Prospectus
September 15, 1999
American Express Retirement Advisor Variable AnnuitySM
Individual flexible premium deferred combination fixed/variable annuity.
IDS Life Variable Account 10
Issued by: IDS Life Insurance Company (IDS Life)
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: 800-437-0602
http://www.americanexpress.com/advisors
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
<PAGE>
o American Express Variable Portfolio Funds
o AIM Variable Insurance Funds, Inc.
o American Century Variable Portfolios, Inc.
o Fidelity Variable Insurance Products Funds - Service Class
o Franklin Templeton Variable Insurance Products Trust - Class 2
o Goldman Sachs Variable Insurance Trust (VIT)
o Lazard Retirement Series, Inc.
o Putnam Variable Trust
o Royce Capital Fund
o Third Avenue Variable Series Trust
o Wanger Advisors Trust
o Warburg Pincus Trust
<PAGE>
Please read the prospectuses carefully and keep them for future reference. This
contract is available for qualified and nonqualified plans.
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
An investment in this contract is not a deposit of a bank or financial
institution and is not insured or guaranteed by the federal deposit insurance
corporation or any other government agency. An investment in this contract
involves investment risk including the possible loss of principal.
A Statement of Additional Information (SAI), dated the same date as this
prospectus, is incorporated by reference into this prospectus. It is filed with
the SEC and is available without charge by contacting us at the telephone number
above or by completing and sending the order form on the last page of this
prospectus. The table of contents of the SAI is on the last page of this
prospectus.
<PAGE>
Table of Contents
Key Terms
The Contract in Brief
Expense Summary
Condensed Financial Information (Unaudited)
Financial Statements
Performance Information
The Variable Account and the Funds
The Fixed Account
Buying Your Contract
Charges
Valuing Your Investment
Making the Most of Your Contract
Surrenders
TSA -- Special Surrender Provisions
Changing Ownership
Benefits in Case of Death
The Annuity Payout Period
Taxes
Voting Rights
Substitution of Investments
About the Service Providers
Year 2000
Table of Contents of the Statement of Additional Information
<PAGE>
Key Terms
These terms can help you understand details about your contract.
Accumulation unit -- A measure of the value of each subaccount before annuity
payouts begin.
Annuitant -- The person on whose life or life expectancy the annuity payouts are
based.
Annuity payouts -- An amount paid at regular intervals under one of several
plans.
Beneficiary -- The person you designate to receive annuity benefits in case of
the owner's or annuitant's death while the contract is in force and before
annuity payouts begin.
Close of business -- When the New York Stock Exchange (NYSE) closes, normally 4
p.m. Eastern time.
Contract value -- The total value of your contract before we deduct any
applicable charges.
Contract year -- A period of 12 months, starting on the effective date of your
contract and on each anniversary of the effective date.
Fixed account -- An account to which you may allocate purchase payments. Amounts
you allocate to this account earn interest at rates that we declare
periodically.
Funds -- Mutual funds and/or portfolios that are investment options under your
contract, each with a different investment objective. You may allocate your
purchase payments into subaccounts investing in shares of any or all of these
funds.
Owner (you, your) -- The person who controls the contract (decides on investment
allocations, transfers, payout options, etc.). Usually, but not always, the
owner is also the annuitant. The owner is responsible for taxes, regardless of
whether he or she receives the contract's benefits.
Qualified annuity -- A contract that you purchase for one of the following
retirement plans that is subject to applicable federal law and any rules of the
plan itself:
o Individual Retirement Annuities (IRAs)
o Simplified Employee Pension (SEP) plans
o Section 401(k) plans
o Custodial and trusteed pension and profit sharing plans
o Tax-Sheltered Annuities (TSAs)
All other contracts are considered nonqualified annuities.
Settlement date -- The date when annuity payouts are scheduled to begin.
Surrender value -- The amount you are entitled to receive if you make a full
surrender from your contract. It is the contract value minus any applicable
charges.
Valuation date -- Any normal business day, Monday through Friday, that the NYSE
is open. Each valuation date ends at the close of business. We calculate the
value of each subaccount at the close of business on each valuation date.
Variable account -- Consists of separate subaccounts to which you may allocate
purchase payments; each invests in shares of one fund. The value of your
investment in each subaccount changes with the performance of the particular
fund.
<PAGE>
The Contract in Brief
Purpose: The purpose of the contract is to allow you
to accumulate money for retirement. You do
this by making one or more investments
(purchase payments) that may earn returns
that increase the value of the contract. The
contract provides lifetime or other forms of
payouts beginning at a specified date (the
settlement date).
Free look period: You may return your contract to our office
within 10 days after it is delivered to
you and receive a full refund of the
contract value, less any purchase payment
credits up to the maximum surrender charge.
(See "Valuing Your Investment - Purchase
payment credits.") We will not deduct any
other charges. However, you bear the
investment risk from the time of purchase
until you return the contract; the refund
amount may be more or less than the payment
you made. (Exception: If the law requires,
we will refund all of your purchase
payments.)
Accounts: Currently, you may allocate your purchase
payments among any or all of:
o the subaccounts, each of which invests
in a fund with a particular investment
objective. The value of each subaccount
varies with the performance of the
particular fund in which it invests. We
cannot guarantee that the value at the
settlement date will equal or exceed the
total purchase payments you allocate to
the subaccounts. (p. __)
o the fixed account, which earns interes
at a rate that we adjust periodically.
(p. __)
Buying your contract: We will help you complete and
submit an application. Applications are
subject to acceptance at our office. You may
buy a nonqualified annuity or a qualified
annuity. After your initial purchase
payment, you have the option of making
additional purchase payments in the future.
o Minimum initial purchase payment --
$2,000 ($1,000 for qualified annuities)
unless you pay in installments by means
of a bank authorization or under a group
billing arrangement such as a payroll
deduction.
o Minimum additional purchase payment --
$50.
o Minimum installment purchase payment --
$50 monthly; $23.08 biweekly (scheduled
payment plan billing).
o Maximum first-year purchase payments --
$100,000 to $1,000,000 depending on your
age.
o Maximum purchase payment for each
subsequent year -- $50,000 to $100,000
depending upon your age. (p. __)
Transfers: Subject to certain restrictions you currently may
redistribute your money among the subaccounts and the fixed
account without charge at any time until annuity payouts
begin, and once per contract year among the subaccounts
after annuity payouts begin. You may establish automated
transfers among the fixed account and subaccounts. Fixed
account transfers are subject to special restrictions. (p.
__)
Surrenders: You may surrender all or part of your contract value at any
time before the settlement date. You also may establish
automated partial surrenders. Surrenders may be subject to
charges and tax penalties (including a 10% IRS penalty if
you surrender prior to your reaching age 59 1/2) and may
have other tax consequences; also, certain restrictions
apply. (p. __)
Changing ownership: You may change ownership of a nonqualified annuity by
written instruction, but this may have federal income tax
consequences. Restrictions apply to changing ownership of a
qualified annuity. (p. --)
Benefits in case
of death: If you or the annuitant die before annuity payouts begin, we
will pay the beneficiary an amount at least equal to the
contract value. (p. --)
Annuity Payouts: You can apply your contract value to an annuity payout plan
that begins on the settlement date. You may choose from a
variety of plans to make sure that payouts continue as long
as you like. If you purchased a qualified annuity, the
payout schedule must meet the requirements of the qualified
plan. We can make payouts on a fixed or variable basis, or
both. Total monthly payouts may include amounts from each
subaccount and the fixed account. During the annuity payout
period, you cannot be invested in more than five subaccounts
at any one time unless we agree otherwise. (p. __)
Taxes: Generally, your contract grows tax-deferred until you
surrender it or begin to receive payouts. (Under certain
circumstances, IRS penalty taxes may apply.) Even if you
direct payouts to someone else, you will be taxed on the
income if you are the owner. (p. __)
Charges:
o $30 annual contract administrative charge;
o for nonqualified annuities a 0.95% mortality and expense risk fee;
o for qualified annuities a 0.75% mortality and expense risk fee;
o surrender charge;
o any premium taxes that may be imposed on us by state or local
governments (currently, we deduct any applicable premium tax
when you make a full surrender or when annuity payouts
begin); and
o the operating expenses of the funds.
<PAGE>
Expense Summary
The purpose of the following information is to help you understand the various
costs and expenses associated with your contract.
You pay no sales charge when you purchase your contract. We show all costs that
you bear directly or indirectly for the subaccounts and funds below. Some
expenses may vary as we explain under "Charges." Please see the funds'
prospectuses for more information on the operating expenses for each fund.
Contract owner expenses:
Surrender charge: contingent deferred sales charge as a percentage of
purchase payment surrendered. The owner selects either a seven-year or
ten-year surrender charge schedule at the time of application.
<TABLE>
<CAPTION>
Seven-year schedule Ten-year schedule
Years from purchase payment Years from purchase
<S> <C> <C> <C> <C>
receipt Surrender charge percentage payment receipt Surrender charge percentage
1 7% 1 8%
2 7 2 8
3 7 3 8
4 6 4 7
5 5 4 7
6 4 6 6
7 2 7 5
Thereafter 0 8 4
9 3
10 2
Thereafter 0
Annual contract administrative charge $30*
* We will waive this charge when your contract value, or total purchase
payments less any payments surrendered, is $50,000 or more on the current
contract anniversary.
</TABLE>
Annual subaccount expenses (as a percentage of average subaccount value):
Mortality and expense risk fee 0.95% for nonqualified annuities
0.75% for qualified annuities
<PAGE>
<TABLE>
<CAPTION>
Annual operating expenses of the funds after fee waivers and/or expense
reimbursements, if applicable, as a percentage of average daily net assets
<S> <C> <C> <C> <C>
Management 12b-1 Other
Fees Fees Expenses Total
AXPSM Variable Portfolio - Blue Chip Advantage Fund .56% -- .39 .95%1
AXPSM Variable Portfolio - Bond Fund .60% -- .07 .67%2
AXPSM Variable Portfolio - Capital Resource Fund .59% -- .07 .66%2
AXPSM Variable Portfolio - Cash Management Fund .50% -- .06 .56%2
AXPSM Variable Portfolio - Diversified Equity Income .56% -- .39 .95%1
Fund
AXPSM Variable Portfolio - Extra Income Fund .62% -- .09 .71%2
AXPSM Variable Portfolio - Federal Income Fund .61% -- .265 .875%1
AXPSM Variable Portfolio - Global Bond Fund .83% -- .13 .96%2
AXPSM Variable Portfolio - Growth Fund .63% -- .32 .95%1
AXPSM Variable Portfolio - International Fund .83% -- .15 .98%2
AXPSM Variable Portfolio - Managed Fund .59% -- .04 .63%2
AXPSM Variable Portfolio - New Dimensions Fund .61% -- .06 .67%2
AXPSM Variable Portfolio - Small Cap Advantage Fund .79% -- .435 1.225%1
AXPSM Variable Portfolio - Strategy Aggressive Fund .59% -- .09 .68%2
AIM V.I. Capital Appreciation Fund .62% -- .05 .67%3
AIM V.I. Capital Development Fund --% -- 1.21 1.21%3,4
American Century VP International Fund 1.48% -- -- 1.48%2
American Century VP Value Fund 1.00% -- -- 1.00%2
Fidelity VIP III Growth & Income Portfolio (Service .49% .10 .11 .70%5
Class)
Fidelity VIP III Mid Cap Portfolio (Service Class) .59% .10 .41 1.10%2
Fidelity VIP Overseas Portfolio (Service Class) .74% .10 .13 .97%5
FT VIP Real Estate Securities Fund - Class 2 .52% .25 .02 .79%6, 7
FT VIP Templeton International Smaller Companies 1.00% .25 .10 1.35%6, 7
Fund - Class 2
FT VIP Value Securities Fund - Class 2 .75% .25 .08 1.08%6, 8
Goldman Sachs VIT CORESM Small Cap Equity Fund .75% -- .15 .90%9
Goldman Sachs VIT CORESM U.S. Equity Fund .70% -- .10 .80%9
Goldman Sachs VIT Mid Cap Value Fund .80% -- .15 .95%10
Lazard Retirement International Equity Portfolio .75% .25 .25 1.25%11
Putnam VT International New Opportunities Fund - 1.18% .15 .68 2.01%12
Class IB Shares
Putnam VT Vista Fund - Class IB Shares .65% .15 .12 .92%1
Royce Micro-Cap Portfolio 1.25% -- .10 1.35%13
Third Avenue Value Portfolio .90% -- .40 1.30%14
Wanger International Small Cap 1.27% -- .28 1.55%3
Wanger U.S. Small Cap .96% -- .06 1.02%3
Warburg Pincus Trust - Emerging Growth Portfolio .84% -- .41 1.25%15
1Based on estimated expenses.
2Annualized operating expenses of funds at Dec. 31, 1998.
3Figures in "Management Fees," "Other Expenses" and "Total" are based on actual
expenses for the fiscal year ended Dec. 31, 1998.
4Had there been no fee waivers or expense reimbursement, expenses would have
been: 0.75%, 0.00%, 5.05% and 5.80%, respectively.
5 Fidelity Management & Research Company agreed to reimburse a portion of the
class' expenses during the period. Without this reimbursement, the Management
Fees, 12b-1 Fee, Other Expenses and Total as a percentage of average net assets
for the following funds would have been: Fidelity VIP Growth & Income Portfolio
(0.49%, 0.10%, 0.12% and 0.71%) and Fidelity VIP Overseas Portfolio (0.74%,
0.10%, 0.17% and 1.01%).
6The figure shown under Management Fees, combines both the Management and
Portfolio Administration Fees. The Portfolio Administration Fee is a direct
expense for the Templeton International Smaller Companies Fund and the Value
Securities Fund; the Real Estate Securities Fund pays for similar services
indirectly through the Management Fee.
7Because no Class 2 shares were issued as of Dec. 31, 1998, figures (other than
rule 12b-1 fees) are based on the Portfolio's Class 1 actual expenses for the
fiscal year ended Dec. 31, 1998 plus Class 2's annual Rule 12b-1 fee of 0.25%.
(While the maximum amount payable under each Portfolio's Class 2 Rule 12b-1 plan
is 0.35% per year of the Portfolio's average daily net assets, the Board of
Trustees of Franklin Templeton Variable Insurance Products Trust has set the
current rate at 0.25% per year).
8The Value Securities Fund commenced operations May 1, 1998, therefore,
Management Fees and Rule 12b-1 Fees are annualized and Other Expenses are
estimated for 1999. (While the maximum amount payable under the Portfolio's
Class 2 Rule 12b-1 plan is 0.35% per year of the Portfolio's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance Products
Trust has set the current rate at 0.25% per year.)
9The Goldman Sachs VIT CORE Small Cap Equity and CORE U.S. Equity Funds'
expenses are based on actual expenses for fiscal year ended Dec. 31, 1998. The
Investment Adviser to the Goldman Sachs VIT CORE Small Cap Equity and CORE U.S.
Equity Funds has voluntarily agreed to reduce or limit certain "Other Expenses"
of such funds (excluding management fees, taxes, interest and brokerage fees,
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.15% and 0.10% per annum of such funds' average daily net
assets, respectively. The expenses shown include this reimbursement. If not
included, the "Other Expenses" and "Total" for the Goldman Sachs VIT CORE Small
Cap Equity and CORE U.S. Equity Funds would be 3.17% and 3.92% and 2.13% and
2.83%, respectively. The reductions or limits may be discontinued or modified by
the investment adviser in their discretion at any time.
10The Goldman Sachs VIT Mid Cap Value Fund's expenses are estimated due to the
fund being in existence for less than ten months. The Investment Adviser to the
Goldman Sachs VIT Mid Cap Value Fund has voluntarily agreed to reduce or limit
certain "Other Expenses" of such funds (excluding management fees, taxes,
interest and brokerage fees, litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.15% per annum of such fund's
average daily net assets, respectively. The expenses shown include this
reimbursement. If not included, the "Other Expenses" and "Total" for the Goldman
Sachs VIT Mid Cap Value Fund would be 0.57% and 1.37%, respectively. The
reductions or limits may be discontinued or modified by the investment adviser
in their discretion at any time.
11The Portfolio's Investment Manager agrees to waive its fees and/or reimburse
the Portfolio through Dec. 31, 1999 to the extent total Portfolio annual
expenses exceed 1.25% of the Portfolio's average daily net assets. Absent fee
waivers and/or reimbursements, the Management Fees, 12b-1 Fees, Other Expenses
and Total as a percentage of average net assets for fiscal year ended Dec. 31,
1998 would have been: (0.75%, 0.25%, 47.67% and 48.67%).
12The Management Fees and Total expenses shown in the table reflect an expense
limitation. In the absence of an expense limitation, Management Fees and Total
expenses would have been 1.20% and 2.03%, respectively.
13Expense ratios are shown after fee waivers and expense reimbursements by the
investment advisor. The expense ratios before the waivers and reimbursements
would have been 1.25%, 1.34% and 2.59%.
14The Fund's expenses are estimated because the fund had not commenced
operations as of Aug. 10, 1999.
15Expense ratios are shown after fee waivers and expense reimbursements by the
investment adviser. The expense ratios before the waivers and reimbursements
would have been: (0.90%, 0.00%, 0.51% and 1.41%).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Examples:*
You would pay the following expenses on a $1,000 investment in a nonqualified
annuity with a seven-year surrender charge schedule and a 0.95% mortality and
expense risk fee assuming a 5% annual return and....
no surrender or selection
a full surrender at the end of an annuity payout plan at the end of
of each time period each time period
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
AXPSM Variable Portfolio - Blue Chip $90.33 $132.80 $20.33 $62.80
Advantage Fund
AXPSM Variable Portfolio - Bond Fund 87.46 124.09 17.46 54.09
AXPSM Variable Portfolio - Capital 87.35 123.78 17.35 53.78
Resource Fund
AXPSM Variable Portfolio - Cash 86.33 120.65 16.33 50.65
Management Fund
AXPSM Variable Portfolio - Diversified 90.33 132.80 20.33 62.80
Equity Income Fund
AXPSM Variable Portfolio - Extra Income 87.87 125.34 17.87 55.34
Fund
AXPSM Variable Portfolio - Federal 89.56 130.48 19.56 60.48
Income Fund
AXPSM Variable Portfolio - Global Bond 90.43 133.11 20.43 63.11
Fund
AXPSM Variable Portfolio - Growth Fund 90.33 132.80 20.33 62.80
AXPSM Variable Portfolio - International 90.63 133.74 20.63 63.74
Fund
AXPM Variable Portfolio - Managed Fund 87.05 122.84 17.05 52.84
AXPM Variable Portfolio - New Dimensions 87.46 124.09 17.46 54.09
Fund
AXPSM Variable Portfolio - Small Cap 93.14 141.31 23.14 71.31
Advantage Fund
AXPSM Variable Portfolio - Strategy 87.56 124.40 17.56 54.40
Aggressive Fund
AIM V.I. Capital Appreciation Fund 87.46 124.09 17.46 54.09
AIM V.I. Capital Development Fund 92.99 140.85 22.99 70.85
American Century VP International Fund 95.76 149.16 25.76 79.16
American Century VP Value Fund 90.84 134.36 20.84 64.36
Fidelity VIP III Growth & Income 87.76 125.03 17.76 55.03
Portfolio (Service Class)
Fidelity VIP III Mid Cap Portfolio 91.86 137.45 21.86 67.45
(Service Class)
Fidelity VIP Overseas Portfolio (Service 90.53 133.43 20.53 63.43
Class)
FT VIP Real Estate Securities Fund - 88.69 127.83 18.69 57.83
Class 2
FT VIP Templeton International Smaller 94.43 145.17 24.43 75.17
Companies Fund - Class 2
FT VIP Value Securities Fund - Class 2 91.66 136.83 21.66 66.83
Goldman Sachs VIT CORESM Small Cap 89.81 131.25 19.81 61.25
Equity Fund
Goldman Sachs VIT CORESM U.S. Equity Fund 88.79 128.14 18.79 58.14
Goldman Sachs VIT Mid Cap Value Fund 90.33 132.80 20.33 62.80
Lazard Retirement International Equity 93.40 142.09 23.40 72.09
Portfolio
Putnam VT International New 101.19 165.34 31.19 95.34
Opportunities Fund - Class IB Shares
Putnam VT Vista Fund - Class IB Shares 90.02 131.87 20.02 61.87
Royce Micro-Cap Portfolio 94.43 145.17 24.43 75.17
Third Avenue Value Portfolio 93.91 143.63 23.91 73.63
Wanger International Small Cap 96.48 151.31 26.48 81.31
Wanger U.S. Small Cap 91.04 134.98 21.04 64.98
Warburg Pincus Trust - Emerging Growth 93.40 142.09 23.40 72.09
Portfolio
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment in a nonqualified
annuity with a ten-year surrender charge schedule and a 0.95% mortality and
expense risk fee assuming a 5% annual return and....
no surrender or selection
a full surrender at the end of an annuity payout plan at the end of
of each time period each time period
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
AXPSM Variable Portfolio - Blue Chip $100.33 $142.80 $20.33 $62.80
Advantage Fund
AXPSM Variable Portfolio - Bond Fund 97.46 134.09 17.46 54.09
AXPSM Variable Portfolio - Capital 97.35 133.78 17.35 53.78
Resource Fund
AXPSM Variable Portfolio - Cash 96.33 130.65 16.33 50.65
Management Fund
AXPSM Variable Portfolio - Diversified 100.33 142.80 20.33 62.80
Equity Income Fund
AXPSM Variable Portfolio - Extra Income 97.87 135.34 17.87 55.34
Fund
AXPSM Variable Portfolio - Federal 99.56 140.48 19.56 60.48
Income Fund
AXPSM Variable Portfolio - Global Bond 100.43 143.11 20.43 63.11
Fund
AXPSM Variable Portfolio - Growth Fund 100.33 142.80 20.33 62.80
AXPSM Variable Portfolio - International 100.63 143.74 20.63 63.74
Fund
AXPSM Variable Portfolio - Managed Fund 97.05 132.84 17.05 52.84
AXPSM Variable Portfolio - New 97.46 134.09 17.46 54.09
Dimensions Fund
AXPSM Variable Portfolio - Small Cap 103.14 151.31 23.14 71.31
Advantage Fund
AXPSM Variable Portfolio - Strategy 97.56 134.40 17.56 54.40
Aggressive Fund
AIM V.I. Capital Appreciation Fund 97.46 134.09 17.46 54.09
AIM V.I. Capital Development Fund 102.99 150.85 22.99 70.85
American Century VP International Fund 105.76 159.16 25.76 79.16
American Century VP Value Fund 100.84 144.36 20.84 64.36
Fidelity VIP III Growth & Income 97.76 135.03 17.76 55.03
Portfolio (Service Class)
Fidelity VIP III Mid Cap Portfolio 101.86 147.45 21.86 67.45
(Service Class)
Fidelity VIP Overseas Portfolio (Service 100.53 143.43 20.53 63.43
Class)
FT VIP Real Estate Securities Fund - 98.69 137.83 18.69 57.83
Class 2
FT VIP Templeton International Smaller 104.43 155.17 24.43 75.17
Companies Fund - Class 2
FT VIP Value Securities Fund - Class 2 101.66 146.83 21.66 66.83
Goldman Sachs VIT CORESM Small Cap 99.81 141.25 19.81 61.25
Equity Fund
Goldman Sachs VIT CORESM U.S. Equity Fund 98.79 138.14 18.79 58.14
Goldman Sachs VIT Mid Cap Value Fund 100.33 142.80 20.33 62.80
Lazard Retirement International Equity 103.40 152.09 23.40 72.09
Portfolio
Putnam VT International New 111.19 175.34 31.19 95.34
Opportunities Fund - Class IB Shares
Putnam VT Vista Fund - Class IB Shares 100.02 141.87 20.02 61.87
Royce Micro-Cap Portfolio 104.43 155.17 24.43 75.17
Third Avenue Value Portfolio 103.91 153.63 23.91 73.63
Wanger International Small Cap 106.48 161.31 26.48 81.31
Wanger U.S. Small Cap 101.04 144.98 21.04 64.98
Warburg Pincus Trust - Emerging Growth 103.40 152.09 23.40 72.09
Portfolio
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment in a qualified
annuity with a seven-year surrender charge schedule and a 0.75% mortality and
expense risk fee assuming a 5% annual return and....
no surrender or selection
a full surrender at the end of an annuity payout plan at the end of
of each time period each time period
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
AXPSM Variable Portfolio - Blue Chip $88.28 $126.58 $18.28 $56.58
Advantage Fund
AXPSM Variable Portfolio - Bond Fund 85.41 117.83 15.41 47.83
AXPSM Variable Portfolio - Capital 85.30 117.52 15.30 47.52
Resource Fund
AXPSM Variable Portfolio - Cash 84.28 114.38 14.28 44.38
Management Fund
AXPSM Variable Portfolio - Diversified 88.28 126.58 18.28 56.58
Equity Income Fund
AXPSM Variable Portfolio - Extra Income 85.82 119.09 15.82 49.09
Fund
AXPSM Variable Portfolio - Federal 87.51 124.25 17.51 54.25
Income Fund
AXPSM Variable Portfolio - Global Bond 88.38 126.90 18.38 56.90
Fund
AXPSM Variable Portfolio - Growth Fund 88.28 126.58 18.28 56.58
AXPSM Variable Portfolio - International 88.58 127.52 18.58 57.52
Fund
AXPSM Variable Portfolio - Managed Fund 85.00 116.58 15.00 46.58
AXPSM Variable Portfolio - New 85.41 117.83 15.41 47.83
Dimensions Fund
AXPSM Variable Portfolio - Small Cap 91.09 135.13 21.09 65.13
Advantage Fund
AXPSM Variable Portfolio - Strategy 85.51 118.15 15.51 48.15
Aggressive Fund
AIM V.I. Capital Appreciation Fund 85.41 117.83 15.41 47.83
AIM V.I. Capital Development Fund 90.94 134.67 20.94 64.67
American Century VP International Fund 93.71 143.01 23.71 73.01
American Century VP Value Fund 88.79 128.14 18.79 58.14
Fidelity VIP III Growth & Income 85.71 118.77 15.71 48.77
Portfolio (Service Class)
Fidelity VIP III Mid Cap Portfolio 89.81 131.25 19.81 61.25
(Service Class)
Fidelity VIP Overseas Portfolio (Service 88.48 127.21 18.48 57.21
Class)
FT VIP Real Estate Securities Fund - 86.64 121.59 16.64 51.59
Class 2
FT VIP Templeton International Smaller 92.38 139.00 22.38 69.00
Companies Fund - Class 2
FT VIP Value Securities Fund - Class 2 89.61 130.63 19.61 60.63
Goldman Sachs VIT CORESM Small Cap 87.76 125.03 17.76 55.03
Equity Fund
Goldman Sachs VIT CORESM U.S. Equity Fund 86.74 121.90 16.74 51.90
Goldman Sachs VIT Mid Cap Value Fund 88.28 126.58 18.28 56.58
Lazard Retirement International Equity 91.35 135.90 21.35 65.90
Portfolio
Putnam VT International New 99.14 159.26 29.14 89.26
Opportunities Fund - Class IB Shares
Putnam VT Vista Fund - Class IB Shares 87.97 125.65 17.97 55.65
Royce Micro-Cap Portfolio 92.38 139.00 22.38 69.00
Third Avenue Value Portfolio 91.86 137.45 21.86 67.45
Wanger International Small Cap 94.43 145.17 24.43 75.17
Wanger U.S. Small Cap 88.99 128.76 18.99 58.76
Warburg Pincus Trust - Emerging Growth 91.35 135.90 21.35 65.90
Portfolio
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment in a qualified
annuity with a ten-year surrender charge schedule and a 0.75% mortality and
expense risk fee assuming a 5% annual return and....
no surrender or selection
a full surrender at the end of an annuity payout plan at the end of
of each time period each time period
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
AXPSM Variable Portfolio - Blue Chip $98.28 $136.58 $18.28 $56.58
Advantage Fund
AXPSM Variable Portfolio - Bond Fund 95.41 127.83 15.41 47.83
AXPSM Variable Portfolio - Capital 95.30 127.52 15.30 47.52
Resource Fund
AXPSM Variable Portfolio - Cash 94.28 124.38 14.28 44.38
Management Fund
AXPSM Variable Portfolio - Diversified 98.28 136.58 18.28 56.58
Equity Income Fund
AXPSM Variable Portfolio - Extra Income 95.82 129.09 15.82 49.09
Fund
AXPSM Variable Portfolio - Federal 97.51 134.25 17.51 54.25
Income Fund
AXPSM Variable Portfolio - Global Bond 98.38 136.90 18.38 56.90
Fund
AXPSM Variable Portfolio - Growth Fund 98.28 136.58 18.28 56.58
AXPSM Variable Portfolio - International 98.58 137.52 18.58 57.52
Fund
AXPSM Variable Portfolio - Managed Fund 95.00 126.58 15.00 46.58
AXPSM Variable Portfolio - New 95.41 127.83 15.41 47.83
Dimensions Fund
AXPSM Variable Portfolio - Small Cap 101.09 145.13 21.09 65.13
Advantage Fund
AXPSM Variable Portfolio - Strategy 95.51 128.15 15.51 48.15
Aggressive Fund
AIM V.I. Capital Appreciation Fund 95.41 127.83 15.41 47.83
AIM V.I. Capital Development Fund 100.94 144.67 20.94 64.67
American Century VP International Fund 103.71 153.01 23.71 73.01
American Century VP Value Fund 98.79 138.14 18.79 58.14
Fidelity VIP III Growth & Income 95.71 128.77 15.71 48.77
Portfolio (Service Class)
Fidelity VIP III Mid Cap Portfolio 99.81 141.25 19.81 61.25
(Service Class)
Fidelity VIP Overseas Portfolio (Service 98.48 137.21 18.48 57.21
Class)
FT VIP Real Estate Securities Fund - 96.64 131.59 16.64 51.59
Class 2
FT VIP Templeton International Smaller 102.38 149.00 22.38 69.00
Companies Fund - Class 2
FT VIP Value Securities Fund - Class 2 99.61 140.63 19.61 60.63
Goldman Sachs VIT CORESM Small Cap 97.76 135.03 17.76 55.03
Equity Fund
Goldman Sachs VIT CORESM U.S. Equity Fund 96.74 131.90 16.74 51.90
Goldman Sachs VIT Mid Cap Value Fund 98.28 136.58 18.28 56.58
Lazard Retirement International Equity 101.35 145.90 21.35 65.90
Portfolio
Putnam VT International New 109.14 169.26 29.14 89.26
Opportunities Fund - Class IB Shares
Putnam VT Vista Fund - Class IB Shares 97.97 135.65 17.97 55.65
Royce Micro-Cap Portfolio 102.38 149.00 22.38 69.00
Third Avenue Value Portfolio 101.86 147.45 21.86 67.45
Wanger International Small Cap 104.43 155.17 24.43 75.17
Wanger U.S. Small Cap 98.99 138.76 18.99 58.76
Warburg Pincus Trust - Emerging Growth 101.35 145.90 21.35 65.90
Portfolio
* In these examples, the $30 contract administrative charge is approximated
as a .083% charge based on our estimated average contract size. Premium
taxes imposed by some state and local governments are not reflected in
these examples. We entered into certain arrangements under which we are
compensated by the funds' advisors and/or distributors for the
administrative services we provide to the funds.
</TABLE>
You should not consider these examples as representations of past or future
expenses. Actual expenses may be more or less than those shown.
<PAGE>
Condensed Financial Information (Unaudited)
We have not provided any condensed financial information for the subaccounts
because they are new and do not have any history.
Financial Statements
You can find our audited financial statements in the SAI. The SAI does not
include the audited financial statements of the subaccounts because they are new
and do not have any performance.
Performance Information
Performance information for the subaccounts may appear from time to time in
advertisements or sales literature. This information reflects the performance of
a hypothetical investment in a particular subaccount during a specified time
period. Currently, we do not provide any performance information for the
subaccounts because they are new and have not had any activity to date. However,
we show performance from the commencement date of the funds as if the contract
existed at that time, which it did not. Although we base performance figures on
historical earnings, past performance does not guarantee future results.
We include non-recurring charges (such as surrender charges) in total return
figures, but not in yield quotations. Excluding non-recurring charges in yield
calculations increases the reported value.
Total return figures reflect deduction of all applicable charges, including:
o the contract administrative charge,
o mortality and expense risk fee, and
o surrender charge (assuming a surrender at the end of the illustrated period).
We also may make optional total return quotations that do not reflect a
surrender charge deduction (assuming no surrender). Total return quotations may
be shown by means of schedules, charts or graphs.
Average annual total return is the average annual compounded rate of return of
the investment over a period of one, five and ten years (or up to the life of
the subaccount if it is less than ten years old).
Cumulative total return is the cumulative change in the value of an investment
over a specified time period. We assume that income earned by the investment is
reinvested. Cumulative total return generally will be higher than average annual
total return.
Annualized simple yield (for subaccounts investing in money market funds)
"annualizes" the income generated by the investment over a given seven-day
period. That is, we assume the amount of income generated by the investment
during the period will be generated each seven-day period for a year. We show
this as a percentage of the investment.
Annualized compound yield (for subaccounts investing in money market funds) is
calculated like simple yield except that we assume the income is reinvested when
we annualize it. Compound yield will be higher than the simple yield because of
the compounding effect of the assumed reinvestment.
Annualized yield (for subaccounts investing in income funds) divides the net
investment income (income less expenses) for each accumulation unit during a
given 30-day period by the value of the unit on the last day of the period. We
then convert the result to an annual percentage.
You should consider performance information in light of the investment
objectives, policies, characteristics and quality of the fund in which the
subaccount invests and the market conditions during the specified time period.
Advertised yields and total return figures include charges that reduce
advertised performance. Therefore, you should not compare subaccount performance
to that of mutual funds that sell their shares directly to the public. (See the
SAI for a further description of methods used to determine total return and
yield.)
If you would like additional information about actual performance, please
contact us.
<PAGE>
The Variable Account and the Funds
You may allocate payments to any or all the subaccounts of the variable account
that invest in shares of the following funds:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Advisor or
Subaccount Investing in Investment Objectives and Policies Manager
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
BC1 AXPSM Variable Portfolio - Objective: long-term total return exceeding that of IDS Life, investment
BC2 Blue Chip Advantage Fund the U.S. stock market. Invests primarily in common manager; American Express
stocks of companies included in the unmanaged S&P Financial Corporation
500 Index. (AEFC), investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
BD1 AXPSM Variable Portfolio - Objective: high level of current income while IDS Life, investment
BD2 Bond Fund conserving the value of the investment for the manager; AEFC, investment
longest time period. Invests primarily in advisor.
investment-grade bonds.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CR1 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
CR2 Capital Resource Fund in U.S. common stocks. manager; AEFC, investment
advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CM1 AXPSM Variable Portfolio - Objective: maximum current income consistent with IDS Life, investment
CM2 Cash Management Fund liquidity and conservation of capital. Invests in manager; AEFC, investment
money market securities. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
DE1 AXPSM Variable Portfolio - Objective: a high level of current income and, as a IDS Life, investment
DE2 Diversified Equity Income secondary goal, steady growth of capital. Invests manager; AEFC, investment
Fund primarily in dividend-paying common and preferred advisor.
stocks.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
EI1 AXPSM Variable Portfolio - Objective: high current income, with capital growth IDS Life, investment
EI2 Extra Income Fund as a secondary objective. Invests primarily in manager; AEFC, investment
long-term, high-yielding, high-risk debt securities advisor.
below investment grade issued by U.S. and foreign
corporations.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
FI1 AXPSM Variable Portfolio - Objective: a high level of current income and IDS Life, investment
FI2 Federal Income Fund safety of principal consistent with an investment manager; AEFC, investment
in U.S. government and government agency advisor.
securities. Invests primarily in debt obligations
issued or guaranteed as to principal and interest
by the U.S. government, its agencies or
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
GB1 AXPSM Variable Portfolio - Objective: high total return through income and IDS Life, investment
GB2 Global Bond Fund growth of capital. Invests primarily in debt manager; AEFC, investment
securities of U.S. and foreign issuers. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
GR1 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
GR2 Growth Fund primarily in common stocks and securities manager; AEFC, investment
convertible into common stocks that appear to offer advisor.
growth opportunities.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
IE1 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
IE2 International Fund in common stock of foreign issuers. manager; AEFC, investment
advisor; American Express
Asset Management
International, Inc., a
wholly-owned subsidiary of
AEFC, sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
MF1 AXPSM Variable Portfolio - Objective: maximum total investment return through IDS Life, investment
MF2 Managed Fund a combination of capital growth and current income. manager; AEFC, investment
Invests primarily in stocks, convertible advisor.
securities, bonds and money market instruments.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
ND1 AXPSM Variable Portfolio - Objective: long-term growth of capital. Invests IDS Life, investment
ND2 New Dimensions Fund primarily in common stocks of U.S. and foreign manager; AEFC, investment
companies showing potential for significant growth. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SC1 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
SC2 Small Cap Advantage Fund primarily in equity stocks of small companies that manager; AEFC, investment
are often included in the S&P SmallCap 600 Index or advisor; Kenwood Capital Management
the Russell 2000 Index. LLC, sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SA1 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
SA2 Strategy Aggressive Fund in common stocks of small- and medium-size companies. manager; AEFC investment
advisor; American Express Asset
Management Group Inc.,
sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1CA AIM V.I. Capital Objective: growth of capital. Invests primarily in A I M Advisors, Inc.
2CA Appreciation Fund common stocks, with emphasis on medium- or
small-sized growth companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1CD AIM V.I. Capital Objective: long term growth of capital. Invests A I M Advisors, Inc.
2CD Development Fund primarily in securities (including common stocks,
convertible securities and bonds) of small- and
medium-sized companies.
- ------------------------------------------------------------------------------------------------------------------------------
1IF American Century VP Objective: long term capital growth. Invests American Century Investment
2IF International Fund primarily in stocks of growing foreign companies. Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1VA American Century VP Value Objective: long-term capital growth, with income as American Century Investment
2VA Fund a secondary objective. Invests primarily in Management, Inc.
securities that management believes to be
undervalued at the time of purchase.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1GI Fidelity VIP III Growth & Objective: high total return through a combination Fidelity Management &
2GI Income Portfolio (Service of current income and capital appreciation. Invests Research Company (FMR),
Class) primarily in common stocks with a focus on those investment manager; FMR
that pay current dividends and show potential for U.K. and FMR Far East,
capital appreciation. sub-investment advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1MP Fidelity VIP III Mid Cap Objective: long-term growth of capital. Invests FMR, investment manager;
2MP Portfolio (Service Class) primarily in medium market capitalization common FMR U.K. and FMR Far East,
stocks. sub-investment advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1OS Fidelity VIP Overseas Objective: long-term growth of capital. Invests FMR, investment manager;
2OS Portfolio (Service Class) primarily in common stocks of foreign securities. FMR U.K., FMR Far East,
Fidelity International
Investment Advisors (FIIA)
and FIIA U.K., sub-investment
advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1RE Franklin Templeton VIP Objective: capital appreciation with a secondary Franklin Advisers, Inc.
2RE Trust Real Estate goal to earn current income. Invests primarily in
Securities Fund - Class 2 securities of companies operating in the real
estate industry, primarily equity real estate
investment trusts (REITS).
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1IS Franklin Templeton VIP Objective: long-term capital appreciation. Invests Templeton Investment
2IS Trust Templeton primarily in equity securities of smaller companies Counsel, Inc.
International Smaller located outside the U.S., including in
emerging Companies Fund
- Class 2 markets.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1SI Franklin Templeton VIP Objective: long-term total return. Invests Franklin Advisory Services,
2SI Trust Value Securities primarily in equity securities of companies the LLC
Fund - Class 2 manager believes are significantly undervalued.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1SE Goldman Sachs VIT Objective: long-term growth of capital. Invests Goldman Sachs Asset
2SE CORESM Small Cap primarily in a broadly diversified portfolio of Management
Equity Fund equity securities of U.S. issuers which are
included in the Russell 2000 Index at the time of
investment.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1UE Goldman Sachs VIT Objective: long-term growth of capital and dividend Goldman Sachs Asset
2UE CORESMU.S. Equity Fund income. Invests primarily in a broadly diversified Management
portfolio of large-cap and blue chip equity
securities representing all major sectors of the
U.S. economy.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1MC Goldman Sachs VIT Mid Objective: long-term capital appreciation. Invests Goldman Sachs Asset
2MC Cap Value Fund primarily in mid-capitalization U.S. stocks that Management
are believed to be undervalued or undiscovered by
the marketplace.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1IP Lazard Retirement Objective: long-term capital appreciation. Invests Lazard Asset Management
2IP International Equity primarily in equity securities, principally common
Portfolio stocks of relatively large non-U.S. companies
(those whose total market value is more than $1
billion) that the Investment Manager believes are
undervalued based on their earnings, cash flow or
asset values.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1IN Putnam VT International Objective: long-term capital appreciation by Putnam Investment
2IN New Opportunities Fund - investing in companies that have above-average Management, Inc.
Class IB Shares growth prospects due to
the fundamental growth of their
market sector. Invests primarily in
growth stocks outside the U.S.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1VS Putnam VT Vista Fund - Objective: capital appreciation. Invests primarily Putnam Investment
2VS Class IB Shares in a diversified portfolio of common stocks that Management, Inc.
Putnam Management believes have the
potential for above-average capital
appreciation.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1MI Royce Micro-Cap Portfolio Objective: long-term growth of capital. Invests Royce & Associates, Inc.
2MI primarily in a broadly diversified portfolio of
equity securities issued by micro-cap companies
(companies with stock market capitalizations below
$300 million).
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1SV Third Avenue Value Objective: long-term capital appreciation. Invests The Investment Adviser EQSF
2SV Portfolio primarily in common stocks of well-financed Advisers, Inc.
companies at a substantial discount to what the
Advisor believes is their true value.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1IT Wanger International Objective: long-term growth of capital. Invests Wanger Asset Management,
2IT Small Cap primarily in stocks of small- and medium-size L.P.
non-U.S. companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1SP Wanger U.S. Small Cap Objective: long-term growth of capital. Invests Wanger Asset Management,
2SP primarily in stocks of small- and medium-size U.S. L.P.
companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
1EG Warburg Pincus Trust - Objective: maximum capital appreciation. Invests Warburg Pincus Asset
2EG Emerging Growth Portfolio primarily in equity securities of small- to medium Management, Inc.
sized U.S. emerging-growth companies.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment objectives and policies of some of the funds are similar to the
investment objectives and policies of other mutual funds that the investment
advisor or its affiliates manage. Although the objectives and policies may be
similar, each fund will have its own portfolio holdings and its own fees and
expenses. Accordingly, each fund will have its own investment results.
The investment managers and advisors cannot guarantee that the funds will meet
their investment objectives. Please read the funds' prospectuses for facts you
should know before investing. These prospectuses are available by contacting us
at the address or telephone number on the first page of this prospectus.
All funds are available to serve as the underlying investments for variable
annuities. Some funds also are available to serve as investment options for
variable life insurance policies and qualified plans. It is possible that in the
future, it may be disadvantageous for variable annuity accounts and variable
life insurance accounts and/or qualified plans to invest in the available funds
simultaneously.
Although the insurance company and the funds do not currently foresee any such
disadvantages, the boards of directors or trustees of the appropriate funds will
monitor events in order to identify any material conflicts between annuity
owners, policy owners and qualified plans and to determine what action, if any,
should be taken in response to a conflict. If a board were to conclude that it
should establish separate funds for the variable annuity, variable life
insurance and qualified plan accounts, you would not bear any expenses
associated with establishing separate funds. Please refer to the fund
prospectuses for risk disclosure regarding simultaneous investments by variable
annuity, variable life insurance and qualified plan accounts.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Internal Revenue Code of 1986, as amended (the
Code). Each fund intends to comply with these requirements.
The variable account was established under Minnesota law on Aug. 23, 1995 and
the subaccounts are registered together as a single unit investment trust under
the Investment Company Act of 1940 (the 1940 Act). This registration does not
involve any supervision of our management or investment practices and policies
by the SEC. All obligations arising under the contracts are general obligations
of IDS Life.
The variable account meets the definition of a separate account under federal
securities laws. We credit or charge income, capital gains and capital losses of
each subaccount only to that subaccount. State insurance law prohibits us from
charging a subaccount with liabilities of any other subaccount or of our general
business. The variable account includes other subaccounts that are available
under contracts that are not described in this prospectus.
The U.S. Treasury and the Internal Revenue Service (IRS) indicated that they may
provide additional guidance on investment control. This concerns how many
variable subaccounts an insurance company may offer and how many exchanges among
subaccounts it may allow before the contract owner would be currently taxed on
income earned within subaccount assets. At this time, we do not know what the
additional guidance will be or when action will be taken. We reserve the right
to modify the contract, as necessary, so that the owner will not be subject to
current taxation as the owner of the subaccount assets.
We intend to comply with all federal tax laws so that the contract continues to
qualify as an annuity for federal income tax purposes. We reserve the right to
modify the contract as necessary to comply with any new tax laws.
<PAGE>
The Fixed Account
You also may allocate purchase payments to the fixed account. We back the
principal and interest guarantees relating to the fixed account. The value of
the fixed account increases as we credit interest to the account. Purchase
payments and transfers to the fixed account become part of our general account.
We credit interest daily and compound it annually. We will change the interest
rates from time to time at our discretion.
Interests in the fixed account are not required to be registered with the SEC.
The SEC staff does not review the disclosures in this prospectus on the fixed
account. Disclosures regarding the fixed account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. (See
"Making the Most of Your Contract -- Transfer policies" for restrictions on
transfers involving the fixed account.)
<PAGE>
Buying Your Contract
You can fill out an application and send it along with your initial purchase
payment to our office. As the owner, you have all rights and may receive all
benefits under the contract. You can own a nonqualified annuity in joint tenancy
with rights of survivorship only in spousal situations. You cannot own a
qualified annuity in joint tenancy. You can buy a contract or become an
annuitant if you are 90 or younger.
When you apply, you may select:
o the length of the surrender charge period (seven or ten years);
o the fixed account and/or subaccounts in which you want to invest;
o how you want to make purchase payments; and o a beneficiary.
The contract provides for allocation of purchase payments to the subaccounts of
the variable account and/or to the fixed account in even 1% increments.
If your application is complete, we will process it and apply your purchase
payment to the fixed account and subaccounts you selected within two business
days after we receive it at our office. If we accept your application, we will
send you a contract. If we cannot accept your application within five business
days, we will decline it and return your payment. We will credit additional
purchase payments you make to your accounts on the valuation date we receive
them. We will value the additional payments at the next accumulation unit value
calculated after we receive your payments at our office.
The settlement date
Annuity payouts are scheduled to begin on the settlement date. When we process
your application, we will establish the settlement date to the maximum age or
date described below. You can also select a date within the maximum limits. You
can align this date with your actual retirement from a job, or it can be a
different future date, depending on your needs and goals and on certain
restrictions. You also can change the date, provided you send us written
instructions at least 30 days before annuity payouts begin.
For nonqualified annuities, the settlement date must be:
o no earlier than the 60th day after the contract's effective date; and
o no later than the annuitant's 85th birthday or the tenth contract
anniversary, if purchased after age 75. (In Pennsylvania, the maximum
settlement date ranges from age 85 to 93 based on the annuitant's age when
we issue the contract. See contract for details.)
For qualified annuities, to avoid IRS penalty taxes, the settlement date
generally must be:
o on or after the date the annuitant reaches age 59 1/2; and
o for IRAs and SEPs, by April 1 of the year following the calendar year when
annuitant reaches age 70 1/2; or
o for all other qualified annuities, by April 1 of the year following the
calendar year when the annuitant reaches age 70 1/2, or, if later retires
(except that 5% business owners may not select a settlement date that is
later than April 1 of the year following the calendar year when they reach
age 70 1/2).
If you take the minimum IRA or TSA distributions as required by the Code from
another tax-qualified investment, or in the form of partial surrenders from this
contract, annuity payouts can start as late as the annuitant's 85th birthday or
the tenth contract anniversary, if later. (In Pennsylvania, the annuity payout
ranges from age 85 to 93 based on the annuitant's age when the contract is
issued. See contract for details.)
Beneficiary
If death benefits become payable before the settlement date (while the contract
is in force and before annuity payouts begin), we will pay your named
beneficiary all or part of the contract value. If there is no named beneficiary,
then you or your estate will be the beneficiary. (See "Benefits in Case of
Death" for more about beneficiaries.)
Purchase payments
Minimum allowable purchase payments
If paying by installments*
under a scheduled If paying by any other method:
payment plan: $1,000 initial payment for qualified plans
$23.08 biweekly, or $2,000 initial payment for nonqualified plans
$50 per month $50 for any additional payments
* Installments must total at least $600 in the first year. If you do not
make any purchase payments for 24 months, and your previous payments total
$600 or less, we have the right to give you 30 days' written notice and
pay you the total value of your contract in a lump sum. This right does
not apply to contracts sold to New Jersey residents.
Maximum allowable purchase payments** based on the age of you or the
annuitant, whoever is older, on the effective date of the contract:
For the first year: For each subsequent year:
$100,000 for ages 86 to 90 $50,000 for ages 86-90
$1,000,000 up to age 85 $100,000 up to age 85
**These limits apply in total to all IDS Life annuities you own. We reserve
the right to increase maximum limits. For qualified annuities the
qualified plan's limits on annual contributions also apply.
We reserve the right to not accept purchase payments allocated to the fixed
account for twelve months following either:
1. a partial surrender from the fixed account; or
2. a lump sum transfer from the fixed account to a subaccount.
How to make purchase payments
1 Send your check along with your name and contract number to:
By letter:
Regular mail:
IDS Life Insurance Company
Box 74
Minneapolis, MN 55440-0074
Express mail:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
2 We can help you set up:
By Scheduled
payment plan:
o an automatic payroll deduction, salary reduction or other group billing
arrangement; or
o a bank authorization.
<PAGE>
Charges
Contract administrative charge
We charge this fee for establishing and maintaining your records. We deduct $30
from the contract value on your contract anniversary at the end of each contract
year. We prorate this charge among the subaccounts and the fixed account in the
same proportion your interest in each account bears to your total contract
value.
We will waive this charge when your contract value, or total purchase payments
less any payments surrendered, is $50,000 or more on the current contract
anniversary.
If you surrender your contract, we will deduct the charge at the time of
surrender regardless of the contract value or purchase payments made. We cannot
increase the annual contract administrative charge and it does not apply after
annuity payouts begin or when we pay death benefits.
Mortality and expense risk fee
We charge this fee daily to the subaccounts. The unit values of your subaccounts
reflect this fee. For nonqualified annuities the fee totals 0.95% of the average
daily net assets on an annual basis. For qualified annuities the fee totals
0.75% of the average daily net assets on an annual basis. This fee covers the
mortality and expense risk that we assume. Approximately two-thirds of this
amount is for our assumption of mortality risk, and one-third is for our
assumption of expense risk. This fee does not apply to the fixed account.
Mortality risk arises because of our guarantee to pay a death benefit and our
guarantee to make annuity payouts according to the terms of the contract, no
matter how long a specific annuitant lives and no matter how long our entire
group of annuitants live. If, as a group, annuitants outlive the life expectancy
we assumed in our actuarial tables, then we must take money from our general
assets to meet our obligations. If, as a group, annuitants do not live as long
as expected, we could profit from the mortality risk fee.
Expense risk arises because we cannot increase the contract administrative
charge and this charge may not cover our expenses. We would have to make up any
deficit from our general assets.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
o first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
o then, if necessary, the funds redeem shares to cover any remaining
fees payable.
We may use any profits we realize from the subaccounts' payment to us of the
mortality and expense risk fee for any proper corporate purpose, including,
among others, payment of distribution (selling) expenses. We do not expect that
the surrender charge, discussed in the following paragraphs, will cover sales
and distribution expenses.
Surrender charge
If you surrender all or part of your contract, you may be subject to a surrender
charge. A surrender charge applies if all or part of the surrender amount is
from purchase payments we received within seven (7) or ten (10) years before
surrender. You select the surrender charge period at the time of your
application for the contract. The surrender charge percentages that apply to you
are shown in your contract.
For purposes of calculating any surrender charge, we treat amounts surrendered
from your contract value in the following order:
1. First, we surrender any contract earnings (contract value less purchase
payments received and not previously surrendered). We do not assess a
surrender charge on contract earnings.
NOTE: We determine contract earnings by looking at the entire contract value,
not the earnings of any particular subaccount or the fixed account.
2. Next, in each contract year, we surrender amounts totaling up to 10% of
your prior contract anniversary contract value, but only to the extent not
included and surrendered in Number 1 above. (Your initial purchase payment
is considered the prior contract anniversary contract value during the
first contract year.) We do not assess a surrender charge on this amount.
3. Next we surrender purchase payments received prior to the surrender charge
period you selected and shown in your contract. We do not assess a
surrender charge on these purchase payments.
4. Finally, if necessary, we surrender purchase payments received that are
still within the surrender charge period you selected and shown in your
contract. We surrender these payments on a first-in, first-out basis. We do
assess a surrender charge on these payments.
We determine your surrender charge by multiplying each of your payments
surrendered by the applicable surrender charge percentage, and then adding the
total surrender charges.
The surrender charge percentage depends on the number of years since you made
the payments that are surrendered, depending on the schedule you selected:
<TABLE>
<CAPTION>
Seven-year schedule Ten-year schedule
<S> <C> <C> <C> <C> <C> <C>
Years from purchase payment Years from purchase
receipt Surrender charge percentage payment receipt Surrender charge percentage
1 7% 1 8%
2 7 2 8
3 7 3 8
4 6 4 7
5 5 4 7
6 4 6 6
7 2 7 5
Thereafter 0 8 4
9 3
10 2
Thereafter 0
</TABLE>
Surrender charge calculation example
Following is an example of the calculation we would make to determine the
surrender charge on a contract that contains a seven-year surrender charge
schedule with this history:
o The contract date is July 1, 1999 with a contract year of July 1 through
June 30 and with an anniversary date of July 1 each year; and
o We received these payments:
-$10,000 July 1, 1999;
-$ 8,000 Dec.31, 2004
-$ 6,000 Feb. 20, 2007; and
o The owner surrenders the contract for its total surrender value of $26,500
on Aug. 5, 2009 and had not made any other surrenders during that contract
year; and
o The prior anniversary July 1, 2008 contract value was $28,000.
<TABLE>
<CAPTION>
<S> <C>
Surrender charge Explanation
$0 $2,500 is contract earnings surrendered without charge; and
$0 $300 is 10% of the prior anniversary contract value that is in excess of
contract earnings surrendered without charge (from above).
10% of $28,000= $2,800 minus $2,500 = $300
$0 $10,000 July 1, 1999 payment was received eight or more years before surrender
and is surrendered without surrender charge; and
$400 $8,000 Dec. 31, 2004 payment is in its fifth year from receipt, surrendered
with a 5% surrender charge; and
$420 $6,000 Feb.20, 2007 payment is in its third year from receipt, surrendered with
----
a 7% surrender charge.
$820
</TABLE>
For a partial surrender that is subject to a surrender charge, the amount we
actually surrender from your contract will be the amount you request plus any
applicable surrender charge. We apply the surrender charge to this total amount.
We pay you the amount you requested. If you make a full surrender of your
contract, we also will deduct the $30 contract administrative charge.
Waiver of surrender charges
We do not assess surrender charges for:
o surrenders of any contract earnings;
o amounts totaling up to 10% of your prior contract anniversary contract
value to the extent it exceeds contract earnings;
o required minimum distributions from a qualified annuity (for those amounts
required to be distributed from the contract described in this prospectus);
o contracts settled using an annuity payout plan;
o amounts we refund to you during the free look period*;
o death benefits*; and
o surrenders you make under your contract's "Waiver of Surrender Charges for
Nursing Home Confinement" provision*. To the extent permitted by state law,
this provision applies when you are under age 76 on the date that we issue
the contract. We will waive surrender charges that we normally assess upon
full or partial surrender if you provide proof satisfactory to us that, as
of the date you request the surrender, you or the annuitant are confined to
a nursing home and have been for the prior 90 days and the confinement
began after the contract date. (See your contract for additional conditions
and restrictions on this waiver.)
* However, we will reverse certain purchase payment credits up to the maximum
surrender charge. (See "Valuing Your Investment - Purchase payment credits.")
Other information on charges: AEFC makes certain custodial services available to
some custodial and trusteed pension and profit sharing plans and 401(k) plans
funded by our annuities. Fees for these services start at $30 per calendar year
per participant. AEFC will charge a termination fee for owners under age 59 1/2
(fee waived in case of death or disability).
Possible group reductions: In some cases we may incur lower sales and
administrative expenses due to the size of the group, the average contribution
and the use of group enrollment procedures. In such cases, we may be able to
reduce or eliminate the contract administrative and surrender charges. However,
we expect this to occur infrequently.
Premium taxes
Certain state and local governments impose premium taxes (up to 3.5%). These
taxes depend upon your state of residence or the state in which the contract was
sold. In some cases, we deduct premium taxes from your purchase payments before
we allocate them. In other cases, we deduct them when you surrender your
contract or when annuity payouts begin.
<PAGE>
Valuing Your Investment
We value your fixed account and subaccounts as follows:
Fixed account: We value the amounts you allocated to the fixed account directly
in dollars. The fixed account value equals:
o the sum of your purchase payments and transfer amounts allocated to the fixed
account;
o plus any purchase payment credits allocated to the fixed account;
o plus interest credited; o minus the sum of amounts surrendered (including
any applicable surrender charges) and amounts transferred out; and
o minus any prorated contract administrative charge.
Subaccounts: We convert amounts you allocated to the subaccounts into
accumulation units. Each time you make a purchase payment or transfer amounts
into one of the subaccounts or we apply any purchase payment credits to a
subaccount, we credit a certain number of accumulation units to your contract
for that subaccount. Conversely, each time you take a partial surrender,
transfer amounts out of a subaccount, or we assess a contract administrative
charge, we subtract a certain number of accumulation units from your contract.
The accumulation units are the true measure of investment value in each
subaccount during the accumulation period. They are related to, but not the same
as, the net asset value of the fund in which the subaccount invests.
The dollar value of each accumulation unit can rise or fall daily depending on
the variable account expenses, performance of the fund and on certain fund
expenses. Here is how we calculate accumulation unit values:
Number of units
To calculate the number of accumulation units for a particular subaccount, we
divide your investment after deduction of any premium taxes, by the current
accumulation unit value.
Accumulation unit value
The current accumulation unit value for each subaccount equals the last value
times the subaccount's current net investment factor.
Net investment factor
We determine the net investment factor by:
o adding the fund's current net asset value per share, plus the per share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee from the result.
Because the net asset value of the fund may fluctuate, the accumulation unit
value may increase or decrease. You bear all the investment risk in a
subaccount.
Factors that affect subaccount accumulation units
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units you own may fluctuate due to:
o additional purchase payments you allocate to the subaccounts;
o any purchase payment credits allocated to the subaccounts;
o transfers into or out of the subaccounts;
o partial surrenders;
o surrender charges; and/or
o prorated portions of the contract administrative charge.
Accumulation unit values will fluctuate due to:
o changes in funds' net asset value;
o dividends distributed to the subaccounts;
o capital gains or losses of funds;
o fund operating expenses; and/or
o mortality and expense risk fees.
Purchase payment credits
We add a credit to your contract in the amount of:
o 1% of each purchase payment received
-if you elect the ten-year surrender charge schedule for your
contract; or
-if you elect the seven-year surrender charge schedule and your initial
purchase payment to the contract is at least $100,000.
o 2% of each purchase payment received if you elect the ten-year surrender
charge schedule for your contract and your initial purchase payment to the
contract is at least $100,000.
We fund the credit from our general account. We do not consider credits to be
"investments" for income tax purposes. (See "Taxes.")
We allocate each credit to your contract value when the applicable purchase
payment is applied to your contract value. We allocate such credits to your
contract value according to allocation instructions in effect for your purchase
payments.
We will reverse credits from the contract value for any purchase payment that is
not honored.
To the extent a death benefit or surrender payment includes purchase payment
credits applied within twelve months preceding: (1) the date of death that
results in a lump sum death benefit under this contract; or (2) a request for
surrender charge waiver due to Nursing Home Confinement, we will assess a
charge, similar to a surrender charge, equal to the amount of the purchase
payment credits. The amount we pay to you under these circumstances will always
equal or exceed your surrender value. The amount returned to you under the free
look provision also will not include any credits applied to your contract.
<PAGE>
Making the Most of Your Contract
Automated dollar-cost averaging
Currently, you can use automated transfers to take advantage of dollar-cost
averaging (investing a fixed amount at regular intervals). For example, you
might transfer a set amount monthly from a relatively conservative subaccount to
a more aggressive one, or to several others, or from the fixed account to one or
more subaccounts. There is no charge for dollar-cost averaging.
This systematic approach can help you benefit from fluctuations in accumulation
unit values caused by fluctuations in the market values of the funds. Since you
invest the same amount each period, you automatically acquire more units when
the market value falls and fewer units when it rises. The potential effect is to
lower your average cost per unit.
<TABLE>
<CAPTION>
How dollar-cost averaging works
<S> <C> <C> <C> <C>
By investing an Amount Accumulation unit Number of units
equal number of Month invested value purchased
dollars each month... Jan $100 $20 5.00
Feb 100 18 5.56
you automatically buy Mar 100 17 5.88
more units when the Apr 100 15 6.67
per unit market price May 100 16 6.25
is low... Jun 100 18 5.56
Jul 100 17 5.88
and fewer units when Aug 100 19 5.26
the per unit market Sept 100 21 4.76
price is high. Oct 100 20 5.00
</TABLE>
You paid an average price of only $17.91 per unit over the 10 months, while the
average market price actually was $18.10.
Dollar-cost averaging does not guarantee that any subaccount will gain in value
nor will it protect against a decline in value if market prices fall. Because
dollar-cost averaging involves continuous investing, your success with this
strategy will depend upon your willingness to continue to invest regularly
through periods of low price levels. Dollar-cost averaging can be an effective
way to help meet your long-term goals. For specific features contact us.
Transferring money between accounts
You may transfer money from any one subaccount, or the fixed account, to another
subaccount before annuity payouts begin. (Certain restrictions apply to
transfers involving the fixed account.) We will process your transfer on the
valuation date we receive your request. We will value your transfer at the next
accumulation unit value calculated after we receive your request. There is no
charge for transfers. Before making a transfer, you should consider the risks
involved in switching investments.
We may suspend or modify transfer privileges at any time. Excessive trading
activity can disrupt fund management strategy and increase expenses, which are
borne by all contract owners who allocated purchase payments to the fund
regardless of their transfer activity. We may apply modifications or
restrictions in any reasonable manner to prevent transfers we believe will
disadvantage other contract owners. (For information on transfers after annuity
payouts begin, see "Transfer policies" below.)
Transfer policies
o Before annuity payouts begin, you may transfer contract values between the
subaccounts, or from the subaccounts to the fixed account at any time.
However, if you made a transfer from the fixed account to the subaccounts,
you may not make a transfer from any subaccount back to the fixed account
until the next contract anniversary.
o You may transfer contract values from the fixed account to the subaccounts
once a year during a 31-day transfer period starting on each contract
anniversary (except for automated transfers, which can be set up at any
time for certain transfer periods subject to certain minimums).
o If we receive your request within 30 days before the contract anniversary
date, the transfer from the fixed account to the subaccounts will be
effective on the anniversary.
o If we receive your request on or within 30 days after the contract
anniversary date, the transfer from the fixed account to the subaccounts
will be effective on the valuation date we receive it.
o We will not accept requests for transfers from the fixed account at any
other time.
o Once annuity payouts begin, you may not make transfers to or from the fixed
account, but you may make transfers once per contract year among the
subaccounts. During the annuity payout period, you cannot invest in more
than five subaccounts at any one time unless we agree otherwise.
<PAGE>
How to request a transfer or surrender
1 Send your name, contract number, Social Security Number or Taxpayer
By letter: Identification Number and signed request for a transfer or surrender
to:
Regular mail:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Express mail:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
Minimum amount
Transfers or
surrenders: $250 or entire account balance
Maximum amount
Transfers or
surrenders: Contract value
2 We can help you set up automated transfers among your
By automated subaccounts or fixed account or partial surrenders
transfers and from the accounts.
automated partial You can start or stop this service by written request
surrenders: or other method acceptable to us. You must allow 30
days for us to change any instructions that are
currently in place.
o Automated transfers from the fixed account to any one of the
subaccounts may not exceed an amount that, if continued, would
deplete the fixed account within 12 months.
o Automated surrenders may be restricted by applicable law under some
contracts.
o You may not make additional purchase payments if automated partial
surrenders are in effect.
o Automated partial surrenders may result in IRS taxes and penalties on
all or part of the amount surrendered.
Minimum amount
Transfers or
surrenders: $50
3 Call between 7 a.m. and 6 p.m. Central time:
By phone:
800-437-0602
TTY service for the hearing impaired:
1-800-285-8846 (toll free)
Minimum amount
Transfers or
surrenders: $250 or entire account balance
Maximum amount
Transfers: Contract value
Surrenders: $50,000
We answer telephone requests promptly, but you may experience delays when the
call volume is unusually high. If you are unable to get through, use the mail
procedure as an alternative.
We will honor any telephone transfer or surrender requests that we believe are
authentic and we will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. We will not
allow a telephone surrender within 30 days of a phoned-in address change. As
long as we follow the procedures, we (and our affiliates) will not be liable for
any loss resulting from fraudulent requests.
Telephone transfers and surrenders are automatically available. You may request
that telephone transfers and surrenders not be authorized from your account by
writing to us.
<PAGE>
Surrenders
You may surrender all or part of your contract at any time before annuity
payouts begin by sending us a written request or calling us. We will process
your surrender request on the valuation date we receive it. For total
surrenders, we will compute the value of your contract at the next accumulation
unit value calculated after we receive your request. We may ask you to return
the contract. You may have to pay surrender charges (see "Charges - Surrender
charge") and IRS taxes and penalties (see "Taxes"). You cannot make surrenders
after annuity payouts begin.
Surrender policies
If you have a balance in more than one account and you request a partial
surrender, we will withdraw money from all your subaccounts and/or the fixed
account in the same proportion as your value in each account correlates to your
total contract value, unless you request otherwise. The minimum contract value
after partial surrender is $600.
Receiving payment
By regular or express mail:
o payable to you;
o mailed to address of record.
NOTE: We will charge you a fee if you request express mail delivery.
By wire:
o request that payment be wired to your bank;
o bank account must be in the same ownership as your contract; and
o pre-authorization required.
For instructions, contact us.
Normally, we will send the payment within seven days after receiving your
request. However, we may postpone the payment if:
- -- the surrender amount includes a purchase payment check that has not cleared;
- -- the NYSE is closed, except for normal holiday and weekend closings;
- -- trading on the NYSE is restricted, according to SEC rules;
- -- an emergency, as defined by SEC rules, makes it impractical to sell
securities or value the net assets of the accounts; or
- -- the SEC permits us to delay payment for the protection of security holders.
<PAGE>
TSA -- Special Surrender Provisions
Participants in Tax-Sheltered Annuities: The Code imposes certain restrictions
on your right to receive early distributions from a TSA:
o Distributions attributable to salary reduction contributions (plus
earnings) made after Dec. 31, 1988, or to transfers or rollovers from other
contracts, may be made from the TSA only if:
-- you are at least age 59 1/2;
-- you are disabled as defined in the Code;
-- you separated from the service of the employer who purchased the
contract; or -- the distribution is because of your death.
o If you encounter a financial hardship (as defined by the Code), you may
receive a distribution of all contract values attributable to salary
reduction contributions made after Dec. 31, 1988, but not the earnings on
them.
o Even though a distribution may be permitted under the above rules, it may
be subject to IRS taxes and penalties (see "Taxes").
o The employer must comply with certain nondiscrimination requirements for
certain types of contributions under a TSA contract to be excluded from
taxable income. You should consult your employer to determine whether the
nondiscrimination rules apply to you.
o The above restrictions on distributions do not affect the availability of
the amount credited to the contract as of Dec. 31, 1988. The restrictions
also do not apply to transfers or exchanges of contract value within the
contract, or to another registered variable annuity contract or investment
vehicle available through the employer.
o If the contract has a loan provision, the right to receive a loan as
described in detail in your contract.
<PAGE>
Changing Ownership
You may change ownership of your nonqualified annuity at any time by completing
a change of ownership form we approve and sending it to our office. The change
will become binding upon us when we receive and record it. We will honor any
change of ownership request that we believe is authentic and we will use
reasonable procedures to confirm authenticity. If we follow these procedures, we
will not take any responsibility for the validity of the change.
If you have a nonqualified annuity, you may incur income tax liability by
transferring, assigning or pledging any part of it. (See "Taxes.")
If you have a qualified annuity, you may not sell, assign, transfer, discount or
pledge your contract as collateral for a loan, or as security for the
performance of an obligation or for any other purpose except as required or
permitted by the Code. However, if the owner is a trust or custodian, or an
employer acting in a similar capacity, ownership of a contract may be
transferred to the annuitant.
<PAGE>
Benefits in Case of Death
We will pay the death benefit to your beneficiary upon the earlier of your death
or the annuitant's death. If a contract has more than one person as the owner,
we will pay benefits upon the first to die of any owner or the annuitant.
If you or the annuitant die before annuity payouts begin while this contract is
in force, we will pay the beneficiary as follows:
If both you and the annuitant are age 80 or younger on the date of death, the
beneficiary receives the greatest of:
o the contract value;
o purchase payments, minus any "adjusted partial surrenders"; or
o the contract value as of the most recent sixth contract anniversary, plus
any purchase payments paid and minus any "adjusted partial surrenders"
since that anniversary.
If either you or the annuitant are age 81 or older on the date of death, the
beneficiary receives the greater of:
o the contract value; or
o purchase payments minus any "adjusted partial surrenders."
Adjusted partial surrenders: We calculate an "adjusted partial surrender" for
each partial surrender as the product of (a) times (b) where
(a) is the ratio of the amount of the partial surrender
(including any applicable surrender charge) to the contract
value on the date of (but prior to) the partial surrender; and
(b) is the death benefit on the date of (but prior to) the
partial surrender.
Example of death benefit calculation when the owner and annuitant are age 80 or
younger:
o The contract is purchased with a payment of $20,000 on Jan. 1, 2000.
o On Jan 1, 2006 (the 6th contract anniversary) the contract value has
grown to $30,000.
o March 1, 2006 the contract value has fallen to $28,000 at which point
the owner takes a $1,500 partial surrender, leaving a contract value
of $26,500.
The death benefit on March 1, 2006 is calculated as follows:
The contract value on the most recent 6th contract anniversary: $30,000.00
plus any purchase payments paid since that anniversary: + 0.00
minus any "adjusted partial surrenders" taken since that anniversary,
calculated as: $1,500 x $30,000 =
$28,000 - 1,607.14
------------
for a death benefit of: $ 28,392.86
If your spouse is sole beneficiary under a nonqualified annuity and you die
before the settlement date, your spouse may keep the contract as owner. To do
this your spouse must, within 60 days after we receive proof of death, give us
written instructions to keep the contract in force.
Under a qualified annuity, if the annuitant dies before the Code requires
distributions to begin, and the spouse is the only beneficiary, the spouse may
keep the contract as owner until the date on which the annuitant would have
reached age 70 1/2 or any other date permitted by the Code. To do this, the
spouse must give us written instructions within 60 days after we receive proof
of death.
Payments: Under a nonqualified annuity we will pay the beneficiary in a single
sum unless you give us other written instructions. A death benefit paid in a
single sum will be reduced by the amount of any purchase payment credits applied
to the contract within 12 months of the date of death. (See "Valuing Your
Investment-Purchase payment credits.") We must fully distribute the death
benefit within five years of your death. However, the beneficiary may receive
payouts under any annuity payout plan available under this contract if:
o the beneficiary asks us in writing within 60 days after we receive proof
of death; and
o payouts begin no later than one year after your death, or other date as
permitted by the Code; and
o the payout period does not extend beyond the beneficiary's life or
life expectancy.
When paying the beneficiary, we will process the death claim on the valuation
date our death claim requirements are fulfilled. We will determine the
contract's value at the next accumulation unit value calculated after our death
claim requirements are fulfilled. We pay interest, if any, from the date of
death at a rate no less than required by law. We will mail payment to the
beneficiary within seven days after our death claim requirements are fulfilled.
Other rules may apply to qualified annuities. (See "Taxes.")
<PAGE>
The Annuity Payout Period
As owner of the contract, you have the right to decide how and to whom annuity
payouts will be made starting at the settlement date. You may select one of the
annuity payout plans outlined below, or we may mutually agree on other payout
arrangements.
The amount available for payouts under the plan you select is the contract value
on your settlement date (less any applicable premium tax). We do not deduct any
surrender charges under the payout plans listed below.
You also decide whether we will make annuity payouts on a fixed or variable
basis, or a combination of fixed and variable. The amounts available to purchase
payouts under the plan you select is the contract value on your settlement date
(less any applicable premium tax). You may reallocate this contract value to the
fixed account to provide fixed dollar payouts and/or among the subaccounts to
provide variable annuity payouts. During the annuity payout period, you cannot
invest in more than five subaccounts at any one time unless we agree otherwise.
Amounts of fixed and variable payouts depend on:
o the annuity payout plan you select;
o the annuitant's age and, in most cases, sex;
o the annuity table in the contract; and
o the amounts you allocated to the accounts at settlement.
In addition, for variable payouts only, amounts depend on the investment
performance of the subaccounts you select. These payouts will vary from month to
month because the performance of the funds will fluctuate. (In the case of fixed
annuities, payouts remain the same from month to month.)
For information with respect to transfers between accounts after annuity payouts
begin, see "Making the Most of Your Contract -- Transfer policies."
Annuity table
The annuity table in your contract shows the amount of the first monthly payment
for each $1,000 of contract value according to the age and, when applicable, the
sex of the annuitant. (Where required by law, we will use a unisex table of
settlement rates.) The table assumes that the contract value is invested at the
beginning of the annuity payout period and earns a 5% rate of return, which is
reinvested and helps to support future payouts.
Substitution of 3.5% table
If you ask us at least 30 days before the settlement date, we will substitute an
annuity table based on an assumed 3.5% investment rate for the 5% table in the
contract. The assumed investment rate affects both the amount of the first
payout and the extent to which subsequent payouts increase or decrease. Using
the 5% table results in a higher initial payment, but later payouts will
increase more slowly when annuity unit values rise and decrease more rapidly
when they decline.
Annuity payout plans
You may choose any one of these annuity payout plans by giving us written
instructions at least 30 days before contract values are used to purchase the
payout plan:
o Plan A -- Life annuity - no refund: We make monthly payouts until the
annuitant's death. Payouts end with the last payout before the annuitant's
death. We will not make any further payouts. This means that if the
annuitant dies after we have made only one monthly payout, we will not make
any more payouts.
o Plan B -- Life annuity with five, 10 or 15 years certain: We make monthly
payouts for a guaranteed payout period of five, 10 or 15 years that you
elect. This election will determine the length of the payout period to the
beneficiary if the annuitant should die before the elected period expires.
We calculate the guaranteed payout period from the settlement date. If the
annuitant outlives the elected guaranteed payout period, we will continue
to make payouts until the annuitant's death.
o Plan C -- Life annuity - installment refund: We make monthly payouts until
the annuitant's death, with our guarantee that payouts will continue for
some period of time. We will make payouts for at least the number of months
determined by dividing the amount applied under this option by the first
monthly payout, whether or not the annuitant is living.
o Plan D -- Joint and last survivor life annuity - no refund: We make monthly
payouts while both the annuitant and a joint annuitant are living. If
either annuitant dies, we will continue to make monthly payouts at the full
amount until the death of the surviving annuitant. Payouts end with the
death of the second annuitant.
o Plan E -- Payouts for a specified period: We make monthly payouts for a
specific payout period of 10 to 30 years that you elect. We will make
payouts only for the number of years specified whether the annuitant is
living or not. Depending on the selected time period, it is foreseeable
that an annuitant can outlive the payout period selected. During the payout
period, you can elect to have us determine the present value of any
remaining variable payouts and pay it to you in a lump sum. We determine
the present value separately for each subaccount from which you are
currently scheduled to receive payouts. The present value for each
subaccount is equal to the discounted value of the remaining annuity
payouts which are assumed to remain level. The discount rate we use in the
calculation will vary between 5.05% and 7.15% depending on the applicable
assumed investment rate and the fund management fees. A 10% IRS penalty tax
could apply under this payout plan. (See "Taxes.")
Restrictions for some qualified plans: If you purchased a qualified annuity, you
may be required to select a payout plan that provides for payouts:
o over the life of the annuitant;
o over the joint lives of the annuitant and a designated beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o for a period not exceeding the joint life expectancies of the annuitant
and a designated beneficiary.
You have the responsibility for electing a payout plan that complies with your
contract and with applicable law.
If we do not receive instructions: You must give us written instructions for the
annuity payouts at least 30 days before the annuitant's settlement date. If you
do not, we will make payouts under Plan B, with 120 monthly payouts guaranteed.
Contract values that you allocated to the fixed account will provide fixed
dollar payouts and contract values that you allocated among the subaccounts will
provide variable annuity payouts.
If monthly payouts would be less than $20: We will calculate the amount of
monthly payouts at the time the contract value is used to purchase a payout
plan. If the calculations show that monthly payouts would be less than $20, we
have the right to pay the contract value to you in a lump sum or to change the
frequency of the payouts.
Death after annuity payouts begin
If you or the annuitant die after annuity payouts begin, we will pay any amount
payable to the beneficiary as provided in the annuity payout plan in effect.
<PAGE>
Taxes
Generally, under current law, any increase in your contract value is taxable to
you only when you receive a payout or surrender (see detailed discussion below).
Any portion of the annuity payouts and any surrenders you request that represent
ordinary income are normally taxable. We will send you a tax information
reporting form for any year in which we made a taxable distribution according to
our records.
Qualified annuities: We designed this contract for use with qualified retirement
plans. Special rules apply to these retirement plans. Your rights to benefits
may be subject to the terms and conditions of these retirement plans regardless
of the terms of the contract.
Adverse tax consequences may result if you do not ensure that contributions,
distributions and other transactions under the contract comply with the law.
Qualified annuities have minimum distribution rules that govern the timing and
amount of distributions during your life and after your death. You should refer
to your retirement plan or adoption agreement or consult a tax advisor for more
information about your distribution rules.
Annuity payouts under nonqualified annuities: A portion of each payout will be
ordinary income and subject to tax, and a portion of each payout will be
considered a return of part of your investment and will not be taxed. All
amounts you receive after your investment in the contract is fully recovered
will be subject to tax.
Tax law requires that all nonqualified deferred annuities issued by the same
company (and possibly its affiliates) to the same owner during a calendar year
be taxed as a single, unified contract when you take distributions from any one
of those contracts.
Annuity payouts under qualified annuities: Under a qualified annuity, the entire
payout generally is includable as ordinary income and is subject to tax except
to the extent that contributions were made with after-tax dollars. If you or
your employer invested in your contract with deductible or pre-tax dollars as
part of a qualified retirement plan, such amounts are not considered to be part
of your investment in the contract and will be taxed when paid to you.
Surrenders: If you surrender part or all of your contract before your annuity
payouts begin, your surrender payment will be taxed to the extent that the value
of your contract immediately before the surrender exceeds your investment. You
also may have to pay a 10% IRS penalty for surrenders you make before reaching
age 59 1/2 unless certain exceptions apply. For qualified annuities, other
penalties may apply if you surrender your contract before your plan specifies
that you can receive payouts.
Death benefits to beneficiaries: The death benefit under a contract is not
tax-exempt. Any amount your beneficiary receives that represents previously
deferred earnings within the contract is taxable as ordinary income to the
beneficiary in the years he or she receives the payments.
Annuities owned by corporations, partnerships or trusts: For nonqualified
annuities any annual increase in the value of annuities held by such entities
generally will be treated as ordinary income received during that year. This
provision is effective for purchase payments made after Feb. 28, 1986. However,
if the trust was set up for the benefit of a natural person only, the income
will remain tax-deferred.
Penalties: If you receive amounts from your contract before reaching age 59 1/2,
you may have to pay a 10% IRS penalty on the amount includable in your ordinary
income. However, this penalty will not apply to any amount received by you or
your beneficiary:
o because of your death;
o because you become disabled (as defined in the Code);
o if the distribution is part of a series of substantially equal periodic
payments, made at least annually, over your life or life expectancy (or
joint lives or life expectancies of you and your beneficiary); or
o if it is allocable to an investment before Aug. 14, 1982 (except for
qualified annuities).
For a qualified annuity, other penalties or exceptions may apply if you
surrender your contract before your plan specifies that payouts can be made.
Withholding, generally: If you receive all or part of the contract value, we may
deduct withholding against the taxable income portion of the payment. Any
withholding represents a prepayment of your tax due for the year. You take
credit for these amounts on your annual tax return.
If the payment is part of an annuity payout plan, we generally compute the
amount of withholding using payroll tables. You may provide us with a statement
of how many exemptions to use in calculating the withholding. As long as you've
provided us with a valid Social Security Number or Taxpayer Identification
Number, you can elect not to have any withholding occur.
If the distribution is any other type of payment (such as a partial or full
surrender), we compute withholding using 10% of the taxable portion. Similar to
above, as long as you have provided us with a valid Social Security Number or
Taxpayer Identification Number, you can elect not to have this withholding
occur.
Some states also impose withholding requirements similar to the federal
withholding described above. If this should be the case, we may deduct state
withholding from any payment from which we deduct federal withholding. The
withholding requirements may differ if we are making payment to a non-U.S.
citizen or if we deliver the payment outside the United States.
Withholding from qualified annuities: If you receive directly all or part of the
contract value from a qualified annuity (except an IRA or SEP), mandatory 20%
federal income tax withholding (and possibly state income tax withholding)
generally will be imposed at the time we make payout. This mandatory withholding
is in place of the elective withholding discussed above. This mandatory
withholding will not be imposed if:
o instead of receiving the distribution check, you elect to have the
distribution rolled over directly to an IRA or another eligible plan;
o the payout is one in a series of substantially equal periodic payouts, made
at least annually, over your life or life expectancy (or the joint lives or
life expectancies of you and your designated beneficiary) or over a
specified period of 10 years or more; or
o the payout is a minimum distribution required under the Code.
Payments we make to a surviving spouse instead of being directly rolled over to
an IRA also may be subject to mandatory 20% income tax withholding.
State withholding also may be imposed on taxable distributions.
Transfer of ownership of a nonqualified annuity: If you transfer a nonqualified
annuity without receiving adequate consideration, the transfer is a gift and
also may be a surrender for federal income tax purposes. If the gift is a
currently taxable event for income tax purposes, the original owner will be
taxed on the amount of deferred earnings at the time of the transfer and also
may be subject to the 10% IRS penalty discussed earlier. In this case, the new
owner's investment in the contract will be the value of the contract at the time
of the transfer.
Collateral assignment of a nonqualified annuity: If you collaterally assign or
pledge your contract, earnings on purchase payments you made after Aug. 13, 1982
will be taxed to you like a surrender.
Important: Our discussion of federal tax laws is based upon our understanding of
current interpretations of these laws. Federal tax laws or current
interpretations of them may change. For this reason and because tax consequences
are complex and highly individual and cannot always be anticipated, you should
consult a tax advisor if you have any questions about taxation of your contract.
Tax qualification: We intend that the contract qualify as an annuity for federal
income tax purposes. To that end, the provisions of the contract are to be
interpreted to ensure or maintain such tax qualification, in spite of any other
provisions of the contract. We reserve the right to amend the contract to
reflect any clarifications that may be needed or are appropriate to maintain
such qualification or to conform the contract to any applicable changes in the
tax qualification requirements. We will send you a copy of any amendments.
<PAGE>
Voting Rights
As a contract owner with investments in the subaccounts, you may vote on
important fund policies until annuity payouts begin. Once they begin, the person
receiving them has voting rights. We will vote fund shares according to the
instructions of the person with voting rights.
Before annuity payouts begin, the number of votes you have is determined by
applying your percentage interest in each subaccount to the total number of
votes allowed to the subaccount.
After annuity payouts begin, the number of votes you have is equal to:
o the reserve held in each subaccount for your contract; divided by
o the net asset value of one share of the applicable fund.
As we make annuity payouts, the reserve for the contract decreases; therefore,
the number of votes also will decrease.
We calculate votes separately for each subaccount. We will send notice of
shareholders' meetings, proxy materials and a statement of the number of votes
to which the voter is entitled. We will vote shares for which we have not
received instructions in the same proportion as the votes for which we received
instructions. We also will vote the shares for which we have voting rights in
the same proportion as the votes for which we received instructions.
<PAGE>
Substitution of Investments
We may substitute the funds in which the subaccounts invest if:
o laws or regulations change,
o existing funds become unavailable, or
o in our judgment, the funds no longer are suitable for the subaccounts.
If any of these situations occur and if we believe it is in the best interest of
persons having voting rights under the contract, we have the right to substitute
funds other than those currently listed in this prospectus for other funds.
We may also:
o add new subaccounts;
o combine any two or more subaccounts;
o add subaccounts investing in additional funds;
o transfer assets to and from the subaccounts or the variable account; and
o eliminate or close any subaccounts.
In the event of substitution or any of these changes, we may amend the contract
and take whatever action is necessary and appropriate without your consent or
approval. However, we will not make any substitution or change without the
necessary approval of the SEC and state insurance departments. We will notify
you of any substitution or change.
<PAGE>
About the Service Providers
Issuer and principal underwriter
IDS Life issues and is the principal underwriter for the contracts. IDS Life is
a stock life insurance company organized in 1957 under the laws of the State of
Minnesota and is located at IDS Tower 10, Minneapolis, MN 55440-0010. IDS Life
conducts a conventional life insurance business.
IDS Life is a wholly-owned subsidiary of AEFC, which itself is a wholly-owned
subsidiary of American Express Company, a financial services company
headquartered in New York City. The AEFC family of companies offers not only
insurance and annuities, but also mutual funds, investment certificates, and a
broad range of financial management services. American Express Financial
Advisors Inc. (AEFA) serves individuals and businesses through its nationwide
network of more than 180 offices and 9200 advisors.
IDS Life will pay commissions for sales of the contracts of up to 7% of the
total purchase payments to AEFA. This revenue is used to cover distribution
costs that include compensation to advisors and field leadership for the selling
advisors. These commissions consist of a combination of time of sale and
on-going service/trail commissions (which, when totaled, could exceed 7% of
purchase payments). From time to time, IDS Life will pay or permit other
promotional incentives, in cash or credit or other compensation.
Legal proceedings
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and AEFC do business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. IDS Life and AEFC, like other life and health insurers, from time
to time are involved in such litigation. On December 13, 1996, an action
entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance Company
and American Express Financial Corporation was commenced in Minnesota state
court. The action was brought by individuals who replaced an existing IDS Life
insurance policy with a new IDS Life policy. The plaintiffs purport to represent
a class consisting of all persons who replaced existing IDS Life policies with
new policies from and after January 1, 1985. The complaint puts at issue various
alleged sales practices and misrepresentations, alleged breaches of fiduciary
duties and alleged violations of consumer fraud statutes. IDS Life and AEFC
filed an answer to the complaint on February 18, 1997, denying the allegations.
A second action, entitled Arnold Mork, Isabella Mork, Ronald Melchart and Susan
Melchart vs. IDS Life Insurance Company and American Express Financial
Corporation was commenced in the same court on March 21,1997. In addition to
claims that are included in the Benacquisto lawsuit, the second action includes
an allegation of improper replacement of an existing IDS Life annuity contract.
A subsequent class action, Richard Thoresen and Elizabeth Thoresen vs. AEFC,
American Partners Life Insurance Company, American Enterprise Life Insurance
Company, American Centurion Life Assurance Company, IDS Life Insurance Company
and IDS Life Insurance Company of New York, was filed in the same court on
October 13, 1998 alleging that the sale of annuities in tax-deferred
contributory retirement investment plans (e.g. IRAs) was done through deceptive
marketing practices, which IDS Life denies. Plaintiffs in each of the above
actions seek damages in an unspecified amount and also seek to establish a
claims resolution facility for the determination of individual issues.
IDS Life and AEFC believe they have meritorious defenses to the claims raised in
the lawsuits. The outcome of any litigation cannot be predicted with certainty.
In the opinion of management, however, the ultimate resolution of the above
lawsuits and others filed against IDS Life should not have a material adverse
effect on IDS Life's consolidated financial position.
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of IDS Life and the
Variable Account. All of the major systems used by IDS Life and by the Variable
Account are maintained by AEFC and are utilized by multiple subsidiaries and
affiliates of AEFC. IDS Life's and the Variable Account's businesses are heavily
dependent upon AEFC's computer systems and have significant interactions with
systems of third parties.
A comprehensive review of AEFC's computer systems and business processes has
been conducted to identify the major systems that could be affected by the Year
2000 issue. Steps have been taken to resolve potential problems including
modification to existing software and the purchase of new software. AEFC's
target date for substantially completing its program of corrective measures on
internal business critical systems was Dec. 31, 1998. As of June 30, 1999, AEFC
completed its program of corrective measures on its internal systems and
applications, including Year 2000 compliance testing. The Year 2000 readiness of
unaffiliated investment managers and other third parties whose system failures
could have an impact on IDS Life's and the Variable Account's operations
continues to be evaluated. The failure of external parties to resolve their own
Year 2000 issues in a timely manner could result in a material financial risk to
AEFC, IDS Life or the Variable Account.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential Year 2000 exposure is gathered.
<PAGE>
Table of Contents of the Statement of Additional Information
Performance Information p.
Calculating Annuity Payouts p.
Rating Agencies p.
Principal Underwriter p.
Independent Auditors p.
Financial Statements
<PAGE>
Please check the appropriate box to receive a copy of the Statement of
Additional Information for:
- -- American Express Retirement Advisor Variable AnnuitySM
- -- American Express Variable Portfolio Funds
- -- AIM Variable Insurance Funds, Inc.
- -- American Century Variable Portfolios, Inc.
- -- Fidelity Variable Insurance Products Funds - Service Class
- -- Franklin Templeton Variable Insurance Products Trust - Class 2
- -- Goldman Sachs Variable Insurance Trust (VIT)
- -- Lazard Retirement Series, Inc.
- -- Putnam Variable Trust
- -- Royce Capital Fund
- -- Third Avenue Variable Series Trust
- -- Wanger Advisors Trust
- -- Warburg Pincus Trust
Mail your request to:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
We will mail your request to:
Your name _____________________________________________
Address _______________________________________________
City _____________________ State _________ Zip ________
<PAGE>
Prospectus
September 15, 1999
American Express Retirement Advisor Variable AnnuitySM - Band 3
Individual flexible premium deferred combination fixed/variable annuity for:
o current or retired employees of American Express Financial Corporation or its
subsidiaries and their spouses (employees),
o current or retired American Express financial advisors and their
spouses (advisors), and
o individuals investing an initial payment of $1 million (other individuals).
IDS Life Variable Account 10
Issued by: IDS Life Insurance Company (IDS Life)
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: 800-437-0602
http://www.americanexpress.com/advisors
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
<PAGE>
o American Express Variable Portfolio Funds
o AIM Variable Insurance Funds, Inc.
o American Century Variable Portfolios, Inc.
o Fidelity Variable Insurance Products Funds - Service Class
o Franklin Templeton Variable Insurance Products Trust - Class 2
o Goldman Sachs Variable Insurance Trust (VIT)
o Lazard Retirement Series, Inc.
o Putnam Variable Trust
o Royce Capital Fund
o Third Avenue Variable Series Trust
o Wanger Advisors Trust
o Warburg Pincus Trust
<PAGE>
Please read the prospectuses carefully and keep them for future reference. This
contract is available for qualified and nonqualified plans.
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
An investment in this contract is not a deposit of a bank or financial
institution and is not insured or guaranteed by the federal deposit insurance
corporation or any other government agency. An investment in this contract
involves investment risk including the possible loss of principal.
A Statement of Additional Information (SAI), dated the same date as this
prospectus, is incorporated by reference into this prospectus. It is filed with
the SEC and is available without charge by contacting us at the telephone number
above or by completing and sending the order form on the last page of this
prospectus. The table of contents of the SAI is on the last page of this
prospectus.
<PAGE>
Table of Contents
Key Terms
The Contract in Brief
Expense Summary
Condensed Financial Information (Unaudited)
Financial Statements
Performance Information
The Variable Account and the Funds
The Fixed Account
Buying Your Contract
Charges
Valuing Your Investment
Making the Most of Your Contract
Surrenders
TSA -- Special Surrender Provisions
Changing Ownership
Benefits in Case of Death
The Annuity Payout Period
Taxes
Voting Rights
Substitution of Investments
About the Service Providers
Year 2000
Table of Contents of the Statement of Additional Information
<PAGE>
Key Terms
These terms can help you understand details about your contract.
Accumulation unit -- A measure of the value of each subaccount before annuity
payouts begin.
Annuitant -- The person on whose life or life expectancy the annuity payouts are
based.
Annuity payouts -- An amount paid at regular intervals under one of several
plans.
Beneficiary -- The person you designate to receive annuity benefits in case of
the owner's or annuitant's death while the contract is in force and before
annuity payouts begin.
Close of business -- When the New York Stock Exchange (NYSE) closes, normally 4
p.m. Eastern time.
Contract value -- The total value of your contract before we deduct any
applicable charges.
Contract year -- A period of 12 months, starting on the effective date of your
contract and on each anniversary of the effective date.
Fixed account -- An account to which you may allocate purchase payments. Amounts
you allocate to this account earn interest at rates that we declare
periodically.
Funds -- Mutual funds and/or portfolios that are investment options under your
contract, each with a different investment objective. You may allocate your
purchase payments into subaccounts investing in shares of any or all of these
funds.
Owner (you, your) -- The person who controls the contract (decides on investment
allocations, transfers, payout options, etc.). Usually, but not always, the
owner is also the annuitant. The owner is responsible for taxes, regardless of
whether he or she receives the contract's benefits.
Qualified annuity -- A contract that you purchase for one of the following
retirement plans that is subject to applicable federal law and any rules of the
plan itself:
o Individual Retirement Annuities (IRAs)
o Simplified Employee Pension (SEP) plans
o Section 401(k) plans
o Custodial and trusteed pension and profit sharing plans
o Tax-Sheltered Annuities (TSAs)
All other contracts are considered nonqualified annuities.
Settlement date -- The date when annuity payouts are scheduled to begin.
Surrender value -- The amount you are entitled to receive if you make a full
surrender from your contract. It is the contract value minus any applicable
charges.
Valuation date -- Any normal business day, Monday through Friday, that the NYSE
is open. Each valuation date ends at the close of business. We calculate the
value of each subaccount at the close of business on each valuation date.
Variable account -- Consists of separate subaccounts to which you may allocate
purchase payments; each invests in shares of one fund. The value of your
investment in each subaccount changes with the performance of the particular
fund.
<PAGE>
The Contract in Brief
Purpose: The purpose of the contract is to allow you to
accumulate money for retirement. You do this by making
one or more investments (purchase payments) that may
earn returns that increase the value of the contract.
The contract provides lifetime or other forms of payouts
beginning at a specified date (the settlement date).
Free look period: You may return your contract to our office within 10
days after it is delivered to you and receive a full
refund of the contract value. No charges will be
deducted. However, you bear the investment risk from the
time of purchase until you return the contract; the
refund amount may be more or less than the payment you
made. (Exception: If the law requires, we will refund
all of your purchase payments.)
Accounts: Currently, you may allocate your purchase payments among
any or all of:
o the subaccounts, each of which invests in a fund with a
particular investment objective. The value of each
subaccount varies with the performance of the particular
fund in which it invests. We cannot guarantee that the
value at the settlement date will equal or exceed the
total purchase payments you allocate to the subaccounts.
(p. __)
o the fixed account, which earns interest at a rate that
we adjust periodically. (p. __)
Buying your contract: We will help you complete and submit an application.
Applications are subject to acceptance at our office.
You may buy a nonqualified annuity or a qualified
annuity. After your initial purchase payment, you have
the option of making additional purchase payments in the
future.
o Minimum initial purchase payment for employees/advisors
-- $2,000 ($1,000 for qualified annuities) unless you
pay in installments by means of a bank authorization or
under a group billing arrangement such as a payroll
deduction.
o Minimum initial purchase payment for other individuals
-- $1,000,000.
o Minimum additional purchase payment -- $50.
o Minimum installment purchase payment -- $50 monthly;
$23.08 biweekly (scheduled payment plan billing).
o Maximum first-year purchase payments for
employees/advisors -- $100,000 to $2,000,000 depending
on your age.
o Maximum first-year purchase payments for other
individuals -- $1,000,000 to $2,000,000 depending on
your age.
o Maximum purchase payment for each subsequent year for
employees/advisors -- $50,000 to $100,000 depending upon
your age.
o Maximum purchase payment for each subsequent year for
other individuals -- $100,000. (p. __)
Transfers: Subject to certain restrictions you currently may
redistribute your money among the subaccounts and the
fixed account without charge at any time until annuity
payouts begin, and once per contract year among the
subaccounts after annuity payouts begin. You may
establish automated transfers among the fixed account
and subaccounts. Fixed account transfers are subject to
special restrictions. (p. __)
Surrenders: You may surrender all or part of your contract value at
any time before the settlement date. You also may
establish automated partial surrenders. Surrenders may
be subject to tax penalties (including a 10% IRS penalty
if you surrender prior to your reaching age 59 1/2) and
may have other tax consequences; also, certain
restrictions apply. (p. --)
Changing ownership: You may change ownership of a nonqualified annuity by
written instruction, but this may have federal income
tax consequences. Restrictions apply to changing
ownership of a qualified annuity. (p. __)
Benefits in
case of death: If you or the annuitant die before annuity payouts
begin, we will pay the beneficiary an amount at least
equal to the contract value. (p. __)
Annuity Payouts: You can apply your contract value to an annuity payout
plan that begins on the settlement date. You may choose
from a variety of plans to make sure that payouts
continue as long as you like. If you purchased a
qualified annuity, the payout schedule must meet the
requirements of the qualified plan. We can make payouts
on a fixed or variable basis, or both. Total monthly
payouts may include amounts from each subaccount and the
fixed account. During the annuity payout period, you
cannot be invested in more than five subaccounts at any
one time unless we agree otherwise. (p. --)
Taxes: Generally, your contract grows tax-deferred until you
surrender it or begin to receive payouts. (Under certain
circumstances, IRS penalty taxes may apply.) Even if you
direct payouts to someone else, you will be taxed on the
income if you are the owner. (p. __)
Charges:
o $30 annual contract administrative charge;
o a 0.55% mortality and expense risk fee;
o any premium taxes that may be imposed on us by state or
local governments (currently, we deduct any applicable
premium tax when you make a full surrender or when
annuity payouts begin); and
o the operating expenses of the funds.
<PAGE>
Expense Summary
The purpose of the following information is to help you understand the various
costs and expenses associated with your contract.
You pay no sales charge when you purchase your contract. We show all costs that
you bear directly or indirectly for the subaccounts and funds below. Some
expenses may vary as we explain under "Charges." Please see the funds'
prospectuses for more information on the operating expenses for each fund.
Contract owner expenses:
Surrender charge 0%
Annual contract administrative charge $30*
* We will waive this charge when your contract value, or total purchase
payments less any payments surrendered, is $50,000 or more on the current
contract anniversary.
Annual subaccount expenses (as a percentage of average subaccount value):
Mortality and expense risk fee 0.55%
<PAGE>
<TABLE>
<CAPTION>
Annual operating expenses of the funds after fee waivers and/or expense
reimbursements, if applicable, as a percentage of average daily net assets
<S> <C> <C> <C> <C>
Management 12b-1 Other
Fees Fees Expenses Total
AXPSM Variable Portfolio - Blue Chip Advantage Fund .56% -- .39 .95%1
AXPSM Variable Portfolio - Bond Fund .60% -- .07 .67%2
AXPSM Variable Portfolio - Capital Resource Fund .59% -- .07 .66%2
AXPSM Variable Portfolio - Cash Management Fund .50% -- .06 .56%2
AXPSM Variable Portfolio - Diversified Equity Income .56% -- .39 .95%1
Fund
AXPSM Variable Portfolio - Extra Income Fund .62% -- .09 .71%2
AXPSM Variable Portfolio - Federal Income Fund .61% -- .27 .88%1
AXPSM Variable Portfolio - Global Bond Fund .83% -- .13 .96%2
AXPSM Variable Portfolio - Growth Fund .63% -- .32 .95%1
AXPSM Variable Portfolio - International Fund .83% -- .15 .98%2
AXPSM Variable Portfolio - Managed Fund .59% -- .04 .63%2
AXPSM Variable Portfolio - New Dimensions Fund .61% -- .06 .67%2
AXPSM Variable Portfolio - Small Cap Advantage Fund .79% -- .44 1.23%1
AXPSM Variable Portfolio - Strategy Aggressive Fund .59% -- .09 .68%2
AIM V.I. Capital Appreciation Fund .62% -- .05 .67%3
AIM V.I. Capital Development Fund --% -- 1.21 1.21%3,4
American Century VP International Fund 1.48% -- -- 1.48%2
American Century VP Value Fund 1.00% -- -- 1.00%2
Fidelity VIP III Growth & Income Portfolio (Service .49% .10 .11 .70%5
Class)
Fidelity VIP III Mid Cap Portfolio (Service Class) .59% .10 .41 1.10%2
Fidelity VIP Overseas Portfolio (Service Class) .74% .10 .13 .97%5
FT VIP Real Estate Securities Fund - Class 2 .52% .25 .02 .79%6, 7
FT VIP Templeton International Smaller Companies 1.00% .25 .10 1.35%6, 7
Fund - Class 2
FT VIP Value Securities Fund - Class 2 .75% .25 .08 1.08%6, 8
Goldman Sachs VIT CORESM Small Cap Equity Fund .75% -- .15 .90%9
Goldman Sachs VIT CORESM U.S. Equity Fund .70% -- .10 .80%9
Goldman Sachs VIT Mid Cap Value Fund .80% -- .15 .95%10
Lazard Retirement International Equity Portfolio .75% .25 .25 1.25%11
Putnam VT International New Opportunities Fund - 1.18% .15 .68 2.01%12
Class IB Shares
Putnam VT Vista Fund - Class IB Shares .65% .15 .12 .92%1
Royce Micro-Cap Portfolio 1.25% -- .10 1.35%13
Third Avenue Value Portfolio .90% -- .40 1.30%14
Wanger International Small Cap 1.27% -- .28 1.55%3
Wanger U.S. Small Cap .96% -- .06 1.02%3
Warburg Pincus Trust - Emerging Growth Portfolio .84% -- .41 1.25%15
</TABLE>
1Based on estimated expenses.
2Annualized operating expenses of funds at Dec. 31, 1998.
3Figures in "Management Fees," "Other Expenses" and "Total" are based on actual
expenses for the fiscal year ended Dec. 31, 1998.
4Had there been no fee waivers or expense reimbursement, expenses would have
been: 0.75%, 0.00%, 5.05% and 5.80%, respectively.
5 Fidelity Management & Research Company agreed to reimburse a portion of the
class' expenses during the period. Without this reimbursement, the Management
Fees, 12b-1 Fee, Other Expenses and Total as a percentage of average net assets
for the following funds would have been: Fidelity VIP Growth & Income Portfolio
(0.49%, 0.10%, 0.12% and 0.71%) and Fidelity VIP Overseas Portfolio (0.74%,
0.10%, 0.17% and 1.01%).
6The figure shown under Management Fees, combines both the Management and
Portfolio Administration Fees. The Portfolio Administration Fee is a direct
expense for the Templeton International Smaller Companies Fund and the Value
Securities Fund; the Real Estate Securities Fund pays for similar services
indirectly through the Management Fee.
7Because no Class 2 shares were issued as of Dec. 31, 1998, figures (other than
rule 12b-1 fees) are based on the Portfolio's Class 1 actual expenses for the
fiscal year ended Dec. 31, 1998 plus Class 2's annual Rule 12b-1 fee of 0.25%.
(While the maximum amount payable under each Portfolio's Class 2 Rule 12b-1 plan
is 0.35% per year of the Portfolio's average daily net assets, the Board of
Trustees of Franklin Templeton Variable Insurance Products Trust has set the
current rate at 0.25% per year).
8The Value Securities Fund commenced operations May 1, 1998, therefore,
Management Fees and Rule 12b-1 Fees are annualized and Other Expenses are
estimated for 1999. (While the maximum amount payable under the Portfolio's
Class 2 Rule 12b-1 plan is 0.35% per year of the Portfolio's average daily net
assets, the Board of Trustees of Franklin Templeton Variable Insurance Products
Trust has set the current rate at 0.25% per year.)
9The Goldman Sachs VIT CORE Small Cap Equity and CORE U.S. Equity Funds'
expenses are based on actual expenses for fiscal year ended Dec. 31, 1998. The
Investment Adviser to the Goldman Sachs VIT CORE Small Cap Equity and CORE U.S.
Equity Funds has voluntarily agreed to reduce or limit certain "Other Expenses"
of such funds (excluding management fees, taxes, interest and brokerage fees,
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.15% and 0.10% per annum of such funds' average daily net
assets, respectively. The expenses shown include this reimbursement. If not
included, the "Other Expenses" and "Total" for the Goldman Sachs VIT CORE Small
Cap Equity and CORE U.S. Equity Funds would be 3.17% and 3.92% and 2.13% and
2.83%, respectively. The reductions or limits may be discontinued or modified by
the investment adviser in their discretion at any time.
10The Goldman Sachs VIT Mid Cap Value Fund's expenses are estimated due to the
fund being in existence for less than ten months. The Investment Adviser to the
Goldman Sachs VIT Mid Cap Value Fund has voluntarily agreed to reduce or limit
certain "Other Expenses" of such funds (excluding management fees, taxes,
interest and brokerage fees, litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.15% per annum of such fund's
average daily net assets, respectively. The expenses shown include this
reimbursement. If not included, the "Other Expenses" and "Total" for the Goldman
Sachs VIT Mid Cap Value Fund would be 0.57% and 1.37%, respectively. The
reductions or limits may be discontinued or modified by the investment adviser
in their discretion at any time.
11The Portfolio's Investment Manager agrees to waive its fees and/or reimburse
the Portfolio through Dec. 31, 1999 to the extent total Portfolio annual
expenses exceed 1.25% of the Portfolio's average daily net assets. Absent fee
waivers and/or reimbursements, the Management Fees, 12b-1 Fees, Other Expenses
and Total as a percentage of average net assets for fiscal year ended Dec. 31,
1998 would have been: (0.75%, 0.25%, 47.67% and 48.67%).
12The Management Fees and Total expenses shown in the table reflect an expense
limitation. In the absence of an expense limitation, Management Fees and Total
expenses would have been 1.20% and 2.03%, respectively.
13Expense ratios are shown after fee waivers and expense reimbursements by the
investment advisor. The expense ratios before the waivers and reimbursements
would have been 1.25%, 1.34% and 2.59%.
14The Fund's expenses are estimated because the fund had not commenced
operations as of Aug. 10, 1999.
15Expense ratios are shown after fee waivers and expense reimbursements by the
investment adviser. The expense ratios before the waivers and reimbursements
would have been: (0.90%, 0.00%, 0.51% and 1.41%).
<PAGE>
Example:*
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and full surrender, no surrender or selection of an annuity payout plan
at the end of each time period.
<TABLE>
<CAPTION>
<S> <C> <C>
1 year 3 years
AXPSM Variable Portfolio - Blue Chip Advantage Fund $16.23 $50.34
AXPSM Variable Portfolio - Bond Fund 13.36 41.55
AXPSM Variable Portfolio - Capital Resource Fund 13.25 41.24
AXPSM Variable Portfolio - Cash Management Fund 12.23 38.09
AXPSM Variable Portfolio - Diversified Equity Income Fund 16.23 50.34
AXPSM Variable Portfolio - Extra Income Fund 13.77 42.81
AXPSM Variable Portfolio - Federal Income Fund 15.46 47.99
AXPSM Variable Portfolio - Global Bond Fund 16.33 50.65
AXPSM Variable Portfolio - Growth Fund 16.23 50.34
AXPSM Variable Portfolio - International Fund 16.53 51.28
AXPM Variable Portfolio - Managed Fund 12.95 40.29
AXPM Variable Portfolio - New Dimensions Fund 13.36 41.55
AXPSM Variable Portfolio - Small Cap Advantage Fund 19.04 58.92
AXPSM Variable Portfolio - Strategy Aggressive Fund 13.46 41.87
AIM V.I. Capital Appreciation Fund 13.36 41.55
AIM V.I. Capital Development Fund 18.89 58.45
American Century VP International Fund 21.66 66.83
American Century VP Value Fund 16.74 51.90
Fidelity VIP III Growth & Income Portfolio (Service Class) 13.66 42.50
Fidelity VIP III Mid Cap Portfolio (Service Class) 17.76 55.03
Fidelity VIP Overseas Portfolio (Service Class) 16.43 50.97
FT VIP Real Estate Securities Fund - Class 2 14.59 45.33
FT VIP Templeton International Smaller Companies Fund - Class 2 20.33 62.80
FT VIP Value Securities Fund - Class 2 17.56 54.40
Goldman Sachs VIT CORESM Small Cap Equity Fund 15.71 48.77
Goldman Sachs VIT CORESM U.S. Equity Fund 14.69 45.64
Goldman Sachs VIT Mid Cap Value Fund 16.23 50.34
Lazard Retirement International Equity Portfolio 19.30 59.70
Putnam VT International New Opportunities Fund - Class IB Shares 27.09 83.15
Putnam VT Vista Fund - Class IB Shares 15.92 49.40
Royce Micro-Cap Portfolio 20.33 62.80
Third Avenue Value Portfolio 19.81 61.25
Wanger International Small Cap 22.38 69.00
Wanger U.S. Small Cap 16.94 52.53
Warburg Pincus Trust - Emerging Growth Portfolio 20.94 64.67
* In this example, the $30 contract administrative charge is approximated as a
.083% charge based on our estimated average contract size. Premium taxes
imposed by some state and local governments are not reflected in this table.
We entered into certain arrangements under which we are compensated by the
funds' advisors and/or distributors for the administrative services we
provide to the funds.
</TABLE>
You should not consider this example as a representation of past or future
expenses. Actual expenses may be more or less than those shown.
<PAGE>
Condensed Financial Information (Unaudited)
We have not provided any condensed financial information for the subaccounts
because they are new and do not have any history.
Financial Statements
You can find our audited financial statements in the SAI. The SAI does not
include the audited financial statements of the subaccounts because they are new
and do not have any performance.
Performance Information
Performance information for the subaccounts may appear from time to time in
advertisements or sales literature. This information reflects the performance of
a hypothetical investment in a particular subaccount during a specified time
period. Currently, we do not provide any performance information for the
subaccounts because they are new and have not had any activity to date. However,
we show performance from the commencement date of the funds as if the contract
existed at that time, which it did not. Although we base performance figures on
historical earnings, past performance does not guarantee future results.
Total return figures reflect deduction of all applicable charges, including:
o the contract administrative charge, and
o mortality and expense risk fee.
Total return quotations may be shown by means of schedules, charts or graphs.
Average annual total return is the average annual compounded rate of return of
the investment over a period of one, five and ten years (or up to the life of
the subaccount if it is less than ten years old).
Cumulative total return is the cumulative change in the value of an investment
over a specified time period. We assume that income earned by the investment is
reinvested. Cumulative total return generally will be higher than average annual
total return.
Annualized simple yield (for subaccounts investing in money market funds)
"annualizes" the income generated by the investment over a given seven-day
period. That is, we assume the amount of income generated by the investment
during the period will be generated each seven-day period for a year. We show
this as a percentage of the investment.
Annualized compound yield (for subaccounts investing in money market funds) is
calculated like simple yield except that we assume the income is reinvested when
we annualize it. Compound yield will be higher than the simple yield because of
the compounding effect of the assumed reinvestment.
Annualized yield (for subaccounts investing in income funds) divides the net
investment income (income less expenses) for each accumulation unit during a
given 30-day period by the value of the unit on the last day of the period. We
then convert the result to an annual percentage.
You should consider performance information in light of the investment
objectives, policies, characteristics and quality of the fund in which the
subaccount invests and the market conditions during the specified time period.
Advertised yields and total return figures include charges that reduce
advertised performance. Therefore, you should not compare subaccount performance
to that of mutual funds that sell their shares directly to the public. (See the
SAI for a further description of methods used to determine total return and
yield.)
If you would like additional information about actual performance, please
contact us.
<PAGE>
The Variable Account and the Funds
<TABLE>
<CAPTION>
You may allocate payments to any or all the subaccounts of the variable account
that invest in shares of the following funds:
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Investment Advisor or
Subaccount Investing in Investment Objectives and Policies Manager
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
BC3 AXPSM Variable Portfolio - Objective: long-term total return exceeding that of IDS Life, investment
Blue Chip Advantage Fund the U.S. stock market. Invests primarily in common manager; American Express
stocks of companies included in the unmanaged S&P Financial Corporation
500 Index. (AEFC), investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
BD3 AXPSM Variable Portfolio - Objective: high level of current income while IDS Life, investment
Bond Fund conserving the value of the investment for the manager; AEFC, investment
longest time period. Invests primarily in advisor.
investment-grade bonds.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CR3 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
Capital Resource Fund in U.S. common stocks. manager; AEFC, investment
advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CM3 AXPSM Variable Portfolio - Objective: maximum current income consistent with IDS Life, investment
Cash Management Fund liquidity and conservation of capital. Invests in manager; AEFC, investment
money market securities. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
DE3 AXPSM Variable Portfolio - Objective: a high level of current
Diversified Equity Income income and, as a secondary goal, IDS Life, investment
Fund steady growth of capital. Invests manager; AEFC, investment
primarily in dividend-paying common advisor.
and preferred stocks.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
EI3 AXPSM Variable Portfolio - Objective: high current income, with capital growth IDS Life, investment
Extra Income Fund as a secondary objective. Invests primarily in manager; AEFC, investment
long-term, high-yielding, high-risk debt securities advisor.
below investment grade issued by U.S. and foreign
corporations.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
FI3 AXPSM Variable Portfolio - Objective: a high level of current income and IDS Life, investment
Federal Income Fund safety of principal consistent with an investment manager; AEFC, investment
in U.S. government and government agency advisor.
securities. Invests primarily in debt obligations
issued or guaranteed as to principal and interest
by the U.S. government, its agencies or
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
GB3 AXPSM Variable Portfolio - Objective: high total return through income and IDS Life, investment
Global Bond Fund growth of capital. Invests primarily in debt manager; AEFC, investment
securities of U.S. and foreign issuers. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
GR3 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
Growth Fund primarily in common stocks and securities manager; AEFC, investment
convertible into common stocks that appear to offer advisor.
growth opportunities.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
IE3 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
International Fund in common stock of foreign issuers. manager; AEFC, investment
advisor; American Express
Asset Management
International, Inc., a
wholly-owned subsidiary of
AEFC, sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
MF3 AXPSM Variable Portfolio - Objective: maximum total investment return through IDS Life, investment
Managed Fund a combination of capital growth and current income. manager; AEFC, investment
Invests primarily in stocks, convertible advisor.
securities, bonds and money market instruments.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
ND3 AXPSM Variable Portfolio - Objective: long-term growth of capital. Invests IDS Life, investment
New Dimensions Fund primarily in common stocks of U.S. and foreign manager; AEFC, investment
companies showing potential for significant growth. advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SC3 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
Small Cap Advantage Fund primarily in equity stocks of small companies that manager; AEFC, investment
are often included in the S&P SmallCap 600 Index or advisor; Kenwood Capital Management
the Russell 2000 Index. LLC, sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SA3 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
Strategy Aggressive Fund in common stocks of small- and medium-size manager; AEFC, investment
companies. advisor; American Express Asset
Management Group Inc.,
sub-investment advisor.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3CA AIM V.I. Capital Objective: growth of capital. Invests primarily in A I M Advisors, Inc.
Appreciation Fund common stocks, with emphasis on medium- or
small-sized growth companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3CD AIM V.I. Capital Objective: long term growth of capital. Invests A I M Advisors, Inc.
Development Fund primarily in securities (including common stocks,
convertible securities and bonds) of small- and
medium-sized companies.
- ------------------------------------------------------------------------------------------------------------------------------
3IF American Century VP Objective: long term capital growth. Invests American Century Investment
International Fund primarily in stocks of growing foreign companies. Management, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3VA American Century VP Value Objective: long-term capital growth, with income as American Century Investment
Fund a secondary objective. Invests primarily in Management, Inc.
securities that management believes to be
undervalued at the time of purchase.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3GI Fidelity VIP III Growth & Objective: high total return through a
Income Portfolio (Service combination of current income and capital Fidelity Management &
Class) appreciation. Invests primarily in common stocks Research Company (FMR),
with a focus on those that pay current investment manager; FMR
dividends and show potential for U.K. and FMR Far East,
capital appreciation. sub-investment advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3MP Fidelity VIP III Mid Cap Objective: long-term growth of capital. Invests FMR, investment manager;
Portfolio (Service Class) primarily in medium market capitalization common FMR U.K. and FMR Far East,
stocks. sub-investment advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3OS Fidelity VIP Overseas Objective: long-term growth of capital. Invests FMR, investment manager;
Portfolio (Service Class) primarily in common stocks of foreign securities. FMR U.K., FMR Far East,
Fidelity International
Investment Advisors(FIIA)
and FIIA U.K., sub-investment
advisors.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3RE Franklin Templeton VIP Objective: capital appreciation with a secondary Franklin Advisers, Inc.
Trust Real Estate goal to earn current income. Invests primarily in
Securities Fund - Class 2 securities of companies operating in the real
estate industry, primarily equity real estate
investment trusts (REITS).
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3IS Franklin Templeton VIP Objective: long-term capital appreciation. Invests Templeton Investment
Trust Templeton primarily in equity securities of smaller Counsel, Inc.
International Smaller companies located outside the U.S., including in
Companies Fund - Class 2 emerging markets.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3SI Franklin Templeton VIP Objective: long-term total return. Invests Franklin Advisory Services,
Trust Value Securities primarily in equity securities of companies the LLC
Fund - Class 2 manager believes are significantly undervalued.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3SE Goldman Sachs VIT CORESM Objective: long-term growth of capital. Invests Goldman Sachs Asset
Small Cap Equity Fund primarily in a broadly diversified portfolio of Management
equity securities of U.S. issuers which are
included in the Russell 2000 Index at the time of
investment.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3UE Goldman Sachs VIT CORESM Objective: long-term growth of capital and dividend Goldman Sachs Asset
U.S. Equity Fund income. Invests primarily in a broadly diversified Management
portfolio of large-cap and blue chip equity
securities representing all major sectors of the
U.S. economy.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3MC Goldman Sachs VIT Mid Cap Objective: long-term capital appreciation. Invests Goldman Sachs Asset
Value Fund primarily in mid-capitalization U.S. stocks that Management
are believed to be undervalued or undiscovered by
the marketplace.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3IP Lazard Retirement Objective: long-term capital appreciation. Invests Lazard Asset Management
International Equity primarily in equity securities, principally common
Portfolio stocks of relatively large non-U.S. companies
(those whose total market value is more than $1
billion) that the Investment Manager believes are
undervalued based on their earnings, cash flow or
asset values.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3IN Putnam VT International Objective: long-term capital appreciation by Putnam Investment
New Opportunities Fund - investing in companies that have above-average Management, Inc.
Class IB Shares growth prospects due to the fundamental growth of
their market sector. Invests primarily in growth
stocks outside the U.S.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3VS Putnam VT Vista Fund - Objective: capital appreciation. Invests primarily Putnam Investment
Class IB Shares in a diversified portfolio of common stocks that Management, Inc.
Putnam Management believes have the
potential for above-average capital
appreciation.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3MI Royce Micro-Cap Portfolio Objective: long-term growth of capital. Invests Royce & Associates, Inc.
primarily in a broadly diversified portfolio of
equity securities issued by micro-cap companies
(companies with stock market capitalizations below
$300 million).
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3SV Third Avenue Value Objective: long-term capital appreciation. Invests The Investment Adviser EQSF
Portfolio primarily in common stocks of well-financed Advisers, Inc.
companies at a substantial discount to what the
Advisor believes is their true value.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3IT Wanger International Small Objective: long-term growth of capital. Invests Wanger Asset Management,
Cap primarily in stocks of small- and medium-size L.P.
non-U.S. companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3SP Wanger U.S. Small Cap Objective: long-term growth of capital. Invests Wanger Asset Management,
primarily in stocks of small- and medium-size U.S. L.P.
companies.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
3EG Warburg Pincus Trust - Objective: maximum capital appreciation. Invests Warburg Pincus Asset
Emerging Growth Portfolio primarily in equity securities of small- to medium Management, Inc.
sized U.S. emerging-growth companies.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment objectives and policies of some of the funds are similar to the
investment objectives and policies of other mutual funds that the investment
advisor or its affiliates manage. Although the objectives and policies may be
similar, each fund will have its own portfolio holdings and its own fees and
expenses. Accordingly, each fund will have its own investment results.
The investment managers and advisors cannot guarantee that the funds will meet
their investment objectives. Please read the funds' prospectuses for facts you
should know before investing. These prospectuses are available by contacting us
at the address or telephone number on the first page of this prospectus.
All funds are available to serve as the underlying investments for variable
annuities. Some funds also are available to serve as investment options for
variable life insurance policies and qualified plans. It is possible that in the
future, it may be disadvantageous for variable annuity accounts and variable
life insurance accounts and/or qualified plans to invest in the available funds
simultaneously.
Although the insurance company and the funds do not currently foresee any such
disadvantages, the boards of directors or trustees of the appropriate funds will
monitor events in order to identify any material conflicts between annuity
owners, policy owners and qualified plans and to determine what action, if any,
should be taken in response to a conflict. If a board were to conclude that it
should establish separate funds for the variable annuity, variable life
insurance and qualified plan accounts, you would not bear any expenses
associated with establishing separate funds. Please refer to the fund
prospectuses for risk disclosure regarding simultaneous investments by variable
annuity, variable life insurance and qualified plan accounts.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Internal Revenue Code of 1986, as amended (the
Code). Each fund intends to comply with these requirements.
The variable account was established under Minnesota law on Aug. 23, 1995 and
the subaccounts are registered together as a single unit investment trust under
the Investment Company Act of 1940 (the 1940 Act). This registration does not
involve any supervision of our management or investment practices and policies
by the SEC. All obligations arising under the contracts are general obligations
of IDS Life.
The variable account meets the definition of a separate account under federal
securities laws. We credit or charge income, capital gains and capital losses of
each subaccount only to that subaccount. State insurance law prohibits us from
charging a subaccount with liabilities of any other subaccount or of our general
business. The variable account includes other subaccounts that are available
under contracts that are not described in this prospectus.
The U.S. Treasury and the Internal Revenue Service (IRS) indicated that they may
provide additional guidance on investment control. This concerns how many
variable subaccounts an insurance company may offer and how many exchanges among
subaccounts it may allow before the contract owner would be currently taxed on
income earned within subaccount assets. At this time, we do not know what the
additional guidance will be or when action will be taken. We reserve the right
to modify the contract, as necessary, so that the owner will not be subject to
current taxation as the owner of the subaccount assets.
We intend to comply with all federal tax laws so that the contract continues to
qualify as an annuity for federal income tax purposes. We reserve the right to
modify the contract as necessary to comply with any new tax laws.
<PAGE>
The Fixed Account
You also may allocate purchase payments to the fixed account. We back the
principal and interest guarantees relating to the fixed account. The value of
the fixed account increases as we credit interest to the account. Purchase
payments and transfers to the fixed account become part of our general account.
We credit interest daily and compound it annually. We will change the interest
rates from time to time at our discretion.
Interests in the fixed account are not required to be registered with the SEC.
The SEC staff does not review the disclosures in this prospectus on the fixed
account. Disclosures regarding the fixed account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. (See
"Making the Most of Your Contract -- Transfer policies" for restrictions on
transfers involving the fixed account.)
<PAGE>
Buying Your Contract
You can fill out an application and send it along with your initial purchase
payment to our office. As the owner, you have all rights and may receive all
benefits under the contract. You can own a nonqualified annuity in joint tenancy
with rights of survivorship only in spousal situations. You cannot own a
qualified annuity in joint tenancy. You can buy a contract or become an
annuitant if you are 90 or younger.
When you apply, you may select:
o the fixed account and/or subaccounts in which you want to invest;
o how you want to make purchase payments; and
o a beneficiary.
The contract provides for allocation of purchase payments to the subaccounts of
the variable account and/or to the fixed account in even 1% increments.
If your application is complete, we will process it and apply your purchase
payment to the fixed account and subaccounts you selected within two business
days after we receive it at our office. If we accept your application, we will
send you a contract. If we cannot accept your application within five business
days, we will decline it and return your payment. We will credit additional
purchase payments you make to your accounts on the valuation date we receive
them. We will value the additional payments at the next accumulation unit value
calculated after we receive your payments at our office.
The settlement date
Annuity payouts are scheduled to begin on the settlement date. When we process
your application, we will establish the settlement date to the maximum age or
date described below. You can also select a date within the maximum limits. You
can align this date with your actual retirement from a job, or it can be a
different future date, depending on your needs and goals and on certain
restrictions. You also can change the date, provided you send us written
instructions at least 30 days before annuity payouts begin.
For nonqualified annuities, the settlement date must be:
o no earlier than the 60th day after the contract's effective date; and
o no later than the annuitant's 85th birthday or the tenth contract
anniversary, if purchased after age 75. (In Pennsylvania, the maximum
settlement date ranges from age 85 to 93 based on the annuitant's age when
we issue the contract. See contract for details.)
For qualified annuities, to avoid IRS penalty taxes, the settlement date
generally must be:
o on or after the date the annuitant reaches age 59 1/2; and
o for IRAs and SEPs, by April 1 of the year following the calendar year when
the annuitant reaches age 70 1/2; or
o for all other qualified annuities, by April 1 of the year following the
calendar year when the annuitant reaches age 70 1/2, or, if later retires
(except that 5% business owners may not select a settlement date that is
later than April 1 of the year following the calendar year when they reach
age 70 1/2).
If you take the minimum IRA or TSA distributions as required by the Code from
another tax-qualified investment, or in the form of partial surrenders from this
contract, annuity payouts can start as late as the annuitant's 85th birthday or
the tenth contract anniversary, if later. (In Pennsylvania, the annuity payout
ranges from age 85 to 93 based on the annuitant's age when the contract is
issued. See contract for details.)
Beneficiary
If death benefits become payable before the settlement date (while the contract
is in force and before annuity payouts begin), we will pay your named
beneficiary all or part of the contract value. If there is no named beneficiary,
then you or your estate will be the beneficiary. (See "Benefits in Case of
Death" for more about beneficiaries.)
Purchase payments
Minimum allowable purchase payments
For employees/advisors:
If paying by installments* If paying by any other method:
under a scheduled payment $1,000 initial payment for qualified plans
plan: $2,000 initial payment for nonqualified plans
$23.08 biweekly, or $50 for any additional payments
$50 per month
For other individuals:
$1 million
* Installments must total at least $600 in the first year. If you do not
make any purchase payments for 24 months, and your previous payments total
$600 or less, we have the right to give you 30 days' written notice and
pay you the total value of your contract in a lump sum. This right does
not apply to contracts sold to New Jersey residents.
Maximum allowable purchase payments** based on the age of you or the annuitant,
whoever is older, on the effective date of the contract:
For employees/advisors:
First year: Each subsequent year:
$ 100,000 for ages 86 to 90 $ 50,000 for ages 86-90
$2,000,000 up to age 85 $100,000 up to age 85
For other individuals:
First year: Each subsequent year:
$1,000,000 for ages 86 to 90 $100,000
$2,000,000 up to age 85
**These limits apply in total to all IDS Life annuities you own. We reserve
the right to increase maximum limits. For qualified annuities the
qualified plan's limits on annual contributions also apply.
We reserve the right to not accept purchase payments allocated to the fixed
account for twelve months following either:
1. a partial surrender from the fixed account; or
2. a lump sum transfer from the fixed account to a subaccount.
How to make purchase payments
1 Send your check along with your name and contract number to:
By letter:
Regular mail:
IDS Life Insurance Company
Box 74
Minneapolis, MN 55440-0074
Express mail:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
2 For employees/advisors only
By Scheduled We can help you set up:
payment plan:
o an automatic payroll deduction, salary reduction or other
group billing arrangement; or
o a bank authorization.
<PAGE>
Charges
Contract administrative charge
We charge this fee for establishing and maintaining your records. We deduct $30
from the contract value on your contract anniversary at the end of each contract
year. We prorate this charge among the subaccounts and the fixed account in the
same proportion your interest in each account bears to your total contract
value.
We will waive this charge when your contract value, or total purchase payments
less any payments surrendered, is $50,000 or more on the current contract
anniversary.
If you surrender your contract, we will deduct the charge at the time of
surrender regardless of the contract value or purchase payments made. We cannot
increase the annual contract administrative charge and it does not apply after
annuity payouts begin or when we pay death benefits.
Mortality and expense risk fee
We charge this fee daily to the subaccounts. The unit values of your subaccounts
reflect this fee. The fee totals 0.55% of the average daily net assets on an
annual basis. This fee covers the mortality and expense risk that we assume.
Approximately two-thirds of this amount is for our assumption of mortality risk,
and one-third is for our assumption of expense risk. This fee does not apply to
the fixed account.
Mortality risk arises because of our guarantee to pay a death benefit and our
guarantee to make annuity payouts according to the terms of the contract, no
matter how long a specific annuitant lives and no matter how long our entire
group of annuitants live. If, as a group, annuitants outlive the life expectancy
we assumed in our actuarial tables, then we must take money from our general
assets to meet our obligations. If, as a group, annuitants do not live as long
as expected, we could profit from the mortality risk fee.
Expense risk arises because we cannot increase the contract administrative
charge and this charge may not cover our expenses. We would have to make up any
deficit from our general assets.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
o first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
o then, if necessary, the funds redeem shares to cover any remaining
fees payable.
We may use any profits we realize from the subaccounts' payment to us of the
mortality and expense risk fee for any proper corporate purpose, including,
among others, payment of distribution (selling) expenses.
Other information on charges: AEFC makes certain custodial services available to
some custodial and trusteed pension and profit sharing plans and 401(k) plans
funded by our annuities. Fees for these services start at $30 per calendar year
per participant. AEFC will charge a termination fee for owners under age 59 1/2
(fee waived in case of death or disability).
Possible group reductions: In some cases we may incur lower sales and
administrative expenses due to the size of the group, the average contribution
and the use of group enrollment procedures. In such cases, we may be able to
reduce or eliminate the contract administrative charge. However, we expect this
to occur infrequently.
Premium taxes
Certain state and local governments impose premium taxes (up to 3.5%). These
taxes depend upon your state of residence or the state in which the contract was
sold. In some cases, we deduct premium taxes from your purchase payments before
we allocate them. In other cases, we deduct them when you surrender your
contract or when annuity payouts begin.
<PAGE>
Valuing Your Investment
We value your fixed account and subaccounts as follows:
Fixed Account: We value the amounts you allocated to the fixed account directly
in dollars. The fixed account value equals:
o the sum of your purchase payments and transfer amounts allocated to the
fixed account;
o plus interest credited;
o minus the sum of amounts surrendered and amounts transferred out; and
o minus any prorated contract administrative charge.
Subaccounts: We convert amounts you allocated to the subaccounts into
accumulation units. Each time you make a purchase payment or transfer amounts
into one of the subaccounts, we credit a certain number of accumulation units to
your contract for that subaccount. Conversely, each time you take a partial
surrender, transfer amounts out of a subaccount, or we assess a contract
administrative charge, we subtract a certain number of accumulation units from
your contract.
The accumulation units are the true measure of investment value in each
subaccount during the accumulation period. They are related to, but not the same
as, the net asset value of the fund in which the subaccount invests.
The dollar value of each accumulation unit can rise or fall daily depending on
the variable account expenses, performance of the fund and on certain fund
expenses. Here is how we calculate accumulation unit values:
Number of units
To calculate the number of accumulation units for a particular subaccount, we
divide your investment after deduction of any premium taxes, by the current
accumulation unit value.
Accumulation unit value
The current accumulation unit value for each subaccount equals the last value
times the subaccount's current net investment factor.
Net investment factor
We determine the net investment factor by:
o adding the fund's current net asset value per share, plus the per share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee from the result.
Because the net asset value of the fund may fluctuate, the accumulation unit
value may increase or decrease. You bear all the investment risk in a
subaccount.
Factors that affect subaccount accumulation units
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units you own may fluctuate due to:
o additional purchase payments you allocate to the subaccounts;
o transfers into or out of the subaccounts;
o partial surrenders; and/or
o prorated portions of the contract administrative charge.
Accumulation unit values will fluctuate due to:
o changes in funds' net asset value;
o dividends distributed to the subaccounts;
o capital gains or losses of funds;
o fund operating expenses; and/or
o mortality and expense risk fees.
<PAGE>
Making the Most of Your Contract
Automated dollar-cost averaging
Currently, you can use automated transfers to take advantage of dollar-cost
averaging (investing a fixed amount at regular intervals). For example, you
might transfer a set amount monthly from a relatively conservative subaccount to
a more aggressive one, or to several others, or from the fixed account to one or
more subaccounts. There is no charge for dollar-cost averaging.
This systematic approach can help you benefit from fluctuations in accumulation
unit values caused by fluctuations in the market values of the funds. Since you
invest the same amount each period, you automatically acquire more units when
the market value falls and fewer units when it rises. The potential effect is to
lower your average cost per unit.
<TABLE>
<CAPTION>
How dollar-cost averaging works
<S> <C> <C> <C> <C>
By investing an Amount Accumulation unit Number of units
equal number of Month invested value purchased
dollars each month... Jan $100 $20 5.00
Feb 100 18 5.56
you automatically buy Mar 100 17 5.88
more units when the Apr 100 15 6.67
per unit market price May 100 16 6.25
is low... Jun 100 18 5.56
Jul 100 17 5.88
and fewer units when Aug 100 19 5.26
the per unit market Sept 100 21 4.76
price is high. Oct 100 20 5.00
</TABLE>
You paid an average price of only $17.91 per unit over the 10 months, while the
average market price actually was $18.10.
Dollar-cost averaging does not guarantee that any subaccount will gain in value
nor will it protect against a decline in value if market prices fall. Because
dollar-cost averaging involves continuous investing, your success with this
strategy will depend upon your willingness to continue to invest regularly
through periods of low price levels. Dollar-cost averaging can be an effective
way to help meet your long-term goals. For specific features contact us.
Transferring money between accounts
You may transfer money from any one subaccount, or the fixed account, to another
subaccount before annuity payouts begin. (Certain restrictions apply to
transfers involving the fixed account.) We will process your transfer on the
valuation date we receive your request. We will value your transfer at the next
accumulation unit value calculated after we receive your request. There is no
charge for transfers. Before making a transfer, you should consider the risks
involved in switching investments.
We may suspend or modify transfer privileges at any time. Excessive trading
activity can disrupt fund management strategy and increase expenses, which are
borne by all contract owners who allocated purchase payments to the fund
regardless of their transfer activity. We may apply modifications or
restrictions in any reasonable manner to prevent transfers we believe will
disadvantage other contract owners. (For information on transfers after annuity
payouts begin, see "Transfer policies" below.)
Transfer policies
o Before annuity payouts begin, you may transfer contract values between the
subaccounts, or from the subaccounts to the fixed account at any time.
However, if you made a transfer from the fixed account to the subaccounts,
you may not make a transfer from any subaccount back to the fixed account
until the next contract anniversary.
o You may transfer contract values from the fixed account to the subaccounts
once a year during a 31-day transfer period starting on each contract
anniversary (except for automated transfers, which can be set up at any
time for certain transfer periods subject to certain minimums).
o If we receive your request within 30 days before the contract anniversary
date, the transfer from the fixed account to the subaccounts will be
effective on the anniversary.
o If we receive your request on or within 30 days after the contract
anniversary date, the transfer from the fixed account to the subaccounts
will be effective on the valuation date we receive it.
o We will not accept requests for transfers from the fixed account at any
other time.
o Once annuity payouts begin, you may not make transfers to or from the fixed
account, but you may make transfers once per contract year among the
subaccounts. During the annuity payout period, you cannot invest in more
than five subaccounts at any one time unless we agree otherwise.
<PAGE>
How to request a transfer or surrender
1 Send your name, contract number, Social Security
By letter: Number or Taxpayer Identification Number and signed
request for a transfer or surrender to:
Regular mail:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Express mail:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
Minimum amount
Transfers or
surrenders: $250 or entire account balance
Maximum amount
Transfers or
surrenders: Contract value
2 We can help you set up automated transfers among your
By automated transfers subaccounts or fixed account or partial surrenders
and automated partial from the accounts.
surrenders: You can start or stop this service by written request
or other method acceptable to us. You must allow 30
days for us to change any instructions that are
currently in place.
o Automated transfers from the fixed account to any
one of the subaccounts may not exceed an amount
that, if continued, would deplete the fixed
account within 12 months.
o Automated surrenders may be restricted by
applicable law under some contracts.
o You may not make additional purchase payments if
automated partial surrenders are in effect.
o Automated partial surrenders may result in IRS
taxes and penalties on all or part of the amount
surrendered.
Minimum amount
Transfers or
surrenders: $50
3 Call between 7 a.m. and 6 p.m. Central time:
By phone:
800-437-0602
TTY service for the hearing impaired:
1-800-285-8846 (toll free)
Minimum amount
Transfers or
surrenders: $250 or entire account balance
Maximum amount
Transfers: Contract value
Surrenders: $50,000
We answer telephone requests promptly, but you may experience delays when the
call volume is unusually high. If you are unable to get through, use the mail
procedure as an alternative.
We will honor any telephone transfer or surrender requests that we believe are
authentic and we will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. We will not
allow a telephone surrender within 30 days of a phoned-in address change. As
long as we follow the procedures, we (and our affiliates) will not be liable for
any loss resulting from fraudulent requests.
Telephone transfers and surrenders are automatically available. You may request
that telephone transfers and surrenders not be authorized from your account by
writing to us.
<PAGE>
Surrenders
You may surrender all or part of your contract at any time before annuity
payouts begin by sending us a written request or calling us. We will process
your surrender request on the valuation date we receive it. For total
surrenders, we will compute the value of your contract at the next accumulation
unit value calculated after we receive your request. We may ask you to return
the contract. You may have to pay IRS taxes and penalties (see "Taxes"). You
cannot make surrenders after annuity payouts begin.
Surrender policies
If you have a balance in more than one account and you request a partial
surrender, we will withdraw money from all your subaccounts and/or the fixed
account in the same proportion as your value in each account correlates to your
total contract value, unless you request otherwise. The minimum contract value
after partial surrender is $600.
Receiving payment
By regular or express mail:
o payable to you;
o mailed to address of record.
NOTE: We will charge you a fee if you request express mail delivery.
By wire:
o request that payment be wired to your bank;
o bank account must be in the same ownership as your contract; and
o pre-authorization required.
For instructions, contact us.
Normally, we will send the payment within seven days after receiving your
request. However, we may postpone the payment if:
- -- the surrender amount includes a purchase payment check that has not cleared;
- -- the NYSE is closed, except for normal holiday and weekend closings;
- -- trading on the NYSE is restricted, according to SEC rules;
- -- an emergency, as defined by SEC rules, makes it impractical to sell
securities or value the net assets of the accounts; or
- -- the SEC permits us to delay payment for the protection of security holders.
<PAGE>
TSA -- Special Surrender Provisions
Participants in Tax-Sheltered Annuities: The Code imposes certain restrictions
on your right to receive early distributions from a TSA:
o Distributions attributable to salary reduction contributions (plus
earnings) made after Dec. 31, 1988, or to transfers or rollovers from other
contracts, may be made from the TSA only if:
-- you are at least age 59 1/2;
-- you are disabled as defined in the Code;
-- you separated from the service of the employer who purchased the
contract; or
-- the distribution is because of your death.
o If you encounter a financial hardship (as defined by the Code), you may
receive a distribution of all contract values attributable to salary
reduction contributions made after Dec. 31, 1988, but not the earnings on
them.
o Even though a distribution may be permitted under the above rules, it may
be subject to IRS taxes and penalties (see "Taxes").
o The employer must comply with certain nondiscrimination requirements for
certain types of contributions under a TSA contract to be excluded from
taxable income. You should consult your employer to determine whether the
nondiscrimination rules apply to you.
o The above restrictions on distributions do not affect the availability of
the amount credited to the contract as of Dec. 31, 1988. The restrictions
also do not apply to transfers or exchanges of contract value within the
contract, or to another registered variable annuity contract or investment
vehicle available through the employer.
o If the contract has a loan provision, the right to receive a loan as
described in detail in your contract.
<PAGE>
Changing Ownership
You may change ownership of your nonqualified annuity at any time by completing
a change of ownership form we approve and sending it to our office. The change
will become binding upon us when we receive and record it. We will honor any
change of ownership request that we believe is authentic and we will use
reasonable procedures to confirm authenticity. If we follow these procedures, we
will not take any responsibility for the validity of the change.
If you have a nonqualified annuity, you may incur income tax liability by
transferring, assigning or pledging any part of it. (See "Taxes.")
If you have a qualified annuity, you may not sell, assign, transfer, discount or
pledge your contract as collateral for a loan, or as security for the
performance of an obligation or for any other purpose except as required or
permitted by the Code. However, if the owner is a trust or custodian, or an
employer acting in a similar capacity, ownership of a contract may be
transferred to the annuitant.
<PAGE>
Benefits in Case of Death
We will pay the death benefit to your beneficiary upon the earlier of your death
or the annuitant's death. If a contract has more than one person as the owner,
we will pay benefits upon the first to die of any owner or the annuitant.
If you or the annuitant die before annuity payouts begin while this contract is
in force, we will pay the beneficiary as follows:
If both you and the annuitant are age 80 or younger on the date of death, the
beneficiary receives the greatest of:
o the contract value;
o purchase payments, minus any "adjusted partial surrenders"; or
o the contract value as of the most recent sixth contract anniversary, plus
any purchase payments paid and minus any "adjusted partial surrenders"
since that anniversary.
If either you or the annuitant are age 81 or older on the date of death, the
beneficiary receives the greater of:
o the contract value; or
o purchase payments minus any "adjusted partial surrenders."
Adjusted partial surrenders: We calculate an "adjusted partial surrender" for
each partial surrender as the product of (a) times (b) where
(a) is the ratio of the amount of the partial surrender to the
contract value on the date of (but prior to) the partial
surrender; and
(b) is the death benefit on the date of (but prior to) the
partial surrender.
Example of death benefit calculation when the owner and annuitant are age 80 or
younger:
o The contract is purchased with a payment of $20,000 on Jan. 1, 2000.
o On Jan 1, 2006 (the 6th contract anniversary) the contract value has grown
to $30,000.
o March 1, 2006 the contract value has fallen to $28,000 at which point the
owner takes a $1,500 partial surrender, leaving a contract value of $26,500.
The death benefit on March 1, 2006 is calculated as follows:
The contract value on the most recent 6th contract anniversary: $30,000.00
plus any purchase payments paid since that anniversary: + 0.00
minus any "adjusted partial surrenders" taken since that
anniversary, calculated as: $1,500 x $30,000 =
$28,000 - 1,607.14
------------
for a death benefit of: $ 28,392.86
If your spouse is sole beneficiary under a nonqualified annuity and you die
before the settlement date, your spouse may keep the contract as owner. To do
this your spouse must, within 60 days after we receive proof of death, give us
written instructions to keep the contract in force.
Under a qualified annuity, if the annuitant dies before the Code requires
distributions to begin, and the spouse is the only beneficiary, the spouse may
keep the contract as owner until the date on which the annuitant would have
reached age 70 1/2 or any other date permitted by the Code. To do this, the
spouse must give us written instructions within 60 days after we receive proof
of death.
Payments: Under a nonqualified annuity we will pay the beneficiary in a single
sum unless you give us other written instructions. We must fully distribute the
death benefit within five years of your death. However, the beneficiary may
receive payouts under any annuity payout plan available under this contract if:
o the beneficiary asks us in writing within 60 days after we receive proof
of death; and
o payouts begin no later than one year after your death, or other date as
permitted by the Code; and
o the payout period does not extend beyond the beneficiary's life or life
expectancy.
When paying the beneficiary, we will process the death claim on the valuation
date our death claim requirements are fulfilled. We will determine the
contract's value at the next accumulation unit value calculated after our death
claim requirements are fulfilled. We pay interest, if any, from the date of
death at a rate no less than required by law. We will mail payment to the
beneficiary within seven days after our death claim requirements are fulfilled.
Other rules may apply to qualified annuities. (See "Taxes.")
<PAGE>
The Annuity Payout Period
As owner of the contract, you have the right to decide how and to whom annuity
payouts will be made starting at the settlement date. You may select one of the
annuity payout plans outlined below, or we may mutually agree on other payout
arrangements.
The amount available for payouts under the plan you select is the contract value
on your settlement date (less any applicable premium tax).
You also decide whether we will make annuity payouts on a fixed or variable
basis, or a combination of fixed and variable. The amounts available to purchase
payouts under the plan you select is the contract value on your settlement date
(less any applicable premium tax). You may reallocate this contract value to the
fixed account to provide fixed dollar payouts and/or among the subaccounts to
provide variable annuity payouts. During the annuity payout period, you cannot
invest in more than five subaccounts at any one time unless we agree otherwise.
Amounts of fixed and variable payouts depend on:
o the annuity payout plan you select;
o the annuitant's age and, in most cases, sex;
o the annuity table in the contract; and
o the amounts you allocated to the accounts at settlement.
In addition, for variable payouts only, amounts depend on the investment
performance of the subaccounts you select. These payouts will vary from month to
month because the performance of the funds will fluctuate. (In the case of fixed
annuities, payouts remain the same from month to month.)
For information with respect to transfers between accounts after annuity payouts
begin, see "Making the Most of Your Contract -- Transfer policies."
Annuity table
The annuity table in your contract shows the amount of the first monthly payment
for each $1,000 of contract value according to the age and, when applicable, the
sex of the annuitant. (Where required by law, we will use a unisex table of
settlement rates.) The table assumes that the contract value is invested at the
beginning of the annuity payout period and earns a 5% rate of return, which is
reinvested and helps to support future payouts.
Substitution of 3.5% table
If you ask us at least 30 days before the settlement date, we will substitute an
annuity table based on an assumed 3.5% investment rate for the 5% table in the
contract. The assumed investment rate affects both the amount of the first
payout and the extent to which subsequent payouts increase or decrease. Using
the 5% table results in a higher initial payment, but later payouts will
increase more slowly when annuity unit values rise and decrease more rapidly
when they decline.
Annuity payout plans
You may choose any one of these annuity payout plans by giving us written
instructions at least 30 days before contract values are used to purchase the
payout plan:
o Plan A -- Life annuity - no refund: We make monthly payouts until the
annuitant's death. Payouts end with the last payout before the annuitant's
death. We will not make any further payouts. This means that if the
annuitant dies after we have made only one monthly payout, we will not make
any more payouts.
o Plan B -- Life annuity with five, 10 or 15 years certain: We make monthly
payouts for a guaranteed payout period of five, 10 or 15 years that you
elect. This election will determine the length of the payout period to the
beneficiary if the annuitant should die before the elected period expires.
We calculate the guaranteed payout period from the settlement date. If the
annuitant outlives the elected guaranteed payout period, we will continue
to make payouts until the annuitant's death.
o Plan C -- Life annuity - installment refund: We make monthly payouts until
the annuitant's death, with our guarantee that payouts will continue for
some period of time. We will make payouts for at least the number of months
determined by dividing the amount applied under this option by the first
monthly payout, whether or not the annuitant is living.
o Plan D -- Joint and last survivor life annuity - no refund: We make monthly
payouts while both the annuitant and a joint annuitant are living. If
either annuitant dies, we will continue to make monthly payouts at the full
amount until the death of the surviving annuitant. Payouts end with the
death of the second annuitant.
o Plan E -- Payouts for a specified period: We make monthly payouts for a
specific payout period of 10 to 30 years that you elect. We will make
payouts only for the number of years specified whether the annuitant is
living or not. Depending on the selected time period, it is foreseeable
that an annuitant can outlive the payout period selected. During the payout
period, you can elect to have us determine the present value of any
remaining variable payouts and pay it to you in a lump sum. We determine
the present value separately for each subaccount from which you are
currently scheduled to receive payouts. The present value for each
subaccount is equal to the discounted value of the remaining annuity
payouts which are assumed to remain level. The discount rate we use in the
calculation will vary between 5.05% and 7.15% depending on the applicable
assumed investment rate and the fund management fees. A 10% IRS penalty tax
could apply under this payout plan. (See "Taxes.")
Restrictions for some qualified plans: If you purchased a qualified annuity, you
may be required to select a payout plan that provides for payouts:
o over the life of the annuitant;
o over the joint lives of the annuitant and a designated beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o for a period not exceeding the joint life expectancies of the annuitant
and a designated beneficiary.
You have the responsibility for electing a payout plan that complies with your
contract and with applicable law.
If we do not receive instructions: You must give us written instructions for the
annuity payouts at least 30 days before the annuitant's settlement date. If you
do not, we will make payouts under Plan B, with 120 monthly payouts guaranteed.
Contract values that you allocated to the fixed account will provide fixed
dollar payouts and contract values that you allocated among the subaccounts will
provide variable annuity payouts.
If monthly payouts would be less than $20: We will calculate the amount of
monthly payouts at the time the contract value is used to purchase a payout
plan. If the calculations show that monthly payouts would be less than $20, we
have the right to pay the contract value to you in a lump sum or to change the
frequency of the payouts.
Death after annuity payouts begin
If you or the annuitant die after annuity payouts begin, we will pay any amount
payable to the beneficiary as provided in the annuity payout plan in effect.
<PAGE>
Taxes
Generally, under current law, any increase in your contract value is taxable to
you only when you receive a payout or surrender (see detailed discussion below).
Any portion of the annuity payouts and any surrenders you request that represent
ordinary income are normally taxable. We will send you a tax information
reporting form for any year in which we made a taxable distribution according to
our records.
Qualified annuities: We designed this contract for use with qualified retirement
plans. Special rules apply to these retirement plans. Your rights to benefits
may be subject to the terms and conditions of these retirement plans regardless
of the terms of the contract.
Adverse tax consequences may result if you do not ensure that contributions,
distributions and other transactions under the contract comply with the law.
Qualified annuities have minimum distribution rules that govern the timing and
amount of distributions during your life and after your death. You should refer
to your retirement plan or adoption agreement or consult a tax advisor for more
information about your distribution rules.
Annuity payouts under nonqualified annuities: A portion of each payout will be
ordinary income and subject to tax, and a portion of each payout will be
considered a return of part of your investment and will not be taxed. All
amounts you receive after your investment in the contract is fully recovered
will be subject to tax.
Tax law requires that all nonqualified deferred annuities issued by the same
company (and possibly its affiliates) to the same owner during a calendar year
be taxed as a single, unified contract when you take distributions from any one
of those contracts.
Annuity payouts under qualified annuities: Under a qualified annuity, the entire
payout generally is includable as ordinary income and is subject to tax except
to the extent that contributions were made with after-tax dollars. If you or
your employer invested in your contract with deductible or pre-tax dollars as
part of a qualified retirement plan, such amounts are not considered to be part
of your investment in the contract and will be taxed when paid to you.
Surrenders: If you surrender part or all of your contract before your annuity
payouts begin, your surrender payment will be taxed to the extent that the value
of your contract immediately before the surrender exceeds your investment. You
also may have to pay a 10% IRS penalty for surrenders you make before reaching
age 59 1/2 unless certain exceptions apply. For qualified annuities, other
penalties may apply if you surrender your contract before your plan specifies
that you can receive payouts.
Death benefits to beneficiaries: The death benefit under a contract is not
tax-exempt. Any amount your beneficiary receives that represents previously
deferred earnings within the contract is taxable as ordinary income to the
beneficiary in the years he or she receives the payments.
Annuities owned by corporations, partnerships or trusts: For nonqualified
annuities any annual increase in the value of annuities held by such entities
generally will be treated as ordinary income received during that year. This
provision is effective for purchase payments made after Feb. 28, 1986. However,
if the trust was set up for the benefit of a natural person only, the income
will remain tax-deferred.
Penalties: If you receive amounts from your contract before reaching age 59 1/2,
you may have to pay a 10% IRS penalty on the amount includable in your ordinary
income. However, this penalty will not apply to any amount received by you or
your beneficiary:
o because of your death;
o because you become disabled (as defined in the Code);
o if the distribution is part of a series of substantially equal periodic
payments, made at least annually, over your life or life expectancy (or
joint lives or life expectancies of you and your beneficiary); or
o if it is allocable to an investment before Aug. 14, 1982 (except for
qualified annuities).
For a qualified annuity, other penalties or exceptions may apply if you
surrender your contract before your plan specifies that payouts can be made.
Withholding, generally: If you receive all or part of the contract value, we may
deduct withholding against the taxable income portion of the payment. Any
withholding represents a prepayment of your tax due for the year. You take
credit for these amounts on your annual tax return.
If the payment is part of an annuity payout plan, we generally compute the
amount of withholding using payroll tables. You may provide us with a statement
of how many exemptions to use in calculating the withholding. As long as you've
provided us with a valid Social Security Number or Taxpayer Identification
Number, you can elect not to have any withholding occur.
If the distribution is any other type of payment (such as a partial or full
surrender), we compute withholding using 10% of the taxable portion. Similar to
above, as long as you have provided us with a valid Social Security Number or
Taxpayer Identification Number, you can elect not to have this withholding
occur.
Some states also impose withholding requirements similar to the federal
withholding described above. If this should be the case, we may deduct state
withholding from any payment from which we deduct federal withholding. The
withholding requirements may differ if we are making payment to a non-U.S.
citizen or if we deliver the payment outside the United States.
Withholding from qualified annuities: If you receive directly all or part of the
contract value from a qualified annuity (except an IRA or SEP), mandatory 20%
federal income tax withholding (and possibly state income tax withholding)
generally will be imposed at the time we make payout. This mandatory withholding
is in place of the elective withholding discussed above. This mandatory
withholding will not be imposed if:
o instead of receiving the distribution check, you elect to have the
distribution rolled over directly to an IRA or another eligible plan;
o the payout is one in a series of substantially equal periodic payouts, made
at least annually, over your life or life expectancy (or the joint lives or
life expectancies of you and your designated beneficiary) or over a
specified period of 10 years or more; or
o the payout is a minimum distribution required under the Code.
Payments we make to a surviving spouse instead of being directly rolled over to
an IRA also may be subject to mandatory 20% income tax withholding.
State withholding also may be imposed on taxable distributions.
Transfer of ownership of a nonqualified annuity: If you transfer a nonqualified
annuity without receiving adequate consideration, the transfer is a gift and
also may be a surrender for federal income tax purposes. If the gift is a
currently taxable event for income tax purposes, the original owner will be
taxed on the amount of deferred earnings at the time of the transfer and also
may be subject to the 10% IRS penalty discussed earlier. In this case, the new
owner's investment in the contract will be the value of the contract at the time
of the transfer.
Collateral assignment of a nonqualified annuity: If you collaterally assign or
pledge your contract, earnings on purchase payments you made after Aug. 13, 1982
will be taxed to you like a surrender.
Important: Our discussion of federal tax laws is based upon our understanding of
current interpretations of these laws. Federal tax laws or current
interpretations of them may change. For this reason and because tax consequences
are complex and highly individual and cannot always be anticipated, you should
consult a tax advisor if you have any questions about taxation of your contract.
Tax qualification: We intend that the contract qualify as an annuity for federal
income tax purposes. To that end, the provisions of the contract are to be
interpreted to ensure or maintain such tax qualification, in spite of any other
provisions of the contract. We reserve the right to amend the contract to
reflect any clarifications that may be needed or are appropriate to maintain
such qualification or to conform the contract to any applicable changes in the
tax qualification requirements. We will send you a copy of any amendments.
<PAGE>
Voting Rights
As a contract owner with investments in the subaccounts, you may vote on
important fund policies until annuity payouts begin. Once they begin, the person
receiving them has voting rights. We will vote fund shares according to the
instructions of the person with voting rights.
Before annuity payouts begin, the number of votes you have is determined by
applying your percentage interest in each subaccount to the total number of
votes allowed to the subaccount.
After annuity payouts begin, the number of votes you have is equal to:
o the reserve held in each subaccount for your contract; divided by
o the net asset value of one share of the applicable fund.
As we make annuity payouts, the reserve for the contract decreases; therefore,
the number of votes also will decrease.
We calculate votes separately for each subaccount. We will send notice of
shareholders' meetings, proxy materials and a statement of the number of votes
to which the voter is entitled. We will vote shares for which we have not
received instructions in the same proportion as the votes for which we received
instructions. We also will vote the shares for which we have voting rights in
the same proportion as the votes for which we received instructions.
<PAGE>
Substitution of Investments
We may substitute the funds in which the subaccounts invest if:
o laws or regulations change,
o existing funds become unavailable, or
o in our judgment, the funds no longer are suitable for the subaccounts.
If any of these situations occur and if we believe it is in the best interest of
persons having voting rights under the contract, we have the right to substitute
funds other than those currently listed in this prospectus for other funds.
We may also:
o add new subaccounts;
o combine any two or more subaccounts;
o add subaccounts investing in additional funds;
o transfer assets to and from the subaccounts or the variable account; and
o eliminate or close any subaccounts.
In the event of substitution or any of these changes, we may amend the contract
and take whatever action is necessary and appropriate without your consent or
approval. However, we will not make any substitution or change without the
necessary approval of the SEC and state insurance departments. We will notify
you of any substitution or change.
<PAGE>
About the Service Providers
Issuer and principal underwriter
IDS Life issues and is the principal underwriter for the contracts. IDS Life is
a stock life insurance company organized in 1957 under the laws of the State of
Minnesota and is located at IDS Tower 10, Minneapolis, MN 55440-0010. IDS Life
conducts a conventional life insurance business.
IDS Life is a wholly-owned subsidiary of AEFC, which itself is a wholly-owned
subsidiary of American Express Company, a financial services company
headquartered in New York City. The AEFC family of companies offers not only
insurance and annuities, but also mutual funds, investment certificates, and a
broad range of financial management services. American Express Financial
Advisors Inc. (AEFA) serves individuals and businesses through its nationwide
network of more than 180 offices and 9200 advisors.
IDS Life will pay commissions for sales of the contracts of up to 7% of the
total purchase payments to AEFA. This revenue is used to cover distribution
costs that include compensation to advisors and field leadership for the selling
advisors. These commissions consist of a combination of time of sale and
on-going service/trail commissions (which, when totaled, could exceed 7% of
purchase payments). From time to time, IDS Life will pay or permit other
promotional incentives, in cash or credit or other compensation
Legal proceedings
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and AEFC do business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. IDS Life and AEFC, like other life and health insurers, from time
to time are involved in such litigation. On December 13, 1996, an action
entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance Company
and American Express Financial Corporation was commenced in Minnesota state
court. The action was brought by individuals who replaced an existing IDS Life
insurance policy with a new IDS Life policy. The plaintiffs purport to represent
a class consisting of all persons who replaced existing IDS Life policies with
new policies from and after January 1, 1985. The complaint puts at issue various
alleged sales practices and misrepresentations, alleged breaches of fiduciary
duties and alleged violations of consumer fraud statutes. IDS Life and AEFC
filed an answer to the complaint on February 18, 1997, denying the allegations.
A second action, entitled Arnold Mork, Isabella Mork, Ronald Melchart and Susan
Melchart vs. IDS Life Insurance Company and American Express Financial
Corporation was commenced in the same court on March 21,1997. In addition to
claims that are included in the Benacquisto lawsuit, the second action includes
an allegation of improper replacement of an existing IDS Life annuity contract.
A subsequent class action, Richard Thoresen and Elizabeth Thoresen vs. AEFC,
American Partners Life Insurance Company, American Enterprise Life Insurance
Company, American Centurion Life Assurance Company, IDS Life Insurance Company
and IDS Life Insurance Company of New York, was filed in the same court on
October 13, 1998 alleging that the sale of annuities in tax-deferred
contributory retirement investment plans (e.g. IRAs) was done through deceptive
marketing practices, which IDS Life denies. Plaintiffs in each of the above
actions seek damages in an unspecified amount and also seek to establish a
claims resolution facility for the determination of individual issues.
IDS Life and AEFC believe they have meritorious defenses to the claims raised in
the lawsuits. The outcome of any litigation cannot be predicted with certainty.
In the opinion of management, however, the ultimate resolution of the above
lawsuits and others filed against IDS Life should not have a material adverse
effect on IDS Life's consolidated financial position.
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of IDS Life and the
Variable Account. All of the major systems used by IDS Life and by the Variable
Account are maintained by AEFC and are utilized by multiple subsidiaries and
affiliates of AEFC. IDS Life's and the Variable Account's businesses are heavily
dependent upon AEFC's computer systems and have significant interactions with
systems of third parties.
A comprehensive review of AEFC's computer systems and business processes has
been conducted to identify the major systems that could be affected by the Year
2000 issue. Steps have been taken to resolve potential problems including
modification to existing software and the purchase of new software. AEFC's
target date for substantially completing its program of corrective measures on
internal business critical systems was Dec. 31, 1998. As of June 30, 1999, AEFC
completed its program of corrective measures on its internal systems and
applications, including Year 2000 compliance testing. The Year 2000 readiness of
unaffiliated investment managers and other third parties whose system failures
could have an impact on IDS Life's and the Variable Account's operations
continues to be evaluated. The failure of external parties to resolve their own
Year 2000 issues in a timely manner could result in a material financial risk to
AEFC, IDS Life or the Variable Account.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential Year 2000 exposure is gathered.
<PAGE>
Table of Contents of the Statement of Additional Information
Performance Information p.
Calculating Annuity Payouts p.
Rating Agencies p.
Principal Underwriter p.
Independent Auditors p.
Financial Statements
<PAGE>
Please check the appropriate box to receive a copy of the Statement of
Additional Information for:
- -- American Express Retirement Advisor Variable AnnuitySM - Band 3
- -- American Express Variable Portfolio Funds
- -- AIM Variable Insurance Funds, Inc.
- -- American Century Variable Portfolios, Inc.
- -- Fidelity Variable Insurance Products Funds - Service Class
- -- Franklin Templeton Variable Insurance Products Trust - Class 2
- -- Goldman Sachs Variable Insurance Trust (VIT)
- -- Lazard Retirement Series, Inc.
- -- Putnam Variable Trust
- -- Royce Capital Fund
- -- Third Avenue Variable Series Trust
- -- Wanger Advisors Trust
- -- Warburg Pincus Trust
Mail your request to:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
We will mail your request to:
Your name _____________________________________________
Address _______________________________________________
City _____________________ State _________ Zip ________
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
AMERICAN EXPRESS RETIREMENT ADVISOR VARIABLE ANNUITYSM
IDS Life Variable Account 10
September 15, 1999
IDS Life Variable Account 10 is a separate account established and maintained by
IDS Life Insurance Company (IDS Life).
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus dated the same date as this SAI, which may be
obtained by writing or calling us at the address and telephone number below. The
prospectus is incorporated in this SAI by reference.
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
800-437-0602
<PAGE>
TABLE OF CONTENTS
Performance Information...................................................p.
Calculating Annuity Payouts...............................................p.
Rating Agencies...........................................................p.
Principal Underwriter.....................................................p.
Independent Auditors......................................................p.
Financial Statements
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The subaccounts may quote various performance figures to illustrate past
performance. We base total return and current yield quotations (if applicable)
on standardized methods of computing performance as required by the Securities
and Exchange Commission (SEC). An explanation of the methods used to compute
performance follows below.
Average Annual Total Return
We will express quotations of average annual total return for the subaccounts in
terms of the average annual compounded rate of return of a hypothetical
investment in the contract over a period of one, five and ten years (or, if
less, up to the life of the subaccounts), calculated according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
We calculated the following performance figures on the basis of historical
performance of each fund. Currently we do not show any performance information
for the subaccounts because they are new and have not had any activity to date.
However, we show performance from the commencement date of the funds as if the
contract existed at that time, which it did not. Past performance does not
guarantee future results.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Nonqualified Annuities With a Seven-Year Surrender Charge Schedule For Periods
Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC1 Blue Chip Advantage Fund+ --% --% --% --%
BD1 Bond Fund (10/81)** -5.85 5.06 7.84 10.16
CR1 Capital Resource Fund (10/81) 15.88 14.94 14.66 14.39
CM1 Cash Management Fund (10/81) -2.51 3.18 4.27 5.62
DE1 Diversified Equity Income Fund+ -- -- -- --
EI1 Extra Income Fund (5/96) -11.30 -- -- 1.69
FI1 Federal Income Fund+ -- -- -- --
GB1 Global Bond Fund (5/96) 0.17 -- -- 3.95
GR1 Growth Fund+ -- -- -- --
IE1 International Fund (1/92) 7.66 5.64 -- 8.11
MF1 Managed Fund (4/86) 7.63 12.29 13.42 11.60
ND1 New Dimensions Fund (5/96) 20.36 -- -- 21.17
SC1 Small Cap Advantage Fund + -- -- -- --
SA1 Strategy Aggressive Fund (1/92) -4.83 8.97 -- 9.55
AIM V.I.
1CA Capital Appreciation Fund (5/93) 11.13 15.61 -- 17.23
1CD Capital Development Fund (5/98) -- -- -- -13.91
American Century
1IF VP International Fund (5/94) 3.93 -- -- 8.35
1VA VP Value Fund (5/96) 0.48 -- -- 14.15
FIDELITY VIP
1GI III Growth & Income Portfolio 20.29 -- -- 23.91
(Service Class) (12/96)
1MP III Mid Cap Portfolio (Service -- -- -- -3.49
Class) (12/98)
1OS Overseas Portfolio (Service Class) -1.27 0.34 5.10 5.40
(12/87)
FRANKLIN TEMPLETON VIP TRUST
1RE Real Estate Securities Fund - Class -23.09 7.69 -- 8.90
2 (1/89)***
1IS Templeton International Smaller -19.20 -- -- -4.30
Companies Fund - Class 2 (5/96)***
1SI Value Securities Fund - Class 2 -- -- -- -27.39
(5/98)***
GOLDMAN SACHS Variable Insurance Trust
(VIT)
1SE CORESM Small Cap Equity Fund (2/98) -- -- -- -15.80
1UE CORESM U.S. Equity Fund (2/98) -- -- -- 6.60
1MC Mid Cap Value Fund (4/98) -- -- -- -19.48
LAZARD RETIREMENT SERIES, INC.
1IP International Equity Portfolio (9/98) -- -- -- 4.88
PUTNAM VARIABLE TRUST
1IN Putnam VT International New -- -- -- -7.91
Opportunities Fund - Class IB Shares
(4/98)
1VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
1MI Micro-Cap Portfolio (12/96) -16.14 -- -- -2.02
THIRD AVENUE VARIABLE SERIES TRUST
1SV Value Portfolio + -- -- -- --
WANGER
1IT International Small Cap (5/95) 8.17 -- -- 19.18
1SP U.S. Small Cap (5/95) 0.76 -- -- 24.71
WARBURG PINCUS TRUST
1EG Emerging Growth Portfolio + -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge, a 0.95% mortality and expense risk fee and
applicable surrender charges associated with the seven-year surrender charge schedule.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Nonqualified Annuities With a Ten-Year Surrender Charge Schedule For Periods
Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC1 Blue Chip Advantage Fund+ --% --% --% --%
BD1 Bond Fund (10/81)** -6.76 4.73 7.74 10.16
CR1 Capital Resource Fund (10/81) 14.88 14.71 14.60 14.39
CM1 Cash Management Fund (10/81) -3.45 2.83 4.13 5.62
DE1 Diversified Equity Income Fund+ -- -- -- --
EI1 Extra Income Fund (5/96) -12.15 -- -- 1.32
FI1 Federal Income Fund+ -- -- -- --
GB1 Global Bond Fund (5/96) -0.79 -- -- 3.60
GR1 Growth Fund+ -- -- -- --
IE1 International Fund (1/92) 6.66 5.32 -- 7.84
MF1 Managed Fund (4/86) 6.63 12.04 13.35 11.60
ND1 New Dimensions Fund (5/96) 19.36 -- -- 20.90
SC1 Small Cap Advantage Fund+ -- -- -- --
SA1 Strategy Aggressive Fund (1/92) -5.74 8.69 -- 9.30
AIM V.I.
1CA Capital Appreciation Fund (5/93) 10.13 15.39 -- 17.06
1CD Capital Development Fund (5/98) -- -- -- -14-73
American Century
1IF VP International Fund (5/94) 2.93 -- -- 8.03
1VA VP Value Fund (5/96) -0.49 -- -- 13.85
FIDELITY VIP
1GI III Growth & Income Portfolio 19.29 -- -- 23.51
(Service Class) (12/96)
1MP III Mid Cap Portfolio (Service -- -- -- -4.42
Class) (12/98)
1OS Overseas Portfolio (Service Class) -2.22 -0.04 5.10 5.40
(12/87)
FRANKLIN TEMPLETON VIP TRUST
1RE Real Estate Securities Fund - Class -23.81 7.40 -- 8.80
2 (1/89)***
1IS Templeton International Smaller -19.20 -- -- -4.64
Companies Fund - Class 2 (5/96)***
1SI Value Securities Fund - Class 2 -- -- -- -28.06
(5/98)***
GOLDMAN SACHS VARIBALE INSURANCE TRUST
(VIT)
1SE CORESM Small Cap Equity Fund (2/98) -- -- -- -16.60
1UE CORESM U.S. Equity Fund (2/98) -- -- -- 5.60
1MC Mid Cap Value Fund (4/98) -- -- -- -20.24
LAZARD RETIREMENT SERIES, INC.
1IP International Equity Portfolio (9/98) -- -- -- 3.88
PUTNAM VARIABLE TRUST
1IN Putnam VT International New -- -- -- -8.79
Opportunities Fund - Class IB Shares
(4/98)
1VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
1MI Micro-Cap Portfolio (12/96) -16.14 -- -- -2.50
THIRD AVENUE VARIABLE SERIES TRUST
1SV Value Portfolio+ -- -- -- --
WANGER
1IT International Small Cap (5/95) 7.17 -- -- 19.01
1SP U.S. Small Cap (5/95) -0.22 -- -- 24.56
WARBURG PINCUS TRUST
1EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge and a 0.95% mortality and expense risk fee and
applicable surrender charges associated with the ten-year surrender charge
schedule.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Nonqualified Annuities Without Surrender For Periods Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC1 Blue Chip Advantage Fund+ --% --% --% --%
BD1 Bond Fund (10/81)** 0.48 5.71 7.84 10.16
CR1 Capital Resource Fund (10/81) 22.88 15.40 14.66 14.39
CM1 Cash Management Fund (10/81) 4.08 3.88 4.27 5.62
DE1 Diversified Equity Income Fund+ -- -- -- --
EI1 Extra Income Fund (5/96) -5.38 -- -- 4.18
FI1 Federal Income Fund+ -- -- -- --
GB1 Global Bond Fund (5/96) 6.96 -- -- 6.36
GR1 Growth Fund+ -- -- -- --
IE1 International Fund (1/92) 14.66 6.25 -- 8.29
MF1 Managed Fund (4/86) 14.63 12.79 13.42 11.60
ND1 New Dimensions Fund (5/96) 27.36 -- -- 23.05
SC1 Small Cap Advantage Fund+ -- -- -- --
SA1 Strategy Aggressive Fund (1/92) 1.58 9.53 -- 9.72
AIM V.I.
1CA Capital Appreciation Fund (5/93) 18.13 16.06 -- 17.57
1CD Capital Development Fund (5/98) -- -- -- -8.18
American Century
1IF VP International Fund (5/94) 10.93 -- -- 9.13
1VA VP Value Fund (5/96) 7.29 -- -- 16.23
FIDELITY VIP
1GI III Growth & Income Portfolio 27.29 -- -- 26.71
(Service Class) (12/96)
1MP III Mid Cap Portfolio (Service -- -- -- 3.03
Class) (12/98)
1OS Overseas Portfolio (Service Class) 5.41 1.09 5.10 5.40
(12/87)
FRANKLIN TEMPLETON VIP TRUST
1RE Real Estate Securities Fund - Class -18.06 8.43 -- 8.90
2 (1/89)***
1IS Templeton International Smaller -13.05 -- -- -2.00-
Companies Fund - Class 2 (5/96)***
1SI Value Securities Fund - Class 2 -- -- -- -22.68
(5/98)***
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(VIT)
1SE CORESM Small Cap Equity Fund (2/98) -- -- -- -10.21
1UE CORESM U.S. Equity Fund (2/98) -- -- -- 13.60
1MC Mid Cap Value Fund (4/98) -- -- -- -14.18
LAZARD RETIREMENT SERIES, INC.
1IP International Equity Portfolio (9/98) -- -- -- 11.88
PUTNAM VARIABLE TRUST
1IN Putnam VT International New -- -- -- -1.73
Opportunities Fund - Class IB Shares
(4/98)
1VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
1MI Micro-Cap Portfolio (12/96) -10.59 -- -- 1.24
THIRD AVENUE VARIABLE SERIES TRUST
1SV Value Portfolio+ -- -- -- --
WANGER
1IT International Small Cap (5/95) 15.17 -- -- 20.19
1SP U.S. Small Cap (5/95) 7.59 -- -- 25.61
WARBURG PINCUS TRUST
1EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge and a 0.95% mortality and expense risk fee.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Qualified Annuities With a Seven-Year Surrender Charge Schedule For Periods
Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC2 Blue Chip Advantage Fund+ --% --% --% --%
BD2 Bond Fund (10/81)** -5.67 5.11 8.06 10.23
CR2 Capital Resource Fund (10/81) 16.12 15.06 14.89 14.49
CM2 Cash Management Fund (10/81) -2.31 3.22 4.48 5.70
DE2 Diversified Equity Income Fund+ -- -- -- --
EI2 Extra Income Fund (5/96) -11.13 -- -- 1.90
FI2 Federal Income Fund+ -- -- -- --
GB2 Global Bond Fund (5/96) 0.37 -- -- 4.17
GR2 Growth Fund+ -- -- -- --
IE2 International Fund (1/92) 7.89 5.70 -- 8.33
MF2 Managed Fund (4/86) 7.86 12.40 13.64 11.83
ND2 New Dimensions Fund (5/96) 20.62 -- -- 21.43
SC2 Small Cap Advantage Fund+ -- -- -- --
SA2 Strategy Aggressive Fund (1/92) -4.64 9.06 -- 9.77
AIM V.I.
2CA Capital Appreciation Fund (5/93) 11.36 15.74 -- 17.47
2CD Capital Development Fund (5/98) -- -- -- -13.80
American Century
2IF VP International Fund (5/94) 4.15 -- -- 8.57
2VA VP Value Fund (5/96) 0.56 -- -- 14.34
FIDELITY VIP
2GI III Growth & Income Portfolio 20.55 -- -- 24.17
(Service Class) (12/96)
2MP III Mid Cap Portfolio (Service -- -- -- -3.48
Class) (12/98)
2OS Overseas Portfolio (Service Class) -1.07 1.29 5.79 6.05
(12/87)
FRANKLIN TEMPLETON VIP TRUST
2RE Real Estate Securities Fund - Class -22.59 8.49 -- 9.41
2 (1/89)***
2IS Templeton International Smaller -18.28 -- -- -4.11
Companies Fund - Class 2 (5/96)***
2SI Value Securities Fund - Class 2 -- -- -- -27.29
(5/98)***
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(VIT)
2SE CORESM Small Cap Equity Fund (2/98) -- -- -- -15.65
2UE CORESM U.S. Equity Fund (2/98) -- -- -- 6.80
2MC Mid Cap Value Fund (4/98) -- -- -- -19.38
LAZARD RETIREMENT SERIES, INC.
2IP International Equity Portfolio (9/98) -- -- -- 4.96
PUTNAM VARIABLE TRUST
2IN Putnam VT International New -- -- -- -7.79
Opportunities Fund - Class IB Shares
(4/98)
2VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
2MI Micro-Cap Portfolio (12/96) -15.98 -- -- -1.83
THIRD AVENUE VARIABLE SERIES TRUST
2SV Value Portfolio+ -- -- -- --
WANGER
2IT International Small Cap (5/95) 8.40 -- -- 19.42
2SP U.S. Small Cap (5/95) 0.96 -- -- 24.96
WARBURG PINCUS TRUST
2EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge, a 0.75% mortality and expense risk fee and
applicable surrender charges associated with the ten-year surrender charge schedule.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Qualified Annuities With a Ten-Year Surrender Charge Schedule For Periods Ending
Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC2 Blue Chip Advantage Fund+ --% --% --% --%
BD2 Bond Fund (10/81)** -6.57 4.95 7.96 10.23
CR2 Capital Resource Fund (10/81) 16.12 15.06 14.89 14.49
CM2 Cash Management Fund (10/81) -3.26 3.04 4.34 5.70
DE2 Diversified Equity Income Fund+ -- -- -- --
EI2 Extra Income Fund (5/96) -11.98 -- -- 1.54
FI2 Federal Income Fund+ -- -- -- --
GB2 Global Bond Fund (5/96) -0.60 -- -- 3.82
GR2 Growth Fund+ -- -- -- --
IE2 International Fund (1/92) 6.89 5.54 -- 8.06
MF2 Managed Fund (4/86) 6.86 12.27 13.58 11.83
ND2 New Dimensions Fund (5/96) 19.62 -- -- 21.15
SC2 Small Cap Advantage Fund+ -- -- -- --
SA2 Strategy Aggressive Fund (1/92) -5.55 8.91 -- 9.52
AIM V.I.
2CA Capital Appreciation Fund (5/93) 10.36 15.63 -- 17.30
2CD Capital Development Fund (5/98) -- -- -- -14.62
American Century
2IF VP International Fund (5/94) 3.15 -- -- 8.25
2VA VP Value Fund (5/96) -0.41 -- -- 14.04
FIDELITY VIP
2GI III Growth & Income Portfolio 19.55 -- -- 23.77
(Service Class) (12/96)
2MP III Mid Cap Portfolio (Service -- -- -- -4.41
Class) (12/98)
2OS Overseas Portfolio (Service Class) -2.03 0.91 5.79 6.05
(12/87)
FRANKLIN TEMPLETON VIP TRUST
2RE Real Estate Securities Fund - Class -22.59 8.20 -- 9.32
2 (1/89)***
2IS Templeton International Smaller -18.28 -- -- -4.45
Companies Fund - Class 2 (5/96)***
2SI Value Securities Fund - Class 2 -- -- -- -27.96
(5/98)***
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(VIT)
2SE CORESM Small Cap Equity Fund (2/98) -- -- -- -16.45
2UE CORESM U.S. Equity Fund (2/98) -- -- -- 5.80
2MC Mid Cap Value Fund (4/98) -- -- -- -20.14
LAZARD RETIREMENT SERIES, INC.
2IP International Equity Portfolio (9/98) -- -- -- 3.96
PUTNAM VARIABLE TRUST
2IN Putnam VT International New -- -- -- -8.67
Opportunities Fund - Class IB Shares
(4/98)
2VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
2MI Micro-Cap Portfolio (12/96) -16.77 -- -- -2.30
THIRD AVENUE VARIABLE SERIES TRUST
2SV Value Portfolio+ -- -- -- --
WANGER
2IT International Small Cap (5/95) 7.40 -- -- 19.25
2SP U.S. Small Cap (5/95) -0.02 -- -- 24.81
WARBURG PINCUS TRUST
2EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge and a 0.75% mortality and expense risk fee and applicable
surrender charges associated with the ten-year surrender charge schedule.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Qualified Annuities Without Surrender For Periods Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC2 Blue Chip Advantage Fund+ --% --% --% --%
BD2 Bond Fund (10/81)** 0.68 5.92 8.06 10.23
CR2 Capital Resource Fund (10/81) 23.12 15.63 14.89 14.49
CM2 Cash Management Fund (10/81) 4.29 4.09 4.48 5.70
DE2 Diversified Equity Income Fund+ -- -- -- --
EI2 Extra Income Fund (5/96) -5.19 -- -- 4.39
FI2 Federal Income Fund+ -- -- -- --
GB2 Global Bond Fund (5/96) 7.18 -- -- 6.58
GR2 Growth Fund+ -- -- -- --
IE2 International Fund (1/92) 14.89 6.49 -- 8.50
MF2 Managed Fund (4/86) 14.86 13.02 13.64 11.83
ND2 New Dimensions Fund (5/96) 27.62 -- -- 23.30
SC2 Small Cap Advantage Fund+ -- -- -- --
SA2 Strategy Aggressive Fund (1/92) 1.79 9.75 -- 9.94
AIM V.I.
2CA Capital Appreciation Fund (5/93) 18.36 16.29 -- 17.80
2CD Capital Development Fund (5/98) -- -- -- -8.06
American Century
2IF VP International Fund (5/94) 11.15 -- -- 9.35
2VA VP Value Fund (5/96) 7.38 -- -- 16.41
FIDELITY VIP
2GI III Growth & Income Portfolio 27.55 -- -- 26.96
(Service Class) (12/96)
2MP III Mid Cap Portfolio (Service -- -- -- 3.03
Class) (12/98)
2OS Overseas Portfolio (Service Class) 5.62 2.23 5.79 6.05
(12/87)
FRANKLIN TEMPLETON VIP TRUST
2RE Real Estate Securities Fund - Class -17.51 9.14 -- 9.41
2 (1/89)***
2IS Templeton International Smaller -12.80 -- -- -1.81
Companies Fund - Class 2 (5/96)***
2SI Value Securities Fund - Class 2 -- -- -- -22.57
(5/98)***
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(VIT)
2SE CORESM Small Cap Equity Fund (2/98) -- -- -- -10.06
2UE CORESM U.S. Equity Fund (2/98) -- -- -- 13.80
2MC Mid Cap Value Fund (4/98) -- -- -- -14.06
LAZARD RETIREMENT SERIES, INC.
2IP International Equity Portfolio (9/98) -- -- -- 11.96
PUTNAM VARIABLE TRUST
2IN Putnam VT International New -- -- -- -1.60
Opportunities Fund - Class IB Shares
(4/98)
2VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
2MI Micro-Cap Portfolio (12/96) -10.40 -- -- 1.44
THIRD AVENUE VARIABLE SERIES TRUST
2SV Value Portfolio+ -- -- -- --
WANGER
2IT International Small Cap (5/95) 15.40 -- -- 20.43
2SP U.S. Small Cap (5/95) 7.81 -- -- 25.86
WARBURG PINCUS TRUST
2EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge and a 0.75% mortality and expense risk fee.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
Cumulative Total Return
Cumulative total return represents the cumulative change in the value of an
investment for a given period (reflecting change in a subaccount's accumulation
unit value). We compute cumulative total return by using the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period, at the
end of the period (or fractional portion thereof).
Total return figures reflect the deduction of the surrender charge which assumes
you withdraw the entire contract value at the end of the one, five and ten year
periods (or, if less, up to the life of the subaccount). We also may show
performance figures without the deduction of a surrender charge. In addition,
total return figures reflect the deduction of all other applicable charges
including the contract administrative charge and mortality and expense risk fee.
Annualized Calculation of Yield for Subaccounts Investing in Money Market Funds
Annualized Simple Yield
For the subaccounts investing in money market funds, we base quotations of
simple yield on:
(a) the change in the value of a hypothetical subaccount (exclusive of
capital changes and income other than investment income) at the
beginning of a particular seven-day period;
(b) less a pro rata share of the subaccount expenses accrued over
the period;
(c) dividing this difference by the value of the subaccount at the
beginning of the period to obtain the base period return; and
(d) multiplying the base period return by 365/7.
The subaccount's value includes:
o any declared dividends,
o the value of any shares purchased with dividends paid during the period, and
o any dividends declared for such shares.
It does not include:
o the effect of any applicable surrender charge, or
o any realized or unrealized gains or losses.
Annualized Compound Yield
We calculate compound yield using the base period return described above, which
we then compound according to the following formula:
Compound Yield = [(Base Period Return + 1)365/7] -1
<PAGE>
You must consider (when comparing an investment in subaccounts investing in
money market funds with fixed annuities) that fixed annuities often provide an
agreed-to or guaranteed yield for a stated period of time, whereas the
subaccount's yield fluctuates. In comparing the yield of the subaccount to a
money market fund, you should consider the different services that the contract
provides.
Annualized Yield for Subaccounts Investing in Income Funds
For the subaccounts investing in income funds, we base quotations of yield on
all investment income earned during a particular 30-day period, less expenses
accrued during the period (net investment income) and compute it by dividing net
investment income per accumulation unit by the value of an accumulation unit on
the last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
where: a = dividends and investment income earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per accumulation unit on the
last day of the period
The subaccount earns yield from the increase in the net asset value of shares of
the fund in which it invests and from dividends declared and paid by the fund,
which are automatically invested in shares of the fund.
The yield on the subaccount's accumulation unit may fluctuate daily and does not
provide a basis for determining future yields.
Independent rating or statistical services or publishers or publications such as
those listed below may quote subaccount performance, compare it to rankings,
yields or returns, or use it in variable annuity accumulation or settlement
illustrations they publish or prepare.
The Bank Rate Monitor National Index, Barron's, Business Week, CDA
Technologies, Donoghue's Money Market Fund Report, Financial Services
Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal
Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today,
U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
CALCULATING ANNUITY PAYOUTS
The Variable Account
We do the following calculations separately for each of the subaccounts of the
variable account. The separate monthly payouts, added together, make up your
total variable annuity payout.
Initial Payout: To compute your first monthly payment, we:
o determine the dollar value of your contract as of the valuation date that
falls on (or closest to the valuation date that falls before) the seventh
calendar day before the settlement date and then deduct any applicable
premium tax; then
o apply the result to the annuity table contained in the contract or another
table at least as favorable.
<PAGE>
The annuity table shows the amount of the first monthly payment for each $1,000
of value which depends on factors built into the table, as described below.
Annuity Units: We then convert the value of your subaccount to annuity units. To
compute the number of units credited to you, we divide the first monthly payment
by the annuity unit value (see below) on the valuation date that falls on (or
closest to the valuation date that falls before) the seventh calendar day before
the settlement date. The number of units in your subaccount is fixed. The value
of the units fluctuates with the performance of the underlying fund.
Subsequent Payouts: To compute later payouts, we multiply:
o the annuity unit value on the valuation date that falls on (or closest to
the valuation date that falls before) the seventh calendar day before the
payout is due; by
o the fixed number of annuity units credited to you.
Annuity Unit Values: We originally set this value at $1 for each subaccount. To
calculate later values we multiply the last annuity value by the product of:
o the net investment factor; and
o the neutralizing factor.
The purpose of the neutralizing factor is to offset the effect of the assumed
rate built into the annuity table. With an assumed investment rate of 5%, the
neutralizing factor is 0.999866 for a one day valuation period.
Net Investment Factor:
We determine the net investment factor by:
o adding the fund's current net asset value per share plus the per share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee from the result.
Because the net asset value of the fund may fluctuate, the net investment factor
may be greater or less than one, and the annuity unit value may increase or
decrease. You bear this investment risk in a variable subaccount.
The Fixed Account
We guarantee your fixed annuity payout amounts. Once calculated, your payout
will remain the same and never change. To calculate your annuity payouts we:
o take the value of your fixed account at the settlement date or the date you
selected to begin receiving your annuity payouts; then
o using an annuity table, we apply the value according to the annuity
payout plan you select.
The annuity payout table we use will be the one in effect at the time you choose
to begin your annuity payouts. The values in the table will be equal to or
greater than the table in your contract.
<PAGE>
RATING AGENCIES
The following chart reflects the ratings given to us by independent rating
agencies. These agencies evaluate the financial soundness and claims-paying
ability of insurance companies based on a number of different factors. This
information does not relate to the management or performance of the subaccounts
of the contract. This information relates only to the fixed account and reflects
our ability to make annuity payouts and to pay death benefits and other
distributions from the contract.
Rating Agency Rating
A.M. Best A+
(Superior)
- -----------------------
Duff & Phelps AAA
- -----------------------
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contract is IDS Life which offers the contract
on a continuous basis.
The contract is new and, therefore, we have not received any surrender charges
or paid any commissions.
INDEPENDENT AUDITORS
The financial statements appearing in this SAI have been audited by Ernst &
Young LLP (1400 Pillsbury Center, 200 South Sixth Street, Minneapolis, MN 55402)
independent auditors, as stated in their report appearing herein.
FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
February 4, 1999
Minneapolis, Minnesota
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
($ thousands)
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $8,420,035; 1997, $9,743,410) $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost:
1998, $13,344,949; 1997, $12,515,030) 13,613,139 12,876,694
Mortgage loans on real estate 3,505,458 3,618,647
Policy loans 525,431 498,874
Other investments 366,604 318,591
Total investments 25,974,746 26,628,256
Cash and cash equivalents 22,453 19,686
Amounts recoverable from reinsurers 262,260 205,716
Amounts due from brokers 327 8,400
Other accounts receivable 47,963 37,895
Accrued investment income 366,574 357,390
Deferred policy acquisition costs 2,496,352 2,479,577
Other assets 30,487 22,700
Separate account assets 27,349,401 23,214,504
Total assets $56,550,563 $52,974,124
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
($ thousands, except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
<S> <C> <C>
Liabilities:
Future policy benefits:
Fixed annuities $21,172,303 $22,009,747
Universal life-type insurance 3,343,671 3,280,489
Traditional life insurance 225,306 213,676
Disability income and long-term care insurance 660,320 533,124
Policy claims and other policyholders' funds 70,309 68,345
Deferred income taxes, net 16,930 61,582
Amounts due to brokers 195,406 381,458
Other liabilities 410,285 345,383
Separate account liabilities 27,349,401 23,214,504
Total liabilities 53,443,931 50,108,308
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 169,584 226,359
Retained earnings 2,645,721 2,345,610
Total stockholder's equity 3,106,632 2,865,816
Total liabilities and stockholder's equity $56,550,563 $52,974,124
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Premiums:
Traditional life insurance $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance 176,298 154,021 131,518
Total premiums 229,430 206,494 182,921
Policyholder and contractholder charges 383,965 341,726 302,999
Management and other fees 401,057 340,892 271,342
Net investment income 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments 6,902 860 (159)
Total revenues 3,007,839 2,878,361 2,722,465
Benefits and expenses:
Death and other benefits:
Traditional life insurance 29,835 28,951 26,919
Universal life-type insurance
and investment contracts 108,349 92,814 85,017
Disability income and long-term care insurance 27,414 22,333 19,185
Increase in liabilities for
future policy benefits:
Traditional life insurance 6,052 3,946 1,859
Disability income and long-term care insurance 73,305 63,631 57,230
Interest credited on universal life-type
insurance and investment contracts 1,317,124 1,386,448 1,370,468
Amortization of deferred policy
acquisition costs 382,642 322,731 278,605
Other insurance and operating expenses 287,326 276,596 261,468
Total benefits and expenses 2,232,047 2,197,450 2,100,751
Income before income taxes 775,792 680,911 621,714
Income taxes 235,681 206,664 207,138
Net income $ 540,111 $ 474,247 $ 414,576
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1998
($ thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,331,708 $3,000 $278,814 $230,129 $1,819,765
Comprehensive income:
Net income 414,576 -- -- -- 414,576
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $10,325 and taxes of $82,982 (154,111) -- -- (154,111) --
Reclassification adjustment for losses
included in net income, net of tax
of $(5,429) 10,084 -- -- 10,084 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (144,027) -- -- (144,027) --
-----------------
Comprehensive income 270,549 -- -- -- --
Capital contribution from parent 4,801 -- 4,801 -- --
Other changes 2,022 -- -- -- 2,022
Cash dividends to parent (165,000) -- -- -- (165,000)
----------------------------------------------------------------------------
Balance, December 31, 1996 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income 474,247 -- -- -- 474,247
Unrealized holding gains arising during
the year, net of effect on deferred policy
acquisition costs of $(7,714) and taxes of
$(75,215) 139,686 -- -- 139,686 --
Reclassification adjustment for losses
included in net income, net of tax of $(308) 571 -- -- 571 --
----------------- --------------------
----------------- --------------------
Other comprehensive income 140,257 -- -- 140,257 --
-----------------
Comprehensive income 614,504 -- -- -- --
Capital contribution from parent 7,232 -- 7,232 -- --
Cash dividends to parent (200,000) -- -- -- (200,000)
----------------------------------------------------------------------------
Balance, December 31, 1997 2,865,816 3,000 290,847 226,359 2,345,610
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
Three years ended December 31, 1998
($ thousands)
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $2,865,816 $3,000 $290,847 $226,359 $2,345,610
Comprehensive income:
Net income 540,111 -- -- -- 540,111
Unrealized holding losses arising during
the year, net of effect on deferred policy
acquisition costs of $6,333 and taxes of $32,826
(60,964) -- -- (60,964) --
Reclassification adjustment for losses
included in net income, net of tax
of $(2,254) 4,189 -- -- 4,189 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (56,775) -- -- (56,775) --
-----------------
Comprehensive income 483,336 -- -- -- --
Other changes (2,520) -- (2,520) -- --
Cash dividends to parent (240,000) -- -- -- (240,000)
----------------------------------------------------------------------------
Balance, December 31, 1998 $3,106,632 $3,000 $288,327 $169,584 $2,645,721
============================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (53,883) (54,665) (49,314)
Repayment 57,902 46,015 41,179
Change in amounts recoverable from reinsurers (56,544) (47,994) (43,335)
Change in other accounts receivable (10,068) 6,194 (4,981)
Change in accrued investment income (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term
care insurance 138,826 112,915 97,479
Change in policy claims and other
policyholders' funds 1,964 (15,289) 27,311
Deferred income tax provision (benefit) (19,122) 19,982 (65,609)
Change in other liabilities 64,902 13,305 46,724
Amortization of premium
(accretion of discount), net 9,170 (5,649) (23,032)
Net realized (gain) loss on investments (6,902) (860) 159
Policyholder and contractholder charges, non-cash (172,396) (160,885) (154,286)
Other, net 10,786 7,161 (10,816)
Net cash provided by (used in) operating
activities $ 485,119 $ 223,914 $ (14,005)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
($ thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls 1,162,731 686,503 759,248
Sales 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls 2,967,311 1,206,213 1,270,240
Sales 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases (555,647) (524,521) (904,536)
Sales 579,038 335,765 236,912
Change in amounts due from brokers 8,073 2,647 (11,047)
Change in amounts due to brokers (186,052) 119,471 140,369
Net cash provided by (used in)
investing activities 390,114 (641,705) (333,352)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 1,873,624 2,785,758 3,567,586
Surrenders and other benefits (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance (97,602) (84,835) (86,501)
Repayment 67,000 54,513 58,753
Capital transaction with parent -- 7,232 4,801
Dividends paid (240,000) (200,000) (165,000)
Net cash (used in) provided by
financing activities (872,466) 212,874 499,813
Net increase (decrease) in cash and cash equivalents 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year 19,686 224,603 72,147
Cash and cash equivalents at end of year $ 22,453 $ 19,686 $ 224,603
See accompanying notes
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is
a wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New
York is a wholly owned subsidiary of the Company and serves New York State
residents. The Company also wholly owns American Enterprise Life Insurance
Company, American Centurion Life Assurance Company, American Partners Life
Insurance Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well. The
Company's insurance products include universal life (fixed and variable),
whole life, single premium life and term products (including waiver of
premium and accidental death benefits). The Company also markets disability
income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and carried
at amortized cost. All other fixed maturities and all marketable equity
securities are classified as available for sale and carried at fair value.
Unrealized gains and losses on securities classified as available for sale
are reported as a separate component of accumulated other comprehensive
income, net of deferred policy acquisition costs and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Mortgage loans on real estate are carried at amortized cost less reserves
for mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate, or the fair
value of collateral. The amount of the impairment is recorded in a reserve
for mortgage loan losses. The reserve for mortgage loan losses is
maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the reserve account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current and anticipated economic and political conditions.
Management regularly evaluates the adequacy of the reserve for mortgage
loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment incom
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
Amounts paid or received under interest rate swap agreements are recognized
as an adjustment to investment income.
The Company purchases and writes index options to hedge the fee income
earned on the management of equity securities in separate accounts and the
underlying mutual funds. These index options are carried at market value
and are included in other investments or other liabilities, as appropriate.
Gains or losses on index options that qualify as hedges are deferred and
recognized in management and other fees in the same period as the hedged
fee income. Gains or losses on index options that do not qualify as hedges
are marked to market through the income statement.
The Company also uses index options to manage the risks related to a
certain annuity product that pays interest based upon the relative change
in a major stock market index between the beginning and end of the
product's term. Purchased options used in conjunction with this product are
reported in other investments and written options are included in other
liabilities. The amortization of the cost of purchased options, the
proceeds of written options and the changes in intrinsic value of the
contracts are included in net investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Statements of cash flows
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.
Supplementary information to the consolidated statements of cash flows for
the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $215,003 $174,472 $317,283
Interest on borrowings 14,529 8,213 4,119
</TABLE>
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the
lives of the contracts, using primarily the interest method. Profits
represent the excess of investment income earned from investment of
contract considerations over interest credited to contract owners and other
expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. Under this method, profits are recognized over the
lives of the policies in proportion to the estimated gross profits expected
to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related benefits
and expenses are associated with premium revenue in a manner that
results in recognition of profits over the lives of the insurance
policies. This association is accomplished by means of the provision for
future policy benefits and the deferral and subsequent amortization of
policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges, issue and administrative fees and surrender charges.
These charges also include the minimum death benefit guarantee fees
received from the variable life insurance separate accounts. Management and
other fees include investment management fees from underlying proprietary
mutual funds and mortality and expense risk fees received from the variable
annuity and variable life insurance separate accounts.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most
single premium deferred annuities and installment annuities are amortized
using primarily the interest method. The costs for universal life-type
insurance and certain installment annuities are amortized as a percentage
of the estimated gross profits expected to be realized on the policies. For
traditional life, disability income and long-term care insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Liabilities for future policy benefits
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates ranging from 5% to
9.5%, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates are
based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration with
persistency on cash value plans generally anticipated to be better than
persistency on term insurance plans. Anticipated interest rates range from
4% to 10%, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based
on the net level premium method, using anticipated morbidity, mortality,
policy persistency and interest earning rates. Anticipated morbidity and
mortality rates are based on established industry morbidity and mortality
tables. Anticipated policy persistency rates vary by policy form, issue
age, policy duration and, for disability income policies, occupation class.
Anticipated interest rates for disability income and long-term care policy
reserves are 3% to 9.5% at policy issue and grade to ultimate rates of 5%
to 7% over 5 to 10 years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are
based on established industry tables. Anticipated interest rates for claim
reserves for both disability income and long-term care range from 6% to 8%.
Reinsurance
The maximum amount of life insurance risk retained by the Company on any
one life is $750 of life benefit plus $50 of accidental death benefits. The
maximum amount of life insurance risk retained on any joint-life
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care
policies are primarily reinsured on a coinsurance basis. Beginning in 1998,
the Company retains all disability income and waiver of premium risk.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $26,291
payable to and $12,061, receivable from, respectively, AEFC for federal
income taxes.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners. The Company receives investment management fees from the
proprietary mutual funds used as investment options for variable annuities
and variable life insurance. The Company receives mortality and expense
risk fees from the separate accounts.
The Company makes 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 makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are 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 payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
Accounting changes
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as
the aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or
losses on available-for-sale securities, net of the effect on deferred
policy acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." The SOP, which
is effective January 1, 1999, requires the capitalization of certain costs
incurred after the date of adoption to develop or obtain software for
internal use. Software utilized by the Company is owned by AEFC and will be
capitalized by AEFC. As a result, the new rule will not have a material
impact on the Company's results of operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments," providing guidance
for the timing of recognition of liabilities related to guaranty fund
assessments. The Company will adopt the SOP on January 1, 1999. The Company
has historically carried a balance in other liabilities on the balance
sheet for potential guaranty fund assessment exposure. Adoption of the SOP
will not have a material impact on the Company's results of operations or
financial condition.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2000.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. Earlier application of all of
the provisions of this Statement is encouraged, but it is permitted only as
of the beginning of any fiscal quarter that begins after issuance of the
Statement. This Statement cannot be applied retroactively. The ultimate
financial impact of the new rule will be measured based on the derivatives
in place at adoption and cannot be estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations 9,683 491 -- 10,173
Corporate bonds and obligations 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities 1,609,067 30,458 152 1,639,373
$ 7,964,114 $483,161 $27,239 $8,420,035
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations 11,060 1,231 -- 12,291
Corporate bonds and obligations 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities 5,949,502 151,511 3,869 6,097,144
Total fixed maturities 13,344,949 427,240 159,050 13,613,139
Equity securities 158 --
3,000 3,158
$13,347,949 $427,398 $159,050 $13,616,297
</TABLE>
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations 9,684 568 -- 10,252
Corporate bonds and obligations 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities 1,983,188 25,976 7,911 2,001,253
$9,315,450 $445,193 $17,233 $9,743,410
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations 11,045 1,348 -- 12,393
Corporate bonds and obligations 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities 7,130,565 160,478 6,879 7,284,164
Total fixed maturities 12,515,030 398,741 37,077 12,876,694
Equity securities 3,000 361 --
3,361
$12,518,030 $399,102 $37,077 $12,880,055
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 by contractual maturity are shown below. 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.
<TABLE>
<CAPTION>
Amortized Fair
Held to maturity Cost Value
<S> <C> <C>
Due in one year or less $ 354,296 $ 359,020
Due from one to five years 2,111,369 2,249,847
Due from five to ten years 3,012,227 3,189,789
Due in more than ten years 877,155 982,006
Mortgage-backed securities 1,609,067 1,639,373
$ 7,964,114 $ 8,420,035
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 102,463 $ 104,475
Due from one to five years 682,336 725,859
Due from five to ten years 3,904,326 4,044,378
Due in more than ten years 2,718,659 2,654,382
Mortgage-backed securities 5,937,165 6,084,045
$13,344,949 $13,613,139
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales
were not significant. The sale of these fixed maturities was due to
significant deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities available for sale were sold during 1997
with proceeds of $457,585 and gross realized gains and losses of $6,639 and
$7,518, respectively. Fixed maturities available for sale were sold during
1996 with proceeds of $238,905 and gross realized gains and losses of $571
and $16,084, respectively.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 83 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $3.6 billion which are rated by AEFC's internal analysts
using criteria similar to Moody's and S&P. A summary of investments in
fixed maturities, at amortized cost, by rating on December 31 is as
follows:
<TABLE>
<CAPTION>
Rating 1998 1997
<S> <C> <C>
Aaa/AAA $ 7,629,628 $ 9,195,619
Aaa/AA 2,277 --
Aa/AA 308,053 232,451
Aa/A 301,325 246,792
A/A 2,525,283 2,787,936
A/BBB 1,148,736 1,200,345
Baa/BBB 6,237,014 5,226,616
Baa/BB 492,696 475,084
Below investment grade 2,664,051 2,465,637
$21,309,063 $21,830,480
</TABLE>
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer
are greater than one percent of the Company's total investments in fixed
maturities.
At December 31, 1998, approximately 13 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Region Sheet to Purchase_ Sheet to Purchase
<S> <C> <C> <C> <C>
East North Central $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central 491,006 81,648 456,934 14,340
South Atlantic 839,233 21,020 922,172 14,619
Middle Atlantic 476,448 6,169 545,601 15,507
New England 263,761 2,824 316,250 2,136
Pacific 195,851 16,946 184,917 3,204
West South Central 136,841 1,412 125,227 --
East South Central 46,029 -- 60,274 --
Mountain 345,379 8,473 297,545 28,717
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase_ Sheet to Purchase_
<S> <C> <C> <C> <C>
Department/retail stores $1,139,349 $ 59,305 $1,189,203 $ 27,314
Apartments 960,808 9,272 1,089,127 16,576
Office buildings 783,576 50,450 716,729 34,546
Industrial buildings 298,549 13,263 295,889 21,200
Hotels/motels 109,185 14,122 101,052 --
Medical buildings 124,369 -- 99,979 9,748
Nursing/retirement homes 46,696 -- 72,359 --
Mixed Use 65,151 -- 71,007 --
Other 17,570 8,473 21,947 1,601
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in
impaired loans was $24,941 and $45,714, respectively, with allowances of
$6,662 and $9,812, respectively. During 1998 and 1997, the average recorded
investment in impaired loans was $37,873 and $61,870, respectively.
The Company recognized $1,809, $2,981 and $4,889 of interest income related
to impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $38,645 $37,495 $37,340
Provision for investment losses 7,582 8,801 10,005
Loan payoffs (800) (3,851) (4,700)
Foreclosures and writeoffs (5,632) (3,800) (5,150)
Balance, December 31 $39,795 $38,645 $37,495
</TABLE>
At December 31, 1998, the Company had commitments to purchase investments
other than mortgage loans for $223,011. Commitments to purchase investments
are made in the ordinary course of business. The fair value of these
commitments is $nil.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
Net investment income for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest on fixed maturities $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans 301,253 305,742 283,830
Other investment income 43,518 25,089 43,283
Interest on cash equivalents 5,486 5,914 5,754
2,027,241 2,029,226 1,999,796
Less investment expenses 40,756 40,837 34,434
$1,986,485 $1,988,389 $1,965,362
</TABLE>
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $ 12,084 $ 16,115 $ 8,736
Mortgage loans (5,933) (6,424) (8,745)
Other investments 751 (8,831) (150)
$ 6,902 $ 860 $ (159)
</TABLE>
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities available for sale $(93,474) $223,441 $(231,853)
Equity securities (203) 53 (52)
</TABLE>
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal income taxes:
Current $244,946 $176,879 $260,357
Deferred (16,602) 19,982 (65,609)
228,344 196,861 194,748
State income taxes-current 7,337 9,803 12,390
Income tax expense $235,681 $206,664 $207,138
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes based on
the statutory rate $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases
are
attributable to:
Tax-excluded interest and
dividend income (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal
benefit 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
Federal income taxes $235,681 30.4% $206,664 30.4% $207,138 33.3%
</TABLE>
A portion of life insurance company income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
policyholders' surplus account. At December 31, 1998, the Company had a
policyholders' surplus account balance of $20,114. The policyholders'
surplus account is only taxable if dividends to the stockholder exceed the
stockholder's surplus account or if the Company is liquidated. Deferred
income taxes of $7,040 have not been established because no distributions
of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Policy reserves $756,769 $748,204
Life insurance guaranty fund assessment reserve 15,289 20,101
Other 4,253 9,589
Total deferred tax assets 776,311 777,894
Deferred tax liabilities:
Deferred policy acquisition costs 698,471 700,032
Unrealized gain on investments 91,315 121,885
Investments, other 3,455 17,559
Total deferred tax liabilities 793,241 839,476
Net deferred tax liabilities $ 16,930 $ 61,582
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets 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.
4. Stockholder's equity
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $1,598,203 as of December 31, 1998
and $1,468,677 as of December 31, 1997 (see Note 3 with respect to the
income tax effect of certain distributions). In addition, any dividend
distributions in 1999 in excess of approximately $353,933 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory net income $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus 1,883,405 1,765,290 1,565,082
</TABLE>
5. Related party transactions
The Company loans funds to AEFC under a collateral loan agreement. The
balance of the loan was $nil at December 31, 1998 and 1997. This loan can
be increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's permanent
investments. Interest income on related party loans totaled $nil, $103 and
$780 in 1998, 1997 and 1996, respectively.
The Company participates in the American Express Company Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. Employer contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. The Company's share of the
total net periodic pension cost was $211, $201 and $174 in 1998, 1997 and
1996, respectively.
The Company also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent
of either each employee's eligible compensation or basic contributions.
Costs of these plans charged to operations in 1998, 1997 and 1996 were
$1,503, $1,245 and $990, respectively.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
5. Related party transactions (continued)
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and
retired financial advisors. The plans include participant contributions and
service related eligibility requirements. Upon retirement, such employees
are considered to have been employees of AEFC. AEFC expenses these benefits
and allocates the expenses to its subsidiaries. The Company's share of
postretirement benefits in 1998, 1997 and 1996 was $1,352, $1,330 and
$1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for
1998, 1997 and 1996, respectively. Certain of these costs are included in
deferred policy acquisition costs.
6. Commitments and contingencies
At December 31, 1998, 1997 and 1996, traditional life insurance and
universal life-type insurance in force aggregated $81,074,928, $74,730,720
and $67,274,354 respectively, of which $4,912,313, $4,351,904 and
$3,875,921 were reinsured at the respective year ends. The Company also
reinsures a portion of the risks assumed under disability income and
long-term care policies. Under all reinsurance agreements, premiums ceded
to reinsurers amounted to $66,378, $60,495 and $48,250 and reinsurance
recovered from reinsurers amounted to $20,982, $19,042, and $15,612 for the
years ended December 31, 1998, 1997 and 1996, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company, its parent and its subsidiaries conduct
business involving insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. The Company has
been named as a defendant in three of these types of actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from the Company and its subsidiaries. The
complaints put at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged
violations of consumer fraud statutes. The Company and its subsidiaries
believe they have meritorious defenses to the claims raised in these
lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the
opinion of management, however, the ultimate resolution of these lawsuits,
taken in the aggregate, should not have a material adverse effect on the
Company's consolidated financial position.
The IRS routinely examines the Company's federal income tax returns, and is
currently auditing the Company's returns for the 1990 through 1992 tax
years. Management does not believe there will be a material adverse effect
on the Company's consolidated financial position as a result of this audit.
7. Lines of credit
The Company has available lines of credit with its parent aggregating
$100,000. The interest rate for any borrowings is established by reference
to various indices plus 20 to 45 basis points, depending on the term.
Borrowings outstanding under this agreement were $nil at December 31, 1998
and 1997.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity market
risk, including hedging specific transactions. The Company does not hold
derivative instruments for trading purposes. The Company manages risks
associated with these instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market
index. The Company is not impacted by market risk related to derivatives
held for non-trading purposes beyond that inherent in cash market
transactions. Derivatives held for purposes other than trading are largely
used to manage risk and, therefore, the cash flow and income effects of the
derivatives are inverse to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit risk.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors 1,000,000 1,082 13,971 13,971
Options purchased 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps 1,667,000 -- (73,477) --
$ 30,635 $(36,859) $47,680
</TABLE>
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 4,600,000 $ 24,963 $ 15,665 $ 15,665
Interest rate floors 1,000,000 1,561 4,551 4,551
Options purchased/written 279,737 9,808 10,449 10,449
Liabilities:
Options written 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps 1,267,000 -- (45,799) --
$36,243 $(15,020) $30,665
</TABLE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps, floors and
swaps expire on various dates from 1999 to 2003. The put and call options
expire on various dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount
of fee income received is based upon the daily market value of the separate
account and mutual fund assets. As a result, changing interest rate
conditions could impact the Company's fee income significantly. The Company
entered into interest rate swaps to hedge anticipated fee income for 1999
related to separate accounts and mutual funds which invest in fixed income
securities. Interest will be accrued and reported in accrued investment
income and other liabilities, as appropriate, and management and other
fees.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company offers a certain annuity product that pays interest based upon
the relative change in a major stock market index between the beginning and
end of the product's term. As a means of hedging its obligation under the
provisions of this product, the Company purchases and writes options on the
major stock market index.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the
underlying mutual funds. The amount of the fee income received is based
upon the daily market value of the separate account and mutual fund assets.
As a result, the Company's fee income could be impacted significantly by
changing economic conditions in the equity market. The Company entered into
index option collars (combination of puts and calls) to hedge anticipated
fee income for 1998 and 1999 related to separate accounts and mutual funds
which invest in equity securities. Testing has demonstrated the impact of
these instruments on the income statement closely correlates with the
amount of fee income the Company realizes. In the event that testing
demonstrates that this correlation no longer exists, or in the event the
Company disposes of the index options collars, the instruments will be
marked-to-market through the income statement. At December 31, 1998
deferred losses on purchased put and written call index options were $2,933
and $7,435, respectively. At December 31, 1997 deferred losses on purchased
put index options were $2,428 and deferred gains on written call index
options were $5,275.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair values of life insurance obligations and all non-financial
instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force,
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of the Company, therefore,
cannot be estimated by aggregating the amounts presented.
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on
real estate (Note 2) 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2) 3,158 3,158 3,361 3,361
Derivative financial
Instruments (Note 8) 41,161 47,680 36,332 30,665
Other 28,872 28,872 82,347 85,383
Cash and cash
equivalents (Note 1) 22,453 22,453 19,686 19,686
Separate account assets (Note 1) 27,349,401 27,349,401 23,214,504 23,214,504
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
9. Fair values of financial instruments (continued)
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Financial Liabilities Value Value Value Value
<S> <C> <C> <C> <C>
Future policy benefits for
fixed annuities $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8) 10,526 84,539 89 45,685
Separate account liabilities 25,005,732 24,179,115 21,488,282 20,707,620
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $1,226,985 and $1,185,155, respectively, and policy
loans of $90,115 and $93,540, respectively. The fair value of these
benefits is based on the status of the annuities at December 31, 1998 and
1997. The fair value of deferred annuities is estimated as the carrying
amount less any applicable surrender charges and related loans. The fair
value for annuities in non-life contingent payout status is estimated as
the present value of projected benefit payments at rates appropriate for
contracts issued in 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any applicable
surrender charges and less variable insurance contracts carried at
$2,343,669 and $1,726,222, respectively.
10. Year 2000 Issue (Unaudited)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of major systems or
miscalculations, which could have a material impact on the operations of
the Company. All of the systems used by the Company are maintained by AEFC
and are utilized by multiple subsidiaries and affiliates of AEFC. The
Company's business is heavily dependent upon AEFC's computer systems and
has significant interactions with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes
has been conducted to identify the major systems that could be affected by
the Year 2000 issue. Steps have been taken to resolve potential problems
including modification to existing software and the purchase of new
software. AEFC's target date for substantially completing it's program of
corrective measures on internal business critical systems was Dec. 31,
1998. As of June 30, 1999, AEFC completed its program of corrective
measures on its internal systems and applications, including Year 2000
compliance testing. The Year 2000 readiness of unaffiliated investment
managers and other third parties whose system failures could have an impact
on the Company's operations continues to be evaluated. The failure of
external parties to resolve their own Year 2000 issues in a timely manner
could result in a material financial risk to AEFC or the Company.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans
for all key business units. Business continuation plans, which address
business continuation in the event of a system disruption, are in place for
all key business units. These plans are being amended to include specific
Year 2000 considerations and will continue to be refined throughout 1999 as
additional information related to potential Year 2000 exposure is gathered.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
AMERICAN EXPRESS RETIREMENT ADVISOR VARIABLE ANNUITYSM -BAND 3
IDS Life Variable Account 10
September 15, 1999
IDS Life Variable Account 10 is a separate account established and maintained by
IDS Life Insurance Company (IDS Life).
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus dated the same date as this SAI, which may be
obtained by writing or calling us at the address and telephone number below. The
prospectus is incorporated in this SAI by reference.
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
800-437-0602
<PAGE>
TABLE OF CONTENTS
Performance Information.......................................................p.
Calculating Annuity Payouts...................................................p.
Rating Agencies...............................................................p.
Principal Underwriter.........................................................p.
Independent Auditors..........................................................p.
Financial Statements
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The subaccounts may quote various performance figures to illustrate past
performance. We base total return and current yield quotations (if applicable)
on standardized methods of computing performance as required by the Securities
and Exchange Commission (SEC). An explanation of the methods used to compute
performance follows below.
Average Annual Total Return
We will express quotations of average annual total return for the subaccounts in
terms of the average annual compounded rate of return of a hypothetical
investment in the contract over a period of one, five and ten years (or, if
less, up to the life of the subaccounts), calculated according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
We calculated the following performance figures on the basis of historical
performance of each fund. Currently we do not show any performance information
for the subaccounts because they are new and have not had any activity to date.
However, we show performance from the commencement date of the funds as if the
contract existed at that time, which it did not. Past performance does not
guarantee future results.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return For Periods Ending Dec. 31, 1998
Performance Since Commencement of the Fund*
<S> <C> <C> <C> <C> <C>
Subaccount Investing In: 1 Year 5 Years 10 Years Since
- ---------- ------------- ------ ------- -------- Commencement
AXPSM VARIABLE PORTFOLIO
BC3 Blue Chip Advantage Fund+ --% --% --% --%
BD3 Bond Fund (10/81)** 0.88 6.13 8.27 10.45
CR3 Capital Resource Fund (10/81) 23.37 15.86 15.12 14.72
CM3 Cash Management Fund (10/81) 4.49 4.29 4.69 5.91
DE3 Diversified Equity Income Fund+ -- -- -- --
EI3 Extra Income Fund (5/96) -5.00 -- -- 4.60
FI3 Federal Income Fund+ -- -- -- --
GB3 Global Bond Fund (5/96) 7.39 -- -- 6.79
GR3 Growth Fund+ -- -- -- --
IE3 International Fund (1/92) 15.12 6.70 -- 8.72
MF3 Managed Fund (4/86) 15.09 13.24 13.87 12.05
ND3 New Dimensions Fund (5/96) 27.88 -- -- 23.55
SC3 Small Cap Advantage Fund+ -- -- -- --
SA3 Strategy Aggressive Fund (1/92) 1.99 9.97 -- 10.16
AIM V.I.
3CA Capital Appreciation Fund (5/93) 18.60 16.52 -- 18.04
3CD Capital Development Fund (5/98) -- -- -- -7.94
American Century
3IF VP International Fund (5/94) 11.38 -- -- 9.57
3VA VP Value Fund (5/96) 7.46 -- -- 16.59
FIDELITY VIP
3GI III Growth & Income Portfolio 27.80 -- -- 27.22
(Service Class) (12/96)
3MP III Mid Cap Portfolio (Service -- -- -- 3.03
Class) (12/98)
3OS Overseas Portfolio (Service Class) 5.83 3.36 6.48 6.70
(12/87)
FRANKLIN TEMPLETON VIP TRUST
3RE Real Estate Securities Fund - Class -17.35 9.36 -- 9.63
2 (1/89)***
3IS Templeton International Smaller -12.72 -- -- -1.62
Companies Fund - Class 2 (5/96)***
3SI Value Securities Fund - Class 2 -- -- -- -22.46
(5/98)***
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(VIT)
3SE CORESM Small Cap Equity Fund (2/98) -- -- -- -9.90
3UE CORESM U.S. Equity Fund (2/98) -- -- -- 14.00
3MC Mid Cap Value Fund (4/98) -- -- -- -13.94
LAZARD RETIREMENT SERIES, INC.
3IP International Equity Portfolio (9/98) -- -- -- 12.03
PUTNAM VARIABLE TRUST
3IN Putnam VT International New -- -- -- -1.47
Opportunities Fund - Class IB Shares
(4/98)
3VS Putnam VT Vista Fund - Class IB -- -- -- --
Shares (1/99)
ROYCE
3MI Micro-Cap Portfolio (12/96) -9.87 -- -- 1.64
THIRD AVENUE VARIABLE SERIES TRUST
3SV Value Portfolio+ -- -- -- --
WANGER
3IT International Small Cap (5/95) 15.63 -- -- 20.67
3SP U.S. Small Cap (5/95) 8.02 -- -- 26.10
WARBURG PINCUS TRUST
3EG Emerging Growth Portfolio+ -- -- -- --
*Current applicable charges deducted from fund performance include a $30
contract administrative charge and a 0.55% mortality and expense risk fee.
+ Fund had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Funds)
***Because Class 2 shares were not offered until Jan. 6, 1999, performance shown
represents Class 1 shares. Although invested in the same portfolio of securities
as Class 1, Class 2's standardized performance will differ because of Class 2's
additional 12b-1 fee expense which affects all performance after the inception
of Class 2. Figures assume reinvestment of dividends and capital gains.
</TABLE>
<PAGE>
Cumulative Total Return
Cumulative total return represents the cumulative change in the value of an
investment for a given period (reflecting change in a subaccount's accumulation
unit value). We compute cumulative total return by using the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period, at the
end of the period (or fractional portion thereof).
All total return figures reflect the deduction of all applicable charges
including the contract administrative charge and mortality and expense risk fee.
Annualized Calculation of Yield for Subaccounts Investing in Money Market Funds
Annualized Simple Yield
For the subaccounts investing in money market funds, we base quotations of
simple yield on:
(a) the change in the value of a hypothetical subaccount (exclusive of
capital changes and income other than investment income) at the
beginning of a particular seven-day period;
(b) less a pro rata share of the subaccount expenses accrued over the
period;
(c) dividing this difference by the value of the subaccount at the
beginning of the period to obtain the base period return; and
(d) multiplying the base period return by 365/7.
The subaccount's value includes:
o any declared dividends,
o the value of any shares purchased with dividends paid during the period, and
o any dividends declared for such shares.
It does not include any realized or unrealized gains or losses.
Annualized Compound Yield
We calculate compound yield using the base period return described above, which
we then compound according to the following formula:
Compound Yield = [(Base Period Return + 1)365/7] -1
<PAGE>
You must consider (when comparing an investment in subaccounts investing in
money market funds with fixed annuities) that fixed annuities often provide an
agreed-to or guaranteed yield for a stated period of time, whereas the
subaccount's yield fluctuates. In comparing the yield of the subaccount to a
money market fund, you should consider the different services that the contract
provides.
Annualized Yield for Subaccounts Investing in Income Funds
For the subaccounts investing in income funds, we base quotations of yield on
all investment income earned during a particular 30-day period, less expenses
accrued during the period (net investment income) and compute it by dividing net
investment income per accumulation unit by the value of an accumulation unit on
the last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
where: a = dividends and investment income earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per accumulation unit on the
last day of the period
The subaccount earns yield from the increase in the net asset value of shares of
the fund in which it invests and from dividends declared and paid by the fund,
which are automatically invested in shares of the fund.
The yield on the subaccount's accumulation unit may fluctuate daily and does not
provide a basis for determining future yields.
Independent rating or statistical services or publishers or publications such as
those listed below may quote subaccount performance, compare it to rankings,
yields or returns, or use it in variable annuity accumulation or settlement
illustrations they publish or prepare.
The Bank Rate Monitor National Index, Barron's, Business Week, CDA
Technologies, Donoghue's Money Market Fund Report, Financial Services
Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal
Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today,
U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
CALCULATING ANNUITY PAYOUTS
The Variable Account
We do the following calculations separately for each of the subaccounts of the
variable account. The separate monthly payouts, added together, make up your
total variable annuity payout.
<PAGE>
Initial Payout: To compute your first monthly payment, we:
o determine the dollar value of your contract as of the valuation date that
falls on (or closest to the valuation date that falls before) the seventh
calendar day before the settlement date and then deduct any applicable
premium tax; then
o apply the result to the annuity table contained in the contract or
another table at least as favorable.
The annuity table shows the amount of the first monthly payment for each $1,000
of value which depends on factors built into the table, as described below.
Annuity Units: We then convert the value of your subaccount to annuity units. To
compute the number of units credited to you, we divide the first monthly payment
by the annuity unit value (see below) on the valuation date that falls on (or
closest to the valuation date that falls before) the seventh calendar day before
the settlement date. The number of units in your subaccount is fixed. The value
of the units fluctuates with the performance of the underlying fund.
Subsequent Payouts: To compute later payouts, we multiply:
o the annuity unit value on the valuation date that falls on (or closest to
the valuation date that falls before) the seventh calendar day before the
payout is due; by
o the fixed number of annuity units credited to you.
Annuity Unit Values: We originally set this value at $1 for each subaccount. To
calculate later values we multiply the last annuity value by the product of:
o the net investment factor; and
o the neutralizing factor.
The purpose of the neutralizing factor is to offset the effect of the assumed
rate built into the annuity table. With an assumed investment rate of 5%, the
neutralizing factor is 0.999866 for a one day valuation period.
Net Investment Factor:
We determine the net investment factor by:
o adding the fund's current net asset value per share plus the per share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee from the result.
Because the net asset value of the fund may fluctuate, the net investment factor
may be greater or less than one, and the annuity unit value may increase or
decrease. You bear this investment risk in a variable subaccount.
The Fixed Account
We guarantee your fixed annuity payout amounts. Once calculated, your payout
will remain the same and never change. To calculate your annuity payouts we:
o take the value of your fixed account at the settlement date or the date you
selected to begin receiving your annuity payouts; then
o using an annuity table, we apply the value according to the annuity
payout plan you select.
<PAGE>
The annuity payout table we use will be the one in effect at the time you choose
to begin your annuity payouts. The values in the table will be equal to or
greater than the table in your contract.
RATING AGENCIES
The following chart reflects the ratings given to us by independent rating
agencies. These agencies evaluate the financial soundness and claims-paying
ability of insurance companies based on a number of different factors. This
information does not relate to the management or performance of the subaccounts
of the contract. This information relates only to the fixed account and reflects
our ability to make annuity payouts and to pay death benefits and other
distributions from the contract.
Rating Agency Rating
A.M. Best A+
(Superior)
- -----------------------
Duff & Phelps AAA
- -----------------------
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contract is IDS Life which offers the contract
on a continuous basis.
The contract is new and, therefore, we have not received any surrender charges
or paid any commissions.
INDEPENDENT AUDITORS
The financial statements appearing in this SAI have been audited by Ernst &
Young LLP (1400 Pillsbury Center, 200 South Sixth Street, Minneapolis, MN
55402), independent auditors, as stated in their report appearing herein.
FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
February 4, 1999
Minneapolis, Minnesota
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
($ thousands)
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $8,420,035; 1997, $9,743,410) $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost:
1998, $13,344,949; 1997, $12,515,030) 13,613,139 12,876,694
Mortgage loans on real estate 3,505,458 3,618,647
Policy loans 525,431 498,874
Other investments 366,604 318,591
Total investments 25,974,746 26,628,256
Cash and cash equivalents 22,453 19,686
Amounts recoverable from reinsurers 262,260 205,716
Amounts due from brokers 327 8,400
Other accounts receivable 47,963 37,895
Accrued investment income 366,574 357,390
Deferred policy acquisition costs 2,496,352 2,479,577
Other assets 30,487 22,700
Separate account assets 27,349,401 23,214,504
Total assets $56,550,563 $52,974,124
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
($ thousands, except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
<S> <C> <C>
Liabilities:
Future policy benefits:
Fixed annuities $21,172,303 $22,009,747
Universal life-type insurance 3,343,671 3,280,489
Traditional life insurance 225,306 213,676
Disability income and long-term care insurance 660,320 533,124
Policy claims and other policyholders' funds 70,309 68,345
Deferred income taxes, net 16,930 61,582
Amounts due to brokers 195,406 381,458
Other liabilities 410,285 345,383
Separate account liabilities 27,349,401 23,214,504
Total liabilities 53,443,931 50,108,308
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 169,584 226,359
Retained earnings 2,645,721 2,345,610
Total stockholder's equity 3,106,632 2,865,816
Total liabilities and stockholder's equity $56,550,563 $52,974,124
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Premiums:
Traditional life insurance $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance 176,298 154,021 131,518
Total premiums 229,430 206,494 182,921
Policyholder and contractholder charges 383,965 341,726 302,999
Management and other fees 401,057 340,892 271,342
Net investment income 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments 6,902 860 (159)
Total revenues 3,007,839 2,878,361 2,722,465
Benefits and expenses:
Death and other benefits:
Traditional life insurance 29,835 28,951 26,919
Universal life-type insurance
and investment contracts 108,349 92,814 85,017
Disability income and long-term care insurance 27,414 22,333 19,185
Increase in liabilities for
future policy benefits:
Traditional life insurance 6,052 3,946 1,859
Disability income and long-term care insurance 73,305 63,631 57,230
Interest credited on universal life-type
insurance and investment contracts 1,317,124 1,386,448 1,370,468
Amortization of deferred policy
acquisition costs 382,642 322,731 278,605
Other insurance and operating expenses 287,326 276,596 261,468
Total benefits and expenses 2,232,047 2,197,450 2,100,751
Income before income taxes 775,792 680,911 621,714
Income taxes 235,681 206,664 207,138
Net income $ 540,111 $ 474,247 $ 414,576
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1998
($ thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,331,708 $3,000 $278,814 $230,129 $1,819,765
Comprehensive income:
Net income 414,576 -- -- -- 414,576
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $10,325 and taxes of $82,982 (154,111) -- -- (154,111) --
Reclassification adjustment for losses
included in net income, net of tax
of $(5,429) 10,084 -- -- 10,084 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (144,027) -- -- (144,027) --
-----------------
Comprehensive income 270,549 -- -- -- --
Capital contribution from parent 4,801 -- 4,801 -- --
Other changes 2,022 -- -- -- 2,022
Cash dividends to parent (165,000) -- -- -- (165,000)
----------------------------------------------------------------------------
Balance, December 31, 1996 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income 474,247 -- -- -- 474,247
Unrealized holding gains arising during
the year, net of effect on deferred policy
acquisition costs of $(7,714) and taxes of
$(75,215) 139,686 -- -- 139,686 --
Reclassification adjustment for losses
included in net income, net of tax of $(308) 571 -- -- 571 --
----------------- --------------------
----------------- --------------------
Other comprehensive income 140,257 -- -- 140,257 --
-----------------
Comprehensive income 614,504 -- -- -- --
Capital contribution from parent 7,232 -- 7,232 -- --
Cash dividends to parent (200,000) -- -- -- (200,000)
----------------------------------------------------------------------------
Balance, December 31, 1997 2,865,816 3,000 290,847 226,359 2,345,610
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
Three years ended December 31, 1998
($ thousands)
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $2,865,816 $3,000 $290,847 $226,359 $2,345,610
Comprehensive income:
Net income 540,111 -- -- -- 540,111
Unrealized holding losses arising during
the year, net of effect on deferred policy
acquisition costs of $6,333 and taxes of $32,826
(60,964) -- -- (60,964) --
Reclassification adjustment for losses
included in net income, net of tax
of $(2,254) 4,189 -- -- 4,189 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (56,775) -- -- (56,775) --
-----------------
Comprehensive income 483,336 -- -- -- --
Other changes (2,520) -- (2,520) -- --
Cash dividends to parent (240,000) -- -- -- (240,000)
----------------------------------------------------------------------------
Balance, December 31, 1998 $3,106,632 $3,000 $288,327 $169,584 $2,645,721
============================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (53,883) (54,665) (49,314)
Repayment 57,902 46,015 41,179
Change in amounts recoverable from reinsurers (56,544) (47,994) (43,335)
Change in other accounts receivable (10,068) 6,194 (4,981)
Change in accrued investment income (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term
care insurance 138,826 112,915 97,479
Change in policy claims and other
policyholders' funds 1,964 (15,289) 27,311
Deferred income tax provision (benefit) (19,122) 19,982 (65,609)
Change in other liabilities 64,902 13,305 46,724
Amortization of premium
(accretion of discount), net 9,170 (5,649) (23,032)
Net realized (gain) loss on investments (6,902) (860) 159
Policyholder and contractholder charges, non-cash (172,396) (160,885) (154,286)
Other, net 10,786 7,161 (10,816)
Net cash provided by (used in) operating
activities $ 485,119 $ 223,914 $ (14,005)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
($ thousands)
1998 1997 1996
<S> <C> <C> <C>
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls 1,162,731 686,503 759,248
Sales 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls 2,967,311 1,206,213 1,270,240
Sales 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases (555,647) (524,521) (904,536)
Sales 579,038 335,765 236,912
Change in amounts due from brokers 8,073 2,647 (11,047)
Change in amounts due to brokers (186,052) 119,471 140,369
Net cash provided by (used in)
investing activities 390,114 (641,705) (333,352)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 1,873,624 2,785,758 3,567,586
Surrenders and other benefits (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance (97,602) (84,835) (86,501)
Repayment 67,000 54,513 58,753
Capital transaction with parent -- 7,232 4,801
Dividends paid (240,000) (200,000) (165,000)
Net cash (used in) provided by
financing activities (872,466) 212,874 499,813
Net increase (decrease) in cash and cash equivalents 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year 19,686 224,603 72,147
Cash and cash equivalents at end of year $ 22,453 $ 19,686 $ 224,603
See accompanying notes
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is
a wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New
York is a wholly owned subsidiary of the Company and serves New York State
residents. The Company also wholly owns American Enterprise Life Insurance
Company, American Centurion Life Assurance Company, American Partners Life
Insurance Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well. The
Company's insurance products include universal life (fixed and variable),
whole life, single premium life and term products (including waiver of
premium and accidental death benefits). The Company also markets disability
income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and carried
at amortized cost. All other fixed maturities and all marketable equity
securities are classified as available for sale and carried at fair value.
Unrealized gains and losses on securities classified as available for sale
are reported as a separate component of accumulated other comprehensive
income, net of deferred policy acquisition costs and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Mortgage loans on real estate are carried at amortized cost less reserves
for mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate, or the fair
value of collateral. The amount of the impairment is recorded in a reserve
for mortgage loan losses. The reserve for mortgage loan losses is
maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the reserve account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current and anticipated economic and political conditions.
Management regularly evaluates the adequacy of the reserve for mortgage
loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment incom
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
Amounts paid or received under interest rate swap agreements are recognized
as an adjustment to investment income.
The Company purchases and writes index options to hedge the fee income
earned on the management of equity securities in separate accounts and the
underlying mutual funds. These index options are carried at market value
and are included in other investments or other liabilities, as appropriate.
Gains or losses on index options that qualify as hedges are deferred and
recognized in management and other fees in the same period as the hedged
fee income. Gains or losses on index options that do not qualify as hedges
are marked to market through the income statement.
The Company also uses index options to manage the risks related to a
certain annuity product that pays interest based upon the relative change
in a major stock market index between the beginning and end of the
product's term. Purchased options used in conjunction with this product are
reported in other investments and written options are included in other
liabilities. The amortization of the cost of purchased options, the
proceeds of written options and the changes in intrinsic value of the
contracts are included in net investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Statements of cash flows
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.
Supplementary information to the consolidated statements of cash flows for
the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $215,003 $174,472 $317,283
Interest on borrowings 14,529 8,213 4,119
</TABLE>
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the
lives of the contracts, using primarily the interest method. Profits
represent the excess of investment income earned from investment of
contract considerations over interest credited to contract owners and other
expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. Under this method, profits are recognized over the
lives of the policies in proportion to the estimated gross profits expected
to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related benefits
and expenses are associated with premium revenue in a manner that
results in recognition of profits over the lives of the insurance
policies. This association is accomplished by means of the provision for
future policy benefits and the deferral and subsequent amortization of
policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges, issue and administrative fees and surrender charges.
These charges also include the minimum death benefit guarantee fees
received from the variable life insurance separate accounts. Management and
other fees include investment management fees from underlying proprietary
mutual funds and mortality and expense risk fees received from the variable
annuity and variable life insurance separate accounts.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most
single premium deferred annuities and installment annuities are amortized
using primarily the interest method. The costs for universal life-type
insurance and certain installment annuities are amortized as a percentage
of the estimated gross profits expected to be realized on the policies. For
traditional life, disability income and long-term care insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Liabilities for future policy benefits
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates ranging from 5% to
9.5%, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates are
based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration with
persistency on cash value plans generally anticipated to be better than
persistency on term insurance plans. Anticipated interest rates range from
4% to 10%, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based
on the net level premium method, using anticipated morbidity, mortality,
policy persistency and interest earning rates. Anticipated morbidity and
mortality rates are based on established industry morbidity and mortality
tables. Anticipated policy persistency rates vary by policy form, issue
age, policy duration and, for disability income policies, occupation class.
Anticipated interest rates for disability income and long-term care policy
reserves are 3% to 9.5% at policy issue and grade to ultimate rates of 5%
to 7% over 5 to 10 years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are
based on established industry tables. Anticipated interest rates for claim
reserves for both disability income and long-term care range from 6% to 8%.
Reinsurance
The maximum amount of life insurance risk retained by the Company on any
one life is $750 of life benefit plus $50 of accidental death benefits. The
maximum amount of life insurance risk retained on any joint-life
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care
policies are primarily reinsured on a coinsurance basis. Beginning in 1998,
the Company retains all disability income and waiver of premium risk.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $26,291
payable to and $12,061, receivable from, respectively, AEFC for federal
income taxes.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners. The Company receives investment management fees from the
proprietary mutual funds used as investment options for variable annuities
and variable life insurance. The Company receives mortality and expense
risk fees from the separate accounts.
The Company makes 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 makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are 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 payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
Accounting changes
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as
the aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or
losses on available-for-sale securities, net of the effect on deferred
policy acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." The SOP, which
is effective January 1, 1999, requires the capitalization of certain costs
incurred after the date of adoption to develop or obtain software for
internal use. Software utilized by the Company is owned by AEFC and will be
capitalized by AEFC. As a result, the new rule will not have a material
impact on the Company's results of operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments," providing guidance
for the timing of recognition of liabilities related to guaranty fund
assessments. The Company will adopt the SOP on January 1, 1999. The Company
has historically carried a balance in other liabilities on the balance
sheet for potential guaranty fund assessment exposure. Adoption of the SOP
will not have a material impact on the Company's results of operations or
financial condition.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2000.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. Earlier application of all of
the provisions of this Statement is encouraged, but it is permitted only as
of the beginning of any fiscal quarter that begins after issuance of the
Statement. This Statement cannot be applied retroactively. The ultimate
financial impact of the new rule will be measured based on the derivatives
in place at adoption and cannot be estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations 9,683 491 -- 10,173
Corporate bonds and obligations 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities 1,609,067 30,458 152 1,639,373
$ 7,964,114 $483,161 $27,239 $8,420,035
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations 11,060 1,231 -- 12,291
Corporate bonds and obligations 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities 5,949,502 151,511 3,869 6,097,144
Total fixed maturities 13,344,949 427,240 159,050 13,613,139
Equity securities 158 --
3,000 3,158
$13,347,949 $427,398 $159,050 $13,616,297
</TABLE>
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1997
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations 9,684 568 -- 10,252
Corporate bonds and obligations 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities 1,983,188 25,976 7,911 2,001,253
$9,315,450 $445,193 $17,233 $9,743,410
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations 11,045 1,348 -- 12,393
Corporate bonds and obligations 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities 7,130,565 160,478 6,879 7,284,164
Total fixed maturities 12,515,030 398,741 37,077 12,876,694
Equity securities 3,000 361 --
3,361
$12,518,030 $399,102 $37,077 $12,880,055
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 by contractual maturity are shown below. 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.
<TABLE>
<CAPTION>
Amortized Fair
Held to maturity Cost Value
<S> <C> <C>
Due in one year or less $ 354,296 $ 359,020
Due from one to five years 2,111,369 2,249,847
Due from five to ten years 3,012,227 3,189,789
Due in more than ten years 877,155 982,006
Mortgage-backed securities 1,609,067 1,639,373
$ 7,964,114 $ 8,420,035
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 102,463 $ 104,475
Due from one to five years 682,336 725,859
Due from five to ten years 3,904,326 4,044,378
Due in more than ten years 2,718,659 2,654,382
Mortgage-backed securities 5,937,165 6,084,045
$13,344,949 $13,613,139
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales
were not significant. The sale of these fixed maturities was due to
significant deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities available for sale were sold during 1997
with proceeds of $457,585 and gross realized gains and losses of $6,639 and
$7,518, respectively. Fixed maturities available for sale were sold during
1996 with proceeds of $238,905 and gross realized gains and losses of $571
and $16,084, respectively.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 83 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $3.6 billion which are rated by AEFC's internal analysts
using criteria similar to Moody's and S&P. A summary of investments in
fixed maturities, at amortized cost, by rating on December 31 is as
follows:
<TABLE>
<CAPTION>
Rating 1998 1997
<S> <C> <C>
Aaa/AAA $ 7,629,628 $ 9,195,619
Aaa/AA 2,277 --
Aa/AA 308,053 232,451
Aa/A 301,325 246,792
A/A 2,525,283 2,787,936
A/BBB 1,148,736 1,200,345
Baa/BBB 6,237,014 5,226,616
Baa/BB 492,696 475,084
Below investment grade 2,664,051 2,465,637
$21,309,063 $21,830,480
</TABLE>
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer
are greater than one percent of the Company's total investments in fixed
maturities.
At December 31, 1998, approximately 13 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Region Sheet to Purchase_ Sheet to Purchase
<S> <C> <C> <C> <C>
East North Central $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central 491,006 81,648 456,934 14,340
South Atlantic 839,233 21,020 922,172 14,619
Middle Atlantic 476,448 6,169 545,601 15,507
New England 263,761 2,824 316,250 2,136
Pacific 195,851 16,946 184,917 3,204
West South Central 136,841 1,412 125,227 --
East South Central 46,029 -- 60,274 --
Mountain 345,379 8,473 297,545 28,717
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase_ Sheet to Purchase_
<S> <C> <C> <C> <C>
Department/retail stores $1,139,349 $ 59,305 $1,189,203 $ 27,314
Apartments 960,808 9,272 1,089,127 16,576
Office buildings 783,576 50,450 716,729 34,546
Industrial buildings 298,549 13,263 295,889 21,200
Hotels/motels 109,185 14,122 101,052 --
Medical buildings 124,369 -- 99,979 9,748
Nursing/retirement homes 46,696 -- 72,359 --
Mixed Use 65,151 -- 71,007 --
Other 17,570 8,473 21,947 1,601
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in
impaired loans was $24,941 and $45,714, respectively, with allowances of
$6,662 and $9,812, respectively. During 1998 and 1997, the average recorded
investment in impaired loans was $37,873 and $61,870, respectively.
The Company recognized $1,809, $2,981 and $4,889 of interest income related
to impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, January 1 $38,645 $37,495 $37,340
Provision for investment losses 7,582 8,801 10,005
Loan payoffs (800) (3,851) (4,700)
Foreclosures and writeoffs (5,632) (3,800) (5,150)
Balance, December 31 $39,795 $38,645 $37,495
</TABLE>
At December 31, 1998, the Company had commitments to purchase investments
other than mortgage loans for $223,011. Commitments to purchase investments
are made in the ordinary course of business. The fair value of these
commitments is $nil.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
Net investment income for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest on fixed maturities $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans 301,253 305,742 283,830
Other investment income 43,518 25,089 43,283
Interest on cash equivalents 5,486 5,914 5,754
2,027,241 2,029,226 1,999,796
Less investment expenses 40,756 40,837 34,434
$1,986,485 $1,988,389 $1,965,362
</TABLE>
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $ 12,084 $ 16,115 $ 8,736
Mortgage loans (5,933) (6,424) (8,745)
Other investments 751 (8,831) (150)
$ 6,902 $ 860 $ (159)
</TABLE>
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities available for sale $(93,474) $223,441 $(231,853)
Equity securities (203) 53 (52)
</TABLE>
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal income taxes:
Current $244,946 $176,879 $260,357
Deferred (16,602) 19,982 (65,609)
228,344 196,861 194,748
State income taxes-current 7,337 9,803 12,390
Income tax expense $235,681 $206,664 $207,138
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes based on
the statutory rate $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases
are
attributable to:
Tax-excluded interest and
dividend income (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal
benefit 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
Federal income taxes $235,681 30.4% $206,664 30.4% $207,138 33.3%
</TABLE>
A portion of life insurance company income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
policyholders' surplus account. At December 31, 1998, the Company had a
policyholders' surplus account balance of $20,114. The policyholders'
surplus account is only taxable if dividends to the stockholder exceed the
stockholder's surplus account or if the Company is liquidated. Deferred
income taxes of $7,040 have not been established because no distributions
of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Policy reserves $756,769 $748,204
Life insurance guaranty fund assessment reserve 15,289 20,101
Other 4,253 9,589
Total deferred tax assets 776,311 777,894
Deferred tax liabilities:
Deferred policy acquisition costs 698,471 700,032
Unrealized gain on investments 91,315 121,885
Investments, other 3,455 17,559
Total deferred tax liabilities 793,241 839,476
Net deferred tax liabilities $ 16,930 $ 61,582
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets 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.
4. Stockholder's equity
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $1,598,203 as of December 31, 1998
and $1,468,677 as of December 31, 1997 (see Note 3 with respect to the
income tax effect of certain distributions). In addition, any dividend
distributions in 1999 in excess of approximately $353,933 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory net income $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus 1,883,405 1,765,290 1,565,082
</TABLE>
5. Related party transactions
The Company loans funds to AEFC under a collateral loan agreement. The
balance of the loan was $nil at December 31, 1998 and 1997. This loan can
be increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's permanent
investments. Interest income on related party loans totaled $nil, $103 and
$780 in 1998, 1997 and 1996, respectively.
The Company participates in the American Express Company Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. Employer contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. The Company's share of the
total net periodic pension cost was $211, $201 and $174 in 1998, 1997 and
1996, respectively.
The Company also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent
of either each employee's eligible compensation or basic contributions.
Costs of these plans charged to operations in 1998, 1997 and 1996 were
$1,503, $1,245 and $990, respectively.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
5. Related party transactions (continued)
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and
retired financial advisors. The plans include participant contributions and
service related eligibility requirements. Upon retirement, such employees
are considered to have been employees of AEFC. AEFC expenses these benefits
and allocates the expenses to its subsidiaries. The Company's share of
postretirement benefits in 1998, 1997 and 1996 was $1,352, $1,330 and
$1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for
1998, 1997 and 1996, respectively. Certain of these costs are included in
deferred policy acquisition costs.
6. Commitments and contingencies
At December 31, 1998, 1997 and 1996, traditional life insurance and
universal life-type insurance in force aggregated $81,074,928, $74,730,720
and $67,274,354 respectively, of which $4,912,313, $4,351,904 and
$3,875,921 were reinsured at the respective year ends. The Company also
reinsures a portion of the risks assumed under disability income and
long-term care policies. Under all reinsurance agreements, premiums ceded
to reinsurers amounted to $66,378, $60,495 and $48,250 and reinsurance
recovered from reinsurers amounted to $20,982, $19,042, and $15,612 for the
years ended December 31, 1998, 1997 and 1996, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company, its parent and its subsidiaries conduct
business involving insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. The Company has
been named as a defendant in three of these types of actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from the Company and its subsidiaries. The
complaints put at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged
violations of consumer fraud statutes. The Company and its subsidiaries
believe they have meritorious defenses to the claims raised in these
lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the
opinion of management, however, the ultimate resolution of these lawsuits,
taken in the aggregate, should not have a material adverse effect on the
Company's consolidated financial position.
The IRS routinely examines the Company's federal income tax returns, and is
currently auditing the Company's returns for the 1990 through 1992 tax
years. Management does not believe there will be a material adverse effect
on the Company's consolidated financial position as a result of this audit.
7. Lines of credit
The Company has available lines of credit with its parent aggregating
$100,000. The interest rate for any borrowings is established by reference
to various indices plus 20 to 45 basis points, depending on the term.
Borrowings outstanding under this agreement were $nil at December 31, 1998
and 1997.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity market
risk, including hedging specific transactions. The Company does not hold
derivative instruments for trading purposes. The Company manages risks
associated with these instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market
index. The Company is not impacted by market risk related to derivatives
held for non-trading purposes beyond that inherent in cash market
transactions. Derivatives held for purposes other than trading are largely
used to manage risk and, therefore, the cash flow and income effects of the
derivatives are inverse to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit risk.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors 1,000,000 1,082 13,971 13,971
Options purchased 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps 1,667,000 -- (73,477) --
$ 30,635 $(36,859) $47,680
</TABLE>
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 4,600,000 $ 24,963 $ 15,665 $ 15,665
Interest rate floors 1,000,000 1,561 4,551 4,551
Options purchased/written 279,737 9,808 10,449 10,449
Liabilities:
Options written 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps 1,267,000 -- (45,799) --
$36,243 $(15,020) $30,665
</TABLE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps, floors and
swaps expire on various dates from 1999 to 2003. The put and call options
expire on various dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount
of fee income received is based upon the daily market value of the separate
account and mutual fund assets. As a result, changing interest rate
conditions could impact the Company's fee income significantly. The Company
entered into interest rate swaps to hedge anticipated fee income for 1999
related to separate accounts and mutual funds which invest in fixed income
securities. Interest will be accrued and reported in accrued investment
income and other liabilities, as appropriate, and management and other
fees.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company offers a certain annuity product that pays interest based upon
the relative change in a major stock market index between the beginning and
end of the product's term. As a means of hedging its obligation under the
provisions of this product, the Company purchases and writes options on the
major stock market index.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the
underlying mutual funds. The amount of the fee income received is based
upon the daily market value of the separate account and mutual fund assets.
As a result, the Company's fee income could be impacted significantly by
changing economic conditions in the equity market. The Company entered into
index option collars (combination of puts and calls) to hedge anticipated
fee income for 1998 and 1999 related to separate accounts and mutual funds
which invest in equity securities. Testing has demonstrated the impact of
these instruments on the income statement closely correlates with the
amount of fee income the Company realizes. In the event that testing
demonstrates that this correlation no longer exists, or in the event the
Company disposes of the index options collars, the instruments will be
marked-to-market through the income statement. At December 31, 1998
deferred losses on purchased put and written call index options were $2,933
and $7,435, respectively. At December 31, 1997 deferred losses on purchased
put index options were $2,428 and deferred gains on written call index
options were $5,275.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair values of life insurance obligations and all non-financial
instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force,
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of the Company, therefore,
cannot be estimated by aggregating the amounts presented.
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on
real estate (Note 2) 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2) 3,158 3,158 3,361 3,361
Derivative financial
Instruments (Note 8) 41,161 47,680 36,332 30,665
Other 28,872 28,872 82,347 85,383
Cash and cash
equivalents (Note 1) 22,453 22,453 19,686 19,686
Separate account assets (Note 1) 27,349,401 27,349,401 23,214,504 23,214,504
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
9. Fair values of financial instruments (continued)
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Financial Liabilities Value Value Value Value
<S> <C> <C> <C> <C>
Future policy benefits for
fixed annuities $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8) 10,526 84,539 89 45,685
Separate account liabilities 25,005,732 24,179,115 21,488,282 20,707,620
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $1,226,985 and $1,185,155, respectively, and policy
loans of $90,115 and $93,540, respectively. The fair value of these
benefits is based on the status of the annuities at December 31, 1998 and
1997. The fair value of deferred annuities is estimated as the carrying
amount less any applicable surrender charges and related loans. The fair
value for annuities in non-life contingent payout status is estimated as
the present value of projected benefit payments at rates appropriate for
contracts issued in 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any applicable
surrender charges and less variable insurance contracts carried at
$2,343,669 and $1,726,222, respectively.
10. Year 2000 Issue (Unaudited)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of major systems or
miscalculations, which could have a material impact on the operations of
the Company. All of the systems used by the Company are maintained by AEFC
and are utilized by multiple subsidiaries and affiliates of AEFC. The
Company's business is heavily dependent upon AEFC's computer systems and
has significant interactions with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes
has been conducted to identify the major systems that could be affected by
the Year 2000 issue. Steps have been taken to resolve potential problems
including modification to existing software and the purchase of new
software. AEFC's target date for substantially completing it's program of
corrective measures on internal business critical systems was Dec. 31,
1998. As of June 30, 1999, AEFC completed its program of corrective
measures on its internal systems and applications, including Year 2000
compliance testing. The Year 2000 readiness of unaffiliated investment
managers and other third parties whose system failures could have an impact
on the Company's operations continues to be evaluated. The failure of
external parties to resolve their own Year 2000 issues in a timely manner
could result in a material financial risk to AEFC or the Company.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans
for all key business units. Business continuation plans, which address
business continuation in the event of a system disruption, are in place for
all key business units. These plans are being amended to include specific
Year 2000 considerations and will continue to be refined throughout 1999 as
additional information related to potential Year 2000 exposure is gathered.
