AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 2007.
REGISTRATION NOS. 333-73544 AND 811-10585
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 6 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 [X]
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MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
(EXACT NAME OF REGISTRANT)
MERRILL LYNCH LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1700 MERRILL LYNCH DRIVE, 3RD FLOOR
PENNINGTON, NEW JERSEY 08534
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
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DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(609) 274-6900
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NAME AND ADDRESS OF AGENT FOR SERVICE: COPY TO:
BARRY G. SKOLNICK, ESQ. STEPHEN E. ROTH, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL MARY E. THORNTON, ESQ.
MERRILL LYNCH LIFE INSURANCE COMPANY SUTHERLAND ASBILL & BRENNAN LLP
1700 MERRILL LYNCH DRIVE, 3RD FLOOR 1275 PENNSYLVANIA AVENUE, N.W.
PENNINGTON, NEW JERSEY 08534 WASHINGTON, D.C. 20004-2415
It is proposed that this filing will become effective (check
appropriate space):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 2007 pursuant to paragraph (b) of Rule 485
(date)
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on ___________ pursuant to paragraph (a)(1) of Rule 485
(date)
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
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TITLE OF SECURITIES BEING REGISTERED:
Units of interest in a separate account under flexible premium individual
deferred variable annuity contracts.
EXHIBIT INDEX CAN BE FOUND ON PAGE C-13
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PROSPECTUS
MAY 1, 2007
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
4802 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/Davis Large Cap Value Portfolio
- Roszel/BlackRock Relative Value Portfolio
- Roszel/Fayez Sarofim Large Cap Core Portfolio
- Roszel/AllianceBernstein Large Cap Core Portfolio
- Roszel/Loomis Sayles Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Marsico Large Cap Growth Portfolio
- Roszel/Cadence Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Delaware Small-Mid Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/JPMorgan International Equity Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/BlackRock Fixed-Income Portfolio
- BLACKROCK VARIABLE SERIES FUNDS, INC.
- BlackRock 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 may be 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 may 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, 2007, 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 of our Service Center
referenced earlier in this Prospectus. There is no charge to obtain it. The
Statement of Additional Information's table of contents appears at the end 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.
CURRENT PROSPECTUSES FOR THE MLIG VARIABLE INSURANCE TRUST AND THE BLACKROCK
VARIABLE SERIES FUNDS, INC. MUST ACCOMPANY THIS PROSPECTUS. PLEASE READ THESE
DOCUMENTS CAREFULLY AND RETAIN THEM FOR FUTURE REFERENCE.
2
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.
Although this Prospectus was primarily designed for potential purchasers of the
Contract, you may be receiving this Prospectus as a current contract owner. If
you are a current contract owner, you should note that the options, features,
and charges of the Contract may vary over time and generally, you may not change
your Contract or its features, as issued. For more information about the
particular options, features, and charges applicable to you, please contact your
Financial Advisor, refer to your contract, and/or note Contract variations
referenced throughout this Prospectus.
3
TABLE OF CONTENTS
PAGE
----
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............................................. 11
Annuity Payments.......................................... 11
Right to Review........................................... 11
Replacement of Contracts.................................. 11
FEE TABLE................................................... 12
YIELDS AND TOTAL RETURNS.................................... 13
MERRILL LYNCH LIFE INSURANCE COMPANY........................ 14
THE ACCOUNT................................................. 15
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
The Funds................................................. 16
Roszel/Lord Abbett Large Cap Value Portfolio........... 16
Roszel/Davis Large Cap Value Portfolio................. 16
Roszel/BlackRock Relative Value Portfolio.............. 16
Roszel/Fayez Sarofim Large Cap Core Portfolio.......... 16
Roszel/AllianceBernstein Large Cap Core Portfolio...... 16
Roszel/Loomis Sayles Large Cap Growth Portfolio........ 16
Roszel/Rittenhouse Large Cap Growth Portfolio.......... 17
Roszel/Marsico Large Cap Growth Portfolio.............. 17
Roszel/Kayne Anderson Rudnick Small-Mid Cap Value
Portfolio............................................. 17
Roszel/Cadence Mid Cap Growth Portfolio................ 17
Roszel/NWQ Small Cap Value Portfolio................... 17
Roszel/Delaware Small-Mid Cap Growth Portfolio......... 17
Roszel/Lazard International Portfolio.................. 17
Roszel/JPMorgan International Equity Portfolio......... 17
Roszel/Lord Abbett Government Securities Portfolio..... 17
Roszel/BlackRock Fixed-Income Portfolio................ 18
BlackRock Variable Series Funds, Inc. .................... 18
BlackRock Money Market V.I. Fund....................... 18
Certain Payments We Receive with Regard to the Funds...... 18
Purchases and Redemptions of Fund Shares; Reinvestment.... 19
Material Conflicts, Substitution of Investments and
Changes to the Account................................. 19
4
PAGE
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CHARGES, DEDUCTIONS AND CREDITS............................. 19
Asset-Based Insurance Charge.............................. 19
Additional Death Benefit Charge........................... 20
Contract Fee.............................................. 20
Other Charges............................................. 20
Transfer Charges....................................... 20
Tax Charges............................................ 21
Fund Expenses.......................................... 21
Premium Taxes.......................................... 21
Contract Value Credit..................................... 21
FEATURES AND BENEFITS OF THE CONTRACT....................... 22
Ownership of the Contract................................. 22
Issuing the Contract...................................... 22
Issue Age.............................................. 22
Information We Need To Issue the Contract.............. 22
Right to Review........................................ 23
Premiums.................................................. 23
Minimum and Maximum Premiums........................... 23
How to Make Payments................................... 23
Automatic Investment Feature........................... 23
Premium Investments.................................... 23
Accumulation Units........................................ 24
How Are My Contract Transactions Priced?............... 24
How Do We Determine The Number of Units?............... 25
Death of Annuitant Prior to Annuity Date.................. 25
Transfers Among Subaccounts............................... 25
General................................................ 25
Disruptive Trading..................................... 26
Dollar Cost Averaging Program............................. 27
What Is It?............................................ 27
Participating in the DCA Program....................... 28
Minimum Amounts........................................ 28
When Do We Make DCA Transfers?......................... 28
Rebalancing Program....................................... 28
Withdrawals and Surrenders................................ 29
When and How Withdrawals are Made...................... 29
Minimum Amounts........................................ 29
Systematic Withdrawal Program.......................... 29
Surrenders............................................. 29
Payments to Contract Owners............................... 30
Contract Changes.......................................... 30
Death Benefit............................................. 31
General................................................ 31
Calculation of Death Benefit........................... 32
Spousal Continuation...................................... 32
Annuity Payments.......................................... 33
Annuity Options........................................... 34
How We Determine Present Value of Future Guaranteed
Annuity Payments...................................... 34
Payments of a Fixed Amount............................. 34
Payments for a Fixed Period............................ 34
Life Annuity........................................... 34
5
PAGE
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Life Annuity With Payments Guaranteed for 5, 10, 15, or
20 Years.............................................. 34
Life Annuity With Guaranteed Return of Contract
Value................................................. 35
Joint and Survivor Life Annuity........................ 35
Joint and Survivor Life Annuity with Payments
Guaranteed for 5, 10, 15, or 20 Years................. 35
Individual Retirement Account Annuity.................. 35
Gender-Based Annuity Purchase Rates....................... 35
FEDERAL INCOME TAXES........................................ 36
Federal Income Taxes...................................... 36
Tax Status of the Contract................................ 36
Diversification Requirements........................... 36
Owner Control.......................................... 36
Required Distributions................................. 36
Taxation of Annuities..................................... 37
In General............................................. 37
Withdrawals and Surrenders............................. 37
Annuity Payments....................................... 37
Taxation of Death Benefit Proceeds..................... 37
Penalty Tax on Some Withdrawals........................... 38
Transfers, Assignments, Annuity Dates, or Exchanges of a
Contract............................................... 38
Withholding............................................... 38
Multiple Contracts........................................ 38
Federal Estate Taxes...................................... 38
Generation-Skipping Transfer Tax.......................... 38
Annuity Purchases by Nonresident Aliens and Foreign
Corporations........................................... 38
Optional Benefit Riders................................... 39
Possible Changes In Taxation.............................. 39
Possible Charge For Our Taxes............................. 39
Foreign Tax Credits....................................... 39
Taxation of Qualified Contracts........................... 39
Individual Retirement Annuities........................... 39
Traditional IRAs....................................... 39
Roth IRAs.............................................. 40
Other Tax Issues For IRAs and Roth IRAs................ 40
Tax Sheltered Annuities................................... 40
OTHER INFORMATION........................................... 41
Notices and Elections..................................... 41
Voting Rights............................................. 41
Reports to Contract Owners................................ 42
Selling the Contract...................................... 42
State Regulation.......................................... 43
Legal Proceedings......................................... 43
Experts................................................... 43
Legal Matters............................................. 43
Registration Statements................................... 43
ACCUMULATION UNIT VALUES.................................... 44
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... 46
APPENDIX A -- Example of Premiums Compounded at 5% GMDB..... A-1
APPENDIX B -- Example of Estate Enhancer with Return of
Premium GMDB.............................................. B-1
APPENDIX C -- Example of Estate Enhancer Benefit............ C-1
APPENDIX D -- Example of Maximum Anniversary Value GMDB..... 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. The annuity date must
occur by the older annuitant's 95th birthday.
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 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(b) of the IRC.
Roth Individual Retirement Account or Annuity ("Roth IRA"): A retirement
arrangement meeting the requirements of Section 408A 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
7
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. Please note that if you purchase your
Contract through a custodial account, the owner of the Contract will be the
custodial account and the annuitant must generally be the custodial account
owner.
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 BlackRock Money Market V.I.
Subaccount. After the 14 days, we will put the money into the subaccounts you've
selected. In Pennsylvania, we will not wait 14 days. Instead, we will invest
your premium immediately in the subaccounts you've selected. For Contracts
issued in California, for contract owners who are 60 years of age or older, we
will put all premiums in the BlackRock Money Market V.I. Subaccount for the
first 35 days following the contract date, unless the contract owner directs us
to invest the premiums immediately in other subaccounts. 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/Davis Large Cap Value Portfolio
- Roszel/BlackRock Relative Value Portfolio
- Roszel/Fayez Sarofim Large Cap Core Portfolio
- Roszel/AllianceBernstein Large Cap Core Portfolio
- Roszel/Loomis Sayles Large Cap Growth Portfolio
- Roszel/Rittenhouse Large Cap Growth Portfolio
- Roszel/Marsico Large Cap Growth Portfolio
- Roszel/Cadence Mid Cap Growth Portfolio
- Roszel/NWQ Small Cap Value Portfolio
- Roszel/Delaware Small-Mid Cap Growth Portfolio
- Roszel/Lazard International Portfolio
- Roszel/JPMorgan International Equity Portfolio
- Roszel/Lord Abbett Government Securities Portfolio
- Roszel/BlackRock Fixed-Income Portfolio
- FUNDS OF BLACKROCK VARIABLE SERIES FUNDS, INC.
- BlackRock Money Market V.I. Fund
If you want detailed information about the investment objectives of the Funds,
see "Investments of the Account" and the prospectuses for the Funds.
We have closed the subaccount investing in the Roszel/Kayne Anderson Rudnick
Small Mid Cap Value Portfolio to allocations of new premium and incoming
transfers of contract value for Contracts issued on or after June 23, 2006.
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
You may have previously elected an additional death benefit (Estate Enhancer).
If you elected the Estate Enhancer benefit or 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
9
withdrawals, is less than $75,000. Accordingly, if your withdrawals have not
decreased your investment in 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 4.0%.
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. 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.
You may take your withdrawals through lump sum withdrawals or the Systematic
Withdrawal Program. 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").
10
DEATH BENEFIT
Regardless of investment performance, this Contract provides a guaranteed
minimum death benefit ("GMDB") if any owner dies (or an annuitant if any
contract owner is a non-natural person) 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 older
annuitant's 95th birthday. If you do not select an annuity date, the annuity
date for non-qualified Contracts is the older 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").
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
along with your letter of instruction 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 we receive your returned
Contract. For Contracts issued in California to contract owners who are 60 years
of age or older and who directed us to invest the premiums immediately in
subaccount(s) other than the BlackRock Money Market V.I. Subaccount, we will
refund the contract value as of the date we receive your returned 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
11
Contract until we have received the initial premium from your existing insurance
company, the issuance of the Contract may be delayed.
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 Fund fees and expenses that you may pay periodically
during the time that you own the Contract. The table shows the minimum and
maximum total operating expenses of the Fund for the fiscal year ended December
31, 2006, before and after any contractual waivers and expense reimbursement.
More detail concerning each Fund's fees and expenses is contained in the
prospectus for each Fund.
---------------
(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
elected or 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.
12
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)..................... 0.58% 4.62%
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).............................................. 0.58% 1.15%
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
------ ------- ------- --------
$683 $2,011 $3,291 $6,292
Assuming the minimum fees and expenses of any Fund, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$277 $851 $1,450 $3,068
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.
---------------
(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, 2006 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 April 30, 2008. For more
information about these arrangements, consult the prospectuses for the
Funds.
13
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 BlackRock 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 BlackRock 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 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
1-, 5- and 10-year 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
14
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 and engaged in the sale of life insurance and
annuity products. We changed our corporate location to Arkansas on August 31,
1991. We are an indirect wholly owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), 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.
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 16 subaccounts currently available through the Account and one
currently closed subaccount.
All subaccounts invest in a corresponding portfolio of the MLIG Variable
Insurance Trust or the BlackRock 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.
15
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 subsidiary of Merrill Lynch) 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.
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 ("MLIG 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 new premiums and incoming
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. These
investment managers may be replaced.
THE FUNDS
The following tables summarize each Fund's investment objective(s), investment
adviser(s)/subadviser(s), and asset class/investment style. There is no
guarantee that any of the Funds will achieve the stated objectives.
MLIG VARIABLE INVESTMENT ASSET CLASS/
INSURANCE TRUST INVESTMENT OBJECTIVE ADVISER(S) SUBADVISER INVESTMENT STYLE
---------------------------------------------------------------------------------------------------------
ROSZEL/LORD ABBETT Seeks long-term Roszel Advisors, Lord, Abbett & Domestic
LARGE CAP VALUE capital LLC ("Roszel Co. LLC Equity/Large Cap
PORTFOLIO appreciation. Advisors") Value
---------------------------------------------------------------------------------------------------------
ROSZEL/DAVIS LARGE Seeks long-term Roszel Advisors Davis Selected Domestic
CAP VALUE PORTFOLIO capital Advisers, L.P. Equity/Large Cap
appreciation. Value
---------------------------------------------------------------------------------------------------------
16
MLIG VARIABLE INVESTMENT ASSET CLASS/
INSURANCE TRUST INVESTMENT OBJECTIVE ADVISER(S) SUBADVISER INVESTMENT STYLE
---------------------------------------------------------------------------------------------------------
ROSZEL/BLACKROCK Seeks long-term Roszel Advisors BlackRock Domestic
RELATIVE VALUE capital Investment Equity/Large Cap
PORTFOLIO appreciation. Management, LLC Value
---------------------------------------------------------------------------------------------------------
ROSZEL/FAYEZ SAROFIM Seeks long-term Roszel Advisors Fayez Sarofim & Domestic
LARGE CAP CORE capital Co. Equity/Large Cap
PORTFOLIO appreciation. Blend
---------------------------------------------------------------------------------------------------------
ROSZEL/ Seeks long-term Roszel Advisors AllianceBernstein Domestic
ALLIANCEBERNSTEIN capital L.P. Equity/Large Cap
LARGE CAP CORE appreciation. Blend
PORTFOLIO
---------------------------------------------------------------------------------------------------------
ROSZEL/LOOMIS SAYLES Seeks long-term Roszel Advisors Loomis Sayles & Domestic
LARGE CAP GROWTH capital Company Equity/Large Cap
PORTFOLIO appreciation. Growth
---------------------------------------------------------------------------------------------------------
ROSZEL/RITTENHOUSE Seeks long-term Roszel Advisors Rittenhouse Domestic
LARGE CAP GROWTH capital Asset Equity/Large Cap
PORTFOLIO appreciation. Management, Inc. Growth
---------------------------------------------------------------------------------------------------------
ROSZEL/MARSICO LARGE Seeks long-term Roszel Advisors Marsico Capital Domestic
CAP GROWTH capital Management, LLC Equity/Large Cap
PORTFOLIO(1) appreciation. Growth
---------------------------------------------------------------------------------------------------------
ROSZEL/KAYNE ANDERSON Seeks long-term Roszel Advisors Kayne Anderson Domestic
RUDNICK SMALL-MID CAP capital Rudnick Equity/Small Cap
VALUE PORTFOLIO(1) appreciation. Investment Value
Management, LLC
---------------------------------------------------------------------------------------------------------
ROSZEL/CADENCE MID Seeks long-term Roszel Advisors Cadence Capital Domestic
CAP GROWTH PORTFOLIO capital Management LLC Equity/Mid Cap
appreciation. Blend
---------------------------------------------------------------------------------------------------------
ROSZEL/NWQ SMALL CAP Seeks long-term Roszel Advisors NWQ Investment Domestic
VALUE PORTFOLIO capital Management Equity/Small Cap
appreciation. Company Value
---------------------------------------------------------------------------------------------------------
ROSZEL/DELAWARE Seeks long-term Roszel Advisors Delaware Domestic
SMALL-MID CAP GROWTH capital Management Equity/Small Cap
PORTFOLIO appreciation. Company Growth
---------------------------------------------------------------------------------------------------------
ROSZEL/LAZARD Seeks long-term Roszel Advisors Lazard Asset International
INTERNATIONAL capital Management LLC Equity/
PORTFOLIO appreciation. International
---------------------------------------------------------------------------------------------------------
---------------
(1) This subaccount is closed to allocations of premium and incoming transfers
of contract value for Contracts issued on or after June 23, 2006.
17
MLIG VARIABLE INVESTMENT ASSET CLASS/
INSURANCE TRUST INVESTMENT OBJECTIVE ADVISER(S) SUBADVISER INVESTMENT STYLE
---------------------------------------------------------------------------------------------------------
ROSZEL/JPMORGAN Seeks long-term Roszel Advisors JPMorgan International
INTERNATIONAL EQUITY capital Investment Equity/
PORTFOLIO appreciation. Management, Inc. International
---------------------------------------------------------------------------------------------------------
ROSZEL/LORD ABBETT Seeks as high a Roszel Advisors Lord, Abbett & Fixed Income/
GOVERNMENT SECURITIES level of income as Co. LLC Intermediate
PORTFOLIO is consistent with Term
investment in
government
securities.
---------------------------------------------------------------------------------------------------------
ROSZEL/BLACKROCK Seeks as high a Roszel Advisors BlackRock Fixed Income/
FIXED-INCOME level of total Investment Intermediate
PORTFOLIO return as is Management, LLC Term
consistent with
investment in high-
grade income-bearing
securities.
---------------------------------------------------------------------------------------------------------
BLACKROCK VARIABLE INVESTMENT ASSET CLASS/
SERIES FUNDS, INC. INVESTMENT OBJECTIVE ADVISER(S) SUBADVISER INVESTMENT STYLE
---------------------------------------------------------------------------------------------------------
BLACKROCK MONEY Seeks to preserve BlackRock BlackRock Fixed Income/
MARKET V.I. FUND capital, maintain Advisors, LLC Institutional Money Market
liquidity, and Management
achieve the highest Corporation
possible current
income consistent
with the foregoing
objectives.
---------------------------------------------------------------------------------------------------------
In order to obtain copies of the Fund prospectuses you may call one of our
customer service representatives at 1-800-535-5549.
CERTAIN PAYMENTS WE RECEIVE WITH REGARD TO THE FUNDS
We receive payments from the investment adviser (or affiliates thereof) of the
Funds. These payments may be used for a variety of purposes, including payment
of expenses that we (and our affiliates) incur in promoting, marketing, and
administering the Contract and, in our role as an intermediary, the Funds. We
(and our affiliates) may profit from these payments. These payments may be
derived, in whole or in part, from the investment advisory fee deducted from
Fund assets. Contract owners, through their indirect investment in the Funds,
bear the costs of these investment advisory fees. The amount of the payments we
receive is based on a percentage of the assets of the particular Funds
attributable to the Contract and to certain other variable insurance contracts
that we and our affiliates issue. These percentages differ, and some advisers
(or affiliates) may pay more than others. These percentages currently range from
0.25% to 0.35%.
Furthermore, Merrill Lynch receives additional compensation on assets invested
in Merrill Lynch's proprietary Funds (i.e. the MLIG Variable Insurance Trust)
because its affiliates receive compensation from the Funds for investment
advisory, administrative, transfer agency, distribution, and/or other services.
Merrill Lynch also makes available to its clients certain funds sponsored,
managed and/or distributed by affiliates of BlackRock, Inc. (collectively,
"BlackRock"). Merrill Lynch owns approximately 49% of BlackRock, Inc. As a
result, Merrill Lynch may benefit from increased sales of BlackRock Funds.
18
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
The Funds sell their shares to our separate accounts in connection with variable
annuity and/or variable life insurance products, and may also sell their shares
to separate accounts of affiliated and/or unaffiliated insurance companies.
Certain Funds may also offer their shares to pension and retirement plans and to
"fund of funds" (open-end management investment companies, or series thereof,
that offer their shares exclusively to insurance companies, their separate
accounts, and/or to qualified plans).
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 new premium payments or incoming transfers of 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.
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%.
19
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
You may have previously elected an additional death benefit (Estate Enhancer).
If you elected the Estate Enhancer benefit or 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 charge 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.
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".)
20
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 4.0%. 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 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%
21
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 and
certain types of "non-grantor" trusts. You should consult your tax advisor if
the annuity will be owned by a "non-natural person." If you are a human being,
you are considered a "natural person." You may designate a beneficiary. If the
owner dies (or the annuitant if any owner is a non-natural person), the
beneficiary will receive a death benefit. You may also designate an annuitant.
Except under qualified contracts, you may change the annuitant at any time prior
to the annuity date. If you don't select an annuitant, you are the annuitant.
Please note that if you purchase your Contract through a custodial account, the
owner of the Contract will be the custodial account and the annuitant must
generally be the custodial account owner.
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 in order for the surviving spouse to
continue the Contract under the Spousal Continuation provision upon the death of
the other spousal co-owner. Certain restrictions apply. (See "Spousal
Continuation" later in this Prospectus.) Co-owners may also designate a
beneficiary to receive benefits on the surviving co-owner's death. The surviving
co-owner may later name a new beneficiary, provided the original beneficiary
designation is not irrevocable. Qualified contracts may not have co-owners.
You may assign the Contract to someone else by giving notice to our Service
Center unless not permitted by law in your state. Please refer to your Contract.
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 and may be prohibited on qualified
contracts, so you should consult with a qualified tax advisor before assigning
the Contract. (See "Federal Income Taxes".)
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 certain documents 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
documents 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
22
haven't received necessary information within five business days, we will return
the premium and no Contract will be issued.
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
along with your letter of instruction 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 we receive your returned
Contract. For Contracts issued in Pennsylvania, we will refund the contract
value as of the date we receive your returned Contract. For Contracts issued in
California to contract owners who are 60 years of age or older and who directed
us to invest the premiums immediately in subaccount(s) other than the BlackRock
Money Market V.I. Subaccount, we will refund the contract value as of the date
we receive your returned 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 must either 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.
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 will hold all premiums in
the BlackRock Money Market V.I. Subaccount. After the 14 days, we'll reallocate
the contract value to the subaccounts you
23
selected. For Contracts issued in California, for contract owners who are 60
years of age or older, we will put all premiums in the BlackRock Money Market
V.I. Subaccount for the first 35 days following the contract date, unless the
contract owner directs us to invest the premiums immediately in other
subaccounts. In Pennsylvania, we will 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.
24
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
25
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. Accordingly, frequent or short-term transfers by a contract owner among
the subaccounts may adversely affect the long-term performance of the Funds,
which may, in turn, adversely affect other contract owners and other persons who
may have an interest in the Contract (e.g., annuitants and beneficiaries). 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
"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. Contract
owners will be provided one warning in writing prior to imposition of any
restrictions on transfers. If a "warned" contract owner engages in any further
disruptive trading activities within the six-month period following a warning
letter, we will notify the contract owner in writing of the restrictions that
will apply to future transfers under a Contract. Currently, our restrictions
require such contract owners to submit all future transfer requests through
regular U.S. mail (thereby refusing to accept transfer requests via overnight
delivery service, telephone, Internet, facsimile, other electronic means, or
through your Financial Advisor). We will also require that the contract owner's
signature on these transfer requests be notarized or signature guaranteed. If
this restriction fails to limit further disruptive trading activities, we may
additionally require a minimum time period between each transfer and refuse to
execute future transfer requests that violate our Disruptive Trading Procedures.
We currently do not, but may in the future, impose different restrictions, such
as:
- not accepting a transfer request from a third party acting under
authorization on behalf of more than one contract owner;
- limiting the dollar or percentage of contract value that may be
transferred among the subaccounts at any one time; and
- imposing a redemption fee on certain transfers.
Because we have adopted our Disruptive Trading Procedures as a preventative
measure to protect contract owners from the potential adverse effects of harmful
trading activity, 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.
26
Despite our best efforts, we cannot guarantee that our Disruptive Trading
Procedures will detect every potential contract owner engaged in disruptive
trading activity, 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 contract owners engaged in disruptive
trading activity. In addition, the other insurance companies and/or retirement
plans that invest in the Funds may have different policies and procedures or may
not have any such policies and procedures because of contractual limitations.
For these reasons, we also cannot guarantee that the Funds (and thus contract
owners) will not be harmed by transfer activity relating to other insurance
companies and/or retirement plans that may invest in the Funds.
The Funds available as investment options under the Contract may have adopted
their own policies and procedures with respect to frequent purchases and
redemptions of their respective shares. The prospectuses for the Funds describe
any such policies and procedures. The disruptive trading policies and procedures
of a Fund may be different, and more or less restrictive, than our Disruptive
Trading Procedures or the disruptive trading policies and procedures of other
Funds. We may not have the contractual authority or the operational capacity to
apply the disruptive trading policies and procedures of the respective Funds
that would be affected by the transfers. However, we have entered into a written
agreement, as required by SEC regulation, with each Fund or its principal
underwriter that obligates us to provide to the Fund, promptly upon request,
certain information about the trading activity of individual contract owners,
and to execute instructions from the Fund to restrict or prohibit further
premium payments or transfers by specific contract owners who violate the
disruptive trading policies established by the Fund.
Accordingly, to the extent permitted by applicable law, we 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 Separate 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.
Contract owners and other persons with interests in the Contracts also should be
aware that the purchase and redemption orders received by the Funds generally
are "omnibus" orders from intermediaries such as retirement plans or separate
accounts funding variable insurance contracts. The omnibus orders reflect the
aggregation and netting of multiple orders from individual retirement plan
participants and/or individual owners of variable insurance contracts. The
omnibus nature of these orders may limit the Funds' ability to apply their
respective disruptive trading policies and procedures. In addition, if a Fund
believes that an omnibus order we submit may reflect one or more transfer
requests from contract owners engaged in disruptive trading activity, the Fund
may reject the entire omnibus order.
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 administer and collect
any such redemption fees on behalf of the Funds.
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
27
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 as
described below in "Minimum Amounts".
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 designated
subaccount drop below the selected monthly transfer amount, you will need to put
more money in to continue the DCA program. You will be notified on your DCA
confirmation of activity notice that the amount remaining in your designated
subaccount has dropped below the selected monthly transfer amount.
WHEN DO WE MAKE DCA TRANSFERS?
You select the date for DCA transfers, within certain limitations. After we
receive your request at our Service Center, we will make the first DCA transfer
on the selected date of the following month. 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.
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.
28
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. Under certain circumstances, you may make
systematic withdrawals, discussed below. Withdrawals may be subject to tax 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,
severance from employment 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.)
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
29
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.
CONTRACT CHANGES
Requests to change the owner, beneficiary, annuitant, or annuity date of a
Contract (if permitted) will take effect as of the date we receive 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, the owner
generally must be the annuitant.
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.
30
DEATH BENEFIT
GENERAL
Regardless of investment experience, the Contract provides a guaranteed minimum
death benefit ("GMDB") to the beneficiary if any owner dies 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 any owner dies (or the annuitant if any owner is a non-natural
person) before the annuity date, Federal tax law generally requires us to
distribute the entire contract value within five years of the 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
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.
Generally, death benefit proceeds, including any Estate Enhancer benefit, are
taxable to the extent of gain. (See "Federal Income Taxes -- Taxation of Death
Benefit Proceeds".)
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, 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.
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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
(i.e., spousal continuation) 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.
THE PAYMENT OF THE DEATH BENEFIT IS SUBJECT TO OUR FINANCIAL STRENGTH AND
CLAIMS-PAYING ABILITY.
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.
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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.
For all Contracts, the annuity date must be at least twelve months after the
contract date.
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). We reserve the right to change the default annuity payment
option at our discretion. You may change the annuity option before the annuity
date. We reserve the right to limit annuity options available to owners of
qualified contracts to comply with the Internal Revenue Code or regulations
under it. For qualified contracts, please note that annuity options without a
life contingency (e.g., payments of a fixed amount or for a fixed period) may
not satisfy required minimum distribution rules. Consult a tax advisor before
electing one of these options.
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. The
rates will never be less than those shown in the Contract.
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 interest at
an annual rate not to exceed the maximum permitted in your state. Likewise, if
we underpaid any amount as the result of a misstatement, we will correct it with
the next payment with interest at an annual rate not to exceed the maximum
permitted in your state.
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
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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.
*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
---------------
* 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.
34
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 you die 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 you die 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 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.
---------------
* 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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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 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.
For purposes of Section 72(s), if any owner is a non-natural person, the death
of any annuitant will be treated as the death of an owner.
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
36
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 non-qualified 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. 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.
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.
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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.
FEDERAL ESTATE TAXES
While no attempt is being made to discuss the federal estate tax implications of
the Contract, a purchaser should keep in mind that the value of an annuity
contract owned by a decedent and payable to a beneficiary by virtue of surviving
the decedent is included in the decedent's gross estate. Depending on the terms
of the annuity contract, the value of the annuity included in the gross estate
may be the value of the lump sum payment payable to the designated beneficiary
or the actuarial value of the payments to be received by the beneficiary.
Consult an estate planning advisor for more information.
GENERATION-SKIPPING TRANSFER TAX
Under certain circumstances, the IRC may impose a "generation skipping transfer
tax" when all or part of an annuity contract is transferred to, or a death
benefit is paid to, an individual two or more generations younger than the
owner. Regulations issued under the IRC may require us to deduct the tax from
your Contract, or from any applicable payment, and pay it directly to the IRS.
ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal withholding tax on taxable distributions from annuity contracts at
a 30% rate, unless a lower treaty rate applies. In addition, purchasers may be
subject to state and/or municipal taxes and taxes that may be imposed by the
purchaser's country of citizenship or residence.
38
Prospective purchasers are advised to consult with a qualified tax advisor
regarding U.S. state and foreign taxation with respect to an annuity contract
purchase.
OPTIONAL BENEFIT RIDERS
It is possible that the IRS may take the position that fees deducted for certain
optional benefit riders, such as the Estate Enhancer, are deemed to be taxable
distributions to you. In particular, the Internal Revenue Service may treat fees
deducted for the optional benefits as taxable withdrawals, which might also be
subject to a tax penalty if withdrawn prior to age 59 1/2. Although we do not
believe that the fees associated or any optional benefit provided under the
Contract should be treated as taxable withdrawals, you should consult your tax
advisor prior to selecting any optional benefit under the Contract.
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 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.
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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 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.
Note: The Treasury made changes to the Required Minimum Distribution ("RMD")
rules which may impact the amount of RMD, if any, you must take. Specifically,
if your qualified annuity provides a guaranteed benefit (GMDB and/or Estate
Enhancer), the actuarial present value of the benefit(s) you elected may be
included in your total RMD calculation.
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.
Taxable "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 or hardship 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
40
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. As noted above, the
value of certain death benefits and other benefits under the Contract may need
to be considered in calculating minimum required distributions.
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
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.
41
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.
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 and
the District Annuity Specialists a portion of the commissions it receives from
the Merrill Lynch Life Agencies 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 0.13% 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.
42
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 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 Merrill Lynch Life Insurance Company as of December
31, 2006 and 2005, and for each of the three years in the period ended December
31, 2006 have been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report dated March 2, 2007 (which
report expresses an unqualified opinion and includes an explanatory paragraph
for the change in accounting method in 2004 for long-duration contracts to
conform to Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Non-Traditional Long Duration Contracts and for Separate
Accounts"), and the financial statements of the Merrill Lynch Life Variable
Annuity Separate Account C as of December 31, 2006, and for each of the two
years in the period ended December 31, 2006 have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their
report dated March 30, 2007, which reports are both incorporated by reference in
this Prospectus and included in the Statement of Additional Information and have
been so included and incorporated by reference in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing. The
principal business address of Deloitte & Touche LLP 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.
43
ACCUMULATION UNIT VALUES
(CONDENSED FINANCIAL INFORMATION)+
ROSZEL/LORD ABBETT
LARGE CAP VALUE PORTFOLIO
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value
at beginning of period
(a).................... $ 13.98 $ 13.92 $ 12.59 $ 9.87 $ 10.00
(2) Accumulation unit value
at end of period....... $ 16.23 $ 13.98 $ 13.92 $ 12.59 $ 9.87
(3) Number of accumulation
units outstanding at
end of period.......... 522,344.4 647,042.7 881,868.7 842,418.5 561,445.4
ROSZEL/DAVIS
LARGE CAP VALUE PORTFOLIO(1)
------------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- ---------- --------- -----------
(1) Accumulation unit value
at beginning of period
(a).................... $ 12.27 $ 12.00 $ 10.70 $ 8.43 $ 10.00
(2) Accumulation unit value
at end of period....... $ 14.44 $ 12.27 $ 12.00 $ 10.70 $ 8.43
(3) Number of accumulation
units outstanding at
end of period.......... 181,493.8 240,940.7 247,424.2 296,473.5 259,622.2
ROSZEL/BLACKROCK
RELATIVE VALUE PORTFOLIO(2)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
----------- --------- --------- -------- --------
(1) Accumulation unit value
at beginning of period
(a).................... $ 13.03 $ 12.99 $ 11.61 $ 9.35 $ 10.00
(2) Accumulation unit value
at end of period....... $ 15.34 $ 13.03 $ 12.99 $ 11.61 $ 9.35
(3) Number of accumulation
units outstanding at
end of period.......... 777,953.6 993,495.5 1,158,576.1 1,345,902.6 657,788.5
ROSZEL/FAYEZ SAROFIM
LARGE CAP CORE PORTFOLIO(3)
--------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
-------- --------- --------- --------- ---------
(1) Accumulation unit value
at beginning of period
(a).................... $ 11.73 $ 11.54 $ 11.17 $ 8.96 $ 10.00
(2) Accumulation unit value
at end of period....... $ 13.02 $ 11.73 $ 11.54 $ 11.17 $ 8.96
(3) Number of accumulation
units outstanding at
end of period.......... 100,865.5 123,509.9 72,152.2 77,179.9 47,199.5
ROSZEL/ALLIANCEBERNSTEIN
LARGE CAP CORE PORTFOLIO(4)
----------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- ---------- ---------
(1) Accumulation unit value
at beginning of period
(a)...................... $ 11.66 $ 10.99 $ 10.79 $ 8.80 $ 10.00
(2) Accumulation unit value
at end of period......... $ 11.66 $ 11.66 $ 10.99 $ 10.79 $ 8.80
(3) Number of accumulation
units outstanding at end
of period................ 124,302.5 158,518.6 222,628.1 219,346.1 170,151.2
ROSZEL/LOOMIS SAYLES
LARGE CAP GROWTH PORTFOLIO(5)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value
at beginning of period
(a)...................... $ 12.56 $ 11.60 $ 10.87 $ 8.83 $ 10.00
(2) Accumulation unit value
at end of period......... $ 11.83 $ 12.56 $ 11.60 $ 10.87 $ 8.83
(3) Number of accumulation
units outstanding at end
of period................ 106,896.1 100,078.0 107,902.8 121,268.1 51,714.8
ROSZEL/RITTENHOUSE
LARGE CAP GROWTH PORTFOLIO
----------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- ---------- ---------
(1) Accumulation unit value
at beginning of period
(a)...................... $ 10.66 $ 10.82 $ 10.59 $ 9.03 $ 10.00
(2) Accumulation unit value
at end of period......... $ 11.49 $ 10.66 $ 10.82 $ 10.59 $ 9.03
(3) Number of accumulation
units outstanding at end
of period................ 638,455.7 811,647.5 989,376.5 1,080,182.2 721,945.5
ROSZEL/MARSICO
LARGE CAP GROWTH PORTFOLIO(6)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value
at beginning of period
(a)...................... $ 11.43 $ 11.31 $ 11.02 $ 8.89 $ 10.00
(2) Accumulation unit value
at end of period......... $ 11.86 $ 11.43 $ 11.31 $ 11.02 $ 8.89
(3) Number of accumulation
units outstanding at end
of period................ 348,175.6 350,553.4 364,051.6 349,649.5 252,860.7
ROSZEL/CADENCE
MID CAP GROWTH PORTFOLIO(7)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)..... $ 12.59 $ 11.39 $ 10.91 $ 8.54 $ 10.00
(2) Accumulation unit value at
end of period............... $ 13.30 $ 12.59 $ 11.39 $ 10.91 $ 8.54
(3) Number of accumulation units
outstanding at end of
period...................... 166,242.3 210.574.1 287,020.89 339,646.8 205,429.9
ROSZEL/KAYNE ANDERSON RUDNICK
SMALL-MID CAP VALUE PORTFOLIO(8)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)..... $ 10.97 $ 11.12 $ 10.26 $ 7.89 $ 10.00
(2) Accumulation unit value at
end of period............... $ 12.14 $ 10.97 $ 11.12 $ 10.26 $ 7.89
(3) Number of accumulation units
outstanding at end of
period...................... 218,442.8 285,253.4 364,100.1 474,470.8 386,559.5
ROSZEL/NWQ
SMALL CAP VALUE PORTFOLIO
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)..... $ 16.12 $ 14.68 $ 11.54 $ 7.67 $ 10.00
(2) Accumulation unit value at
end of period............... $ 19.00 $ 16.12 $ 14.68 $ 11.54 $ 7.67
(3) Number of accumulation units
outstanding at end of
period...................... 270,872.7 355,997.2 411,974.0 441,030.3 257,884.2
ROSZEL/DELAWARE
SMALL-MID CAP GROWTH PORTFOLIO
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value at
beginning of period (a)..... $ 11.82 $ 11.17 $ 10.10 $ 7.55 $ 10.00
(2) Accumulation unit value at
end of period............... $ 12.75 $ 11.82 $ 11.17 $ 10.10 $ 7.55
(3) Number of accumulation units
outstanding at end of
period...................... 211,753.6 283,372.0 298,145.4 238,053.1 175.853.5
ROSZEL/LAZARD
INTERNATIONAL PORTFOLIO
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit
value at beginning
of period (a)...... $ 13.63 $ 12.80 $ 11.21 $ 8.85 $ 10.00
(2) Accumulation unit
value at end of
period............. $ 16.44 $ 13.63 $ 12.80 $ 11.21 $ 8.85
(3) Number of
accumulation units
outstanding at end
of period.......... 313,233.3 365,553.3 368,052.4 320,651.9 117,103.8
ROSZEL/JPMORGAN
INTERNATIONAL EQUITY PORTFOLIO(9)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02**
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit
value at beginning
of period (a)...... $ 14.61 $ 12.73 $ 11.60 $ 8.83 $ 10.00
(2) Accumulation unit
value at end of
period............. $ 17.43 $ 14.61 $ 12.73 $ 11.60 $ 8.83
(3) Number of
accumulation units
outstanding at end
of period.......... 205,663.7 221,032.3 232,552.4 291,619.8 263,792.2
ROSZEL/LORD ABBETT
GOVERNMENT SECURITIES PORTFOLIO
-----------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- ----------- ---------
(1) Accumulation unit
value at beginning
of period (a)...... $ 10.72 $ 10.68 $ 10.47 $ 10.47 $ 10.00
(2) Accumulation unit
value at end of
period............. $ 10.91 $ 10.72 $ 10.68 $ 10.47 $ 10.47
(3) Number of
accumulation units
outstanding at end
of period.......... 741,282.2 822,547.3 926,780.4 1,189,858.0 867,091.4
ROSZEL/BLACKROCK
FIXED-INCOME PORTFOLIO(10)
-------------------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
----------- ----------- ----------- ----------- -----------
(1) Accumulation unit
value at beginning
of period (a)...... $ 10.16 $ 10.25 $ 10.23 $ 10.18 $ 10.00
(2) Accumulation unit
value at end of
period............. $ 10.29 $ 10.16 $ 10.25 $ 10.23 $ 10.18
(3) Number of
accumulation units
outstanding at end
of period.......... 1,007,873.2 1,285,774.6 1,490,706.8 1,730,141.3 1,108,135.3
44
BLACKROCK
MONEY MARKET V.I. FUND(11)
---------------------------------------------------------
1/1/06 1/1/05 1/1/04 1/1/03 7/1/02
TO TO TO TO TO
12/31/06 12/31/05 12/31/04 12/31/03 12/31/02
--------- --------- --------- --------- ---------
(1) Accumulation unit value at beginning of period (a)...... $ 9.85 $ 9.77 $ 9.86 $ 9.97 $ 10.00
(2) Accumulation unit value at end of period................ $ 10.11 $ 9.85 $ 9,77 $ 9.86 $ 9.97
(3) Number of accumulation units outstanding at end of
period.................................................. 199,035.0 314,194.7 225,213.6 336,476.8 852,609.8
---------------
+ Merrill Lynch Life commenced sales of Consults Annuity on July 1, 2002.
1 Roszel/Davis Large Cap Value Portfolio was formerly named Roszel/BKF Large
Cap Value Portfolio. Prior to that, it was named Roszel/Levin Large Cap Value
Portfolio.
2 Roszel/BlackRock Relative Value Portfolio was formerly named Roszel/MLIM
Relative Value Portfolio.
3 Roszel/Fayez Sarofim Large Cap Core Portfolio was formerly named Roszel/Sound
Large Cap Core Portfolio.
4 Roszel/AllianceBernstein Large Cap Core Portfolio was formerly named
Roszel/INVESCO-NAM Large Cap Core Portfolio.
5 Roszel/Loomis Sayles Large Cap Growth Portfolio was formerly named
Roszel/Nicholas-Applegate Large Cap Growth Portfolio.
6 Roszel/Marsico Large Cap Growth Portfolio was formerly named Roszel/Seneca
Large Cap Growth Portfolio.
7 Roszel/Cadence Mid Cap Growth Portfolio was formerly named Roszel/Franklin
Mid Cap Growth Portfolio. Prior to that, it was named Roszel/Seneca Mid Cap
Growth Portfolio.
8 Roszel/Kayne Anderson Rudnick Small-Mid Cap Value Portfolio was formerly
named Roszel/Kayne Anderson Rudnick Mid Cap Value Portfolio. Prior to that,
it was named Roszel/Valenzuela Mid Cap Value Portfolio.
9 Roszel/JPMorgan International Equity Portfolio was formerly named
Roszel/William Blair International Portfolio. Prior to that, it was named
Roszel/Credit Suisse International Portfolio.
10 Roszel/BlackRock Fixed-Income Portfolio was formerly named Roszel/MLIM
Fixed-Income Portfolio.
11 Roszel/BlackRock Money Market V.I. Fund was formerly named Roszel/MLIM
Domestic Money Market V.I. Fund.
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
Keep Well Agreement
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
EXAMPLE OF 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, 2007
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.
DEATH BENEFIT
TRANSACTIONS CONTRACT PREM. COMP. (GREATER OF
------------------ ADJ. VALUE AT 5% CV AND
DATE PREM. WITHDR. WITHDR. (CV) (GMDB) GMDB)
---- -------- ------- ------- -------- ----------- -------------
9/1/07 THE CONTRACT IS ISSUED $100,000 $100,000 $100,000 $100,000
9/1/08 FIRST CONTRACT ANNIVERSARY $103,500 $105,000 $105,000
Assume contract value increased by $3,500 due to
positive investment performance.
1/1/09 OWNER TAKES A $5,250 WITHDRAWAL* $5,250 $5,082 $96,250 $101,644 $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 9/1/08?
$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 caret (243/365)) = $5,082
GMDB as of 1/1/09 = GMDB as of 9/1/08 compounded
at 5% interest for the number of days since the
last anniversary less adjusted withdrawals =
$105,000 X 1.05 caret (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
9/1/2009 below)
9/1/09 SECOND CONTRACT ANNIVERSARY
Assume contract value increased by $5,000 due to $101,250 $105,000 $105,000
positive investment performance
GMDB as of 9/1/09 = GMDB as of 9/1/08 compounded
at
5% interest less the adjusted
withdrawal as of 1/1/09
compounded at
5% interest for the number of
days
since the withdrawal
= 9/1/08 GMDB X 1.05 - adj.
withdrawal X 1.05 caret
(243/365) = $105,000 X 1.05 -
$5,082 X 1.05 caret (243/365)
= $110,250
- $5,250 = $105,000
Note that $5,250 withdrawal as of 1/1/09 reduces the
9/1/2009 GMDB dollar for dollar.
* IF INSTEAD THE OWNER TOOK A WITHDRAWAL OF $10,000 $10,000 $10,515 $91,500 $ 96,211 $ 96,211
AS OF 1/1/2009 THEN:
Is withdrawal equal to or less than 5% of GMDB as
of 9/1/08
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 caret (122/365) - Adj.
withdr. = $106,726 - $10,515 = $96,211
A-2
APPENDIX B
EXAMPLE OF 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
EXAMPLE OF 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,
2007 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 OF MAXIMUM ANNIVERSARY VALUE GMDB
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, 2007 and a subsequent premium of $10,000 on April 1, 2009. You also
make a withdrawal of $50,000 on May 1, 2009. 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
---- -------- ------- --------- ------------ --------
10/01/07 THE CONTRACT IS ISSUED $100,000 $100,000 $0 $100,000
MAV is $0 until first contract anniversary
10/01/08 FIRST CONTRACT ANNIVERSARY $100,000 $110,000 $110,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2008 = Contract value on
10/1/2008 = $110,000
MAV = greatest of anniversary values = $110,000
04/01/09 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 10/1/2008 = contract value on
10/1/2008 + premiums added since that anniversary = $110,000
+ $10,000 = $120,000
MAV = greatest of anniversary values = $120,000
05/01/09 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 10/1/2008 = contract value on
10/1/2008 + 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
10/01/09 SECOND CONTRACT ANNIVERSARY $ 50,000 $ 60,000 $55,000
Assume contract value increased by $5,000 due to positive
investment performance
Anniversary value for 10/1/2008 = $60,000
Anniversary value for 10/1/2009 = contract value on
10/1/2008 = $55,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000) = $60,000
10/01/10 THIRD CONTRACT ANNIVERSARY $ 50,000 $ 65,000 $65,000
Assume contract value increased by $10,000 due to positive
investment performance
Anniversary value for 10/1/2008 = $60,000
Anniversary value for 10/1/2009 = contract value on
10/1/2009 = $55,000
Anniversary value for 10/1/2010 = contract value on
10/1/2010 = $65,000
MAV = greatest of anniversary values = maximum ($60,000,
$55,000, $65,000) = $65,000
DATE DEATH BENEFIT
---- -----------------------------------
10/01/07 $100,000 (maximum of (A), (B), (C))
10/01/08 $110,000 (maximum of (A), (B), (C))
04/01/09 $120,000 (maximum of (A), (B), (C))
05/01/09 $ 60,000 (maximum of (A), (B), (C))
10/01/09 $ 60,000 (maximum of (A), (B), (C))
10/01/10 $ 65,000 (maximum of (A), (B), (C))
D-1
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2007
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
4802 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, 2007, 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
Keep Well Agreement......................................... 3
CALCULATION OF YIELDS AND TOTAL RETURNS..................... 3
Money Market Yield.......................................... 3
Other Subaccount Yields..................................... 4
Total Returns............................................... 5
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, 2006, 2005, and 2004, Distributor received
$12,759, $27,731, and $102,102, respectively, in connection with the sale of the
Contracts. 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, 2006, 2005, and 2004, Merrill Lynch Life
paid administrative services fees of $29.7 million, $33.1 million, and $33.2
million respectively.
KEEP WELL AGREEMENT
On May 14, 2003, Merrill Lynch & Co., Inc. ("Merrill Lynch & Co.") entered into
a "keep well" agreement with Merrill Lynch Life. Under the agreement, at all
times that Merrill Lynch Life is a direct or indirect wholly owned subsidiary of
Merrill Lynch & Co., Merrill Lynch & Co. will ensure that Merrill Lynch Life
maintains statutory net worth in excess of certain minimum surveillance levels.
At December 31, 2006, the statutory net worth of Merrill Lynch Life was in
excess of these minimum surveillance levels. Contract owners have certain rights
under the agreement to enforce the provisions of the agreement. However, the
agreement does not guarantee, directly or indirectly, any indebtedness,
liability, or obligation of Merrill Lynch Life. The agreement may be modified,
amended, or terminated only by written agreement of the parties, but any such
modification, amendment, or termination may not materially and adversely affect
any contract owners at that time unless the respective contract owners consent
in writing.
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 BlackRock Money Market V.I.
Subaccount for a 7-day period in a manner that does not take into
3
consideration any realized or unrealized gains or losses on shares of the
underlying Funds or on their 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, but not the Additional Death Benefit
Charge. 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 BlackRock 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 BlackRock Money Market V.I. Subaccount will be lower than the yield for the
corresponding underlying Fund.
The yields on amounts held in the BlackRock 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 BlackRock
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 BlackRock 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
4
by the subaccount over a specified 30-day or one-month period. Because the yield
is annualized, the yield 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/Davis Large Cap Value Portfolio(1) July 1, 2002 July 1, 2002
Roszel/BlackRock Relative Value Portfolio(2) July 1, 2002 July 1, 2002
Roszel/Fayez Sarofim Large Cap Core Portfolio July 1, 2002 July 1, 2002
Roszel/AllianceBernstein Large Cap Core Portfolio July 1, 2002 July 1, 2002
Roszel/Loomis Sayles Large Cap Growth Portfolio July 1, 2002 July 1, 2002
5
FUND SUBACCOUNT
INCEPTION INCEPTION
FUND DATE DATE
---- ----------------- ------------
Roszel/Rittenhouse Large Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/Marsico Large Cap Growth Portfolio July 1, 2002 July 1, 2002
Roszel/Kayne Anderson Rudnick Small-Mid Cap Value
Portfolio(3) July 1, 2002 July 1, 2002
Roszel/Cadence Mid Cap Growth Portfolio(4) 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/JP Morgan International Equity Portfolio(5) July 1, 2002 July 1, 2002
Roszel/Lord Abbett Government Securities Portfolio July 1, 2002 July 1, 2002
Roszel/BlackRock Fixed-Income Portfolio(2) July 1, 2002 July 1, 2002
BlackRock Money Market V.I. Fund(6) February 21, 1992 July 1, 2002
---------------
(1) Effective September 15, 2006, Davis Selected Advisers, L.P. replaced BKF
Asset Management Company as subadviser.
(2) Effective October 2, 2006, BlackRock Investment Management, LLC replaced
Merrill Lynch Investment Managers, L.P. as subadviser.
(3) This subaccount is closed to allocations of premium and incoming transfers
of contract value for Contracts issued on or after June 23, 2006.
(4) Effective April 1, 2007, Cadence Capital Management LLC replaced Franklin
Portfolio Advisors, a division of Franklin Templeton Portfolio Advisors,
Inc., as subadviser.
(5) Effective January 5, 2007, JPMorgan Investment Management, Inc. replaced
William Blair & Company, L.L.C. as subadviser, and the Fund was renamed
JPMorgan International Equity Portfolio.
(6) Effective October 2, 2006, BlackRock Advisors, LLC replaced Merrill Lynch
Investment Managers, L.P. as investment adviser and BlackRock Institutional
Management Corporation became subadviser.
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.
6
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 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 investment divisions disclosed in
Note 1 which comprise the Merrill Lynch Life Variable
Annuity Separate Account C (the "Account"), as of December
31, 2006, 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 the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The
Account is not required to have, nor were we engaged to
perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the
effectiveness of the Account's internal control over
financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles
used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
Our procedures included confirmation of investment divisions
owned as of December 31, 2006, by correspondence with the
custodian. 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 each of the
investment divisions constituting the Merrill Lynch Life
Variable Annuity Separate Account C as of December 31, 2006,
the results of each of their operations and 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.
/s/ Deloitte & Touche LLP
March 30, 2007
MERRILL LYNCH LIFE VARIABLE ANNUITY SEPARATE ACCOUNT C
MERRILL LYNCH LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 2006
Divisions Investing In
========================================================
Roszel /
BlackRock William Roszel /
Money Blair Lazard
Market International International
V.I. Fund a Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
BlackRock Money Market V.I. Fund, 2,012 shares
(Cost $2,012) $ 2,012 $ $
Roszel / William Blair International Portfolio, 279 shares
(Cost $3,073) 3,585
Roszel / Lazard International Portfolio, 351 shares
(Cost $4,445) 5,151
------------------ ------------------ ------------------
Total Assets $ 2,012 $ 3,585 $ 5,151
================== ================== ==================
Net Assets
Accumulation Units $ 2,012 $ 3,585 $ 5,151
================== ================== ==================
a Formerly Mercury Domestic Money Market V.I. Fund. Change effective September 30, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Davis Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio b,c Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Roszel / Davis Large Cap Value Portfolio, 249 shares
(Cost $2,452) $ 2,620 $ $
Roszel / Lord Abbett Government Securities Portfolio, 797 shares
(Cost $8,212) 8,085
Roszel / Lord Abbett Large Cap Value Portfolio, 698 shares
(Cost $8,621) 8,479
------------------ ------------------ ------------------
Total Assets $ 2,620 $ 8,085 $ 8,479
================== ================== ==================
Net Assets
Accumulation Units $ 2,620 $ 8,085 $ 8,479
================== ================== ==================
b Formerly Roszel / Levin Large Cap Value Portfolio. Change effective January 6, 2006.
c Formerly Roszel / BFK Large Cap Value Portfolio. Change effective September 15, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
BlackRock BlackRock Alliance
Fixed- Relative Large Cap
Income Value Core
Portfolio d Portfolio e Portfolio
================== ================== ==================
(In thousands)
Assets
Roszel / BlackRock Fixed-Income Portfolio, 1,065 shares
(Cost $10,708) $ 10,370 $ $
Roszel / BlackRock Relative Value Portfolio, 985 shares
(Cost $11,012) 11,934
Roszel / Alliance Large Cap Core Portfolio, 150 shares
(Cost $1,568) 1,449
------------------ ------------------ ------------------
Total Assets $ 10,370 $ 11,934 $ 1,449
================== ================== ==================
Net Assets
Accumulation Units $ 10,370 $ 11,934 $ 1,449
================== ================== ==================
d Formerly Roszel / MLIM Fixed-Income Portfolio. Change effective September 30, 2006.
e Formerly Roszel / MLIM Relative Value Portfolio. Change effective September 30, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Loomis Sayles NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Roszel / Delaware Small-Mid Cap Growth Portfolio, 220 shares
(Cost $2,479) $ 2,700 $ $
Roszel / Loomis Sayles Large Cap Growth Portfolio, 127 shares
(Cost $1,377) 1,264
Roszel / NWQ Small Cap Value Portfolio, 420 shares
(Cost $5,146) 5,146
------------------ ------------------ ------------------
Total Assets $ 2,700 $ 1,264 $ 5,146
================== ================== ==================
Net Assets
Accumulation Units $ 2,700 $ 1,264 $ 5,146
================== ================== ==================
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Marsico Franklin
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Assets
Roszel / Rittenhouse Large Cap Growth Portfolio, 696 shares
(Cost $7,299) $ 7,338 $ $
Roszel / Marsico Large Cap Growth Portfolio, 366 shares
(Cost $4,007) 4,130
Roszel / Franklin Mid Cap Growth Portfolio, 225 shares
(Cost $2,333) 2,211
------------------ ------------------ ------------------
Total Assets $ 7,338 $ 4,130 $ 2,211
================== ================== ==================
Net Assets
Accumulation Units $ 7,338 $ 4,130 $ 2,211
================== ================== ==================
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, 2006
Divisions Investing In
=====================================
Roszel / Roszel /
Fayez Sarofim Kayne Anderson
Large Cap Rudnick Small-Mid
Core Cap Value
Portfolio Portfolio
================== ==================
(In thousands)
Assets
Roszel / Fayez Sarofim Large Cap Core Portfolio, 111 shares
(Cost $1,247) $ 1,313 $
Roszel / Kayne Anderson Rudnick Small-Mid Cap Value Portfolio, 333 shares
(Cost $2,951) 2,652
------------------ ------------------
Total Assets $ 1,313 $ 2,652
================== ==================
Net Assets
Accumulation Units $ 1,313 $ 2,652
================== ==================
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, 2006
Divisions Investing In
========================================================
Roszel /
BlackRock William Roszel /
Money Blair Lazard
Market International International
V.I. Fund a Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 104 $ 87 $ 75
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (44) (68) (97)
------------------ ------------------ ------------------
Net Investment Income (Loss) 60 19 (22)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 0 77 326
Net Change In Unrealized Depreciation
During the Year 0 468 253
Capital Gain Distributions (Note 2) 0 51 427
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 0 596 1,006
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 60 615 984
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 1,232 25 54
Contract Owner Withdrawals (2,885) (707) (923)
Net Transfers In (Out) (Note 3) 511 424 52
Contract Charges (Note 7) (1) (1) 0
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (1,143) (259) (817)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (1,083) 356 167
Net Assets, Beginning of Period 3,095 3,229 4,984
------------------ ------------------ ------------------
Net Assets, End of Period $ 2,012 $ 3,585 $ 5,151
================== ================== ==================
a Formerly Mercury Domestic Money Market V.I. Fund. Change effective September 30, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Davis Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio b,c Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 38 $ 360 $ 91
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (51) (149) (161)
------------------ ------------------ ------------------
Net Investment Income (Loss) (13) 211 (70)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 128 (98) 370
Net Change In Unrealized Depreciation
During the Year 106 15 (510)
Capital Gain Distributions (Note 2) 210 0 1,520
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 444 (83) 1,380
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 431 128 1,310
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 9 23 30
Contract Owner Withdrawals (525) (1,169) (1,848)
Net Transfers In (Out) (Note 3) (252) 286 (55)
Contract Charges (Note 7) 0 (2) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (768) (862) (1,874)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (337) (734) (564)
Net Assets, Beginning of Period 2,957 8,819 9,043
------------------ ------------------ ------------------
Net Assets, End of Period $ 2,620 $ 8,085 $ 8,479
================== ================== ==================
b Formerly Roszel / Levin Large Cap Value Portfolio. Change effective January 6, 2006.
c Formerly Roszel / BFK Large Cap Value Portfolio. Change effective September 15, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
BlackRock BlackRock Alliance
Fixed- Relative Large Cap
Income Value Core
Portfolio d Portfolio e Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 426 $ 186 $ 3
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (208) (224) (31)
------------------ ------------------ ------------------
Net Investment Income (Loss) 218 (38) (28)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) (200) 691 (50)
Net Change In Unrealized Depreciation
During the Year 107 (65) (200)
Capital Gain Distributions (Note 2) 0 1,406 237
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (93) 2,032 (13)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 125 1,994 (41)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 67 86 8
Contract Owner Withdrawals (3,088) (2,170) (590)
Net Transfers In (Out) (Note 3) 207 (917) 224
Contract Charges (Note 7) (2) (1) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (2,816) (3,002) (359)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (2,691) (1,008) (400)
Net Assets, Beginning of Period 13,061 12,942 1,849
------------------ ------------------ ------------------
Net Assets, End of Period $ 10,370 $ 11,934 $ 1,449
================== ================== ==================
d Formerly Roszel / MLIM Fixed-Income Portfolio. Change effective September 30, 2006.
e Formerly Roszel / MLIM Relative Value Portfolio. Change effective September 30, 2006.
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Loomis Sayles NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 0 $ 0 $ 20
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (55) (25) (107)
------------------ ------------------ ------------------
Net Investment Income (Loss) (55) (25) (87)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 232 (50) 376
Net Change In Unrealized Depreciation
During the Year (201) (195) (543)
Capital Gain Distributions (Note 2) 246 175 1,225
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 277 (70) 1,058
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 222 (95) 971
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 17 12 35
Contract Owner Withdrawals (505) (185) (1,228)
Net Transfers In (Out) (Note 3) (384) 275 (370)
Contract Charges (Note 7) 0 0 (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (872) 102 (1,564)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (650) 7 (593)
Net Assets, Beginning of Period 3,350 1,257 5,739
------------------ ------------------ ------------------
Net Assets, End of Period $ 2,700 $ 1,264 $ 5,146
================== ================== ==================
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, 2006
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Marsico Franklin
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 24 $ 0 $ 0
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (135) (78) (44)
------------------ ------------------ ------------------
Net Investment Income (Loss) (111) (78) (44)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 313 (5) 47
Net Change In Unrealized Depreciation
During the Year (325) 24 (435)
Capital Gain Distributions (Note 2) 652 197 557
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 640 216 169
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 529 138 125
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 52 88 55
Contract Owner Withdrawals (1,379) (891) (580)
Net Transfers In (Out) (Note 3) (513) 787 (41)
Contract Charges (Note 7) 0 0 0
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (1,840) (16) (566)
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (1,311) 122 (441)
Net Assets, Beginning of Period 8,649 4,008 2,652
------------------ ------------------ ------------------
Net Assets, End of Period $ 7,338 $ 4,130 $ 2,211
================== ================== ==================
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, 2006
Divisions Investing In
=====================================
Roszel / Roszel /
Fayez Sarofim Kayne Anderson
Large Cap Rudnick Small-Mid
Core Cap Value
Portfolio Portfolio
================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 20 $ 29
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (23) (50)
------------------ ------------------
Net Investment Income (Loss) (3) (21)
------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) (14) 85
Net Change In Unrealized Depreciation
During the Year 578 (955)
Capital Gain Distributions (Note 2) 60 661
------------------ ------------------
Net Gain (Loss) on Investments 624 (209)
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 621 (230)
------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 1 28
Contract Owner Withdrawals (169) (628)
Net Transfers In (Out) (Note 3) (588) 354
Contract Charges (Note 7) 0 0
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (756) (246)
------------------ ------------------
Total Increase (Decrease) in Net Assets (135) (476)
Net Assets, Beginning of Period 1,448 3,128
------------------ ------------------
Net Assets, End of Period $ 1,313 $ 2,652
================== ==================
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, 2005
Divisions Investing In
========================================================
Roszel /
BlackRock William Roszel /
Money Blair Lazard
Market International International
V.I. Fund a Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 69 $ 71 $ 58
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (47) (58) (89)
------------------ ------------------ ------------------
Net Investment Income (Loss) 22 13 (31)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 0 268 344
Net Change In Unrealized Depreciation
During the Year 0 (531) (336)
Capital Gain Distributions (Note 2) 0 683 325
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 0 420 333
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 22 433 302
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 2,962 51 101
Contract Owner Withdrawals (582) (640) (816)
Net Transfers In (Out) (Note 3) (1,507) 426 685
Contract Charges (Note 7) 0 (1) 0
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 873 (164) (30)
------------------ ------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 895 269 272
Net Assets, Beginning of Period 2,200 2,960 4,712
------------------ ------------------ ------------------
Net Assets, End of Period $ 3,095 $ 3,229 $ 4,984
================== ================== ==================
a Formerly Mercury Domestic Money Market V.I. Fund. Change effective September 30, 2006.
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, 2005
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Davis Lord Abbett Lord Abbett
Large Cap Government Large Cap
Value Securities Value
Portfolio b,c Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 42 $ 363 $ 93
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (55) (178) (191)
------------------ ------------------ ------------------
Net Investment Income (Loss) (13) 185 (98)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 91 (30) 993
Net Change In Unrealized Depreciation
During the Year (521) (120) (2,024)
Capital Gain Distributions (Note 2) 507 0 1,093
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 77 (150) 62
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 64 35 (36)
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 15 144 51
Contract Owner Withdrawals (265) (1,503) (3,148)
Net Transfers In (Out) (Note 3) 173 243 (100)
Contract Charges (Note 7) 0 (2) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (77) (1,118) (3,198)
------------------ ------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (13) (1,083) (3,234)
Net Assets, Beginning of Period 2,970 9,902 12,277
------------------ ------------------ ------------------
Net Assets, End of Period $ 2,957 $ 8,819 $ 9,043
================== ================== ==================
b Formerly Roszel / Levin Large Cap Value Portfolio. Change effective January 6, 2006.
c Formerly Roszel / BFK Large Cap Value Portfolio. Change effective September 15, 2006.
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, 2005
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
BlackRock BlackRock Alliance
Fixed- Relative Large Cap
Income Value Core
Portfolio d Portfolio e Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 499 $ 235 $ 11
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (262) (254) (40)
------------------ ------------------ ------------------
Net Investment Income (Loss) 237 (19) (29)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) (64) 887 114
Net Change In Unrealized Depreciation
During the Year (299) (2,464) (184)
Capital Gain Distributions (Note 2) 0 1,627 201
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (363) 50 131
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (126) 31 102
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 177 406 54
Contract Owner Withdrawals (1,878) (2,589) (678)
Net Transfers In (Out) (Note 3) (384) 44 (75)
Contract Charges (Note 7) (3) (1) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (2,088) (2,140) (700)
------------------ ------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (2,214) (2,109) (598)
Net Assets, Beginning of Period 15,275 15,051 2,447
------------------ ------------------ ------------------
Net Assets, End of Period $ 13,061 $ 12,942 $ 1,849
================== ================== ==================
d Formerly Roszel / MLIM Fixed-Income Portfolio. Change effective September 30, 2006.
e Formerly Roszel / MLIM Relative Value Portfolio. Change effective September 30, 2006.
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, 2005
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Delaware Loomis Sayles NWQ
Small-Mid Large Cap Small Cap
Cap Growth Growth Value
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 0 $ 1 $ 8
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (62) (21) (108)
------------------ ------------------ ------------------
Net Investment Income (Loss) (62) (20) (100)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 302 105 605
Net Change In Unrealized Depreciation
During the Year (168) (94) (966)
Capital Gain Distributions (Note 2) 119 91 986
------------------ ------------------ ------------------
Net Gain (Loss) on Investments 253 102 625
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 191 82 525
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 37 51 74
Contract Owner Withdrawals (546) (241) (1,035)
Net Transfers In (Out) (Note 3) 337 114 127
Contract Charges (Note 7) 0 0 (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (172) (76) (835)
------------------ ------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets 19 6 (310)
Net Assets, Beginning of Period 3,331 1,251 6,049
------------------ ------------------ ------------------
Net Assets, End of Period $ 3,350 $ 1,257 $ 5,739
================== ================== ==================
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, 2005
Divisions Investing In
========================================================
Roszel / Roszel / Roszel /
Rittenhouse Marsico Franklin
Large Cap Large Cap Mid Cap
Growth Growth Growth
Portfolio Portfolio Portfolio
================== ================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 50 $ 3 $ 0
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (173) (73) (52)
------------------ ------------------ ------------------
Net Investment Income (Loss) (123) (70) (52)
------------------ ------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 435 204 247
Net Change In Unrealized Depreciation
During the Year (981) (302) (15)
Capital Gain Distributions (Note 2) 529 210 89
------------------ ------------------ ------------------
Net Gain (Loss) on Investments (17) 112 321
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (140) 42 269
------------------ ------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 128 31 49
Contract Owner Withdrawals (1,242) (679) (462)
Net Transfers In (Out) (Note 3) (800) 496 (473)
Contract Charges (Note 7) (1) (1) (1)
------------------ ------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions (1,915) (153) (887)
------------------ ------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) 0 0 0
------------------ ------------------ ------------------
Total Increase (Decrease) in Net Assets (2,055) (111) (618)
Net Assets, Beginning of Period 10,704 4,119 3,270
------------------ ------------------ ------------------
Net Assets, End of Period $ 8,649 $ 4,008 $ 2,652
================== ================== ==================
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, 2005
Divisions Investing In
=====================================
Roszel / Roszel /
Fayez Sarofim Kayne Anderson
Large Cap Rudnick Small-Mid
Core Cap Value
Portfolio Portfolio
================== ==================
(In thousands)
Investment Income:
Ordinary Dividends (Note 2) $ 5 $ 0
Investment Expenses:
Asset-Based Insurance Charges (Note 7) (27) (62)
------------------ ------------------
Net Investment Income (Loss) (22) (62)
------------------ ------------------
Realized and Unrealized Gains (Losses)
On Investments:
Net Realized Gains (Losses) (Note 2) 67 284
Net Change In Unrealized Depreciation
During the Year (116) (828)
Capital Gain Distributions (Note 2) 94 538
------------------ ------------------
Net Gain (Loss) on Investments 45 (6)
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 23 (68)
------------------ ------------------
Contract Transactions:
Premiums Received from Contract Owners 38 30
Contract Owner Withdrawals (445) (570)
Net Transfers In (Out) (Note 3) 1,001 (310)
Contract Charges (Note 7) 0 (1)
------------------ ------------------
Net Increase (Decrease) in Net Assets
Resulting from Contract Transactions 594 (851)
------------------ ------------------
Decrease in Amounts Retained
in Separate Account C, net (Note 4) (123) 0
------------------ ------------------
Total Increase (Decrease) in Net Assets 494 (919)
Net Assets, Beginning of Period 954 4,047
------------------ ------------------
Net Assets, End of Period $ 1,448 $ 3,128
================== ==================
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 investment divisions that support one annuity contract
- Consults Annuity. Only investment divisions with
balances at December 31, 2006 appear in the Statements of
Assets and Liabilities and only investment divisions with
activity during the years ended December 31, 2006 or
2005 are shown in the Statements of Operations and
Changes in Net Assets. The investment divisions are as
follows:
BlackRock Money Market V.I. Fund
Roszel/William Blair International Portfolio
Roszel/Alliance Large Cap Core Portfolio
Roszel/Lazard International Portfolio
Roszel/Davis Large Cap Value Portfolio
Roszel/Lord Abbett Government Securities Portfolio
Roszel/Lord Abbett Large Cap Value Portfolio
Roszel/BlackRock Fixed-Income Portfolio
Roszel/BlackRock Relative Value Portfolio
Roszel/Delaware Small-Mid Cap Growth Portfolio
Roszel/Loomis Sayles Large Cap Growth Portfolio
Roszel/NWQ Small Cap Value Portfolio
Roszel/Rittenhouse Large Cap Growth Portfolio
Roszel/Marscio Large Cap Growth Portfolio
Roszel/Franklin Mid Cap Growth Portfolio
Roszel/Fayez Sarofim large Cap Core Portfolio
Roszel/Kayne Anderson Rudnick Small-Mid Cap Value Portfolio
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.
Effective September 30, 2006, Merrill Lynch & Co.
transferred the Merrill Lynch Investment Managers, L.P.
("MLIM") investment management business to BlackRock,
Inc. ("BlackRock") in exchange for approximately half of
the economic interest in the combined firm, including a
45% voting interest. Under this agreement, effective
September 30, 2006, all previous investment divisions
under the investment advisors FAM Series Funds, Inc. and
FAM Variable Series Funds, Inc. merged into investment
advisors BlackRock Series Funds, Inc. and BlackRock
Variable Series Funds, Inc., respectively.
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.
Certain reclassifications and format changes have been
made to prior year amounts to conform to the current year
presentation.
The significant accounting policies and related judgments
underlying the Company's Financial Statements are
summarized below. In applying these policies, management
makes subjective and complex judgments that frequently
require estimates about matters that are inherently
uncertain.
- 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 readily available
market value. Investment transactions are recorded on
the trade date.
- Ordinary dividends and capital gain distributions are
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.
- All premiums and contract owner withdrawals are applied
as described in the prospectus.
- Accumulation units are units of measure used to
determine the value of an interest in the Divisions
during the accumulation period. The accumulation unit
value is the value of an accumulation unit during a
valuation period determined for each Division as of the
close of trading on each day the New York Stock
Exchange is open.
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) and other Contract benefits.
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
During 2005, Merrill Lynch Life held $123,000 in net
assets in Separate Account C which was representative of
an investment by Merrill Lynch Life in certain investment
divisions to facilitate the establishment of those
investment divisions; however, as of December 30, 2005,
the entire investment was sold. 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, 2006 were as
follows:
(In thousands)
Purchases Sales
------------------ ------------------
BlackRock Money Market V.I. Fund $ 3,888 $ 4,971
Roszel / William Blair International Portfolio 1,066 1,256
Roszel / Lazard International Portfolio 1,326 1,739
Roszel / Davis Large Cap Value Portfolio 343 914
Roszel / Lord Abbett Government Securities Portfolio 1,651 2,302
Roszel / Lord Abbett Large Cap Value Portfolio 2,472 2,897
Roszel / BlackRock Fixed-Income Portfolio 1,354 3,952
Roszel / BlackRock Relative Value Portfolio 1,975 3,609
Roszel / Alliance Large Cap Core Portfolio 657 806
Roszel / Delaware Small-Mid Cap Growth Portfolio 611 1,293
Roszel / Loomis Sayles Large Cap Growth Portfolio 1,045 792
Roszel / NWQ Small Cap Value Portfolio 1,841 2,267
Roszel / Rittenhouse Large Cap Growth Portfolio 1,873 3,171
Roszel / Marsico Large Cap Growth Portfolio 1,950 1,847
Roszel / Franklin Mid Cap Growth Portfolio 789 841
Roszel / Fayez Sarofim Large Cap Core Portfolio 596 817
Roszel / Kayne Anderson Rudnick Small-Mid Cap Value Portfolio 1,006 1,088
------------------ ------------------
$ 24,443 $ 34,562
================== ==================
6. UNIT VALUES
The following is a summary of units outstanding, unit values and net assets for variable annuity contracts. In addition, the
following ratios and returns are provided:
Investment income ratio:
------------------
The investment income ratio represents the dividends, excluding 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 reduction 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.
Expense ratio:
------------------
The expense ratio represents the annualized contract expenses of the separate accounts, consisting primarily of mortality and
expense charges, for each period indicated. These 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.
Total return:
------------------
The total return include changes in the value of the underlying mutual fund, which includes expenses assessed through the
reduction of unit values. These returns do not include any expenses assessed through the redemption of units. Investment
divisions with a date notation indicated 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)
BlackRock Money Market V.I. Fund
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 199 $ 10.11 $ 2,012 4.37% 1.85% 2.63%
2005 314 9.85 3,095 2.72 1.85 0.82
2004 225 9.77 2,200 0.86 1.85 -0.93
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 / William Blair International Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 206 $ 17.43 $ 3,585 2.37% 1.85% 19.31%
2005 221 14.61 3,229 2.26 1.85 14.77
2004 233 12.73 2,960 1.62 1.85 9.69
2003 292 11.60 3,384 0.20 1.85 31.46
2002 264 8.83 2,328 0.00 1.85 -11.72
6. UNIT VALUES (Continued)
Roszel / Lazard International Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 313 $ 16.44 $ 5,151 1.43% 1.85% 20.61%
2005 366 13.63 4,984 1.21 1.85 6.49
2004 368 12.80 4,712 0.58 1.85 14.16
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 / Davis Large Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 181 $ 14.44 $ 2,620 1.38% 1.85% 17.62%
2005 241 12.27 2,957 1.41 1.85 2.25
2004 247 12.00 2,970 0.96 1.85 12.20
2003 297 10.70 3,172 0.62 1.85 26.89
2002 260 8.43 2,188 0.00 1.85 -15.69
Roszel / Lord Abbett Government Securities Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 741 $ 10.91 $ 8,085 4.47% 1.85% 1.72%
2005 823 10.72 8,819 3.77 1.85 0.35
2004 927 10.68 9,902 3.27 1.85 2.10
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
---------------------------------------------------------------------------------------
2006 522 $ 16.23 $ 8,479 1.05% 1.85% 16.14%
2005 647 13.98 9,043 0.90 1.85 0.39
2004 882 13.92 12,277 0.43 1.85 10.55
2003 842 12.59 10,609 0.17 1.85 27.62
2002 561 9.87 5,540 0.00 1.85 -1.32
6. UNIT VALUES (Continued)
Roszel / BlackRock Fixed-Income Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 1,008 $ 10.29 $ 10,370 3.79% 1.85% 1.28%
2005 1,286 10.16 13,061 3.52 1.85 -0.87
2004 1,491 10.25 15,275 2.89 1.85 0.17
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 / BlackRock Relative Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 778 $ 15.34 $ 11,934 1.54% 1.85% 17.76%
2005 993 13.03 12,942 1.71 1.85 0.28
2004 1,159 12.99 15,051 1.09 1.85 11.94
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 / Alliance Large Cap Core Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 124 $ 11.66 $ 1,449 0.18% 1.85% -0.02%
2005 159 11.66 1,849 0.51 1.85 6.07
2004 223 10.99 2,447 0.36 1.85 1.90
2003 219 10.79 2,367 0.24 1.85 22.64
2002 170 8.80 1,497 0.00 1.85 -12.02
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
---------------------------------------------------------------------------------------
2006 212 $ 12.75 $ 2,700 0.00% 1.85% 7.84%
2005 283 11.82 3,350 0.00 1.85 5.82
2004 298 11.17 3,331 0.00 1.85 10.65
2003 238 10.10 2,404 0.00 1.85 33.76
2002 176 7.55 1,327 0.00 1.85 -24.51
6. UNIT VALUES (Continued)
Roszel / Loomis Sayles Large Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 107 $ 11.83 $ 1,264 0.00% 1.85% -5.80%
2005 100 12.56 1,257 0.09 1.85 8.28
2004 108 11.60 1,251 0.00 1.85 6.71
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
---------------------------------------------------------------------------------------
2006 271 $ 19.00 $ 5,146 0.35% 1.85% 17.83%
2005 356 16.12 5,739 0.14 1.85 9.82
2004 412 14.68 6,049 0.14 1.85 27.27
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
---------------------------------------------------------------------------------------
2006 638 $ 11.49 $ 7,338 0.33% 1.85% 7.86%
2005 812 10.66 8,649 0.53 1.85 -1.50
2004 989 10.82 10,704 0.13 1.85 2.17
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 / Marsico Large Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 348 $ 11.86 $ 4,130 0.00% 1.85% 3.75%
2005 351 11.43 4,008 0.08 1.85 1.04
2004 364 11.31 4,119 0.02 1.85 2.70
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 / Franklin Mid Cap Growth Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 166 $ 13.30 $ 2,211 0.00% 1.85% 5.63%
2005 211 12.59 2,652 0.00 1.85 10.56
2004 287 11.39 3,270 0.00 1.85 4.38
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 / Fayez Sarofim Large Cap Core Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 101 $ 13.02 $ 1,313 1.61% 1.85% 11.03%
2005 124 11.73 1,448 0.34 1.85 1.63
2004 72 11.54 833 0.26 1.85 3.33
2003 77 11.17 862 0.62 1.85 24.68
2002 47 8.96 423 0.00 1.85 -10.44
Roszel / Kayne Anderson Rudnick Small-Mid Cap Value Portfolio
------------------------------------
Investment
Net Assets Income Expense Total
December 31, Units (000's) Unit Value (000's) Ratio Ratio Return
---------------------------------------------------------------------------------------
2006 218 $ 12.14 $ 2,652 1.07% 1.85% 10.71%
2005 285 10.97 3,128 0.00 1.85 -1.34
2004 364 11.16 4,047 0.09 1.85 8.34
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
------------------------------------------ -------------------------------------- ---------------------------------------------
Asset-Based Insurance Charges:
Mortality and Expense Charge Daily - reduction of unit values 1/365 of 1.85% per day
Contract Charges:
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, annuitization,
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 2006 and 2005 were as follows:
Roszel / Roszel /
BlackRock William Roszel / Davis
Money Blair Lazard Large Cap
Market International International Value
V.I. Fund Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2005 225 233 368 247
Activity during 2005:
Issued 472 93 110 29
Redeemed (383) (105) (112) (35)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2005 314 221 366 241
Activity during 2006:
Issued 383 60 56 7
Redeemed (498) (75) (109) (67)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2006 199 206 313 181
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
Lord Abbett Lord Abbett BlackRock BlackRock
Government Large Cap Fixed- Relative
Securities Value Income Value
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2005 927 882 1,491 1,159
Activity during 2005:
Issued 105 69 102 123
Redeemed (209) (304) (307) (289)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2005 823 647 1,286 993
Activity during 2006:
Issued 121 58 94 29
Redeemed (203) (183) (372) (244)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2006 741 522 1,008 778
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
Alliance Delaware Loomis Sayles NWQ
Large Cap Small-Mid Large Cap Small Cap
Core Cap Growth Growth Value
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2005 223 298 108 412
Activity during 2005:
Issued 27 80 38 49
Redeemed (91) (95) (46) (105)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2005 159 283 100 356
Activity during 2006:
Issued 34 30 73 35
Redeemed (69) (101) (66) (120)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2006 124 212 107 271
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel / Roszel / Roszel / Roszel /
Rittenhouse Marsico Franklin Fayez Sarofim
Large Cap Large Cap Mid Cap Large Cap
Growth Growth Growth Core
Portfolio Portfolio Portfolio Portfolio
-------------------- -------------------- -------------------- --------------------
(In thousands)
Outstanding at January 1, 2005 989 364 287 72
Activity during 2005:
Issued 147 149 24 132
Redeemed (324) (162) (100) (80)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2005 812 351 211 124
Activity during 2006:
Issued 110 152 18 42
Redeemed (284) (155) (63) (65)
-------------------- -------------------- -------------------- --------------------
Outstanding at December 31, 2006 638 348 166 101
==================== ==================== ==================== ====================
8. UNITS ISSUED AND REDEEMED (Continued)
Roszel /
Kayne Anderson
Rudnick Small-Mid
Cap Value
Portfolio
--------------------
(In thousands)
Outstanding at January 1, 2005 364
Activity during 2005:
Issued 38
Redeemed (117)
--------------------
Outstanding at December 31, 2005 285
Activity during 2006:
Issued 27
Redeemed (94)
--------------------
Outstanding at December 31, 2006 218
====================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Merrill Lynch Life Insurance Company
We have audited the accompanying balance sheets of Merrill Lynch Life Insurance
Company (the "Company") as of December 31, 2006 and 2005, 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, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 Merrill Lynch Life Insurance Company as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, in 2004 the Company changed
its method of accounting for long-duration contracts to conform to Statement of
Position 03-1 "Accounting and Reporting by Insurance Enterprises for Certain
Non-Traditional Long-Duration Contracts and for Separate Accounts."
/s/ Deloitte & Touche LLP
New York, New York
March 2, 2007
G-1
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
(dollars in thousands) 2006 2005
------------ ------------
ASSETS
INVESTMENTS
Fixed maturity available-for-sale securities, at estimated fair
value (amortized cost: 2006 - $1,586,196; 2005 - $1,900,606) $ 1,570,383 $ 1,884,039
Equity available-for-sale securities, at estimated fair value
(cost: 2006 - $70,021; 2005 - $61,696) 72,728 64,278
Trading account securities, at estimated fair value -- 27,436
Limited partnerships, at cost 11,417 12,195
Policy loans on insurance contracts, at outstanding loan balances 968,874 992,143
----------- -----------
2,623,402 2,980,091
----------- -----------
CASH AND CASH EQUIVALENTS 230,586 56,319
ACCRUED INVESTMENT INCOME 47,548 52,466
DEFERRED POLICY ACQUISITION COSTS 285,648 296,189
DEFERRED SALES INDUCEMENTS 20,606 8,298
FEDERAL INCOME TAXES -- DEFERRED -- 1,937
REINSURANCE RECEIVABLES 10,522 9,231
AFFILIATED RECEIVABLES -- NET -- 5,519
RECEIVABLES FROM SECURITIES SOLD 23,921 254
OTHER ASSETS 49,241 33,338
SEPARATE ACCOUNTS ASSETS 11,330,397 10,917,234
----------- -----------
TOTAL ASSETS $14,621,871 $14,360,876
=========== ===========
See Notes to Financial Statements. (Continued)
G-2
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
(dollars in thousands, except common stock par value and shares) 2006 2005
------------ ------------
LIABILITIES
POLICYHOLDER LIABILITIES AND ACCRUALS
Policyholder account balances $ 2,047,973 $ 2,163,838
Future policy benefits 408,681 420,542
Claims and claims settlement expenses 42,426 31,147
----------- -----------
2,499,080 2,615,527
----------- -----------
OTHER POLICYHOLDER FUNDS 6,973 1,948
LIABILITY FOR GUARANTY FUND ASSESSMENTS 6,005 6,791
FEDERAL INCOME TAXES -- CURRENT 16,295 17,572
FEDERAL INCOME TAXES -- DEFERRED 2,846 --
PAYABLES FOR SECURITIES PURCHASED 40,319 962
AFFILIATED PAYABLES -- NET 9,982 --
UNEARNED POLICY CHARGE REVENUE 35,545 45,604
OTHER LIABILITIES 5,393 2,405
SEPARATE ACCOUNTS LIABILITIES 11,330,397 10,917,234
----------- -----------
TOTAL LIABILITIES 13,952,835 13,608,043
----------- -----------
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 397,324 397,324
Accumulated other comprehensive loss, net of taxes (10,233) (11,699)
Retained earnings 279,445 364,708
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 669,036 752,833
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $14,621,871 $14,360,876
=========== ===========
See Notes to Financial Statements.
G-3
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(dollars in thousands) 2006 2005 2004
-------- -------- --------
NET REVENUES
Policy charge revenue $264,669 $304,848 $233,982
Net investment income 142,617 147,730 157,080
Net realized investment gains 1,236 2,622 3,999
-------- -------- --------
TOTAL NET REVENUES 408,522 455,200 395,061
-------- -------- --------
BENEFITS AND EXPENSES
Interest credited to policyholder liabilities 101,837 106,444 119,804
Policy benefits (net of reinsurance recoveries: 2006 - $14,536;
2005 - $17,706; 2004 - $15,903) 39,158 47,270 54,282
Reinsurance premium ceded 26,919 26,322 25,197
Amortization of deferred policy acquisition costs 42,337 126,281 4,904
Insurance expenses and taxes 59,248 59,396 57,560
-------- -------- --------
TOTAL BENEFITS AND EXPENSES 269,499 365,713 261,747
-------- -------- --------
EARNINGS BEFORE FEDERAL INCOME TAXES 139,023 89,487 133,314
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 40,293 32,083 37,334
Deferred 3,993 (9,960) 3,285
-------- -------- --------
TOTAL FEDERAL INCOME TAX EXPENSE 44,286 22,123 40,619
-------- -------- --------
EARNINGS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 94,737 67,364 92,695
-------- -------- --------
Change in Accounting Princple, Net of tax -- -- (27,400)
-------- -------- --------
NET EARNINGS $ 94,737 $ 67,364 $ 65,295
======== ======== ========
See Notes to Financial Statements.
G-4
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,
--------------------------------
(dollars in thousands) 2006 2005 2004
-------- -------- ----------
NET EARNINGS $94,737 $ 67,364 $ 65,295
------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS)
Net unrealized gains (losses) on available-for-sale
securities:
Net unrealized holding gains (losses) arising
during the period 1,403 (48,849) (11,852)
Reclassification adjustment for gains included in
net earnings (524) (2,851) (2,562)
------- -------- --------
879 (51,700) (14,414)
------- -------- --------
Adjustments for policyholder liabilities 1,377 11,704 19,033
Adjustments for deferred federal income taxes (790) 13,999 (1,526)
Adjustments for deferred policy acquisition costs -- -- (260)
------- -------- --------
Total other comprehensive income (loss), net of taxes 1,466 (25,997) 2,833
------- -------- --------
COMPREHENSIVE INCOME $96,203 41,367 $ 68,128
======= ======== ========
See Notes to Financial Statements.
G-5
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF MERRILL LYNCH INSURANCE GROUP, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
(dollars in thousands) STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
------ ---------- ------------- --------- -------------
BALANCE, JANUARY 1, 2004 $2,500 $397,324 $ 11,465 $ 329,549 $ 740,838
Net earnings 65,295 65,295
Cash dividend paid to parent (97,500) (97,500)
Other comprehensive income, net of taxes 2,833 2,833
------ -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2004 2,500 397,324 14,298 297,344 711,466
Net earnings 67,364 67,364
Other comprehensive loss, net of taxes (25,997) (25,997)
------ -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2005 2,500 397,324 (11,699) 364,708 752,833
Net earnings 94,737 94,737
Cash dividend paid to parent (180,000) (180,000)
Other comprehensive income, net of taxes 1,466 1,466
------ -------- -------- --------- ---------
BALANCE, DECEMBER 31, 2006 $2,500 $397,324 $(10,233) $ 279,445 $669,036
====== ======== ======== ========= =========
See Notes to Financial Statements.
G-6
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,
(dollars in thousands) ---------------------------------
2006 2005 2004
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 94,737 $ 67,364 $ 65,295
Noncash items included in earnings:
Change in accounting principle, net of tax -- -- 27,400
Amortization of deferred policy acquisition costs 42,337 126,281 4,904
Capitalization of policy acquisition costs (31,796) (29,954) (34,116)
Amortization of deferred sales inducements 944 352
Capitalization of sales inducements (13,252) (8,650)
Amortization (Accretion) of unearned policy charge revenue (10,357) (68,309) 1,921
Capitalization of unearned policy charge revenue 298 1,692 2,539
Amortization of investments 7,350 9,476 10,863
Interest credited to policyholder liabilities 101,837 106,444 119,804
Change in guaranteed benefit liabilities (2,218) 1,797 (1,706)
Deferred federal income tax expense (benefit) 3,993 (9,960) 3,285
(Increase) decrease in operating assets:
Trading account securities 28,148 642 (373)
Accrued investment income 4,918 5,180 5,919
Reinsurance receivables (1,291) (5,399) 2,172
Affiliated receivables -- net 5,519 92 (5,611)
Other (15,903) 2,848 59
Increase (decrease) in operating liabilities:
Claims and claims settlement expenses 11,279 (3,998) 2,648
Other policyholder funds 5,025 (5,276) (5,691)
Liability for guaranty fund assessments (786) (265) (83)
Federal income taxes -- current (1,277) (6,044) 3,470
Affiliated payables -- net 9,982 -- (2,365)
Other 2,988 2,139 (3,214)
Other operating activities:
Net realized investment gains (1,236) (2,622) (3,999)
--------- --------- ---------
Net cash and cash equivalents provided by operating activities 241,239 183,830 193,121
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Sales of available-for-sale securities 390,637 369,222 212,732
Maturities of available-for-sale securities 160,863 191,749 353,824
Purchases of available-for-sale securities (236,551) (503,621) (406,551)
Sales of limited partnerships 1,028 3,466 1,357
Purchases of limited partnerships (250) (2,349) (3,100)
Policy loans on insurance contracts -- net 23,269 37,893 56,501
--------- --------- ---------
Net cash and cash equivalents provided by investing activities 338,996 96,360 214,763
--------- --------- ---------
See Notes to Financial Statements. (Continued)
G-7
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,
-----------------------------------
(dollars in thousands) 2006 2005 2004
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Cash dividend paid to parent $(180,000) $ -- $ (97,500)
Policyholder deposits (excludes internal policy
replacement deposits) 685,069 623,148 730,643
Policyholder withdrawals (including transfers from
separate accounts) (911,037) (911,222) (1,052,253)
--------- --------- -----------
Net cash and cash equivalents used in financing activities (405,968) (288,074) (419,110)
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents 174,267 (7,884) (11,226)
Cash and cash equivalents, beginning of year 56,319 64,203 75,429
Cash and cash equivalents, end of year $ 230,586 $ 56,319 $ 64,203
========= ========= ===========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid to affiliates for:
Federal income taxes $ 41,570 $ 38,127 $ 33,864
Interest 494 332 260
See Notes to Financial Statements.
G-8
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, 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 judgments underlying the
Company's Financial Statements are summarized below. In applying these policies,
management makes subjective and complex judgments that frequently require
estimates about matters that are inherently uncertain.
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 guaranteed benefits 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, immediate annuities, and single premium deferred annuities) and
interest-sensitive life insurance contracts (single premium whole life
insurance) 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. The Company does not currently manufacture
single premium deferred annuities or single premium whole life contracts.
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 loss,
net of taxes. These changes in estimated fair value are not reflected in the
Statements of Earnings until a sale transaction occurs or when declines in fair
value are deemed other-than-temporary. Unrealized gains and losses on trading
account securities are included in net realized investment gains. During the
first quarter 2006 the Company liquidated its trading portfolio.
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, information obtained from
external sources (i.e. company announcements, ratings agency announcements, or
news wire services) and the Company's 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. The factors that may give rise to a
potential other-than-temporary impairment include, but are not limited to, i)
G-9
certain credit-related events such as default of principal or interest payments
by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings,
and iv) fair market value less than amortized cost for an extended period of
time. In the absence of a readily ascertainable market value, the estimated fair
value on these securities represents management's best estimate and is based on
comparable securities and other assumptions as appropriate. 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 below investment
grade. The Company defines below investment grade securities as unsecured debt
obligations that have a Standard and Poor's (or similar rating agency) rating
lower than BBB-.
Investments in limited partnerships are carried at cost.
Policy loans on insurance contracts are stated at unpaid principal balances.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and short-term
investments with original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS ("DAC")
Policy acquisition costs for variable annuities and variable life insurance
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, commonly referred to as
"unlocking". 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 DAC.
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 rollforward
of the acquisition costs related to this reinsurance agreement for the years
ended December 31:
2006 2005 2004
-------- -------- --------
Beginning balance $ 54,781 $ 62,099 $ 69,289
Interest accrued 4,109 4,657 5,197
Amortization (12,497) (11,975) (12,387)
-------- -------- --------
Ending balance $ 46,393 $ 54,781 $ 62,099
======== ======== ========
G-10
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.
2007 2008 2009 2010 2011
------ ------ ------ ------ ------
$6,184 $5,801 $5,628 $5,339 $5,159
DEFERRED SALES INDUCEMENTS
The Company offers a sales inducement whereby the contract owner receives a
bonus which increases the initial account balance by an amount equal to a
specified percentage of the contract owner's deposit. This amount may be subject
to recapture under certain circumstances. Consistent with DAC, sales inducements
for variable 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,
commonly referred to as "unlocking". 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 the deferred sales inducement asset.
The expense and the subsequent capitalization and amortization are recorded as a
component of policy benefits in the Statements of Earnings.
SEPARATE ACCOUNTS
The Company's Separate Accounts consist of variable annuities and variable life
insurance contracts, of which the assets and liabilities are legally segregated
and reported 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 claims of the Company only
to the extent the value of such assets exceeds Separate Accounts liabilities.
The assets of the Separate Accounts are carried at the daily net asset value of
the mutual funds in which they invest.
Absent any contract provision wherein the Company guarantees either a minimum
return or account value upon death or annuitization, the net investment income
and net realized and unrealized gains and losses attributable to Separate
Accounts assets supporting variable annuities and variable life contracts accrue
directly to the contract owner and are not reported as revenue in the Statements
of Earnings. Mortality, guaranteed benefit fees, policy administration,
maintenance, and withdrawal charges associated with Separate Accounts products
are included in policy charge revenue in the Statements of Earnings.
POLICYHOLDER ACCOUNT BALANCES
The Company's liability for policyholder account balances represents the
contract value that has accrued to the benefit of the policyholder as of the
balance sheet date. The liability is generally equal to the accumulated account
deposits plus interest credited less policyholders' withdrawals and other
charges assessed against the account balance. 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 1.20% -- 6.80%
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.
FUTURE POLICY BENEFITS
The Company's liability for future policy benefits consists of liabilities for
immediate annuities and liabilities for certain guaranteed benefits contained in
the variable insurance products the Company manufactures. Liabilities for
immediate annuities are equal to the present value of estimated future payments
to or on behalf of policyholders, where the timing and amount of payment
generally depends on policyholder mortality. Interest rates used in establishing
such liabilities range from 3.00% to 11.00%. Liabilities for guaranteed benefits
for variable annuity and life insurance contracts are discussed in more detail
in Note 6 of the Financial Statements.
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.
G-11
UNEARNED POLICY CHARGE REVENUE ("UPCR")
Certain variable life insurance products contain policy charges that are
assessed at policy issuance. These policy charges are deferred and accreted into
policy charge revenue based on the estimated future gross profits for each group
of contracts, consistent with the amortization of DAC. The impact of any
revisions on cumulative accretion is recorded as a charge or credit to current
operations, commonly referred to as "unlocking". The Company records a liability
equal to the unaccreted balance of these policy charges on the Balance Sheets.
The accretion of the UPCR is recorded as a component of policy charge revenue in
the Statement of Earnings.
FEDERAL 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 provides for income taxes on all transactions that have been
recognized in the financial statements in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Accordingly,
deferred taxes are 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.
The Company is subject to taxes on premiums and is exempt from state income
taxes in most states.
ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 provides a fair value option election that allows companies to
irrevocably elect fair value as the initial and subsequent measurement attribute
for certain financial assets and liabilities, with changes in fair value
recognized in earnings as they occur. SFAS No. 159 permits the fair value option
election on an instrument by instrument basis at initial recognition of an asset
or liability or upon an event that gives rise to a new basis of accounting for
that instrument. SFAS No. 159 is effective as of the beginning of an entity's
first fiscal year that begins after November 15, 2007. Early adoption is
permitted as of the beginning of a fiscal year that begins on or before November
15, 2007 provided that the entity makes that choice in the first 120 days of
that fiscal year, has not yet issued financial statements for any interim period
of the fiscal year of adoption, and also elects to apply the provisions of
Statement No. 157, Fair Value Measurements ("SFAS No. 157"). The Company intends
to early adopt SFAS No. 159 as of the first quarter of fiscal 2007. The adoption
is not expected to have a material impact on the Company's Financial Statements.
On January 1, 2007, the Company adopted Statement of Position ("SOP") 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
With Modifications or Exchanges of Insurance Contracts. SOP 05-1 provides
guidance on accounting by insurance enterprises for deferred acquisition costs
on internal replacements of insurance and investment contracts other than those
specifically described in SFAS No. 97. SOP 05-1 defines an internal replacement
as a modification in product benefits, features, rights, or coverages that
occurs by the exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a feature or coverage
within a contract. Since the Company's practice of accounting for deferred
acquisition costs, in connection with modifications or exchanges, substantially
meets the provisions prescribed within SOP 05-1, the adoption of SOP 05-1 did
not have a material impact on the Company's Financial Statements.
As of December 31, 2006, the Company adopted Staff Accounting Bulletin ("SAB")
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. The interpretations in the
SAB provides the Staff's views regarding the process of quantifying financial
statement misstatements. Specifically, the SEC staff believes that registrants
must quantify the impact on current period financial statements of correcting
all misstatements, including both those occurring in the current period and the
effect of reversing those that have accumulated from prior periods. Since the
Company's method for quantifying financial statement misstatements already
considers those occurring in the current period and the effect of reversing
those that have accumulated from prior periods, the adoption of the SAB did not
have an impact on the Company's Financial Statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is effective for Financial
Statements issued for fiscal years beginning after November 15, 2007 with early
adoption permitted. The Company intends to early adopt SFAS No. 157 as of the
first quarter of fiscal 2007. The adoption is not expected to have a material
impact on the Company's Financial Statements.
G-12
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company's Financial Statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company will adopt
FIN 48 in the first quarter of 2007. The adoption of FIN 48 is not expected to
have a material impact on the Company's Financial Statements.
On January 1, 2004, the Company adopted the provisions of SOP 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts. SOP 03-1 required the establishment of a
liability for contracts that contain death or other insurance benefits using a
reserve methodology that was different from the methodology that the Company
previously employed. As a result, the Company recorded a $41,304 increase in
policyholder liabilities and a $850 decrease in deferred policy acquisition
costs resulting in a charge to earnings of $27,400, net of a federal income tax
benefit of $14,754, which was reported as a cumulative effect of a change in
accounting principle during 2004.
NOTE 2. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or amounts that approximate fair
value. The carrying values of financial instruments at December 31 were:
2006 2005
----------- -----------
Assets:
Fixed maturity securities (1) $ 1,570,383 $ 1,884,039
Equity securities (1) 72,728 64,278
Trading account securities (1) -- 27,436
Limited partnerships (2) 11,417 12,195
Policy loans on insurance contracts (3) 968,874 992,143
Cash and cash equivalents (4) 230,586 56,319
Separate accounts assets (5) 11,330,397 10,917,234
----------- -----------
Total assets: $14,184,385 $13,953,644
=========== ===========
Liabilities :
Policyholder account balances (6) $ 2,047,973 $ 2,163,838
=========== ===========
----------
(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.
(2) The Company has investments in three limited partnerships that do not have
readily ascertainable market values. Management has estimated the fair
value of two of the partnerships as equal to cost, based on the review of
the underlying investments of the partnerships. During 2005, the Company
recognized a realized investment loss of $311 and reduced the carrying
value of the third partnership to zero.
(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 the Separate Accounts are carried at the net asset value
provided by the fund managers.
(6) The Company records certain adjustments to policyholder account balances in
conjunction with the unrealized holding gains or losses on investments
classified as available-for-sale. The Company adjusts a portion of these
liabilities as if the unrealized holding gains or losses had actually been
realized, with corresponding credits or charges reported in accumulated
other comprehensive loss, net of taxes.
G-13
NOTE 3. INVESTMENTS
The amortized cost and estimated fair value of investments in fixed maturity
securities and equity securities (excluding trading account securities) at
December 31 were:
2006
-------------------------------------------------
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $1,424,640 $7,509 $22,568 $1,409,581
Mortgage-backed securities 91,956 226 376 91,806
U.S. Government and agencies 44,363 200 419 44,144
Foreign governments 21,281 321 648 20,954
Municipals 3,956 38 96 3,898
---------- ------ ------- ----------
Total fixed maturity securities $1,586,196 $8,294 $24,107 $1,570,383
========== ====== ======= ==========
Equity securities:
Non-redeemable preferred stocks $ 70,021 $2,869 $ 162 $ 72,728
========== ====== ======= ==========
2005
-------------------------------------------------
Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $1,807,866 $13,939 $30,359 $1,791,446
U.S. Government and agencies 44,593 576 451 44,718
Mortgage-backed securities 22,755 394 402 22,747
Foreign governments 21,369 415 716 21,068
Municipals 4,023 41 4 4,060
---------- ------- ------- ----------
Total fixed maturity securities $1,900,606 $15,365 $31,932 $1,884,039
========== ======= ======= ==========
Equity securities:
Non-redeemable preferred stocks $ 61,584 $ 2,662 $ 93 $ 64,153
Investment in Separate Accounts (1) 112 13 -- 125
---------- ------- ------- ----------
Total equity securities $ 61,696 $ 2,675 $ 93 $ 64,278
========== ======= ======= ==========
----------
(1) The Company's investment in the Separate Accounts was sold during 2006.
G-14
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, 2006 were:
2006
--------------------------------------------------------------------------
Less than 12 months More than 12 Months Total
---------------------- ----------------------- -----------------------
Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- ---------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $116,759 $1,074 $ 961,147 21,494 $1,077,906 $22,568
Foreign governments 62 -- 17,844 648 17,906 648
U.S. Government and agencies 15,057 143 21,862 276 36,919 419
Mortgage-backed securities 5,555 15 14,886 361 20,441 376
Municipals 2,104 96 -- -- 2,104 96
Equity securities:
Non-redeemable preferred stocks 17,408 134 483 28 17,891 162
-------- ------ ---------- ------- ---------- -------
Total temporarily impaired
securities $156,945 $1,462 $1,016,222 $22,807 $1,173,167 $24,269
======== ====== ========== ======= ========== =======
2005
-------------------------------------------------------------------------
Less than 12 months More than 12 Months Total
---------------------- ---------------------- -----------------------
Estimated Estimated Estimated
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- ---------- ----------
Fixed maturity securities:
Corporate debt securities $852,876 $15,046 $467,689 15,313 $1,320,565 $30,359
Foreign governments 1,951 47 15,823 669 17,774 716
U.S. Government and agencies 5,286 7 16,692 444 21,978 451
Mortgage-backed securities 5,647 79 9,308 323 14,955 402
Municipals 2,651 4 -- -- 2,651 4
Equity securities:
Non-redeemable preferred stocks 5,292 67 490 26 5,782 93
-------- ------- -------- ------- ---------- -------
Total temporarily impaired
securities $873,703 $15,250 $510,002 $16,775 $1,383,705 $32,025
======== ======= ======== ======= ========== =======
Unrealized losses are primarily due to price fluctuations resulting from changes
in interest rates and credit spreads. 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.
There were no recorded realized investment losses due to other-than-temporary
declines in fair value of securities in 2006. The Company recorded realized
investment losses due to other-than-temporary declines in fair value of $1,937
and $2,129 for the years ended December 31, 2005 and 2004, respectively.
G-15
The amortized cost and estimated fair value of fixed maturity securities at
December 31 by contractual maturity were:
2006
-----------------------
Estimated
Amortized Fair
Cost Value
---------- ----------
Fixed maturity securities:
Due in one year or less $ 288,695 $ 286,606
Due after one year through five years 827,644 813,813
Due after five years through ten years 284,352 283,360
Due after ten years 93,549 94,798
---------- ----------
1,494,240 1,478,577
Mortgage-backed securities 91,956 91,806
---------- ----------
Total fixed maturity securities $1,586,196 $1,570,383
========== ==========
2005
-----------------------
Estimated
Amortized Fair
Cost Value
---------- ----------
Fixed maturity securities:
Due in one year or less $ 224,814 $ 223,708
Due after one year through five years 1,219,632 1,200,236
Due after five years through ten years 319,999 320,200
Due after ten years 113,406 117,148
---------- ----------
1,877,851 1,861,292
Mortgage-backed securities 22,755 22,747
---------- ----------
Total fixed maturity securities $1,900,606 $1,884,039
========== ==========
In the preceding tables fixed maturity securities not due at a single maturity
date have been included 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.
G-16
The amortized cost and estimated fair value of fixed maturity securities at
December 31 by rating agency equivalent were:
2006
-----------------------
Estimated
Amortized Fair
Cost Value
---------- ----------
AAA $ 260,478 $ 258,082
AA 307,490 303,167
A 533,715 527,398
BBB 467,182 464,259
Below investment grade 17,331 17,477
---------- ----------
Total fixed maturity securities $1,586,196 $1,570,383
========== ==========
Investment grade 99% 99%
Below investment grade 1% 1%
2005
-----------------------
Estimated
Amortized Fair
Cost Value
---------- ----------
AAA $ 208,688 $ 206,236
AA 305,894 300,621
A 716,440 710,750
BBB 641,376 639,643
Below investment grade 28,208 26,789
---------- ----------
Total fixed maturity securities $1,900,606 $1,884,039
========== ==========
Investment grade 99% 99%
Below investment grade 1% 1%
At December 31, 2006 and 2005, the carrying value of fixed maturity securities
rated BBB- were $58,695 and $131,960, respectively, which is the lowest
investment grade rating given by Standard and Poor's.
The components of net unrealized gains (losses) included in accumulated other
comprehensive loss, net of taxes, at December 31 were as follows:
2006 2005
-------- --------
Assets:
Fixed maturity securities $(15,813) $(16,567)
Equity securities 2,707 2,582
-------- --------
(13,106) (13,985)
-------- --------
Liabilities:
Policyholder account balances 2,636 4,013
Federal income taxes -- deferred (5,509) (6,299)
-------- --------
(2,873) (2,286)
-------- --------
Stockholder equity:
Accumulated other comprehensive loss,
net of taxes $(10,233) $(11,699)
======== ========
G-17
Proceeds and gross realized investment gains and losses from the sale of
available-for-sale securities for the years ended December 31 were as follows:
2006 2005 2004
-------- -------- --------
Proceeds $390,637 $369,222 $212,732
Gross realized investment gains 4,533 7,026 7,927
Gross realized investment losses 4,009 4,175 5,365
The Company considers fair value at the date of sale to be equal to proceeds
received. Proceeds on the sale of available-for-sale securities sold at a
realized loss were $156,475, $191,302 and $66,006 for the years ended December
31, 2006, 2005 and 2004, respectively.
During the 2006, 2005 and 2004 the Company incurred realized investment losses
in order to further diversify and match the duration of its invested assets to
corresponding policyholder liabilities.
The Company had investment securities with a carrying value of $22,355 and
$22,756 that were deposited with insurance regulatory authorities at December
31, 2006 and 2005, 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 by source for the years ended December 31 was as follows:
2006 2005 2004
-------- -------- --------
Fixed maturity securities $ 84,176 $ 91,754 $ 97,750
Policy loans on insurance contracts 50,755 51,346 55,243
Cash and cash equivalents 6,030 2,673 2,059
Equity securities 4,739 4,313 5,199
Limited partnerships 15 483 30
Other (149) 38 374
-------- -------- --------
Gross investment income 145,566 150,607 160,655
Less investment expenses (2,949) (2,877) (3,575)
-------- -------- --------
Net investment income $142,617 $147,730 $157,080
======== ======== ========
Net realized investment gains (losses), for the years ended December 31 were as
follows:
2006 2005 2004
------ ------ -------
Trading account securities $ 712 $ 82 $1,437
Fixed maturity securities 447 2,854 1,628
Equity securities 77 (3) 934
Limited partnerships -- (311) --
------ ------ ------
Net realized investment gains $1,236 $2,622 $3,999
====== ====== ======
The Company maintained a trading portfolio comprised of convertible debt and
equity securities. The net unrealized holdings losses on trading account
securities included in net realized investment gains were $1,012 and $359 at
December 31, 2005 and 2004, respectively.
G-18
NOTE 4. DAC AND UPCR
The components of amortization of DAC for the years ended December 31 were as
follows:
2006 2005 2004
-------- -------- --------
Normal amortization related to variable life
and annuity insurance products $ 58,994 $ 44,415 $ 46,230
Unlocking related to variable life insurance products 1,055 55,492 --
Unlocking related to variable annuity insurance products (17,712) 26,374 (41,326)
-------- -------- --------
Total amortization of DAC $ 42,337 $126,281 $ 4,904
======== ======== ========
During 2006, the Company revised its reinsurance and mortality assumptions and
historical claims relating to its variable universal life insurance product. In
addition, the Company updated its DAC model to reflect actual market returns,
which were favorable as compared to expectations, for its variable annuity
products resulting in favorable unlocking. This is consistent with the
application of the reversion to the mean approach, which is described in more
detail below.
During 2005, the Company lowered its future gross profit assumptions on certain
variable life insurance and annuity products resulting from historical surrender
experience and reinsurance assumptions. This adjustment resulted in a
corresponding and partially offsetting increase in UPCR accretion.
During 2004, the Company elected to adopt new assumptions for market returns
associated with assets held in the variable annuity Separate Accounts. If
returns over a determined historical period differ from the Company's long-term
assumption, returns for future determined periods are calculated so that the
long-term assumption is achieved. This method for projecting market returns is
known as reversion to the mean, a standard industry practice. The Company
previously established estimates for market returns based on actual historical
results and on future anticipated market returns without the use of a mean
reversion technique.
The components of accretion of UPCR for the years ended December 31 were as
follows:
2006 2005 2004
------- ------- -------
Normal accretion related to variable life insurance products $ 8,825 $ 400 $(1,921)
Unlocking related to variable life insurance products 1,532 67,909 --
------- ------- -------
Total accretion of UPCR $10,357 $68,309 $(1,921)
======= ======= =======
During 2006, the Company revised its reinsurance and mortality assumptions and
historical claims for the current year on its variable universal life insurance
product. The increase in normal UPCR accretion during 2006 is attributable to
lower mortality as compared to 2005.
During 2005, the Company lowered its future gross profit assumptions on its
variable life insurance product in connection to historical surrender experience
and reinsurance assumptions. This adjustment resulted in a corresponding and
partially offsetting increase in DAC amortization.
NOTE 5. DEFERRED SALES INDUCEMENTS
During 2005, the Company introduced a new variable annuity product in which
certain contracts contain sales inducements. The components of deferred sales
inducements for the years ended December 31 were as follows:
2006 2005
-------- ------
Beginning balance $ 8,298 $ --
Capitalization 13,252 8,650
Amortization (1,884) (352)
Unlocking 940 --
------- ------
Ending balance $20,606 $8,298
======= ======
G-19
NOTE 6. VARIABLE CONTRACTS CONTAINING GUARANTEED BENEFITS
VARIABLE ANNUITY CONTRACTS CONTAINING GUARANTEED BENEFITS
The Company issues variable annuity contracts in which the Company may
contractually guarantee to the contract owner a guaranteed minimum death benefit
("GMDB") and/or an optional guaranteed living benefit provision. The living
benefit provisions offered by the Company include a guaranteed minimum income
benefit ("GMIB") and a guaranteed minimum withdrawal benefit ("GMWB").
Information regarding the general characteristics of each guaranteed benefit
type is provided below:
- In general, contracts containing GMDB provisions provide a death
benefit equal to the greater of the GMDB or the contract value.
Depending on the type of contract, the GMDB may equal: i) contract
deposits accumulated at a specified interest rate, ii) the contract
value on specified contract anniversaries, iii) return of contract
deposits, or iv) some combination of these benefits. Each benefit type
is reduced for contract withdrawals.
- In general, contracts containing GMIB provisions provide the option to
receive a guaranteed future income stream upon annuitization. There is
a waiting period of ten years that must elapse before the GMIB
provision can be exercised.
- Contracts containing GMWB provisions provide the contract owner the
ability to withdraw minimum annual payments regardless of the impact
of market performance on the contract owner's account value. In
general, withdrawal percentages are based on the contract owner's age
at the time of the first withdrawal. The Company began offering the
GMWB benefit provision in March 2006.
The Company had the following variable annuity contracts containing guaranteed
benefits at December 31:
2006 2005
-------------------------- --------------------------
GMDB GMIB GMWB GMDB GMIB GMWB
-------- -------- ---- -------- -------- ----
Net amount at risk (1) $693,011 $ 1,906 $ 91 $982,449 $ 1,912 $n/a
Average attained age of contract owners 68 59 71 67 59 n/a
Weighted average period remaining
until expected annuitization n/a 7.6 yrs n/a n/a 8.3 yrs n/a
----------
(1) Net amount at risk for GMDB is defined as the current GMDB in excess of the
contract owners' account balance at the balance sheet date.
Net amount at risk for GMIB is defined as the present value of the minimum
guaranteed annuity payments available to the contract owner in excess of
the contract owners' account balance at the balance sheet date.
Net amount at risk for GMWB is defined as the present value of the minimum
guaranteed withdrawals available to the contract owner in excess of the
contract owners' account balance at the balance sheet date.
The Company records liabilities for contracts containing GMDB and GMIB
provisions as a component of future policy benefits in the Balance Sheets.
Changes in these guaranteed benefit liabilities are included as a component of
policy benefits in the Statement of Earnings. The GMDB and GMIB liabilities are
calculated in accordance with SOP 03-1 and are determined by projecting future
expected guaranteed benefits under multiple scenarios for returns on Separate
Accounts assets. The Company uses estimates for mortality and surrender
assumptions based on actual and projected experience for each contract type.
These estimates are consistent with the estimates used in the calculation of
DAC. The Company regularly evaluates the estimates used and adjusts the GMDB
and/or GMIB liability balances with a related charge or credit to earnings
("unlocking"), if actual experience or evidence suggests that earlier
assumptions should be revised.
G-20
The variable annuity GMDB and GMIB liabilities for the years ended December 31
were as follows:
GMDB GMIB
-------- ------
Balance at January 1, 2005 $106,222 $ 587
Guaranteed benefits incurred 28,761 1,658
Guaranteed benefits paid (24,466) --
Unlocking (4,308) --
-------- ------
Balance at December 31, 2005 106,209 2,245
Guaranteed benefits incurred 28,405 2,530
Guaranteed benefits paid (22,622) --
Unlocking (11,691) 1,007
-------- ------
Balance at December 31, 2006 $100,301 $5,782
======== ======
The Company unlocked its GMDB liabilities during 2006 and 2005 and its GMIB
liabilities during 2006 as a result of modeling refinements that were
implemented.
The Company records liabilities for contracts containing GMWB provisions as a
component of other policyholder funds in the Balance Sheets, with changes in the
fair value recognized as a component of policy benefits in the Statement of
Earnings. In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, the GMWB provision is treated as an embedded derivative
and is required to be reported separately from the host variable annuity
contract. The fair value of the GMWB obligation is calculated based on actuarial
and capital market assumptions related to the projected cash flows, including
benefits and related contract charges, over the anticipated life of the related
contracts. The cash flow estimates are produced by using stochastic techniques
under a variety of market return scenarios and other best estimate assumptions.
The Company regularly evaluates the estimates used and adjusts the GMWB
liability balances with a related charge or credit to earnings ("unlocking"), if
actual experience or evidence suggests that earlier assumptions should be
revised. Based on the Company's modeling assumptions, the variable annuity GMWB
liability at December 31, 2006 was $0.
At December 31, contract owners' account balances by mutual fund class for
contracts containing guaranteed benefit provisions were distributed as follows:
2005
-----------------------------------------------------------------
Money
Equity Bond Market Balanced Other Total
---------- --------- ------- -------- ------ ----------
GMDB only $4,179,526 1,299,032 652,257 244,804 4,304 $6,379,923
GMDB and GMIB 1,240,068 333,382 245,410 85,355 14,613 1,918,828
GMIB only 31,763 6,613 1,216 8,547 2,193 50,332
No guaranteed benefit 5,911 1,565 111 2,306 446 10,339
---------- --------- ------- ------- ------ ----------
Total $5,457,268 1,640,592 898,994 341,012 21,556 $8,359,422
========== ========= ======= ======= ====== ==========
VARIABLE LIFE CONTRACTS CONTAINING GUARANTEED BENEFITS
The Company has issued variable life contracts in which the Company
contractually guarantees to the contract owner a GMDB. In general, contracts
containing GMDB provisions provide a death benefit equal to the amount specified
in the contract regardless of the level of the contract's account value.
The Company records liabilities for contracts containing GMDB provisions as a
component of future policy benefits. Changes in the GMDB liabilities are
included as a component of policy benefits in the Statements of Earnings. The
variable life GMDB liability at December 31, 2006 and 2005 was $2,286 and $2,132
respectively. The variable life GMDB liability is set as a percentage of asset-
G-21
based fees and cost of insurance charges deducted from contracts that include a
GMDB provision. The percentage is established based on the Company's estimate of
the likelihood of future GMDB claims.
At December 31, contract owners' account balances by mutual fund class for
contracts containing GMDB provisions were distributed as follows:
2006 2005
---------- ----------
Balanced $1,013,969 $ 951,955
Equity 983,622 977,768
Bond 342,893 371,649
Money Market 251,172 245,084
Other -- 11,356
---------- ----------
Total $2,591,656 $2,557,812
========== ==========
NOTE 7. 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:
2006 2005 2004
------- ------- -------
Provisions for income taxes computed at
Federal statutory rate $48,658 $31,320 $46,660
Decrease in income taxes resulting from:
Dividend received deduction (3,657) (8,615) (6,635)
Foreign tax credit (715) (582) 594
------- ------- -------
Federal income tax provision $44,286 $22,123 $40,619
======= ======= =======
The Federal statutory rate for each of the three years ended December 31 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 were as follows:
2006 2005 2004
------- -------- --------
Deferred sales inducements $ 4,308 $ 2,904 $ --
Unearned revenue 3,521 23,316 (1,561)
Reinsurance adjustments 2,175 -- --
Investment adjustment 557 5,645 476
Liability for guaranty fund assessments 275 93 29
DAC (1) (288) (29,060) 15,013
Other (387) (3,497) 60
Policyholder account balances (1) (6,168) (9,361) (10,732)
------- -------- --------
Deferred Federal income tax provision
(benefit) $ 3,993 $ (9,960) $ 3,285
======= ======== ========
----------
(1) The 2004 amounts exclude deferred tax benefits related to the adoption of
SOP 03-1 (see Note 1 to the Financial Statements).
G-22
Deferred tax assets and liabilities at December 31 were as follows:
2006 2005
------- -------
Deferred tax assets:
Policyholder account balances $64,914 $58,746
Unearned revenue 12,440 15,961
Net unrealized investment loss on
investment securities 5,510 6,300
Liability for guaranty fund assessments 2,102 2,377
------- -------
Total deferred tax assets 84,966 83,384
------- -------
Deferred tax liabilities:
DAC 77,469 77,757
Deferred sales inducements 7,212 2,904
Reinsurance adjustments 2,175 --
Investment adjustments 791 234
Other 165 552
------- -------
Total deferred tax liabilities 87,812 81,447
------- -------
Net deferred tax asset (liability) $(2,846) $ 1,937
======= =======
The Company anticipates that all deferred tax assets will be realized; therefore
no valuation allowance has been provided.
NOTE 8. 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 mortality risk 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 contract owners. 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. As of December 31, 2006, the Company held
collateral under reinsurance agreements in the form of letters of credit and
funds withheld totaling $600 that can be drawn upon for delinquent reinsurance
recoverables.
As of December 31, 2006 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 $9,847,143 $2,655,819 $845 $7,192,169 0.01%
The Company is party to 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 from January 1, 1997 to June 30, 2001.
In addition, the Company seeks to limit its exposure to guaranteed benefit
features contained in certain variable annuity contracts. Specifically, the
Company reinsures certain GMIB and GMDB provisions to the extent reinsurance
capacity is available in the marketplace. As of December 31, 2006, 69% and 6% of
the account value for variable annuity contracts containing GMIB and GMDB
provisions, respectively, were reinsured.
G-23
NOTE 9. 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 allocated to the Company by MLIG pursuant to the agreement
were $29,692, $33,127 and $33,164 for 2006, 2005 and 2004, 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 $494, $332 and $260 for 2006, 2005 and 2004, respectively.
Intercompany interest is included in net investment income.
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 $57,298, $54,058 and $56,506 for 2006, 2005 and
2004, respectively. Certain commissions were capitalized as DAC and are being
amortized in accordance with the accounting policy discussed in Note 1 to the
Financial Statements. Charges attributable to this agreement are included in
insurance expenses and taxes, net of amounts capitalized.
Effective September 30, 2006, Merrill Lynch & Co. transferred the Merrill Lynch
Investment Managers, L.P. ("MLIM") investment management business to BlackRock,
Inc. ("BlackRock") in exchange for approximately half of the economic interest
in the combined firm, including a 45% voting interest. Under this agreement, all
previous investment management services performed by MLIM were merged into
BlackRock. Prior to September 30, 2006, the Company and MLIM were parties to a
service agreement whereby MLIM agreed to provide certain invested asset
management services to the Company. The Company paid a fee to MLIM, for these
services through the MLIG service agreement. Charges paid to MLIM through the
first three quarters of 2006 and allocated to the Company by MLIG were $1,172.
Charges for 2005 and 2004 were $1,681 and $1,821, respectively.
MLIG has entered into agreements with i) Roszel Advisors, LLC ("Roszel"), a
subsidiary of MLIG, with respect to administrative services for the MLIG
Variable Insurance Trust ("the Trust") and ii) the former MLIM, now BlackRock,
with respect to administrative services for the Merrill Lynch Series Fund, Inc.,
Merrill Lynch Variable Series Funds, Inc. and Mercury Variable Trust,
(collectively, "the Funds"). Certain Separate Accounts of the Company may invest
in the various mutual fund portfolios of the Trust and Funds in connection with
the variable life insurance and annuity contracts the Company has inforce. Under
these agreements, Roszel and MLIM pay MLIG an amount equal to a percentage of
the assets invested in the Trust and 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 from
Roszel in the amount of $2,492, $2,528 and $2,347 during 2006, 2005 and 2004,
respectively. The Company received from MLIG its allocable share of such
compensation from MLIM in the amount of $12,700 through the first three quarters
of 2006. Compensation from MLIM for 2005 and 2004 was $16,588 and $17,896,
respectively.
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 10. STOCKHOLDER'S EQUITY AND STATUTORY REGULATIONS
During 2006, the Company paid cash dividends of $180,000 to MLIG, of which
$39,845 were ordinary dividends. During 2005, the Company did not pay a
dividend. During 2004, the Company paid a cash dividend of $97,500 to MLIG, of
which $29,322 was an ordinary dividend.
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, policyholder
liabilities 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 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 Commissioners ("NAIC") statutory accounting practices as a component
of prescribed or permitted practices by the State of Arkansas.
G-24
Statutory capital and surplus at December 31, 2006 and 2005 were $418,100 and
$400,951, respectively. At December 31, 2006 and 2005, approximately $41,560 and
$39,845, respectively, of stockholder's equity was available for distribution to
MLIG that does not require approval by the Arkansas Insurance Department.
The Company's statutory net income for 2006, 2005 and 2004 was $193,731,
$117,262 and $79,115, respectively.
The NAIC utilizes the Risk Based Capital ("RBC") adequacy monitoring system. The
RBC calculates the amount of adjusted capital that a life insurance company
should hold based upon that company's risk profile. As of December 31, 2006 and
2005, based on the RBC formula, the Company's total adjusted capital level was
well in excess of the minimum amount of capital required to avoid regulatory
action.
NOTE 11. 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 contract owners 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 contract owner 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,
2006 and 2005, the Company's estimated liability for future guaranty fund
assessments was $6,005 and $6,791, 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.
During the first quarter 2006, the Company committed the remaining $300 of a
$10,000 obligation and has no further commitment obligation.
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, results of operations or cash flows
of the Company.
NOTE 12. SEGMENT INFORMATION
In reporting to management, the Company's operating results are categorized into
two business segments: Annuities and Life Insurance. The Company's Annuity
segment consists of variable annuity and interest-sensitive annuity contracts.
The Company's Life Insurance segment consists of variable life insurance and
interest-sensitive life insurance contracts. The Company currently does not
manufacture, market, or issue life insurance contracts. 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 contract 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 invested assets
that do not support life or annuity policyholder liabilities.
G-25
The following tables summarize each business segment's contribution to the
consolidated amounts for the years ended December 31.
ANNUITIES
------------------------------------
2006 2005 2004
---------- ---------- ----------
Policy charge revenue $ 169,395 $ 152,818 $ 148,337
Net interest spread (1) 16,208 18,542 16,764
Net realized in investment gains (losses) 1,065 3,371 2,515
---------- ---------- ----------
Net revenues 186,668 174,731 167,616
---------- ---------- ----------
Policy benefits 21,129 26,463 28,877
Reinsurance premium ceded 5,988 5,680 4,699
Amortization of DAC 22,185 58,263 (5,591)
Insurance expenses and taxes 49,710 50,669 48,834
---------- ---------- ----------
Net benefits and expenses 99,012 141,075 76,819
---------- ---------- ----------
Earnings before federal income tax provision 87,656 33,656 90,797
---------- ---------- ----------
Federal income tax provision 27,639 5,363 29,582
---------- ---------- ----------
Earnings before change in accounting principal 60,017 28,293 61,215
---------- ---------- ----------
Change in accounting principal, net of tax -- -- (26,215)
---------- ---------- ----------
Net earnings $ 60,017 $ 28,293 $ 35,000
========== ========== ==========
Select Balance Sheet information:
Total assets $9,873,167 $9,598,360 $9,752,836
Total policyholder liabilities and accruals 810,770 868,962 981,237
----------
(1) Management considers investment income net of interest credited to
policyholder liabilities in evaluating results.
G-26
LIFE INSURANCE
------------------------------------
2006 2005 2004
---------- ---------- ----------
Policy charge revenue $ 95,274 $ 152,030 $ 85,645
Net interest spread (1) 14,759 15,025 11,630
Net realized in investment gains (losses) (633) (521) (79)
---------- ---------- ----------
Net revenues 109,400 166,534 97,196
---------- ---------- ----------
Policy benefits 18,029 20,807 25,405
Reinsurance premium ceded 20,931 20,642 20,498
Amortization of DAC 20,152 68,018 10,495
Insurance expenses and taxes 9,538 8,727 8,726
---------- ---------- ----------
Net benefits and expenses 68,650 118,194 65,124
---------- ---------- ----------
Earnings before federal income tax provision 40,750 48,340 32,072
---------- ---------- ----------
Federal income tax provision 12,931 14,138 7,381
---------- ---------- ----------
Earnings before change in accounting principal 27,819 34,202 24,691
---------- ---------- ----------
Change in accounting principal, net of tax -- -- (1,185)
---------- ---------- ----------
Net earnings $ 27,819 $ 34,202 $ 23,506
========== ========== ==========
Select Balance Sheet information:
Total assets $4,479,664 $4,487,349 $4,827,192
Total policyholder liabilities and accruals 1,688,310 1,746,565 1,829,825
----------
(1) Management considers investment income net of interest credited to
policyholder liabilities in evaluating results.
G-27
OTHER
------------------------------
2006 2005 2004
-------- -------- --------
Policy charge revenue $ -- $ -- $ --
Net interest spread (1) 9,813 7,719 8,882
Net realized in investment gains (losses) 804 (228) 1,563
-------- -------- --------
Net revenues 10,617 7,491 10,445
-------- -------- --------
Earnings before federal income tax provision 10,617 7,491 10,445
-------- -------- --------
Federal income tax provision 3,716 2,622 3,656
-------- -------- --------
Net earnings $ 6,901 $ 4,869 $ 6,789
======== ======== ========
Select Balance Sheet information:
Total assets $269,040 $275,167 $170,173
----------
(1) Management considers investment income net of interest credited to
policyholder liabilities in evaluating results.
G-28
The following table summarizes the Company's net revenues by contract type for
the years ended December 31:
2006 2005 2004
-------- -------- --------
Annuities:
Variable annuities $176,988 $161,370 $159,528
Interest-sensitive annuities 9,680 13,361 8,088
-------- -------- --------
Total Annuities 186,668 174,731 167,616
-------- -------- --------
Life Insurance:
Variable Life 101,434 157,312 85,999
Interest-sensitive whole life 7,966 9,222 11,197
-------- -------- --------
Total Life Insurance 109,400 166,534 97,196
-------- -------- --------
Other 10,617 7,491 10,445
-------- -------- --------
Net Revenues (1) $306,685 $348,756 $275,257
======== ======== ========
----------
(1) Management considers investment income net of interest credited to
policyholder liabilities in evaluating Net Revenues.
******
G-29
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Financial Statements of Merrill Lynch Life Variable Annuity
Separate Account C as of December 31, 2006 and for the two
years ended December 31, 2006 and the Notes relating
thereto appear in the Statement of Additional Information.
(2) Financial Statements of Merrill Lynch Life Insurance Company
for the three years ended December 31, 2006 and the Notes
relating thereto appear in the Statement of Additional
Information.
(b) Exhibits
(1) Resolution of the Board of Directors of Merrill Lynch Life
Insurance Company establishing the Merrill Lynch Life
Variable Annuity Separate Account C. (Incorporated by
Reference to Registrant's Registration Statement on Form
N-4, Registration No. 333-73544 Filed November 16, 2001.)
(2) Not Applicable.
(3) Form of Underwriting Agreement Between Merrill Lynch Life
Insurance Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated. (Incorporated by Reference to Registrant's
Pre-Effective Amendment No. 1 to Form N-4, Registration No.
333-73544 Filed May 31, 2002.)
(4) (a) Form of Contract for the Flexible Premium Individual
Deferred Variable Annuity. (Incorporated by Reference to
Registrant's Registration Statement on Form N-4,
Registration No. 333-73544 Filed November 16, 2001.)
(b) Individual Retirement Annuity Endorsement. (Incorporated by
Reference to Merrill Lynch Life Variable Annuity Separate
Account A's Registration Statement on Form N-4,
Registration No. 333-90243 filed November 3, 1999.)
(c) Tax Sheltered Annuity Endorsement. (Incorporated by
Reference to Registrant's Registration Statement on Form
N-4, Registration No. 333-73544 Filed November 16, 2001.)
(d) Estate Enhancer Death Benefit Enhancement Rider.
(Incorporated by Reference to Merrill Lynch Life Variable
Annuity Separate Account A's Post-Effective Amendment No. 2
to Form N-4, Registration No. 333-90243 Filed July 24,
2001.)
(e) Death Benefit Endorsement ML056. (Incorporated by Reference
to Merrill Lynch Life Variable Annuity Separate Account A's
Registration Statement on Form N-4, Registration No.
333-63904 Filed June 26, 2001.)
(f) Death Benefit Endorsement ML067. (Incorporated by Reference
to Registrant's Registration Statement on Form N-4,
Registration No. 333-73544 Filed November 16, 2001.)
(g) Qualified Plan Endorsement. (Incorporated by Reference to
Registrant's Registration Statement on Form N-4,
Registration No. 333-73544 Filed November 16, 2001.)
(5) Form of Application for the Flexible Premium Individual
Deferred Variable Annuity. (Incorporated by Reference to
Registrant's Registration Statement on Form N-4,
Registration No. 333-73544 Filed November 16, 2001.)
(6) (a) Articles of Amendment, Restatement and Redomestication of
the Articles of Incorporation of Merrill Lynch Life
Insurance Company. (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 10 to Form N-4, Registration
No. 33-43773 Filed December 10, 1996.)
C-1
(b) Amended and Restated By-Laws of Merrill Lynch Life Insurance
Company. (Incorporated by Reference to Merrill Lynch Life
Variable Annuity Separate Account A's Post-Effective
Amendment No. 10 to Form N-4, Registration No. 33-43773
Filed December 10, 1996.)
(7) Not Applicable.
(8) (a) Amended General Agency Agreement. (Incorporated by Reference
to Merrill Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 5 to Form N-4, Registration
No. 33-43773 Filed April 28, 1994.)
(b) Indemnity Agreement Between Merrill Lynch Life Insurance
Company and Merrill Lynch Life Agency, Inc. (Incorporated
by Reference to Merrill Lynch Life Variable Annuity
Separate Account A's Post-Effective Amendment No. 10 to
Form N-4, Registration No. 33-43773 Filed December 10,
1996.)
(c) Agreement Between Merrill Lynch Life Insurance Company and
Merrill Lynch Variable Series Funds, Inc. Relating to
Maintaining Constant Net Asset Value for the Domestic Money
Market Fund. (Incorporated by Reference to Merrill Lynch
Life Variable Annuity Separate Account A's Post-Effective
Amendment No. 10 to Form N-4, Registration No. 33-43773
Filed December 10, 1996.)
(d) Agreement Between Merrill Lynch Life Insurance Company and
Merrill Lynch Variable Series Funds, Inc. Relating to
Valuation and Purchase Procedures. (Incorporated by
Reference to Merrill Lynch Life Variable Annuity Separate
Account A's Post Effective Amendment No. 10 to Form N-4,
Registration No. 33-43773 Filed December 10, 1996.)
(e) Amended Service Agreement Between Merrill Lynch Life
Insurance Company and Merrill Lynch Insurance Group, Inc.
(Incorporated by Reference to Merrill Lynch Life Variable
Annuity Separate Account A's Post-Effective Amendment No. 5
to Form N-4, Registration No. 33-43773 Filed April 28,
1994.)
(f) Reimbursement Agreement Between Merrill Lynch Asset
Management, L.P. and Merrill Lynch Life Agency, Inc.
(Incorporated by Reference to Merrill Lynch Life Variable
Annuity Separate Account A's Post-Effective Amendment No.
10 to Form N-4, Registration No. 33-43773 Filed December
10, 1996.)
(g) Form of Participation Agreement Between Merrill Lynch
Variable Series Funds, Inc. and Merrill Lynch Life
Insurance Company. (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 10 to Form N-4, Registration
No. 33-43773 Filed December 10, 1996.)
(h) Amendment to the Participation Agreement Between Merrill
Lynch Variable Series Funds, Inc. and Merrill Lynch Life
Insurance Company. (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Registration Statement on Form N-4, Registration No.
333-90243 Filed November 3, 1999.)
(i) Form of Participation Agreement Between MLIG Variable
Insurance Trust, Merrill Lynch Pierce, Fenner & Smith,
Inc., and Merrill Lynch Life Insurance Company.
(j) Form of Rule 22c-2 Shareholder Information Agreement Between
BlackRock Distributors, Inc. and Merrill Lynch Life
Insurance Company.
(9) Opinion of Barry G. Skolnick, Esq. and Consent to its use as
to the legality of the securities being registered.
(Incorporated by Reference to Registrant's Pre-Effective
Amendment No. 1 to Form N-4, Registration No. 333-73544
Filed May 31, 2002.)
(10) (a) Written Consent of Sutherland Asbill & Brennan LLP.
(b) Written Consent of Deloitte & Touche LLP, independent
registered public accounting firm.
(c) Written Consent of Barry G. Skolnick, Esq.
(11) Not Applicable.
(12) Not Applicable.
(13) (a) Powers of Attorney. (Incorporated by Reference to Merrill
Lynch Life Variable Annuity Separate Account A's
Post-Effective Amendment No. 4 to Form N-4, Registration
No. 333-118362 Filed April 21, 2006.)
C-2
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR*
NAME PRINCIPAL BUSINESS ADDRESS POSITION WITH DEPOSITOR
---- ----------------------------------- ----------------------------------------
Deborah J. Adler............ 1700 Merrill Lynch Drive, 3rd Floor Director, Chairman of the Board,
President,
Pennington, New Jersey 08534 Chief Executive Officer and Chief
Actuary.
John C. Carroll............. 1700 Merrill Lynch Drive, 3rd Floor Director and Senior Vice President.
Pennington, New Jersey 08534
Joseph E. Justice........... 1700 Merrill Lynch Drive, 3rd Floor Director, Senior Vice President,
Pennington, New Jersey 08534 Chief Financial Officer, and Treasurer.
Paul Michalowski............ 1700 Merrill Lynch Drive, 3rd Floor Director and Vice President.
Pennington, New Jersey 08534
Barry G. Skolnick........... 1700 Merrill Lynch Drive, 3rd Floor Director, Senior Vice President and
Pennington, New Jersey 08534 General Counsel.
Joseph Benesch.............. 1700 Merrill Lynch Drive, 3rd Floor Vice President.
Pennington, New Jersey 08534
Mark Buchinsky.............. 1700 Merrill Lynch Drive, 3rd Floor Vice President and Senior Counsel.
Pennington, New Jersey 08534
Scott Edblom................ 1700 Merrill Lynch Drive, 3rd Floor Vice President and Product Actuary.
Pennington, New Jersey 08534
Elizabeth Garrison.......... 1700 Merrill Lynch Drive, 3rd Floor Vice President and Controller.
Pennington, New Jersey 08534
Frances C. Grabish.......... 1700 Merrill Lynch Drive, 3rd Floor Vice President and Senior Counsel.
Pennington, New Jersey 08534
Richard Gracey.............. 1700 Merrill Lynch Drive, 3rd Floor Vice President and Actuary.
Pennington, New Jersey 08534
Roger Helms................. 1700 Merrill Lynch Drive, 3rd Floor Vice President.
Pennington, New Jersey 08534
Sharon Hockersmith.......... 4802 Deer Lake Drive East Senior Vice President, Administration.
Jacksonville, FL 32246
Hsiang Kau.................. 1700 Merrill Lynch Drive, 3rd Floor Vice President and Pricing Actuary.
Pennington, New Jersey 08534
Radha Lakshminarayanan...... 1700 Merrill Lynch Drive, 3rd Floor Vice President and Corporate
Pennington, New Jersey 08534 Actuary.
Kirsty Lieberman............ 1700 Merrill Lynch Drive, 3rd Floor Vice President and Senior Counsel.
Pennington, New Jersey 08534
Patrick Lusk................ 1700 Merrill Lynch Drive, 3rd Floor Vice President and Financial Actuary.
Pennington, New Jersey 08534
Denise Marshall............. 1700 Merrill Lynch Drive, 3rd Floor Vice President, Senior Paralegal, and
Pennington, New Jersey 08534 Assistant Secretary.
Robin A. Maston............. 1700 Merrill Lynch Drive, 3rd Floor Vice President and Senior
Pennington, New Jersey 08534 Compliance Officer.
Jane R. Michael............. 4802 Deer Lake Drive East Vice President.
Jacksonville, FL 32246
Heather Reilly.............. 1700 Merrill Lynch Drive, 3rd Floor Vice President and Compliance Officer.
Pennington, New Jersey 08534
Concetta M. Ruggiero........ 1700 Merrill Lynch Drive, 3rd Floor Senior Vice President.
Pennington, New Jersey 08534
Lori M. Salvo............... 1700 Merrill Lynch Drive, 3rd Floor Vice President, Chief Compliance
Officer,
Pennington, New Jersey 08534 Deputy General Counsel, and Secretary.
Sarah Scanga................ 1700 Merrill Lynch Drive, 3rd Floor Vice President.
Pennington, New Jersey 08534
Cheryl Y. Sullivan.......... 1700 Merrill Lynch Drive, 3rd Floor Vice President and Counsel.
Pennington, New Jersey 08534
C-3
NAME PRINCIPAL BUSINESS ADDRESS POSITION WITH DEPOSITOR
---- ----------------------------------- ----------------------------------------
Greta Rein Ulmer............ 1700 Merrill Lynch Drive, 3rd Floor Vice President and Director of
Compliance.
Pennington, New Jersey 08534
Kelley Woods................ 4802 Deer Lake Drive East Vice President.
Jacksonville, FL 32246
---------------
* Each director is elected to serve until the next annual shareholder meeting or
until his or her successor is elected and shall have qualified.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
Merrill Lynch Life Insurance Company is an indirect wholly owned subsidiary
of Merrill Lynch & Co., Inc.
A list of subsidiaries of Merrill Lynch & Co., Inc. ("ML & Co.") appears
below.
SUBSIDIARIES OF THE REGISTRANT
The following are subsidiaries of ML & Co. as of December 29, 2006 and the
states or jurisdictions in which they are organized. Indentation indicates the
principal parent of each subsidiary. Except as otherwise specified, in each case
ML & Co. owns, directly or indirectly, at least 99% of the voting securities of
each subsidiary. The names of particular subsidiaries have been omitted because,
considered in the aggregate as a single subsidiary, they would not constitute,
as of the end of the year covered by this report, a "significant subsidiary" as
that term is defined in Rule 1.02(w) of Regulation S-X under the Securities
Exchange Act of 1934.
STATE OR
NAME JURISDICTION OF ENTITY
---- ----------------------
Merrill Lynch & Co., Inc. .............................. Delaware
Merrill Lynch, Pierce, Fenner & Smith
Incorporated(1)................................... Delaware
Merrill Lynch Life Agency Inc.(2)............... Washington
Merrill Lynch Professional Clearing Corp.(3).... Delaware
Merrill Lynch Singapore Commodities Pte.
Ltd. ........................................ Singapore
ML Petrie Parkman Co., Inc. .................... Delaware
Merrill Lynch Capital Services, Inc. ............... Delaware
Merrill Lynch Commodities, Inc. ................ Delaware
Merrill Lynch Government Securities Inc. ........... Delaware
Merrill Lynch Money Markets Inc. ............... Delaware
Merrill Lynch Group, Inc. .......................... Delaware
Investor Protection Insurance Company........... Vermont
Merrill Lynch Credit Reinsurance Limited........ Bermuda
FAM Distributors, Inc. ......................... Delaware
Merrill Lynch Investment Holdings (Mauritius)
Limited(4)................................... Mauritius
Merrill Lynch (Mauritius) Investments
Limited.................................. Mauritius
DSP Merrill Lynch Limited(5)............ Mumbai, India
DSP Merrill Lynch Capital
Limited.......................... Mumbai, India
DSP Merrill Lynch Securities
Trading Limited.................. Mumbai, India
C-4
STATE OR
NAME JURISDICTION OF ENTITY
---- ----------------------
DSP Merrill Lynch Trust Services
Limited.......................... Mumbai, India
ML Invest, Inc. ................................ Delaware
Merrill Lynch Investment Managers Group
Services Limited......................... England
Merrill Lynch Investment Managers
(Finance) Limited.................... England
Merrill Lynch Investment Managers
Holdings B.V..................... Netherlands
Merrill Lynch Portfolio Managers Limited.... England
Merrill Lynch Bank & Trust Co., FSB............. Federal
Merrill Lynch Mortgage and Investment
Corporation(6)........................... Delaware
Merrill Lynch Community Development
Company, LLC......................... New Jersey
Merrill Lynch Credit Corporation........ Delaware
ML Mortgage Holdings Inc. .............. Delaware
Merrill Lynch Bank USA.......................... Utah
Financial Data Services, Inc. .............. Florida
Merrill Lynch Business Financial Services
Inc.(7).................................. Delaware
Merrill Lynch Commercial Finance Corp. ..... Delaware
Merrill Lynch Utah Investment Corporation... Utah
ML Private Finance LLC...................... Delaware
MLBUSA Community Development Corp. ......... Delaware
MLBUSA Funding Corporation.................. Delaware
Merrill Lynch NJ Investment
Corporation.......................... New Jersey
Merrill Lynch Insurance Group, Inc. ............ Delaware
Merrill Lynch Insurance Group Services,
Inc. .................................... Delaware
Merrill Lynch Life Insurance Company........ Arkansas
ML Life Insurance Company of New York....... New York
Roszel Advisors, LLC........................ Delaware
Merrill Lynch European Asset Holdings Inc. ..... Delaware
Merrill Lynch Group Holdings Limited........ Ireland
Merrill Lynch International Bank
Limited(8)........................... Ireland
Majestic Acquisitions Limited...... England
Mortgage Holdings Limited...... England
Mortgages plc................ England
Mortgages 1 Limited.......... England
Merrill Lynch Bank (Suisse)
S.A. ............................ Switzerland
Merrill Lynch Diversified Investments, LLC...... Delaware
Merrill Lynch Credit Products, LLC.......... Delaware
C-5
STATE OR
NAME JURISDICTION OF ENTITY
---- ----------------------
Merrill Lynch Mortgage Capital Inc. Delaware
Merrill Lynch Mortgage Lending,
Inc. Delaware
Wilshire Credit Corporation Delaware
MLDP Holdings, Inc. Delaware
Merrill Lynch Derivative Products AG Switzerland
ML IBK Positions, Inc. Delaware
Merrill Lynch PCG, Inc. Delaware
Merrill Lynch Capital Corporation Delaware
ML Leasing Equipment Corp.(9) Delaware
Merrill Lynch Canada Holdings Company Nova Scotia, Canada
Merrill Lynch Canada Finance Company(10) Nova Scotia, Canada
Merrill Lynch & Co., Canada Ltd. Ontario, Canada
Merrill Lynch Financial Assets Inc. Canada
Merrill Lynch Canada Inc.(11) Canada
Merrill Lynch International Incorporated Delaware
Merrill Lynch Futures Asia Limited Taiwan
Merrill Lynch Futures (Hong Kong) Limited Hong Kong
Merrill Lynch Reinsurance Solutions LTD Bermuda
Merrill Lynch (Australasia) Pty. Ltd. New South Wales, Australia
Merrill Lynch Finance (Australia) Pty
Limited Victoria, Australia
Merrill Lynch Markets (Australia) Pty
Limited New South Wales, Australia
Equity Margins Ltd. Victoria, Australia
Merrill Lynch (Australia) Pty Ltd New South Wales, Australia
Merrill Lynch Equities (Australia)
Limited Victoria, Australia
Merrill Lynch Private (Australia)
Limited New South Wales, Australia
Berndale Securities Limited Victoria, Australia
Merrill Lynch (Australia) Nominees
Pty. Limited New South Wales, Australia
Merrill Lynch International (Australia)
Limited New South Wales, Australia
Merrill Lynch (Australia) Futures
Limited New South Wales, Australia
Merrill Lynch Japan Securities Co., Ltd. Japan
Merrill Lynch Japan Finance Co., Ltd. Japan
Merrill Lynch International Holdings Inc. Delaware
Merrill Lynch France SAS France
Merrill Lynch Capital Markets (France)
SAS France
Merrill Lynch, Pierce, Fenner & Smith
SAS France
Merrill Lynch Mexico, S.A. de C.V., Casa de
Bolsa Mexico
PT Merrill Lynch Indonesia(12) Indonesia
Merrill Lynch (Asia Pacific) Limited Hong Kong
Merrill Lynch Far East Limited Hong Kong
C-6
STATE OR
NAME JURISDICTION OF ENTITY
---- ----------------------
ML Cayman Holdings Inc. .................... Cayman Islands, British West
Indies
Merrill Lynch Bank and Trust Company
(Cayman) Limited..................... Cayman Islands, British West
Indies
Institucion Financiera Externa
Merrill Lynch Bank Uruguay
S.A.............................. Uruguay
Merrill Lynch Espanola Agencia de
Valores S.A. .................... Spain
Merrill Lynch Capital Markets AG(13)........ Switzerland
Merrill Lynch Europe PLC.................... England
Merrill Lynch, Pierce, Fenner & Smith
Limited.............................. England
Merrill Lynch Global Asset
Management Limited............... England
ML UK Capital Holdings(14).............. England
Merrill Lynch International(15).... England
Merrill Lynch Europe Intermediate
Holdings............................. England
Merrill Lynch Capital Markets
Espana S.A., S.V................. Spain
Merrill Lynch Holdings Limited.......... England
Merrill Lynch Commodities (Europe)
Holdings Limited................... England
Merrill Lynch Commodities (Europe)
Limited.......................... England
Merrill Lynch Commodities
(Europe) Trading Limited..... England
Merrill Lynch Commodities
GmbH......................... England
Merrill Lynch (Singapore) Pte.
Ltd.(16)............................. Singapore
Merrill Lynch South Africa (Proprietary)
Limited(17).......................... South Africa
Merrill Lynch Argentina S.A.(18)............ Argentina
Merrill Lynch, Pierce, Fenner & Smith de
Argentina................................ Argentina
Sociedad Anonima, Financiera, Mobiliaria y
de Mandatos(19)
Banco Merrill Lynch de Investimentos
S.A.(20)................................. Brazil
Merrill Lynch S.A. Corretora de Titulos
e Valores Mobiliarios................ Brazil
Merrill Lynch S.A. ......................... Luxembourg
Merrill Lynch Europe Ltd. .................. Cayman Islands, British West
Indies
C-7
STATE OR
NAME JURISDICTION OF ENTITY
---- ----------------------
Herzog, Heine, Geduld, LLC.......................... Delaware
Merrill Lynch Financial Markets, Inc. .............. Delaware
The Princeton Retirement Group, Inc. ............... Delaware
---------------
(1) Also conducts business under the name "Merrill Lynch & Co."
(2) Similarly named affiliates and subsidiaries that engage in the sale of
insurance and annuity products are incorporated in various other
jurisdictions.
(3) The preferred stock of the corporation is owned by an unaffiliated group of
investors.
(4) Merrill Lynch Group, Inc. and Merrill Lynch International Incorporated each
hold fifty percent of this entity.
(5)Partially held by another indirect subsidiary of ML & Co.
(6)13.2% of this entity is held by Merrill Lynch Bank USA.
(7)Also conducts business under the name "Merrill Lynch Capital."
(8)Held through several intermediate holding companies.
(9) This corporation has 20 direct or indirect subsidiaries operating in the
United States and serving as either general partners or associate general
partners of limited partnerships.
(10) Held through several intermediate holding companies.
(11) Held through several intermediate holding companies.
(12)Merrill Lynch International Holdings Inc. has an 80% stake in this entity
through a joint venture.
(13) Also conducts business under the names "Merrill Lynch Capital Markets S.A."
and "Merrill Lynch Capital Markets Ltd."
(14) Held through several intermediate holding companies.
(15) Partially owned by another indirect subsidiary of ML & Co.
(16) Held through intermediate subsidiaries.
(17) Held through intermediate subsidiaries.
(18)Partially owned by another direct subsidiary of ML & Co.
(19)Partially owned by another direct subsidiary of ML & Co.
(20) Partially owned by another direct subsidiary of ML & Co.
ITEM 27. NUMBER OF CONTRACTS
The number of Contracts in force as of March 23, 2007 was 334.
ITEM 28. INDEMNIFICATION
The following provisions regarding the Indemnification of Directors and
Officers of the Registrant are applicable:
AMENDED AND RESTATED BY-LAWS OF MERRILL LYNCH LIFE INSURANCE COMPANY, ARTICLE VI
SECTIONS 1, 2, 3 AND 4 -- INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS
SECTION 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that he
is or was a director, officer or employee of the Corporation, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon
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a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer or employee of the Corporation, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the Court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other Court shall deem proper.
SECTION 3. RIGHT TO INDEMNIFICATION. To the extent that a director, officer or
employee of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Sections 1 and 2 of
this Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
SECTION 4. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under
Sections 1 and 2 of this Article (unless ordered by a Court) shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, or employee is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 1 and 2 of this Article. Such determination shall be made (i) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders.
BY-LAWS OF MERRILL LYNCH & CO., INC.,
SECTION 2 -- INDEMNIFICATION BY CORPORATION
Any persons serving as an officer, director or trustee of a corporation,
trust, or other enterprise, including the Registrant, at the request of Merrill
Lynch are entitled to indemnification from Merrill Lynch, to the fullest extent
authorized or permitted by law, for liabilities with respect to actions taken or
omitted by such persons in any capacity in which such persons serve Merrill
Lynch or such other corporation, trust, or other enterprise. Any action
initiated by any such person for which indemnification is provided shall be
approved by the Board of Directors of Merrill Lynch prior to such initiation.
OTHER INDEMNIFICATION
There is no indemnification of the principal underwriter, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, with respect to the Contract.
The indemnity agreement between Merrill Lynch Life Insurance Company
("Merrill Lynch Life") and its affiliate Merrill Lynch Life Agency Inc.
("MLLA"), with respect to MLLA's general agency responsibilities on behalf of
Merrill Lynch Life and the Contract, provides:
Merrill Lynch Life will indemnify and hold harmless MLLA and all persons
associated with MLLA as such term is defined in Section 3(a) (21) of the
Securities Exchange Act of 1934 against all claims, losses, liabilities
and expenses, to include reasonable attorneys' fees, arising out of the
sale by MLLA of insurance products under the above-referenced Agreement,
provided that Merrill Lynch Life shall not be bound to indemnify or hold
harmless MLLA or its associated persons for claims, losses, liabilities
and expenses arising directly out of the willful misconduct or
negligence of MLLA or its associated persons.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registration pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue. There is no indemnification of the principal underwriter, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, with respect to the Contract.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Merrill Lynch, Pierce, Fenner & Smith Incorporated also acts as
principal underwriter for the following additional funds: CBA Money Fund; CMA
Government Securities Fund; CMA Money Fund; CMA Tax-Exempt Fund; CMA Treasury
Fund; CMA Multi-State Municipal Series Trust; WCMA Money Fund; WCMA Government
Securities Fund; WCMA Tax-Exempt Fund; WCMA Treasury Fund; The Merrill Lynch
Fund of Stripped ("Zero") U.S. Treasury Securities; The Fund of Stripped
("Zero") U.S. Treasury Securities; Merrill Lynch Trust for Government
Securities; MLIG Variable Insurance Trust; Municipal Income Fund; Municipal
Investment Trust Fund; Defined Asset Funds; Corporate Income Fund; Government
Securities Income Fund; Equity Investor Fund; and Preferred Income Strategies
Fund, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated also acts as principal
underwriter for the following additional accounts: ML of New York Variable
Annuity Separate Account A; ML of New York Variable Annuity Separate Account B;
ML of New York Variable Annuity Separate Account C; ML of New York Variable
Annuity Separate Account D; Merrill Lynch Variable Life Separate Account;
Merrill Lynch Life Variable Life Separate Account II; Merrill Lynch Life
Variable Annuity Separate Account; Merrill Lynch Life Variable Annuity Separate
Account A; Merrill Lynch Life Variable Annuity Separate Account B; Merrill Lynch
Life Variable Annuity Separate Account D; ML of New York Variable Life Separate
Account; ML of New York Variable Life Separate Account II and ML of New York
Variable Annuity Separate Account.
(b) The directors, president, treasurer, executive vice presidents, chief
financial officer, and controller of Merrill Lynch, Pierce, Fenner & Smith
Incorporated are as follows:
NAME AND PRINCIPAL
BUSINESS ADDRESS POSITIONS AND OFFICES WITH UNDERWRITER
------------------ --------------------------------------
Candace E. Browning Director and Senior Vice President
Gregory J. Fleming Director and Executive Vice President
Dow Kim Director and Executive Vice President
Robert J. McCann Director, Chairman of the Board and Chief
Executive Officer
Carlos M. Morales Director and Senior Vice President
Rosemary T. Berkery Executive Vice President
Ahmass L. Fakahany Executive Vice President
Allen G. Braithwaite, III Treasurer
Joseph F. Regan First Vice President, Chief Financial
Officer and Controller
---------------
Business address for all persons listed: 4 World Financial Center, New
York, NY 10080.
(c) Not applicable
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ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books, and records required to be maintained by Section 31(a)
of the 1940 Act and the rules promulgated thereunder are maintained by the
depositor at the principal executive offices at 1700 Merrill Lynch Drive, 3rd
Floor, Pennington, New Jersey 08534 and at the Service Center at 4802 Deer Lake
Drive East, Jacksonville, Florida 32246.
ITEM 31. NOT APPLICABLE
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) Registrant undertakes to file a post-effective amendment to the
Registrant Statement as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more than 16 months
old for so long as payments under the variable annuity contracts may be
accepted.
(b) Registrant undertakes to include either (1) as part of any application
to purchase a contract offered by the prospectus, a space that an applicant can
check to request a statement of additional information, or (2) a postcard or
similar written communications affixed to or included in the prospectus that the
applicant can remove to send for a statement of additional information.
(c) Registrant undertakes to deliver any statement of additional
information and any financial statements required to be made available under
this Form promptly upon written or oral request.
(d) Merrill Lynch Life Insurance Company hereby represents that the fees
and charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by Merrill Lynch Life Insurance Company.
(e) Registrant hereby represents that it is relying on the American Council
of Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to
Contracts used in connection with retirement plans meeting the requirements of
Section 403(b) of the Internal Revenue Code, and represents further that it will
comply with the provisions of paragraphs (1) through (4) set forth in that
no-action letter.
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SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Merrill Lynch Life Variable Annuity Separate Account C,
certifies that this Post-Effective Amendment meets all the requirements for
effectiveness under paragraph (b) of Rule 485, and accordingly, has caused this
Amendment to be signed on its behalf, in the Borough of Pennington, State of New
Jersey, on this 17th day of April, 2007.
Merrill Lynch Life Variable Annuity
Separate Account C
(Registrant)
By: /s/ BARRY G. SKOLNICK
-------------------------------------------
Barry G. Skolnick
Senior Vice President and General Counsel
Merrill Lynch Life Insurance Company
(Depositor)
By: /s/ BARRY G. SKOLNICK
-------------------------------------------
Barry G. Skolnick
Senior Vice President and General Counsel
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 6 to the Registration Statement has been signed below by the following
persons in the capacities indicated on April 17, 2007.
SIGNATURE TITLE
--------- -----
* Director, Chairmen of the Board,
------------------------------------------ President, Chief Executive Officer and
Deborah J. Adler Chief Actuary
* Director and Senior Vice President
------------------------------------------
John C. Carroll
* Director, Senior Vice President, Chief
------------------------------------------ Financial Officer, and Treasurer
Joseph E. Justice
* Director and Senior Vice President
------------------------------------------
Paul Michalowski
*By: /s/ BARRY G. SKOLNICK In his own capacity as Director, Senior
------------------------------------------ Vice President, and General Counsel, and
Barry G. Skolnick as Attorney-In-Fact
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EXHIBIT LIST
(8) (i) Form of Participation Agreement Between MLIG Variable
Insurance Trust, Merrill Lynch Pierce, Fenner & Smith,
Inc., and Merrill Lynch Life Insurance Company.
(8) (j) Form of Rule 22c-2 Shareholder Information Agreement Between
BlackRock Distributors, Inc. and Merrill Lynch Life
Insurance Company.
(10) (a) Written Consent of Sutherland Asbill & Brennan LLP.
(b) Written Consent of Deloitte & Touche LLP, independent
registered public accounting firm.
(c) Written Consent of Barry G. Skolnick, Esq.
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