after June 18, 2003;
- The Roszel/Credit Suisse International Portfolio for Contracts issued on
or after August 1, 2003;
- The Roszel/Sound Large Cap Core Portfolio for Contracts issued on or
after October 17, 2003;
- The Roszel/Valenzuela Mid Cap Value Portfolio for Contracts issued on or
after February 3, 2004; and
- The Roszel/MLIM Relative Value Portfolio for Contracts issued on or after
March 16, 2004.
For each of these subaccounts, if you purchased your Contract before the noted
date, you may continue to allocate premiums and transfer contract value to the
respective subaccount. If you purchased your Contract after the noted date, you
may not allocate premiums or transfer contract value to that subaccount.
All subaccounts invest in a corresponding portfolio of the MLIG Variable
Insurance Trust or the Merrill Lynch Variable Series Funds, Inc. Additional
subaccounts may be added or closed in the future.
Although the investment objectives and policies of certain Funds are similar to
the investment objectives and policies of other portfolios that may be managed
or sponsored by the same investment adviser, subadviser, manager, or sponsor,
nevertheless, we do not represent or assure that the investment results will be
comparable to any other portfolio, even where the investment adviser,
subadviser, or manager is the same. Differences in portfolio size, actual
investments held, fund expenses, and other factors all contribute to differences
in fund performance. For all of these reasons, you should expect investment
results to differ. In particular, certain Funds available only through the
Contract may have names similar to funds not available through the Contract. The
performance of a fund not available through the Contract does not indicate
performance of any similarly named Fund available through the Contract.
INVESTMENTS OF THE ACCOUNT
GENERAL INFORMATION AND INVESTMENT RISKS
Information about investment objectives, management, policies, restrictions,
expenses, risks, and all other aspects of fund operations can be found in the
Funds' prospectuses and Statements of Additional Information. Read these
carefully before investing. Fund shares are currently sold to our separate
accounts as well as separate accounts of ML Life Insurance Company of New York
(an indirect wholly owned
15
subsidiary of Merrill Lynch & Co., Inc.) to fund benefits under certain variable
annuity and variable life insurance contracts. Shares of these Funds may be
offered to certain pension or retirement plans.
The investment adviser or subadviser of a Fund (or their affiliates) may pay
compensation to us or our affiliates, which may be significant, in connection
with administration or other services provided with respect to the Funds and
their availability through the Contracts. The amount of this compensation is
based upon a percentage of the assets of the Fund attributable to the Contracts
and other contracts that we or our affiliates issue. These percentages currently
range from 0.25% to 0.35%.
Generally, you should consider the Funds as long-term investments and vehicles
for diversification, but not as a balanced investment program. Many of these
Funds may not be appropriate as the exclusive investment to fund a Contract for
all contract owners. The Fund prospectuses also describe certain additional
risks, including investing on an international basis or in foreign securities
and investing in lower rated or unrated fixed income securities. There is no
guarantee that any Fund will be able to meet its investment objectives. Meeting
these objectives depends upon future economic conditions and upon how well Fund
management anticipates changes in economic conditions.
MLIG VARIABLE INSURANCE TRUST
The MLIG Trust is registered with the Securities and Exchange Commission as an
open-end management investment company. It currently offers sixteen of its
separate investment portfolios ("Portfolios") to the Account. We generally seek
to make available under the Contracts subaccounts that invest in Portfolios of
the MLIG Trust that are subadvised by investment managers that are part of the
Merrill Lynch Consults managed brokerage account program (the "Program") offered
by our affiliate MLPF&S. However, at times, an investment manager may be placed
"on hold" in the Program. An investment manager may be placed on hold for a
variety of reasons including changes in key personnel, changes in investment
process, performance, or other factors. During any period that an investment
manager is "on hold," its investment team, process, and performance are being
evaluated.
In order to keep the investment options under the Contract aligned with the
Program, we may close a subaccount to allocations of premiums and transfers of
contract value for Contracts issued on or after a specified date if that
subaccount invests in a MLIG Trust Portfolio whose subadviser is an investment
manager placed "on hold" within the Program by MLPF&S. Currently, the
subaccounts investing in the following Portfolios are closed to allocations of
premiums and transfers of contract value for Contracts issued after the dates
shown:
- The Roszel/Levin Large Cap Value Portfolio for Contracts issued on or
after June 18, 2003;
- The Roszel/Credit Suisse International Portfolio for Contracts issued on
or after August 1, 2003;
- The Roszel/Sound Large Cap Core Portfolio for Contracts issued on or
after October 17, 2003;
- The Roszel/Valenzuela Mid Cap Value Portfolio for Contracts issued on or
after February 3, 2004; and
- The Roszel/MLIM Relative Value Portfolio for Contracts issued on or after
March 16, 2004.
For each of these subaccounts, if you purchased your Contract before the noted
date, you may continue to allocate premiums and transfer contract value to the
respective subaccount. If you purchased your Contract after the noted date, you
may not allocate premiums or transfer contract value to that subaccount.
Roszel Advisors, LLC ("Roszel Advisors"), located at 1300 Merrill Lynch Drive,
2nd Floor, Pennington, New Jersey 08534, serves as the investment manager of the
MLIG Trust and each of the Portfolios. As investment manager, Roszel Advisors is
responsible for overall management of the Trust and retains subadvisers
("advisers") to manage the assets of each Portfolio according to its investment
objective and strategies. Roszel Advisors is an indirect subsidiary of Merrill
Lynch & Co., Inc. As the investment
16
manager, it is paid fees by the Funds for its services. Roszel Advisors pays the
subadvisory fees, not the Fund. A summary of the investment objective and
strategy for each Fund is set forth below.
ROSZEL/LORD ABBETT LARGE CAP VALUE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities that the adviser
believes are undervalued by the market. The adviser's approach is to invest in
stocks and sectors that it believes the market systematically misprices. The
adviser emphasizes quantitative analysis of companies and seeks to identify one
or more catalysts that are likely to increase a company's earnings over the next
several years. On the quantitative side, normalized earnings are a key factor in
assessing a security's potential future value. The adviser uses macroeconomic
and benchmark factors to manage risk and maximize risk-adjusted return for the
Portfolio.
ROSZEL/LEVIN LARGE CAP VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
are undervalued by the market. The adviser emphasizes fundamental analysis of
companies and selects companies it believes have strong proprietary products or
services, sell at a discount to private market value and/or have new products or
developments. The adviser seeks to minimize performance volatility vis-a-vis the
Russell 1000 Index, the Portfolio's performance benchmark. In this regard,
avoiding "downside" risk is often as important to the adviser as pursuing
"upside" potential.
The subaccount investing in the Roszel/Levin Large Cap Value Portfolio is closed
to allocations of premium and transfers of contract value for Contracts issued
on or after June 18, 2003. This subaccount was placed "on hold" on June 18,
2003, when Phil Friedman was named co-manager alongside Jack Murphy.
ROSZEL/MLIM RELATIVE VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
are undervalued by the market. The adviser uses a proprietary multi-factor
screen to identify undervalued securities. Securities must meet or exceed a
minimum qualifying score in order to be considered for further analysis. The
adviser generally stays within sector limits to avoid overweighting or
underweighting any sector by more than 50% in comparison with the S&P 500 Index.
The subaccount investing in the Roszel/MLIM Relative Value Portfolio is closed
to allocations of premium and transfers of contract value for Contracts issued
on or after March 16, 2004. This subaccount was placed "on hold" on March 16,
2004, because of the resignation from MLIM of four key members of the portfolio
management team. Senior Portfolio Manager Ty Nutt and portfolio managers Robert
Vogel, Jr., Anthony Lombardi, and Jordan Irving left MLIM to join another
investment management firm. A team led by Senior Portfolio Manager Joel
Heymsfeld is now responsible for the MLIM Relative Value strategy. Current
contributing Relative Value research analysts Richard Franzen, Robert N. Moses,
Jr., and Jacob L. Silady will support Mr. Heymsfeld.
ROSZEL/SOUND LARGE CAP CORE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities that the adviser believes
have a potential to earn a high return on capital and/or are undervalued by the
market. The adviser uses a disciplined sector weighting approach by which it
divides the securities in the S&P 500 Index, the Portfolio's performance
benchmark, into ten sectors and adjusts the weightings of investments in these
sectors such that they do not deviate more than 5% from the benchmark's
weightings. The adviser then seeks certain securities within a sector that it
believes offer better than average growth and earnings prospects. Within this 5%
tolerance, the adviser may overweight or underweight investments in various
sectors when it believes the sectors may outperform or underperform the
benchmark.
The subaccount investing in the Roszel/Sound Large Cap Core Portfolio is closed
to allocations of premium and transfers of contract value for Contracts issued
on or after October 17, 2003. This subaccount was placed "on hold" on October
17, 2003, because of changes in the investment team and
17
resulting alterations of the investment process. Robert Pyles, Chief Investment
Officer, was replaced by another member of the team, Robert Wylie.
ROSZEL/INVESCO-NAM LARGE CAP CORE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities that the adviser
believes have a potential to earn a high return on capital and/or are
undervalued by the market. The adviser's approach is to blend some
characteristics of value investing style with those of a growth investing style
in seeking stocks with market capitalizations greater than $2 billion. Under
normal market conditions, "value" stocks and "growth" stocks each make up
between 35% and 65% of the Portfolio's total assets. Using a quantitative
approach, the adviser constructs the Portfolio using stocks having one or more
of the following three characteristics: low share price-to-earnings ratios, high
yields, or sustained high rates of earnings growth. Investments in each category
comprise between 20% and 50% of the Portfolio.
ROSZEL/NICHOLAS-APPLEGATE LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks
long-term capital appreciation. The Portfolio pursues its investment objective
by investing primarily in large capitalization equity securities of companies
that the adviser believes have a potential for high earnings growth rates.
Generally such securities are those of well-established issuers with strong
business franchises and favorable long-term growth prospects. The adviser's
approach is to find companies that are experiencing positive change that is
timely and sustainable. Following a comprehensive risk evaluation, the adviser
constructs an investment portfolio from among the securities of such companies.
ROSZEL/RITTENHOUSE LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in large capitalization equity securities of companies that
the adviser believes have a potential for competitive earnings growth rates.
Generally such securities are those of well-established companies with strong
business franchises and favorable long-term growth prospects. The adviser's
approach is to select companies with a minimum of $5 billion market
capitalization. The adviser focuses on the quality of a company's earnings and
seeks those with historically consistent earnings and sustainable long-term
growth rates. The adviser's goal is to provide above-average risk-adjusted
returns as compared with its benchmarks. Avoiding "downside" risk is often as
important to the adviser as is pursuing "upside" potential.
ROSZEL/SENECA LARGE CAP GROWTH PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in large capitalization equity securities of companies that the
adviser believes have a potential for high earnings growth rates. Generally such
securities are those of well-established issuers with strong business franchises
and favorable long-term growth prospects. The adviser's approach is to acquire a
balanced mix of companies with stable demonstrated long-term growth and
companies with expected acceleration in earnings growth. To identify companies
that may experience an acceleration of earnings growth, the adviser often looks
for those providing unanticipated increases in quarterly earnings and/or upward
revisions in future earnings estimates. The adviser also uses various
quantitative techniques to control risk. To limit portfolio volatility, no more
than 5% of the Portfolio's total assets is invested in the securities of any
single issuer. The Portfolio may include mid capitalization securities from time
to time and may invest in a wide variety of income-bearing securities.
ROSZEL/VALENZUELA MID CAP VALUE PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in mid capitalization equity securities that the adviser
believes are undervalued by the market. The adviser focuses on stock selection
and valuation using both quantitative and qualitative analysis. The adviser's
quantitative analysis uses financial data, mainly 3- to 5-year historical
quarterly ratio analysis. Normally, the adviser follows about 180 issuers of mid
capitalization securities using approximately 25 different financial ratios. The
adviser's qualitative analysis of companies includes interviewing a company's
management as well as its customers, competitors, and suppliers, about issues
raised by the adviser's quantitative analysis. From this, the adviser compiles a
purchase list with buy and sell target prices of about 100 stocks.
18
The subaccount investing in the Roszel/Valenzuela Mid Cap Value Portfolio is
closed to allocations of premium and transfers of contract value for Contracts
issued on or after February 3, 2004. This subaccount was placed "on hold" on
February 3, 2004, because of the departure of Wendell Mackey, the portfolio
manager who had day-to-day responsibility for the Roszel/Valenzuela Mid Cap
Value Portfolio. Mr. Mackey left Valenzuela Capital Partners in mid-December,
2003 and Thomas Valenzuela, the firm's Chief Investment Officer, took over Mr.
Mackey's portfolio management responsibilities at that time.
ROSZEL/SENECA MID CAP GROWTH PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in mid capitalization equity securities of companies that the adviser
believes have a potential for high and sustainable earnings growth rates. The
adviser's approach is to acquire a balanced mix of companies with stable
long-term growth and companies with expected acceleration in earnings growth. To
identify companies that may experience an acceleration of earnings growth, the
adviser often looks for those providing unanticipated increases in quarterly
earnings and/or upward revisions in future earnings estimates. The adviser also
uses various quantitative measures to control risks. In addition to equity
securities, the Portfolio also may invest in a variety of income-bearing
securities.
ROSZEL/NWQ SMALL CAP VALUE PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in small capitalization equity securities that the adviser believes
are undervalued by the market. The adviser uses a value investing style that
emphasizes qualitative factors over quantitative ones. Although the adviser uses
traditional quantitative methods such as cash flow analysis to identify
undervalued securities, it focuses on seeking stocks under temporary selling
pressure or those of special situation companies such as turnaround candidates
or companies expected to outperform their peers due to changes in the economic
cycle. The adviser also looks for companies with potential catalysts to unlock
or improve profitability. Typical catalysts are: new management, renewed
management focus, improving fundamentals, industry consolidation and company
restructuring. The adviser generally tries to maintain the Portfolio's dollar
weighted median capitalization at or near that of its benchmark, the Russell
2000 Value Index.
ROSZEL/DELAWARE SMALL-MID CAP GROWTH PORTFOLIO (FORMERLY THE ROSZEL/NEUBERGER
BERMAN SMALL CAP GROWTH PORTFOLIO). The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in small capitalization and mid capitalization equity securities of
companies that the adviser believes have a potential for high earnings growth
rates. The adviser uses a growth investing style, seeking small and mid size
companies that offer substantial opportunities for long-term price appreciation
because they are poised to benefit from changing and dominant social and
political trends. The adviser evaluates a company's management, product
development and sales and earnings. The adviser uses a "bottom-up" approach for
this evaluation and seeks market leaders, strong product cycles, innovative
concepts and industry trends.
ROSZEL/LAZARD INTERNATIONAL PORTFOLIO. The Portfolio seeks long-term capital
appreciation. The Portfolio pursues its investment objective by investing
primarily in equity securities of foreign issuers that the adviser believes are
undervalued by the market. The adviser uses a relative value investing style to
seek financially productive securities that are undervalued relative to their
respective industries and peers based on their earnings, cash flow or asset
values. The adviser invests in securities of relatively large established
foreign issuers located in economically developed countries.
ROSZEL/CREDIT SUISSE INTERNATIONAL PORTFOLIO. The Portfolio seeks long-term
capital appreciation. The Portfolio pursues its investment objective by
investing primarily in equity securities of foreign issuers that the adviser
believes have a potential for strong earnings growth rates. The adviser uses a
style that combines favorable growth prospects with attractive valuations, or a
"growth at a reasonable price" strategy. The adviser invests in securities of a
wide variety of well established foreign issuers, including depository receipts.
The subaccount investing in the Roszel/Credit Suisse International Portfolio is
closed to allocations of premium and transfers of contract value for Contracts
issued on or after August 1, 2003. This subaccount was placed "on hold" on
August 1, 2003 after the departure of lead portfolio manager Vincent McBride
19
and two other members of the international investment team. Nancy Nierman, who
was directly responsible for the Roszel/Credit Suisse International Portfolio,
now oversees the international investment process.
ROSZEL/LORD ABBETT GOVERNMENT SECURITIES PORTFOLIO. The Portfolio seeks as high
a level of income as is consistent with investment in Government securities. The
Portfolio invests primarily in Government securities and generally maintains an
average portfolio duration of three to eight years. The Portfolio seeks to
maintain a relatively stable level of income and to limit share price
volatility. The adviser seeks to manage the duration of portfolio investments to
achieve an optimal balance of yield and corresponding interest rate risk.
Similarly, the adviser often seeks higher yields from investments in
mortgage-related Government securities when it can do so without taking on
excessive prepayment/extension risk. In this regard, mortgage-related Government
securities may make up a substantial portion of the Portfolio's assets.
ROSZEL/MLIM FIXED-INCOME PORTFOLIO. The Portfolio seeks as high a level of
total return as is consistent with investment in high-grade income-bearing
securities. The Portfolio invests primarily in high-grade income-bearing
securities and seeks to maintain total return through duration management and
sector rotation consistent with the adviser's outlook of future interest rate
changes. The Portfolio generally maintains an average portfolio duration of
three to six years. It generally maintains an average credit quality of A or
better. The Portfolio invests in a wide variety of income-bearing securities
including mortgage-backed securities.
MLIG VARIABLE INSURANCE TRUST SUBADVISERS
The following chart lists the subadviser for each Portfolio in the MLIG Trust:
---------------------------------------------------------------------------------------------
PORTFOLIO SUBADVISER
---------------------------------------------------------------------------------------------
Roszel/Lord Abbett Large Cap Value Portfolio Lord, Abbett & Co. LLC
---------------------------------------------------------------------------------------------
Roszel/Levin Large Cap Value Portfolio John A. Levin & Co., Inc.
---------------------------------------------------------------------------------------------
Roszel/MLIM Relative Value Portfolio Merrill Lynch Investment Managers, L.P.
---------------------------------------------------------------------------------------------
Roszel/Sound Large Cap Core Portfolio Sound Capital Partners
---------------------------------------------------------------------------------------------
Roszel/INVESCO-NAM Large Cap Core INVESCO-National Asset Management Group
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Nicholas-Applegate Large Cap Growth Nicholas-Applegate Capital Management, LLC
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Rittenhouse Large Cap Growth Portfolio Rittenhouse Asset Management, Inc.
---------------------------------------------------------------------------------------------
Roszel/Seneca Large Cap Growth Portfolio Seneca Capital Management LLC
---------------------------------------------------------------------------------------------
Roszel/Valenzuela Mid Cap Value Portfolio Valenzuela Capital Partners LLC
---------------------------------------------------------------------------------------------
Roszel/Seneca Mid Cap Growth Portfolio Seneca Capital Management LLC
---------------------------------------------------------------------------------------------
Roszel/NWQ Small Cap Value Portfolio NWQ Investment Management Company
---------------------------------------------------------------------------------------------
Roszel/Delaware Small-Mid Cap Growth Delaware Management Company*
Portfolio
---------------------------------------------------------------------------------------------
Roszel/Lazard International Portfolio Lazard Asset Management LLC
---------------------------------------------------------------------------------------------
Roszel/Credit Suisse International Portfolio Credit Suisse Asset Management, LLC
---------------------------------------------------------------------------------------------
Roszel/Lord Abbett Government Securities Lord, Abbett & Co. LLC
Portfolio
---------------------------------------------------------------------------------------------
Roszel/MLIM Fixed-Income Portfolio Merrill Lynch Investment Managers, L.P.
---------------------------------------------------------------------------------------------
* Effective March 3, 2003, Delaware Management Company replaced Neuberger Berman
Management, Inc. as investment subadviser.
20
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
The Variable Series Funds is registered with the Securities and Exchange
Commission as an open-end management investment company. It currently offers
Class I shares of the ML Domestic Money Market V.I. Fund to the Account.
Merrill Lynch Investment Managers, L.P. ("MLIM") is the investment adviser to
the ML Domestic Money Market V.I. Fund. MLIM is also the subadviser to the
Roszel/MLIM Relative Value and Roszel/MLIM Fixed-Income Portfolios of MLIG
Variable Insurance Trust. MLIM, together with its affiliates, Fund Asset
Management, L.P., Merrill Lynch Asset Management U.K., Ltd., and Merrill Lynch
Investment Managers International Ltd., (all of which may operate under the
name, "Mercury Advisors"), is a worldwide mutual fund leader, and had a total of
$513 billion in investment company and other portfolio assets under management
as of March 31, 2004. It is registered as an investment adviser under the
Investment Advisers Act of 1940. MLIM is an indirect subsidiary of Merrill Lynch
& Co., Inc. MLIM's principal business address is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536. As the investment adviser, it is paid fees by the
Fund for its services. MLIM and Merrill Lynch Life Agency Inc. have entered into
a Reimbursement Agreement that limits the operating expenses paid by the
Domestic Money Market V.I. Fund in a given year to 1.25% of its average net
assets. A summary of the investment objective and strategy for the Domestic
Money Market V.I. Fund is set forth below.
DOMESTIC MONEY MARKET V.I. FUND. This Fund seeks to preserve capital, maintain
liquidity, and achieve the highest possible current income consistent with the
foregoing objectives by investing in short-term domestic money market
securities. Although the Domestic Money Market V.I. Fund seeks to preserve
capital, it is possible to lose money by investing in this Fund. During extended
periods of low interest rates, the yields of the Domestic Money Market V.I.
Subaccount also may be extremely low and possibly negative.
PURCHASES AND REDEMPTIONS OF FUND SHARES; REINVESTMENT
The Account will purchase and redeem shares of the Funds at net asset value to
provide benefits under the Contract. Fund distributions to the Account are
automatically reinvested at net asset value in additional shares of the Funds.
MATERIAL CONFLICTS, SUBSTITUTION OF INVESTMENTS AND CHANGES TO THE ACCOUNT
It is conceivable that material conflicts could arise as a result of both
variable annuity and variable life insurance separate accounts investing in the
Funds. Although no material conflicts are foreseen, the participating insurance
companies will monitor events in order to identify any material conflicts
between variable annuity and variable life insurance contract owners to
determine what action, if any, should be taken. Material conflicts could result
from such things as (1) changes in state insurance law, (2) changes in Federal
income tax law or (3) differences between voting instructions given by variable
annuity and variable life insurance contract owners. If a conflict occurs, we
may be required to eliminate one or more subaccounts of the Account or
substitute a new subaccount. In responding to any conflict, we will take the
action we believe necessary to protect our contract owners.
We may substitute a different investment option for any of the current Funds. A
substitution may become necessary if, in our judgment, a portfolio no longer
suits the purposes of the Contracts or for any other reason in our sole
discretion. This may happen due to a change in laws or regulations, or a change
in a portfolio's investment objectives or restrictions, or because the portfolio
is no longer available for investment, or for some other reason. A substituted
portfolio may have different fees and expenses. Substitution may be made with
respect to existing contract value or future premium payments, or both for some
or all classes of Contracts. Furthermore, we may close subaccounts to allocation
of premium payments or contract value, or both for some or all classes of
Contracts, at any time in our sole discretion. However, before any such
substitution, we would obtain any necessary approval of the Securities and
Exchange Commission and applicable state insurance departments. We will notify
you of any substitutions.
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We may also add new subaccounts to the Account, eliminate subaccounts in the
Account, deregister the Account under the Investment Company Act of 1940 (the
"1940 Act"), make any changes required by the 1940 Act, operate the Account as a
managed investment company under the 1940 Act or any other form permitted by
law, transfer all or a portion of the assets of a subaccount or separate account
to another subaccount or separate account pursuant to a combination or
otherwise, and create new separate accounts. Before we make certain changes, we
may need approval of the Securities and Exchange Commission and applicable state
insurance departments. We will notify you of any changes.
CHARGES, DEDUCTIONS AND CREDITS
We deduct the charges described below to cover costs and expenses, services
provided, and risks assumed under the Contracts. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits. We add the credit described below to your contract value in certain
circumstances where we realize cost reductions and administrative efficiencies.
This credit, if any, will effectively reduce the amount of the annual
asset-based insurance charge we collect.
ASSET-BASED INSURANCE CHARGE
We currently impose an asset-based insurance charge on the Account that equals
1.85% annually. It will never exceed 1.85%.
We deduct this charge daily from the net asset value of the subaccounts prior to
the annuity date. This amount compensates us for mortality risks we assume for
the annuity payment and death benefit guarantees made under the Contract. These
guarantees include making annuity payments which won't change based on our
actual mortality experience, and providing a GMDB under the Contract.
The charge also compensates us for expense risks we assume to cover Contract
maintenance expenses. These expenses may include issuing Contracts, maintaining
records, and performing accounting, regulatory compliance, and reporting
functions. Finally, this charge compensates us for costs associated with the
establishment, administration and distribution of the Contract, including
programs like transfers and Dollar Cost Averaging.
If the asset-based insurance charge is inadequate to cover the actual expenses
of mortality, maintenance, administration and distribution, we will bear the
loss. If the charge exceeds the actual expenses, we will add the excess to our
profit.
ADDITIONAL DEATH BENEFIT CHARGE
If you elected to combine the Estate Enhancer benefit with either the Maximum
Anniversary Value GMDB or Premiums Compounded at 5% GMDB, you will pay an annual
additional charge of 0.25% of the average of your contract values as of the end
of each of the prior four contract quarters. We won't deduct this charge after
the annuity date. We will impose a pro rata amount of this charge upon
surrender, annuitization, death, or termination of the rider between contract
anniversaries. We deduct this charge regardless of whether the Estate Enhancer
benefit has any value. Since the Estate Enhancer benefit is no longer available,
this change does not apply to newly issued Contracts.
CONTRACT FEE
We may charge a $50 contract fee each year. We will only impose this fee at the
end of each contract year and upon termination if the greater of contract value,
or premiums less withdrawals, is less than $75,000. Accordingly, if you have not
made any withdrawals from your Contract (or your withdrawals have not decreased
your investment in the Contract below $75,000), we will not impose this fee.
The contract fee reimburses us for additional expenses related to maintenance of
certain Contracts with lower contract values. We do not deduct the contract fee
after the annuity date. The contract fee will never increase.
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If the contract fee applies, we will deduct it as follows:
- We deduct this fee from your contract value at the end of each contract
year before the annuity date.
- We deduct this fee from your contract value if you surrender the contract
on any date other than at the end of each contract year.
- We deduct this fee on a pro rata basis from all subaccounts in which your
contract value is invested.
Currently, a contract owner of more than three of these Contracts will be
assessed no more than $150 in contract fees annually. We reserve the right to
change this limit on contract fees at any time.
OTHER CHARGES
TRANSFER CHARGES
You may make up to twelve transfers among subaccounts per contract year without
charge. If you make more than twelve, we may, but currently do not, charge you
$25 for each extra transfer. We deduct this charge pro rata from the subaccounts
from which you are transferring contract value. Currently, transfers made by us
under the Dollar Cost Averaging Program and the Rebalancing Program will not
count toward the twelve transfers permitted among subaccounts per contract year
without charge. (See "Dollar Cost Averaging Program", "Rebalancing Program", and
"Transfers Among Subaccounts".)
TAX CHARGES
We reserve the right, subject to any necessary regulatory approval, to charge
for assessments or Federal premium taxes or Federal, state or local excise,
profits or income taxes measured by or attributable to the receipt of premiums.
We also reserve the right to deduct from the Account any taxes imposed on the
Account's investment earnings. (See "Tax Status of the Contract".)
FUND EXPENSES
In calculating net asset value, the Funds deduct advisory fees and operating
expenses from assets. (See "Fee Table".) Information about those fees and
expenses also can be found in the prospectuses for the Funds, and in the
applicable Statement of Additional Information for each Fund.
PREMIUM TAXES
Various states impose a premium tax on annuity premiums when they are received
by an insurance company. In other jurisdictions, a premium tax is paid on the
contract value on the annuity date.
Premium tax rates vary from jurisdiction to jurisdiction and currently range
from 0% to 5%. Although we pay these taxes when due, we won't deduct them from
your contract value until the annuity date. In those jurisdictions that do not
allow an insurance company to reduce its current taxable premium income by the
amount of any withdrawal, surrender or death benefit paid, we will also deduct a
charge for these taxes on any withdrawal, surrender or death benefit paid under
the Contract.
Premium tax rates are subject to change by law, administrative interpretations,
or court decisions. Premium tax amounts will depend on, among other things, the
contract owner's state of residence, our status within that state, and the
premium tax laws of that state.
CONTRACT VALUE CREDIT
We may add a Contract Value Credit to your contract value if your contract value
reaches certain levels as shown below. The contract values of multiple contracts
(including other contracts issued by us or an affiliate) cannot be added
together to reach these levels. The amount, if any, is added on the last
business day of each calendar quarter as the sum of Contract Value Credits
determined for each month within that calendar quarter. Contract Value Credits,
if any, will also be credited on a pro rata basis upon termination
23
of the Contract due to full withdrawal, annuitization, or receipt of due proof
of death. Contract Value Credits are determined as follows:
(a) Determine the Contract Value on the last business day of the month or
date of Contract termination ("Calculation Date")
(b) Allocate the Contract Value among the tiers shown below
(c) Multiply the amount in each tier by the corresponding annual credit
percentage
(d) Sum the results of each tier
(e) Multiply the number of days that the Contract was in force since the
last Calculation Date (excluding the contract date)
(f) Divide by 365
CONTRACT VALUE TIER ANNUAL CREDIT PERCENTAGE
------------------- ------------------------
Less than $250,000.......................................... 0.00%
Next $250,000............................................... 0.20%
Next $250,000............................................... 0.30%
Next $250,000............................................... 0.40%
Next $1,000,000............................................. 0.50%
Next $3,000,000............................................. 0.65%
Excess over $5,000,000...................................... 0.75%
FEATURES AND BENEFITS OF THE CONTRACT
As we describe the contract, we will often use the word "you". In this context
"you" means "contract owner".
OWNERSHIP OF THE CONTRACT
The contract owner is entitled to exercise all rights under the Contract. Unless
otherwise specified, the purchaser of the Contract will be the contract owner.
The Contract can be owned by a trust or a corporation. However, special tax
rules apply to Contracts owned by "non-natural persons" such as corporations or
trusts. If you are a human being, you are considered a "natural person." You may
designate a beneficiary. If you die, the beneficiary will receive a death
benefit. You may also designate an annuitant. You may change the annuitant at
any time prior to the annuity date. If you don't select an annuitant, you are
the annuitant. If your Contract is held in a qualified plan, you should consult
with a qualified tax advisor regarding these designations.
If a non-natural person owns the Contract and changes the annuitant, the
Internal Revenue Code (IRC) requires us to treat the change as the death of a
contract owner. We will then pay the beneficiary the death benefit.
Only spouses may be co-owners of the Contract, except in Pennsylvania, New
Jersey, and Oregon. When the Contract is issued in exchange for another contract
that was co-owned by non-spouses, the Contract will be issued with non-spousal
co-owners. When co-owners are established, they exercise all rights under the
Contract jointly unless they elect otherwise. Co-owner spouses must each be
designated as beneficiary for the other. Co-owners may also designate a
beneficiary to receive benefits on the surviving co-owner's death. Qualified
contracts may not have co-owners.
You may assign the Contract to someone else by giving notice to our Service
Center. Only complete ownership of the Contract may be assigned to someone else.
You can't do it in part. An assignment to a new owner cancels all prior
beneficiary designations except a prior irrevocable beneficiary designation.
Assignment of the Contract may have tax consequences or may be prohibited on
certain qualified contracts, so you should consult with a qualified tax adviser
before assigning the Contract. (See "Federal Income Taxes".)
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ISSUING THE CONTRACT
ISSUE AGE
You can buy a nonqualified Contract if you (and any co-owner) are less than 80
years old. Annuitants on nonqualified Contracts must be less than 80 years old
when we issue the Contract. For qualified Contracts owned by natural persons,
the contract owner and annuitant must be the same person. Contract owners and
annuitants on qualified Contracts must be less than 70 1/2 years old when we
issue the Contract, unless certain exceptions are met.
INFORMATION WE NEED TO ISSUE THE CONTRACT
Before we issue the Contract, we need certain information from you. We may
require you to complete and return a written application in certain
circumstances, such as when the Contract is being issued to replace, or in
exchange for, another annuity or life insurance contract. Once we review and
approve the application or the information provided, and you pay the initial
premium, we'll issue a Contract. Generally, we'll issue the Contract and invest
the premium within two business days of our receiving your premium. If we
haven't received necessary information within five business days, we will return
the premium and no Contract will be issued.
TEN DAY RIGHT TO REVIEW
When you get the Contract, review it carefully to make sure it is what you
intended to purchase. Generally, within ten days after you receive the Contract,
you may return it for a refund. The Contract will then be deemed void. Some
states allow a longer period of time to return the Contract, particularly if the
Contract is replacing another contract. To get a refund, return the Contract to
our Service Center or to the Financial Advisor who sold it. We will then refund
the greater of all premiums paid into the Contract or the contract value as of
the date you return the Contract. For Contracts issued in Pennsylvania, we'll
refund the contract value as of the date you return the Contract.
PREMIUMS
MINIMUM AND MAXIMUM PREMIUMS
The initial premium payment must be $75,000 or more. Subsequent premium payments
generally must each be $50 or more. You can make subsequent premium payments at
any time before the annuity date. The maximum premium that will be accepted
without Company approval is $1,000,000. We may refuse to issue a Contract or
accept additional premiums under your Contract if the total premiums paid under
all variable annuity contracts issued by us and our affiliate, ML Life Insurance
Company of New York, on your life (or the life of any older co-owner) exceed
$1,000,000. We also reserve the right to reject subsequent premium payments for
any other reason.
The Contract is available as a non-qualified contract or may be issued as an IRA
or purchased through an established IRA or Roth IRA custodial account with
MLPF&S. Federal law limits maximum annual contributions to qualified contracts.
Transfer amounts from tax sheltered annuity plans that are not subject to the
Employee Retirement Income Security Act of 1974, as amended, will be accepted as
premium payments, as permitted by law. Other premium payments will not be
accepted under a Contract used as a tax sheltered annuity. We may waive the $50
minimum for premiums paid under IRA Contracts held in custodial accounts with
MLPF&S where you're transferring the complete cash balance of such account into
a Contract.
HOW TO MAKE PAYMENTS
You can pay premiums directly to our Service Center at the address printed on
the first page of this Prospectus or have money debited from your MLPF&S
brokerage account.
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AUTOMATIC INVESTMENT FEATURE
You may make systematic premium payments on a monthly, quarterly, semi-annual or
annual basis. Each payment must be for at least $50. Premiums paid under this
feature must be deducted from an MLPF&S brokerage account specified by you and
acceptable to us. You must specify how premiums paid under this feature will be
allocated among the subaccounts. If you select the Rebalancing Program, premiums
will be allocated based on the subaccounts and percentages you have selected for
the program. You may change the specified premium amount, the premium
allocation, or cancel the Automatic Investment Feature at any time upon notice
to us. We reserve the right to make changes to this program at any time.
PREMIUM INVESTMENTS
For the first 14 days following the contract date, we'll hold all premiums in
the ML Domestic Money Market V.I. Subaccount. After the 14 days, we'll
reallocate the contract value to the subaccounts you selected. (In Pennsylvania,
we'll invest all premiums as of the contract date in the subaccounts you
selected.)
Currently, you may allocate your premium among all of the available subaccounts.
Allocations must be made in whole numbers. For example, 12% of a premium
received may be allocated to the NWQ Small Cap Value Subaccount, 58% allocated
to the Lazard International Subaccount, and 30% to the Lord Abbett Government
Securities Subaccount. However, you may not allocate 33 1/3% to the NWQ Small
Cap Value Subaccount and 66 2/3% to the Lord Abbett Government Securities
Subaccount. If we don't get allocation instructions when we receive subsequent
premiums, we will allocate those premiums according to the allocation
instructions you last gave us. We reserve the right to modify the limit on the
number of subaccounts to which future allocations may be made.
ACCUMULATION UNITS
Each subaccount has a distinct value, called the accumulation unit value. The
accumulation unit value for a subaccount varies daily with the performance and
expenses of the corresponding Fund. We use this value to determine the number of
subaccount accumulation units represented by your investment in a subaccount.
HOW ARE MY CONTRACT TRANSACTIONS PRICED?
We calculate an accumulation unit value for each subaccount at the close of
business on each day that the New York Stock Exchange is open. Transactions are
priced, which means that accumulation units in your Contract are purchased
(added to your Contract) or redeemed (taken out of your contract), at the unit
value next calculated after our Service Center receives notice of the
transaction. For premium payments, transfers into a subaccount, or Contract
Value Credits, units are purchased. For payment of Contract proceeds (i.e.,
withdrawals, surrenders, annuitization, and death benefits), transfers out of a
subaccount, and deductions for any contract fee, any additional death benefit
charge, any transfer charge, and any premium taxes due, units are redeemed.
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HOW DO WE DETERMINE THE NUMBER OF UNITS?
We determine the number of accumulation units purchased by dividing the dollar
value of the premium payment, amount transferred into the subaccount, or
Contract Value Credit by the value of one accumulation unit for that subaccount
for the valuation period in which the premium payment, transfer, or Contract
Value Credit is made. Similarly, we determine the number of accumulation units
redeemed by dividing the dollar value of the amount of the Contract proceeds
(i.e., withdrawals, surrenders, annuitization, and death benefits), transfers
out of a subaccount, and deductions for any contract fee, any additional death
benefit charge, any transfer charge, and any premium taxes due from a subaccount
by the value of one accumulation unit for that subaccount for the valuation
period in which the redemption is made. The number of subaccount accumulation
units for a Contract will therefore increase or decrease as these transactions
are made. The number of subaccount accumulation units for a Contract will not
change as a result of investment experience or the deduction of asset-based
insurance charges. Instead, this charge and investment experience are reflected
in the accumulation unit value.
When we establish a subaccount, we set an initial value for an accumulation unit
(usually, $10). Accumulation unit values increase, decrease, or stay the same
from one valuation period to the next. An accumulation unit value for any
valuation period is determined by multiplying the accumulation unit value for
the prior valuation period by the net investment factor for the subaccount for
the current valuation period.
The net investment factor is an index used to measure the investment performance
of a subaccount from one valuation period to the next. For any subaccount, we
determine the net investment factor by dividing the value of the assets of the
subaccount for that valuation period by the value of the assets of the
subaccount for the preceding valuation period. We subtract from that result the
daily equivalent of the asset-based insurance charge for the valuation period.
We also take reinvestment of dividends and capital gains into account when we
determine the net investment factor.
We may adjust the net investment factor to make provisions for any change in tax
law that requires us to pay tax on earnings in the Account or any charge that
may be assessed against the Account for assessments or premium taxes or Federal,
state or local excise, profits or income taxes measured by or attributable to
the receipt of premiums. (See "Other Charges".)
DEATH OF ANNUITANT PRIOR TO ANNUITY DATE
If the annuitant dies before the annuity date, and the annuitant is not a
contract owner, the owner, provided the owner is a natural person, may designate
a new annuitant. If a new annuitant is not designated, the contract owner will
become the annuitant. If any contract owner is not a natural person, no new
annuitant may be named and the death benefit will be paid to the beneficiary.
TRANSFERS AMONG SUBACCOUNTS
GENERAL
Before the annuity date, you may transfer all or part of your contract value
among the subaccounts up to twelve times per contract year without charge. You
can make additional transfers among subaccounts, but we may charge you $25 for
each extra transfer. We will deduct the transfer charge pro rata from among the
subaccounts you're transferring from. Currently, transfers made by us under the
Dollar Cost Averaging Program and the Rebalancing Program will not count toward
the twelve transfers permitted among
27
subaccounts per contract year without charge. (See "Dollar Cost Averaging
Program" and "Rebalancing Program".) We reserve the right to change the number
of additional transfers permitted each contract year.
Transfers among subaccounts may be made in specific dollar amounts or as a
percentage of contract value. You must transfer at least $100 or the total value
of a subaccount, if less.
You may request transfers in writing or by telephone, once we receive proper
telephone authorization. Transfer requests may also be made through your Merrill
Lynch Financial Advisor, or another person you designate, once we receive proper
authorization. Transfers will take effect as of the end of the valuation period
on the date the Service Center receives the request. Where you or your
authorized representative have not given instructions to a Service Center
representative prior to 4:00 p.m. (ET), even if due to our delay in answering
your call, we will consider telephone transfer requests to be received the
following business day. (See "Other Information -- Notices and Elections" for
additional information on potential delays applicable to telephone
transactions.)
DISRUPTIVE TRADING
Frequent or short-term transfers among subaccounts, such as those associated
with "market timing" transactions, can adversely affect the Funds and the
returns achieved by contract owners. In particular, such transfers may dilute
the value of the Fund shares, interfere with the efficient management of the
Funds' investments, and increase brokerage and administrative costs of the
Funds. In order to try to protect our contract owners and the Funds from
potentially disruptive or harmful trading activity, we have adopted certain
policies and procedures ("Disruptive Trading Procedures"). We employ various
means to try to detect such transfer activity, such as periodically examining
the number of transfers and/or the number of "round trip" transfers into and out
of particular subaccounts made by contract owners within given periods of time
and/or examining transfer activity identified by the Funds on a case-by-case
basis.
Our policies and procedures may result in restrictions being applied to contract
owners who are found to be engaged in disruptive trading activities. We will
notify any such contract owner in writing (by mail to the address of record on
file with us) of the restrictions that will apply to future transfers under a
Contract. Such contract owners will receive one warning prior to imposition of
any restrictions on transfers. Potential transfer restrictions may include
refusing to execute future transfer requests that violate our Disruptive Trading
Procedures or requiring all future transfer requests to be submitted through
regular U.S. mail (thereby refusing to accept transfer requests via overnight
delivery service, telephone, Internet, facsimile, or other electronic means).
Because we have adopted our Disruptive Trading Procedures as a prophylactic
measure to protect contract owners from the potential adverse effects of harmful
trading activity, please keep in mind that we will impose the restriction stated
in the notification on that contract owner even if we cannot identify, in the
particular circumstances, any harmful effect from that contract owner's future
transfers.
Despite our best efforts, we cannot guarantee that our Disruptive Trading
Procedures will detect every potential market timer, but we apply our Disruptive
Trading Procedures consistently to all contract owners without special
arrangement, waiver, or exception. Our ability to detect and deter such transfer
activity may be limited by our operational systems and technological
limitations. Furthermore, the identification of contract owners determined to be
engaged in disruptive or harmful transfer activity involves judgments that are
inherently subjective. In our sole discretion, we may revise our Disruptive
Trading Procedures at any time without prior notice as necessary to better
detect and deter frequent or short-term transfers that may adversely affect
other contract owners or the Funds, to comply with state or Federal regulatory
requirements, or to impose additional or alternate restrictions on market timers
(such as dollar or percentage limits on transfers).
In the future, some Funds may begin imposing redemption fees on short-term
trading (i.e., redemptions of mutual fund shares within a certain number of
business days after purchase). We reserve the right to
28
administer and collect any such redemption fees on behalf of the Funds. To the
extent permitted by applicable law, we also reserve the right to refuse to make
a transfer at any time that we are unable to purchase or redeem shares of any of
the Funds available through the Account, including any refusal or restriction on
purchases or redemptions of their shares as a result of a Fund's own policies
and procedures on disruptive trading activities.
DOLLAR COST AVERAGING PROGRAM
WHAT IS IT?
The Contract offers an optional transfer program called Dollar Cost Averaging
("DCA"). This program allows you to reallocate money at monthly intervals from a
designated subaccount to one or more other subaccounts. The DCA Program is
intended to reduce the effect of short term price fluctuations on investment
cost. Since we transfer the same dollar amount to selected subaccounts monthly,
the DCA Program allows you to purchase more accumulation units when prices are
low and fewer accumulation units when prices are high. Therefore, you may
achieve a lower average cost per accumulation unit over the long-term. However,
it is important to understand that a DCA Program does not assure a profit or
protect against loss in a declining market. If you choose to participate in the
DCA Program you should have the financial ability to continue making transfers
through periods of fluctuating markets.
If you choose to participate in the DCA Program, each month we will transfer
amounts from the subaccount that you designate and allocate them, in accordance
with your allocation instructions, to the subaccounts that you select.
If you choose the Rebalancing Program, you cannot use the DCA Program. We
reserve the right to make changes to this program at any time.
PARTICIPATING IN THE DCA PROGRAM
You can choose the DCA Program any time before the annuity date. You may elect
the DCA Program in writing or by telephone, once we receive proper telephone
authorization. Once you start using the DCA Program, you must continue it for at
least three months. After three months, you may cancel the DCA Program at any
time by notifying us in a form satisfactory to us. Once you reach the annuity
date, you may no longer use this program.
MINIMUM AMOUNTS
To elect the DCA Program, you need to have a minimum amount of money in the
designated subaccount. We determine the amount required by multiplying the
specified length of your DCA Program in months by your specified monthly
transfer amount. Amounts of $100 or more must be allotted for transfer each
month in the DCA Program. We reserve the right to change these minimums.
Allocations must be designated in whole percentage increments. No specific
dollar amount designations may be made. Should the amount in your selected
subaccount drop below the selected monthly transfer amount, we'll notify you
that you need to put more money in to continue the program.
WHEN DO WE MAKE DCA TRANSFERS?
You select the date for DCA transfers, within certain limitations. We will make
the first DCA transfer on the selected date following the later of 14 days after
the contract date or the date we receive notice of your DCA election at our
Service Center. We'll make subsequent DCA transfers on the same day of each
succeeding month. Currently, we don't charge for DCA transfers; they are in
addition to the twelve annual transfers permitted without charge under the
Contract.
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REBALANCING PROGRAM
Under the Rebalancing Program, we will allocate your premiums and rebalance your
contract value quarterly, semi-annually, or annually according to the frequency,
subaccounts and percentages you select based on your investment goals and risk
tolerance.
After you elect the Rebalancing Program, we allocate your premiums in accordance
with the subaccounts and percentages you have selected. Depending on the
frequency you select (on the last business day of each calendar quarter for
quarterly rebalancing, on the last business day of June and December for
semi-annual rebalancing, or on the last business day of December for annual
rebalancing), we automatically reallocate your contract value to maintain the
particular percentage allocation among the subaccounts that you have selected.
You may change the frequency of your Rebalancing Program at any time.
We perform this periodic rebalancing to take account of:
- increases and decreases in contract value in each subaccount due to
subaccount performance, and
- increases and decreases in contract value in each subaccount due to
withdrawals, transfers, and premiums.
The Rebalancing Program can be elected at issue or at any time after issue. You
may elect the Rebalancing Program in writing or by telephone, once we get proper
telephone authorization. If you elect the Rebalancing Program, you must include
all contract value in the program. We allocate all systematic investment
premiums and, unless you instruct us otherwise, all other premiums in accordance
with the subaccount allocations that you have selected. The percentages that you
select under the Rebalancing Program will override any prior percentage
allocations that you have chosen and we will allocate all future premiums
accordingly. You may change your allocations at any time. Once elected, you may
instruct us, in a form satisfactory to us, at any time to terminate the program.
Currently, we don't charge for transfers under this program; they are in
addition to the twelve annual transfers permitted without charge under the
Contract.
We reserve the right to make changes to this program at any time. If you choose
the DCA Program, you cannot use the Rebalancing Program.
WITHDRAWALS AND SURRENDERS
WHEN AND HOW WITHDRAWALS ARE MADE
Before the annuity date, you may make lump-sum withdrawals from the Contract at
any time during the contract year. In addition, you may make systematic
withdrawals, discussed below. Withdrawals are subject to tax to the extent of
gain and prior to age 59 1/2 may also be subject to a 10% Federal penalty tax.
Certain withdrawals from Roth IRAs are tax-free, and withdrawals from tax
sheltered annuities are not generally permitted before age 59 1/2, death,
disability, separation from service or hardship. (See "Federal Income Taxes".)
Unless you direct us otherwise, we will make lump-sum withdrawals from
subaccounts in the same proportion as the subaccounts bear to your contract
value. You may make a withdrawal request in writing to our Service Center. You
may withdraw money by telephone, once you've submitted a proper telephone
authorization form to our Service Center, but only if the amount withdrawn is to
be paid into a Merrill Lynch brokerage account or sent to the address of record.
Where you or your authorized representative have not given instructions to a
Service Center representative prior to 4:00 p.m. (ET), even if due to our delay
in answering your call, we will consider telephone withdrawal requests to be
received the following business day. (See "Other Information -- Notices and
Elections" for additional information on potential delays applicable to
telephone transactions.)
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MINIMUM AMOUNTS
The minimum amount that may be withdrawn is $100. At least $5,000 must remain in
the Contract after you make a withdrawal. We reserve the right to change these
minimums.
SYSTEMATIC WITHDRAWAL PROGRAM
You may have automatic withdrawals of a specified dollar amount made monthly,
quarterly, semi-annually or annually. Each withdrawal must be for at least $100
and the remaining contract value must be at least $5,000. You may change the
specified dollar amount or frequency of withdrawals or stop the Systematic
Withdrawal Program at any time upon notice to us. We will make systematic
withdrawals from subaccounts in the same proportion as the subaccounts bear to
your contract value. We reserve the right to restrict the maximum amount that
may be withdrawn each year under the Systematic Withdrawal Program and to make
any other changes to this program at any time.
SURRENDERS
At any time before the annuity date you may surrender the Contract through a
full withdrawal. Any request to surrender the Contract must be in writing. The
Contract must be delivered to our Service Center. We will pay you an amount
equal to the contract value as of the end of the valuation period when we
process the surrender, minus any applicable contract fee, minus any applicable
additional death benefit charge, plus any applicable Contract Value Credits, and
minus any applicable charge for premium taxes. (See "Charges, Deductions and
Credits.") Surrenders are subject to tax and, prior to age 59 1/2, may also be
subject to a 10% Federal penalty tax. Certain surrenders of Roth IRAs are
tax-free, and surrenders of tax sheltered annuities before age 59 1/2, death,
disability, severance from employment, or hardship may be restricted unless
proceeds are transferred to another tax sheltered annuity arrangement. (See
"Federal Income Taxes".)
PAYMENTS TO CONTRACT OWNERS
We'll make any payments to you usually within seven days of our Service Center
receiving your proper request. However, we may delay any payment, or delay
processing any annuity payment or transfer request if:
(a) the New York Stock Exchange is closed;
(b) trading on the New York Stock Exchange is restricted by the Securities
and Exchange Commission;
(c) the Securities and Exchange Commission declares that an emergency
exists making it not reasonably practicable to dispose of securities
held in the Account or to determine the value of the Account's assets;
(d) the Securities and Exchange Commission by order so permits for the
protection of security holders; or
(e) payment is derived from a check used to make a premium payment which
has not cleared through the banking system.
Applicable laws designed to counter terrorism and prevent money laundering
might, in certain circumstances, require us to block a contract owner's ability
to make certain transactions and thereby refuse to accept any premium payments
or requests for transfers, withdrawals, surrenders, annuitization, or death
benefits, until instructions are received from the appropriate regulator. We may
also be required to provide additional information about you and your Contract
to government regulators.
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CONTRACT CHANGES
Requests to change the owner, beneficiary, annuitant, or annuity date of a
Contract will take effect as of the date you sign such a request, unless we have
already acted in reliance on the prior status. We are not responsible for the
validity of such a request.
If you change the owner or annuitant on a nonqualified Contract, the new owner
or annuitant must be less than 80 years old. For qualified Contracts, if you
change the owner or annuitant, the new owner or annuitant must be less than
70 1/2 years old.
The Estate Enhancer benefit will terminate upon a non-spousal ownership change,
or upon a spousal ownership change where the new spousal owner was over attained
age 75 as of the effective date of the Estate Enhancer rider. Any applicable
additional death benefit charge will be deducted on the date that the Estate
Enhancer benefit terminates.
You may change the owner of the Contract to your spouse without terminating the
Estate Enhancer benefit provided that your spouse is younger than attained age
76 on the effective date. After such a change in owner, the amount of the Estate
Enhancer benefit will be based on the attained age of your spouse on the
effective date, if older than the oldest owner since that date.
If the Estate Enhancer benefit terminates and you did not elect the Estate
Enhancer benefit in combination with either the Maximum Anniversary Value GMDB
or the Premiums Compounded at 5% GMDB, the asset-based insurance charge will not
be reduced. This results in a loss of benefits without a corresponding reduction
in charges.
DEATH BENEFIT
GENERAL
Regardless of investment experience, the Contract provides a guaranteed minimum
death benefit ("GMDB") to the beneficiary if you die before the annuity date.
The GMDB for newly issued Contracts is the Maximum Anniversary Value. (If an
owner is a non-natural person, then the death of the annuitant will be treated
as the death of the owner.)
Unless the owner has chosen the manner in which the death benefit is to be paid,
we will pay the death benefit in a lump sum unless the beneficiary chooses an
annuity payment option available under the Contract. (See "Annuity Options".)
However, if you die before the annuity date, Federal tax law generally requires
us to distribute the entire contract value within five years of your date of
death. Special rules may apply to a surviving spouse. (See "Federal Income
Taxes".)
We determine the death benefit as of the date we receive certain information at
our Service Center. We call this information due proof of death. It consists of
the Beneficiary Statement, a certified death certificate, and any additional
documentation we may need to process the death claim. If we haven't received the
other documents within 60 days following our receipt of a certified death
certificate, we will consider due proof of death to have been received and we
will pay the death benefit in a lump sum. For multiple beneficiaries, we will
pay the first beneficiary to provide us with due proof of death his or her share
of the death benefit. We will not pay any remaining beneficiary his or her share
of the death benefit until we receive due proof of death from that beneficiary.
Such beneficiaries continue to bear the investment risk that contract value will
increase or decrease until such time as they submit due proof of death or 60
days following receipt of a certified death certificate, whichever is sooner.
If the age of an owner or annuitant, if the owner is a non-natural person, is
misstated, any death benefit will be adjusted to reflect the correct age. Unless
you irrevocably designated a beneficiary, you may change the beneficiary at any
time before the annuity date.
Death benefit proceeds, including any Estate Enhancer benefit, are taxable to
the extent of gain. (See "Federal Income Taxes -- Taxation of Death Benefit
Proceeds".)
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EXISTING CONTRACT OWNERS PLEASE NOTE: The death benefit applicable to your
Contract may vary from the description in the text below. Prior to December 12,
2002, we offered several death benefit options. If you applied for your Contract
prior to that date, you may have selected Premiums Compounded at 5% GMDB or
Estate Enhancer benefit with Return of Premium GMDB as your death benefit or you
may have added the Estate Enhancer as an optional benefit to your Contract.
If you elected Premiums Compounded at 5% GMDB as your death benefit, see
APPENDIX A for a description of the death benefit that applies to your Contract.
If you elected the Estate Enhancer with the Return of Premium GMDB as your death
benefit, see APPENDIX B for a description of the death benefit that applies to
your Contract.
If you elected the Estate Enhancer benefit and added it to the Maximum
Anniversary Value GMDB or the Premiums Compounded at 5% GMDB, see APPENDIX C for
a description of how the Estate Enhancer benefit will affect your death benefit.
If you would like assistance in determining which death benefit applies to your
Contract, please refer to the Contract or contact the Service Center at (800)
535-5549.
CALCULATION OF DEATH BENEFIT
The death benefit is equal to the greatest of:
(i) the contract value;
(ii) the premiums paid into the Contract less "adjusted" withdrawals from
the Contract; or
(iii) the Maximum Anniversary Value.
For this formula, each "adjusted" withdrawal equals the amount withdrawn
multiplied by the greater of [(a) or (b)] / (c) where:
a = premiums paid into the Contract less previous "adjusted" withdrawals;
b = the Maximum Anniversary Value; and
c = the contract value.
Values for (a), (b), and (c) are calculated immediately prior to the
withdrawal.
The Maximum Anniversary Value is equal to the greatest anniversary value for the
Contract. An anniversary value is equal to the contract value on a contract
anniversary increased by premium payments and decreased by "adjusted"
withdrawals since that anniversary. "Adjusted" withdrawals are calculated
according to the formula that appears immediately above this section.
To determine the Maximum Anniversary Value, we will calculate an anniversary
value for each contract anniversary through the earlier of your attained age 80
or the anniversary on or prior to your date of death. If the contract has
co-owners, we will calculate the anniversary value through the earlier of the
older owner's attained age 80 or the anniversary on or prior to any owner's date
of death if a death benefit is payable. If an owner is a non-natural person,
then the annuitant's age, rather than the owner's age, will be used to determine
any age limitations that apply in calculating the Maximum Anniversary Value.
We will calculate the Maximum Anniversary Value based on your age (or the age of
the older owner, if the Contract has co-owners, or the annuitant, if the owner
is a non-natural person) on the contract date. Subsequent changes in owner will
not increase the period of time used to determine the Maximum Anniversary Value.
If a new owner has not reached attained age 80 and is older than the owner whose
age is being used to determine the Maximum Anniversary Value at the time of the
ownership change, the period of time used in the calculation of the Maximum
Anniversary Value will be based on the age of the new owner at the time of the
ownership change. If at the time of an ownership change the new owner is
attained age 80 or over, we will use the Maximum Anniversary Value as of the
anniversary on or prior to the ownership change, increased by premium payments
and decreased by "adjusted" withdrawals since that anniversary.
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FOR AN EXAMPLE OF THE CALCULATION OF THE MAXIMUM ANNIVERSARY VALUE GMDB, SEE
APPENDIX D.
SPOUSAL CONTINUATION
If your beneficiary is your surviving spouse, your spouse may elect to continue
the Contract if you die before the annuity date (except under tax sheltered
annuities). Your spouse becomes the contract owner and the beneficiary until
your spouse names a new beneficiary. If the death benefit, including any Estate
Enhancer benefit, which would have been paid to the surviving spouse is greater
than the contract value as of the date we determine the death benefit, we will
increase the contract value of the continued Contract to equal the death benefit
we would have paid to the surviving spouse. Your interest in each subaccount
available at that time for allocations of premiums and transfers of contract
value will be increased by any excess of the death benefit over your contract
value multiplied by the ratio of your contract value in each subaccount
available for investment to your total contract value in the subaccounts
available for investment prior to the increase.
If the surviving spouse is attained age 75 or younger on the date he or she
elects to continue the Contract, the Estate Enhancer benefit will also be
continued, if applicable. We will use the date the surviving spouse elects to
continue the Contract as the effective date, and the percentages used in the
calculations described under the Estate Enhancer benefit will be based on the
surviving spouse's attained age on the effective date. Estate Enhancer gain and
net premiums are calculated from the new effective date and the contract value
on the effective date is considered a premium for purpose of these calculations.
If the surviving spouse is attained age 76 or older on the date he or she elects
to continue the Contract, the Estate Enhancer benefit will terminate. If the
Estate Enhancer benefit terminates and you did not elect the Estate Enhancer
benefit in combination with either the Maximum Anniversary Value GMDB or the
Premiums Compounded at 5% GMDB, the asset-based insurance charge will not be
reduced. This results in a loss of benefits without a corresponding reduction in
charges.
ANNUITY PAYMENTS
We'll make the first annuity payment on the annuity date, and payments will
continue according to the annuity option selected. When you first buy the
Contract, the annuity date for non-qualified Contracts is the first day of the
month following the annuitant's 95th birthday. However, you may specify an
earlier annuity date but that date cannot be before the first Contract
Anniversary. You may change the annuity date at any time before the annuity
date. Generally, the annuity date for IRA or tax sheltered annuity Contracts is
when the owner/annuitant reaches age 70 1/2. However, we will not require IRA
and tax sheltered annuities to annuitize at age 70 1/2 if distributions from the
Contract are not necessary to meet Federal minimum distribution requirements.
Contract owners may select from a variety of fixed annuity payment options, as
outlined below in "Annuity Options." If you don't choose an annuity option,
we'll use the Life Annuity with Payments Guaranteed for 10 Years annuity option
when the annuitant reaches age 95 (age 70 1/2 for an IRA Contract or tax
sheltered annuity). You may change the annuity option before the annuity date.
We reserve the right to limit annuity options available to IRA contract owners
to comply with the Internal Revenue Code or regulations under it.
We calculate your annuity payments as of the annuity date, not the date when the
annuitization request forms are received at the Service Center. Until the
annuity date, your contract value will fluctuate in accordance with the
performance of the investment options you have selected. We determine the dollar
amount of annuity payments by applying your contract value less any applicable
premium tax (reduced by any additional death benefit charge collected upon
termination and increased by any Contract Value Credit paid upon termination) on
the annuity date to our then current annuity purchase rates. Purchase rates show
the amount of periodic payment that a $1000 value buys. These rates are based on
the annuitant's age and sex (where permitted) at the time payments begin, and
will assume interest of not less than 3% per year. The rates will never be less
than those shown in the Contract.
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If the age and/or sex of the annuitant was misstated to us, resulting in an
incorrect calculation of annuity payments, we will adjust future annuity
payments to reflect the correct age and/or sex. We will deduct any amount we
overpaid as the result of a misstatement from future payments with 6% annual
interest charges. Likewise, if we underpaid any amount as the result of a
misstatement, we will correct it with the next payment made with 6% annual
interest credited.
If the contract value on the annuity date after the deduction of any applicable
premium taxes is less than $5,000, we may cash out your Contract in a lump sum.
If any annuity payment would be less than $50 (or a different minimum amount, if
required by state law), we may change the frequency of payments so that all
payments will be at least $50 (or the minimum amount required by state law).
Unless you tell us differently, we'll make annuity payments directly to your
Merrill Lynch brokerage account.
ANNUITY OPTIONS
We currently provide the following fixed annuity payment options. After the
annuity date, your Contract does not participate in the performance of the
Account. We may in the future offer more options. Once you begin to receive
annuity payments, you cannot change the payment option, payment amount, or the
payment period. Please note that there is no guarantee that aggregate payments
under any of these annuity options will equal the total premiums paid. If you or
the annuitant dies while guaranteed payments remain unpaid, several options
provide the ability to take the present value of future guaranteed payments in a
lump sum.
HOW WE DETERMINE PRESENT VALUE OF FUTURE
GUARANTEED ANNUITY PAYMENTS
Present value refers to the amount of money needed today to fund the remaining
guaranteed payments under the annuity payment option you select. The primary
factor in determining present value is the interest rate assumption we use. If
you are receiving annuity payments under an option that gives you the ability to
take the present value of future payments in a lump sum and you elect to take
the lump sum we will use the same interest rate assumption in calculating the
present value that we used to determine your payment stream at the time your
annuity payments commenced.
PAYMENTS OF A FIXED AMOUNT
We will make equal payments in an amount you choose until the sum of all
payments equals the contract value applied, increased for interest credited. The
amount you choose must provide at least five years of payments. These payments
don't depend on the annuitant's life. If the annuitant dies before the
guaranteed amount has been paid, you may elect to have payments continued for
the amount guaranteed or to receive the present value of the remaining
guaranteed payments in a lump sum. If the contract owner dies while guaranteed
amounts remain unpaid, the beneficiary may elect to receive the present value of
the remaining guaranteed payments in a lump sum.
PAYMENTS FOR A FIXED PERIOD
We will make equal payments for a period you select of at least five years.
These payments don't depend on the annuitant's life. If the annuitant dies
before the end of the period, you may elect to have payments continued for the
period guaranteed or to receive the present value of the remaining guaranteed
payments in a lump sum. If the contract owner dies while guaranteed amounts
remain unpaid, the beneficiary may elect to receive the present value of the
remaining guaranteed payments in a lump sum.
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*LIFE ANNUITY
We make payments for as long as the annuitant lives. Payments will cease with
the last payment made before the annuitant's death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5, 10, 15, OR 20 YEARS
We make payments for as long as the annuitant lives. In addition, even if the
annuitant dies before the period ends, we guarantee payments for either 5, 10,
15, or 20 years as you selected. If the annuitant dies before the guaranteed
period ends, you may elect to have payments continued for the period guaranteed
or to receive the present value of the remaining guaranteed payments in a lump
sum. If the contract owner dies while guaranteed amounts remain unpaid, the
beneficiary may elect to receive the present value of the remaining guaranteed
payments in a lump sum.
LIFE ANNUITY WITH GUARANTEED RETURN OF CONTRACT VALUE
We make payments for as long as the annuitant lives. In addition, even if the
annuitant dies, we guarantee payments until the sum of all annuity payments
equals the contract value applied. If the annuitant dies while guaranteed
amounts remain unpaid, you may elect to have payments continued for the amount
guaranteed or to receive the present value of the remaining guaranteed amount in
a lump sum. If the contract owner dies while guaranteed amounts remain unpaid,
the beneficiary may elect to receive the present value of the remaining
guaranteed amount in a lump sum.
*JOINT AND SURVIVOR LIFE ANNUITY
We make payments for the lives of the annuitant and a designated second person.
Payments will continue as long as either one is living.
JOINT AND SURVIVOR LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5, 10, 15, OR
20 YEARS
We make payments during the lives of the annuitant and a designated second
person. Payments will continue as long as either one is living. In addition,
even if the annuitant and the designated second person die before the guaranteed
period ends, we guarantee payments for either 5, 10, 15, or 20 years as you
selected. If the annuitant and the designated second person die before the end
of the period, you may elect to have payments continued for the period
guaranteed or to receive the present value of the remaining guaranteed payments
in a lump sum. If the contract owner dies while guaranteed amounts remain
unpaid, the beneficiary may elect to receive the present value of the remaining
guaranteed payments in a lump sum.
INDIVIDUAL RETIREMENT ACCOUNT ANNUITY
This annuity option is available only to IRA contract owners. Payments will be
made annually based on (a) the life expectancy of the annuitant; (b) the joint
life expectancy of the annuitant and his or her spouse; or (c) the life
expectancy of the surviving spouse if the annuitant dies before the annuity
date. Each annual payment will be determined in accordance with the applicable
Internal Revenue Service regulations. Each subsequent payment will be made on
the anniversary of the annuity date. Interest will be credited at our current
rate for this option. On the death of the measuring life or lives prior to full
distribution of the remaining value, we will pay that value to the beneficiary
in a lump sum.
GENDER-BASED ANNUITY PURCHASE RATES
Generally, the Contract provides for gender-based annuity purchase rates when
life annuity options are chosen. However, in Montana, which has adopted
regulations prohibiting gender-based rates, blended
---------------
* These options are "pure" life annuities. Therefore, it is possible for the
payee to receive only one annuity payment if the person (or persons) on whose
life (lives) payment is based dies after only one payment or to receive only
two annuity payments if that person (those persons) dies after only two
payments, etc.
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unisex annuity purchase rates will be applied to both male and female
annuitants. Unisex annuity purchase rates will provide the same annuity payments
for male or female annuitants that are the same age on their annuity dates.
Employers and employee organizations considering purchase of the Contract should
consult with their legal advisor to determine whether purchasing a Contract
containing gender-based annuity purchase rates is consistent with Title VII of
the Civil Rights Act of 1964 or other applicable law. We may offer such contract
owners Contracts containing unisex annuity purchase rates.
FEDERAL INCOME TAXES
FEDERAL INCOME TAXES
The following summary discussion is based on our understanding of current
Federal income tax law as the Internal Revenue Service (IRS) now interprets it.
We can't guarantee that the law or the IRS's interpretation won't change. It
does not purport to be complete or to cover all tax situations. This discussion
is not intended as tax advice. Counsel or other tax advisors should be consulted
for further information.
We haven't considered any applicable Federal gift, estate or any state or other
tax laws. Of course, your own tax status or that of your beneficiary can affect
the tax consequences of ownership or receipt of distributions.
When you invest in an annuity contract, you usually do not pay taxes on your
investment gains until you withdraw the money -- generally for retirement
purposes. If your annuity is independent of any formal retirement or pension
plan, it is termed a nonqualified contract. If you invest in a variable annuity
as part of an individual retirement annuity or tax sheltered annuity, your
contract is called a qualified contract. The tax rules applicable to qualified
contracts vary according to the type of retirement plan and the terms and
conditions of the plan.
TAX STATUS OF THE CONTRACT
DIVERSIFICATION REQUIREMENTS
Section 817(h) of the Internal Revenue Code (IRC) and the regulations under it
provide that separate account investments underlying a contract must be
"adequately diversified" for it to qualify as an annuity contract under IRC
section 72. The Account, through the subaccounts, intends to comply with the
diversification requirements of the regulations under Section 817(h). This will
affect how we make investments.
OWNER CONTROL
In some circumstances, owners of variable contracts who retain excessive control
over the investment of the underlying separate account assets may be treated as
the owners of those assets and may be subject to tax on income produced by those
assets. Although there is little guidance in this area and published guidance
does not address certain aspects of the Contracts, we believe that the owner of
a Contract should not be treated as the owner of the underlying assets. We
reserve the right to modify the Contracts to bring them into conformity with
applicable standards should such modification be necessary to prevent owners of
the Contracts from being treated as the owners of the underlying Account assets.
REQUIRED DISTRIBUTIONS
To qualify as an annuity contract under Section 72(s) of the IRC, a
non-qualified annuity contract must provide that: (a) if any owner dies on or
after the annuity starting date but before all amounts under the Contract have
been distributed, the remaining amounts will be distributed at least as quickly
as under the method being used when the owner died; and (b) if any owner dies
before the annuity starting date, all
37
amounts under the Contract will be distributed within five years of the date of
death. So long as the distributions begin within a year of the owner's death,
the IRS will consider these requirements satisfied for any part of the owner's
interest payable to or for the benefit of a "designated beneficiary" and
distributed over the beneficiary's life or over a period that cannot exceed the
beneficiary's life expectancy. A designated beneficiary is the person the owner
names as beneficiary and who assumes ownership when the owner dies. A designated
beneficiary must be a natural person. If the deceased owner's spouse is the
designated beneficiary, he or she can continue the Contract when such contract
owner dies.
The nonqualified Contracts are designed to comply with Section 72(s), although
no regulations interpreting these requirements have yet been issued. We will
review the Contract and amend it if necessary to make sure that it continues to
comply with the section's requirements when such requirements are clarified by
regulation or otherwise.
Other rules regarding required distributions apply to qualified Contracts.
TAXATION OF ANNUITIES
IN GENERAL
IRC Section 72 governs annuity taxation generally. We believe an owner who is a
natural person usually won't be taxed on increases in the value of a contract
until there is a distribution (i.e., the owner withdraws all or part of the
contract value or takes annuity payments). Assigning, pledging, or agreeing to
assign or pledge any part of the contract value usually will be considered a
distribution. Distributions of accumulated investment earnings are taxable as
ordinary income.
The owner of any annuity contract who is not a natural person (e.g., a
corporation or a trust) generally must include in income any increase in the
excess of the contract value over the "investment in the contract" during the
taxable year. There are some exceptions to this rule and a prospective owner
that is not a natural person may wish to discuss them with a competent tax
advisor.
The following discussion applies generally to Contracts owned by a natural
person:
WITHDRAWALS AND SURRENDERS
When you take a withdrawal from a Contract, the amount received generally will
be treated as ordinary income subject to tax up to an amount equal to the excess
(if any) of the contract value immediately before the distribution over the
investment in the Contract (generally, the premiums or other consideration paid
for the Contract, reduced by any amount previously distributed from the Contract
that was not subject to tax) at that time. Other rules apply to qualified
contracts. In the case of a withdrawal under a qualified Contract, a ratable
portion of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the individual's total account balance or
accrued benefit under the retirement plan. The "investment in the contract"
generally equals the amount of any non-deductible premium payments paid by or on
behalf of any individual. In many cases, the "investment in the contract" under
a qualified Contract can be zero.
If you withdraw your entire contract value, you will be taxed only on the part
that exceeds your "investment in the contract."
ANNUITY PAYMENTS
Although tax consequences may vary depending on the annuity option selected
under an annuity contract, a portion of each annuity payment is generally not
taxed and the remainder is taxed as ordinary income. The non-taxable portion of
an annuity payment is generally determined in a manner that is designed to allow
you to recover your investment in the Contract ratably on a tax-free basis over
the expected stream of annuity payments, as determined when annuity payments
start. Once your investment in the Contract has been fully recovered, however,
the full amount of each annuity payment is subject to tax as ordinary income.
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TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be paid from a Contract because an owner or annuitant (if an owner
is not a natural person) has died. If the payments are made in a single sum,
they're taxed the same way a full withdrawal from the Contract is taxed. If they
are distributed as annuity payments, they're taxed as annuity payments. Because
the Estate Enhancer benefit should be treated as a taxable death benefit, we
believe that for Federal tax purposes, the Estate Enhancer benefit should be
treated as an integral part of the Contract's benefits (e.g. as investment
protection benefit) and that any charges under the Contract for the Estate
Enhancer benefit should not be treated as a distribution received by the
Contract owner. However, it is possible that the IRS may take a position that
some or all of any charge for the Estate Enhancer benefit should be deemed a
taxable distribution to you. Although we do not believe that any fees associated
with the Estate Enhancer benefit should be treated as taxable withdrawals, you
should consult your tax advisor regarding the Estate Enhancer benefit.
PENALTY TAX ON SOME WITHDRAWALS
You may have to pay a penalty tax (10 percent of the amount treated as taxable
income) on some withdrawals. However, there is usually no penalty on
distributions:
(1) on or after you reach age 59 1/2;
(2) after you die (or after the annuitant dies, if an owner isn't an
individual);
(3) after you become disabled; or
(4) that are part of a series of substantially equal periodic (at least
annual) payments for your life (or life expectancy) or the joint lives
(or life expectancies) of you and your beneficiary.
Other exceptions may be applicable under certain circumstances and special rules
may apply in connection with the exceptions listed above. Also, additional
exceptions apply to distributions from an Individual Retirement Annuity or tax
sheltered annuity. You should consult a tax advisor with regard to exceptions
from the penalty tax.
TRANSFERS, ASSIGNMENTS, ANNUITY DATES, OR EXCHANGES OF A CONTRACT
Transferring or assigning ownership of the Contract, designating a payee or
beneficiary who is not also the owner, designating an annuitant, selecting
certain annuity dates, or exchanging a Contract can have other tax consequences
that we don't discuss here. If you're thinking about any of those transactions,
contact a tax advisor.
WITHHOLDING
Annuity distributions usually are subject to withholding for the recipient's
Federal income tax liability at rates that vary according to the type of
distribution and the recipient's tax status. However, except for certain
distributions from tax sheltered annuities, recipients can usually choose not to
have tax withheld from distributions.
MULTIPLE CONTRACTS
All nonqualified deferred annuity Contracts that we (or our affiliates) issue to
the same owner during any calendar year are generally treated as one annuity
Contract for purposes of determining the amount includible in such owner's
income when a taxable distribution occurs. This could affect when income is
taxable and how much is subject to the ten percent penalty tax discussed above.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. It is also possible that any change
39
could be retroactive (that is, effective prior to the date of the change). A tax
advisor should be consulted with respect to legislative developments and their
effect on the Contract.
We have the right to modify the Contract in response to legislative changes that
could otherwise diminish the favorable tax treatment that annuity contract
owners currently receive. We make no guarantee regarding the tax status of any
Contract and do not intend this discussion as tax advice.
POSSIBLE CHARGE FOR OUR TAXES
Currently we don't charge the Account for any Federal, state, or local taxes on
them or the Contracts (other than premium taxes), but we reserve the right to
charge the Account or the Contracts for any tax or other cost resulting from the
tax laws that we believe should be attributed to them.
FOREIGN TAX CREDITS
To the extent that any Fund makes the appropriate election, certain foreign
taxes paid by the Fund will be treated as being paid by the Company, which may
deduct or claim a tax credit for such taxes. The benefits of any such deduction
or credit will not be passed through to the contract owners.
TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to qualified Contracts vary according to the type of
retirement plan and the terms and conditions of the plan. Your rights under a
qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions, and other
transactions with respect to the Contract comply with the law.
INDIVIDUAL RETIREMENT ANNUITIES
TRADITIONAL IRAS
Section 408 of the IRC permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity" or
"IRA." This Contract is available for purchase either as an IRA or through an
established IRA custodial account with MLPF&S. Subject to special rules, an
individual may make annual contributions of up to the lesser of the limit
specified in the IRC or 100% of compensation includible in the individual's
gross income. The contributions may be deductible in whole or in part, depending
on the individual's income. Distributions from certain pension plans may be
"rolled over" into an IRA on a tax-deferred basis without regard to these
limits. Amounts in the IRA (other than nondeductible contributions) are taxed
when distributed from the IRA. A 10% penalty tax generally applies to
distributions made before age 59 1/2, unless certain exceptions apply. IRAs have
minimum distribution rules that govern the timing and amount of distributions.
You should refer to your adoption agreement or consult a tax advisor for more
information about these distribution rules. Adverse tax consequences may result
if you do not ensure that contributions, distributions and other transactions
with respect to the Contract comply with the law.
ROTH IRAS
A Contract is available for purchase by an individual who has separately
established a Roth IRA custodial account with MLPF&S. Roth IRAs, as described in
section 408A of the IRC, permit certain eligible individuals to make
non-deductible contributions to a Roth IRA in cash or as a rollover or transfer
from another Roth IRA or other IRA. Subject to special rules, an individual may
make annual contributions to a Roth IRA of up to the lesser of the limit
specified in the IRC or 100% of compensation includible in the individual's
gross income. A rollover from or conversion of an IRA to a Roth IRA is generally
subject to tax and other special rules apply. You may wish to consult a tax
advisor before combining any converted amounts with any other Roth IRA
contributions, including any other conversion amounts from other tax years.
Distributions from a Roth IRA generally are not taxed, except that, once
aggregate distributions
40
exceed contributions to the Roth IRA, income tax and a 10% penalty tax may apply
to distributions made (1) before age 59 1/2 (subject to certain exceptions) or
(2) during the five taxable years starting with the year in which the first
contribution is made to any Roth IRA. A 10% penalty tax may apply to amounts
attributable to a conversion from an IRA if they are distributed during the five
taxable years beginning with the year in which the conversion was made.
OTHER TAX ISSUES FOR IRAS AND ROTH IRAS
Subject to special rules, total annual contributions to all of an individual's
IRAs and Roth IRAs may not exceed the limit specified in the IRC or 100% of
compensation includible in the individual's gross income. Distributions from an
IRA or Roth IRA generally are subject to withholding for the participant's
Federal income tax liability. The withholding rate varies according to the type
of distribution and the owner's tax status. The owner will be provided the
opportunity to elect not have tax withheld from distributions.
The IRS has not reviewed the Contract for qualification as an IRA or Roth IRA,
and has not addressed in a ruling of general applicability whether certain death
benefit provisions in the Contract comport with IRA and Roth IRA qualification
requirements. Disqualification of the policy as an IRA or Roth IRA could result
in the immediate taxation of amounts held in the Contract and the imposition of
penalty taxes. The Estate Enhancer benefit was not available with an IRA or Roth
IRA.
TAX SHELTERED ANNUITIES
Section 403(b) of the IRC allow employees of certain Section 501(c)(3)
organizations and public schools to exclude from their gross income the premium
payments made, within certain limits, on a contract that will provide an annuity
for the employee's retirement. These premium payments may be subject to FICA
(social security) tax. Transfer amounts from tax sheltered annuity plans that
are not subject to the Employee Retirement Income Security Act of 1974, as
amended, are accepted as premium payments, as permitted by law, under a
Contract. Other premium payments, including premium payments subject to IRC
Section 402(g), will not be accepted. Distributions of (1) salary reduction
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings on amounts held as of the last year
beginning before January 1, 1989, are not allowed prior to age 59 1/2, severance
from employment, death, or disability. Salary reduction contributions may also
be distributed upon hardship, but would generally be subject to penalties.
"Eligible rollover distributions" from tax sheltered annuities are subject to a
mandatory Federal income tax withholding of 20%. An eligible rollover
distribution is any distribution to an employee (or employee's spouse or former
spouse as beneficiary or alternate payee) from such a plan, except certain
distributions such as distributions required by the Code, distributions in a
specified annuity form, hardship distributions or certain nontaxable
distributions. The 20% withholding does not apply, however, if the employee
chooses a "direct rollover" from the plan to a tax-qualified plan, IRA or tax
sheltered annuity or to a governmental 457 plan that agrees to separately
account for rollover contributions. Certain death benefit provisions in the
Contract could be characterized as providing an incidental death benefit, the
amount of which is limited in any tax sheltered annuity. Individuals using the
Contract in connection with such plans should consult their tax advisors as
certain death benefit provisions may exceed this limitation. The Estate Enhancer
benefit was not available with a tax sheltered annuity.
OTHER INFORMATION
NOTICES AND ELECTIONS
You must send any changes, notices, and/or choices for your Contract to our
Service Center. These requests must be in writing and signed unless you have
submitted a telephone authorization form. If you have submitted an authorization
form, you may make the following choices via telephone:
1. Transfers
2. Premium allocation
41
3. Withdrawals, other than full surrenders
4. Requests to change the annuity date
We will use reasonable procedures to confirm that a telephone request is proper.
These procedures may include possible tape recording of telephone calls and
obtaining appropriate identification before effecting any telephone
transactions. We do not have any liability if we act on a request that we
reasonably believe is proper.
Because telephone transactions will be available to anyone who provides certain
information about you and your Contract, you should protect that information. We
may not be able to verify that you are the person providing telephone
instructions, or that you have authorized any such person to act for you.
Telephone systems may not always be available. Any telephone system, whether it
is yours, your service provider's, your Financial Advisor's, or ours, can
experience outages or slowdowns for a variety of reasons. These outages or
slowdowns may delay or prevent our processing of your request. Where you or your
authorized representative have not given instructions to a Service Center
representative prior to 4:00 p.m. (ET), even if due to our delay in answering
your call, we will consider requests to be received the following business day.
Although we have taken precautions to help our systems handle heavy use, we
cannot promise reliability under all circumstances. If you are experiencing
problems, you should make your request by writing to our Service Center.
VOTING RIGHTS
We own all Fund shares held in the Account. As the owner, we have the right to
vote on any matter put to vote at any Funds' shareholder meetings. However, we
will vote all Fund shares attributable to Contracts by following instructions we
receive from you. If we don't receive voting instructions, we'll vote those
shares in the same proportion as shares for which we receive instructions. We
determine the number of shares you may give voting instructions on by dividing
your interest in a subaccount by the net asset value per share of the
corresponding Fund. We'll determine the number of shares you may give voting
instructions on as of a record date we choose. We may vote Fund shares in our
own right if laws change to permit us to do so.
You have voting rights until the annuity date. You may give voting instructions
concerning:
(1) the election of a Fund's Board of Directors;
(2) ratification of a Fund's independent accountant;
(3) approval of the investment advisory agreement for a Fund corresponding to
your selected subaccounts;
(4) any change in a fundamental investment policy of a Fund corresponding to
your selected subaccounts; and
(5) any other matter requiring a vote of the Fund's shareholders.
REPORTS TO CONTRACT OWNERS
At least once each contract year before the annuity date, we will send you
information about your Contract. It will outline all your Contract transactions
during the year, your Contract's current number of accumulation units in each
subaccount, the value of each accumulation unit of each subaccount, and the
contract value.
You will also receive an annual and a semi-annual report containing financial
statements and a list of portfolio securities of the Funds.
42
SELLING THE CONTRACT
We have entered into a distribution agreement with our affiliate, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Distributor"), for the
distribution and sale of the Contracts. Distributor offers the Contracts through
its registered representatives ("Financial Advisors"). The Financial Advisors
are registered with the NASD, Inc., licensed as insurance agents in the states
in which they do business, and appointed through various Merrill Lynch Life
Agencies as our insurance agents. The Merrill Lynch Life Agencies are wholly
owned subsidiaries of Distributor.
We pay commissions to the Merrill Lynch Life Agencies for sales of the Contracts
by the Financial Advisors. Pursuant to a sales agreement, the Merrill Lynch Life
Agencies pay Distributor a portion of the commissions they receive from us for
the sales of the Contracts, and the Distributor pays the Financial Advisors a
portion of the commissions it receives from the Merrill Lynch Life Agencies for
the sales of the Contracts. The Merrill Lynch Life Agencies also pay the
District Annuity Specialists a portion of the commissions they receive for the
sales of the Contracts. Each District Annuity Specialist provides training and
marketing support to Financial Advisors in a specific geographic region and is
compensated based on sales of the Contracts in that region.
The maximum amount of commissions paid to the Merrill Lynch Life Agencies is
1.10% of each premium and up to 1.10% of contract value per year. In addition,
the maximum commission paid to the Merrill Lynch Life Agencies on the annuity
date is 2.40% of contract value. The maximum commission payable to Financial
Advisors for Contract sales is 0.64% of contract value per year. In addition, on
the annuity date, the maximum commission payable to the Financial Advisors is
1.50% of contract value not subject to a sales charge. The maximum amount of
compensation that may be paid to District Annuity Specialists is 0.18% of each
premium.
Financial Advisors and their branch managers are also eligible for various cash
benefits, such as bonuses, insurance benefits and financing arrangements, and
non-cash compensation items. Non-cash items include conferences, seminars, and
trips (including travel, lodging, and meals in connection therewith),
entertainment, merchandise, and other similar items. In addition, Financial
Advisors who meet certain productivity, persistency, and length of service
standards and/or their branch managers may be eligible for additional
compensation from Distributor. District Annuity Specialists who meet certain
productivity standards may also be eligible for additional compensation from the
Merrill Lynch Life Agencies. Sales of the Contracts may help Financial Advisors,
their branch managers, and District Annuity Specialists qualify for such
benefits. Distributor's Financial Advisors and their branch managers may receive
other payments from Distributor for services that do not directly involve the
sale of the Contracts, including payments made for the recruitment and training
of personnel, production of promotional literature, and similar services.
The Distributor does not currently sell the Contracts through other
broker-dealers ("selling firms"). However, the Distributor may enter into
selling agreements with selling firms in the future. Selling firms may be
compensated on a different basis than the various Merrill Lynch Life Agencies
and the Financial Advisors; however, commissions paid to selling firms and their
sales representatives will not exceed those described above.
Commissions and other incentives or payments described above are not charged
directly to Contract owners or the Account. We intend to recoup commissions and
other sales expenses through fees and charges deducted under the Contract.
STATE REGULATION
We are subject to the laws of the State of Arkansas and to the regulations of
the Arkansas Insurance Department. We are also subject to the insurance laws and
regulations of all jurisdictions in which we're licensed to do business.
We file an annual statement with the insurance departments of jurisdictions
where we do business. The statement discloses our operations for the preceding
year and our financial condition as of the end of that
43
year. Our books and accounts are subject to insurance department review at all
times. The Arkansas Insurance Department, in conjunction with the National
Association of Insurance Commissioners, conducts a full examination of our
operations periodically.
LEGAL PROCEEDINGS
There are no legal proceedings involving the Account. We and MLPF&S are engaged
in various kinds of routine litigation that, in our judgment, are not material
to our total assets.
EXPERTS
The financial statements of the Account as of December 31, 2003, and for the
period ended December 31, 2003, and our financial statements as of December 31,
2003 and 2002 and for each of the three years in the period ended December 31,
2003, included in the Statement of Additional Information and incorporated by
reference in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports, which are included in the
Statement of Additional Information and incorporated by reference herein, and
have been so included and incorporated in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing. Their
principal business address is Two World Financial Center, New York, New York
10281-1414.
LEGAL MATTERS
Our organization, our authority to issue the Contract, and the validity of the
form of the Contract have been passed upon by Barry G. Skolnick, our General
Counsel. Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain matters relating to Federal securities laws.
REGISTRATION STATEMENTS
Registration Statements that relate to the Contract and its investment options
have been filed with the Securities and Exchange Commission under the Securities
Act of 1933 and the Investment Company Act of 1940. This Prospectus does not
contain all of the information in the registration statements. You can obtain
the omitted information from the Securities and Exchange Commission's principal
office in Washington, D.C., upon payment of a prescribed fee.
44
ACCUMULATION UNIT VALUES
(CONDENSED FINANCIAL INFORMATION)+
ROSZEL/LORD ROSZEL/LEVIN ROSZEL/MLIM ROSZEL/SOUND
ABBETT LARGE CAP LARGE CAP RELATIVE VALUE LARGE CAP
VALUE PORTFOLIO VALUE PORTFOLIO** PORTFOLIO****** CORE PORTFOLIO***
--------------------- ---------------------- ----------------------- --------------------
1/1/03 7/1/02 1/1/03 7/1/02 1/1/03 7/1/02 1/1/03 7/1/02
TO TO TO TO TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
--------- --------- --------- ---------- ----------- --------- --------- --------
(1) Accumulation unit value at
beginning of period (a).... $ 9.87 $ 10.00 $ 8.43 $ 10.00 $ 9.35 $ 10.00 $ 8.96 $ 10.00
(2) Accumulation unit value at
end of period.............. $ 12.59 $ 9.87 $ 10.70 $ 8.43 $ 11.61 $ 9.35 $ 11.17 $ 8.96
(3) Number of accumulation
units outstanding at end of
period..................... 842,418.5 561,445.4 296,473.5 259,622.2 1,345,902.6 657,788.5 77,179.9 47,199.5
ROSZEL/INVESCO- ROSZEL/NICHOLAS-
NAM LARGE CAP APPLEGATE LARGE CAP
CORE PORTFOLIO GROWTH PORTFOLIO
--------------------- --------------------
1/1/03 7/1/02 1/1/03 7/1/02
TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02
--------- --------- --------- --------
(1) Accumulation unit value at
beginning of period (a).... $ 8.80 $ 10.00 $ 8.83 $ 10.00
(2) Accumulation unit value at
end of period.............. $ 10.79 $ 8.80 $ 10.87 $ 8.83
(3) Number of accumulation
units outstanding at end of
period..................... 219,346.1 170,151.2 121,268.1 51,714.8
ROSZEL/RITTENHOUSE ROSZEL/SENECA ROSZEL/SENECA
LARGE CAP LARGE CAP MID CAP
GROWTH PORTFOLIO GROWTH PORTFOLIO GROWTH PORTFOLIO
----------------------- --------------------- ---------------------
1/1/03 7/1/02 1/1/03 7/1/02 1/1/03 7/1/02
TO TO TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
----------- --------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)........... $ 9.03 $ 10.00 $ 8.89 $ 10.00 $ 8.54 $ 10.00
(2) Accumulation unit value at end of
period............................ $ 10.59 $ 9.03 $ 11.02 $ 8.89 $ 10.91 $ 8.54
(3) Number of accumulation units
outstanding at end of period...... 1,080,182.2 721,945.5 349,649.5 252,860.7 339,646.8 205,429.9
ROSZEL/VALENZUELA ROSZEL/NWQ ROSZEL/DELAWARE
MID CAP SMALL CAP SMALL-MID CAP
VALUE PORTFOLIO**** VALUE PORTFOLIO GROWTH PORTFOLIO*
--------------------- --------------------- ---------------------
1/1/03 7/1/02 1/1/03 7/1/02 1/1/03 7/1/02
TO TO TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
--------- --------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)........... $ 7.89 $ 10.00 $ 7.67 $ 10.00 $ 7.55 $ 10.00
(2) Accumulation unit value at end of
period............................ $ 10.26 $ 7.89 $ 11.54 $ 7.67 $ 10.10 $ 7.55
(3) Number of accumulation units
outstanding at end of period...... 474,470.8 386,559.5 441,030.3 257,884.2 238,053.1 175.853.5
ROSZEL/CREDIT SUISSE ROSZEL/LORD ABBETT
ROSZEL/LAZARD INTERNATIONAL GOVERNMENT SECURITIES
INTERNATIONAL PORTFOLIO PORTFOLIO***** PORTFOLIO
----------------------- --------------------- -----------------------
1/1/03 7/1/02 1/1/03 7/1/02** 1/1/03 7/1/02
TO TO TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02 12/31/03 12/31/02
---------- ---------- --------- --------- ----------- ---------
(1) Accumulation unit value at
beginning of period (a)........ $ 8.85 $ 10.00 $ 8.83 $ 10.00 $ 10.47 $ 10.00
(2) Accumulation unit value at end
of period...................... $ 11.21 $ 8.85 $ 11.60 $ 8.83 $ 10.47 $ 10.47
(3) Number of accumulation units
outstanding at end of period... 320,651.9 117,103.8 291,619.8 263.792.2 1,189,858.0 867,091.4
ML DOMESTIC
ROSZEL/MLIM MONEY MARKET V.I.
FIXED-INCOME PORTFOLIO FUND
------------------------- ---------------------
1/1/03 7/1/02 1/1/03 7/1/02
TO TO TO TO
12/31/03 12/31/02 12/31/03 12/31/02
----------- ----------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)........ $ 10.18 $ 10.00 $ 9.97 $ 10.00
(2) Accumulation unit value at end
of period...................... $ 10.23 $ 10.18 $ 9.86 $ 9.97
(3) Number of accumulation units
outstanding at end of period... 1,730,141.3 1,108,135.3 336,476.8 852,609.8
---------------
+ Merrill Lynch Life commenced sales of Consults Annuity on July 1, 2002.
* Roszel/Delaware Small-Mid Cap Portfolio was formerly named
Roszel/Neuberger Berman Small Cap Growth Portfolio.
** The subaccount investing in the Roszel/Levin Large Cap Value Portfolio is
closed to allocations of premium and transfers of contract value for
Contracts issued on or after June 18, 2003.
*** The subaccount investing in the Roszel/Sound Large Cap Core Portfolio is
closed to allocations of premium and transfers of contract value for
Contracts issued on or after October 17, 2003.
**** The subaccount investing in the Roszel/Valenzuela Mid Cap Value Portfolio
is closed to allocations of premium and transfers of contract value for
Contracts issued on or after February 3, 2004.
***** The subaccount investing in the Roszel/Credit Suisse International
Portfolio is closed to allocations of premium and transfers of contract
value for Contracts issued on or after August 1, 2003.
****** The subaccount investing in the Roszel/MLIM Relative Value Portfolio is
closed to allocations of premiums and transfers of contract value for
Contracts issued on or after March 16, 2004.
45
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The contents of the Statement of Additional Information for the Contract include
the following:
OTHER INFORMATION
Selling the Contract
Financial Statements
Administrative Services Arrangements
CALCULATION OF YIELDS AND TOTAL RETURNS
Money Market Yield
Other Subaccount Yields
Total Returns
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE VARIABLE ANNUITY
SEPARATE ACCOUNT C
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE COMPANY
46
APPENDIX A
PREMIUMS COMPOUNDED AT 5% GMDB
If you chose the Premiums Compounded at 5% GMDB, the GMDB is equal to:
(i) premiums paid into the Contract with interest compounded daily from
the date of receipt of premium to yield 5% annually, less
(ii) "adjusted" withdrawals from the Contract with interest compounded
daily from the date of withdrawal to yield 5% annually.
Interest will continue to be credited until the earliest of the older contract
owner's attained age 80, the last day of the twentieth contract year or the date
of death.
You may withdraw up to 5% of the value of the Premiums Compounded at 5% GMDB at
the beginning of each Contract Year and withdrawals will be "adjusted" so that
they reduce the Premiums Compounded at 5% GMDB dollar-for-dollar for that
Contract Year.
Any withdrawal that causes the total of all withdrawals since the beginning of a
Contract Year to exceed 5% of the Premiums Compounded at 5% GMDB as of the
beginning of that Contract Year will be "adjusted" so that it reduces the GMDB
proportionally. The adjustment is determined by multiplying the amount of the
withdrawal by the ratio of the Premiums Compounded at 5% GMDB to the contract
value, where both values are calculated immediately prior to the withdrawal.
This adjustment may cause the Premiums Compounded at 5% GMDB to be reduced by
more than the amount of the withdrawal.
We will calculate Premiums Compounded at 5% GMDB based on your age (or the age
of the older owner, if the Contract has co-owners, or the annuitant, if the
owner is a non-natural person) on the contract date. Subsequent changes in owner
will not increase the period of time that the 5% interest will compound. If a
new owner has not reached attained age 80 and is older than the owner whose age
is being used to determine the Premiums Compounded at 5% GMDB at the time of
ownership change, the period of time used in the calculation of the Premiums
Compounded at 5% GMDB will be based on the age of the new owner at the time of
ownership change. If at the time of an ownership change the new owner is
attained age 80 or over, we will use the Premiums Compounded at 5% GMDB as of
the anniversary on or prior to the ownership change, increased by premium
payments and decreased by "adjusted" withdrawals since that anniversary.
THE PURPOSE OF THE EXAMPLE ON THE NEXT PAGE IS TO ILLUSTRATE THE OPERATION OF
THE PREMIUMS COMPOUNDED AT 5% GUARANTEED MINIMUM DEATH BENEFIT, IN PARTICULAR,
THE CALCULATION OF "ADJUSTED" WITHDRAWALS. THE INVESTMENT RETURNS SHOWN ARE
HYPOTHETICAL AND ARE NOT REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE. ACTUAL
INVESTMENT RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A
NUMBER OF FACTS, INCLUDING INVESTMENT ALLOCATIONS MADE BY A CONTRACT OWNER AND
THE INVESTMENT EXPERIENCE OF THE FUNDS. THE EXAMPLE DOES NOT REFLECT THE
DEDUCTION OF FEES AND CHARGES.
A-1
EXAMPLE: Assume a 65 year-old person purchased a Contract on September 1, 2002
with the Premiums Compounded at 5% guaranteed minimum death benefit and made an
initial payment of $100,000. The following chart depicts the impact of both
withdrawals and investment performance on the death benefit at certain points
over the life of the contract owner.
TRANSACTIONS CONTRACT PREM. COMP.
------------------ ADJ. VALUE AT 5%
DATE PREM. WITHDR. WITHDR. (CV) (GMDB)
---- -------- ------- ------- -------- -----------
9/1/02 THE CONTRACT IS ISSUED $100,000 $100,000 $100,000
9/1/03 FIRST CONTRACT ANNIVERSARY $103,500 $105,000
Assume contract value increased by $3,500 due to positive
investment performance.
1/1/04 OWNER TAKES A $5,250 WITHDRAWAL* $5,250 $5,082 $96,250 $101,644
Assume contract value decreased by $2,000 due to negative
investment performance.
Is withdrawal equal to or less than 5% of GMDB as of 9/1/03?
$5,250 <= 5% of $105,000 = $5,250
Adjusted withdrawal = withdrawal discounted for the number
of days until the next contract anniversary at
5% = $5,250/(1.05( 7/8)(243/365)) = $5,082
GMDB as of 1/1/04 = GMDB as of 9/1/03 compounded at 5%
interest for the number of days since the last anniversary
less adjusted withdrawals = $105,000 X 1.05( 7/8)(122/365) -
Adj. withdr. = $106,726 - $5,082 = $101,644
This means that as long as withdrawals during the contract
year do not exceed 5% of the last anniversary GMDB they will
be adjusted as of the current date so that they will
effectively reduce the next anniversary GMDB dollar for
dollar. (see 9/1/2004 below)
9/1/04 SECOND CONTRACT ANNIVERSARY
Assume contract value increased by $5,000 due to positive $101,250 $105,000
investment performance
GMDB as of 9/1/04 = GMDB as of 9/1/03 compounded at 5%
interest less the adjusted withdrawal as of 1/1/04
compounded at 5% interest for the number
of days since the withdrawal
= 9/1/03 GMDB X 1.05 - adj. withdrawal X 1.05( 7/8)(243/365)
= $105,000 X 1.05 -
$5,082 X 1.05 ( 7/8)(243/365) = $110,250 - $5,250 =
$105,000
Note that $5,250 withdrawal as of 1/1/04 reduces the
9/1/2004 GMDB dollar for dollar.
* IF INSTEAD THE OWNER TOOK A WITHDRAWAL OF $10,000 AS OF $10,000 $10,515 $91,500 $ 96,211
1/1/2004 THEN:
Is withdrawal equal to or less than 5% of GMDB as of 9/1/03
5% of $105,000 = $5,250
Since the withdrawal exceeds 5% of the last anniversary
GMDB, the withdrawal will be adjusted so that it
proportionally reduces the GMDB
Adjusted withdrawal = withdrawal X GMDB/CV (where all values
are determined immediately prior to the withdrawal) = 10,000
X $106,726/101,500 = 10,515
GMDB = $105,000 X 1.05( 7/8)(122/365) - Adj. withdr. =
$106,726 - $10,515 = $96,211
DEATH BENEFIT
(GREATER OF
CV AND
DATE GMDB)
---- -------------
9/1/02 $100,000
9/1/03 $105,000
1/1/04 $101,644
9/1/04
$105,000
* $ 96,211
A-2
APPENDIX B
ESTATE ENHANCER WITH RETURN OF PREMIUM GMDB
If you elected the Estate Enhancer benefit without adding it to either the
Maximum Anniversary Value GMDB or the Premiums Compounded at 5% GMDB, a Return
of Premium GMDB is provided. The Return of Premium GMDB is equal to:
(i) premiums paid into the Contract, less
(ii) "adjusted" withdrawals from the Contract.
For this formula, each "adjusted" withdrawal equals the amount withdrawn
multiplied by (a) / (b) where:
a = premiums paid into the Contract less previous "adjusted" withdrawals; and
b = the contract value.
Both (a) and (b) are calculated immediately prior to the withdrawal.
B-1
APPENDIX C
ESTATE ENHANCER BENEFIT
If you elected the Estate Enhancer benefit, coverage in addition to your GMDB is
provided. The Estate Enhancer benefit is designed to help offset expenses,
including income taxes, attributable to payment of the death benefit.
You cannot cancel the Estate Enhancer benefit (except in North Dakota). The
Estate Enhancer benefit, however, will terminate if you annuitize or surrender
the contract, upon certain ownership changes, or if the Contract otherwise
terminates (See "Contract Changes").
THE AMOUNT OF THE ESTATE ENHANCER BENEFIT DEPENDS UPON THE AMOUNT OF GAIN IN
YOUR CONTRACT. BECAUSE WITHDRAWALS AND POOR PERFORMANCE OF THE FUNDS WILL REDUCE
THE AMOUNT OF GAIN IN YOUR CONTRACT, THEY WILL REDUCE THE VALUE OF THE ESTATE
ENHANCER BENEFIT. IT IS POSSIBLE THAT THE ESTATE ENHANCER BENEFIT MAY NOT HAVE
ANY VALUE.
The percentage used to determine the benefit depends on your age (or the age of
the older owner, if the Contract has co-owners, or the annuitant, if the owner
is a non-natural person) on the effective date. The effective date is the
contract date unless the Contract is continued under the spousal continuation
provision, in which case the effective date is the date the surviving spouse
elects to continue the Contract. If you are attained age 69 or under on the
effective date, your benefit is equal to 45% of the Estate Enhancer gain (but
not less than zero). In no event will the benefit exceed 45% of net premiums
(excluding any premiums paid within one year prior to the death of any owner, or
the annuitant, if the owner is a non-natural person, and any premiums paid
between the date of death and the date we receive notification of death). Estate
Enhancer gain is the contract value on the date we calculate the death benefit
minus net premiums paid into the Contract. Net premiums equal the premiums paid
into the Contract less the portion of each withdrawal considered to be premium.
Withdrawals reduce Estate Enhancer gain first and only withdrawals in excess of
Estate Enhancer gain reduce net premiums. If you (or the older owner, if the
Contract has co-owners, or the annuitant, if the owner is a non-natural person)
are attained age 70 or over on the contract date, the percentages are reduced
from 45% to 30% in the calculation above.
See "Contract Changes" for the effect of an ownership change on the Estate
Enhancer benefit.
THE PURPOSE OF THE EXAMPLE ON THE NEXT PAGE IS TO ILLUSTRATE THE OPERATION OF
THE ESTATE ENHANCER BENEFIT. THE INVESTMENT RETURNS ASSUMED ARE HYPOTHETICAL AND
ARE NOT REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE. ACTUAL INVESTMENT RETURNS
MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS MADE BY A CONTRACT OWNER AND THE INVESTMENT
EXPERIENCE OF THE FUNDS. THE EXAMPLE ASSUMES NO WITHDRAWALS AND DOES NOT REFLECT
THE DEDUCTION OF ANY FEES AND CHARGES OR ANY CONTRACT VALUE CREDITS.
C-1
FACTS: Assume that a couple (ages 60 and 55) purchased a Contract on October 1,
2004 with the Estate Enhancer benefit, and makes an initial premium payment of
$100,000. The Contract value as of receipt of due proof of death of the first to
die is $300,000. The following chart depicts the potential Estate Enhancer
benefit at the death of the contract owner.
Net Premiums................................................ $100,000
Contract Value.............................................. $300,000
Estate Enhancer Gain........................................ $200,000
Estate Enhancer benefit
Lesser of 45% of Estate Enhancer Gain ($90,000) or 45% of
Net Premiums ($45,000).................................... $ 45,000
* Assuming the contract value is greater than the GMDB, the total death benefit
payable equals $300,000 + $45,000 = $345,000. Assuming a lump sum payout and
an income tax rate of 36%, the after-tax death benefit is $256,800.
If instead, the couple had been ages 70 and 55, the percentage used in the above
calculations would have been 30% since the oldest owner at issue was over age 69
and the Estate Enhancer benefit would have been $30,000.
C-2
APPENDIX D
EXAMPLE: The purpose of this example is to illustrate the operation of the
Maximum Anniversary Value GMDB. You pay an initial premium of $100,000 on
October 1, 2004 and a subsequent premium of $10,000 on April 1, 2006. You also
make a withdrawal of $50,000 on May 1, 2006. Your death benefit, based on
HYPOTHETICAL Contract values and transactions, and resulting hypothetical
maximum anniversary values ("MAV"), are illustrated below. This example assumes
hypothetical positive and negative investment performance of the Account, as
indicated, to demonstrate the calculation of the death benefit value. There is,
of course, no assurance that the Account will experience positive investment
performance. The example does not reflect the deduction of fees and charges. FOR
A DETAILED EXPLANATION OF HOW WE CALCULATE THE DEATH BENEFIT, SEE "DEATH
BENEFIT."
(A) (B) (C)
--------- ------------ --------
TRANSACTIONS PREMS MAX
------------------ LESS ADJ. ANNIV. VALUE CONTRACT
DATE PREM. WITHDR. WITHDRWS. (MAV) VALUE
---- -------- ------- --------- ------------ --------
10/01/04 THE CONTRACT IS ISSUED $100,000 $100,000 $0 $100,000
MAV is $0 until first contract anniversary
10/01/05 FIRST CONTRACT ANNIVERSARY $100,000 $110,000 $110,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2005 = Contract value on
10/1/2005 = $110,000
MAV = greatest of anniversary values = $110,000
04/01/06 OWNER PUTS IN $10,000 ADDITIONAL PREMIUM $ 10,000 $110,000 $120,000 $114,000
Assume contract value decreased by $6,000 due to negative
investment performance
Anniversary value for 10/1/2005 = contract value on
10/1/2005 + premiums added since that anniversary = $110,000
+ $10,000 = $120,000
MAV = greatest of anniversary values = $120,000
05/01/06 OWNER TAKES A $50,000 WITHDRAWAL $50,000 $ 50,000 $ 60,000 $50,000
Assume contract value decreased by $14,000 due to negative
investment performance
Anniversary value for 10/1/2005 = contract value on
10/1/2005 + premiums added - adjusted withdrawals since that
anniversary = $110,000 + $10,000 - $60,000 = $60,000
Adjusted withdrawal = withdrawal X maximum (MAV, prems -
adj. withdrs.) / contract value
= 50,000 maximum (120,000, 110,000) / 100,000
= $50,000 x 120,000 / 100,000 = $60,000
(Note: all values are determined immediately prior to the
withdrawal)
MAV = greatest of anniversary values = $60,000
10/01/06 SECOND CONTRACT ANNIVERSARY $ 50,000 $ 60,000 $55,000
Assume contract value increased by $5,000 due to positive
investment performance
Anniversary value for 10/1/2005 = $60,000
Anniversary value for 10/1/2006 = contract value on
10/1/2005 = $55,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000) = $60,000
10/01/07 THIRD CONTRACT ANNIVERSARY $ 50,000 $ 65,000 $65,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2005 = $60,000
Anniversary value for 10/1/2006 = contract value on
10/1/2006 = $55,000
Anniversary value for 10/1/2007 = contract value on
10/1/2007 = $65,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000, $65,000) = $65,000
DATE DEATH BENEFIT
---- -----------------------------------
10/01/04 $100,000 (maximum of (A), (B), (C))
10/01/05 $110,000 (maximum of (A), (B), (C))
04/01/06 $120,000 (maximum of (A), (B), (C))
05/01/06 $ 60,000 (maximum of (A), (B), (C))
10/01/06 $ 60,000 (maximum of (A), (B), (C))
10/01/07 $ 65,000 (maximum of (A), (B), (C))
D-1
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2004
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
FLEXIBLE PREMIUM INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
MERRILL LYNCH LIFE INSURANCE COMPANY
HOME OFFICE: LITTLE ROCK, ARKANSAS 72201
SERVICE CENTER: P.O. BOX 44222
JACKSONVILLE, FLORIDA 32231-4222
4804 DEER LAKE DRIVE EAST
JACKSONVILLE, FLORIDA 32246
PHONE: (800) 535-5549
OFFERED THROUGH
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
This individual deferred variable annuity contract (the "Contract") is designed
to provide comprehensive and flexible ways to invest and to create a source of
income protection for later in life through the payment of annuity benefits. An
annuity is intended to be a long term investment. Contract owners should
consider their need for deferred income before purchasing the Contract. The
Contract is issued by Merrill Lynch Life Insurance Company ("Merrill Lynch
Life") both on a nonqualified basis, and as an Individual Retirement Annuity
("IRA") that is given qualified tax status. The Contract may also be purchased
through an established IRA or Roth IRA custodial account with Merrill Lynch,
Pierce, Fenner & Smith Incorporated. Transfer amounts from tax sheltered annuity
plans that are not subject to the Employee Retirement Income Security Act of
1974, as amended, will be accepted as premium payments, as permitted by law.
Other premium payments will not be accepted under a Contract used as a tax
sheltered annuity.
This Statement of Additional Information is not a Prospectus and should be read
together with the Contract's Prospectus dated May 1, 2004, which is available on
request and without charge by writing to or calling Merrill Lynch Life at the
Service Center address or phone number set forth above.
TABLE OF CONTENTS
PAGE
----
OTHER INFORMATION........................................... 3
Selling the Contract........................................ 3
Financial Statements........................................ 3
Administrative Services Arrangements........................ 3
CALCULATION OF YIELDS AND TOTAL RETURNS..................... 3
Money Market Yield.......................................... 3
Other Subaccount Yields..................................... 5
Total Returns............................................... 6
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE VARIABLE ANNUITY
SEPARATE ACCOUNT C........................................ S-1
FINANCIAL STATEMENTS OF MERRILL LYNCH LIFE INSURANCE
COMPANY................................................... G-1
2
OTHER INFORMATION
SELLING THE CONTRACT
The Contracts are offered to the public on a continuous basis. We anticipate
continuing to offer the Contracts, but reserve the right to discontinue the
offering.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Distributor")
serves as principal underwriter for the Contracts. Distributor is a Delaware
corporation and its home office is located at 4 World Financial Center, New
York, New York 10080. Distributor is an indirect, wholly owned subsidiary of
Merrill Lynch & Co., Inc. Distributor is registered as a broker-dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
well as with the securities commissions in the states in which it operates, and
is a member of NASD, Inc. Distributor offers the Contracts through its Financial
Advisors. Financial Advisors are appointed as our insurance agents through the
various Merrill Lynch Life Agencies.
For the years ended December 31, 2003 and 2002, Distributor received $339,778
and $654,111, respectively, in connection with the sale of the Contracts.
Distributor did not receive any payments or commissions in connection with the
sale of the Contracts in prior years. Distributor retains a portion of
commissions it receives in return for its services as distributor for the
Contracts.
FINANCIAL STATEMENTS
The financial statements of Merrill Lynch Life included in this Statement of
Additional Information should be distinguished from the financial statements of
the Account and should be considered only as bearing upon the ability of Merrill
Lynch Life to meet any obligations it may have under the Contract.
ADMINISTRATIVE SERVICES ARRANGEMENTS
Merrill Lynch Life has entered into a Service Agreement with its parent, Merrill
Lynch Insurance Group, Inc. ("MLIG") pursuant to which Merrill Lynch Life can
arrange for MLIG to provide directly or through affiliates certain services.
Pursuant to this agreement, Merrill Lynch Life has arranged for MLIG to provide
administrative services for the Account and the Contracts, and MLIG, in turn,
has arranged for a subsidiary, Merrill Lynch Insurance Group Services, Inc.
("MLIG Services"), to provide these services. Compensation for these services,
which will be paid by Merrill Lynch Life, will be based on the charges and
expenses incurred by MLIG Services, and will reflect MLIG Services' actual
costs. For the years ended December 31, 2003 and 2002, Merrill Lynch Life paid
administrative services fees of $33.4 million and $33.8 million, respectively.
Merrill Lynch Life did not pay any administrative services fees in connection
with the Account or the Contracts in prior years.
CALCULATION OF YIELDS AND TOTAL RETURNS
MONEY MARKET YIELD
From time to time, Merrill Lynch Life may quote in advertisements and sales
literature the current annualized yield for the ML Domestic Money Market V.I.
Subaccount for a 7-day period in a manner that does not take into consideration
any realized or unrealized gains or losses on shares of the underlying Funds or
on their
3
respective portfolio securities. The current annualized yield is computed by:
(a) determining the net change (exclusive of realized gains and losses on the
sales of securities and unrealized appreciation and depreciation) at the end of
the 7-day period in the value of a hypothetical account under a Contract having
a balance of 1 unit at the beginning of the period, (b) dividing such net change
in account value by the value of the account at the beginning of the period to
determine the base period return; and (c) annualizing this quotient on a 365-day
basis. The net change in account value reflects: (1) net income from the Fund
attributable to the hypothetical account; and (2) charges and deductions imposed
under the Contract which are attributable to the hypothetical account. The
charges and deductions include the per unit charges for the hypothetical account
for: (1) the asset-based insurance charge; and (2) the annual contract fee. For
purposes of calculating current yield for a Contract, an average per unit
contract fee is used. Based on our current estimates of average contract size
and withdrawals, we have assumed the average per unit contract fee to be 0.00%.
Current yield will be calculated according to the following formula:
Current Yield = ((NCF - ES)/UV) X (365/7)
Where:
NCF = the net change in the value of the Fund (exclusive of
realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) for the 7-day
period attributable to a hypothetical account having a
balance of 1 unit.
ES = per unit expenses for the hypothetical account for the 7-day
period.
UV = the unit value on the first day of the 7-day period.
Merrill Lynch Life also may quote the effective yield of the ML Domestic Money
Market V.I. Subaccount for the same 7-day period, determined on a compounded
basis. The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
Effective Yield = (1 + ((NCF - ES)/UV))(365/7) - 1
Where:
NCF = the net change in the value of the Fund (exclusive of
realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) for the 7-day
period attributable to a hypothetical account having a
balance of 1 unit.
ES = per unit expenses of the hypothetical account for the 7-day
period.
UV = the unit value for the first day of the 7-day period.
Because of the charges and deductions imposed under the Contract, the yield for
the ML Domestic Money Market V.I. Subaccount will be lower than the yield for
the corresponding underlying Fund.
The yields on amounts held in the ML Domestic Money Market V.I. Subaccount
normally will fluctuate on a daily basis. Therefore, the disclosed yield for any
given past period is not an indication or representation of future yields or
rates of return. The actual yield for the subaccount is affected by changes in
interest rates on money market securities, average portfolio maturity of the
underlying Fund, the types and qualities of portfolio securities held by the
Fund and the Fund's operating expenses. Yields on amounts held in the ML
Domestic Money Market V.I. Subaccount may also be presented for periods other
than a 7-day period.
OTHER SUBACCOUNT YIELDS
From time to time, Merrill Lynch Life may quote in sales literature or
advertisements the current annualized yield of one or more of the subaccounts
(other than the ML Domestic Money Market V.I. Subaccount) for a Contract for a
30-day or one-month period. The annualized yield of a subaccount refers to
income generated by the subaccount over a specified 30-day or one-month period.
Because the yield is annualized, the yield
4
generated by the subaccount during the 30-day or one-month period is assumed to
be generated each period over a 12-month period. The yield is computed by: (1)
dividing the net investment income of the Fund attributable to the subaccount
units less subaccount expenses for the period; by (2) the maximum offering price
per unit on the last day of the period times the daily average number of units
outstanding for the period; then (3) compounding that yield for a 6-month
period; and then (4) multiplying that result by 2. Expenses attributable to the
subaccount include the asset-based insurance charge and the annual contract fee.
For purposes of calculating the 30-day or one-month yield, an average contract
fee per dollar of contract value in the subaccount is used to determine the
amount of the charge attributable to the subaccount for the 30-day or one-month
period. Based on our current estimates of average contract size and withdrawals,
we have assumed the average contract fee to be 0.00%. The 30-day or one-month
yield is calculated according to the following formula:
Yield = 2 X ((((NI - ES)/(U X UV)) + 1)(6) - 1)
Where:
NI = net investment income of the Fund for the 30-day or
one-month period attributable to the subaccount's units.
ES = expenses of the subaccount for the 30-day or one-month
period.
U = the average number of units outstanding.
UV = the unit value at the close of the last day in the 30-day or
one-month
Currently, Merrill Lynch Life may quote yields on bond subaccounts. Because of
the charges and deductions imposed under the Contracts, the yield for a
subaccount will be lower than the yield for the corresponding Fund.
The yield on the amounts held in the subaccounts normally will fluctuate over
time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. A subaccount's
actual yield is affected by the types and quality of portfolio securities held
by the corresponding Fund, and its operating expenses.
TOTAL RETURNS
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements, total returns, including average annual total returns for one or
more of the subaccounts for various periods of time. Average annual total
returns will be provided for a subaccount for 1, 5 and 10 years, or for a
shorter period, if applicable.
Total returns assume the Contract was surrendered at the end of the period
shown, and are not indicative of performance if the Contract was continued for a
longer period. The Contract does not impose any surrender charge.
Average annual total returns for other periods of time may also be disclosed
from time to time. For example, average annual total returns may be provided
based on the assumption that a subaccount had been in existence and had invested
in the corresponding underlying Fund for the same period as the corresponding
Fund had been in operation. The Funds and the subaccounts corresponding to the
Funds commenced operations as indicated below:
FUND SUBACCOUNT
INCEPTION INCEPTION
FUND DATE DATE
---- ----------------- ------------
Roszel/Lord Abbett Large Cap Value Portfolio July 1, 2002 July 1, 2002
Roszel/Levin Large Cap Value Portfolio July 1, 2002 July 1, 2002
Roszel/MLIM Relative Value Portfolio July 1, 2002 July 1, 2002
5
FUND SUBACCOUNT
INCEPTION INCEPTION
FUND DATE DATE
---- ----------------- ------------
Roszel/Sound Large Cap Core Portfolio July 1, 2002 July 1, 2002
Roszel/INVESCO-NAM Large Cap Core Portfolio July 1, 2002 July 1, 2002
Roszel/Nicholas-Applegate Large Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/Rittenhouse Large Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/Seneca Large Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/Valenzuela Mid Cap Value Portfolio July 1, 2002 July 1, 2002
Roszel/Seneca Mid Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/NWQ Small Cap Value Portfolio July 1, 2002 July 1, 2002
Roszel/Delaware Small-Mid Cap Growth Portfolio* July 1, 2002 July 1, 2002
Roszel/Lazard International Portfolio July 1, 2002 July 1, 2002
Roszel/Credit Suisse International Portfolio July 1, 2002 July 1, 2002
Roszel/Lord Abbett Government Securities Portfolio July 1, 2002 July 1, 2002
Roszel/MLIM Fixed-Income Portfolio July 1, 2002 July 1, 2002
ML Domestic Money Market V.I. Fund February 21, 1992 July 1, 2002
---------------
* Effective March 3, 2003, Delaware Management Company replaced Newberger Berman
Management, Inc. as investment subadviser and the Fund's name was changed from
the Roszel/Neuberger Berman Small Cap Growth Portfolio to the Roszel/Delaware
Small-Mid Cap Growth Portfolio.
Average annual total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 under a Contract to the
redemption value or that investment as of the last day of each of the periods.
The ending date for each period for which total return quotations are provided
will generally be as of the most recent calendar quarter-end.
Average annual total returns are calculated using subaccount unit values
calculated on each valuation day based on the performance of the corresponding
underlying Fund, the deductions for the asset-based insurance charge and the
contract fee, and assume a surrender of the Contract at the end of the period
for the return quotation (although the Contract does not impose a surrender
charge). For purposes of calculating total return, an average per dollar
contract fee attributable to the hypothetical account for the period is used.
Based on our current estimates of average contract size and withdrawals, we have
assumed the average contract fee to be 0.00%. The average annual total return is
then calculated according to the following formula:
TR = ((ERV/P)(1/N)) -- 1
Where:
TR = the average annual total return net of subaccount recurring
charges (such as the asset-based insurance charge and
contract fee).
ERV = the ending redeemable value at the end of the period of the
hypothetical account with an initial payment of $1,000.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements total returns for other periods.
From time to time, Merrill Lynch Life also may quote in sales literature or
advertisements total returns or other performance information for a hypothetical
Contract assuming the initial premium is allocated to more than one subaccount
or assuming monthly transfers from a specified subaccount to one or more
designated subaccounts under a dollar cost averaging program. Merrill Lynch Life
also may quote in sales literature or advertisements total returns or other
performance information for a hypothetical Contract assuming
6
participation in an asset allocation or rebalancing program. These returns will
reflect the performance of the affected subaccount(s) for the amount and
duration of the allocation to each subaccount for the hypothetical Contract.
They also will reflect the deduction of the charges described above. For
example, total return information for a Contract with a dollar cost averaging
program for a 12-month period will assume commencement of the program at the
beginning of the most recent 12-month period for which average annual total
return information is available. This information will assume an initial
lump-sum investment in a specified subaccount (the "DCA subaccount") at the
beginning of that period and monthly transfers of a portion of the contract
value from the DCA subaccount to designated other subaccount(s) during the 12-
month period. The total return for the Contract for this 12-month period
therefore will reflect the return on the portion of the contract value that
remains invested in the DCA subaccount for the period it is assumed to be so
invested, as affected by monthly transfers, and the return on amounts
transferred to the designated other subaccounts for the period during which
those amounts are assumed to be invested in those subaccounts. The return for an
amount invested in a subaccount will be based on the performance of that
subaccount for the duration of the investment, and will reflect the charges
described above. Performance information for a dollar cost-averaging program
also may show the returns for various periods for a designated subaccount
assuming monthly transfers to the subaccount, and may compare those returns to
returns assuming an initial lump-sum investment in that subaccount. This
information also may be compared to various indices, such as the Merrill Lynch
91-day Treasury Bills index or the U.S. Treasury Bills index and may be
illustrated by graphs, charts, or otherwise.
7
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying statements of assets and
liabilities of each of the divisions of Merrill Lynch Life
Variable Annuity Separate Account C, comprised of divisions
investing in the Domestic Money Market V.I. Fund, Roszel /
Credit Suisse International Portfolio, Roszel / Lazard
International Portfolio, Roszel / Levin Large Cap Value
Portfolio, Roszel / Lord Abbett Government Securities
Portfolio, Roszel / Lord Abbett Large Cap Value Portfolio,
Roszel / MLIM Fixed-Income Portfolio, Roszel / MLIM Relative
Value Portfolio, Roszel / INVESCO-NAM Large Cap Core
Portfolio, Roszel / Delaware Small-Mid Cap Growth Portfolio
(formerly Roszel / Neuberger Berman Small Cap Growth
Portfolio), Roszel / Nicholas-Applegate Large Cap Growth
Portfolio, Roszel / NWQ Small Cap Value Portfolio, Roszel /
Rittenhouse Large Cap Growth Portfolio, Roszel / Seneca
Large Cap Growth Portfolio, Roszel / Seneca Mid Cap Growth
Portfolio, Roszel / Sound Large Cap Core Portfolio, and
Roszel / Valenzuela Mid Cap Value Portfolio (collectively,
the "Divisions"), as of December 31, 2003 and the related
statements of operations and changes in net assets for each
of the two years in the period then ended. These financial
statements are the responsibility of the management of
Merrill Lynch Life Insurance Company. Our responsibility is
to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of mutual
fund securities owned at December 31, 2003. 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, such financial statements present fairly, in
all material respects, the financial positions of the
Divisions as of December 31, 2003, the results of their
operations and the changes in their net assets for each
of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United
States of America.
Deloitte & Touche, LLP
New York, New York
March 5, 2004
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel /
Domestic Credit Roszel /
Money Suisse Lazard
Market International International
V.I. Fund Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Investment in Merrill Lynch Variable Series Funds, Inc. (Note 1):
Domestic Money Market V.I. Fund, 3,318 shares
(Cost $3,318) $ 3,318 $ $
Investments in MLIG Variable Insurance Trust (Note 1):
Roszel / Credit Suisse International Portfolio, 284 shares
(Cost $2,543) 3,384
Roszel / Lazard International Portfolio, 312 shares
(Cost $2,962) 3,596
------------------ ------------------ ------------------
Total Assets $ 3,318 $ 3,384 $ 3,596
================== ================== ==================
Net Assets
Accumulation Units $ 3,318 $ 3,384 $ 3,596
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Net Assets $ 3,318 $ 3,384 $ 3,596
==========================================================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
AS OF DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Levin Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Investments in MLIG Variable Insurance Trust (cont'd) (Note 1):
Roszel / Levin Large Cap Value Portfolio, 291 shares
(Cost $2,462) $ 3,172 $ $
Roszel / Lord Abbett Government Securities Portfolio, 1,205 shares
(Cost $12,566) 12,452
Roszel / Lord Abbett Large Cap Value Portfolio, 822 shares
(Cost $8,323) 10,609
------------------ ------------------ ------------------
Total Assets $ 3,172 $ 12,452 $ 10,609
================== ================== ==================
Net Assets
Accumulation Units $ 3,172 $ 12,452 $ 10,609
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Net Assets $ 3,172 $ 12,452 $ 10,609
==========================================================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
AS OF ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
MLIM MLIM INVESCO-NAM
Fixed- Relative Large Cap
Income Value Core
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Investments in MLIG Variable Insurance Trust (cont'd) (Note 1):
Roszel / MLIM Fixed-Income Portfolio, 1,746 shares
(Cost $17,693) $ 17,699 $ $
Roszel / MLIM Relative Value Portfolio, 1,312 shares
(Cost $12,727) 15,621
Roszel / INVESCO-NAM Large Cap Core Portfolio, 214 shares
(Cost $2,003) 2,367
------------------ ------------------ ------------------
Total Assets $ 17,699 $ 15,621 $ 2,367
================== ================== ==================
Net Assets
Accumulation Units $ 17,699 $ 15,621 $ 2,367
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Net Assets $ 17,699 $ 15,621 $ 2,367
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
AS OF DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Nicholas-Applegate NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Investments in MLIG Variable Insurance Trust (cont'd) (Note 1):
Roszel / Delaware Small-Mid Cap Growth Portfolio, 232 shares
(Cost $1,952) $ 2,404 $ $
Roszel / Nicholas-Applegate Large Cap Growth Portfolio, 118 shares
(Cost $1,129) 1,318
Roszel / NWQ Small Cap Value Portfolio, 430 shares
(Cost $3,608) 5,088
------------------ ------------------ ------------------
Total Assets $ 2,404 $ 1,318 $ 5,088
================== ================== ==================
Net Assets
Accumulation Units $ 2,404 $ 1,318 $ 5,088
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Net Assets $ 2,404 $ 1,318 $ 5,088
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
AS OF DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Seneca Seneca
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Investments in MLIG Variable Insurance Trust (cont'd) (Note 1):
Roszel / Rittenhouse Large Cap Growth Portfolio, 1,051 shares
(Cost $10,048) $ 11,438 $ $
Roszel / Seneca Large Cap Growth Portfolio, 341 shares
(Cost $3,281) 3,852
Roszel / Seneca Mid Cap Growth Portfolio, 331 shares
(Cost $3,088) 3,707
------------------ ------------------ ------------------
Total Assets $ 11,438 $ 3,852 $ 3,707
================== ================== ==================
Net Assets
Accumulation Units $ 11,438 $ 3,852 $ 3,707
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Net Assets $ 11,438 $ 3,852 $ 3,707
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
AS OF DECEMBER 31, 2003
Divisions Investing In
=====================================
Roszel / Roszel /
Sound Valenzuela
Large Cap Mid Cap
Core Value
Portfolio Portfolio
================== ==================
(In thousands)
Assets
Investments in MLIG Variable Insurance Trust (cont'd) (Note 1):
Roszel / Sound Large Cap Core Portfolio, 85 shares
(Cost $832) $ 977 $
Roszel / Valenzuela Mid Cap Value Portfolio, 462 shares
(Cost $3,833) 4,868
---------------------------------------
Total Assets $ 977 $ 4,868
=======================================
Net Assets
Accumulation Units $ 862 $ 4,868
Retained in Separate Account C by Merrill Lynch Life
Insurance Company (Note 4) 115 0
------------------ ------------------
Total Net Assets $ 977 $ 4,868
=======================================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel /
Domestic Credit Roszel /
Money Suisse Lazard
Market International International
V.I. Fund Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 38 $ 6 $ 4
Asset-Based Insurance Charges (Note 7) (96) (56) (40)
------------------ ------------------ ------------------
Net Investment Income (Loss) (58) (50) (36)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 0 62 37
Net Change In Unrealized Appreciation
(Depreciation) During the Year 0 868 637
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 0 930 674
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (58) 880 638
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 32,219 30 72
Contract Owner Withdrawals (1,407) (394) (42)
Net Transfers In (Out) (Note 3) (35,938) 540 1,892
Contract Charges (Note 7) (1) 0 0
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (5,127) 176 1,922
------------------ ------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) 0 (89) (89)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (5,185) 967 2,471
Net Assets, Beginning of Period 8,503 2,417 1,125
------------------ ------------------ ------------------
Net Assets, End of Period $ 3,318 $ 3,384 $ 3,596
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Levin Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 17 $ 373 $ 14
Asset-Based Insurance Charges (Note 7) (51) (206) (151)
------------------ ------------------ ------------------
Net Investment Income (Loss) (34) 167 (137)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 23 6 152
Net Change In Unrealized Appreciation
(Depreciation) During the Year 693 (211) 2,161
Capital Gain Distributions (Note 2) 9 15 19
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 725 (190) 2,332
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 691 (23) 2,195
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 130 185 166
Contract Owner Withdrawals (110) (1,564) (644)
Net Transfers In (Out) (Note 3) 273 4,775 3,353
Contract Charges (Note 7) 0 (2) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 293 3,394 2,874
------------------ ------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) (85) 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 899 3,371 5,069
Net Assets, Beginning of Period 2,273 9,081 5,540
------------------ ------------------ ------------------
Net Assets, End of Period $ 3,172 $ 12,452 $ 10,609
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
MLIM MLIM INVESCO-NAM
Fixed- Relative Large Cap
Income Value Core
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 442 $ 20 $ 5
Asset-Based Insurance Charges (Note 7) (275) (200) (38)
------------------ ------------------ ------------------
Net Investment Income (Loss) 167 (180) (33)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 12 123 71
Net Change In Unrealized Appreciation
(Depreciation) During the Year (110) 2,786 393
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (98) 2,909 464
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 69 2,729 431
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 451 781 60
Contract Owner Withdrawals (1,355) (593) (86)
Net Transfers In (Out) (Note 3) 7,258 6,553 466
Contract Charges (Note 7) (4) (1) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 6,350 6,740 439
------------------ ------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) 0 0 (89)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 6,419 9,469 781
Net Assets, Beginning of Period 11,280 6,152 1,586
------------------ ------------------ ------------------
Net Assets, End of Period $ 17,699 $ 15,621 $ 2,367
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Nicholas-Applegate NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 0 $ 3 $ 7
Asset-Based Insurance Charges (Note 7) (32) (18) (67)
------------------ ------------------ ------------------
Net Investment Income (Loss) (32) (15) (60)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 9 8 204
Net Change In Unrealized Appreciation
(Depreciation) During the Year 534 209 1,485
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 543 217 1,689
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 511 202 1,629
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 47 1 55
Contract Owner Withdrawals (109) (91) (249)
Net Transfers In (Out) (Note 3) 628 750 1,677
Contract Charges (Note 7) 0 0 (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 566 660 1,482
------------------ ------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) (76) (89) (77)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 1,001 773 3,034
Net Assets, Beginning of Period 1,403 545 2,054
------------------ ------------------ ------------------
Net Assets, End of Period $ 2,404 $ 1,318 $ 5,088
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Seneca Seneca
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 6 $ 5 $ 3
Asset-Based Insurance Charges (Note 7) (168) (55) (53)
------------------ ------------------ ------------------
Net Investment Income (Loss) (162) (50) (50)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 34 47 57
Net Change In Unrealized Appreciation
(Depreciation) During the Year 1,600 625 682
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 1,634 672 739
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,472 622 689
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 343 137 38
Contract Owner Withdrawals (731) (362) (257)
Net Transfers In (Out) (Note 3) 3,839 1,208 1,483
Contract Charges (Note 7) (1) 0 (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 3,450 983 1,263
------------------ ------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) 0 (90) (86)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 4,922 1,515 1,866
Net Assets, Beginning of Period 6,516 2,337 1,841
------------------ ------------------ ------------------
Net Assets, End of Period $ 11,438 $ 3,852 $ 3,707
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2003
Divisions Investing In
=====================================
Roszel / Roszel /
Sound Valenzuela
Large Cap Mid Cap
Core Value
Portfolio Portfolio
================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 4 $ 7
Asset-Based Insurance Charges (Note 7) (12) (72)
------------------ ------------------
Net Investment Income (Loss) (8) (65)
------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Note 2) 6 2
Net Change In Unrealized Appreciation
(Depreciation) During the Year 147 1,140
Capital Gain Distributions (Note 2) 0 0
------------------ ------------------
Net Gain (Loss) on Investments 153 1,142
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 145 1,077
------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 10 112
Contract Owner Withdrawals (22) (305)
Net Transfers In (Out) (Note 3) 307 936
Contract Charges (Note 7) 0 (1)
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 295 742
------------------ ------------------
Increase (Decrease) in Amounts Retained
in Separate Account C, net (Note 4) 24 (80)
------------------ ------------------
Total Increase (Decrease) in Net Assets 464 1,739
Net Assets, Beginning of Period 513 3,129
------------------ ------------------
Net Assets, End of Period $ 977 $ 4,868
================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
========================================================
Roszel /
Domestic Credit Roszel /
Money Suisse Lazard
Market International International
V.I. Fund Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 41 $ 0 $ 0
Asset-Based Insurance Charges (Note 7) (60) (11) (2)
------------------ ------------------ ------------------
Net Investment Income (Loss) (19) (11) (2)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 0 (16) 0
Net Change In Unrealized Appreciation
(Depreciation) During the Year 0 (25) (1)
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 0 (41) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (19) (52) (3)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 65,890 179 9
Contract Owner Withdrawals (1,046) (56) 0
Net Transfers In (Out) (Note 3) (56,322) 2,257 1,030
------------------ ------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 8,522 2,380 1,039
------------------ ------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 0 89 89
------------------ ------------------ ------------------
Total Increase in Net Assets 8,503 2,417 1,125
Net Assets, Beginning of Period 0 0 0
------------------ ------------------ ------------------
Net Assets, End of Period $ 8,503 $ 2,417 $ 1,125
================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Levin Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 0 $ 36 $ 0
Asset-Based Insurance Charges (Note 7) (9) (33) (21)
------------------ ------------------ ------------------
Net Investment Income (Loss) (9) 3 (21)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) (3) 9 10
Net Change In Unrealized Appreciation
(Depreciation) During the Year 19 97 126
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 16 106 136
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 7 109 115
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 86 366 75
Contract Owner Withdrawals (27) (337) (66)
Net Transfers In (Out) (Note 3) 2,122 8,943 5,416
------------------ ------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 2,181 8,972 5,425
------------------ ------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 85 0 0
------------------ ------------------ ------------------
2,273 9,081 5,540
Total Increase in Net Assets 0 0 0
Net Assets, Beginning of Period ------------------ ------------------ ------------------
$ 2,273 $ 9,081 $ 5,540
Net Assets, End of Period ================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
MLIM MLIM INVESCO-NAM
Fixed- Relative Large Cap
Income Value Core
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 54 $ 0 $ 0
Asset-Based Insurance Charges (Note 7) (40) (23) (6)
------------------ ------------------ ------------------
Net Investment Income (Loss) 14 (23) (6)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 1 12 (2)
Net Change In Unrealized Appreciation
(Depreciation) During the Year 117 107 (33)
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 118 119 (35)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 132 96 (41)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 615 293 49
Contract Owner Withdrawals (292) (274) (25)
Net Transfers In (Out) (Note 3) 10,825 6,037 1,514
------------------ ------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 11,148 6,056 1,538
------------------ ------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 0 0 89
------------------ ------------------ ------------------
11,280 6,152 1,586
Total Increase in Net Assets 0 0 0
Net Assets, Beginning of Period ------------------ ------------------ ------------------
$ 11,280 $ 6,152 $ 1,586
Net Assets, End of Period ================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Nicholas-Applegate NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 0 $ 0 $ 0
Asset-Based Insurance Charges (Note 7) (6) (2) (8)
------------------ ------------------ ------------------
Net Investment Income (Loss) (6) (2) (8)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 0 (1) (9)
Net Change In Unrealized Appreciation
(Depreciation) During the Year (81) (26) (6)
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (81) (27) (15)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (87) (29) (23)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 11 18 58
Contract Owner Withdrawals (63) (2) (97)
Net Transfers In (Out) (Note 3) 1,466 469 2,039
------------------ ------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 1,414 485 2,000
------------------ ------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 76 89 77
------------------ ------------------ ------------------
1,403 545 2,054
Total Increase in Net Assets 0 0 0
Net Assets, Beginning of Period ------------------ ------------------ ------------------
$ 1,403 $ 545 $ 2,054
Net Assets, End of Period ================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Seneca Seneca
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 0 $ 0 $ 0
Asset-Based Insurance Charges (Note 7) (24) (9) (6)
------------------ ------------------ ------------------
Net Investment Income (Loss) (24) (9) (6)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 12 1 (1)
Net Change In Unrealized Appreciation
(Depreciation) During the Year (210) (55) (66)
Capital Gain Distributions (Note 2) 0 0 0
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (198) (54) (67)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (222) (63) (73)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 359 15 17
Contract Owner Withdrawals (182) (25) (21)
Net Transfers In (Out) (Note 3) 6,561 2,320 1,832
------------------ ------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 6,738 2,310 1,828
------------------ ------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 0 90 86
------------------ ------------------ ------------------
6,516 2,337 1,841
Total Increase in Net Assets 0 0 0
Net Assets, Beginning of Period ------------------ ------------------ ------------------
$ 6,516 $ 2,337 $ 1,841
Net Assets, End of Period ================== ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (Continued)
FOR THE PERIOD ENDED DECEMBER 31, 2002
Divisions Investing In
=====================================
Roszel / Roszel /
Sound Valenzuela
Large Cap Mid Cap
Core Value
Portfolio Portfolio
================== ==================
(In thousands)
Investment Income (Loss):
Ordinary Dividends (Note 2) $ 0 $ 0
Asset-Based Insurance Charges (Note 7) (1) (11)
------------------ ------------------
Net Investment Income (Loss) (1) (11)
------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) (2) (7)
Net Change In Unrealized Appreciation
(Depreciation) During the Year (16) (104)
Capital Gain Distributions (Note 2) 0 0
------------------ ------------------
Net Gain (Loss) on Investments (18) (111)
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (19) (122)
------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 0 225
Contract Owner Withdrawals (1) (102)
Net Transfers In (Out) (Note 3) 443 3,048
------------------ ------------------
Net Increase in Net Assets
Resulting from Contract Transactions 442 3,171
------------------ ------------------
Increase in Amounts Retained
in Separate Account C, net (Note 4) 90 80
------------------ ------------------
513 3,129
Total Increase in Net Assets 0 0
Net Assets, Beginning of Period ------------------ ------------------
$ 513 $ 3,129
Net Assets, End of Period ================== ==================
See accompanying notes to financial statements.
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Merrill Lynch Life Variable Annuity Separate Account C
("Separate Account C"), a separate account of Merrill
Lynch Life Insurance Company ("Merrill Lynch Life"), was
established to support Merrill Lynch Life's operations
with respect to certain variable annuity contracts
("Contracts"). Separate Account C is governed by Arkansas
State Insurance Law. Merrill Lynch Life is an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch & Co."). Separate Account C is
registered as a unit investment trust under the
Investment Company Act of 1940, as amended, and consists
of seventeen investment divisions that support one
annuity contract - Consults Annuity. The investment
divisions are as follows:
- Merrill Lynch Variable Series Funds, Inc. - One of the
investment divisions invests in the shares of a single
mutual fund portfolio of the Merrill Lynch Variable
Series Funds, Inc. ("Merrill Variable Funds"). The
Investment advisor to the Merrill Variable Funds is
Merrill Lynch Investment Managers, L.P. ("MLIM"), an
Indirect subsidiary of Merrill Lynch & Co.
- MLIG Variable Insurance Trust - Sixteen of the
investment divisions each invest in the shares of a
single mutual fund portfolio of the MLIG Variable
Insurance Trust("MLIG Variable Trust"). The investment
advisor to the MLIG Variable Trust is Roszel Advisors,
LLC, an indirect subsidiary of Merrill Lynch & Co.
Effective March 3, 2003 the Roszel / Neuberger Berman
Small Cap Growth Portfolio was renamed the Roszel /
Delaware Small-Mid Cap Growth Portfolio. Effective
June 18, 2003, the Roszel / Levin Large Cap Value
Portfolio was placed on hold to allocations of
premiums and contract value from new investors. The
Investment division accepts additional deposits from
existing contract holders. Effective August 1, 2003,
the Roszel / Credit Suisse International Portfolio was
placed on hold to allocations of premiums and contract
value from new investors. The Investment division
accepts additional deposits from existing contract
holders. Effective October 17, 2003, the Roszel /
Sound Large Cap Core Portfolio was placed on hold to
allocations of premiums and contract value from new
investors. The Investment division accepts additional
deposits from existing contract holders.
The assets of Separate Account C are registered in the
name of Merrill Lynch Life. The portion of Separate
Account C's assets applicable to the Contracts are not
chargeable with liabilities arising out of any other
business Merrill Lynch Life may conduct.
The change in net assets accumulated in Separate Account
C provides the basis for the periodic determination of
the amount of increased or decreased benefits under the
Contracts.
The net assets may not be less than the amount required
under Arkansas State Insurance Law to provide for death
benefits (without regard to the guaranteed minimum death
benefits ("GMDB")) and other Contract benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein have been
prepared in accordance with accounting principles
generally accepted in the United States of America for
variable annuity separate accounts registered as unit
investment trusts. The preparation of financial
statements in conformity with accounting principles
generally accepted in the United States of America
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
from those estimates.
Investments of the investment divisions are included in
the statement of assets and liabilities at the net asset
value of the shares held in the underlying funds, which
value their investments at market value. Dividend income
includes ordinary dividends and capital gain
distributions and is recognized on the ex-dividend date.
All dividends are automatically reinvested. Realized
gains and losses on the sales of investments are computed
on the first in first out basis. Investment transactions
are recorded on the trade date.
The operations of Separate Account C are included in the
Federal income tax return of Merrill Lynch Life. Under
the provisions of the Contracts, Merrill Lynch Life has
the right to charge Separate Account C for any Federal
income tax attributable to Separate Account C. No
charge is currently being made against Separate Account C
for such tax since, under current tax law, Merrill Lynch
Life pays no tax on investment income and capital gains
reflected in variable annuity contract reserves. However,
Merrill Lynch Life retains the right to charge for any
Federal income tax incurred that is attributable to
Separate Account C if the law is changed. Charges for
state and local taxes, if any, attributable to Separate
Account C may also be made.
3. NET TRANSFERS
Net transfers include transfers among applicable Separate
Account C investment divisions.
4. INVESTMENTS IN SEPARATE ACCOUNT
The $115,000 in net assets retained by Merrill Lynch Life
in Separate Account C represent an investment by Merrill
Lynch Life in certain investment divisions to facilitate
the establishment of those investment divisions. Merrill
Lynch Life's investment is not subject to charges for
mortality and expense risks and may be transferred to
Merrill Lynch Life's General Account.
5. PURCHASES AND SALES OF INVESTMENTS
The cost of purchases and proceeds from sales of investments for the year ended December 31, 2003 were as
follows:
(In thousands)
Purchases Sales
------------------ ------------------
Domestic Money Market V.I. Fund $ 23,535 $ 28,720
Roszel / Credit Suisse International Portfolio 1,152 1,125
Roszel / Lazard International Portfolio 2,787 999
Roszel / Levin Large Cap Value Portfolio 654 485
Roszel / Lord Abbett Government Securities Portfolio 6,462 2,886
Roszel / Lord Abbett Large Cap Value Portfolio 3,930 1,174
Roszel / MLIM Fixed-Income Portfolio 8,168 1,651
Roszel / MLIM Relative Value Portfolio 7,779 1,219
Roszel / INVESCO-NAM Large Cap Core Portfolio 1,326 1,024
Roszel / Delaware Small-Mid Cap Growth Portfolio 877 443
Roszel / Nicholas-Applegate Large Cap Growth Portfolio 828 290
Roszel / NWQ Small Cap Value Portfolio 2,501 1,181
Roszel / Rittenhouse Large Cap Growth Portfolio 4,126 838
Roszel / Seneca Large Cap Growth Portfolio 1,591 760
Roszel / Seneca Mid Cap Growth Portfolio 1,815 704
Roszel / Sound Large Cap Core Portfolio 359 72
Roszel / Valenzuela Mid Cap Value Portfolio 1,250 672
------------------ ------------------
$ 69,140 $ 44,243
================== ==================
6. UNIT VALUES
The following is a summary of units outstanding, unit values and net assets for variable annuity contracts. The investment
income ratio represents the dividends, excluding the distributions of capital gains, received by the investment division
from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets.
These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit
values. The recognition of investment income by the investment division is affected by the timing of the declaration of
dividends by the underlying fund in which the investment divisions invest. The expense ratio represents the annualized
contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period
indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly
to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded. The total
return amounts include changes in the value of the underlying mutual fund, which includes expenses assessed through the
reduction of unit values. The ratio does not include any expenses assessed through the redemption of units. Investment
divisions with a date notation indicate the effective date of that investment division in the separate account. The total
return is calculated for the period indicated or from the effective date through the end of the reporting period.
(In thousands, except unit values)
Domestic Money Market V.I. Fund
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 337 $ 9.86 $ 3,318 0.73% 1.85% -1.12%
2002 853 9.97 8,503 1.26 1.85 -0.27
Roszel / Credit Suisse International Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 292 $ 11.60 $ 3,384 0.20% 1.85% 31.46%
2002 264 8.83 2,328 0.00 1.85 -11.72
Roszel / Lazard International Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 320 $ 11.21 $ 3,596 0.19% 1.85% 26.76%
2002 117 8.85 1,036 0.00 1.85 -11.53
Roszel / Levin Large Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 297 $ 10.70 $ 3,172 0.62% 1.85% 26.89%
2002 260 8.43 2,188 0.00 1.85 -15.69
6. UNIT VALUES (Continued)
Roszel / Lord Abbett Government Securities Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 1,190 $ 10.47 $ 12,452 3.35% 1.85% -0.07%
2002 867 10.47 9,081 2.02 1.85 4.73
Roszel / Lord Abbett Large Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 842 $ 12.59 $ 10,609 0.17% 1.85% 27.62%
2002 561 9.87 5,540 0.00 1.85 -1.32
Roszel / MLIM Fixed-Income Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 1,730 $ 10.23 $ 17,699 2.97% 1.85% 0.49%
2002 1,108 10.18 11,280 2.50 1.85 1.80
Roszel / MLIM Relative Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 1,346 $ 11.61 $ 15,621 0.19% 1.85% 24.09%
2002 658 9.35 6,152 0.00 1.85 -6.47
Roszel / INVESCO-NAM Large Cap Core Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 219 $ 10.79 $ 2,367 0.24% 1.85% 22.64%
2002 170 8.80 1,497 0.00 1.85 -12.02
6. UNIT VALUES (Continued)
Roszel / Delaware Small-Mid Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 238 $ 10.10 $ 2,404 0.00% 1.85% 33.76%
2002 176 7.55 1,327 0.00 1.85 -24.51
Roszel / Nicholas-Applegate Large Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 121 $ 10.87 $ 1,318 0.31% 1.85% 23.13%
2002 52 8.83 456 0.00 1.85 -11.72
Roszel / NWQ Small Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 441 $ 11.54 $ 5,088 0.19% 1.85% 50.43%
2002 258 7.67 1,977 0.00 1.85 -23.32
Roszel / Rittenhouse Large Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 1,080 $ 10.59 $ 11,438 0.07% 1.85% 17.32%
2002 722 9.03 6,516 0.00 1.85 -9.74
Roszel / Seneca Large Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 350 $ 11.02 $ 3,852 0.17% 1.85% 23.98%
2002 253 8.89 2,247 0.00 1.85 -11.13
6. UNIT VALUES (Continued)
Roszel / Seneca Mid Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 340 $ 10.91 $ 3,707 0.10% 1.85% 27.79%
2002 205 8.54 1,755 0.00 1.85 -14.60
Roszel / Sound Large Cap Core Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 77 $ 11.17 $ 862 0.62% 1.85% 24.68%
2002 47 8.96 423 0.00 1.85 -10.44
Roszel / Valenzuela Mid Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2003 475 $ 10.26 $ 4,868 0.18% 1.85% 30.10%
2002 387 7.89 3,049 0.00 1.85 -21.14
7.CHARGES AND FEES
The following table is a listing of all expenses charged to the separate account. Mortality and expense, rider and
administrative charges may be assessed through a reduction in unit value or redemption of units or as fixed charges.
Charge When Charge Is Deducted Amount Deducted
------------------------------------------ -------------------------------------- ---------------------------------------------
Mortality and expense charge Daily - reduction of unit values 1/365 of 1.85% per day
Contract maintenance charge Annually - redemption of units $50 at the end of each contract year and upon
a full withdrawal only if the greater of
contract value, or premiums less withdrawals,
is less than $75,000
Additional death benefit charge Quarterly - redemption of units 0.25% of the contract value at the end of
provides coverage in addition each contract year based on the average
to that provided by the death contract values as of the end of each of the
benefit prior four quarters and a pro rata amount of
this charge upon surrender, anuitization,
death, or termination of the rider if the
Estate Enhancer benefit was combined with
either the Maximum Anniversary Value GMDB or
Premiums Compounded at 5% GMDB
Transfer Fee Per incident - redemption of units $25 for each transfer after the twelfth
transfer in a contract year
8. UNITS ISSUED AND REDEEMED
Units issued and redeemed during 2003 and 2002 were as follows:
Roszel / Roszel /
Credit Roszel / Levin
Domestic Suisse Lazard Large Cap
Money International International Value
Market V.I. Fund Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2002 0 0 0 0
Activity during 2002:
Issued 3,406 301 118 269
Redeemed (2,553) (37) (1) (9)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2002 853 264 117 260
Activity during 2003:
Issued 2,370 129 300 72
Redeemed (2,886) (101) (97) (35)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2003 337 292 320 297
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
Lord Abbett Lord Abbett MLIM MLIM
Government Large Cap Fixed- Relative
Securities Value Income Value
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2002 0 0 0 0
Activity during 2002:
Issued 908 576 1,141 694
Redeemed (41) (15) (33) (36)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2002 867 561 1,108 658
Activity during 2003:
Issued 591 376 770 797
Redeemed (268) (95) (148) (109)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2003 1,190 842 1,730 1,346
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
INVESCO-NAM Delaware Nicholas-Applegate NWQ
Large Cap Small-Mid Large Cap Small Cap
Core Cap Growth Growth Value
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2002 0 0 0 0
Activity during 2002:
Issued 176 189 56 275
Redeemed (6) (13) (4) (17)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2002 170 176 52 258
Activity during 2003:
Issued 141 98 86 289
Redeemed (92) (36) (17) (106)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2003 219 238 121 441
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
Rittenhouse Seneca Seneca Sound
Large Cap Large Cap Mid Cap Large Cap
Growth Growth Growth Core
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2002 0 0 0 0
Activity during 2002:
Issued 742 255 209 50
Redeemed (20) (2) (4) (3)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2002 722 253 205 47
Activity during 2003:
Issued 434 160 193 36
Redeemed (76) (63) (58) (6)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2003 1,080 350 340 77
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel /
Valenzuela
Mid Cap
Value
Portfolio
--------------------
(In thousands)
Outstanding at January 1, 2002 0
Activity during 2002:
Issued 400
Redeemed (13)
--------------------
Outstanding at December 31, 2002 387
Activity during 2003:
Issued 148
Redeemed (60)
--------------------
Outstanding at December 31, 2003 475
====================
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Merrill Lynch Life Insurance Company:
We have audited the accompanying balance sheets of Merrill Lynch Life Insurance
Company (the "Company"), a wholly owned subsidiary of Merrill Lynch Insurance
Group, Inc., as of December 31, 2003 and 2002, and the related statements of
earnings, comprehensive income, stockholder's equity, and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche, LLP
New York, New York
March 1, 2004
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except common stock par value and shares)
ASSETS 2003 2002
------ ----------- -----------
INVESTMENTS:
Fixed maturity securities, at estimated fair value (amortized cost: 2003 -
$2,108,310; 2002 - $1,844,077) $ 2,157,127 $ 1,856,732
Equity securities, at estimated fair value (cost: 2003 - $78,816; 2002 -
$112,903) 82,469 105,430
Trading account securities, at estimated fair value 26,186 21,949
Limited partnerships, at cost 11,880 12,150
Policy loans on insurance contracts 1,086,537 1,143,663
----------- -----------
Total Investments 3,364,199 3,139,924
CASH AND CASH EQUIVALENTS 75,429 312,217
ACCRUED INVESTMENT INCOME 63,565 63,603
DEFERRED POLICY ACQUISITION COSTS 364,414 404,220
FEDERAL INCOME TAXES -- CURRENT -- 39,905
REINSURANCE RECEIVABLES 6,004 8,197
AFFILIATED RECEIVABLES -- NET 696 3,040
RECEIVABLES FROM SECURITIES SOLD 1,349 10,072
OTHER ASSETS 36,246 37,399
SEPARATE ACCOUNTS ASSETS 10,736,343 9,079,285
----------- -----------
TOTAL ASSETS $14,648,245 $13,097,862
=========== ===========
See accompanying notes to financial statements (Continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
BALANCE SHEETS (Continued)
AS OF DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except common stock par value and shares)
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
------------------------------------ ------------ ------------
LIABILITIES:
POLICYHOLDER LIABILITIES AND ACCRUALS:
Policyholders' account balances $ 2,887,937 $ 3,084,042
Claims and claims settlement expenses 101,718 98,526
------------ ------------
Total policyholder liabilities and cruals 2,989,655 3,182,568
OTHER POLICYHOLDER FUNDS 12,915 11,815
LIABILITY FOR GUARANTY FUND ASSESSMENTS 7,139 7,221
FEDERAL INCOME TAXES -- DEFERRED 31,965 67,304
FEDERAL INCOME TAXES -- CURRENT 21,182 --
PAYABLES FOR SECURITIES PURCHASED 683 19,635
UNEARNED POLICY CHARGE REVENUE 107,761 113,774
OTHER LIABILITIES 3,480 6,033
SEPARATE ACCOUNTS LIABILITIES 10,730,601 9,072,606
------------ ------------
Total Liabilities 13,905,381 12,480,956
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock ($10 par value; authorized: 1,000,000 shares; issued and
outstanding: 250,000 shares) 2,500 2,500
Additional paid-in capital 397,324 347,324
Retained earnings 331,575 290,092
Accumulated other comprehensive income (loss) 11,465 (23,010)
------------ ------------
Total Stockholder's Equity 742,864 616,906
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,648,245 $ 13,097,862
============ ============
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
2003 2002 2001
--------- --------- ---------
REVENUES:
Policy charge revenue $ 228,878 $ 239,030 $ 253,837
Net investment income 174,662 207,064 221,872
Net realized investment gains (losses) 987 (9,056) (13,844)
--------- --------- ---------
Total Revenues 404,527 437,038 461,865
--------- --------- ---------
BENEFITS AND EXPENSES:
Interest credited to policyholders' account balances 128,958 141,373 153,111
Market value adjustment expense 4,806 3,683 2,296
Policy benefits (net of reinsurance recoveries:
2003 - $17,641; 2002 - $14,620; 2001 - $16,562) 64,631 58,060 37,773
Reinsurance premium ceded 22,599 23,131 24,535
Amortization of deferred policy acquisition costs 76,402 101,118 59,335
Insurance expenses and taxes 52,003 47,932 65,700
--------- --------- ---------
Total Benefits and Expenses 349,399 375,297 342,750
--------- --------- ---------
Net Earnings Before Federal Income Tax Provision 55,128 61,741 119,115
--------- --------- ---------
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current 67,547 (41,505) 23,002
Deferred (53,902) 55,301 17,875
--------- --------- ---------
Total Federal Income Tax Provision 13,645 13,796 40,877
--------- --------- ---------
NET EARNINGS $ 41,483 $ 47,945 $ 78,238
========= ========= =========
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
2003 2002 2001
-------- -------- --------
NET EARNINGS $ 41,483 $ 47,945 $ 78,238
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gains on available-for-sale securities and investments
in separate accounts:
Net unrealized holding gains (losses) arising during the
period 46,905 (1,799) 32,328
Reclassification adjustment for losses included in net
earnings 3,286 11,494 12,600
-------- -------- --------
Net unrealized gains on investment securities 50,191 9,695 44,928
Adjustments for:
Policyholder liabilities 6,302 (15,214) (9,498)
Deferred policy acquisition costs (3,455) 9 (15,551)
Deferred federal income taxes (18,563) 1,928 (6,958)
-------- -------- --------
Total other comprehensive income (loss), net of tax 34,475 (3,582) 12,921
-------- -------- --------
COMPREHENSIVE INCOME $ 75,958 $ 44,363 $ 91,159
======== ======== ========
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- --------- --------- ------------- ----------
BALANCE, JANUARY 1, 2001 $ 2,500 $ 347,324 $ 194,808 $ (32,349) $ 512,283
Net earnings 78,238 78,238
Other comprehensive income, net of tax 12,921 12,921
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2001 2,500 347,324 273,046 (19,428) 603,442
Cash dividend paid to parent (30,899) (30,899)
Net earnings 47,945 47,945
Other comprehensive loss, net of tax (3,582) (3,582)
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2002 2,500 347,324 290,092 (23,010) 616,906
Capital contribution from parent 50,000 50,000
Net earnings 41,483 41,483
Other comprehensive income, net of tax 34,475 34,475
--------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2003 $ 2,500 $ 397,324 $ 331,575 $ 11,465 $ 742,864
========= ========= ========= ========= =========
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (Dollars in thousands)
2003 2002 2001
----------- ----------- -----------
Cash Flows From Operating Activities:
Net earnings $ 41,483 $ 47,945 $ 78,238
Noncash items included in earnings:
Amortization of deferred policy acquisition costs 76,402 101,118 59,335
Capitalization of policy acquisition costs (40,051) (34,391) (51,736)
Amortization (accretion) of investments 9,883 2,406 (1,033)
Interest credited to policyholders' account balances 128,958 141,373 153,111
Provision (benefit) for deferred Federal income tax (53,902) 55,301 17,875
(Increase) decrease in operating assets:
Accrued investment income 38 6,281 1,117
Federal income taxes -- current 39,905 (39,905) --
Reinsurance receivables 2,193 1,231 (6,338)
Affiliated receivables -- net 2,344 (3,040) 667
Other 1,153 4,513 (1,298)
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 3,192 3,506 9,347
Other policyholder funds 1,100 (2,424) (3,439)
Liability for guaranty fund assessments (82) (1,228) (1,801)
Federal income taxes -- current 21,182 (5,522) 388
Affiliated payables -- net -- (3,736) 3,736
Unearned policy charge revenue (6,013) 98 12,494
Other (2,553) (1,561) (24,695)
Other operating activities:
Net realized investment (gains) losses (987) 9,056 13,844
----------- ----------- -----------
Net cash and cash equivalents provided by operating activities 224,245 281,021 259,812
Cash Flow From Investing Activities:
Proceeds from (payments for):
Sales of available-for-sale securities 312,514 817,498 278,420
Maturities of available-for-sale securities 533,534 360,062 342,148
Purchases of available-for-sale securities (1,097,868) (988,168) (511,122)
Trading account securities (559) (456) (214)
Sales of real estate held-for-sale -- 22,900 --
Sales of limited partnerships 470 -- 1,000
Purchases of limited partnerships (200) (880) (1,857)
Policy loans on insurance contracts 57,126 50,815 (788)
Recapture of investment in separate accounts 3,015 1,785 --
Investment in separate accounts (304) (3,554) (1,009)
----------- ----------- -----------
Net cash and cash equivalents provided by (used in) investing
activities (192,272) 260,002 106,578
----------- ----------- -----------
See accompanying notes to financial statements (Continued)
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Dollars in thousands)
2003 2002 2001
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from (payments for):
Capital contribution received from (cash dividend paid to)
parent $ 50,000 $ (30,899) $ --
Policyholder deposits (excludes internal policy replacement
deposits) 936,437 640,103 1,090,788
Policyholder withdrawals (including transfers to/from
separate accounts) (1,255,198) (968,439) (1,419,479)
----------- ----------- -----------
Net cash and cash equivalents used in financing activities (268,761) (359,235) (328,691)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (236,788) 181,788 37,699
CASH AND CASH EQUIVALENTS
Beginning of year 312,217 130,429 92,730
----------- ----------- -----------
End of year $ 75,429 $ 312,217 $ 130,429
=========== =========== ===========
Supplementary Disclosure of Cash Flow Information:
Cash paid to affiliates for:
Federal income taxes $ 6,460 $ 3,922 $ 22,614
Interest 197 125 639
See accompanying notes to financial statements.
MERRILL LYNCH LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Merrill Lynch Insurance Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Merrill Lynch Life Insurance Company (the
"Company") is a wholly owned subsidiary of Merrill Lynch Insurance
Group, Inc. ("MLIG"). The Company is an indirect wholly owned subsidiary
of Merrill Lynch & Co., Inc. ("Merrill Lynch & Co."). The Company is
domiciled in the State of Arkansas.
The Company sells non-participating annuity products, including variable
annuities, modified guaranteed annuities and immediate annuities. The
Company is currently licensed to sell insurance and annuities in
forty-nine states, the District of Columbia, Puerto Rico, the U.S.
Virgin Islands and Guam. The Company markets its products solely through
the retail network of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated ("MLPF&S"), a wholly owned broker-dealer subsidiary of
Merrill Lynch & Co.
BASIS OF REPORTING: The accompanying financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America and prevailing industry practices, both of
which require management to make estimates that affect the reported
amounts and disclosure of contingencies in the financial statements.
Actual results could differ from those estimates.
The significant accounting policies and related judgements underlying
the Company's financial statements are summarized below. In applying
these policies, management makes subjective and complex judgements that
frequently require estimates about matters that are inherently
uncertain.
For the purpose of reporting cashflows, cash and cash equivalents
include cash on hand and on deposit and short-term investments with
original maturities of three months or less.
Certain reclassifications and format changes have been made to prior
year amounts to conform to the current year presentation.
REVENUE RECOGNITION: Revenues for variable annuity contracts consist of
policy charges for i) mortality and expense risks, ii) certain benefit
guarantees selected by the contract owner, iii) administration fees, iv)
annual contract maintenance charges, and v) withdrawal charges assessed
on contracts surrendered during the withdrawal charge period.
Revenues for variable life insurance contracts consist of policy charges
for i) mortality and expense risks, ii) cost of insurance fees, iii)
amortization of front-end and deferred sales charges, and iv) withdrawal
charges assessed on contracts surrendered during the withdrawal charge
period. The Company does not currently manufacture variable life
insurance contracts.
Revenues for interest-sensitive annuity contracts (market value adjusted
annuities and immediate annuities) and interest-sensitive life insurance
contracts (single premium whole life insurance, which is not currently
marketed) consist of i) investment income, ii) gains (losses) on the
sale of invested assets, and iii) withdrawal charges assessed on
contracts surrendered during the withdrawal charge period.
INVESTMENTS: The Company's investments in fixed maturity and equity
securities are classified as either available-for-sale or trading and
are reported at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholder's equity as a
component of accumulated other comprehensive income (loss), net of tax.
Unrealized gains and losses on trading account securities are included
in net realized investment gains (losses). If management determines that
a decline in the value of an available-for-sale security is
other-than-temporary, the carrying value is adjusted to estimated fair
value and the decline in value is recorded as a net realized investment
loss. Management makes this determination through a series of
discussions with the Company's portfolio managers and credit analysts,
as well as information obtained from external sources (i.e. company
announcements, ratings agency announcements, or news wire services). The
factors that give rise to potential impairments include, but are not
limited to, i) certain credit-related events such as default of
principal or interest payments, ii) bankruptcy of issuer, and iii)
certain security restructurings. In the absence of a readily
ascertainable market value, the estimated fair value on these securities
represents management's estimate of the security's ultimate recovery
value. Management bases this determination on the most recent
information available.
For fixed maturity securities, premiums are amortized to the earlier of
the call or maturity date, discounts are accreted to the maturity date,
and interest income is accrued daily. For equity securities, dividends
are recognized on the ex-dividend date. Realized gains and losses on the
sale or maturity of investments are determined on the basis of specific
identification. Investment transactions are recorded on the trade date.
Certain fixed maturity and equity securities are considered
non-investment grade. The Company defines non-investment grade
securities as unsecured debt obligations or equity positions that have a
rating equivalent to Standard and Poor's (or similar rating agency) BB+
or lower.
Investments in limited partnerships are carried at cost.
Policy loans on insurance contracts are stated at unpaid principal
balances.
DEFERRED POLICY ACQUISITION COSTS: Certain policy acquisition costs for
life and annuity contracts are deferred and amortized based on the
estimated future gross profits for each group of contracts. These future
gross profit estimates are subject to periodic evaluation by the
Company, with necessary revisions applied against amortization to date.
The impact of these revisions on cumulative amortization is recorded as
a charge or credit to current operations. It is reasonably possible that
estimates of future gross profits could be reduced in the future,
resulting in a material reduction in the carrying amount of deferred
policy acquisition costs.
Policy acquisition costs are principally commissions and a portion of
certain other expenses relating to policy acquisition, underwriting and
issuance that are primarily related to and vary with the production of
new business. Insurance expenses and taxes reported in the Statements of
Earnings are net of amounts deferred. Policy acquisition costs can also
arise from the acquisition or reinsurance of existing inforce policies
from other insurers. These costs include ceding commissions and
professional fees related to the reinsurance assumed. The deferred costs
are amortized in proportion to the estimated future gross profits over
the anticipated life of the acquired insurance contracts utilizing an
interest methodology.
During 1990, the Company entered into an assumption reinsurance
agreement with an unaffiliated insurer. The acquisition costs relating
to this agreement are being amortized over a twenty-five year period
using an effective interest rate of 7.5%. This reinsurance agreement
provided for payment of contingent ceding commissions, for a ten year
period, based upon the persistency and mortality experience of the
insurance contracts assumed. Payments made for contingent ceding
commissions were capitalized and amortized using an identical
methodology as that used for the initial acquisition costs. The
following is a reconciliation of the acquisition costs related to this
reinsurance agreement for the years ended December 31:
2003 2002 2001
--------- --------- ---------
Beginning balance $ 81,425 $ 95,869 $ 105,503
Capitalized amounts -- -- 147
Interest accrued 6,107 7,190 7,913
Amortization (18,243) (21,634) (17,694)
--------- --------- ---------
Ending balance $ 69,289 $ 81,425 $ 95,869
========= ========= =========
The following table presents the expected amortization, net of interest
accrued, of these deferred acquisition costs over the next five years.
Amortization may be adjusted based on periodic evaluation of the
expected gross profits on the reinsured policies.
2004 $ 4,647
2005 $ 5,045
2006 $ 5,875
2007 $ 5,629
2008 $ 5,612
SEPARATE ACCOUNTS: Assets and liabilities of Separate Accounts,
representing net deposits and accumulated net investment earnings less
fees, held primarily for the benefit of contract owners, are shown as
separate captions in the Balance Sheets. Separate Accounts are
established in conformity with Arkansas State Insurance law and are
generally not chargeable with liabilities that arise from any other
business of the Company. Separate Accounts assets may be subject to
general claims of the Company only to the extent the value of such
assets exceeds Separate Accounts liabilities. At December 31, 2003 and
2002, the Company's Separate Accounts assets exceeded Separate Accounts
liabilities by $5,742 and $6,679, respectively. This excess represents
the Company's temporary investment in certain Separate Accounts
investment divisions that were made to facilitate the establishment of
those investment divisions.
Net investment income and net realized and unrealized gains (losses)
attributable to Separate Accounts assets accrue directly to contract
owners and are not reported as revenue in the Company's Statements of
Earnings.
POLICYHOLDERS' ACCOUNT BALANCES: Liabilities for the Company's universal
life type contracts, including its life insurance and annuity products,
are equal to the full accumulation value of such contracts as of the
valuation date plus deficiency reserves for certain products.
Interest-crediting rates for the Company's fixed-rate products are as
follows:
Interest-sensitive life products 4.00% - 4.85%
Interest-sensitive deferred annuities 1.00% - 7.40%
Immediate annuities 3.00% - 11.00%
These rates may be changed at the option of the Company after initial
guaranteed rates expire, unless contracts are subject to minimum
interest rate guarantees.
CLAIMS AND CLAIMS SETTLEMENT EXPENSES: Liabilities for claims and claims
settlement expenses equal the death benefit (plus accrued interest) for
claims that have been reported to the Company but have not settled and
an estimate, based upon prior experience, for unreported claims.
Additionally, the Company has established a mortality benefit accrual
for its variable annuity products.
INCOME TAXES: The results of operations of the Company are included in
the consolidated Federal income tax return of Merrill Lynch & Co. The
Company has entered into a tax-sharing agreement with Merrill Lynch &
Co. whereby the Company will calculate its current tax provision based
on its operations. Under the agreement, the Company periodically remits
to Merrill Lynch & Co. its current Federal income tax liability.
The Company uses the asset and liability method in providing income
taxes on all transactions that have been recognized in the financial
statements. The asset and liability method requires that deferred taxes
be adjusted to reflect the tax rates at which future taxable amounts
will likely be settled or realized. The effects of tax rate changes on
future deferred tax liabilities and deferred tax assets, as well as
other changes in income tax laws, are recognized in net earnings in the
period during which such changes are enacted. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. See Note 4 to the financial statements for
further information.
The Company is generally subject to taxes on premiums and, in
substantially all states, is exempt from state income taxes.
UNEARNED POLICY CHARGE REVENUE: Certain variable life insurance products
contain policy charges that are assessed at policy issuance. These
policy charges are deferred and amortized into policy charge revenue
based on the estimated future gross profits for each group of contracts.
The Company records a liability equal to the unamortized balance of
these policy charges.
ACCOUNTING PRONOUNCEMENTS: On April 30, 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In addition, it clarifies when a derivative contains
a financing component that warrants special reporting in the statements
of cash flows. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on the Financial Statements.
On July 7, 2003, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts. The SOP provides guidance on accounting and
reporting by insurance companies for certain nontraditional
long-duration contracts and for separate accounts. The SOP is effective
for financial statements for the Company beginning in 2004. The SOP
requires the establishment of a liability for contracts that contain
death or other insurance benefits using a specified reserve methodology
that is different from the methodology that the Company currently
employs. The adoption of SOP 03-1, which is effective January 1, 2004,
will approximately result in a $43.0 million increase in policyholder
liabilities and a corresponding pre-tax charge to earnings. The adoption
of SOP 03-1 is considered a change in accounting principle.
In November of 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 03-01, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments, as it relates to disclosures
for SFAS 115 securities. In addition to the disclosures already required
by SFAS 115, EITF Issue 03-01 requires both quantitative and qualitative
disclosures for marketable equity and debt securities. The new
disclosure requirements are required to be applied to financial
statements for fiscal years ending after December 15, 2003. See Note 3
to the Financial Statements for these disclosures.
On December 31, 2002, the FASB issued SFAS No.148, Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of
FASB Statement No. 123, Accounting for Stock Based Compensation. SFAS
No. 148 permits three alternative methods for a voluntary transition to
the fair value-based method for those entities that adopt the standard
prior to the end of fiscal year-end 2003. Beginning in 2004, SFAS No.
148 eliminates prospective application as a method of adoption for
reporting stock-based compensation, but continues to permit modified
prospective application, which requires the fair value of all unvested
awards to be amortized over the remaining service period, as well as
restatement of prior years' expense. The transition guidance and
disclosure provisions of SFAS No. 148 were effective for fiscal years
ending after December 15, 2002. Merrill Lynch & Co. intends to adopt the
fair value method of accounting for stock-based compensation under SFAS
No. 123 in 2004 using the retroactive restatement method permitted under
SFAS No. 148. This will result in additional allocated compensation
expense to the Company. The allocation of additional compensation
expense is not expected to have a material impact on the Company's
Financial Statements.
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that
approximate fair value. The carrying value of financial instruments as
of December 31 were:
2003 2002
----------- -----------
Assets:
Fixed maturity securities(1) $ 2,157,127 $ 1,856,732
Equity securities(1) 82,469 105,430
Trading account securities(1) 26,186 21,949
Limited partnerships(2) 11,880 12,150
Policy loans on insurance contracts(3) 1,086,537 1,143,663
Cash and cash equivalents(4) 75,429 312,217
Separate Accounts assets(5) 10,736,343 9,079,285
----------- -----------
Total financial instruments $14,175,971 $12,531,426
=========== ===========
(1) For publicly traded securities, the estimated fair value is determined
using quoted market prices. For securities without a readily
ascertainable market value, the Company utilizes pricing services and
broker quotes. Such estimated fair values do not necessarily represent
the values for which these securities could have been sold at the dates
of the balance sheets. At December 31, 2003 and 2002, securities without
a readily ascertainable market value, having an amortized cost of
$262,302 and $292,466, had an estimated fair value of $270,731 and
$283,064, respectively.
(2) The Company has investments in three limited partnerships that do not
have readily ascertainable market values. Management has estimated the
fair value as equal to cost based on the review of the underlying
investments of the partnerships.
(3) The Company estimates the fair value of policy loans as equal to the
book value of the loans. Policy loans are fully collateralized by the
account value of the associated insurance contracts, and the spread
between the policy loan interest rate and the interest rate credited
to the account value held as collateral is fixed.
(4) The estimated fair value of cash and cash equivalents approximates the
carrying value.
(5) Assets held in Separate Accounts are carried at the net asset value
provided by the fund managers.
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed
maturity securities and equity securities (excluding trading account
securities) as of December 31 were:
2003
-------------------------------------------------------
COST / GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $2,003,958 $ 59,352 $ 12,349 $2,050,961
U.S. Government and agencies 69,346 1,752 646 70,452
Mortgage-backed securities 18,999 1,329 1 20,327
Foreign governments 11,953 345 1,106 11,192
Municipals 4,054 141 -- 4,195
---------- ---------- ---------- ----------
Total fixed maturity securities $2,108,310 $ 62,919 $ 14,102 $2,157,127
========== ========== ========== ==========
Equity securities:
Non-redeemable preferred stocks $ 78,816 $ 3,916 $ 263 $ 82,469
========== ========== ========== ==========
2002
---------------------------------------------------------
COST / GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $ 1,705,862 $49,304 $ 39,971 $1,715,195
U.S. Government and agencies 74,309 2,706 356 76,659
Mortgage-backed securities 38,581 2,711 2 41,290
Foreign governments 12,955 300 2,380 10,875
Municipals 12,370 343 -- 12,713
----------- ------- -------- ----------
Total fixed maturity securities $ 1,844,077 $55,364 $ 42,709 $1,856,732
=========== ======= ======== ==========
Equity securities:
Non-redeemable preferred stocks $ 112,903 $ 1,395 $ 8,868 $ 105,430
=========== ======= ======== ==========
Estimated fair value and gross unrealized losses by length of time that
certain fixed maturity and equity securities have been in a continuous
unrealized loss position at December 31, 2003 were:
LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL
------------------------- ------------------------- -------------------------
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
------------ ---------- ------------ ---------- ------------ ----------
Fixed Maturity Securities:
Corporate debt securities $ 365,765 $ 5,934 $ 93,749 $ 6,415 $ 459,514 $ 12,349
U.S. Government and agencies 18,458 646 -- -- 18,458 646
Foreign governments 7,873 1,106 -- -- 7,873 1,106
Mortgage-backed securities -- -- 93 1 93 1
Equity securities:
Non-redeemable preferred stocks -- -- 6,909 263 6,909 263
------------ ---------- ------------ ---------- ------------ -----------
Total temporarily impaired securities $ 392,096 $ 7,686 $ 100,751 $ 6,679 $ 492,847 $ 14,365
============ ========== ============ ========== ============ ===========
Unrealized losses primarily relate to corporate debt securities rated
BBB or higher and are due to price fluctuations as a result of changes
in interest rates. These investments are not considered
other-than-temporarily impaired since based on the most recent available
information the Company has the ability and intent to hold the
investments for a period of time sufficient for a forecasted market
price recovery up to or beyond the amortized cost of the investment.
Realized investment losses on securities deemed to have incurred
other-than-temporary declines in fair value were $9,139, $23,997 and
$11,153 for the years ended December 31, 2003, 2002, and 2001
respectively.
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2003 by contractual maturity were:
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- ---------------
Fixed maturity securities:
Due in one year or less $ 201,721 $ 204,855
Due after one year through five years 1,302,540 1,332,162
Due after five years through ten years 430,129 444,803
Due after ten years 154,921 154,980
--------------- ---------------
2,089,311 2,136,800
Mortgage-backed securities 18,999 20,327
--------------- ---------------
Total fixed maturity securities $ 2,108,310 $ 2,157,127
=============== ===============
Fixed maturity securities not due at a single maturity date have been
included in the preceding table in the year of final maturity. Expected
maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2003 by rating agency equivalent were:
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------------- ---------------
AAA $ 445,444 $ 452,068
AA 225,214 225,586
A 633,833 648,769
BBB 703,750 732,823
Non-investment grade 100,069 97,881
---------------- ----------------
Total fixed maturity securities $ 2,108,310 $ 2,157,127
================ ================
The Company has recorded certain adjustments to deferred policy
acquisition costs and policyholders' account balances in connection with
unrealized holding gains or losses on investments classified as
available-for-sale. The Company adjusts those assets and liabilities as
if the unrealized holding gains or losses had actually been realized,
with corresponding credits or charges reported in accumulated other
comprehensive income (loss), net of taxes. The components of net
unrealized gains (losses) included in accumulated other comprehensive
income (loss) at December 31 were as follows:
2003 2002
----------- -------------
Assets:
Fixed maturity securities $ 48,817 $ 12,655
Equity securities 3,653 (7,473)
Deferred policy acquisition costs 260 3,715
Separate Accounts assets (341) (3,244)
----------- -------------
52,389 5,653
----------- -------------
Liabilities:
Policyholders' account balances 34,750 41,052
Federal income taxes -- deferred 6,174 (12,389)
----------- -------------
40,924 28,663
----------- -------------
Stockholder's equity:
Accumulated other comprehensive income (loss) $ 11,465 $ (23,010)
=========== ============
Proceeds and gross realized investment gains and losses from the sale of
available-for-sale securities for the years ended December 31 were:
2003 2002 2001
--------------- -------------- ---------------
Proceeds $ 312,514 $ 817,498 $ 278,420
Gross realized investment gains 13,380 37,899 4,913
Gross realized investment losses 16,071 48,294 17,320
The Company considers fair value at the date of sale to be equal to
proceeds received. Proceeds received for gross realized investment
losses from the sale of available-for-sale securities were $65,451,
$140,742 and $60,640 for the years ended December 31, 2003, 2002, and
2001, respectively.
The Company had investment securities with a carrying value of $25,570
and $26,307 that were deposited with insurance regulatory authorities at
December 31, 2003 and 2002, respectively.
Excluding investments in U.S. Government and agencies, the Company is
not exposed to any significant concentration of credit risk in its fixed
maturity securities portfolio.
Net investment income arose from the following sources for the years
ended December 31:
2003 2002 2001
--------------- -------------- --------------
Fixed maturity securities $ 107,940 $ 128,962 $ 139,285
Equity securities 9,162 12,624 15,303
Real estate held-for-sale -- 3,220 924
Limited partnerships 28 24 39
Policy loans on insurance contracts 58,157 61,390 62,695
Cash and cash equivalents 2,155 2,912 7,578
Other 233 1,200 335
--------------- -------------- --------------
Gross investment income 177,675 210,332 226,159
Less investment expenses (3,013) (3,268) (4,287)
--------------- -------------- --------------
Net investment income $ 174,662 $ 207,064 $ 221,872
=============== ============== ==============
Net realized investment gains (losses), for the years ended December 31
were as follows:
2003 2002 2001
------------ ------------- -------------
Fixed maturity securities $ (1,167) $ (11,416) $ (12,035)
Equity securities (395) 1,021 (372)
Trading account securities 3,678 (2,143) (1,437)
Real estate held-for-sale -- 3,453 --
Investment in Separate Accounts (1,129) 29 --
------------ ------------- -------------
Net realized investment gains (losses) $ 987 $ (9,056) $ (13,844)
============ ============= =============
The Company maintains a trading portfolio comprised of convertible debt
and equity securities. The net unrealized holdings gains (losses) on
trading account securities included in net realized investment gains
(losses) were $1,663, ($515) and $462 at December 31, 2003, 2002 and
2001, respectively.
NOTE 4. FEDERAL INCOME TAXES
The following is a reconciliation of the provision for income taxes
based on earnings before Federal income taxes, computed using the
Federal statutory tax rate, versus the reported provision for income
taxes for the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Provision for income taxes computed at Federal statutory rate $ 19,295 $ 21,609 $ 41,690
Increase (decrease) in income taxes resulting from:
Dividend received deduction (3,478) (7,782) (1,024)
Foreign tax credit (2,172) (31) (310)
Non-deductible fees -- -- 521
----------- ----------- -----------
Federal income tax provision $ 13,645 $ 13,796 $ 40,877
=========== =========== ===========
The Federal statutory rate for each of the three years ended December
31, 2003 was 35%.
The Company provides for deferred income taxes resulting from temporary
differences that arise from recording certain transactions in different
years for income tax reporting purposes than for financial reporting
purposes. The sources of these differences and the tax effect of each
are as follows:
2003 2002 2001
------------ ------------- -----------
Policyholders' account balances $ (45,837) $ 72,680 $ 19,520
Deferred policy acquisition costs (8,582) (18,789) (2,336)
Liability for guaranty fund assessments 29 430 630
Investment adjustments 488 980 61
------------ ------------- -----------
Deferred Federal income tax provision (benefit) $ (53,902) $ 55,301 $ 17,875
============ ============= ===========
Deferred tax assets and liabilities as of December 31 are determined as
follows:
2003 2002
------------ ------------
Deferred tax assets:
Policyholders' account balances $ 66,815 $ 20,978
Liability for guaranty fund assessments 2,498 2,527
Investment adjustments 985 1,473
Net unrealized investment loss on investment securities -- 12,389
------------ ------------
Total deferred tax assets 70,298 37,367
------------ ------------
Deferred tax liabilities:
Deferred policy acquisition costs 92,101 100,683
Net unrealized gains on investment securities 6,174 --
Other 3,988 3,988
------------ ------------
Total deferred tax liabilities 102,263 104,671
------------ ------------
Net deferred tax liability $ 31,965 $ 67,304
============ ============
The Company anticipates that all deferred tax assets will be realized;
therefore no valuation allowance has been provided.
NOTE 5. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured life and to recover a portion of
benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers under indemnity reinsurance agreements, primarily excess
coverage and coinsurance agreements. The maximum amount of mortality
risk retained by the Company is approximately $500 on single life
policies and $750 on joint life policies.
Indemnity reinsurance agreements do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor their
obligations could result in losses to the Company. The Company regularly
evaluates the financial condition of its reinsurers so as to minimize
its exposure to significant losses from reinsurer insolvencies. The
Company holds collateral under reinsurance agreements in the form of
letters of credit and funds withheld totaling $585 that can be drawn
upon for delinquent reinsurance recoverables.
As of December 31, 2003 the Company had the following life insurance
inforce:
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
----------------- --------------- ----------- --------------- -----------
Life insurance inforce $ 11,931,195 $ 3,606,160 $ 994 $ 8,326,029 0.01%
The Company had entered into an indemnity reinsurance agreement with an
unaffiliated insurer whereby the Company coinsures, on a modified
coinsurance basis, 50% of the unaffiliated insurer's variable annuity
contracts sold through the Merrill Lynch & Co. distribution system.
During 2001, the agreement was amended whereby the Company ceased
reinsuring variable annuity contracts sold subsequent to June 30, 2001.
In addition, the Company seeks to limit its exposure to guaranteed
features contained in certain variable annuity contracts. Specifically,
the Company reinsures certain guaranteed living and minimum death
benefit provisions to the extent reinsurance capacity is available in
the marketplace. As of December 31, 2003, 100% and 11% of
the account value for variable annuity contracts containing guaranteed
living and minimum death benefit provisions, respectively, were
reinsured.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company and MLIG are parties to a service agreement whereby MLIG has
agreed to provide certain accounting, data processing, legal, actuarial,
management, advertising and other services to the Company. Expenses
incurred by MLIG in relation to this service agreement are reimbursed by
the Company on an allocated cost basis. Charges billed to the Company by
MLIG pursuant to the agreement were $33,429, $33,833 and $50,575 for
2003, 2002 and 2001, respectively. Charges attributable to this
agreement are included in insurance expenses and taxes, except for
investment related expenses, which are included in net investment
income. The Company is allocated interest expense on its accounts
payable to MLIG that approximates the daily Federal funds rate. Total
intercompany interest incurred was $197, $125 and $639 for 2003, 2002
and 2001, respectively. Intercompany interest is included in net
investment income.
The Company and Merrill Lynch Investment Managers, L.P. ("MLIM") are
parties to a service agreement whereby MLIM has agreed to provide
certain invested asset management services to the Company. The Company
pays a fee to MLIM for these services through the MLIG service
agreement. Charges attributable to this agreement and allocated to the
Company by MLIG were $1,845, $1,787 and $1,990 for 2003, 2002 and 2001,
respectively.
MLIG has entered into agreements with MLIM and Roszel Advisors, LLC, a
subsidiary of MLIG (collectively, "Affiliated Investment Advisors"),
with respect to administrative services for the Merrill Lynch Series
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Mercury Variable
Trust, and MLIG Variable Insurance Trust (collectively, "the Funds").
Certain Separate Accounts of the Company may invest in the various
mutual fund portfolios of the Funds in connection with the variable life
insurance and annuity contracts the Company has inforce. Under this
agreement, the Affiliated Investment Advisors pay MLIG an amount equal
to a percentage of the assets invested in the Funds through the Separate
Accounts. Revenue attributable to these agreements is included in policy
charge revenue. The Company received from MLIG its allocable share of
such compensation in the amount of $18,471, $19,677 and $21,667 during
2003, 2002 and 2001, respectively.
The Company has a general agency agreement with Merrill Lynch Life
Agency Inc. ("MLLA") whereby registered representatives of MLPF&S, who
are the Company's licensed insurance agents, solicit applications for
contracts to be issued by the Company. MLLA is paid commissions for the
contracts sold by such agents. Commissions paid to MLLA were $60,686,
$43,099 and $65,021 for 2003, 2002 and 2001, respectively. Substantially
all of these commissions were capitalized as deferred policy acquisition
costs and are being amortized in accordance with the policy discussed in
Note 1 to the Financial Statements.
While management believes that the service agreements referenced above
are calculated on a reasonable basis, they may not necessarily be
indicative of the costs that would have been incurred with an unrelated
third party. Affiliated agreements generally contain reciprocal
indemnity provisions pertaining to each party's representations and
contractual obligations thereunder.
NOTE 7. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
The Company paid no dividend in 2003 or 2001. During 2002, the Company
paid an ordinary cash dividend of $30,899 to MLIG.
During 2002, the Company established $144,000 in statutory reserves to
support its cashflow testing analysis required by state insurance
regulation. As a result, statutory capital and surplus was significantly
reduced from December 2001, but remained in excess of regulatory capital
requirements. However, due to the inherent volatility in statutory
earnings, the Company received a $50,000 capital contribution from MLIG
on March 3, 2003.
Statutory capital and surplus at December 31, 2003 and 2002, were
$295,722 and $136,823, respectively. At December 31, 2003 and 2002,
approximately $29,322 and $13,432, respectively, of stockholder's equity
was available for distribution to MLIG.
Applicable insurance department regulations require that the Company
report its accounts in accordance with statutory accounting practices.
Statutory accounting practices differ from principles utilized in these
financial statements as follows: policy acquisition costs are expensed
as incurred, future policy benefit reserves are established using
different actuarial assumptions, provisions for deferred income taxes
are limited to temporary differences that will be recognized within one
year, and securities are valued on a different basis. The Company's
statutory net income (loss) for 2003, 2002 and 2001 was $98,570,
($140,955) and $48,108, respectively. The statutory net loss incurred
during 2002 was primarily due to establishing additional policy benefit
reserves required by state insurance regulation.
The Company's statutory financial statements are presented on the basis
of accounting practices prescribed or permitted by the Arkansas
Insurance Department. The State of Arkansas has adopted the National
Association of Insurance Commissioner's statutory accounting practices
as a component of prescribed or permitted practices by the State of
Arkansas.
The National Association of Insurance Commissioners utilizes the Risk
Based Capital ("RBC") adequacy monitoring system. The RBC calculates the
amount of adjusted capital that a life insurance company should have
based upon that company's risk profile. As of December 31, 2003 and
2002, based on the RBC formula, the Company's total adjusted capital
level was in excess of the minimum amount of capital required to avoid
regulatory action.
NOTE 8. COMMITMENTS AND CONTINGENCIES
State insurance laws generally require that all life insurers who are
licensed to transact business within a state become members of the
state's life insurance guaranty association. These associations have
been established for the protection of policyholders from loss (within
specified limits) as a result of the insolvency of an insurer. At the
time an insolvency occurs, the guaranty association assesses the
remaining members of the association an amount sufficient to satisfy the
insolvent insurer's policyholder obligations (within specified limits).
The Company has utilized public information to estimate what future
assessments it will incur as a result of insolvencies. At December 31,
2003 and 2002, the Company's estimated liability for future guaranty
fund assessments was $7,139 and $7,221, respectively. If additional
future insolvencies occur, the Company's estimated liability may not be
sufficient to fund these insolvencies and the estimated liability may
need to be adjusted. The Company regularly monitors public information
regarding insurer insolvencies and adjusts its estimated liability
appropriately.
During 2000, the Company committed to participate in a limited
partnership. As of December 31, 2003, $4,300 had been advanced towards
the Company's $10,000 commitment to the limited partnership.
In the normal course of business, the Company is subject to various
claims and assessments. Management believes the settlement of these
matters would not have a material effect on the financial position or
results of operations of the Company.
NOTE 9. SEGMENT INFORMATION
In reporting to management, the Company's operating results are
categorized into two business segments: Life Insurance and Annuities.
The Company's Life Insurance segment consists of variable life insurance
products and interest-sensitive life insurance products. The Company's
Annuity segment consists of variable annuities and interest-sensitive
annuities. The accounting policies of the business segments are the same
as those described in the summary of significant accounting policies.
All revenue and expense transactions are recorded at the product level
and accumulated at the business segment level for review by management.
The "Other" category, presented
in the following segment financial information, represents net revenues
and earnings on assets that do not support life or annuity contract
owner liabilities.
The following table summarizes each business segment's contribution to
the consolidated amounts:
LIFE
2003 INSURANCE ANNUITIES OTHER TOTAL
----------------- ----------------- --------------- ----------------
Net interest spread (a) $ 14,823 $ 25,887 $ 4,994 $ 45,704
Other revenues 91,176 134,868 3,821 229,865
----------------- ----------------- --------------- ----------------
Net revenues 105,999 160,755 8,815 275,569
----------------- ----------------- --------------- ----------------
Policy benefits 18,238 46,393 -- 64,631
Reinsurance premium ceded 21,337 1,262 -- 22,599
Amortization of deferred policy
acquisition costs 31,467 44,935 -- 76,402
Other non-interest expenses 8,171 48,638 -- 56,809
----------------- ----------------- --------------- ----------------
Total non-interest expenses 79,213 141,228 -- 220,441
----------------- ----------------- --------------- ----------------
Net earnings before Federal
income tax provision 26,786 19,527 8,815 55,128
Federal income tax provision 5,785 4,775 3,085 13,645
----------------- ----------------- --------------- ----------------
Net earnings $ 21,001 $ 14,752 $ 5,730 $ 41,483
================= ================= =============== ================
Balance Sheet Information:
Total assets $ 5,036,566 $ 9,438,256 $ 173,423 $ 14,648,245
Deferred policy acquisition costs 178,918 185,496 -- 364,414
Policyholder liabilities and accruals 1,916,761 1,072,894 -- 2,989,655
Other policyholder funds 6,213 6,702 -- 12,915
LIFE
2002 INSURANCE ANNUITIES OTHER TOTAL
------------------ ------------------ -------------- -----------------
Net interest spread (a) $ 24,791 $ 34,444 $ 6,456 $ 65,691
Other revenues 98,435 137,513 (5,974) 229,974
------------------ ------------------ -------------- -----------------
Net revenues 123,226 171,957 482 295,665
------------------ ------------------ -------------- -----------------
Policy benefits 19,632 38,428 -- 58,060
Reinsurance premium ceded 22,883 248 -- 23,131
Amortization of deferred policy acquisition costs 41,190 59,928 -- 101,118
Other non-interest expenses 7,471 44,144 -- 51,615
------------------ ------------------ -------------- -----------------
Total non-interest expenses 91,176 142,748 -- 233,924
------------------ ------------------ -------------- -----------------
Net earnings before Federal income tax provision 32,050 29,209 482 61,741
Federal income tax provision 8,779 4,848 169 13,796
------------------ ------------------ -------------- -----------------
Net earnings $ 23,271 $ 24,361 $ 313 $ 47,945
================== ================== ============== =================
Balance Sheet Information:
Total assets $ 4,970,388 $ 8,109,682 $ 17,792 $ 13,097,862
Deferred policy acquisition costs 211,999 192,221 -- 404,220
Policyholder liabilities and accruals 2,005,718 1,176,850 -- 3,182,568
Other policyholder funds 4,995 6,820 -- 11,815
LIFE
2001 INSURANCE ANNUITIES OTHER TOTAL
----------------- ------------------ -------------- ----------------
Net interest spread (a) $ 34,815 $ 31,302 $ 2,644 $ 68,761
Other revenues 101,685 139,727 (1,419) 239,993
----------------- ------------------ -------------- ----------------
Net revenues 136,500 171,029 1,225 308,754
----------------- ------------------ -------------- ----------------
Policy benefits 21,320 16,453 -- 37,773
Reinsurance premium ceded 24,531 4 -- 24,535
Amortization of deferred policy acquisition costs 30,913 28,422 -- 59,335
Other non-interest expenses 18,097 49,899 -- 67,996
----------------- ------------------ -------------- ----------------
Total non-interest expenses 94,861 94,778 -- 189,639
----------------- ------------------ -------------- ----------------
Net earnings before Federal income tax provision 41,639 76,251 1,225 119,115
Federal income tax provision 15,607 24,841 429 40,877
----------------- ------------------ -------------- ----------------
Net earnings $ 26,032 $ 51,410 $ 796 $ 78,238
================= ================== ============== ================
Balance Sheet Information:
Total assets $ 5,674,704 $ 9,625,104 $ 150,208 $ 15,450,016
Deferred policy acquisition costs 251,245 219,693 -- 470,938
Policyholder liabilities and accruals 2,094,195 1,256,616 -- 3,350,811
Other policyholder funds 9,236 5,003 -- 14,239
(a) Management considers investment income net of interest credited to
policyholders' account balances in evaluating results.
The table below summarizes the Company's net revenues by product for 2003, 2002
and 2001:
2003 2002 2001
---------------- ---------------- -----------------
Life Insurance
Variable life insurance $ 97,002 $ 102,603 $ 110,842
Interest-sensitive life insurance 8,997 20,623 25,658
---------------- ---------------- -----------------
Total Life Insurance 105,999 123,226 136,500
---------------- ---------------- -----------------
Annuities
Variable annuities 139,577 139,210 152,427
Interest-sensitive annuities 21,178 32,747 18,602
---------------- ---------------- -----------------
Total Annuities 160,755 171,957 171,029
---------------- ---------------- -----------------
Other 8,815 482 1,225
---------------- ---------------- -----------------
Total $ 275,569 $ 295,665 $ 308,754
================ ================ =================
* * * * *