<Page>
As filed with the Securities and Exchange Commission on April 4, 2003.
File No. 333-43805
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Post-Effective Amendment No. 8 to
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
81-0170040
(I.R.S. Employer Identification Number)
500 Bielenberg Drive
Woodbury, Minnesota 55125
(651) 738-4000
(Address, including zip code, and telephone number, including area code of
registrant's principal executive office)
Marianne O'Doherty
Hartford Life Insurance Company
P.O. BOX 2999
Hartford, Connecticut 06104-2999
(860) 843-6733
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<Page>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securties Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securties Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<Page>
PART I
<Page>
<Table>
EMPOWER VARIABLE ANNUITY
VARIABLE ACCOUNT D
ISSUED BY:
FORTIS BENEFITS INSURANCE COMPANY
P.O. BOX 64272
ST. PAUL, MINNESOTA 55164
ADMINISTERED BY:
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
TELEPHONE: 1-800-862-6668 (CONTRACT OWNERS)
1-800-862-7155 (REGISTERED REPRESENTATIVES)
</Table>
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This prospectus describes information you should know before you purchase the
Fortis EmPower Variable Annuity. Please read it carefully.
Fortis EmPower Variable Annuity is a contract between you and Fortis Benefits
Insurance Company where you agree to make at least one Premium Payment and
Fortis agrees to make a series of Annuity Payouts at a later date. This Contract
is a flexible premium, tax-deferred, variable annuity offered to both
individuals and groups. It is:
x Flexible, because you may add Premium Payments at any time.
x Tax-deferred, which means you don't pay taxes until you take money out or
until we start to make Annuity Payouts.
x Variable, because the value of your Contract will fluctuate with the
performance of the underlying Funds.
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At the time you purchase your Contract, you allocate your Premium Payment to
"Sub-Accounts." These are subdivisions of our Separate Account, an account that
keeps your Contract assets separate from our company assets. The Sub-Accounts
then purchase shares of mutual funds set up exclusively for variable annuity or
variable life insurance products. These are not the same mutual funds that you
buy through your stockbroker or through a retail mutual fund. They may have
similar investment strategies and the same portfolio managers as retail mutual
funds. This Contract offers you Funds with investment strategies ranging from
conservative to aggressive and you may pick those Funds that meet your
investment goals and risk tolerance. The Sub-Accounts and the Funds are listed
below:
- - HARTFORD ADVISERS HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford Advisers HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD BLUE CHIP STOCK HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford Blue Chip Stock HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD BOND HLS FUND SUB-ACCOUNT which purchases Class IA shares of Hartford
Bond HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD CAPITAL APPRECIATION HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford Capital Appreciation HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD CAPITAL OPPORTUNITIES HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford Capital Opportunities HLS Fund of Hartford HLS Series Fund
II, Inc.
- - HARTFORD GLOBAL LEADERS HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford Global Leaders HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD GROWTH AND INCOME HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford Growth and Income HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD GROWTH OPPORTUNITIES HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford Growth Opportunities HLS Fund of Hartford HLS Series Fund
II, Inc.
- - HARTFORD HIGH YIELD HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford High Yield HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD INDEX HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford Index HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD INTERNATIONAL OPPORTUNITIES HLS FUND SUB-ACCOUNT which purchases
Class IA shares of Hartford International Opportunities HLS Fund of Hartford
Series Fund, Inc.
<Page>
- - HARTFORD INTERNATIONAL STOCK HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford International Stock HLS Fund of Hartford HLS Series Fund
II, Inc.
- - HARTFORD LARGE CAP GROWTH HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford LargeCap Growth HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD MID CAP STOCK HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford MidCap Stock HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD MONEY MARKET HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford Money Market HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD MULTISECTOR BOND HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford Multisector Bond HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD SMALLCAP GROWTH HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford SmallCap Growth HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD SMALL CAP VALUE HLS FUND SUB-ACCOUNT which purchases Class IA shares
of Hartford SmallCap Value HLS Fund of Hartford HLS Series Fund II, Inc.
- - HARTFORD STOCK HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford Stock HLS Fund of Hartford Series Fund, Inc.
- - HARTFORD U.S. GOVERNMENT SECURITIES HLS FUND SUB-ACCOUNT which purchases
Class IA shares of Hartford U.S. Government Securities HLS Fund of Hartford
HLS Series Fund II, Inc.
- - HARTFORD VALUE OPPORTUNITIES HLS FUND SUB-ACCOUNT which purchases Class IA
shares of Hartford Value Opportunities HLS Fund of Hartford HLS Series Fund
II, Inc.
You may also allocate some or all of your Premium Payment to a Guarantee Period
in our General Account. A Guarantee Period guarantees a rate of interest until a
specified maturity date and may be subject to a Market Value Adjustment. Premium
Payments allocated to a Guarantee Period are not segregated from our company
assets like the assets of the Separate Account.
If you decide to buy this Contract, you should keep this prospectus for your
records. You can also call us at 1-800-862-6668 to get a Statement of Additional
Information, free of charge. The Statement of Additional Information contains
more information about this Contract, and includes Financial Statements for
Hartford and the Separate Account. Like this prospectus, the Statement of
Additional Information is filed with the Securities and Exchange Commission
("SEC").
Although we file the prospectus and the Statement of Additional Information with
the SEC, the SEC doesn't approve or disapprove these securities or determine if
the information in this prospectus is truthful or complete. Anyone who
represents that the SEC does these things may be guilty of a criminal offense.
This prospectus and the Statement of Additional Information can also be obtained
from the SEC's website (www.sec.gov).
This Contract IS NOT:
- A bank deposit or obligation
- Federally insured
- Endorsed by any bank or governmental agency
This Contract may not be available for sale in all states.
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PROSPECTUS DATED: MAY 1, 2003
STATEMENT OF ADDITIONAL INFORMATION DATED: MAY 1, 2003
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FORTIS BENEFITS INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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DEFINITIONS 4
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FEE TABLES 6
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HIGHLIGHTS 9
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GENERAL CONTRACT INFORMATION 10
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Fortis Benefits Insurance Company 10
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The Separate Account 10
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The Funds 10
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PERFORMANCE RELATED INFORMATION 12
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GUARANTEE PERIODS 13
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THE CONTRACT 14
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Purchases and Contract Value 14
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Charges and Fees 16
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Death Benefit 17
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Surrenders 18
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ANNUITY PAYOUTS 20
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OTHER PROGRAMS AVAILABLE 21
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OTHER INFORMATION 22
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Legal Matters 22
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More Information 22
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FEDERAL TAX CONSIDERATIONS 23
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INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS 27
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ACCUMULATION UNIT VALUES 31
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FURTHER INFORMATION ABOUT FORTIS BENEFITS INSURANCE COMPANY 33
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TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION 37
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APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS 38
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APPENDIX II -- INVESTMENTS BY FORTIS 39
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FORTIS BENEFITS FINANCIAL STATEMENTS F-1
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</Table>
<Page>
4 FORTIS BENEFITS INSURANCE COMPANY
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DEFINITIONS
These terms are capitalized when used throughout this prospectus. Please refer
to these defined terms if you have any questions as you read your prospectus.
ACCOUNT: Any of the Sub-Accounts or Guarantee Periods.
ACCUMULATION PERIOD: The time after you purchase the Contract until we begin to
make Annuity Payouts.
ACCUMULATION UNITS: If you allocate your Premium Payment to any of the
Sub-Accounts, we will convert those payments into Accumulation Units in the
selected Sub-Accounts. Accumulation Units are valued at the end of each
Valuation Day and are used to calculate the value of your Contract prior to
Annuitization.
ACCUMULATION UNIT VALUE: The daily price of Accumulation Units on any Valuation
Day.
ADMINISTRATIVE OFFICE: Hartford Life and Annuity Insurance Company administers
these Contracts. Our location and overnight mailing address is: 200 Hopmeadow
Street, Simsbury, Connecticut 06089. Our standard mailing address is: INVESTMENT
PRODUCT SERVICES, P.O. Box 5085, Hartford, Connecticut 06102-5085.
ANNIVERSARY VALUE: The value equal to the Contract Value as of a Contract
Anniversary, increased by the dollar amount of any Premium Payments made since
that anniversary and reduced by the dollar amount of any partial Surrenders
since that anniversary.
ANNUITANT: The person on whose life the Contract is based. The Annuitant may not
be changed after your Contract is issued.
ANNUITY CALCULATION DATE: The date we calculate the first Annuity Payout.
ANNUITY PAYOUT: The money we pay out after the Annuity Commencement Date for the
duration and frequency you select.
ANNUITY PAYOUT OPTION: Any of the options available for payout after the Annuity
Commencement Date or death of the Contract Owner or Annuitant.
ANNUITY PERIOD: The time during which we make Annuity Payouts.
ANNUITY UNIT: The unit of measure we use to calculate the value of your Annuity
Payouts under a variable dollar amount Annuity Payout Option.
ANNUITY UNIT VALUE: The daily price of Annuity Units on any Valuation Day.
BENEFICIARY: The person entitled to receive a Death Benefit upon the death of
the Contract Owner.
CHARITABLE REMAINDER TRUST: An irrevocable trust, where an individual donor
makes a gift to the trust, and in return receives an income tax deduction. In
addition, the individual donor has the right to receive a percentage of the
trust earnings for a specified period of time.
CODE: The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT: The person you may designate to become the Annuitant if
the original Annuitant dies before the Annuity Commencement Date. You must name
a Contingent Annuitant before the original Annuitant's death. This is only
available if you own a Non-Qualified Contract.
CONTRACT: The individual Annuity Contract and any endorsements or riders. Group
participants and some individuals may receive a certificate rather than a
Contract.
CONTRACT ANNIVERSARY: The anniversary of the date we issued your Contract. If
the Contract Anniversary falls on a Non-Valuation Day, then the Contract
Anniversary will be the next Valuation Day.
CONTRACT OWNER OR YOU: The owner or holder of the Contract described in this
prospectus. We do not capitalize "you" in the prospectus.
CONTRACT VALUE: The total value of the Accounts on any Valuation Day.
CONTRACT YEAR: Any 12 month period between Contract Anniversaries, beginning
with the date the Contract was issued.
DEATH BENEFIT: The amount payable after the Contract Owner or the Annuitant
dies.
FORTIS: Fortis Benefits Insurance Company, the company that issued this
Contract.
GENERAL ACCOUNT: This account holds our company assets and any assets not
allocated to a Separate Account. The assets in this account are available to the
creditors of Fortis and/or Hartford.
JOINT ANNUITANT: The person on whose life Annuity Payouts are based if the
Annuitant dies after Annuitization. You may name a Joint Annuitant only if your
Annuity Payout Option provides for a survivor. The Joint Annuitant may not be
changed.
MARKET VALUE ADJUSTMENT: An adjustment that either increases or decreases the
amount we pay you under certain circumstances.
NET INVESTMENT FACTOR: This is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next, and is also used to calculate
your Annuity Payout amount.
NON-VALUATION DAY: Any day the New York Stock Exchange is not open for trading.
PAYEE: The person or party you designate to receive Annuity Payouts.
PREMIUM PAYMENT: Money sent to us to be invested in your Contract.
<Page>
FORTIS BENEFITS INSURANCE COMPANY 5
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PREMIUM TAX: A tax charged by a state or municipality on Premium Payments.
QUALIFIED CONTRACT: A Contract that is defined as a tax-qualified retirement
plan in the Code.
REQUIRED MINIMUM DISTRIBUTION: A federal requirement that individuals age 70 1/2
and older must take a distribution from their tax-qualified retirement account
by December 31, each year. For employer sponsored Qualified Contracts, the
individual must begin taking distributions at the age of 70 1/2 or upon
retirement, whichever comes later.
SUB-ACCOUNT VALUE: The value on or before the Annuity Calculation Date, which is
determined on any day by multiplying the number of Accumulation Units by the
Accumulation Unit Value for that Sub-Account.
SURRENDER: A complete or partial withdrawal from your Contract.
SURRENDER VALUE: The amount we pay you if you terminate your Contract before the
Annuity Commencement Date. The Surrender Value is equal to the Contract Value
minus any applicable charges and increased or decreased, as applicable, by any
Market Value Adjustment.
VALUATION DAY: Every day the New York Stock Exchange is open for trading. Values
of the Separate Account are determined as of the close of the New York Stock
Exchange, generally 4:00 p.m. Eastern Time.
VALUATION PERIOD: The time span between the close of trading on the New York
Stock Exchange from one Valuation Day to the next.
<Page>
6 FORTIS BENEFITS INSURANCE COMPANY
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FEE TABLES
The following tables describe the fees and expenses that you will pay when
buying, owning, and surrendering the Contract.
This table describes the fees and expenses that you will pay at the time that
you purchase the Contract or Surrender the Contract. Charges for state premium
taxes may also be deducted when you purchase the Contract, upon Surrender or
when we start to make Annuity Payouts.
<Table>
CONTRACT OWNER TRANSACTION EXPENSES
SALES CHARGE IMPOSED ON PURCHASES (as a percentage of
Premium Payments) None
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MAXIMUM CONTINGENT DEFERRED SALES CHARGE (as a percentage of
Premium Payments) None
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SUB-ACCOUNT TRANSFER FEE (1) $25
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</Table>
(1) The Sub-Account Transfer Fee is currently being waived.
This table describes the fees and expenses that you will pay periodically and on
a daily basis during the time that you own the Contract, not including fees and
expenses of the underlying Funds.
<Table>
ANNUAL MAINTENANCE FEE (2) $30
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SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average
daily Sub-Account value)
Mortality and Expense Risk Charge 1.10%
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Administrative Charge 0.15%
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Total Separate Account Annual Expenses 1.25%
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</Table>
(2) An annual $30 charge deducted on a Contract Anniversary or upon Surrender if
the Contract Value at either of those times is less than $100,000. It is
deducted proportionately from the Accounts in which you are invested at the
time of the charge.
<Page>
FORTIS BENEFITS INSURANCE COMPANY 7
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Annual Fund Operating Expenses
As of the Fund's Year End
(As a percentage of net assets)
<Table>
<Caption>
TOTAL FUND
OTHER OPERATING
MANAGEMENT FEES EXPENSES EXPENSES
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Hartford Advisers HLS Fund 0.63% 0.04% 0.67%
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Hartford Blue Chip Stock HLS Fund 0.88% 0.04% 0.92%
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Hartford Bond HLS Fund 0.47% 0.04% 0.51%
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Hartford Capital Appreciation HLS Fund 0.64% 0.05% 0.69%
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Hartford Capital Opportunities HLS Fund 0.90% 0.15% 1.05%
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Hartford Global Leaders HLS Fund 0.74% 0.07% 0.81%
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Hartford Growth and Income HLS Fund 0.75% 0.04% 0.79%
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Hartford Growth Opportunities HLS Fund 0.62% 0.04% 0.66%
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Hartford High Yield HLS Fund 0.78% 0.04% 0.82%
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Hartford Index HLS Fund 0.40% 0.04% 0.44%
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Hartford International Opportunities HLS Fund 0.72% 0.09% 0.81%
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Hartford International Stock HLS Fund 0.85% 0.12% 0.97%
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Hartford Large Cap Growth HLS Fund 0.90% 0.05% 0.95%
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Hartford Mid Cap Stock HLS Fund 0.90% 0.07% 0.97%
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Hartford Money Market HLS Fund 0.45% 0.04% 0.49%
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Hartford Multisector Bond HLS Fund 0.75% 0.08% 0.83%
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Hartford SmallCap Growth HLS Fund 0.64% 0.05% 0.69%
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Hartford Small Cap Value HLS Fund 0.87% 0.05% 0.92%
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Hartford Stock HLS Fund 0.46% 0.03% 0.49%
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Hartford U.S. Government Securities HLS Fund 0.46% 0.03% 0.49%
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Hartford Value Opportunities HLS Fund 0.69% 0.04% 0.73%
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</Table>
<Page>
8 FORTIS BENEFITS INSURANCE COMPANY
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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 CONTRACT OWNER TRANSACTION CONTRACT FEES, SEPARATE ACCOUNT ANNUAL
EXPENSES, AND FUND FEES AND 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 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:
(1) If you Surrender your Contract at the end of the applicable time period:
<Table>
1 year $ 243
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3 years $ 749
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5 years $1,281
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10 years $2,736
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</Table>
(2) If you annuitize at the end of the applicable time period:
<Table>
1 year $ 236
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3 years $ 741
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5 years $1,273
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10 years $2,726
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</Table>
(3) If you do not Surrender your Contract:
<Table>
1 year $ 243
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3 years $ 749
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5 years $1,281
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10 years $2,736
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</Table>
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FORTIS BENEFITS INSURANCE COMPANY 9
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HIGHLIGHTS
HOW DO I PURCHASE THIS CONTRACT?
You must complete our application or order request and submit it to us for
approval with your first Premium Payment. Your first Premium Payment must be at
least $25,000 ($10,000 for Qualified Contracts) and subsequent Premium Payments
must be at least $50, unless you take advantage of our InvestEase-Registered
Trademark- Program or are part of certain retirement plans.
- For a limited time, usually within ten days after you receive your Contract,
you may cancel your Contract. You may bear the investment risk for your
Premium Payment prior to our receipt of your request for cancellation.
IS THERE AN ANNUAL MAINTENANCE FEE?
We deduct this $30 Fee each year on your Contract Anniversary or when you fully
Surrender your Contract, if, on either of those dates, the value of your
Contract is less than $100,000.
WHAT CHARGES WILL I PAY ON AN ANNUAL BASIS?
In addition to the Annual Maintenance Fee, you pay the following charges each
year:
- - MORTALITY AND EXPENSE RISK CHARGE -- This charge is for insurance. It is
subtracted daily and is equal to an annual charge of 1.10% of your Contract
Value invested in the Funds.
- - ADMINISTRATIVE CHARGE -- This is a charge for the administration of the
Contract. It is subtracted daily and is equal to an annual charge of 0.15% of
the Contract Value held in the Separate Account.
- - ANNUAL FUND OPERATING EXPENSES -- These are charges for the Funds. See the
Annual Fund Operating Expenses table for more complete information and the
Funds' prospectuses accompanying this prospectus.
CAN I TAKE OUT ANY OF MY MONEY?
You may Surrender all or part of the amounts you have invested at any time
before we start making Annuity Payouts.
- - You may have to pay income tax on the money you take out and, if you Surrender
before you are age 59 1/2 , you may have to pay an income tax penalty.
- - You may have to pay a Market Value Adjustment on the amount you Surrender.
IS THERE A MARKET VALUE ADJUSTMENT?
Surrenders and other withdrawals from a Guarantee Period in our General Account
more than fifteen days from the end of a Guarantee Period are subject to a
Market Value Adjustment. The Market Value Adjustment may increase or reduce the
General Account value of your Contract. The Market Value Adjustment is computed
using a formula that is described in this prospectus under "Market Value
Adjustment".
WHAT INVESTMENT CHOICES ARE AVAILABLE?
You may allocate your Premium Payment or Contract Values among the following
investment choices:
- - The variable Sub-Accounts that invest in underlying Funds; and/or
- - One or more Guarantee Periods, which may be subject to a Market Value
Adjustment.
Guarantee Periods are not available for Contracts issued in Pennsylvania and
Nevada.
WILL FORTIS PAY A DEATH BENEFIT?
There is a Death Benefit if the Contract Owner dies before we begin to make
Annuity Payouts. If the Contract Owner is a non-natural person, we will pay the
Death Benefit upon the death of the Annuitant prior to the Annuity Commencement
Date. In such case, if more than one Annuitant has been named, we will pay the
Death Benefit only upon the death of the last survivor of the Annuitants. The
Death Benefit amount will remain invested in the Sub-Accounts according to your
last instructions and will fluctuate with the performance of the underlying
Funds until we receive proof of death and complete instructions from the
Beneficiary.
The Death Benefit is the greatest of:
- - The total Premium Payments you have made to us minus adjustments for partial
Surrenders; or
- - The Contract Value of your Contract; or
- - The highest Anniversary Value before the earlier of the decedent's death or
the Contract Owner's age 75.
See "Death Benefit" for a complete description for the Death Benefit applicable
to your Contract.
WHAT ANNUITY PAYOUT OPTIONS ARE AVAILABLE?
When it comes time for us to make payouts, you may choose one of the following
Annuity Payout Options: Life Annuity, Life Annuity with Payments for 10 or 20
years, Joint and Full Survivor Life Annuity, and Joint and 1/2 Contingent
Survivor Life Annuity. We may make other Annuity Payout Options available at any
time.
You must begin to take payouts by the Annuitant's 110th birthday unless you
elect a later date to begin receiving payments subject to the laws and
regulations then in effect and our approval. The date you select may have tax
consequences, so please check with a qualified tax advisor. You cannot begin to
take Annuity Payouts until the completion of the 2nd Contract Year. If you do
not tell us what Annuity Payout Option you want before that time, we will make
Automatic Annuity Payouts under the Life Annuity with Payments for a Period
Certain Payout Option with a ten-year period certain payment option.
<Page>
10 FORTIS BENEFITS INSURANCE COMPANY
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Depending on the investment allocation of your Contract in effect on the Annuity
Commencement Date, we will make Automatic Annuity Payouts that are:
- - fixed dollar amount Automatic Annuity Payouts,
- - variable dollar amount Automatic Annuity Payouts, or
- - a combination of fixed dollar amount and variable dollar amount Automatic
Annuity Payouts.
GENERAL CONTRACT INFORMATION
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FORTIS BENEFITS INSURANCE COMPANY
Fortis Benefits Insurance Company ("Fortis") is the issuer of the contracts.
Fortis is a Minnesota corporation founded in 1910. It is qualified to sell life
insurance and annuity contracts in the District of Columbia and in all states
except New York. Fortis is an indirectly wholly owned subsidiary of
Fortis, Inc., which is itself indirectly owned 50% by Fortis N.V. and 50% by
Fortis (SA/NV). Fortis, Inc. manages the United States operations for these two
companies.
Fortis N.V. is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
(SA/NV) is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis N.V. and Fortis
(SA/NV) have merged their operating companies under the trade name of Fortis.
The Fortis group of companies is active in insurance, banking, financial
services, and real estate development in the Netherlands, Belgium, the United
States, Western Europe, and the Pacific Rim.
All of the guarantees and commitments under the contracts are general
obligations of Fortis. None of Fortis' affiliated companies has any legal
obligation to back Fortis' obligations under the contracts.
On April 1, 2001, Fortis, Inc., the parent company of Fortis entered into an
agreement with Hartford Life and Annuity Insurance Company ("Hartford") to
co-insure the obligations of Fortis under the variable annuity Contracts and to
provide administration for the Contracts. Hartford was originally incorporated
under the laws of Wisconsin on January 9, 1956, and subsequently redomiciled to
Connecticut. Hartford's offices are located in Simsbury, Connecticut; however,
its mailing address is P.O. Box 2999, Hartford, CT 06104-2999. Hartford is
ultimately controlled by The Hartford Financial Services Group, Inc., one of the
largest financial service providers in the United States.
FORTIS' RATINGS
<Table>
<Caption>
EFFECTIVE DATE
RATING AGENCY OF RATING RATING BASIS OF RATING
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A.M. Best and
Company, Inc. 3/11/03 A Financial Strength
- --------------------------------------------------------------------------------
</Table>
These ratings apply to Fortis' ability to meet its obligations under the
Contract. The ratings do not apply to the Separate Account or the underlying
Funds.
THE SEPARATE ACCOUNT
The Separate Account is where we set aside and invest the assets of some of our
annuity contracts, including this Contract. The Separate Account was established
on October 14, 1987 as "Variable Account D" and is registered as a unit
investment trust under the Investment Company Act of 1940. This registration
does not involve supervision by the SEC of the management or the investment
practices of the Separate Account, Fortis or Hartford. The Separate Account
meets the definition of "Separate Account" under federal securities law. This
Separate Account holds only assets for variable annuity contracts. The Separate
Account:
- - Holds assets for your benefit and the benefit of other Contract Owners, and
the persons entitled to the payouts described in the Contract.
- - Is not subject to the liabilities arising out of any other business Fortis or
Hartford may conduct.
- - Is not affected by the rate of return of Fortis' General Account or Hartford's
General Account or by the investment performance of any of Fortis' or
Hartford's other Separate Accounts.
- - May be subject to liabilities from a Sub-Account of the Separate Account that
holds assets of other variable annuity contracts offered by the Separate
Account, which are not described in this prospectus.
- - Is credited with income and gains, and takes losses, whether or not realized,
from the assets it holds.
We do not guarantee the investment results of the Separate Account. There is no
assurance that the value of your Contract will equal the total of the payments
you make to us.
THE FUNDS
Hartford Series Fund, Inc. is a Maryland Corporation registered with the
Securities and Exchange Commission as an open-end management investment company.
Hartford HLS Funds are sponsored and administered by Hartford. Hartford Advisers
HLS Fund, Hartford Bond HLS Fund, Hartford Index HLS Fund and Hartford Money
Market HLS Fund, Hartford Capital Appreciation HLS Fund, Hartford High Yield HLS
Fund, Hartford International Opportunities HLS Fund, Hartford Global Leaders HLS
Fund, Hartford Growth and Income HLS Fund and Hartford Stock HLS Fund are series
of Hartford Series Fund, Inc.
Hartford HLS Series Fund II, Inc. is a Maryland corporation registered with the
Securities and Exchange Commission as an open-end management investment company.
Hartford U.S. Government Securities HLS Fund, Hartford Multisector Bond HLS
Fund, Hartford International Stock HLS Fund, Hartford Value Opportunities HLS
Fund, Hartford Capital Opportunities HLS Fund, Hartford Blue Chip Stock HLS
Fund, Hartford Large
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FORTIS BENEFITS INSURANCE COMPANY 11
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Cap Growth HLS Fund, Hartford Mid Cap Stock HLS Fund, Hartford Growth
Opportunities HLS Fund, Hartford Small Cap Value HLS Fund and Hartford SmallCap
Growth HLS Fund are series of the Hartford HLS Series Fund II, Inc.,
HL Investment Advisors, LLC ("HL Advisors") serves as the investment adviser to
the Funds.
Hartford Capital Appreciation HLS Fund, Hartford International Opportunities HLS
Fund, Hartford Global Leaders HLS Fund, Hartford Advisers HLS Fund, Hartford
Value Opportunities HLS Fund, Hartford Growth and Income HLS Fund, Hartford
Growth Opportunities HLS Fund, Hartford SmallCap Growth HLS Fund and Hartford
Stock HLS Fund are sub-advised by Wellington Management Company, LLP
("Wellington").
Hartford Money Market HLS Fund, Hartford U.S. Government Securities HLS Fund,
Hartford Bond HLS Fund, Hartford High Yield HLS Fund, and Hartford Index HLS
Fund are sub-advised by Hartford Investment Management Company ("HIMCO").
Hartford Multisector Bond HLS Fund is sub-advised by A I M Capital
Management, Inc.
Hartford International Stock HLS Fund is sub-advised by Lazard Asset Management.
Hartford Blue Chip Stock HLS Fund is sub-advised by T. Rowe Price
Associates, Inc.
Hartford Capital Opportunities HLS Fund is sub-advised by Massachusetts
Financial Services Company.
Hartford Large Cap Growth HLS Fund is sub-advised by Alliance Capital Management
L.P.
Hartford Mid Cap Stock HLS Fund is sub-advised by The Dreyfus Corporation.
Hartford Small Cap Value HLS Fund is sub-advised by Janus Capital Management,
LLC. which has contracted with Perkins, Wolf, McDonnell & Company to provide
day-to-day investment management for the Series.
The shares of certain Hartford HLS Fund have been divided into Class IA and
Class IB. Only Class IA shares are available in this Contract.
We do not guarantee the investment results of any of the underlying Funds. Since
each underlying Fund has different investment objectives, each is subject to
different risks. These risks and the Funds' expenses are more fully described in
the accompanying Funds' prospectus, and the Funds' Statement of Additional
Information which may be ordered from us. The Funds' prospectus should be read
in conjunction with this Prospectus before investing.
The Funds may not be available in all states.
The investment goals of each of the Funds are as follows:
HARTFORD ADVISERS HLS FUND -- Seeks maximum long-term total return. Sub-advised
by Wellington Management.
HARTFORD BLUE CHIP STOCK HLS FUND -- Seeks long-term growth of capital. Current
income is a secondary objective. Sub-advised by T. Rowe Price Associates, Inc.
HARTFORD BOND HLS FUND -- Seeks a high level of current income, consistent with
a competitive total return, as compared to bond funds with similar investment
objectives and policies. Sub-advised by HIMCO.
HARTFORD CAPITAL APPRECIATION HLS FUND -- Seeks growth of capital. Sub-advised
by Wellington Management.
HARTFORD CAPITAL OPPORTUNITIES HLS FUND -- Seeks capital appreciation.
Sub-advised by Massachusetts Financial Services Company.
HARTFORD GLOBAL LEADERS HLS FUND -- Seeks growth of capital. Sub-advised by
Wellington Management.
HARTFORD GROWTH AND INCOME HLS FUND -- Seeks growth of capital and current
income. Sub-advised by Wellington Management.
HARTFORD GROWTH OPPORTUNITIES HLS FUND -- Seeks long-term capital appreciation.
Sub-advised by Wellington.
HARTFORD HIGH YIELD HLS FUND -- Seeks high current income. Growth of capital is
a secondary objective. Sub-advised by HIMCO.
HARTFORD INDEX HLS FUND -- Seeks to provide investment results which approximate
the price and yield performance of publicly traded common stocks in the
aggregate. Sub-advised by HIMCO.
HARTFORD INTERNATIONAL OPPORTUNITIES HLS FUND -- Seeks growth of capital.
Sub-advised by Wellington Management.
HARTFORD INTERNATIONAL STOCK HLS FUND -- Seeks long-term capital appreciation.
Sub-advised by Lazard Asset Management.
HARTFORD LARGE CAP GROWTH HLS FUND -- Seeks long-term growth of capital.
Sub-advised by Alliance Capital Management L.P.
HARTFORD MID CAP STOCK HLS FUND -- Seeks total investment returns, including
capital appreciation and income that consistently outperform the Standard &
Poor's 400 MidCap Index ("S&P MidCap"). Sub-advised by The Dreyfus Corporation.
HARTFORD MONEY MARKET HLS FUND -- Seeks maximum current income consistent with
liquidity and preservation of capital. Sub-advised by HIMCO.
HARTFORD MULTISECTOR BOND HLS FUND -- Seeks to achieve a high level of current
income consistent with reasonable concern for safety of principal. Sub-advised
by A I M Capital Management, Inc.
HARTFORD SMALLCAP GROWTH HLS FUND -- Seeks to maximize short- and long-term
capital appreciation. Sub-advised by Wellington.
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12 FORTIS BENEFITS INSURANCE COMPANY
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HARTFORD SMALL CAP VALUE HLS FUND -- Seeks short-term capital appreciation.
Sub-advised by Janus Capital Management, LLC.
HARTFORD STOCK HLS FUND -- Seeks long-term growth of capital, with income as a
secondary consideration. Sub-advised by Wellington Management.
HARTFORD U.S. GOVERNMENT SECURITIES HLS FUND -- Seeks to maximize total return
while providing a high level of current income consistent with prudent
investment risk. Sub-advised by HIMCO.
HARTFORD VALUE OPPORTUNITIES HLS FUND -- Seeks short-and long-term capital
appreciation. Sub-advised by Wellington.
MIXED AND SHARED FUNDING -- Shares of the Funds may be sold to our other
separate accounts and our insurance company affiliates or other unaffiliated
insurance companies to serve as the underlying investment for both variable
annuity contracts and variable life insurance policies, a practice known as
"mixed and shared funding." As a result, there is a possibility that a material
conflict may arise between the interests of Contract Owners, and of owners of
other contracts whose contract values are allocated to one or more of these
other separate accounts investing in any one of the Funds. In the event of any
such material conflicts, we will consider what action may be appropriate,
including removing the Fund from the Separate Account or replacing the Fund with
another underlying fund. There are certain risks associated with mixed and
shared funding, as disclosed in the Funds' prospectus.
VOTING RIGHTS -- We are the legal owners of all Fund shares held in the Separate
Account and we have the right to vote at the Fund's shareholder meetings. To the
extent required by federal securities laws or regulations, we will:
- - Notify you of any Fund shareholders' meeting if the shares held for your
Contract may be voted.
- - Send proxy materials and a form of instructions that you can use to tell us
how to vote the Fund shares held for your Contract.
- - Arrange for the handling and tallying of proxies received from Contract
Owners.
- - Vote all Fund shares attributable to your Contract according to instructions
received from you, and
- - Vote all Fund shares for which no voting instructions are received in the same
proportion as shares for which instructions have been received.
If any federal securities laws or regulations, or their present interpretation,
change to permit us to vote Fund shares on our own, we may decide to do so. You
may attend any shareholder meeting at which shares held for your Contract may be
voted. After we begin to make Annuity Payouts to you, the number of votes you
have will decrease.
SUBSTITUTIONS, ADDITIONS, OR DELETIONS OF FUNDS -- We reserve the right, subject
to any applicable law, to make certain changes to the Funds offered under your
Contract. We may, in our sole discretion, establish new Funds. New Funds will be
made available to existing Contract Owners as we determine appropriate. We may
also close one or more Funds to additional Premium Payments or transfers from
existing Sub-Accounts.
We may eliminate the shares of any of the Funds from the Contract for any reason
and we may substitute shares of another registered investment company for the
shares of any Fund already purchased or to be purchased in the future by the
Separate Account. To the extent required by the Investment Company Act of 1940
(the "1940 Act"), substitutions of shares attributable to your interest in a
Fund will not be made until we have the approval of the Commission and we have
notified you of the change.
In the event of any substitution or change, we may, by appropriate endorsement,
make any changes in the Contract necessary or appropriate to reflect the
substitution or change. If we decide that it is in the best interest of Contract
Owners, the Separate Account may be operated as a management company under the
1940 Act or any other form permitted by law, may be deregistered under the 1940
Act in the event such registration is no longer required, or may be combined
with one or more other Separate Accounts.
ADMINISTRATIVE AND DISTRIBUTION SERVICES -- Fortis has entered into agreements
with the investment advisers or distributors of many of the Funds. Under the
terms of these agreements, Fortis, or its agents, provide administrative and
distribution related services and the Funds pay fees that are usually based on
an annual percentage of the average daily net assets of the Funds. These
agreements may be different for each Fund or each Fund family and may include
fees under a distribution and/or servicing plan adopted by a Fund pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
PERFORMANCE RELATED INFORMATION
- --------------------------------------------------------------------------------
The Separate Account may advertise certain performance-related information
concerning the Sub-Accounts, Performance information about a Sub-Account is
based on the Sub-Account's past performance only and is no indication of future
performance.
When a Sub-Account advertises its standardized total return, it will usually be
calculated since the inception of the Separate Account for one year, five years,
and ten years or some other relevant periods if the Sub-Account has not been in
existence for at least ten years. Total return is measured by comparing the
value of an investment in the Sub-Account at the beginning of the relevant
period to the value of the investment at the end of the period. Total return
calculations reflect a deduction for Total Annual Fund Operating Expenses, any
Contingent Deferred
<Page>
FORTIS BENEFITS INSURANCE COMPANY 13
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Sales Charge, Separate Account Annual Expenses without any optional charge
deductions, and the Annual Maintenance Fee.
The Separate Account may also advertise non-standardized total returns that
pre-date the inception of the Separate Account. These non-standardized total
returns are calculated by assuming that the Sub-Accounts have been in existence
for the same periods as the underlying Funds and by taking deductions for
charges equal to those currently assessed against the Sub-Accounts.
Non-standardized total return calculations reflect a deduction for Total Annual
Fund Operating Expenses and Separate Account Annual Expenses without any
optional charge deductions, and do not include deduction for Contingent Deferred
Sales Charge or the Annual Maintenance Fee. This means the non-standardized
total return for a Sub-Account is higher than the standardized total return for
a Sub-Account. These non-standardized returns must be accompanied by
standardized returns.
If applicable, the Sub-Accounts may advertise yield in addition to total return.
The yield will be computed in the following manner: The net investment income
per unit earned during a recent one month period is divided by the unit value on
the last day of the period. This figure includes the recurring charges at the
Separate Account level.
A money market Sub-Account may advertise yield and effective yield. The yield of
a Sub-Account over a seven-day period and then annualized, i.e. the income
earned in the period is assumed to be earned every seven days over a 52-week
period and stated as a percentage of the investment. Effective yield is
calculated similarly but when annualized, the income earned by the investment is
assumed to be reinvested in Sub-Account units and thus compounded in the course
of a 52-week period. Yield and effective yield include the recurring charges at
the Separate Account level.
We may provide information on various topics to Contract Owners and prospective
Contract Owners in advertising, sales literature or other materials. These
topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as systematic investing and asset allocation),
the advantages and disadvantages of investing in tax-deferred and taxable
instruments, customer profiles and hypothetical purchase scenarios, financial
management and tax and retirement planning, and other investment alternatives,
including comparisons between the Contract and the characteristics of and market
for such alternatives.
GUARANTEE PERIODS
- --------------------------------------------------------------------------------
Any amount you allocate to our General Account under this Contract earns a
guaranteed interest rate beginning on the date you make the allocation. The
guaranteed interest rate continues for the number of years you select, up to a
maximum of ten years. We call this a Guarantee Period. At the end of your
Guarantee Period, your Contract Value, including accrued interest, will be
allocated to a new Guarantee Period that is the same length as your original
Guarantee Period. However, you may reallocate your Contract Value to different
Guarantee Periods or to the Sub-Accounts. If you decide to reallocate your
Contract Value, you must do so by sending us a written request. We must receive
your written request at least three business days before the end of your
Guarantee Period. The first day of your new Guarantee Period or other
reallocation will be the day after the end of your previous Guarantee Period. We
will notify you at least 45 days and not more than 75 days before the end of
your Guarantee Period.
We currently offer ten different Guarantee Periods. These Guarantee Periods
range in length from one to ten years. Each Guarantee Period has its own
guaranteed interest rate, which may differ from other Guarantee Periods. We
will, at our discretion, change the guaranteed interest rate for future
Guarantee Periods. These changes will not affect the guaranteed interest rates
we are paying on current Guarantee Periods. The guaranteed interest rate will
never be less than an effective annual rate of 3%. We cannot predict or assure
the level of any future guaranteed interest rates in excess of an effective
annual rate of 3%.
We declare the guaranteed interest rates from time to time as market conditions
dictate. We advise you of the guaranteed interest rate for a Guarantee Period at
the time we receive a Purchase Payment from you, or at the time we execute a
transfer you have requested, or at the time a Guarantee Period is renewed. You
may obtain information concerning the guaranteed interest rates that apply to
the various Guarantee Periods. You may obtain this information from our home
office or from your sales representative at any time.
The maximum amount you can invest in a Guarantee Period is $500,000.
We do not have a specific formula for establishing the guaranteed interest rates
for the Guarantee Periods. Guaranteed interest rates may be influenced by the
available interest rates on the investments we acquire with the amounts you
allocate for a particular Guarantee Period. Guaranteed interest rates do not
necessarily correspond to the available interest rates on the investments we
acquire with the amounts you allocate for a particular Guarantee Period. In
addition, when we determine guaranteed interest rates, we may consider:
- - the duration of a Guarantee Period,
- - regulatory and tax requirements,
- - sales and administrative expenses we bear,
- - risks we assume,
- - our profitability objectives, and
- - general economic trends.
<Page>
14 FORTIS BENEFITS INSURANCE COMPANY
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Guarantee Periods are not available for Contracts issued in Pennsylvania or
Nevada.
MARKET VALUE ADJUSTMENT
Except as described below, we will apply a Market Value Adjustment to any
General Account value that is:
- - surrendered,
- - transferred, or
- - otherwise paid out
before the end of its Guarantee Period.
For example, we will apply a Market Value Adjustment to account value that we
pay:
- - as a death benefit pursuant to a Contract,
- - as an amount applied to an Annuity Payout option, or
- - as an amount paid as a single sum in lieu of an Annuity Payout.
The Market Value Adjustment reflects both the amount of time left in your
Guarantee Period and the difference between the rate of interest credited to
your current Guarantee Period and the rate of interest we are crediting to a new
Guarantee period with a duration equal to the amount of time left in your
Guarantee Period. If your Guarantee Period's rate of interest is lower than the
rate of interest we are currently crediting the new Guarantee Period, then the
application of the Market Value Adjustment will reduce the amount you receive or
transfer. Conversely, if your Guarantee period's rate of interest is higher than
the rate of interest we are crediting for the new Guarantee Period, then the
application of the Market Value Adjustment will increase the amount you receive
or transfer.
You will find sample Market Value Adjustment calculations in Appendix I.
We do not apply a Market Value Adjustment to withdrawals and transfers of
account value under two exceptions.
(1) We will not apply a Market Value Adjustment to account value that we pay out
during a 30 day period that: -- begins 15 days before the end date of the
Guarantee Period in which the account value was being held, and that: --
ends 15 days after the end date of the Guarantee Period in which the account
value was being held.
(2) We will not apply a Market Value Adjustment to account value that is
withdrawn or transferred from a Guarantee Period on a periodic, automatic
basis. This exception only applies to such withdrawals or transfers under a
formal Fortis program for the withdrawal or transfer of General Account
value.
We may impose conditions and limitations on any formal Fortis program for the
withdrawal or transfer of General Account value. Ask your Fortis representative
about the availability of such a program in your state. In addition, if such a
program is available in your state, your Fortis representative can inform you
about the conditions and limitations that may apply to that program.
THE CONTRACT
- --------------------------------------------------------------------------------
PURCHASES AND CONTRACT VALUE
WHAT TYPES OF CONTRACTS ARE AVAILABLE?
The Contract is an individual or group tax-deferred variable annuity contract.
It is designed for retirement planning purposes and may be purchased by any
individual, group or trust, including:
- - Any trustee or custodian for a retirement plan qualified under Sections
401(a) or 403(a) of the Code;
- - Annuity purchase plans adopted by public school systems and certain tax-exempt
organizations according to Section 403(b) of the Code; and
- - Individual Retirement Annuities adopted according to Section 408 of the Code.
- - Certain eligible deferred compensation plans as defined in Section 457 of the
Code.
The examples above represent Qualified Contracts, as defined by the Code. In
addition, individuals and trusts can also purchase Contracts that are not part
of a tax qualified retirement plan. These are known as Non-Qualified Contracts.
If you are purchasing the Contract for use in an IRA or other qualified
retirement plan, you should consider other features of the Contract besides tax
deferral, since any investment vehicle used within an IRA or other qualified
plan receives tax-deferred treatment under the Code.
HOW DO I PURCHASE A CONTRACT?
You may purchase a Contract by completing and submitting an application or an
order request along with an initial Premium Payment. For most Contracts, the
minimum Premium Payment is $25,000 ($10,000 for Qualified Contracts). For
additional Premium Payments, the minimum Premium Payment is $50. Under certain
situations, we may allow smaller Premium Payments, for example, if you are part
of our InvestEase-Registered Trademark- Program or certain tax qualified
retirement plans. Prior approval is required for Premium Payments of $1,000,000
or more.
You and your Annuitant must not be older than age 90 on the date that your
Contract is issued. You must be of legal age in the state where the Contract is
being purchased or a guardian must act on your behalf.
HOW ARE PREMIUM PAYMENTS APPLIED TO MY CONTRACT?
Your initial Premium Payment will be invested within two Valuation Days of our
receipt of a properly completed application or an order request and the Premium
Payment. If we receive your subsequent Premium Payment before the close of the
New York
<Page>
FORTIS BENEFITS INSURANCE COMPANY 15
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Stock Exchange, it will be priced on the same Valuation Day. If we receive your
Premium Payment after the close of the New York Stock Exchange, it will be
invested on the next Valuation Day. If we receive your subsequent Premium
Payment on a Non-Valuation Day, the amount will be invested on the next
Valuation Day. Unless we receive new instructions, we will invest the Premium
Payment based on your last allocation instructions. We will send you a
confirmation when we invest your Premium Payment.
If the request or other information accompanying the initial Premium Payment is
incomplete when received, we will hold the money in a non-interest bearing
account for up to five Valuation Days while we try to obtain complete
information. If we cannot obtain the information within five Valuation Days, we
will either return the Premium Payment and explain why the Premium Payment could
not be processed or keep the Premium Payment if you authorize us to keep it
until you provide the necessary information.
CAN I CANCEL MY CONTRACT AFTER I PURCHASE IT?
We want you to be satisfied with the Contract you have purchased. We urge you to
closely examine its provisions. If for any reason you are not satisfied with
your Contract, simply return it within ten days after you receive it with a
written request for cancellation that indicates your tax-withholding
instructions. In some states, you may be allowed more time to cancel your
Contract. We may require additional information, including a signature
guarantee, before we can cancel your Contract.
You bear the investment risk from the time the Contract is issued until we
receive your complete cancellation request.
The amount we pay you upon cancellation depends on the requirements of the state
where you purchased your Contract.
HOW IS THE VALUE OF MY CONTRACT CALCULATED BEFORE THE ANNUITY COMMENCEMENT DATE?
The Contract Value is the sum of all Accounts. There are two things that affect
your Sub-Account value: (1) the number of Accumulation Units and (2) the
Accumulation Unit Value. The Sub-Account value is determined by multiplying the
number of Accumulation Units by the Accumulation Unit Value. Therefore, on any
Valuation Day your Contract Value reflects the investment performance of the
Sub-Accounts and will fluctuate with the performance of the underlying Funds.
When Premium Payments are credited to your Sub-Accounts, they are converted into
Accumulation Units by dividing the amount of your Premium Payments, minus any
Premium Taxes, by the Accumulation Unit Value for that day. The more Premium
Payments you put into your Contract, the more Accumulation Units you will own.
You decrease the number of Accumulation Units you have by requesting Surrenders,
transferring money out of an Account, settling a Death Benefit claim or by
annuitizing your Contract.
To determine the current Accumulation Unit Value, we take the prior Valuation
Day's Accumulation Unit Value and multiply it by the Net Investment Factor for
the current Valuation Day.
The Net Investment Factor is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next. The Net Investment Factor for
each Sub-Account equals:
- - The net asset value per share plus applicable distributions per share of each
Fund held in the Sub-Account at the end of the current Valuation Day divided
by
- - The net asset value per share of each Fund held in the Sub-Account at the end
of the prior Valuation Day; multiplied by
- - The daily expense factor for the mortality and expense risk charge adjusted
for the number of days in the period, and any other applicable charges.
We will send you a statement at least annually, which tells you how many
Accumulation Units you have, their value and your total Contract Value.
A Contract's Guarantee Period value is guaranteed by Fortis. We bear the
investment risk with respect to amounts allocated to a Guarantee Period, except
to the extent that (1) we may vary the guaranteed interest rate for future
Guarantee Periods (subject to the 3% effective annual minimum) and (2) the
Market Value Adjustment imposes investment risks on you. The Contract's
Guarantee Period value on any Valuation Date is the sum of its General Account
values in each Guarantee Period on that date. The General Account value in a
Guarantee Period is equal to the following amounts, in each case increased by
accrued interest at the applicable guaranteed interest rate:
- - The amount of Premium Payments or transferred amounts allocated to the
Guarantee Period; less
- - The amount of any transfers or Surrenders out of the Guarantee Period.
CAN I TRANSFER FROM ONE INVESTMENT CHOICE TO ANOTHER?
Subject to the restrictions below, you may transfer Contract Value:
- - From a Sub-Account to another Sub-Account;
- - From a Sub-Account to a Guarantee Period;
- - From a Guarantee Period to a Sub-Account;
- - From a Guarantee Period to another Guarantee Period.
Transfers from a Guarantee Period may be subject to a Market Value Adjustment.
TRANSFERS BETWEEN SUB-ACCOUNTS -- You may transfer from one Sub-Account to
another before and after the Annuity Commencement Date. We may impose a
Sub-Account Transfer Fee not to exceed $25 per transfer. For purposes of the
Sub-Account Transfer Fee, we will count all transfers between and among the
Sub-Accounts as one transfer if all of the transfer requests are made at the
same time as part of one request. Your transfer request will be processed on the
day that it is received as long as
<Page>
16 FORTIS BENEFITS INSURANCE COMPANY
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it is received on a Valuation Day before the close of the New York Stock
Exchange. Otherwise, your request will be processed on the following Valuation
Day. We will send you a confirmation when we process your transfer. You are
responsible for verifying transfer confirmations and promptly advising us of any
errors within 30 days of receiving the confirmation. After the Annuity
Commencement Date, the Payee may make four Sub-Account Transfers.
SUB-ACCOUNT TRANSFER RESTRICTIONS -- This Contract is not designed to serve as a
vehicle for frequent trading in response to short-term fluctuations in the stock
market. Any individual or legal entity that intends to engage in international
arbitrage, utilize market timing practices or make frequent transfers to take
advantage of inefficiencies in Fund pricing should not purchase this Contract.
These abusive or disruptive transfers can have an adverse impact on management
of a Fund, increase Fund expenses and affect Fund performance.
- - You may submit 20 Sub-Account transfers each Contract Year for each Contract
by U.S. Mail, Voice Response Unit, Internet or telephone.
- - Once these 20 Sub-Account transfers have been executed, you may submit any
additional Sub-Account transfers only in writing by U.S. Mail or overnight
delivery service. Transfer requests sent by same day mail or courier service
will not be accepted. If you want to cancel a written Sub-Account transfer,
you must also cancel it in writing by U.S. Mail or overnight delivery service.
We will process the cancellation request as of the day we receive it.
In addition, if your initial Premium Payment is $1 million or more, or if you
are acting on behalf of multiple Contract Owners with aggregate Contract Values
of $2 million or more, you may be required to sign a separate agreement with
Hartford which includes additional restrictions before you may submit any Sub-
Account transfers.
ABUSIVE TRANSFERS -- Regardless of the number of transfers you have made, we
will monitor Sub-Account transfers and we may terminate your transfer privileges
until your next Contract Anniversary if we determine that you are engaging in a
pattern of transfers that is disadvantageous or potentially harmful to other
Contract Owners. We will consider the following factors:
- - the dollar amount of the transfer;
- - the total assets of the Funds involved in the transfer;
- - the number of transfers completed in the current calendar quarter; or
- - whether the transfer is part of a pattern of transfers designed to take
advantage of short term market fluctuations or market inefficiencies.
We will send you a letter after your 10th Sub-Account transfer to remind you of
our Sub-Account transfer policy. After your 20th transfer, or after any time we
determine that you are engaging in a pattern of abusive transfers, we will send
you a letter to notify you that your transfer privileges have been restricted or
terminated under our policy until your next Contract Anniversary.
None of these restrictions are applicable to Sub-Account transfers made under a
systematic transfer program.
We will continue to monitor transfer activity and Fortis or Hartford may modify
these restrictions at any time.
POWER OF ATTORNEY -- You may authorize another person to make transfers on your
behalf by submitting a completed power of attorney form. Once we have the
completed form on file, we will accept transfer instructions from your
designated third party, subject to any transfer restrictions in place, until we
receive new instructions in writing from you. You will not be able to make
transfers or other changes to your Contract if you have authorized someone else
to act under a power of attorney.
TRANSFERS BETWEEN THE SUB-ACCOUNTS AND GUARANTEE PERIODS: You may transfer from
the Sub-Accounts to a Guarantee Period or from one Guarantee Period to another
Guarantee Period. Transfers from a Guarantee Period, other than the one-year
Guarantee Period, are subject to a Market Value Adjustment if the transfer is:
- - more than 15 days before or 15 days after the expiration of the existing
Guarantee Period, or
- - are not part of a formal Fortis program for the transfer of General Account
value.
The amount of any positive or negative Market Value Adjustment will be added or
deducted from the transferred amount.
You may not make a transfer into the one-year Guarantee Period within six months
of a transfer out of the one-year Guarantee Period.
GENERAL ACCOUNT TRANSFER RESTRICTIONS -- We reserve the right to defer transfers
from the General Account for up to 6 months from the date of your request. After
any transfer, you must wait six months before moving Sub-Account Values back to
a Guarantee Period in the General Account. After the Annuity Commencement Date,
you may not make transfers from the General Account.
CHARGES AND FEES
The following charges and fees are associated with the Contract:
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contract, we deduct a daily
charge at an annual rate of 1.10% of Sub-Account Value. The mortality and
expense risk charge is broken into charges for mortality risks and an expense
risk:
- - MORTALITY RISK -- There are two types of mortality risks that we assume, those
made while your Premium Payments are accumulating and those made once Annuity
Payouts have begun.
During the period your Premium Payments are accumulating, we are required to
cover any difference between the Death
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FORTIS BENEFITS INSURANCE COMPANY 17
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Benefit paid and the Surrender Value. These differences may occur during
periods of declining value or in periods where the Contingent Deferred Sales
Charges would have been applicable. The risk that we bear during this period
is that actual mortality rates, in aggregate, may exceed expected mortality
rates.
Once Annuity Payouts have begun, we may be required to make Annuity Payouts as
long as the Annuitant is living, regardless of how long the Annuitant lives.
The risk that we bear during this period is that actual mortality rates, in
aggregate, may be lower than expected mortality rates.
- - EXPENSE RISK -- We also bear an expense risk that the Contingent Deferred
Sales Charges collected before the Annuity Commencement Date may not be enough
to cover the actual cost of selling, distributing and administering the
Contract.
Although variable Annuity Payouts will fluctuate with the performance of the
underlying Fund selected, your Annuity Payouts will NOT be affected by (a) the
actual mortality experience of our Annuitants, or (b) our actual expenses if
they are greater than the deductions stated in the Contract. Because we cannot
be certain how long our Annuitants will live, we charge this percentage fee
based on the mortality tables currently in use. The mortality and expense risk
charge enables us to keep our commitments and to pay you as planned.
ADMINISTRATIVE CHARGE
For administration, we deduct a daily charge at the rate of 0.15% per year
against all Contract Values held in the Separate Account during both the
accumulation and annuity phases of the Contract. There is not necessarily a
relationship between the amount of administrative charge imposed on a given
Contract and the amount of expenses that may be attributable to that Contract;
expenses may be more or less than the charge.
ANNUAL MAINTENANCE FEE
The Annual Maintenance Fee is a flat fee that is deducted from your Contract
Value to reimburse us for expenses relating to the administrative maintenance of
the Contract and the Accounts. The annual $30 charge is deducted on a Contract
Anniversary or when the Contract is fully Surrendered if the Contract Value at
either of those times is less than $100,000. The charge is deducted
proportionately from each Account in which you are invested.
WHEN IS THE ANNUAL MAINTENANCE FEE WAIVED?
We will waive the Annual Maintenance Fee if your Contract Value is $100,000 or
more on your Contract Anniversary or when you fully Surrender your Contract. We
reserve the right to waive the Annual Maintenance Fee under certain other
conditions.
PREMIUM TAXES
We deduct Premium Taxes, if required, by a state or other government agency.
Some states collect the taxes when Premium Payments are made; others collect at
Annuitization. Since we pay Premium Taxes when they are required by applicable
law, we may deduct them from your Contract when we pay the taxes, upon
Surrender, or on the Annuity Commencement Date. The Premium Tax rate varies by
state or municipality. Currently, the maximum rate charged by any state is 5%
and 1% in Puerto Rico.
CHARGES AGAINST THE FUNDS
The Separate Account purchases shares of the Funds at net asset value. The net
asset value of the Fund shares reflects investment advisory fees and
administrative expenses already deducted from the assets of the Funds. These
charges are described in the Fund prospectuses accompanying this prospectus.
DEATH BENEFIT
WHAT IS THE DEATH BENEFIT AND HOW IS IT CALCULATED?
The Death Benefit is the amount we will pay if the Contract Owner or Annuitant
dies before the Annuity Commencement Date. The Death Benefit is calculated when
we receive a certified death certificate or other legal document acceptable to
us along with complete instructions from all beneficiaries on how to pay the
death benefit.
Until we receive proof of death and the completed instructions from the
Beneficiary, the Death Benefit will remain invested in the same Accounts,
according to the Contract Owner's last instructions. Therefore, the Death
Benefit amount will fluctuate with the performance of the underlying Funds. When
there is more than one Beneficiary, we will calculate the Accumulation Units for
each Sub-Account for each Beneficiary's portion of the proceeds.
The Death Benefit is the greatest of:
- - The total Premium Payments you have made to us minus adjustments for partial
Surrenders; or
- - The Contract Value of your Contract; or
- - The highest Anniversary Value before the earlier of the decedent's death or
the Contract Owner's age 75.
Adjustments for partial Surrenders to total Premium Payments are calculated by:
- - Taking the amount of the partial Surrender and
- - Dividing that amount by the Contract Value immediately prior to the partial
Surrender and
- - Multiplying that amount by all prior Premium Payments minus prior adjustments
for partial Surrenders.
Adjustments for partial Surrenders to the highest Anniversary Value are
calculated by:
- - Taking the amount of the partial Surrender and
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18 FORTIS BENEFITS INSURANCE COMPANY
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- - Dividing that amount by the Contract Value immediately prior to the partial
Surrender and
- - Multiplying that amount by an amount equal to the Contract Value on the
highest Anniversary Value, plus Premium Payments made since that Anniversary,
minus adjustments for partial Surrenders since that Anniversary.
HOW IS THE DEATH BENEFIT PAID?
The Death Benefit may be taken in one lump sum or under any of the Annuity
Payout Options then being offered by us. On the date we receive proof of death
and complete instructions from the Beneficiary, we will compute the Death
Benefit to be paid out or applied to a selected Annuity Payout Option. When
there is more than one Beneficiary, we will calculate the Death Benefit amount
for each Beneficiary's portion of the proceeds and then pay it out or apply it
to a selected Annuity Payout Option according to each Beneficiary's
instructions. If we receive the complete instructions on a Non-Valuation Day,
computations will take place on the next Valuation Day.
If your Beneficiary elects to receive the Death Benefit amount as a lump sum
payment, we may transfer that amount to our General Account and issue the
Beneficiary a draftbook. The Beneficiary can write one draft for the total
payment of the Death Benefit, or keep the money in the General Account and write
drafts as needed. We will credit interest at a rate determined periodically in
our sole discretion. For Federal income tax purposes, the Beneficiary will be
deemed to have received the lump sum payment on transfer of the Death Benefit
amount to the General Account. The interest will be taxable in the tax year that
it is credited. If the Beneficiary resides or the Contract was purchased in a
state that imposes restrictions on this method of lump sum payment, we may issue
a check to the Beneficiary.
The Beneficiary may elect, under the Annuity Proceeds Settlement Option, "Death
Benefit Remaining with the Company", to leave proceeds from the Death Benefit
with us for up to five years from the date of death if the death occurred before
the Annuity Commencement Date. Once we receive a certified death certificate or
other legal document acceptable to us, the Beneficiary can: (a) make Sub-Account
transfers and (b) take Surrenders.
The Beneficiary of a non-qualified Contract or IRA may also elect the "Single
Life Expectancy Only" option. This option allows the Beneficiary to take the
Death Benefit in a series of payments spread over a period equal to the
Beneficiary's remaining life expectancy. Distributions are calculated based on
IRS life expectancy tables. This option is subject to different limitations and
conditions depending on whether the Contract is non-qualified or an IRA.
REQUIRED DISTRIBUTIONS -- If the Contract Owner dies before the Annuity
Commencement Date, the Death Benefit must be distributed within five years after
death, or be distributed under a distribution option or Annuity Payout Option
that satisfies the Alternatives to the Required Distributions described below.
If the Contract Owner dies on or after the Annuity Commencement Date under an
Annuity Payout Option that permits the Beneficiary to elect to continue Annuity
Payouts or receive the Commuted Value, any remaining value must be distributed
at least as rapidly as under the payment method being used as of the Contract
Owner's death.
If the Contract Owner is not an individual (e.g. a trust), then the original
Annuitant will be treated as the Contract Owner in the situations described
above and any change in the original Annuitant will be treated as the death of
the Contract Owner.
WHAT SHOULD THE BENEFICIARY CONSIDER?
ALTERNATIVES TO THE REQUIRED DISTRIBUTIONS -- The selection of an Annuity Payout
Option and the timing of the selection will have an impact on the tax treatment
of the Death Benefit. To receive favorable tax treatment, the Annuity Payout
Option selected: (a) cannot extend beyond the Beneficiary's life or life
expectancy, and (b) must begin within one year of the date of death.
If these conditions are not met, the Death Benefit will be treated as a lump sum
payment for tax purposes. This sum will be taxable in the year in which it is
considered received.
SPOUSAL CONTRACT CONTINUATION -- If the Contract Owner dies and the Beneficiary
is the Contract Owner's spouse, the Beneficiary may elect to continue the
Contract as the Contract Owner, receive the death benefit in one lump sum
payment or elect an Annuity Payout Option. If the Contract continues with the
spouse as Contract Owner, we will adjust the Contract Value to the amount that
we would have paid as the Death Benefit payment, had the spouse elected to
receive the Death Benefit as a lump sum payment. Spousal Contract Continuation
will only apply one time for each Contract.
SURRENDERS
WHAT KINDS OF SURRENDERS ARE AVAILABLE?
FULL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- When you Surrender your
Contract before the Annuity Commencement Date and while the Annuitant is living,
the Surrender Value of the Contract will be made in a lump sum payment. The
Surrender Value is the Contract Value minus any applicable Contingent Deferred
Sales Charge and Premium Taxes and adjusted for any positive or negative Market
Value Adjustment. The Surrender Value may be more or less than the amount of the
Premium Payments made to a Contract.
PARTIAL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- You may request a
partial Surrender of Contract Values at any time before the Annuity Commencement
Date and while the Annuitant is living. There are two restrictions:
- - The partial Surrender amount must be at least equal to $1,000, our current
minimum for partial Surrenders, and
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FORTIS BENEFITS INSURANCE COMPANY 19
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- - The Contract must have a minimum Contract Value of $1,000 after the Surrender.
We reserve the right to close your Contract and pay the full Surrender Value
if the Contract Value is under the minimum after the Surrender.
HOW DO I REQUEST A SURRENDER?
Requests for full Surrenders must be in writing. Requests for partial Surrenders
can be made in writing or by telephone. We will send your money within seven
days of receiving complete instructions. However, we may postpone payment of
Surrenders whenever: (a) the New York Stock Exchange is closed, (b) trading on
the New York Stock Exchange is restricted by the SEC, (c) the SEC permits and
orders postponement, or (d) the SEC determines that an emergency exists to
restrict valuation. We may also defer payment of Surrender proceeds payable out
of the Fixed Accumulation Feature for a period of up to 6 months.
WRITTEN REQUESTS -- To request a full or partial Surrender, complete a Surrender
Form or send us a letter, signed by you, stating:
- - the dollar amount that you want to receive, either before or after we withhold
taxes and deduct for any applicable charges,
- - your tax withholding amount or percentage, if any, and
- - your mailing address.
If there are joint Contract Owners, both must authorize all Surrenders. For a
partial Surrender, specify the Accounts that you want your Surrender to come
from, otherwise, the Surrender will be taken in proportion to the value in each
Account.
TELEPHONE REQUESTS -- To request a partial Surrender by telephone, we must have
received your completed Telephone Redemption Program Enrollment Form. If there
are joint Contract Owners, both must sign this form. By signing the form, you
authorize us to accept telephone instructions for partial Surrenders from either
Contract Owner. Telephone authorization will remain in effect until we receive a
written cancellation notice from you or your joint Contract Owner, we
discontinue the program; or you are no longer the owner of the Contract. There
are some restrictions on telephone surrenders, please call us with any
questions.
We may record telephone calls and use other procedures to verify information and
confirm that instructions are genuine. We will not be liable for losses or
expenses arising from telephone instructions reasonably believed to be genuine.
WE MAY MODIFY THE REQUIREMENTS FOR TELEPHONE REDEMPTIONS AT ANY TIME.
Telephone Surrender instructions received before the close of the New York Stock
Exchange will be processed on that Valuation Day. Otherwise, your request will
be processed on the next Valuation Day.
COMPLETING A POWER OF ATTORNEY FORM FOR ANOTHER PERSON TO ACT ON YOUR BEHALF MAY
PREVENT YOU FROM MAKING SURRENDERS VIA TELEPHONE.
WHAT SHOULD BE CONSIDERED ABOUT TAXES?
There are certain tax consequences associated with Surrenders:
PRIOR TO AGE 59 1/2 -- If you make a Surrender prior to age 59 1/2, there may be
adverse tax consequences including a 10% federal income tax penalty on the
taxable portion of the Surrender payment. Surrendering before age 59 1/2 may
also affect the continuing tax-qualified status of some Contracts.
WE DO NOT MONITOR SURRENDER REQUESTS. TO DETERMINE WHETHER A SURRENDER IS
PERMISSIBLE, WITH OR WITHOUT FEDERAL INCOME TAX PENALTY, PLEASE CONSULT YOUR
PERSONAL TAX ADVISER.
MORE THAN ONE CONTRACT ISSUED IN THE SAME CALENDAR YEAR -- If you own more than
one contract issued by us or our affiliates in the same calendar year, then
these contracts may be treated as one contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. Please
consult your tax adviser for additional information.
INTERNAL REVENUE CODE SECTION 403(b) ANNUITIES -- As of December 31, 1988, all
section 403(b) annuities have limits on full and partial Surrenders.
Contributions to your Contract made after December 31, 1988 and any increases in
cash value after December 31, 1988 may not be distributed unless you are:
(a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or
(e) experiencing a financial hardship (cash value increases may not be
distributed for hardships prior to age 59 1/2). Distributions prior to age
59 1/2 due to financial hardship; unemployment or retirement may still be
subject to a penalty tax of 10%.
WE ENCOURAGE YOU TO CONSULT WITH YOUR QUALIFIED TAX ADVISER BEFORE MAKING ANY
SURRENDERS. PLEASE SEE THE "FEDERAL TAX CONSIDERATIONS" SECTION FOR MORE
INFORMATION.
ANNUITY PAYOUTS
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THIS SECTION DESCRIBES WHAT HAPPENS WHEN WE BEGIN TO MAKE REGULAR ANNUITY
PAYOUTS FROM YOUR CONTRACT. YOU, AS THE CONTRACT OWNER, SHOULD ANSWER FIVE
QUESTIONS:
- - When do you want Annuity Payouts to begin?
- - Which Annuity Payout Option do you want to use?
- - How often do you want to receive Annuity Payouts?
- - What level of Assumed Investment Return should you choose?
- - Do you want Annuity Payouts to be fixed or variable or a combination?
Please check with your financial adviser to select the Annuity Payout Option
that best meets your income needs.
1. WHEN DO YOU WANT ANNUITY PAYOUTS TO BEGIN?
You select an Annuity Commencement Date when you purchase your Contract or at
any time before you begin receiving Annuity Payouts. You may change the Annuity
Commencement Date by
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20 FORTIS BENEFITS INSURANCE COMPANY
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notifying us within thirty days prior to the date. The Annuity Commencement Date
cannot be deferred beyond the Annuitant's 110th birthday, subject to the laws
and regulations then in effect and our approval. The date you select may have
tax consequences, so please check with a qualified tax advisor. You cannot begin
to take Annuity Payouts until the end of the 2nd Contract Year. If this Contract
is issued to the trustee of a Charitable Remainder Trust, the Annuity
Commencement Date may be deferred to the Annuitant's 100th birthday.
The Annuity Calculation Date is when the amount of your Annuity Payout is
determined. This occurs within five Valuation Days before your selected Annuity
Commencement Date.
All Annuity Payouts, regardless of frequency, will occur on the same day of the
month as the Annuity Commencement Date. After the initial payout, if an Annuity
Payout date falls on a Non-Valuation Day, the Annuity Payout is computed on the
prior Valuation Day. If the Annuity Payout date does not occur in a given month
due to a leap year or months with only 28 days (i.e. the 31st), the Annuity
Payout will be computed on the last Valuation Day of the month.
2. WHICH ANNUITY PAYOUT OPTION DO YOU WANT TO USE?
Your Contract contains the Annuity Payout Options described below. The Annuity
Proceeds Settlement Option is an option that can be elected by the Beneficiary
and is described in the "Death Benefit" section. We may at times offer other
Annuity Payout Options. Once we begin to make Annuity Payouts, the Annuity
Payout Option cannot be changed.
LIFE ANNUITY
We make Annuity Payouts as long as the Annuitant is living. When the Annuitant
dies, we stop making Annuity Payouts. A Payee would receive only one Annuity
Payout if the Annuitant dies after the first payout, two Annuity Payouts if the
Annuitant dies after the second payout, and so forth.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS
We will make Annuity Payouts as long as the Annuitant is living, but we at least
guarantee to make Annuity Payouts for a time period you select either 10 or 20
years. If the Annuitant dies before the guaranteed number of years have passed,
then the Beneficiary may elect to continue Annuity Payouts for the remainder of
the guaranteed number of years.
JOINT AND FULL SURVIVOR LIFE ANNUITY
We will make Annuity Payouts as long as the Annuitant and Joint Annuitant are
living. When one Annuitant dies, we continue to make Annuity Payouts to the
other Annuitant until that second Annuitant dies.
JOINT AND 1/2 CONTINGENT SURVIVOR LIFE ANNUITY
We make Payouts as long as both the Annuitant and Joint Annuitant are alive. If
the Annuitant dies first, we will make Payouts equal to 1/2 the original payout.
If the Joint Annuitant dies first, we will continue to make Payouts at the full
amount.
We may offer other Annuity Payout Options available.
IMPORTANT INFORMATION:
- - YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYOUTS BEGIN
- - For Qualified Contracts, if you elect an Annuity Payout Option with a Period
Certain, the guaranteed number of years must be less than the life expectancy
of the Annuitant at the time the Annuity Payouts begin. We compute life
expectancy using the IRS mortality tables.
- - AUTOMATIC ANNUITY PAYOUTS -- If you do not elect an Annuity Payout Option,
Annuity Payouts will automatically begin on the Annuity Commencement Date
under the Life Annuity with Payments for a Period Certain Annuity Payout
Option with a ten-year period certain. Automatic Annuity Payouts will be fixed
dollar amount Annuity Payouts, variable dollar amount Annuity Payouts, or a
combination of fixed or variable dollar amount Annuity Payouts, depending on
the investment allocation of your Account in effect on the Annuity
Commencement Date.
3. HOW OFTEN DO YOU WANT THE PAYEE TO RECEIVE ANNUITY PAYOUTS?
In addition to selecting an Annuity Commencement Date and an Annuity Payout
Option, you must also decide how often you want the Payee to receive Annuity
Payouts. You may choose to receive Annuity Payouts:
- - monthly,
- - quarterly,
- - semiannually, or
- - annually.
Once you select a frequency, it cannot be changed. If you do not make a
selection, the Payee will receive monthly Annuity Payouts. You must select a
frequency that results in an Annuity Payout of at least $50. If the amount falls
below $50, we have the right to change the frequency to bring the Annuity Payout
up to at least $50 ($20 in Texas).
WHAT IS THE ASSUMED INVESTMENT RETURN?
The Assumed Investment Return ("AIR") is the investment return before we start
to make Annuity Payouts. It is a critical assumption for calculating variable
dollar amount Annuity Payouts. The first Annuity Payout will be based upon the
AIR. The remaining Annuity Payouts will fluctuate based on the performance of
the underlying Funds. The AIR for this Contract is 3%.
For example, if the Sub-Accounts earned exactly the same as the AIR, then the
second monthly Annuity Payout Option is the same as the first. If the
Sub-Accounts earned more than the AIR, then the second monthly Annuity Payout
Option is higher than the first. If the Sub-Accounts earned less than the AIR,
then the second monthly Annuity Payout Option is lower than the first.
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FORTIS BENEFITS INSURANCE COMPANY 21
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Level variable dollar Annuity Payouts would be produced if the investment
returns remained constant and equal to the AIR. In fact, Annuity Payouts will
vary up or down as the investment rate varies up or down from the AIR.
DO YOU WANT FIXED DOLLAR AMOUNT OR VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS OR A
COMBINATION OF BOTH?
You may choose an Annuity Payout Option with fixed dollar amounts, variable
dollar amounts or a combination depending on your income needs.
FIXED DOLLAR AMOUNT ANNUITY PAYOUTS -- Once a fixed dollar amount Annuity Payout
begins, you cannot change your selection to receive variable dollar amount
Annuity Payout. You will receive equal fixed dollar amount Annuity Payouts
throughout the Annuity Payout period. Fixed dollar amount Annuity Payout amounts
are determined by multiplying the Contract Value, minus any applicable Premium
Taxes, by an annuity rate. The annuity rate is set by us and is not less than
the rate specified in the fixed dollar amount Annuity Payout Option tables in
your Contract.
VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS -- A variable dollar amount Annuity
Payout is based on the investment performance of the Sub-Accounts. The variable
dollar amount Annuity Payouts may fluctuate with the performance of the
underlying Funds. To begin making variable dollar amount Annuity Payouts, we
convert the first Annuity Payout amount to a set number of Annuity Units and
then price those units to determine the Annuity Payout amount. The number of
Annuity Units that determines the Annuity Payout amount remains fixed unless you
transfer units between Sub-Accounts.
The dollar amount of the first variable Annuity Payout depends on:
- - the Annuity Payout Option chosen,
- - the Annuitant's attained age and gender (if applicable), and,
- - the applicable annuity purchase rates based on the 1983a Individual Annuity
Mortality table
- - the Assumed Investment Return
The total amount of the first variable dollar amount Annuity Payout is
determined by dividing the Contract Value minus any applicable Premium Taxes, by
$1,000 and multiplying the result by the payment factor defined in the Contract
for the selected Annuity Payout Option.
The dollar amount of each subsequent variable dollar amount Annuity Payout is
equal to the total of:
Annuity Units for each Sub-Account multiplied by Annuity Unit Value for each
Sub-Account.
The Annuity Unit Value of each Sub-Account for any Valuation Period is equal to
the Accumulation Unit Value Net Investment Factor for the current Valuation
Period multiplied by the Annuity Unit factor, multiplied by the Annuity Unit
Value for the preceding Valuation Period.
COMBINATION ANNUITY PAYOUTS -- You may choose to receive a combination of fixed
dollar amount and variable dollar amount annuity payouts as long as they total
100% of your Annuity Payout. For example, you may choose to receive 40% fixed
dollar amount and 60% variable dollar amount to meet your income needs.
TRANSFER OF ANNUITY UNITS -- After the Annuity Calculation Date, you may
transfer dollar amounts of Annuity Units from one Sub-Account to another. On the
day you make a transfer, the dollar amounts are equal for both Sub-Accounts and
the number of Annuity Units will be different. We will transfer the dollar
amount of your Annuity Units the day we receive your written request if received
before the close of the New York Stock Exchange. Otherwise, the transfer will be
made on the next Valuation Day.
OTHER PROGRAMS AVAILABLE
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We may discontinue, modify or amend any of these Programs or any other programs
we establish. Any changes to a Program will not affect Contract Owners currently
enrolled in the Program.
INVESTEASE-REGISTERED TRADEMARK- -- InvestEase, which was formerly called "PAC,"
is an electronic transfer program that allows you to have money automatically
transferred from your checking or savings account, and invested in your
Contract. It is available for Premium Payments made after your initial Premium
Payment. The minimum amount for each transfer is $50. You can elect to have
transfers occur either monthly or quarterly, and they can be made into any
Account available in your Contract.
AUTOMATIC INCOME PROGRAM -- The Automatic Income Program allows you to Surrender
a percentage of your total Premium Payments each Contract Year. You can
Surrender from the Accounts you select systematically on a monthly, quarterly,
semiannual, or annual basis.
ASSET ALLOCATION PROGRAM -- Asset Allocation is a program that allows you to
choose an allocation for your Sub-Accounts to help you reach your investment
goals. The Contract offers model allocations with pre-selected Sub-Accounts and
percentages that have been established for each type of investor ranging from
conservative to aggressive. Over time, Sub-Account performance may cause your
Contract's allocation percentages to change, but under the Asset Allocation
Program, your Sub-Account allocations are rebalanced to the percentages in the
current model you have chosen. You can transfer freely between allocation models
up to twelve times per year. You can also allocate a portion of your investment
to Sub-Accounts that may not be part of the model. You can only participate in
one asset allocation model at a time.
ASSET REBALANCING -- Asset Rebalancing is another type of asset allocation
program in which you customize your Sub-Accounts to meet your investment needs.
You select the Sub-
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Accounts and the percentages you want allocated to each Sub-Account. Based on
the frequency you select, your model will automatically rebalance to the
original percentages chosen. You can transfer freely between models up to twelve
times per year. You can also allocate a portion of your investment to
Sub-Accounts that are not part of the model. You can only participate in one
asset rebalancing model at a time.
OTHER INFORMATION
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ASSIGNMENT -- A Non-Qualified Contract may be assigned. We must be properly
notified in writing of an assignment. Any Annuity Payouts or Surrenders
requested or scheduled before we record an assignment will be made according to
the instructions we have on record. We are not responsible for determining the
validity of an assignment. Assigning a Non-Qualified Contract may require the
payment of income taxes and certain penalty taxes. Please consult a qualified
tax adviser before assigning your Contract.
A Qualified Contract may not be transferred or otherwise assigned, unless
allowed by applicable law.
CONTRACT MODIFICATION -- The Annuitant may not be changed. However, if the
Annuitant is still living, the Contingent Annuitant may be changed at any time
prior to the Annuity Commencement Date by sending us written notice.
We may modify the Contract, but no modification will affect the amount or term
of any Contract unless a modification is required to conform the Contract to
applicable federal or state law. No modification will effect the method by which
Contract Values are determined.
HOW CONTRACTS ARE SOLD -- Woodbury Financial Services ("WFS")serves as Principal
Underwriter for the securities issued with respect to the Separate Account. WFS
is registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as a broker-dealer and is a member of the National
Association of Securities Dealers, Inc. It is an affiliate of ours. WFS is
ultimately controlled by The Hartford. The principal business address of WFS is
500 Bielenberg Drive, Woodbury, MN 55125. The securities will be sold by
individuals who represent us as insurance agents and who are registered
representatives of broker-dealers that have entered into distribution agreements
with WFS.
Commissions will be paid by Fortis and will not be more than 7% of Premium
Payments. From time to time, Fortis may pay or permit other promotional
incentives, in cash or credit or other compensation.
Broker-dealers or financial institutions are compensated according to a schedule
set forth by WFS and any applicable rules or regulations for variable insurance
compensation. Compensation is generally based on Premium Payments made by
policyholders or Contract Owners. This compensation is usually paid from the
sales charges described in this prospectus.
In addition, a broker-dealer or financial institution may also receive
additional compensation for, among other things, training, marketing or other
services provided. WFS, its affiliates or Fortis may also make compensation
arrangements with certain broker-dealers or financial institutions based on
total sales by the broker-dealer or financial institution of insurance products.
These payments, which may be different for different broker-dealers or financial
institutions, will be made by WFS, its affiliates or Fortis out of their own
assets and will not affect the amounts paid by the policyholders or Contract
Owners to purchase, hold or Surrender variable insurance products.
INDEPENDENT ACCOUNTANTS
The financial statements as of December 31, 2002 and 2001 and for each of the
three years in the period ended December 31, 2002 included in this Registration
Statement have been audited by PricewaterhouseCoopers LLP and are included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting. The
principal business address of PricewaterhouseCoopers LLP is 650 Third Avenue
South, Suite 1300, Minneapolis, MN 55402.
LEGAL MATTERS
There are no material legal proceedings pending to which the Separate Account is
a party.
Counsel with respect to federal laws and regulations applicable to the issue and
sale of the Contracts and with respect to Minnesota law is Douglas R. Lowe,
corporate counsel, Fortis Benefits Insurance Company, 500 Bielenberg Drive,
Woodbury, MN 55125.
MORE INFORMATION
You may call your Registered Representative if you have any questions or write
or call us at the address below:
Hartford Life and Annuity Insurance Company
Attn: Investment Product Services
P.O. Box 5085
Hartford, Connecticut 06102-5085.
Telephone: 1-800-862-6668 (Contract Owners)
1-800-862-7155 (Registered Representatives)
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FORTIS BENEFITS INSURANCE COMPANY 23
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FEDERAL TAX CONSIDERATIONS
What are some of the federal tax consequences which affect these Contracts?
A. GENERAL
Since federal tax law is complex, the tax consequences of purchasing this
contract will vary depending on your situation. You may need tax or legal advice
to help you determine whether purchasing this contract is right for you.
Our general discussion of the tax treatment of this contract is based on our
understanding of federal income tax laws as they are currently interpreted. A
detailed description of all federal income tax consequences regarding the
purchase of this contract cannot be made in the prospectus. We also do not
discuss state, municipal or other tax laws that may apply to this contract. For
detailed information, you should consult with a qualified tax adviser familiar
with your situation.
B. TAXATION OF FORTIS AND THE SEPARATE ACCOUNT
The Separate Account is taxed as part of Fortis which is taxed as a life
insurance company under Subchapter L of Chapter 1 of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, the Separate Account will not be
taxed as a "regulated investment company" under Subchapter M of Chapter 1 of the
Code. Investment income and any realized capital gains on the assets of the
Separate Account are reinvested and are taken into account in determining the
value of the Accumulation and Annuity Units. As a result, such investment income
and realized capital gains are automatically applied to increase reserves under
the Contract.
No taxes are due on interest, dividends and short-term or long-term capital
gains earned by the Separate Account with respect to Qualified or Non-Qualified
Contracts.
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING PURCHASERS OTHER THAN
QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Code Section 72 contains provisions for contract owners which are not natural
persons. Non-natural persons include corporations, trusts, limited liability
companies, partnerships and other types of legal entities. The tax rules for
contracts owned by non-natural persons are different from the rules for
contracts owned by individuals. For example, the annual net increase in the
value of the contract is currently includable in the gross income of a
non-natural person, unless the non-natural person holds the contract as an agent
for a natural person. There are additional exceptions from current inclusion
for:
- - certain annuities held by structured settlement companies,
- - certain annuities held by an employer with respect to a terminated qualified
retirement plan and
- - certain immediate annuities.
A non-natural person which is a tax-exempt entity for federal tax purposes will
not be subject to income tax as a result of this provision.
If the contract owner is a non-natural person, the primary annuitant is treated
as the contract owner in applying mandatory distribution rules. These rules
require that certain distributions be made upon the death of the contract owner.
A change in the primary annuitant is also treated as the death of the contract
owner.
2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract value (determined without
regard to surrender charges) is an appropriate measure. However, the IRS
could take the position that the value should be the current Contract value
(determined without regard to surrender charges) increased by some measure
of the value of certain future benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any
such "income on the contract" and then from "investment in the contract,"
and for these purposes such "income on the contract" shall be computed by
reference to any aggregation rule in subparagraph 2.c. below. As a result,
any such amount received or deemed received (1) shall be includable in
gross income to the extent that such amount does not exceed any such
"income on the contract," and (2) shall not be includable in gross income
to the extent that such amount does exceed any such "income on the
contract." If at the time that any amount is received or deemed received
there is no "income on the contract" (e.g., because the gross value of the
Contract does not exceed the "investment in the contract" and no
aggregation rule applies), then such amount received
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24 FORTIS BENEFITS INSURANCE COMPANY
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or deemed received will not be includable in gross income, and will simply
reduce the "investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
vi. In general, any amount actually received under the Contract as a Death
Benefit, including any optional Death Benefits, will be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b. As a result, we believe that for federal tax purposes any
optional Death Benefits should be treated as an integral part of the
Contract's benefits (i.e., as an investment protection benefit) and that
any charges under the Contract for any optional Death Benefits should not
be treated as an amount received by the Contract Owner for purposes of this
subparagraph a. However, it is possible that the IRS could take a contrary
position that some or all of these charges for any optional Death Benefits
should be treated for federal tax purposes as an amount received under the
Contract (e.g., as an amount distributed from the Contract to pay for an
additional benefit that should be treated as a benefit that is being
provided by a separate contract for tax purposes, i.e., by a separate
contract that is not part of the annuity Contract for tax purposes).
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and
shall be fully includable in gross income. However, upon a full surrender
after such date, only the excess of the amount received (after any
surrender charge) over the remaining "investment in the contract" shall be
includable in gross income (except to the extent that the aggregation rule
referred to in the next subparagraph c. may apply).
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same Contract Owner within the same calendar year (other than
certain contracts held in connection with a tax-qualified retirement
arrangement) will be treated as one annuity Contract for the purpose of
determining the taxation of distributions prior to the Annuity Commencement
Date. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new Contract for this
purpose. We believe that for any annuity subject to such aggregation, the values
under the Contracts and the investment in the contracts will be added together
to determine the taxation under subparagraph 2.a., above, of amounts received or
deemed received prior to the Annuity Commencement Date. Withdrawals will first
be treated as withdrawals of income until all of the income from all such
Contracts is withdrawn. As of the date of this prospectus, there are no
regulations interpreting this provision.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN WITHDRAWALS AND ANNUITY
PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions:
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments (not less frequently than annually) for the life (or
life expectancy) of the recipient (or the joint lives or life
expectancies of the recipient and the recipient's designated
Beneficiary). In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take
the position that the entire interest in the Contract should include not
only the current Contract value, but also some measure of the value of
certain future benefits.
5. Distributions made under certain annuities issued in connection with
structured settlement agreements.
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6. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to
August 14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract,
(2) then from the portion of the "income on the contract" (carried over to, as
well as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such post-
exchange Contracts are generally subject to the rules described in this
subparagraph e.
f. REQUIRED DISTRIBUTIONS.
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract will be distributed within 5 years after
such death; and
3. If the Contract Owner is not an individual, then for purposes of 1. or
2. above, the primary annuitant under the Contract shall be treated as
the Contract Owner, and any change in the primary annuitant shall be
treated as the death of the Contract Owner. The primary annuitant is the
individual, the events in the life of whom are of primary importance in
affecting the timing or amount of the payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Contract Owner described in i. above is
payable to or for the benefit of a designated beneficiary, such beneficiary
may elect to have the portion distributed over a period that does not extend
beyond the life or life expectancy of the beneficiary. Distributions must
begin within a year of the Contract Owner's death.
iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for the
benefit of his or her spouse, and the Annuitant or Contingent Annuitant is
living, such spouse shall be treated as the Contract Owner of such portion
for purposes of section i. above. This spousal contract continuation shall
apply only once for this contract.
g. ADDITION OF RIDERS.
The addition of a rider to the Contract could cause it to be considered newly
issued or entered into, for tax purposes, and thus could result in the loss of
certain grandfathering with respect to the Contract. Please contact your tax
adviser for more information.
3. DIVERSIFICATION REQUIREMENTS.
The Code requires that investments supporting your contract be adequately
diversified. Code Section 817 provides that a variable annuity contract will not
be treated as an annuity contract for any period during which the investments
made by the separate account or underlying fund are not adequately diversified.
If a contract is not treated as an annuity contract, the contract owner will be
subject to income tax on annual increases in cash value.
The Treasury Department's diversification regulations require, among other
things, that:
- - no more than 55% of the value of the total assets of the segregated asset
account underlying a variable contract is represented by any one investment,
- - no more than 70% is represented by any two investments,
- - no more than 80% is represented by any three investments and
- - no more than 90% is represented by any four investments.
In determining whether the diversification standards are met, all securities of
the same issuer, all interests in the same real property project, and all
interests in the same commodity are each treated as a single investment. In the
case of government securities, each government agency or instrumentality is
treated as a separate issuer.
A separate account must be in compliance with the diversification standards on
the last day of each calendar quarter or within 30 days after the quarter ends.
If an insurance company inadvertently fails to meet the diversification
requirements, the company may still comply within a reasonable period and avoid
the taxation of contract income on an ongoing basis. However, either the company
or the contract owner must agree to pay the tax due for the period during which
the diversification requirements were not met.
We monitor the diversification of investments in the separate accounts and test
for diversification as required by the Code. We
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intend to administer all contracts subject to the diversification requirements
in a manner that will maintain adequate diversification.
4. OWNERSHIP OF THE ASSETS IN THE SEPARATE ACCOUNT.
In order for a variable annuity contract to qualify for tax deferral, assets in
the separate accounts supporting the contract must be considered to be owned by
the insurance company and not by the contract owner. It is unclear under what
circumstances an investor is considered to have enough control over the assets
in the separate account to be considered the owner of the assets for tax
purposes.
The IRS has issued several rulings discussing investor control. These rulings
say that certain incidents of ownership by the contract owner, such as the
ability to select and control investments in a separate account, will cause the
contract owner to be treated as the owner of the assets for tax purposes.
In its explanation of the diversification regulations, the Treasury Department
recognized that the temporary regulations "do not provide guidance concerning
the circumstances in which investor control of the investments of a segregated
asset account may cause the investor, rather than the insurance company, to be
treated as the owner of the assets in the account." The explanation further
indicates that "the temporary regulations provide that in appropriate cases a
segregated asset account may include multiple sub-accounts, but do not specify
the extent to which policyholders may direct their investments to particular
sub-accounts without being treated as the owners of the underlying assets.
Guidance on this and other issues will be provided in regulations or revenue
rulings under Section 817(d), relating to the definition of variable contract."
The final regulations issued under Section 817 did not provide guidance
regarding investor control, and as of the date of this prospectus, guidance has
yet to be issued. We do not know if additional guidance will be issued. If
guidance is issued, we do not know if it will have a retroactive effect.
Due to the lack of specific guidance on investor control, there is some
uncertainty about when a contract owner is considered the owner of the assets
for tax purposes. We reserve the right to modify the contract, as necessary, to
prevent you from being considered the owner of assets in the separate account.
D. FEDERAL INCOME TAX WITHHOLDING
Any portion of a distribution that is current taxable income to the Contract
Owner will generally be subject to federal income tax withholding and reporting
under the Code. Generally, however, a Contract Owner may elect not to have
income taxes withheld or to have income taxes withheld at a different rate by
filing a completed election form with us. Election forms will be provided at the
time distributions are requested.
E. GENERAL PROVISIONS AFFECTING QUALIFIED RETIREMENT PLANS
The Contract may be used for a number of qualified retirement plans. If the
Contract is being purchased with respect to some form of qualified retirement
plan, please refer to Appendix I for information relative to the types of plans
for which it may be used and the general explanation of the tax features of such
plans.
F. 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 income tax and withholding on taxable annuity distributions at a
30% rate, unless a lower treaty rate applies and any required tax forms are
submitted to us. In addition, purchasers may be subject to state premium tax,
other state and/or municipal taxes, and taxes that may be imposed by the
purchaser's country of citizenship or residence. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity purchase.
G. GENERATION SKIPPING TRANSFER TAX
Under certain circumstances, the Code 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 Code may require us to deduct the tax from
your Contract, or from any applicable payment, and pay it directly to the IRS.
H. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
repealed the Federal estate tax and replaced it with a carryover basis income
tax regime effective for estates of decedents dying after December 31, 2009.
EGTRRA also repealed the generation skipping transfer tax, but not the gift tax,
for transfers made after December 31, 2009. EGTRRA contains a sunset provision,
which essentially returns the Federal estate, gift and generation skipping
transfer taxes to their pre-EGTRRA form, beginning in 2011. Congress may or may
not enact permanent repeal between now and then.
During the period prior to 2010, EGTRRA provides for periodic decreases in the
maximum estate tax rate coupled with periodic increases in the unified credit
exemption amount. For 2003, the maximum estate tax rate is 49% and the unified
credit exemption amount is $1,000,000.
The complexity of the new tax law, along with uncertainty as to how it might be
modified in coming years, underscores the importance of seeking guidance from a
qualified advisor to help ensure that your estate plan adequately addresses your
needs and that of your beneficiaries under all possible scenarios.
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FORTIS BENEFITS INSURANCE COMPANY 27
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INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS
This summary does not attempt to provide more than general information about the
federal income tax rules associated with use of a Contract by a tax-qualified
retirement plan. State income tax rules applicable to tax-qualified retirement
plans often differ from federal income tax rules, and this summary does not
describe any of these differences. Because of the complexity of the tax rules,
owners, participants and beneficiaries are encouraged to consult their own tax
advisors as to specific tax consequences.
The Contracts may offer death benefits that may exceed the greater of the
amounts paid for the Contract or the Contract's cash value. Owners who intend to
use the Contract in connection with tax-qualified retirement plans should
consider the income tax effects that such a death benefit may have on the plan.
The federal tax rules applicable to owners of Contracts under tax-qualified
retirement plans vary according to the type of plan as well as the terms and
conditions of the plan itself. Contract owners, plan participants and
beneficiaries are cautioned that the rights and benefits of any person may be
controlled by the terms and conditions of the tax-qualified retirement plan
itself, regardless of the terms and conditions of a Contract. We are not bound
by the terms and conditions of such plans to the extent such terms conflict with
a Contract, unless we specifically consent to be bound.
Some tax-qualified retirement plans are subject to distribution and other
requirements that are not incorporated into our administrative procedures.
Contract owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions comply with applicable
law. Tax penalties may apply to transactions with respect to tax-qualified
retirement plans if applicable federal income tax rules and restrictions are not
carefully observed.
We do not currently offer the Contracts in connection with all of the types of
tax-qualified retirement plans discussed below and may not offer the Contracts
for all types of tax-qualified retirement plans in the future.
1. TAX-QUALIFIED PENSION OR PROFIT-SHARING PLANS -- Eligible employers can
establish certain tax-qualified pension and profit-sharing plans under
section 401 of the Code. Rules under section 401(k) of the Code govern certain
"cash or deferred arrangements" under such plans. Rules under section 408(k)
govern "simplified employee pensions". Tax-qualified pension and profit-sharing
plans are subject to limitations on the amount that may be contributed, the
persons who may be eligible to participate, the time when distributions must
commence, and the form in which distributions must be paid. Employers intending
to use the Contracts in connection with tax-qualified pension or profit-sharing
plans should seek competent tax and other legal advice. If the death benefit
under the Contract can exceed the greater of the amount paid for the Contract
and the Contract's cash value, it is possible that the IRS would characterize
such death benefit as an "incidental death benefit." There are limitations on
the amount of incidental benefits that may be provided under pension and profit
sharing plans. In addition, the provision of such benefits may result in
currently taxable income to the participants.
2. TAX SHELTERED ANNUITIES UNDER SECTION 403(b) -- Public schools and certain
types of charitable, educational and scientific organizations, as specified in
section 501(c)(3) of the Code, can purchase tax-sheltered annuity contracts for
their employees. Tax-deferred contributions can be made to tax-sheltered annuity
contracts under section 403(b) of the Code, subject to certain limitations. In
general, total contributions may not exceed the lesser of (1) 100% of the
participant's compensation, and (2) $40,000 (adjusted for increases in
cost-of-living). The maximum elective deferral amount is equal to $12,000 for
2003, $13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter,
indexed. The limitation on elective deferrals may be increased to allow certain
"catch-up" contributions for individuals who have attained age 50.
Tax-sheltered annuity programs under section 403(b) are subject to a PROHIBITION
AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE
PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such distribution is made:
- - after the participating employee attains age 59 1/2;
- - upon severance from employment;
- - upon death or disability; or
- - in the case of hardship (and in the case of hardship, any income attributable
to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable to
cash values or other amounts held under a section 403(b) contract as of
December 31, 1988.
If the death benefit under the Contract can exceed the greater of the amount
paid for the Contract and the Contract's cash value, it is possible that the IRS
would characterize such death benefit as an "incidental death benefit." If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a section 403(b)
arrangement.
3. DEFERRED COMPENSATION PLANS UNDER SECTION 457 -- Certain governmental
employers or tax-exempt employers other than a governmental unit can establish a
Deferred Compensation Plan under section 457 of the Code. For these purposes, a
"governmental employer" is a State, a political subdivision of a State, or an
agency or an instrumentality of a State or political subdivision of a State.
Employees and independent contractors performing services for a governmental or
tax-exempt employer can elect to have contributions made to a Deferred
Compensation Plan of their employer in accordance with the employer's plan and
section 457 of the Code.
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Deferred Compensation Plans that meet the requirements of section 457(b) of the
Code are called "eligible" Deferred Compensation Plans. Section 457(b) limits
the amount of contributions that can be made to an eligible Deferred
Compensation Plan on behalf of a participant. Generally, the limitation on
contributions is the lesser of (1) 100% of a participant's includible
compensation or (2) the applicable dollar amount, equal to $12,000 for 2003,
$13,000 for 2004, $14,000 for 2005, and $15,000 for 2006 and thereafter,
indexed. The plan may provide for additional "catch-up" contributions during the
three taxable years ending before the year in which the participant attains
normal retirement age. In addition, the contribution limitation may be increased
to allow certain "catch-up" contributions for individuals who have attained age
50.
All of the assets and income of an eligible Deferred Compensation Plan for a
governmental employer must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, certain custodial
accounts and annuity contracts are treated as trusts. The requirement of a trust
does not apply to amounts under an eligible Deferred Compensation Plan of a
tax-exempt (non-governmental) employer. In addition, the requirement of a trust
does not apply to amounts under a Deferred Compensation Plan of a governmental
employer if the Deferred Compensation Plan is not an eligible plan within the
meaning of section 457(b) of the Code. In the absence of such a trust, amounts
under the plan will be subject to the claims of the employer's general
creditors.
In general, distributions from an eligible Deferred Compensation Plan to a
participant or beneficiary are prohibited under section 457 of the Code unless
made after the participating employee:
- - attains age 70 1/2,
- - has a severance from employment as defined in the Code (including death of the
participating employee), or
- - suffers an unforeseeable financial emergency as defined in the Code.
4. INDIVIDUAL RETIREMENT ANNUITIES ("IRAS") UNDER SECTION 408
TRADITIONAL IRAS -- Eligible individuals can establish individual retirement
programs under section 408 of the Code through the purchase of an IRA. Section
408 imposes limits with respect to IRAs, including limits on the amount that may
be contributed to an IRA, the amount of such contributions that may be deducted
from taxable income, the persons who may be eligible to contribute to an IRA,
and the time when distributions commence from an IRA. See Section 6 below for a
discussion of rollovers involving IRAs.
SIMPLE IRAS -- Eligible employees may establish SIMPLE IRAs in connection with a
SIMPLE IRA plan of an employer under section 408(p) of the Code. Special
rollover rules apply to SIMPLE IRAs. Amounts can be rolled over from one SIMPLE
IRA to another SIMPLE IRA. However, amounts can be rolled over from a SIMPLE IRA
to a Traditional IRA only after two years have expired since the employee first
commenced participation in the employer's SIMPLE IRA plan. Amounts cannot be
rolled over to a SIMPLE IRA from a qualified plan or a Traditional IRA. Fortis
is a non-designated financial institution for purposes of the SIMPLE IRA rules.
ROTH IRAS -- Eligible individuals may establish Roth IRAs under section 408A of
the Code. Contributions to a Roth IRA are not deductible. Subject to special
limitations, a Traditional IRA, SIMPLE IRA or Simplified Employee Pension under
Section 408(k) of the Code may be converted into a Roth IRA or a distribution
from such an arrangement may be rolled over to a Roth IRA. However, a conversion
or a rollover to a Roth IRA is not excludable from gross income. If certain
conditions are met, qualified distributions from a Roth IRA are tax-free.
5. FEDERAL TAX PENALTIES AND WITHHOLDING -- Distributions from tax-qualified
retirement plans are generally taxed as ordinary income under section 72 of the
Code. Under these rules, a portion of each distribution may be excludable from
income. The excludable amount is the portion of the distribution that bears the
same ratio as the after-tax contributions bear to the expected return.
(a) PENALTY TAX ON EARLY DISTRIBUTIONS Section 72(t) of the Code imposes an
additional penalty tax equal to 10% of the taxable portion of a distribution
from certain tax-qualified retirement plans. However, the 10% penalty tax
does not apply to a distribution that is:
- - Made on or after the date on which the employee reaches age 59 1/2;
- - Made to a beneficiary (or to the estate of the employee) on or after the death
of the employee;
- - Attributable to the employee's becoming disabled (as defined in the Code);
- - Part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and his or her
designated beneficiary. In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take the
position that the entire interest in the Contract should include not only the
current Contract value, but also some measure of the value of certain future
benefits;
- - Except in the case of an IRA, made to an employee after separation from
service after reaching age 55; or
- - Not greater than the amount allowable as a deduction to the employee for
eligible medical expenses during the taxable year.
In addition, the 10% penalty tax does not apply to a distribution from an IRA
that is:
- - Made after separation from employment to an unemployed IRA owner for health
insurance premiums, if certain conditions are met;
<Page>
FORTIS BENEFITS INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
- - Not in excess of the amount of certain qualifying higher education expenses,
as defined by section 72(t)(7) of the Code; or
- - A qualified first-time homebuyer distribution meeting the requirements
specified at section 72(t)(8) of the Code.
If you are a participant in a SIMPLE IRA plan, you should be aware that the 10%
penalty tax is increased to 25% with respect to non-exempt early distributions
made from your SIMPLE IRA during the first two years following the date you
first commenced participation in any SIMPLE IRA plan of your employer.
(b) MINIMUM DISTRIBUTION PENALTY TAX If the amount distributed is less than the
minimum required distribution for the year, the Participant is subject to a
50% penalty tax on the amount that was not properly distributed.
An individual's interest in a tax-qualified retirement plan generally must be
distributed, or begin to be distributed, not later than the Required Beginning
Date. Generally, the Required Beginning Date is April 1 of the calendar year
following the later of:
- - the calendar year in which the individual attains age 70 1/2; or
- - the calendar year in which the individual retires from service with the
employer sponsoring the plan.
The Required Beginning Date for an individual who is a five (5) percent owner
(as defined in the Code), or who is the owner of an IRA, is April 1 of the
calendar year following the calendar year in which the individual attains age
70 1/2.
The entire interest of the Participant must be distributed beginning no later
than the Required Beginning Date over:
- - the life of the Participant or the lives of the Participant and the
Participant's designated beneficiary (as defined in the Code), or
- - over a period not extending beyond the life expectancy of the Participant or
the joint life expectancy of the Participant and the Participant's designated
beneficiary.
Each annual distribution must equal or exceed a "minimum distribution amount"
which is determined generally by dividing the account balance by the applicable
life expectancy. This account balance is generally based upon the account value
as of the close of business on the last day of the previous calendar year. In
addition, minimum distribution incidental benefit rules may require a larger
annual distribution. Required minimum distributions also can be made in the form
of annuity payments. The death benefit under the contract may affect the amount
of the minimum required distribution that must be taken.
If an individual dies before reaching his or her Required Beginning Date, the
individual's entire interest must generally be distributed within five years of
the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary and distribution is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of the beneficiary). If the beneficiary is the individual's surviving
spouse, distributions may be delayed until the individual would have attained
age 70 1/2.
If an individual dies after reaching his or her Required Beginning Date or after
distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
The minimum distribution requirements apply to Roth IRAs after the Contract
owner dies, but not while the Contract owner is alive. In addition, if the owner
of a Traditional or Roth IRA dies and the Contract owner's spouse is the sole
designated beneficiary, the surviving spouse may elect to treat the Traditional
or Roth IRA as his or her own.
In 2002, the Internal Revenue Service issued final and temporary regulations in
the Federal Register relating to minimum required distributions. Please consult
with your tax or legal adviser with any questions regarding the new regulations.
(c) WITHHOLDING We are generally required to withhold federal income tax from
the taxable portion of each distribution made under a Contract. The federal
income tax withholding requirements, including the rate at which withholding
applies, depend on whether a distribution is or is not an eligible rollover
distribution.
Federal income tax withholding from the taxable portion of distributions that
are not eligible rollover distributions is required unless the payee is eligible
to, and does in fact, elect not to have income tax withheld by filing an
election with us. Where the payee does not elect out of withholding, the rate of
income tax to be withheld depends on whether the distribution is nonperiodic or
periodic. Regardless of whether an election is made not to have federal income
taxes withheld, the recipient is still liable for payment of federal income tax
on the taxable portion of the distribution.
For periodic payments, federal income tax will be withheld from the taxable
portion of the distribution by treating the payment as wages under IRS wage
withholding tables, using the marital status and number of withholding
allowances elected by the payee on an IRS Form W-4P, or acceptable substitute,
filed with us. Where the payee has not filed a Form W-4P, or acceptable
substitute, with us, the payee will be treated as married claiming three
withholding allowances. Special rules apply where the payee has not provided us
with a proper taxpayer identification number or where the payments are sent
outside the United States or U.S. possessions.
For nonperiodic distributions, where a payee has not elected out of withholding,
income tax will be withheld at a rate of 10 percent from the taxable portion of
the distribution.
Federal income tax withholding is required at a rate of 20 percent from the
taxable portion of any distribution that is an eligible rollover distribution to
the extent it is not directly rolled over to an eligible recipient plan. Payees
cannot elect out of income tax withholding with respect to such distributions.
<Page>
30 FORTIS BENEFITS INSURANCE COMPANY
- --------------------------------------------------------------------------------
Also, special withholding rules apply with respect to distributions from
non-governmental section 457(b) plans, and to distributions made to individuals
who are neither citizens or resident aliens of the United States.
6. ROLLOVER DISTRIBUTIONS -- Under present federal tax law, "eligible rollover
distributions" from qualified retirement plans under section 401(a) of the Code,
qualified annuities under section 403(a) of the Code, section 403(b)
arrangements, and governmental 457(b) plans generally can be rolled over
tax-free within 60 days to any of such plans or arrangements that accept such
rollovers. Similarly, distributions from an IRA generally are permitted to be
rolled over tax-free within 60 days to a qualified plan, qualified annuity,
section 403(b) arrangement, or governmental 457(b) plan. After tax contributions
may be rolled over from a qualified plan, qualified annuity or governmental 457
plan into another qualified plan or an IRA. In the case of such a rollover of
after tax contributions, the rollover is permitted to be accomplished only
through a direct rollover. In addition, a qualified plan is not permitted to
accept rollovers of after tax contributions unless the plan provides separate
accounting for such contributions (and earnings thereon). Similar rules apply
for purposes of rolling over after tax contributions from a section 403(b)
arrangement. After tax contributions (including nondeductible contributions to
an IRA) are not permitted to be rolled over from an IRA into a qualified plan,
qualified annuity, section 403(b) arrangement, or governmental 457(b) plan.
For this purpose, an eligible rollover distribution is generally a distribution
to an employee of all or any portion of the balance to the credit of the
employee in a qualified trust under section 401(a) of the Code, qualified
annuity under section 403(a) of the Code, a 403(b) arrangement or a governmental
457(b) plan. However, an eligible rollover distribution does not include: any
distribution which is one of a series of substantially equal periodic payments
(not less frequently than annually) made (1) for the life (or life expectancy)
of the employee or the joint lives (or joint life expectancies) of the employee
and the employee's designated beneficiary, or (2) for a specified period of 10
years or more; any distribution to the extent it is a required minimum
distribution amount (discussed above); or any distribution which is made upon
hardship of the employee.
Separate accounting is required on amounts rolled from plans described under
Code sections 401, 403(b) or 408(IRA), when those amounts are rolled into plans
described under section 457(b) sponsored by governmental employers. These
amounts, when distributed from the governmental 457(b) plan, will be subject to
the 10% early withdrawal tax applicable to distributions from plans described
under sections 401, 403(b) or 408(IRA), respectively.
<Page>
FORTIS BENEFITS INSURANCE COMPANY 31
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
The following information should be read in conjunction with the financial
statements for the Separate Account included in the Statement of Additional
Information, which is incorporated by reference in this prospectus. There is no
information for Hartford International Opportunities HLS Fund, Hartford Stock
HLS Fund and Hartford Capital Appreciation HLS Fund Sub-Accounts because as of
December 31, 2002, the Sub-Accounts had not commenced operation.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
SUB-ACCOUNT 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------
HARTFORD ADVISERS HLS FUND
Accumulation Unit Value at beginning of period $11.572 $12.288 $12.537 $11.479 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $9.853 $11.572 $12.288 $12.537 $11.479
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 487 729 848 585 231
- ------------------------------------------------------------------------------------------
HARTFORD BLUE CHIP STOCK HLS FUND
Accumulation Unit Value at beginning of period $10.601 $12.543 $13.021 $10.998 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $7.915 $10.601 $12.543 $13.021 $10.998
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 373 530 712 636 134
- ------------------------------------------------------------------------------------------
HARTFORD BOND HLS FUND
Accumulation Unit Value at beginning of period $11.202 $10.437 $9.437 $9.753 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.179 $11.202 $10.437 $9.437 $9.753
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 153 156 126 134 56
- ------------------------------------------------------------------------------------------
HARTFORD CAPITAL OPPORTUNITIES HLS FUND
Accumulation Unit Value at beginning of period $6.606 $8.760 $10.000 -- --
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $4.642 $6.606 $8.760 -- --
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 56 62 47 -- --
- ------------------------------------------------------------------------------------------
HARTFORD GLOBAL LEADERS HLS FUND
Accumulation Unit Value at beginning of period $9.075 $11.016 $12.003 $8.083 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $7.214 $9.075 $11.016 $12.003 $8.083
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 147 170 243 117 83
- ------------------------------------------------------------------------------------------
HARTFORD GROWTH AND INCOME HLS FUND
Accumulation Unit Value at beginning of period $10.299 $11.338 $12.167 $10.113 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $7.663 $10.299 $11.338 $12.167 $10.113
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 248 246 276 202 76
- ------------------------------------------------------------------------------------------
HARTFORD GROWTH OPPORTUNITIES HLS FUND
Accumulation Unit Value at beginning of period $12.438 $16.327 $15.898 $10.374 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $8.887 $12.438 $16.327 $15.898 $10.374
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 246 327 399 153 58
- ------------------------------------------------------------------------------------------
HARTFORD HIGH YIELD HLS FUND
Accumulation Unit Value at beginning of period $8.932 $8.807 $8.827 $8.536 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $8.217 $8.932 $8.807 $8.827 $8.536
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 59 93 72 81 34
- ------------------------------------------------------------------------------------------
HARTFORD INDEX HLS FUND
Accumulation Unit Value at beginning of period $10.083 $11.644 $13.028 $10.949 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $7.723 $10.083 $11.644 $13.028 $10.949
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 501 642 830 858 345
- ------------------------------------------------------------------------------------------
</Table>
<Page>
32 FORTIS BENEFITS INSURANCE COMPANY
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
SUB-ACCOUNT 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------
HARTFORD INTERNATIONAL STOCK HLS FUND
Accumulation Unit Value at beginning of period $8.022 $10.728 $12.023 $9.818 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $7.150 $8.022 $10.728 $12.023 $9.818
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 165 235 285 270 98
- ------------------------------------------------------------------------------------------
HARTFORD LARGE CAP GROWTH HLS FUND
Accumulation Unit Value at beginning of period $10.065 $11.978 $14.779 $11.763 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $6.855 $10.065 $11.978 $14.779 $11.763
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 217 313 393 360 131
- ------------------------------------------------------------------------------------------
HARTFORD MID CAP STOCK HLS FUND
Accumulation Unit Value at beginning of period $10.725 $11.333 $10.555 $9.632 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $9.208 $10.725 $11.333 $10.555 $9.632
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 126 151 139 108 43
- ------------------------------------------------------------------------------------------
HARTFORD MONEY MARKET HLS FUND
Accumulation Unit Value at beginning of period $11.459 $11.171 $10.662 $10.293 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.483 $11.459 $11.171 $10.662 $10.293
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 515 743 646 573 201
- ------------------------------------------------------------------------------------------
HARTFORD MULTISECTOR BOND HLS FUND
Accumulation Unit Value at beginning of period $10.760 $10.317 $10.021 $10.974 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.045 $10.760 $10.317 $10.021 $10.974
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 67 97 85 64 24
- ------------------------------------------------------------------------------------------
HARTFORD SMALLCAP GROWTH HLS FUND
Accumulation Unit Value at beginning of period $14.216 $18.036 $21.505 $10.406 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $9.991 $14.216 $18.036 $21.505 $10.406
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 164 218 352 216 84
- ------------------------------------------------------------------------------------------
HARTFORD SMALL CAP VALUE HLS FUND
Accumulation Unit Value at beginning of period $16.003 $13.392 $10.677 $9.373 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.408 $16.003 $13.392 $10.677 $9.373
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 163 257 190 186 48
- ------------------------------------------------------------------------------------------
HARTFORD U.S. GOVERNMENT SECURITIES HLS FUND
Accumulation Unit Value at beginning of period $12.007 $11.307 $10.243 $10.576 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.131 $12.007 $11.307 $10.243 $10.576
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 657 605 473 443 129
- ------------------------------------------------------------------------------------------
HARTFORD VALUE OPPORTUNITIES HLS FUND
Accumulation Unit Value at beginning of period $11.753 $12.212 $10.435 $9.698 $10.000
- ------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $8.710 $11.753 $12.212 $10.435 $9.698
- ------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at
end of period (in thousands) 170 256 151 114 64
- ------------------------------------------------------------------------------------------
</Table>
<Page>
FORTIS BENEFITS INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
FURTHER INFORMATION ABOUT FORTIS BENEFITS INSURANCE COMPANY
Fortis Benefits is a Minnesota corporation founded in 1910. It is qualified to
sell life, health and annuity insurance in the District of Columbia and in all
states except New York. Fortis Benefits is an indirectly wholly-owned subsidiary
of Fortis, Inc., which is itself indirectly owned 50% by Fortis N.V. and 50% by
Fortis (SA/NV). Fortis, Inc. manages the United States operations for these two
companies.
Fortis N.V. is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
SA/NV is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis N.V. and Fortis
SA/ NV have merged their operating companies under the trade name of Fortis. The
Fortis group of companies is active in insurance, banking and financial
services, and real estate development in The Netherlands, Belgium, the United
States, Western Europe, and the Pacific Rim.
We offer and sell insurance products, including life insurance policies, annuity
contracts, and group life, accident and health insurance policies. We market our
products to small businesses and individuals through a national network of
independent agents, brokers, and financial institutions.
Effective April 1, 2001, Fortis Benefits contracted the administrative servicing
obligations for its registered variable and market value adjusted insurance
contracts to Hartford Life and Annuity Insurance Company ("Hartford L&A"), a
subsidiary of The Hartford Financial Services Group ("Hartford"). Although
Fortis Benefits remains responsible for all contract terms and conditions,
Hartford L&A is responsible for servicing the contracts, including the payment
of benefits, oversight of investment management (i.e., the Portfolios) and
overall contract administration. This was part of a larger transaction whereby
Hartford L&A reinsured all of the individual life insurance and annuity business
of Fortis Benefits.
Fortis Benefits seeks to compete primarily on the basis of customer service,
product design, and, in the case of variable products, the investment results
achieved. Many other insurance companies compete with Fortis Benefits in each of
its markets, including on the basis of price. Many of these companies, which
include some of the largest and best known insurance companies, have
considerably greater resources than Fortis Benefits.
The Company is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. Fortis Benefits'
operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of Fortis Benefits under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include health care reform, employee benefit regulation, controls on
medicare costs and medical entitlement programs, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Pursuant to state insurance laws and regulations, Fortis Benefits is obligated
to carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, if Fortis Benefits were
to incur claims or expenses at rates significantly higher than expected or
significant unexpected losses on its investments.
PROPERTIES
Fortis Benefits has approximately 1500 employees. Fortis Benefits has its
principal offices in Kansas City, Missouri. Fortis Benefits leases a portion of
that building consisting of 297,000 square feet. Fortis Benefits occupies
approximately 85% of its building, which it expects will be adequate for its
purposes for the foreseeable future. Fortis Benefits also leases approximately
70,000 square feet of space in Birmingham, Alabama for the employees of its
dental insurance division. In addition Fortis Benefits has several regional
claims and sales offices throughout the United States.
LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits, none of which, in the opinion of
the Company counsel, will result in a material liability.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A shareholder meeting was held on April 30, 2002 to elect the current slate of
directors of Fortis Benefits Insurance Company and minor amendments were made to
the Bylaws of the Company.
<Page>
34 FORTIS BENEFITS INSURANCE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from the financial statements of Fortis
Benefits included elsewhere in this prospectus. You should read the following
along with these financial statements.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 2002 2001 2000 1999* 1998*
- ------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Premiums and policy charges $1,686,364 $ 1,547,678 $ 1,604,244 $ 1,528,081 $1,333,258
Net investment income 258,590 306,377 331,380 289,719 234,043
Net realized gains (losses) on investment (45,801) (34,437) (21,629) 18,854 52,404
Other income 13,099 13,161 9,607 11,663 11,183
---------- ----------- ----------- ----------- ----------
Total Revenues $1,972,438 $ 1,884,958 $ 1,928,602 $ 1,849,418 $1,630,888
---------- ----------- ----------- ----------- ----------
Total benefits and expenses $1,827,564 $ 1,722,125 $ 1,791,172 $ 1,714,876 $1,538,604
Federal Income taxes 44,225 55,474 44,820 44,869 30,402
Net income 100,648 107,359 92,610 89,673 61,882
BALANCE SHEET DATA
Total assets $8,944,759 $10,025,352 $10,632,449 $ 9,610,139* $7,578,055
Total liabilities 8,110,533 9,304,557 9,641,403 8,760,587* 6,692,587
Total shareholder's equity 834,226 720,795 991,046 849,552* 885,468
- ------------------------------------------------------------------------------------------------------------------
</Table>
*The Balance Sheet Data for 1999 and 1998 and the Income Statement Data for 1998
have not been restated to reflect the merger activity occurring in 2001. The
remaining data for 1999 and 2000 have been restated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2002 COMPARED TO 2001
REVENUES
Fortis Benefits Insurance Company (the "Company") distributes its products
through a network of independent agents, brokers and financial institutions. The
Company's major products offered are group dental, group disability, group
medical, group life, pre-need annuity and life and accidental death coverages.
On December 31, 2001, the Company purchased (the "Purchase") the Dental Benefits
Division of Protective Life Corporation ("Protective"). The Purchase includes
primarily group dental products. The Company reinsured this business on a 100%
coinsurance basis and will perform all administration activities. The Company
assumed approximately $75 million of reserves, $244 million of assets including
$147 million of goodwill and intangibles, and paid net cash of approximately
$169 million.
The purchase of the Protective business is the primary reason for the increase
in accident and health premiums from December 31, 2001 to December 31, 2002.
During 2001, the Company began offering a new accidental death product through
financial institutions. This business represents 7.2% and 4.4% of total accident
and health premium as of December 31, 2002 and 2001 respectively. Rate increases
in the group medical line resulted in a 19.5% decrease of group medical premium
due to non-renewal of existing business and lower new sales.
Strong sales in the pre-need annuity and life line resulted in an increase of
pre-need premium from December 31, 2001 to December 31, 2002 of 4%. On April 1,
2001, the Company entered into a coinsurance agreement with Hartford Financial
Services Group ("Hartford") whereby the Company ceded the Investment Product
block of business to the Hartford. Premium on this business represented 0% and
2% of total Company premium income for the year ended December 31, 2002 and
2001, respectively.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Investment income decreased from $306 million in
2001 to $259 million in 2002 due to lower yielding investment markets. Changes
in interest rates during 2002 and 2001 resulted in recognition of realized gains
and losses upon sales of securities. The Company had more capital losses from
fixed maturity investments in 2002 as compared to 2001.
BENEFITS
The total year-to-date policyholder benefit to premium ratio decreased from 80%
to 77% from December 31, 2001 to December 31, 2002. The group dental, group
disability, group medical, group life and pre-need benefit to premium ratios for
the year ended December 31, were 72%, 87%, 66%, 74% and 101% respectively in
2002 and 73%, 88%, 75%, 72% and 103% respectively in 2001. The 9% decrease in
the group medical benefit to premium ratio during 2002 compared to 2001 is a
result of pricing increases and improved administration on this business.
EXPENSES
Commission rates have increased slightly from levels in 2001. This is primarily
due to changes in the mix of business by product lines as well as the change in
first year versus renewal premiums.
The Company's general and administrative expense to premium ratio has decreased
slightly from 18.6% at December 31, 2001 to 18.3% at December 31, 2002. 2001
expenses associated with
<Page>
FORTIS BENEFITS INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
the business reinsured by the Hartford had proportionally higher expenses on
premium revenue than the remaining business' expense to premium levels.
Offsetting this 2001 to 2002 decrease in expense to premium ratio are expense
increases related to systems project costs. The Company continues to monitor
expenses, striving to improve the expense to premium ratio, while maintaining
quality and timely services to policyholders.
MARKET RISK AND RISK MANAGEMENT
Interest rate risk is the Company's primary market risk exposure. Substantial
and sustained increases and decreases in market interest rates can affect the
profitability of insurance products and market value of investments. The yield
realized on new investments generally increases or decreases in direct
relationship with interest rate changes. The market value of the Company's fixed
maturity and mortgage loan portfolios generally increases when interest rates
decrease, and decreases when interest rates increase.
Interest rate risk is monitored and controlled through asset/ liability
management. As part of the risk management process, different economic scenarios
are modeled, including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet projected
liability cash flows. A major component of the Company's asset/liability
management program is structuring the investment portfolio with cash flow
characteristics consistent with the cash flow characteristics of the Company's
insurance liabilities. The Company uses computer models to perform simulations
of the cash flow generated from existing insurance policies under various
interest rate scenarios. Information from these models is used in the
determination of interest crediting strategies and investment strategies. The
asset/liability management discipline includes strategies to minimize exposure
to loss as market interest rates change. On the basis of these analyses,
management believes there is no material solvency risk to the Company with
respect to interest rate movements up or down of 100 basis points from year-end
levels.
Equity market risk exposure is not significant. Equity investments in the
general account are not material enough to threaten solvency and contract owners
bear the investment risk related to the variable products. Therefore, the risks
associated with the investments supporting the variable separate accounts are
assumed by contract owners, not by the Company. The Company provides certain
minimum death benefits that depend on the performance of the variable separate
accounts. Currently these death benefit risks are reinsured which then protects
the Company from adverse mortality experience and prolonged capital market
decline.
LIQUIDITY AND CAPITAL RESOURCES
The market value of cash, short-term investments and publicly traded bonds and
stocks is at least equal to all policyholder reserves and liabilities. The
Company's portfolio is readily marketable and convertible to cash to a degree
sufficient to provide for short-term needs. The Company consistently monitors
its liability durations and invests assets accordingly. The Company has no
material commitments or off-balance sheet financing arrangements, which would
reduce sources of funds in the upcoming year.
The National Association of Insurance Commissioners has implemented risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. Based upon current calculations using
these risk-based capital standards, the Company's percentage of total adjusted
capital is in excess of ratios, which would require regulatory attention.
The Company's fixed maturity investments consisted of 97.3% investment grade
bonds as of December 31, 2002 and the Company does not expect this percentage to
change significantly in the future.
CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company makes estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
as of December 31, 2002 and the reported amounts of revenues and expenses for
the year ended December 31, 2002.
The most critical estimates include those used in determining deferred policy
acquisition costs, impairment losses on investment and federal income taxes.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For traditional and pre-need life insurance and long-term care
products (included as accident and health products), such costs are amortized
over the premium paying period. For interest sensitive and investment products,
such costs are amortized in relation to expected future gross profits.
Estimation of future gross profits requires significant management judgment and
is reviewed periodically. As excess amounts of deferred costs over future
premiums or gross profits are identified, such excess amounts are expensed.
See note 2 to the financial statements for a discussion of the Company's
accounting policies, including recently issued accounting pronouncements.
IMPAIRMENT LOSSES ON INVESTMENTS
The Company regularly reviews its fixed maturities and equity securities
portfolio to evaluate the necessity of recording impairment loss for
other-than-temporary declines in the fair value of investments. A number of
criteria are considered during this process including, but not limited to,
violations of financial covenants, public securities trading at a substantial
discount to par as a result of credit concerns, securities with a market value
less than
<Page>
36 FORTIS BENEFITS INSURANCE COMPANY
- --------------------------------------------------------------------------------
carrying value for an extended period of time and other subjective factors
relating to the issuer. Other than temporary impairments are recorded at the end
of each quarter based on the fair value of the security at the reporting date.
FEDERAL INCOME TAXES
Income taxes have been provided using the liability method. Deferred tax assets
and liabilities are determined based on the temporary differences between the
financial reporting and the tax bases and are measured using the currently
enacted tax rates.
REGULATION
The Company is subject to the laws and regulations established by the Minnesota
State Insurance Department governing insurance business conducted in Minnesota
State. Periodic audits are conducted by the Minnesota Insurance Department
related to the Company's compliance with these laws and regulations. To date,
there have been no adverse findings regarding the Company's operations.
<Page>
FORTIS BENEFITS INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION
<Table>
<Caption>
- ----------------------------------------------------------------------
GENERAL INFORMATION
- ----------------------------------------------------------------------
Safekeeping of Assets
- ----------------------------------------------------------------------
Independent Accountants
- ----------------------------------------------------------------------
Non-Participating
- ----------------------------------------------------------------------
Misstatement of Age or Sex
- ----------------------------------------------------------------------
Principal Underwriter
- ----------------------------------------------------------------------
PERFORMANCE RELATED INFORMATION
- ----------------------------------------------------------------------
Total Return for all Sub-Accounts
- ----------------------------------------------------------------------
Yield for Sub-Accounts
- ----------------------------------------------------------------------
Money Market Sub-Accounts
- ----------------------------------------------------------------------
Additional Materials
- ----------------------------------------------------------------------
Performance Comparisons
- ----------------------------------------------------------------------
PERFORMANCE TABLES
- ----------------------------------------------------------------------
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
</Table>
<Page>
38 FORTIS BENEFITS INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is: [(1
+ I)/(1 + J + .005)] TO THE POWER OF n/12 - 1
SAMPLE CALCULATION 1: POSITIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee
Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .07 + .005)] TO THE
POWER OF 60/12 - 1]
= $234.73
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$10,234.73
SAMPLE CALCULATION 2: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee
Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .09 + .005)] TO THE
POWER OF 60/12 - 1]
= -$666.42
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,333.58
SAMPLE CALCULATION 3: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee
Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .0775 + .005)] TO THE
POWER OF 60/12 - 1]
= $114.94
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,885.06
* Assumed for illustrative purposes only.
<Page>
FORTIS BENEFITS INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
APPENDIX II -- INVESTMENTS BY FORTIS
Fortis' legal obligations with respect to the Guarantee Periods are supported by
our General Account assets. These General Account assets also support our
obligations under other insurance and annuity contracts. Investments purchased
with amounts allocated to the Guarantee Periods are the property of Fortis, and
you have no legal rights in such investments. Subject to applicable law, we have
sole discretion over the investment of assets in our General Account. Neither
our General Account nor the Guarantee Periods are subject to registration under
the Investment Company Act of 1940.
We will invest amounts in our General Account in compliance with applicable
state insurance laws and regulations concerning the nature and quality of
investments for the General Account. Within specified limits and subject to
certain standards and limitations, these laws generally permit investment in:
- - federal, state and municipal obligations,
- - preferred and common stocks,
- - corporate bonds,
- - real estate mortgages and mortgage backed securities,
- - real estate, and
- - certain other investments, including various derivative investments.
See the Financial Statements for information on our investments.
When we establish guaranteed interest rates, we will consider the available
return on the instruments in which we invest amounts allocated to the General
Account. However, this return is only one of many factors we consider when we
establish the guaranteed interest rates. See "Guarantee Periods".
Generally, we expect to invest amounts allocated to the Guarantee Periods in
debt instruments. We expect that these debt instruments will approximately match
our liabilities with regard to the Guarantee Periods. We also expect that these
debt instruments will primarily include:
(1) securities issued by the United States Government or its agencies or
instrumentalities. These securities may or may not be guaranteed by the
United States Government;
(2) debt securities that, at the time of purchase, have an investment grade
within the four highest grades assigned by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or any
other nationally recognized rating service. Moody's four highest grades are:
Aaa, Aa, A, and Baa. Standard & Poor's four highest grades are: AAA, AA, A,
and BBB;
(3) other debt instruments including, but not limited to, issues of, or
guaranteed by, banks or bank holding companies and corporations. Although
not rated by Moody's or Standard & Poor's, we deem these obligations to have
an investment quality comparable to securities that may be purchased as
stated above;
(4) other evidences of indebtedness secured by mortgages or deeds of trust
representing liens upon real estate.
Except as required by applicable state insurance laws and regulations, we are
not obligated to invest amounts allocated to the General Account according to
any particular strategy.
The Contracts are reinsured by Hartford Life and Annuity Insurance Company. As
part of this reinsurance arrangement, the assets supporting the General Account
under the Contracts are held by Fortis; however, these assets are managed by
Hartford Investment Management Company ("HIMCO"), an affiliate of Hartford Life
and Annuity Insurance Company. HIMCO generally invests those assets as described
above for the Contract General Account related investments of Fortis.
<Page>
To obtain a Statement of Additional Information, please complete the form below
and mail to:
Fortis Benefits Insurance Company
Attn: Investment Product Services
P.O. Box 5085
Hartford, CT 06102-5085
Please send a Statement of Additional Information for EmPower variable annuity
to me at the following address:
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City/State Zip Code
<Page>
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------
To the Board of Directors and Shareholder of
Fortis Benefits Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in shareholder's equity and of cash flows present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company (the Company), an indirect, wholly owned subsidiary of Fortis (SA/NV)
and Fortis N.V. at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, then ended in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 13, 2003
F-1
<Page>
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
----------------------------------
2002 2001
----------------------------------
(In thousands, except share data)
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost
2002 - $2,884,670; 2001 - $2,744,158) $3,044,689 $ 2,785,442
Equity securities, at fair value (cost 2002 -
$108,002; 2001 - $114,049) 102,214 115,348
Mortgage loans on real estate, less allowance
for probable losses (2002 - $13,228; 2001 -
$13,118) 578,517 655,211
Policy loans 10,301 9,935
Short-term investments 282,383 258,790
Real estate and other investments 62,248 64,424
----------------------------------
4,080,352 3,889,150
Cash and cash equivalents 9,660 11,704
Receivables:
Uncollected premiums 62,480 63,080
Reinsurance recoverable on unpaid and paid
losses 1,151,186 1,104,617
Other 16,183 34,027
----------------------------------
1,229,849 1,201,724
Accrued investment income 45,584 50,999
Deferred policy acquisition costs 123,813 108,406
Property and equipment at cost, less accumulated
depreciation 3,796 4,972
Federal income tax recoverable 8,258 --
Deferred federal income taxes 125,317 193,022
Other assets 7,746 12,780
Identifiable intangible assets, less accumulated
amortization (2002 - $1,400) 27,400 --
Due from affiliates -- 12,044
Goodwill, less accumulated amortization (2002
and 2001 - $5,720) 156,006 167,992
Assets held in separate accounts 3,126,978 4,372,559
----------------------------------
TOTAL ASSETS $8,944,759 $10,025,352
----------------------------------
POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S
EQUITY
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional and pre-need life insurance $1,881,137 $ 1,796,952
Interest sensitive and investment products 1,020,724 1,052,932
Accident and health 1,264,565 1,110,436
----------------------------------
4,166,426 3,960,320
Unearned revenues 50,145 54,811
Other policy claims and benefits payable 257,880 265,702
Policyholder dividends payable 1,876 2,023
----------------------------------
4,476,327 4,282,856
Accrued expenses 96,099 92,783
Current income taxes payable -- 80,306
Other liabilities 99,120 106,220
Due to Affiliates 3,842 --
Deferred gain on reinsurance ceded 308,167 369,833
Liabilities related to separate accounts 3,126,978 4,372,559
----------------------------------
TOTAL POLICY RESERVES AND LIABILITIES 8,110,533 9,304,557
----------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 14) -- --
SHAREHOLDER'S EQUITY:
Common stock, $5 par value: authorized, issued
and outstanding shares - 1,000,000 5,000 5,000
Additional paid-in capital 516,570 516,570
Retained earnings 211,459 170,811
Accumulated other comprehensive income 101,197 28,414
----------------------------------
TOTAL SHAREHOLDER'S EQUITY 834,226 720,795
----------------------------------
TOTAL POLICY RESERVES AND LIABILITIES AND
SHAREHOLDER'S EQUITY $8,944,759 $10,025,352
----------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-2
<Page>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31
------------------------------------
2002 2001 2000
------------------------------------
(In thousands)
REVENUES:
Insurance operations:
Traditional and pre-need life insurance premiums $ 504,230 $ 497,053 $ 492,288
Interest sensitive and investment product policy
charges 2,481 49,690 159,728
Accident and health insurance premiums 1,179,653 1,000,935 952,228
------------------------------------
1,686,364 1,547,678 1,604,244
Net investment income 258,590 306,377 331,380
Net realized losses on investments (45,801) (34,437) (21,629)
Amortization of gain on reinsured business 61,666 52,179 5,000
Other income 11,619 13,161 9,607
------------------------------------
TOTAL REVENUES 1,972,438 1,884,958 1,928,602
------------------------------------
BENEFITS AND EXPENSES:
Benefits to policyholders:
Traditional and pre-need life insurance 437,249 422,478 413,326
Interest sensitive investment products 3,955 39,701 89,062
Accident and health claims 863,561 773,926 750,048
------------------------------------
1,304,765 1,236,105 1,252,436
Policyholder dividends 22 966 2,685
Amortization of deferred policy acquisition
costs 47,793 55,936 55,311
Insurance commissions 166,393 141,623 131,772
General and administrative expenses 308,592 287,495 348,968
------------------------------------
TOTAL BENEFITS AND EXPENSES 1,827,565 1,722,125 1,791,172
------------------------------------
Income before federal income taxes 144,873 162,833 137,430
Federal income taxes 44,225 55,474 44,820
------------------------------------
NET INCOME $ 100,648 $ 107,359 $ 92,610
------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-3
<Page>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<Table>
<Caption>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Total Stock Capital Earnings (Loss) Income
-------------------------------------------------------------
(In thousands)
BALANCE, DECEMBER 31, 1999 $1,000,291 $5,000 $645,757 $427,328 $(77,794)
Comprehensive income:
Net income 92,610 -- -- 92,610 --
Change in unrealized gain on
investments, net 55,941 -- -- -- 55,941
Change in unrealized loss due to
foreign currency exchange (1,310) (1,310)
-------------------------------------------------------------
Total comprehensive income 148,551
Dividend (156,486) -- -- (156,486) --
-------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 991,046 $5,000 $645,757 $363,452 $(23,163)
-------------------------------------------------------------
Comprehensive income:
Net income 107,359 -- -- 107,359 --
Change in unrealized gain on
investments, net 53,062 -- -- -- 53,062
Change in unrealized loss due to
foreign currency exchange (1,485) (1,485)
Total comprehensive income 160,421
Net deemed dividend to parent (129,187) -- (129,187) -- --
Dividend (300,000) -- -- (300,000) --
-------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 720,795 $5,000 $516,570 $170,811 $ 28,414
-------------------------------------------------------------
Comprehensive income:
Net income 100,648 -- -- 100,648 --
Change in unrealized gain on
investments, net 74,696 -- -- -- 74,696
Change in unrealized loss due to
foreign currency exchange (1,913) (1,913)
Total comprehensive income 175,344 -- -- -- --
Dividend (60,000) -- -- (60,000) --
-------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 834,226 $5,000 $516,570 $211,459 $101,197
-------------------------------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-4
<Page>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31
---------------------------------------
2002 2001 2000
---------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 100,648 $ 107,359 $ 92,610
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization of
intangibles 2,654 2,769 6,628
Amortization of gain on reinsured business (61,666) (52,179) (5,000)
Amortization of investment (discounts) premiums,
net 343 (8,065) 4,190
Net realized losses on investments 45,801 34,436 21,629
Policy acquisition costs deferred (63,200) (74,993) (118,867)
Amortization of deferred policy acquisition
costs 47,793 55,936 55,311
Provision for deferred federal income taxes 23,897 (147,243) (8,093)
(Increase) decrease in income taxes recoverable (86,520) 163,445 (13,963)
Change in receivables, accrued investment
income, unearned revenue, accrued expenses,
other assets, due to and from affiliates and
other liabilities (14,175) 37,210 (51,691)
Increase in future policy benefit reserves for
traditional, interest sensitive and accident
and health policies 206,106 121,712 165,148
(Decrease) increase in other policy claims and
benefits and policyholder dividends payable (7,761) 13,360 (25,303)
Other (3,979) (1,947) 215
---------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 189,941 251,800 122,814
---------------------------------------
Cash flows from investing activities:
Purchases of fixed maturity investments (1,997,147) (1,400,355) (1,757,391)
Sales and repayments of fixed maturity
investments 1,806,737 1,729,692 1,992,838
Purchase of short-term investments (1,042,551) (1,378,825) (565,146)
Sales and repayments of short-term investments 1,018,878 1,291,366 518,870
Purchases of other investments (80,010) (222,285) (363,978)
Sales of other investments 169,310 294,350 298,927
Purchases of property and equipment (78) (131) (635)
Sales and repayments of property and equipment 1 17,321 32
Cash (paid) received pursuant to reinsurance
agreement -- (27,176) 17,591
Cash paid pursuant to reinsurance agreement (6,697) (162,003) --
---------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (131,557) 141,954 141,109
---------------------------------------
Cash flows from financing activities:
Activities related to investment products:
Considerations received -- 43,713 226,139
Surrenders and death benefits -- (79,329) (448,349)
Interest credited to policyholders -- 7,174 32,886
Dividend (60,000) (375,000) (81,486)
Change in foreign exchange rate (428) 4,308 1,337
---------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (60,428) (399,134) (269,473)
---------------------------------------
(Decrease) increase in cash and cash equivalents (2,044) (5,380) (5,550)
Cash and cash equivalents at beginning of year 11,704 17,084 22,634
---------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,660 $ 11,704 $ 17,084
---------------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-5
<Page>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31
--------------------------------
2002 2001 2000
--------------------------------
(In thousands)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
ACTIVITIES:
Assets and liabilities transferred in
reinsurance transactions (Note 9): Cessations
of FFG in 2001 and LTC in 2000:
Non-cash assets (ceded) received:
Compensation for ceded liabilities $ -- $ (500,000) $ --
Fixed maturities -- (161,579) --
Other investments -- (196,987) --
Capital gains on assets transferred -- 582 --
Other assets -- (20,367) (157)
Deferred acquisition costs -- (441,555) (20,829)
--------------------------------
TOTAL VALUE OF ASSETS (CEDED) RECEIVED $ -- $(1,319,906) $(20,986)
--------------------------------
Non-cash liabilities ceded (assumed):
Ceding commission $ -- $ 500,000 $ --
Future policy benefit reserves -- 1,049,137 15,086
Claim liabilities and dividends payable -- 14,928 7
Unearned premium reserves -- 241 7,641
Separate accounts seed money liability -- (21,387) --
Other liabilities -- 1,515 (320)
Proceeds reallocation -- 198,750 --
--------------------------------
TOTAL LIABILITIES CEDED (ASSUMED) $ -- $ 1,743,184 $ 22,414
--------------------------------
Deemed dividend to parent $ -- $ (198,750) $ --
Deferred tax asset -- 69,563 --
--------------------------------
Net deemed dividend to parent $ -- $ (129,187) $ --
--------------------------------
Assumptions of Protective DBD in 2002 and 2001:
Non-cash assets assumed:
Goodwill and intangibles (3,796) 143,204 --
Other assets 1,435 20,890 --
Federal income tax recoverable (2,044) 77,110 --
--------------------------------
TOTAL ASSETS ASSUMED $(4,405) $ 241,204 $ --
--------------------------------
Non-cash liabilities assumed
Future policy benefit reserves $ -- $ (21,913) $ --
Unearned premium reserves -- (13,975) --
Claim liabilities and dividends payable 208 (15,068) --
Accrued expenses and other liabilities (2,500) (28,245) --
--------------------------------
TOTAL LIABILITIES ASSUMED $(2,292) $ (79,201) $ --
--------------------------------
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
F-6
<Page>
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect wholly owned
subsidiary of Fortis, Inc. (Fortis), which itself is an indirect, wholly owned
subsidiary of Fortis (SA/NV) and Fortis N.V. The Company is incorporated in
Minnesota and distributes its products in all states except New York. The
Company's revenues are derived principally from group employee benefits products
and from individual pre-need products.
Effective March 1, 2000, the Company sold through cessation long-term care
insurance business to John Hancock Life Insurance Company on a 100% co-insurance
basis. (See Note 9 "Reinsurance" for more information on this reinsurance
transaction.)
Effective April 1, 2001, the Company sold through cessation certain individual
life insurance policies and annuity contracts to Hartford Life Insurance and
Annuity Company on a 100% co-insurance basis and it's Separate Accounts business
on a 100% modified co-insurance basis. (See Note 9 "Reinsurance" for more
information on this reinsurance transaction.)
Effective July 1, 2001, the Company completed a statutory merger in which Pierce
National Life Insurance Company (PNL), a California insurance company, merged
with and into the Company (the Merger). Immediately prior to the Merger, both
the Company and PNL were indirect wholly owned subsidiaries of Fortis, Inc., a
Nevada corporation and a holding company for certain insurance companies in the
United States. The Merger was completed as part of an internal reorganization
being effected by Fortis, Inc. with respect to certain of its life and health
insurance companies. Prior period financial statements have been restated to
reflect the merger.
On December 31, 2001, the Company purchased the Dental Benefits Division of
Protective Life Corporation. The Purchase includes group dental, group life and
group disability insurance products. The Company reinsured these insurance
products on a 100% co-insurance basis and performs administration of such
insurance products. (See Note 9 "Reinsurance" for more information on this
reinsurance transaction.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs
Associated with or Disposal Activities, which is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company currently is
not engaging in any exit or disposal activities and does not believe the impact
of this new pronouncement will be material.
In June 2001, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 addresses financial accounting
and reporting for business combinations and requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method. See Note 3 "Identifiable Intangibles".
SFAS 142 eliminates the amortization of goodwill and certain intangible assets
that are deemed to have indefinite lives and requires such assets to be tested
for impairment and to be written down to fair value, if necessary. In accordance
with SFAS 142, the Company no longer amortizes goodwill but rather tests this
intangible for impairment at least on an annual basis. Upon adoption of this
standard in 2002, the Company reviewed its goodwill and determined that no
impairment was necessary. The Company's goodwill arises predominately from the
purchase of the Dental Benefits Division of Protective Life Corporation, see
Note 9 "Reinsurance".
Derivatives Implementation Group (DIG) Issue B36, Bifurcation of Embedded Credit
Derivatives, will require companies to review their modified coinsurance
agreements for embedded credit derivatives. The Company is reviewing this issue
at the current time and does not believe it to have a material effect on its
financial statements going forward.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance liability matching, rate of return, maturity, credit risk, tax
considerations and regulatory requirements.
All fixed maturity investments and all marketable equity securities are
classified as available-for-sale and carried at fair value.
Changes in fair values of available for sale securities, after related deferred
income taxes and after adjustment for the changes in the pattern of amortization
of deferred policy acquisition costs and participating policyholder dividends,
are reported directly in shareholder's equity as accumulated other comprehensive
income and, accordingly, have no effect on net income. The unrealized
appreciation or depreciation is net of deferred policy acquisition cost
F-7
<Page>
amortization and taxes that would have been required as a charge or credit to
income had such unrealized amounts been realized.
Mortgage loans constitute first liens on commercial real estate and other income
producing properties. The insurance statutes in Minnesota generally require that
the initial principal loaned not exceed 80% of the appraised value of the
property securing the loan. Mortgage loans on real estate are reported at
amortized cost, less allowance for losses. The change in the allowance for
losses is recorded with realized gains and losses on investments.
Policy loans are reported at their unpaid balance. Short-term investments are
carried at cost, which approximates fair value.
Real estate and other investments consist principally of limited partnerships
and are accounted for using the equity method of accounting.
Realized gains and losses on sales of investments, and declines in value judged
to be other-than-temporary, are recognized on the specific identification basis.
Investment income is recorded as earned.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For traditional and pre-need life insurance and long-term care
products (included as accident and health products), such costs are amortized
over the premium paying period. For interest sensitive and investment products,
such costs are amortized in relation to expected future gross profits.
Estimation of future gross profits requires significant management judgment and
is reviewed periodically. As excess amounts of deferred costs over future
premiums or gross profits are identified, such excess amounts are expensed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
Company provides for depreciation principally on the straight-line method over
the estimated useful lives of the related property. Depreciation expense was
$1,253, $1,243 and $4,831 for the years ended December 31, 2002, 2001 and 2000,
respectively.
INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. (Fortis). Income
tax expense or credits are allocated among the affiliated subsidiaries by
applying corporate income tax rates to taxable income or loss determined on a
separate return basis according to a Tax Allocation Agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under regulatory
supervision. This may result in future assessments to the Company by state
guaranty fund associations to cover losses to policyholders of insolvent or
rehabilitated companies. These assessments can be partially recovered through a
reduction in future premium taxes in some states. The Company believes it has
adequately provided for the impact of future assessments relating to current
insolvencies.
SEPARATE ACCOUNTS
Effective April 1, 2001, the Company sold through cessation its separate
accounts business to Hartford Life Insurance and Annuity Company on a 100%
modified co-insurance basis. Reinsurance ceded would become a liability of the
Company in the event the reinsurers are unable to meet the obligations assumed
under the reinsurance agreement. (See Note 9 "Reinsurance" for more information
on this reinsurance transaction.)
Revenues and expenses related to the separate account assets and liabilities are
excluded from the amounts reported in the accompanying statements of income.
Assets and liabilities associated with the separate accounts relate to deposits
and annuity considerations for variable life and variable annuity products for
which the contract owner, rather than the Company, bears the investment risk.
Separate account assets are reported at fair value and represent funds held for
the exclusive benefit of the variable annuity and variable life insurance
contract owners.
The Company received mortality and expense risk fees from the separate accounts,
deducted monthly cost of insurance charges, and received minimum death benefit
guarantee fees along with issue and administrative fees from the variable life
insurance separate accounts prior to the sale.
The Company made contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company made periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities in the benefit payment period. The Company also guarantees that the
rates at which administrative fees are deducted from contract funds will not
exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue to be payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
F-8
<Page>
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance and pre-need life products are
recognized as revenues when due over the premium-paying period. Reserves for
future policy benefits are computed using the net level method and include
investment yield, mortality, withdrawal, and other assumptions based on the
Company's experience, modified as necessary to reflect anticipated trends and to
include provisions for possible unfavorable deviations.
Revenues for interest sensitive and investment products consist of charges
assessed against policy account balances during the period for the cost of
insurance, policy administration, and surrender charges. Future policy benefit
reserves are computed under the retrospective deposit method and consist of
policy account balances before applicable surrender charges. Policy benefits
charged to expense during the period include amounts paid in excess of policy
account balances and interest credited to policy account balances. Interest
crediting rates for universal life and investment products ranged from 3% to 10%
in 2002, 3% to 14% in 2001 and 4% to 15% in 2000.
A portion of the Company's pre-need life products provide an increasing future
benefit tied typically to the U.S. Consumer Price Index or a targeted growth
rate established at management's discretion. All pre-need life products that
have death benefit increases made at management's discretion are accounted for
as interest-sensitive life products.
Premiums for accident and health insurance products, including medical, long-and
short-term disability and dental insurance products, are recognized as revenues
ratably over the contract period in proportion to the risk insured. Reserves for
future disability benefits are based on the 1987 Commissioners Group Disability
Table. The valuation interest rate is the Single Premium Immediate Annuity
valuation rate less 100 basis points. Claims in the first five years are
modified based on the Company's actual experience.
Other policy claims and benefits payable for reported and incurred but not
reported claims and related claims adjustment expenses are determined using
case-basis estimates and past experience. The methods of making such estimates
and establishing the related liabilities are continually reviewed and updated.
Any adjustments resulting there from are reflected in income currently.
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive income
which includes unrealized gains and losses adjusted for the impact of gains and
losses realized during the current year on securities classified as
available-for-sale, net of the effect on deferred policy acquisition costs,
unrealized gains and losses on foreign currency exchange, and taxes.
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost which approximates fair value.
RECLASSIFICATIONS
Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform to the 2002 presentation.
INSURANCE RELATED ASSESSMENTS
The Company has received notification of the insolvency of various life and
health insurance companies. It is expected that these insolvencies will result
in guaranty fund assessments against the Company based on premiums already
written. As a result, the Company has accrued guaranty fund liabilities of
$5,200 and $3,900 at December 31, 2002 and December 31, 2001 respectively. These
liabilities are generally paid within one to two years after a company has been
declared insolvent.
The Company is also required to be a member of various state health insurance
pools. It is expected that it will receive assessments from these pools based on
premiums already written. As a result, the Company has accrued health insurance
pool liabilities of $900 and $650 at December 31, 2002 and December 31, 2001
respectively. These liabilities are generally paid within one to two years after
the premiums are written.
3. IDENTIFIABLE INTANGIBLES
The Company applied the provisions of SFAS 141 for the purchase of the Dental
Benefits Division of Protective Life Corporation on December 31, 2001. The
Company completed the final allocation of the purchase price and recorded
$28,800 of other identifiable intangible assets as follows:
<Table>
<Caption>
Years Ended
December 31
-----------------
2002 2001
-----------------
Other $ 2,000 $ --
Current Groups in Force:
Present Value of Customer
Contracts and Relationships 26,800
-----------------
Total 28,800 --
Less Accumulated Amortization 1,400 --
-----------------
NET INTANGIBLES $27,400 --
-----------------
</Table>
Identifiable intangibles are amortized over 20 years using a straight line
method. During 2002, $1,400 of amortization expense was recognized.
Approximately, $1,400 of intangible assets amortization expense will be
recognized each year over the next 19 years.
F-9
<Page>
4. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the available-for-sale securities:
<Table>
<Caption>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------------------------
AT DECEMBER 31, 2002:
Fixed maturities:
Governments $ 188,467 $ 11,486 $ 13 $ 199,940
Public utilities 213,793 15,253 2,430 226,616
Industrial and miscellaneous 1,954,189 133,903 20,544 2,067,549
Other 528,221 22,365 2 550,584
-------------------------------------------------------------------
Total fixed maturities 2,884,670 183,007 22,989 3,044,689
Equity securities 108,002 2,617 8,405 102,214
-------------------------------------------------------------------
TOTAL $2,992,672 $185,624 $31,394 $3,146,903
-------------------------------------------------------------------
AT DECEMBER 31, 2001:
Fixed maturities:
Governments $ 216,644 $ 3,554 $ 3,583 $ 216,615
Public utilities 191,860 4,777 4,834 191,803
Industrial and miscellaneous 2,048,100 69,239 34,104 2,083,235
Other 287,554 6,701 466 293,789
-------------------------------------------------------------------
Total fixed maturities 2,744,158 84,271 42,987 2,785,442
Equity securities 114,049 6,012 4,713 115,348
-------------------------------------------------------------------
TOTAL $2,858,207 $ 90,283 $47,700 $2,900,790
-------------------------------------------------------------------
</Table>
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 2002, by contractual maturity, are shown below.
<Table>
<Caption>
Amortized
Cost Fair Value
-----------------------------
Due in one year or less $ 47,087 $ 47,185
Due after one year through five years 381,407 402,914
Due after five years through ten years 858,016 906,034
Due after ten years 1,598,160 1,688,556
-----------------------------
TOTAL $2,884,670 $3,044,689
-----------------------------
</Table>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 37% and 36% of outstanding principal
is concentrated in the states of New York, California and Florida, at
December 31, 2002 and 2001, respectively. Loan commitments outstanding totaled
$10,200 and $0 at December 31, 2002 and 2001, respectively.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $47,125 and $64,176 at December 31,
2002 and 2001, respectively, on deposit with various governmental authorities as
required by law.
F-10
<Page>
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) on investments recorded in
accumulated other comprehensive income for the year ended December 31, are set
forth below:
<Table>
<Caption>
Before-Tax Tax Benefit Net-of-Tax
Amount (Expense) Amount
-------------------------------------------------
December 31, 2002:
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $160,604 $(55,542) $105,062
Reclassification for gains (losses) realized in net
income (46,717) 16,351 (30,366)
Unrealized loss due to foreign currency exchange (1,913) (1,913)
-------------------------------------------------
OTHER COMPREHENSIVE GAIN $111,974 $(39,191) $ 72,783
-------------------------------------------------
December 31, 2001:
(Restated) Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $125,473 $(43,904) $ 81,569
Increase in amortization of deferred policy
acquisition costs (1,752) 612 (1,140)
Reclassification for gains (losses) realized in net
income (42,061) 14,694 (27,367)
Unrealized loss due to foreign currency exchange (1,485) (1,485)
-------------------------------------------------
OTHER COMPREHENSIVE GAIN $ 80,175 $(28,598) $ 51,577
-------------------------------------------------
December 31, 2000:
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $118,869 $(41,145) $ 77,724
Increase in amortization of deferred policy
acquisition costs (2,314) 810 (1,504)
Reclassification for gains (losses) realized in net
income (31,198) 10,919 (20,279)
Unrealized loss due to foreign currency exchange (1,310) (1,310)
-------------------------------------------------
OTHER COMPREHENSIVE GAIN $ 84,047 $(29,416) $ 54,631
-------------------------------------------------
</Table>
NET INVESTMENT INCOME AND NET REALIZED (LOSSES) GAINS ON INVESTMENTS
Major categories of net investment income and realized (losses) gains on
investments for each year were as follows:
<Table>
2002 2001 2000
------------------------------------------
NET INVESTMENT INCOME:
Fixed maturities $200,458 $217,535 $240,163
Equity securities 10,364 16,967 15,842
Mortgage loans on real estate 52,392 65,524 72,278
Policy loans 575 2,156 7,114
Short-term investments 787 939 600
Real estate and other investments 1,894 9,428 2,877
------------------------------------------
266,470 312,549 338,874
Expenses (7,880) (6,172) (7,494)
------------------------------------------
$258,590 $306,377 $331,380
------------------------------------------
NET REALIZED (LOSSES) GAINS ON INVESTMENTS:
Fixed maturities $(50,698) $(35,594) $(35,889)
Equity securities 3,981 (6,467) 4,691
Mortgage loans on real estate 917 7,810 --
Short-term investments -- (129) 120
Real estate and other investments (1) (57) 9,449
------------------------------------------
$(45,801) $(34,437) $(21,629)
------------------------------------------
</Table>
Other than temporary impairments (OTTI) are included in realized gains and
losses and consist of $39,249, $5,907 and $3,129 for fixed maturities and
$6,560, $28,529 and $18,500 for equity equities in 2002, 2001 and 2000
respectively. OTTI write-downs are recorded at the end of each quarter based on
the fair value of the security as of the reporting date.
Proceeds from sales of investments in fixed maturities were $1,772,351,
$1,729,692 and $1,992,838 in 2002, 2001 and 2000, respectively. In fixed
maturities there were gross gains of $58,295, $47,473 and $16,692 and gross
losses of $108,993, $83,067 and $52,581 of which were realized on the sales in
2002, 2001 and 2000, respectively.
F-11
<Page>
5. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows:
<Table>
<Caption>
Interest Sensitive
Traditional and and Investment Accident
Pre-Need Life Products and Health Total
-------------------------------------------------------------------------------
Balance, December 31, 1999 $107,679 $ 366,724 $ 18,498 $ 492,901
Acquisition costs deferred 20,866 95,284 2,983 119,133
Acquisition costs amortized (21,806) (32,854) (21,481) (76,141)
Foreign currency conversion (262) (4) -- (266)
Increased amortization of deferred
acquisition costs from unrealized
gains on available-for-sale
securities -- (2,314) -- (2,314)
-------------------------------------------------------------------------------
Balance, December 31, 2000 $106,477 $ 426,836 $ -- $ 533,313
Acquisition costs deferred 52,413 22,580 -- 74,993
Acquisition costs amortized (51,811) (445,681) -- (497,492)
Foreign currency conversion (615) (41) -- (656)
Increased amortization of deferred
acquisition costs from unrealized
gains on available-for-sale
securities -- (1,752) -- (1,752)
-------------------------------------------------------------------------------
Balance, December 31, 2001 106,464 1,942 -- 108,406
Acquisition costs deferred 53,474 9,260 381 63,115
Acquisition costs amortized (45,870) (1,923) -- (47,793)
Foreign currency conversion 61 24 -- 85
-------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $114,129 $ 9,303 $ 381 $ 123,813
-------------------------------------------------------------------------------
</Table>
Included in total policy acquisition costs amortized in 2001 are $441,555 of
acquisition costs and $8,013 of present value of future profits resulting from
the reinsurance cession agreement on certain individual life insurance policies
and annuity contracts with Hartford Life Insurance Company, which became
effective April 1, 2001. See Note 9 "Reinsurance" for more information on the
reinsurance transaction.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows:
<Table>
2002 2001
-------------------------
Leasehold improvements $ 2,106 $ 2,106
Furniture and equipment 38,670 49,878
-------------------------
40,776 51,984
Less accumulated depreciation (36,980) (47,012)
-------------------------
NET PROPERTY AND EQUIPMENT $ 3,796 $ 4,972
-------------------------
</Table>
During 2001, land, building and furniture and equipment with book values of
$1,900, $15,307, and $1,605, respectively, were sold to Hartford Life and
Annuity Insurance Company for $20,791.
F-12
<Page>
7. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims is summarized
as follows:
<Table>
<Caption>
Years Ended December 31
--------------------------------------------
2002 2001 2000
--------------------------------------------
Balance as of January 1, net of reinsurance recoverables $1,247,580 $1,154,773 $1,140,084
Add: Incurred losses related to:
Current year 873,404 822,695 753,173
Prior years (9,843) (36,591) (25,859)
--------------------------------------------
TOTAL INCURRED LOSSES 863,561 786,104 727,314
--------------------------------------------
Deduct: Paid losses related to:
Current year 508,427 434,095 428,725
Prior years 302,984 259,202 283,900
--------------------------------------------
TOTAL PAID LOSSES 811,411 693,297 712,625
--------------------------------------------
BALANCE AS OF DECEMBER 31, NET OF REINSURANCE
RECOVERABLES $1,299,730 $1,247,580 $1,154,773
--------------------------------------------
</Table>
The table above differs from the amounts reported on the balance sheet in the
following respects: (1) the table above is presented net of ceded reinsurance
and the accident and health reserves reported on the balance sheet are gross of
ceded reinsurance; and (2) the table above includes accident and health benefits
payable which are included with other policy claims and benefits payable
reported on the balance sheet.
Included in incurred losses presented above related to 2001 is $12,178 of
reserves assumed resulting from the Dental Benefits Division of Protective Life
Corporation reinsurance agreement which became effective December 31, 2001. See
Note 9 "Reinsurance" for more information on this reinsurance transaction.
Excluded from incurred losses presented above related to 2000 is $22,734 of
reserves ceded resulting from the long-term care reinsurance agreement with John
Hancock Life Insurance Company, which became effective March 1, 2000. See
Note 9 "Reinsurance" for more information on this reinsurance transaction.
In 2002, 2001 and 2000 presented above, the accident and health insurance line
of business experienced overall favorable development on claims reserves
established as of the previous year end. The favorable development was a result
of a reduction of loss reserves due to ongoing analysis of recent loss
development trends.
The liability for unpaid accident and health claims includes $1,250,267,
$1,109,112 and $1,042,180 of total disability income reserves as of
December 31, 2002, 2001 and 2000 respectively, which were discounted for
anticipated interest earnings using a rate which varies by incurral year.
F-13
<Page>
8. FEDERAL INCOME TAXES
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 2002 and 2001 are as follows:
<Table>
2002 2001
-----------------------
Deferred tax assets:
Deferred gain on reinsurance $107,859 $129,427
Separate account assets/liabilities -- 8,418
Reserves 25,892 24,356
Deferred policy acquisition costs 20,327 23,427
Claims and benefits payable 7,936 7,706
Accrued liabilities 10,870 8,229
Capital loss Carryforward 12,011 --
Unrealized losses 3,686 --
Investments 3,560 4,515
Other 4,799 6,508
-----------------------
TOTAL DEFERRED TAX ASSETS 196,940 212,586
-----------------------
Deferred tax liabilities:
Unrealized gains 56,384 16,523
Fixed assets 1,258 1,075
Investments 2,571 1,966
Intangible Assets 11,410 --
-----------------------
TOTAL DEFERRED TAX LIABILITIES 71,623 19,564
-----------------------
NET DEFERRED TAX ASSET $125,317 $193,022
-----------------------
</Table>
As of December 31, 2002, the Company had a balance of $12,145 in its
Policyholder Surplus Account under the provisions of the Internal Revenue Code.
This amount could become taxable to the extent that certain future events occur.
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets, and, therefore, no such valuation
allowance has been established.
The Company's tax expense (benefit) for the year ended December 31 is shown as
follows:
<Table>
2002 2001 2000
-----------------------------------
Current $20,805 $84,696 $52,981
Deferred 23,420 (29,222) (8,161)
-----------------------------------
$44,225 $55,474 $44,820
-----------------------------------
</Table>
Federal income tax payments and refunds resulted in net payments of $112,164,
$8,684 and $67,384 in 2002, 2001 and 2000, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<Table>
2002 2001 2000
--------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Other (4.5) (0.9) (2.1)
--------------------------
30.5% 34.1% 32.9%
--------------------------
</Table>
In 2002, the Company's effective tax rate varied from the statutory federal
income tax rate primarily due to an IRS audit settlement adjustment.
At December 31, 2002, the Company has a capital loss carryforward of $33,485.
All net operating loss and alternative minimum tax credit carryforwards have
been fully utilized.
F-14
<Page>
9. REINSURANCE
In the 1996, First Fortis Life Insurance Company (First Fortis), an affiliate,
received approval from the New York State Insurance Department for a reinsurance
agreement with the Company. The agreement, which became effective as of January
1, 1996, decreased First Fortis' long-term disability reinsurance retention from
a $10 net monthly benefit to a $2 net monthly benefit for claims incurred on and
after January 1, 1996. The Company has assumed $6,705, $6,622 and $6,884 of
premium from First Fortis in 2002, 2001 and 2000, respectively. The Company has
assumed $21,905 and $17,480 of reserves in 2002 and 2001, respectively, from
First Fortis.
In the 1999, United Family Life Insurance Company (UFL), an affiliate, received
approval from the state of Georgia for a reinsurance agreement with the Company.
The agreement, which became effective October 1, 1999, provided for the cession
of substantially all of UFL's pre-need life insurance business on a 100%
co-insurance basis. The Company assumed approximately $690,806 of reserves and
received approximately $654,924 of cash, investments (primarily fixed maturities
and mortgages) and other assets as of October 1, 1999. The $35,882 ceding
commission was capitalized as an acquisition cost. The Company has assumed
premium from UFL of $25,048 in 2002 and $35,919 in 2001 and $63,069 in 2000. The
Company has assumed $665,081 and $696,961 of reserves in 2002 and 2001,
respectively, from UFL.
In 2000, the Company entered into a reinsurance agreement with John Hancock Life
Insurance Company (John Hancock) for the sale of the Long-Term Care (LTC) line
of business. The sale of the LTC line of business was effective March 1, 2000.
The Company recorded a gain on this transaction of $19,019. The gain has been
deferred and is being amortized as the level of direct inforce LTC policies
decreases over future years, not to exceed 30 years. The amount of gain
amortized was $1,959, $2,581 and $3,100 in 2002, 2001 and 2000, respectively.
The Company ceded $81,712, $69,719 and $32,222 of premiums in 2002, 2001 and
2000, respectively. The Company ceded $133,173 and $62,637 of reserves to John
Hancock in 2002 and 2001, respectively.
In 2001, the Company entered into a reinsurance agreement with Hartford Life
Insurance and Annuity Company (Hartford) for the sale (Sale) of its Fortis
Financial Group division (the Division). The Division includes, among other
blocks of business, certain individual life insurance policies and annuity
contracts (collectively, the Insurance Contracts) written by the Company.
Certain of the Insurance Contracts permit investment in, among other investment
options, various series of the Fortis Series Fund.
To effect the Sale as it relates to the Company, The Hartford reinsured the
Insurance Contracts on a 100% coinsurance basis (or 100% modified coinsurance
basis for the Separate Accounts block) and agreed to administer the Insurance
Contracts going forward. The Company received in connection with the Sale
aggregate cash consideration of approximately $500 million from The Hartford.
The reinsurance transaction resulted in a gain of $396,102 which was deferred
and is being amortized into income at the rate that earnings from the business
sold would have expected to emerge. The amount of gain amortized in 2002 and
2001 was $58,227 and $47,928 respectively.
In 2001, the Company entered into a reinsurance agreement with Protective Life
Corporation (Protective). The agreement, which became effective December 31,
2001, provided for the assumption of Protective's Dental Benefits Division on a
100% co-insurance basis. The Company assumed approximately $75,000 of reserves,
$244,000 of assets including $147,000 of goodwill and intangibles, and paid cash
of approximately $169,000. During 2002, the Company finalized its purchase price
allocation and allocated $28,800 to intangible assets (see Note 3), net of
deferred income taxes of $10,060.
The maximum amount that the Company retains on any one life is $800 of life
insurance including accidental death. Amounts in excess of $800 are reinsured
with other life insurance companies on a yearly renewable term basis.
<Table>
2002 2001 2000
-------------------------------------
Life insurance $307,360 $435,917 $17,048
Accident and health insurance 101,426 76,132 48,427
-------------------------------------
$408,786 $512,049 $65,475
-------------------------------------
</Table>
Ceded reinsurance premiums for the year ended December 31 were as follows:
<Table>
2002 2001 2000
-------------------------------------
Life insurance $ 56,229 $ 52,548 $ 6,686
Accident and health insurance 11,701 7,420 8,535
-------------------------------------
$ 67,930 $ 59,968 $15,221
-------------------------------------
</Table>
Recoveries under reinsurance contracts for the year ended December 31 were as
follows:
Reinsurance ceded would become a liability of the Company in the event the
reinsurers are unable to meet the obligations assumed under the reinsurance
agreement. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations
F-15
<Page>
of credit risk arising from similar geographic regions, activities or economic
characteristics of the reinsurers.
10. DIVIDEND RESTRICTIONS
Dividend distributions to the parent are restricted as to the amount by state
regulatory requirements. A dividend is extraordinary when combined with all
other dividends and distributions made with in the preceding 12 months exceeds
the greater of 10% of the insurers surplus as regards to policy holders on
December 31 of the next preceding year, or the net gain from operations. In 2002
the Company declared dividends of $60,000, all of which were ordinary. In 2001,
the Company declared dividends of $300,000, all of which was extraordinary.
Approval was sought and received from the Minnesota Department of Commerce for
the distribution of the extraordinary dividends in 2001. The Company paid
$375,000 during 2001, $75,000 of which was declared in 2000. The Company paid
$60,000 during 2002.
11. REGULATORY ACCOUNTING REQUIREMENTS
Statutory-basis financial statements are prepared in accordance with accounting
practices prescribed or permitted by the Minnesota Department of Commerce.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners (NAIC), as well as state
laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. The Company does not employ any
significant permitted practices.
In 1998, the NAIC adopted codified statutory accounting practices (Codification)
effective January 1, 2001. Codification changed, to some extent, prescribed
statutory accounting practices and resulted in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Codification required adoption by the various states before it
became the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Minnesota adopted Codification effective
January 1, 2001. The cumulative effect of all changes resulting from the
Codification guidance was recorded as a direct adjustment to statutory surplus
on January 1, 2001. The effect of the adoption was an increase to statutory
surplus of $33,501 due primarily to deferred taxes.
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital (RBC) requirements developed by the NAIC. The Company
exceeds the minimum RBC requirements.
Reconciliations of net income and shareholder's equity on the basis of statutory
accounting to the related amounts presented in the accompanying statements were
as follows:
<Table>
<Caption>
Net Income Shareholder's Equity
------------------------------- --------------------
2002 2001 2000 2002 2001
-------------------------------------------------------
Based on statutory accounting practices $111,378 $(48,149) $99,806 $503,324 $485,031
Deferred policy acquisition costs 15,321 19,057 63,821 123,814 108,406
Investment valuation differences (4,058) (3,892) (3,456) 150,916 49,062
Deferred and uncollected premiums (846) 2,684 449 (13,078) (12,934)
Policy reserves (4,628) (2,744) (13,383) 45,922 52,593
Commissions 1,755 6,722 (45,485) -- 5
Current income taxes payable (2,044) (60,568) 2,616 1,384 1,384
Deferred income taxes (23,420) 29,221 8,162 87,841 162,081
Realized gains on investments (1,794) 3,444 (4,958) -- --
Realized gains (losses) transferred to the
Interest Maintenance Reserve (IMR), net of tax (8,201) 6,011 (17,376) -- --
Amortization of IMR, net of tax 2,260 672 (5,352) -- --
Write-off of investment (6,507) (5,907) (3,129) -- --
Pension expense 5,447 3,745 (2,145) (810) (6,256)
Goodwill and intangibles (1,400) (1,535) (1,551) 188,605 174,492
Property and equipment -- (1,255) -- 2,062 2,532
Interest maintenance reserve -- -- -- 8,682 14,621
Asset valuation reserve -- -- -- 35,464 55,616
Ceded reinsurance agreement 9,503 8,998 -- (308,167) (361,513)
Assumed reinsurance agreement 6,697 147,429 -- -- --
Other, net 1,185 3,426 14,591 8,267 (4,325)
-------------------------------------------------------
BASED ON GENERALLY ACCEPTED ACCOUNTING PRINCIPLES $100,648 $107,359 $92,610 $834,226 $720,795
-------------------------------------------------------
</Table>
F-16
<Page>
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis and its affiliates. These
services include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment, information technology and other
administrative functions. The fees paid to Fortis, Inc. for these services for
years ended December 31, 2002, 2001 and 2000, were $15,406, $9,332 and $11,174,
respectively. Information technology expenses were $8,711, $10,436 and $47,123
for years ended December 31, 2002, 2001 and 2000, respectively.
In conjunction with the marketing of its fixed and variable annuity and variable
life products, the Company paid $0, $19,313 and $93,107 in commissions to its
affiliate, Fortis Investors, Inc., for the years ended December 31, 2002, 2001
and 2000, respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on a separate
company basis.
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
The fair values for fixed maturity securities and equity securities are based on
quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
Mortgage loans are reported at unpaid principal balance less allowances for
possible losses. The fair values of mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Mortgage loans with
similar characteristics are aggregated for purposes of the calculations. The
carrying amount of policy loans reported in the balance sheet approximates fair
value. For short-term investments, the carrying amount is a reasonable estimate
of fair value. The fair values for the Company's policy reserves under the
investment products are determined using cash surrender value. Separate account
assets and liabilities are reported at their estimated fair values in the
balance sheet.
The fair value of group annuities is primarily based upon termination value,
which is calculated by applying contractual market value adjustments to the
account balances. For those contracts not subject to market value adjustments at
termination, book value represents fair value. For fair value of individual
annuities is based primarily on surrender values. For those individual annuities
that are not surrenderable, discounted future cash flows are used for
calculating fair value.
Separate account assets and liabilities are reported at their estimated fair
value in the balance sheet.
The fair values under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
<Table>
<Caption>
December 31, 2002 December 31, 2001
--------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------------------------------------------------------
ASSETS:
Investments:
Securities available-for-sale:
Fixed maturities $3,044,689 $3,044,689 $2,785,442 $2,791,350
Equity securities 102,214 102,214 115,348 115,348
Mortgage loans on real estate 578,517 656,268 655,211 690,026
Policy loans 10,301 10,301 9,935 9,935
Short-term investments 282,383 282,383 258,790 258,790
Assets held in separate accounts 3,126,978 3,126,978 4,372,559 4,372,559
LIABILITIES:
Individual and group annuities (subject to
discretionary withdrawal) 436,123 430,199 286,367 276,900
Liabilities related to separate accounts 3,126,978 3,126,978 4,372,559 4,372,559
</Table>
F-17
<Page>
14. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. These actions have been
considered in establishing policy benefit and loss reserves. Management and its
legal counsel are of the opinion that the settlement of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
15. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is an indirect wholly-owned subsidiary of Fortis, which sponsors a
defined benefit pension plan covering employees and certain agents who meet
eligibility requirements as to age and length of service. The benefits are based
on years of service and career compensation. Fortis Inc.'s funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes, and to charge each subsidiary an allocable amount based on its
employee census. Pension cost allocated to the Company amounted to approximately
$3,640, $4,114 and $2,097 for 2002, 2001 and 2000, respectively.
The Company participates in a contributory profit sharing plan, sponsored by
Fortis, covering employees and certain agents who meet eligibility requirements
as to age and length of service. Benefits are payable to participants on
retirement or disability and to the beneficiaries of participants in the event
of death. For employees hired on or before December 31, 2000, the first 3% of an
employee's contribution is matched 200% by the Company. The second 2% is matched
50% by the Company. For employees hired after December 31, 2000, the first 3% of
an employee's contribution is matched 100% by the Company. The second 2% is
matched 50% by the Company. The amount expensed was approximately $5,344, $5,216
and $4,573 for 2002, 2001 and 2000, respectively.
In addition to retirement benefits, the Company participates in other health
care and life insurance benefit plans (postretirement benefits) for retired
employees, sponsored by Fortis. Health care benefits, either through a Fortis
sponsored retiree plan for retirees under age 65 or through a cost offset for
individually purchased Medigap policies for retirees over age 65, are available
to employees who retire on or after January 1, 1993, at age 55 or older, with 10
years or more service. Life insurance, on a retiree pay all basis, is available
to those who retire on or after January 1, 1993.
There were no net postretirement benefit costs allocated to the Company for the
years ended December 31, 2002, 2001 and 2000. The Company made contributions to
the postretirement benefit plans of approximately $2,275, $1,049 and $0 in 2002,
2001 and 2000, respectively, as claims were incurred. During 2002, 2001 and 2000
the Company incurred expenses related to retirement benefits of $1,223, $1,369
and $48, respectively.
F-18
<Page>
PART II
<Page>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Not applicable.
Item 15. Indemnification of Directors and Officers
Fortis Benefit's By-Laws provide for indemnity and payment of expenses of Fortis
Benefits's officers, directors and employees in connection with certain legal
proceedings, judgments, and settlements arising by reason of their service as
such, all to the extent and in the manner permitted by law. Applicable Minnesota
law generally permits payment of such indemnification and expenses if the person
seeking indemnification has acted in good faith and in a manner that he
reasonably believed to be in the best interests of the Company and if such
person has received no improper personal benefit, and in a criminal proceeding,
if the person seeking indemnification also has no reasonable cause to believe
his conduct was unlawful.
There are agreements in place under which the underwriter and affiliated persons
of the Registrant may be indemnified against liabilities arising out of acts or
omissions in connection with the offer of the Contracts; provided however, that
so such indemnity will be made to the underwriter or affiliated persons of the
Registrant for liabilities to which they would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question 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.
<Page>
Item 16. Exhibits and Financial Statement Schedules
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
1 Underwriting Agreement Incorporated by reference to
Post-Effective Amendment No. 7 to the
Registration Statement File No.
333-43805, dated April 4, 2002.
3(a) Articles of Incorporation Incorporated by reference to
Post-Effective Amendment No. 7 to the
Registration Statement File No.
333-43805, dated April 4, 2002.
3(b) By-laws Incorporated by reference to
Post-Effective Amendment No. 7 to the
Registration Statement File No.
333-43805, dated April 4, 2002.
4 Variable Annuity Contract Incorporated by reference to
Pre-Effective Amendment No. #1 to the
Registration Statement File No.
333-43799 filed with the Commission on
April 24, 1998.
5 Opinion re legality Filed herewith.
23(a) Legal Consent Filed herewith as Exhibit 5.
23(b) Consent of PricewaterhouseCoopers LLP, Filed herewith.
Independent Accountants
24 Copy of Power of Attorney Filed herewith.
</table>
<Page>
Item 18. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
reasonable grounds to believe that it meets all the requirements for filing this
Post-Effective Amendment on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Simsbury, State of Connecticut on this 4th day of
April, 2003.
FORTIS BENEFITS INSURANCE COMPANY
By: Robert B. Pollock *By: /s/ Marianne O'Doherty
-------------------------------- ----------------------------------
Robert B. Pollock, President* Marianne O'Doherty
Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated.
J. Kerry Clayton
Chairman of the Board*
Arie Aristide Fakkert
Director*
Alan W. Feagin
Director*
Robert Brian Pollock *By: /s/ Marianne O'Doherty
President and Director* -----------------------------------
Chief Executive Officer Marianne O'Doherty
Michael John Peninger Attorney-in-Fact
Director*
Larry M. Cains Date: April 4, 2003
Treasurer, Principal Accounting
Officer, and Principal Financial Officer
Lesley Silvester
Director*
333-43805
<Page>
EXHIBIT INDEX
5 Opinion and Consent of Douglas R. Lowe, Esq., corporate counsel of
Fortis Benefits Insurance Company.
23(a) Legal Consent filed as part of Exhibit 5.
23(b) Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24 Copy of Power of Attorney