<PAGE>
As Filed with the Securities and Exchange Commission on April 30, 1999
Registration No. 333-19521
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 4 to
-----------------------------
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
STATE FARM LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
(Exact name of trust)
STATE FARM LIFE INSURANCE COMPANY
(Name of depositor)
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Complete address of depositor's principal executive offices)
(Name and complete address
of agent for service) Copy to:
Laura P. Sullivan, Esq. Stephen E. Roth, Esq.
State Farm Life Insurance Company Sutherland Asbill & Brennan LLP
One State Farm Plaza 1275 Pennsylvania Avenue, N.W.
Bloomington, Illinois 61710-0001 Washington, DC 20004-2415
Approximate date of proposed public offering:
As soon as practicable after the effective date of this Registration Statement
Securities Being Offered: Variable Universal Life Insurance Policies
It is proposed that this filing become effective:
/ / Immediately upon filing pursuant to paragraph (b) of Rule 485.
/X/ On April 30, 1999 pursuant to paragraph (b) of Rule 485.
/ / 80 days after filing pursuant to paragraph (a)(1) of Rule 485.
/ / On (date) pursuant to paragraph (a)(1) of Rule 485.
<PAGE>
PROSPECTUS DATED MAY 1, 1999
VARIABLE UNIVERSAL LIFE INSURANCE POLICY
ISSUED BY
STATE FARM LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
OF STATE FARM LIFE INSURANCE COMPANY
P.O. BOX 2307
BLOOMINGTON, ILLINOIS 61702-2307
TELEPHONE (888) 702-2307
State Farm Life Insurance Company ("State Farm," "we," "us," or "our") is
offering the variable universal life insurance policy (the "Policy") described
in this prospectus. State Farm designed the Policy to provide: (1) lifetime
insurance protection on the insured person named in the policy, and (2)
flexibility regarding premiums and death benefits. Subject to certain
restrictions, the purchaser of a Policy (the "Owner," "you," or "your") may:
- - change the frequency and amounts of premium payments;
- - change the level of death benefits; and
- - allocate premiums (after State Farm deducts a premium charge) and Policy
values to:
--) State Farm's general account (the "Fixed Account"), an account that
provides a specified minimum rate of interest; and
--) subaccounts of State Farm Life Insurance Company Variable Life Separate
Account (the "Variable Account"), a separate account allowing you to invest
in the following investment portfolios ("Funds") of the State Farm Variable
Product Trust (the "Trust"):
/ / Large Cap Equity Index Fund
/ / Small Cap Equity Index Fund
/ / International Equity Index Fund
/ / Stock and Bond Balanced Fund
/ / Bond Fund
/ / Money Market Fund
The accompanying prospectus for the Trust describes each of the investment
portfolios, including the risks of investing in each portfolio, and provides
other information about the Trust.
An Owner of a Policy can select between two death benefit options: (1) a level
insurance amount (Basic Amount) or (2) a level insurance amount plus the Policy
Account Value. As long as the Policy is in force, State Farm guarantees that the
death benefit will never be less than the Basic Amount less any unrepaid Policy
loans and past due charges. For a Policy issued in Texas or Maryland, if the
Insured is alive on the Maturity Date, State Farm will pay the Cash Surrender
Value on the Maturity Date to the Owner and the Policy will terminate.
The Policy provides for a Cash Surrender Value, which is the amount State Farm
would pay if you surrender the policy. Because this value varies with the
portfolio's performance, there is no guaranteed Cash Surrender Value or
guaranteed minimum Cash Surrender Value if you allocate premiums and Policy
values to the Trust. On any given day, the Cash Surrender Value could be more or
less than the premiums paid.
The Policy provides for a death benefit guarantee whereby the Policy will not
lapse so long as you pay certain minimum premiums. The Policy also allows you to
take loans, make withdrawals, and participate in a dollar-cost averaging program
or a portfolio rebalancing program.
Please read this prospectus carefully and keep it for future reference. A
prospectus or prospectus profile for State Farm Variable Product Trust must
accompany this prospectus and you should read it in conjunction with this
prospectus.
INTERESTS IN THE POLICIES AND SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF OR GUARANTEED BY A BANK, AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THE
POLICIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEX OF TERMS................................................... 2
SUMMARY OF THE POLICY............................................ 3
PREMIUMS......................................................... 7
Applying for a Policy.......................................... 7
Exchanges from State Farm Universal Life and State Farm
Traditional Ordinary Whole Life............................... 7
Free Look Right to Cancel Policy............................... 7
Premiums....................................................... 7
Planned Premiums............................................... 8
Premiums to Prevent Lapse...................................... 8
Death Benefit Guarantee........................................ 8
Crediting Premiums to the Policy............................... 8
ALLOCATION OPTIONS............................................... 8
Net Premium Allocations........................................ 8
Subaccount Options............................................. 9
Fixed Account Option........................................... 9
Transfers...................................................... 9
Dollar-Cost Averaging.......................................... 10
Portfolio Rebalancing Program.................................. 10
CHARGES AND DEDUCTIONS........................................... 11
HOW YOUR POLICY ACCOUNT VALUES VARY.............................. 12
Policy Account Value........................................... 12
Cash Value..................................................... 12
Cash Surrender Value........................................... 12
Subaccount Policy Value........................................ 13
Fixed Policy Account Value..................................... 13
DEATH BENEFITS................................................... 13
Amount of Death Benefit Payable................................ 13
Death Benefit Options.......................................... 13
Changing the Death Benefit Option.............................. 14
Changing the Basic Amount...................................... 14
Effect of Withdrawals on the Death Benefit..................... 15
Changing the Beneficiary....................................... 15
LOAN BENEFITS.................................................... 15
Loan Account................................................... 15
Interest....................................................... 15
Loan Repayment................................................. 15
Effect of Policy Loan.......................................... 15
SURRENDER BENEFITS............................................... 16
Full Surrender................................................. 16
Withdrawals.................................................... 16
HYPOTHETICAL ILLUSTRATIONS OF ACCUMULATED PREMIUMS, POLICY
ACCOUNT VALUES, CASH SURRENDER VALUES, AND DEATH BENEFITS....... 17
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS................... 26
Requesting Payments............................................ 26
Telephone Transactions......................................... 26
OTHER POLICY BENEFITS AND PROVISIONS............................. 26
Exchange Provision............................................. 26
Other Policy Provisions........................................ 27
Beneficiary.................................................... 27
Reinstatement.................................................. 27
Other Changes.................................................. 27
Reports to Policy Owners....................................... 27
Assignment and Change of Owner................................. 27
Supplemental Benefits.......................................... 27
STATE FARM AND THE FIXED ACCOUNT................................. 28
State Farm Life Insurance Company.............................. 28
State Farm Directors and Officers.............................. 28
THE VARIABLE ACCOUNT AND THE TRUST............................... 31
TAX CONSIDERATIONS............................................... 32
TAX TREATMENT OF POLICY BENEFITS................................. 32
ADDITIONAL INFORMATION........................................... 33
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS.
THIS PROSPECTUS CONSTITUTES AN OFFERING ONLY IN
THOSE JURISDICTIONS WHERE SUCH OFFERING
MAY LAWFULLY BE MADE.
1 -------
<PAGE>
INDEX OF TERMS
This prospectus uses the following special terms:
AGE -- Age means the age on the Insured's last birthday as of the Policy Date
and each Policy Anniversary. If the Policy Date falls on the Insured's birthday,
the Age will be the age the Insured reaches on the Policy Date.
CASH VALUE -- Policy Account Value less any applicable surrender charge.
CASH SURRENDER VALUE -- Cash Value less any Loan Amount.
DEATH BENEFIT -- The amount of insurance provided under the Policy determined by
the Death Benefit Option and any insurance amounts provided by riders. State
Farm will reduce the amount payable on the Insured's death by any Loan Amount
and any unpaid Monthly Deductions.
DEDUCTION DATE -- The Policy Date and each monthly anniversary of the Policy
Date.
FUND -- An investment portfolio of the State Farm Variable Product Trust.
HOME OFFICE -- P.O. Box 2307, Bloomington, IL 61702-2307, 1-888-702-2307.
INSURED -- The person upon whose life State Farm issues the Policy.
ISSUE DATE -- The date State Farm issues the Policy.
LOAN ACCOUNT -- A part of our general account to which we transfer Policy
Account Value in the Variable Account and the Fixed Account to provide
collateral for any loan you take under the Policy.
LOAN AMOUNT -- The sum of all outstanding Policy loans including both principal
plus accrued interest.
LOAN POLICY ACCOUNT VALUE -- The value of the Loan Account for this Policy.
MATURITY DATE -- For Policies issued in Texas and Maryland, the Maturity Date is
the Policy Anniversary when the Insured is Age 100.
MINIMUM PREMIUM -- For any Policy Month during the first 10 Policy Years (first
9 Policy Years for Policies issued in Texas) the cumulative minimum monthly
premium required to keep the Death Benefit Guarantee in effect.
POLICY -- The variable life insurance policy described in this prospectus. The
Policy contains the Basic Plan, any amendments, endorsements and riders, and a
copy of the application. The Policy is the entire contract.
POLICY ACCOUNT VALUE -- The combined value of your Policy in all of the
Subaccounts of the Variable Account, the Fixed Account, and the values held in
our general account to secure Policy loans.
POLICY ANNIVERSARY -- The same day and month as the Policy Date each year that
the Policy remains in force.
POLICY DATE -- If we issue the Policy as applied for and we receive the premium
before the Issue Date, the Policy Date is the later of the application date or
the date we receive the premium. Otherwise, the Policy Date is the Issue Date.
We measure Policy Months, Years and Anniversaries from the Policy Date. The
Policy Date cannot be the 29th, 30th, or 31st day of any month.
POLICY MONTH -- The same day as the Policy Date each month that the Policy
remains in force.
POLICY YEAR -- Any 12-month period starting with the Policy Date or a Policy
Anniversary.
TRUST -- State Farm Variable Product Trust.
VALUATION DAY -- Each day on which both the New York Stock Exchange and the Home
Office are open for business except for a day that a Subaccount's corresponding
Fund does not value its shares. The New York Stock Exchange is currently closed
on weekends and on the following holidays: New Year's Day; Reverend Dr. Martin
Luther King, Jr. Holiday; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
VALUATION PERIOD -- The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
- ---------
2
<PAGE>
SUMMARY OF THE POLICY
The following paragraphs summarize certain prospectus information and the
important features of the Policy. Please read this summary along with the more
detailed information appearing elsewhere in this prospectus. Unless otherwise
indicated, the description of the Policy in this prospectus assumes that the
Policy is in force and there is no outstanding Loan Amount. Please refer to the
Index of Terms for definitions of certain terms this prospectus uses.
Purpose of the Policy. State Farm designed the Policy to provide insurance
benefits with a long-term investment element. You should consider the Policy in
conjunction with other insurance you own. Please consider carefully before
replacing existing insurance with the Policy.
Comparison with Universal Life Insurance. The Policy is similar in many ways to
universal life insurance. As with universal life insurance:
- - the Owner pays premiums for insurance coverage on the Insured;
- - the Policy provides for the accumulation of a Cash Surrender Value that is
payable if you surrender the Policy during the Insured's lifetime; and
- - the Cash Surrender Value may be substantially lower than the premiums paid.
However, the Policy differs significantly from universal life insurance in that
the Policy Account Value may decrease if the investment performance of the
Subaccounts to which you allocated Policy Account Value declines (or is not
sufficiently favorable). If the Cash Surrender Value becomes insufficient to
cover charges when due and the Death Benefit Guarantee is not in effect, the
Policy will lapse without value after a grace period. See "Premiums to Prevent
Lapse," page 8.
Tax Considerations. State Farm intends for the Policy to satisfy the definition
of a life insurance contract under Section 7702 of the Internal Revenue Code of
1986, as amended (the "Code"). Under certain circumstances, a Policy could be
treated as a "modified endowment contract." State Farm will monitor Policies and
will attempt to notify an Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract. For further discussion of
the tax status of a Policy and the tax consequences of being treated as a life
insurance contract or a modified endowment contract, see "Tax Considerations,"
page 32.
Free Look Right to Cancel Policy. For a limited time after State Farm issues a
Policy, you have the right to cancel your Policy and receive a full refund of
all premiums paid. See "Free Look Right to Cancel Policy," page 7. During this
limited period, State Farm will allocate Net Premiums paid to the Fixed Account.
See "Net Premium Allocations," page 8.
Owner Inquiries. If you have any questions, you may write or call our Home
Office at P.O. Box 2307, Bloomington, IL 61702-2307, (888) 702-2307 (toll free).
3 -------
<PAGE>
PREMIUMS
- - You select a payment plan but are not required to pay premiums according to
the plan. You can vary the frequency and amount, within limits, and can skip
planned premiums. See "Planned Premiums," page 8.
- - Minimum initial premium and planned premium depend on the Insured's Age, sex,
rate class, Basic Amount selected, and any supplemental riders. See
"Premiums," page 7.
- - You may pay unplanned premiums, within limits. See "Premiums," page 7.
- - Under certain circumstances, you may need to pay extra premiums to prevent
lapse. See "Premiums to Prevent Lapse," page 8.
ALLOCATING OF NET PREMIUMS
- - State Farm deducts a 5% premium charge from each premium before allocation
resulting in a net premium.
- - You direct the allocation of Net Premiums among six Subaccounts and the Fixed
Account. See "Net Premium Allocations," page 8, for rules and limits.
- - State Farm credits interest on amounts allocated to the Fixed Account at a
rate we determine, but not less than an annual effective rate of 4%. See
"Transfers," page 9, for rules and limits on Fixed Account allocations.
FUNDS AVAILABLE THROUGH SUBACCOUNTS
- - The Subaccounts invest in corresponding portfolios of State Farm Variable
Product Trust. See "The Trust," page 31.
TABLE A
FUND ANNUAL EXPENSES
(as a percentage of average daily net assets)
The investment advisory fees shown below are the actual amounts incurred in the
fiscal year ended December 31, 1998 for each of the Funds. The Stock and Bond
Balanced Fund invests primarily in the Large Cap Equity Index Fund and the Bond
Fund. The Stock and Bond Balanced Fund will not pay investment advisory fees
directly, but will indirectly bear its share of the investment advisory fees
incurred by the Large Cap Equity Index Fund and the Bond Fund. Therefore, the
investment results of the Stock and Bond Balanced Fund will be net of these
fees. The relative amounts that the Stock and Bond Balanced Fund invests in the
Large Cap Equity Index Fund and the Bond Fund at any one time will fluctuate,
but under normal circumstances, the Stock and Bond Balanced Fund will attempt to
maintain approximately 60% of its net assets in shares of the Large Cap Equity
Index Fund and approximately 40% of its net assets in shares of the Bond Fund.
Based on these percentages, an approximate investment advisory fee was derived
for the Stock and Bond Balanced Fund. This derived fee is used for the purpose
of showing the Stock and Bond Balanced Fund's annual expenses in the table below
and for purposes of the Example below.
- ---------
4
<PAGE>
By investing in the Large Cap Equity Index Fund and the Bond Fund, the Stock and
Bond Balanced Fund will indirectly bear its share of those underlying Funds'
Other Expenses and will incur its own Other Expenses. Other Expenses reflect the
fact that the investment adviser to the Funds has agreed to bear the expenses
incurred by each Fund (other than the International Equity Index Fund), other
than the investment advisory fee, that exceed 0.10% of such Fund's average daily
net assets, and that the investment adviser to the Funds has agreed to bear all
of the Stock and Bond Balanced Fund's own Other Expenses. The investment adviser
to the Funds has agreed to bear the expenses incurred by the International
Equity Index Fund, other than the investment advisory fee, that exceed 0.20% of
that Fund's average daily net assets. These expense limitation arrangements are
voluntary and the investment adviser can eliminate them at any time.
<TABLE>
<CAPTION>
TOTAL
OTHER EXPENSES ANNUAL EXPENSES
INVESTMENT (AFTER EXPENSE (AFTER EXPENSE
FUND ADVISORY FEES LIMITATION) (*) LIMITATION) (*)
<S> <C> <C> <C>
Large Cap Equity Index Fund 0.26% 0.06% 0.32%
Small Cap Equity Index Fund 0.40% 0.10% 0.50%
International Equity Index Fund 0.55% 0.20% 0.75%
Money Market Fund 0.40% 0.03% 0.43%
Bond Fund 0.50% 0.07% 0.57%
Stock and Bond Balanced Fund 0.36% 0.06% 0.42%
</TABLE>
(*) Absent this expense limitation, Other Expenses for the Small Cap Equity
Index Fund, International Equity Index Fund, and Money Market Fund would be
0.15%, 0.38%, and 0.12%, respectively. During the year ended December 31,
1998, the investment adviser reimbursed a greater amount of expenses of the
Money Market Fund than required under the agreement, further reducing that
Fund's other expenses to 0.03%.
DEDUCTIONS FROM ASSETS
- - State Farm makes a monthly deduction for cost of insurance, $6 current monthly
expense charge (maximum of $8 per month), and supplemental benefit charges.
See "Charges and Deductions, Monthly Deduction," page 11.
- - State Farm deducts a daily charge at a current annual rate of 0.80% (maximum
annual rate of 0.90%) from assets in the Subaccounts. See "Charges and
Deductions Mortality and Expense Risk Charge," page 11. State Farm does not
deduct this charge from assets in the Fixed Account.
POLICY ACCOUNT VALUE
- - Policy Account Value is the amount in the Subaccounts and in the Fixed Account
credited to your Policy plus the value held in the general account to secure
the Loan Amount. See "Policy Account Value," page 12, "Fixed Policy Account
Value," page 13, and "Subaccount Policy Value," page 13.
- - Policy Account Value varies from day to day to reflect Subaccount investment
experience, interest credited on any Fixed Account allocations, charges
deducted and other Policy transactions (such as Policy loans, transfers and
withdrawals).
- - You may transfer Policy Account Value among the Subaccounts and the Fixed
Account. A $25 transfer processing fee may apply to transfers made after the
12th transfer in a Policy Year. See "Transfers" for rules and limits. Policy
loans reduce the amount available for allocations and transfers.
- - Policy Account Value serves as the starting point for calculating certain
values under a Policy, such as the Cash Surrender Value and the Death Benefit.
- - There is no minimum guaranteed Policy Account Value. The Policy may lapse on a
Deduction Date if the Cash Surrender Value is insufficient to cover the
Monthly Deduction then due and the Death Benefit Guarantee is not in effect.
5 -------
<PAGE>
CASH BENEFITS
- - You may take loans for amounts up to 90% of Cash Value, at a net interest rate
of 2%. See "Loan Benefits," page 15, and "Tax Treatment of Policy Benefits,"
page 32.
- - You may make withdrawals up to 4 times each Policy Year provided there is
sufficient remaining Cash Surrender Value. A withdrawal processing fee equal
to the lesser of $25 or 2% of the amount requested for withdrawal will apply
to each withdrawal. See "Withdrawals," page 16, for rules and limits.
- - You can surrender the Policy at any time for its Cash Surrender Value (Policy
Account Value minus Loan Amount and minus any applicable surrender charge).
See "Full Surrender," page 16.
- - State Farm will deduct a surrender charge from the Policy Account Value upon a
full surrender of the Policy during the first 10 Policy Years or the first 10
years after an increase in Basic Amount. See "Surrender Charge," page 11.
- - A variety of payment options are available.
DEATH BENEFITS
- - Death Benefits are available as a lump sum or under a variety of payment
options.
- - The minimum Basic Amount available is $50,000.
- - Death Benefits are available in two death benefit options:
- - Option 1 (greater of Basic Amount plus any Net Premium payment received since
the last Deduction Date, or a specified percentage of Policy Account Value);
or
- - Option 2 (greater of Basic Amount plus the Policy Account Value, or a
specified percentage of Policy Account Value). See "Death Benefits," page 13.
- - We provide flexibility to change the Basic Amount and to change the Death
Benefit option. See "Changing the Basic Amount" and "Changing the Death
Benefit Option," page 14, for rules and limits.
- - The Death Benefit Guarantee keeps the Policy in force regardless of
sufficiency of Cash Surrender Value so long as cumulative premiums paid on the
Policy, less any withdrawals and less the Loan Policy Account Value, are at
least equal to the Minimum Premium. See "Death Benefit Guarantee," page 8.
- - The Death Benefit should be excludible from the gross income of the
Beneficiary. See "Tax Treatment of Policy Benefits," page 32.
- ---------
6
<PAGE>
PREMIUMS
Applying for a Policy. To purchase a Policy, you must complete an application
and submit it to an authorized State Farm agent. You also must pay an initial
premium of a sufficient amount. See "Premiums," below. You can submit your
initial premium with your application or at a later date. Coverage becomes
effective as of the date we receive the premium, but is limited to $300,000
(unless the Insured is under 15 days old in which case coverage will not exceed
$3,000) until the application is approved.
Generally, State Farm will issue a Policy covering an Insured up to age 80 if
evidence of insurability satisfies our underwriting rules and we have received
an initial premium of sufficient amount. This amount must be at least equal to
the minimum monthly premium if the payment mode of the Policy is monthly, and 12
times the minimum monthly premium if the payment mode of the Policy is annual.
Evidence of insurability may include, among other things, a medical examination
of the Insured. We reserve the right not to accept an application for any lawful
reason.
Exchanges from State Farm Universal Life and State Farm Traditional Ordinary
Whole Life. State Farm will permit the owner of a State Farm Universal Life
policy or a State Farm Traditional Ordinary whole life policy to exchange such
policy for a Policy subject to the following conditions:
(1) the initial Basic Amount for the Policy must equal or exceed the Basic
Amount less any policy loan and accrued loan interest for the original
policy;
(2) State Farm will waive evidence of insurability where the initial Basic
Amount of the Policy is equal to the Basic Amount less any policy loan
and accrued loan interest for the original policy, and where the death
benefit options are the same for exchanges from a Universal Life policy
or where the death benefit option is Option 1 for exchanges from a
Traditional Ordinary whole life policy; and
(3) the original policy must be terminated.
State Farm can change this program at any time. We reserve the right to refuse
an exchange for any lawful reason.
On exchanges from a Universal Life policy to a Policy, State Farm will waive the
surrender charge on the Universal Life policy and will waive the 5% premium
charge on the Policy for the amount transferred from the Universal Life policy
to the Policy.
On exchanges from a Traditional Ordinary whole life policy to a Policy, State
Farm will waive the 5% premium charge on the Policy for the amount transferred
from the Traditional Ordinary whole life policy to the Policy.
Free Look Right to Cancel Policy. During your "free-look" period, you may cancel
your Policy and receive a refund of all premiums paid. The free look period
expires 10 days after you receive your Policy. Some states may require a longer
period. If you decide to cancel the Policy, you must return it by mail or other
delivery to State Farm or to an authorized State Farm agent. Immediately after
mailing or delivery, State Farm will deem the Policy void from the beginning.
Premiums. The premium amounts sufficient to fund a Policy depend on a number of
factors, such as the Age, sex and rate class of the proposed Insured, the
desired Basic Amount, and any supplemental benefits. After you pay the initial
premium, you may pay additional premiums in any amount and at any time. However,
total premiums paid in a Policy Year may not exceed guideline premium
limitations for life insurance set forth in the Code. We reserve the right to
reject any premium that would result in the Policy being disqualified as life
insurance under the Code and will refund any rejected premium. In addition, we
will monitor Policies and will attempt to notify the Owner on a timely basis if
his or her Policy is in jeopardy of becoming a modified endowment contract under
the Code. See "Tax Considerations," page 32.
State Farm allows a credit on conversions of eligible State Farm term insurance
to the Policy. The amount of the credit is based on the premiums paid on the
term coverage during the 12 months prior to conversion. The amount of the credit
will be added to the premium, if any, submitted by the Owner converting the term
coverage, and will be treated as part of the initial premium for the Policy
(except for purposes of the free look provision). Therefore, the credit will be
included in the premiums for purposes of calculating and deducting the premium
charge. See "Charges and Deductions Premium Charge," page 11. State Farm will
not recapture the credit if you surrender the Policy. State Farm will not
include the amount of the credit for purposes of calculating agent compensation.
See "Additional Information Sale of the Policies," page 33.
7 -------
<PAGE>
Planned Premiums. When you apply for a Policy, you select a monthly or annual
premium payment plan. You may arrange for monthly premiums to be paid via
automatic deduction from your checking account. You are not required to pay
premiums in accordance with this premium plan; rather, you can pay more or less
than planned or skip a planned premium entirely. You can change the amount of
planned premiums and payment arrangements, or switch between monthly and annual
frequencies, whenever you want by providing satisfactory written or telephone
instructions to the Home Office (if we have your telephone authorization on
file), which will be effective upon our receipt of the instructions.
Depending on the Policy Account Value at the time of an increase in the Basic
Amount and the amount of the increase requested, a change in the amount of
planned premiums may be advisable. See "Changing the Basic Amount," page 14.
Premiums to Prevent Lapse. Failure to pay planned premiums will not necessarily
cause a Policy to lapse. Rather, whether a Policy lapses depends on whether its
Cash Surrender Value is insufficient to cover the Monthly Deduction when due. If
the Cash Surrender Value on a Deduction Date is less than the Monthly Deduction
we are to deduct on that date and the Death Benefit Guarantee is not in effect,
the Policy will be in default and a grace period will begin. See "Monthly
Deduction," page 11, and "Death Benefit Guarantee," below. This could happen if
the Cash Surrender Value has decreased due to insufficient investment experience
or because premiums paid have been insufficient to offset the Monthly Deduction.
You have until the end of the grace period to pay the required premium. If the
grace period ends prior to the end of the Death Benefit Guarantee (See "Death
Benefit Guarantee"), the required premium must be large enough to provide the
lesser of (1) the Minimum Premium required at the end of the grace period, or
(2) an amount large enough to provide an increase in the Cash Surrender Value
sufficient to cover the Monthly Deductions for the grace period and any increase
in the surrender charges. If the grace period ends after the end of the Death
Benefit Guarantee, the required premium must be large enough to provide an
increase in the Cash Surrender Value sufficient to cover the Monthly Deductions
for the grace period and any increase in the surrender charges. State Farm will
send notice of the amount required to be paid during the grace period to your
last known address and to any assignee of record. The grace period will end 61
days after we send the notice and your Policy will remain in effect during the
grace period. If the Insured should die during the grace period before you pay
the required premium, the Death Benefit will still be payable to the
Beneficiary, although the amount paid will reflect a reduction for the Monthly
Deduction(s) due on or before the date of the Insured's death. See "Amount of
Death Benefit Payable," page 13. If you do not pay the required premium before
the grace period ends, your Policy will lapse. It will have no value and no
benefits will be payable. But see "Other Policy Benefits and Provisions," page
26, for a discussion of your reinstatement rights.
A grace period also may begin if the Cash Surrender Value is insufficient to
cover charges due to the outstanding Loan Amount. See "Effect of Policy Loan,"
page 15.
Death Benefit Guarantee. During the first 10 Policy Years (first 9 Policy Years
for Policies issued in Texas), so long as cumulative premiums paid, less
withdrawals and the Loan Policy Account Value, are at least equal to the Minimum
Premium amount for your Policy, the Policy will remain in force, regardless of
the sufficiency of Cash Surrender Value to cover Monthly Deductions.
Crediting Premiums to the Policy. We will credit your initial premium to the
Policy on the Policy Date. We will credit any additional premium received after
the Policy Date to the Policy as of the end of the Valuation Period when we
receive the premium at our Home Office based on the unit value next computed
after receipt. See Subaccount Policy Value. We will deem any premiums we receive
on a non-Valuation Day as being received on the next succeeding Valuation Day.
ALLOCATION OPTIONS
Net Premium Allocations. When you apply for a Policy, you specify the percentage
of Net Premium you want to allocate to each Subaccount and the Fixed Account.
You can change the allocation percentages at any time by sending satisfactory
written or telephone instructions to the Home Office (if we have your telephone
authorization on file). The change will apply to all premiums we receive with or
after we receive your instructions. Net Premium allocations must be in
percentages totaling 100%, and each allocation percentage must be a whole
number.
- ---------
8
<PAGE>
Until the free look period expires, we will allocate all Net Premiums to the
Fixed Account. At the end of this period, we transfer the Policy Account Value
to the Subaccounts and/or retain it in the Fixed Account based on the net
premium allocation percentages in effect at the time of the transfer. See "How
Your Policy Account Values Vary," page 12. For this purpose, we assume your free
look period starts 10 days after we issue your Policy.
Subaccount Options. The Variable Account has six Subaccounts, each investing in
a specific Fund of the Trust. The Trust is a series-type fund registered with
the Securities and Exchange Commission ("SEC") as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The paragraphs below summarize the investment objective(s) of each
of the Funds in which Subaccounts invest. There is no assurance that a Fund will
meet its objective(s).
- - The Large Cap Equity Index Fund seeks to match the performance of the Standard
& Poor's Composite Index of 500 Stocks-Registered Trademark-(2). This Fund
will pursue its objective by investing primarily on a capitalization-weighted
basis in the securities that make up the S&P 500.
- - The Small Cap Equity Index Fund seeks to match the performance of the Russell
2000-Registered Trademark- Small Stock Index(3). This Fund will pursue its
objective by investing primarily in a representative sample of stocks found in
the Russell 2000.
- - The International Equity Index Fund seeks to match the performance of the
Morgan Stanley Capital International Europe, Australia and Far East Free
Index-Registered Trademark- (the "EAFE-Registered Trademark-Free")(4). This
Fund will pursue its objective by investing primarily in a representative
sample of stocks found in the EAFE Free.
- - The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and
capital gains. This Fund will pursue its objective by investing primarily in
good quality bonds issued by domestic companies.
- - The Stock and Bond Balanced Fund seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing
primarily in the Trust's Large Cap Equity Index Fund and the Bond Fund.
- - The Money Market Fund seeks to maximize current income to the extent
consistent with the preservation of capital and maintenance of liquidity. This
Fund will pursue its objective by investing exclusively in high quality money
market instruments. THE U.S. GOVERNMENT or the FEDERAL DEPOSIT INSURANCE
CORPORATION DO NOT INSURE OR GUARANTEE AN INVESTMENT IN THE MONEY MARKET FUND.
This Fund will attempt to maintain a stable net asset value of $1.00 per
share, BUT THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The accompanying prospectus for the Trust contains further information about the
Funds. Please read the Trust's prospectus in conjunction with this prospectus.
See also "The Trust," page 31.
Fixed Account Option. The Fixed Account is part of our general account. It is
not a separate account. We credit amounts allocated to the Fixed Account with
interest for the period of allocation at rates we determine in our sole
discretion, but in no event will interest credited on these amounts be less than
an effective annual rate of 4%. The current interest rate is the guaranteed
interest rate plus any excess interest rate. We determine the current interest
rate periodically. You assume the risk that interest credited may not exceed the
guaranteed minimum rate of 4% per year. See "State Farm's Fixed Account Option,"
page 31. There are significant limits on your right to transfer Policy Account
Value from the Fixed Account. See "Transfers," below.
Transfers. You may transfer Policy Account Value from and among the Subaccounts
at any time after the end of the free look period. The minimum amount of Policy
Account Value that you may transfer from a Subaccount is $250, or, if less, the
Policy Account Value held in the Subaccount. You may transfer Policy Account
Value held in the Fixed Account to a
- ------------------------------
(2) Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P
500-Registered Trademark-, Standard & Poor's 500 and 500 are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed for use by State Farm
and the Trust. Neither the State Farm Variable Universal Life Policy, the
Large Cap Equity Index Fund, nor the Stock and Bond Balanced Fund (the
"Product and the Funds") is sponsored, endorsed, sold or promoted by Standard
& Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Product and the Funds. (For more information
regarding the S&P 500 Index, see "Relationships with the Companies that
Maintain the Benchmark Indices" in this prospectus.)
(3) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell is a trademark of the Frank Russell
Company. The Small Cap Equity Index Fund (the "Fund") is not sponsored,
endorsed, sold or promoted by the Frank Russell Company, and the Frank
Russell Company makes no representation regarding the advisability of
investing in the Fund. (For more information regarding the Russell 2000
Index, see "Relationships with the Companies that Maintain the Benchmark
Indices" in this prospectus.)
(4) The Morgan Stanley Capital International Europe, Australia and Far East Free
(EAFE-Registered Trademark- Free) Index is the exclusive property of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"). Morgan Stanley Capital
International is a service mark of Morgan Stanley and has been licensed for
use by the Trust. The International Equity Index Fund (the "Fund") is not
sponsored, endorsed, sold or promoted by Morgan Stanley and Morgan Stanley
makes no representation regarding the advisability of investing in the Fund.
(For more information regarding the Morgan Stanley Capital International EAFE
Free Index, see "Relationships with the Companies that Maintain the Benchmark
Indices" in this prospectus.)
9 -------
<PAGE>
Subaccount or Subaccounts only once each Policy Year and only during the 30-day
period following the end of each Policy Year. Unused transfers do not carry over
to the next year. The maximum transfer amount is the greater of 25% of the
Policy Account Value held in the Fixed Account on the date of the transfer or
$1,000, unless waived by us. The amount transferred must be at least $250, or,
if less, the Policy Account Value held in the Fixed Account.
You may make transfer requests by satisfactory written or telephone request (if
we have your telephone authorization on file). A transfer will take effect at
the end of the Valuation Period during which we receive the request at the Home
Office. State Farm may, however, defer transfers under the same conditions that
we may delay paying proceeds. See "Requesting Payments," page 26. There is no
limit on the number of transfers from and among the Subaccounts. However, State
Farm reserves the right to impose a $25 per transfer processing fee on each
transfer in a Policy Year in excess of 12. For purposes of assessing this fee,
each transfer request is considered one transfer, regardless of the number of
Subaccounts affected by the transfer. Any unused "free" transfers do not carry
over to the next year. State Farm reserves the right to modify, restrict,
suspend or eliminate the transfer privileges, including telephone transfer
privileges, at any time, for any reason.
Dollar-Cost Averaging. The dollar-cost averaging program permits you to
systematically transfer on a monthly, quarterly, semi-annual or annual basis a
set dollar amount from either the Subaccount investing in the Money Market Fund
(the "Money Market Subaccount") or the Subaccount investing in the Bond Fund
(the "Bond Subaccount") to any combination of Subaccounts and/or the Fixed
Account. If the Money Market Subaccount or the Bond Subaccount is the Subaccount
from which the transfer is made, it cannot also be used as one of the
Subaccounts in this combination.
The dollar-cost averaging method of investment is designed to reduce the risk of
making purchases only when the price of units is high, but you should carefully
consider your financial ability to continue the program over a long enough
period of time to purchase units when their value is low as well as when it is
high. Dollar-cost averaging does not assure a profit or protect against a loss.
You may elect to participate in the dollar-cost averaging program at any time by
sending us a written request. To use the dollar-cost averaging program, you must
transfer at least $100 from the Money Market Subaccount or Bond Subaccount, as
applicable. Once elected, dollar-cost averaging remains in effect from the date
we receive your request until the value of the Subaccount from which transfers
are being made is depleted, or until you cancel the program by written request
or by telephone if we have your telephone authorization on file. There is no
additional charge for dollar-cost averaging. A transfer under this program is
not considered a transfer for purposes of assessing a transfer processing fee.
We reserve the right to discontinue offering the dollar-cost averaging program
at any time and for any reason. Dollar-cost averaging is not available while you
are participating in the portfolio rebalancing program.
Portfolio Rebalancing Program. Once your money has been allocated among the
Subaccounts, the performance of each Subaccount may cause your allocation to
shift. You may instruct us to automatically rebalance (on a monthly, quarterly,
semi-annual or annual basis) the value of your Policy in the Subaccounts to
return to the percentages specified in your allocation instructions. You may
elect to participate in the portfolio rebalancing program at any time by sending
us a written request at the Home Office. Your percentage allocations must be in
whole percentages. You may make subsequent changes to your percentage
allocations at any time by providing written or telephone instructions to the
Home Office (if we have your telephone authorization on file). Once elected,
portfolio rebalancing remains in effect from the date we receive your written
request until you instruct us to discontinue portfolio rebalancing. There is no
additional charge for using portfolio rebalancing, and a portfolio rebalancing
transfer is not considered a transfer for purposes of assessing a transfer
processing fee. We reserve the right to discontinue offering the portfolio
rebalancing program at any time and for any reason. Portfolio rebalancing does
not guarantee a profit or protect against loss. You may not use amounts in the
Fixed Account in connection with the portfolio rebalancing program. Portfolio
rebalancing is not available while you are participating in the dollar-cost
averaging program.
- ---------
10
<PAGE>
CHARGES AND DEDUCTIONS
State Farm deducts the charges described below. Certain of the charges depend on
a number of variables, and are illustrated in the hypothetical illustrations
beginning on page 17. The charges are for the services and benefits State Farm
provides, costs and expenses State Farm incurs and risks State Farm assumes
under or in connection with the Policies.
Services and benefits State Farm provides include:
- - the death, cash and loan benefits provided by the Policy;
- - investment options, including Net Premium allocations, dollar-cost averaging
and portfolio rebalancing programs;
- - administration of various elective options under the Policy; and
- - the distribution of various reports to Owners.
Costs and expenses State Farm incurs include those associated with underwriting
applications, increases in Basic Amount, and riders, various overhead and other
expenses associated with providing the services and benefits under the Policy,
sales and marketing expenses, and other costs of doing business, such as
federal, state and local premium and other taxes and fees.
Risks State Farm assumes include the risks that Insureds may live for a shorter
period of time than estimated, therefore resulting in the payment of greater
death benefits than expected, and that the costs of providing the services and
benefits under the Policies will exceed the charges deducted.
- PREMIUM CHARGE. State Farm deducts a 5% charge from each premium before
allocating the resulting Net Premium to the Policy Account Value.
- MORTALITY AND EXPENSE RISK CHARGE. State Farm currently deducts a daily
charge from assets in the Subaccounts attributable to the Policies at an
annual rate of 0.80% of net assets. State Farm guarantees that this charge
will not exceed an annual rate of 0.90% of net assets. This charge does
not apply to Fixed Account assets attributable to the Policies. We factor
this charge into the Net Investment Factor (see page 13). State Farm may
profit from this charge and may use such profit for any lawful purpose
including paying our expenses related to selling the Policies.
- MONTHLY DEDUCTION. State Farm deducts the Monthly Deduction on each
Deduction Date from Policy Account Value in the Variable Account and the
Fixed Account on a pro rata basis. The Monthly Deduction for each Policy
consists of (1) the cost of insurance charge discussed below, (2) a
current monthly expense charge of $6 (it cannot exceed $8 per month), and
(3) any charges for additional benefits added by riders to the Policy (see
"Supplemental Benefits").
- SURRENDER CHARGE. If you surrender the Policy during the first 10 Policy
Years or the first 10 years after an increase in Basic Amount, State Farm
will deduct a surrender charge based on the Basic Amount at issue, or
increase, as applicable. State Farm will deduct the surrender charge
before we pay any surrender proceeds. The surrender charge depends on the
Insured's Age at issue, or on the Policy Anniversary preceding an
increase. We calculate the surrender charge based as an amount per $1,000
of the Basic Amount at issue (or increase). The maximum surrender charge
amount per $1,000 of Basic Amount is $21 which is for Insured's ages 70 to
80. During the 10-year period a surrender charge is in effect, it
increases monthly in the first two years, remains level for the next four
years, then decreases by 1/5 each year for the next five years to zero.
See Appendix A for sample surrender charges. Your Policy will state the
surrender charge for your Policy.
- OTHER CHARGES: State Farm reserves the right to impose a $25 transfer
processing fee on each transfer in a Policy Year in excess of 12. See
"Transfers," page 9, for a discussion of the transfer processing fee. On
each withdrawal, State Farm will assess a withdrawal processing fee equal
to the lesser of $25 or 2% of the amount withdrawn. See "Withdrawals,"
page 16, for a discussion of the withdrawal processing fee. There are Fund
expenses that, in 1998, ranged on an annual basis from 0.32% to 0.75% of
the average daily value of your money invested in the Funds. See "Summary
of the Policy," page 3 , and the prospectus for the Trust for a
description of the investment advisory fees and other expenses incurred by
the Funds.
11-------
<PAGE>
Comment on Cost of Insurance. The cost of insurance is a significant charge
under your Policy because it is the primary charge for the death benefit
provided by your Policy. The cost of insurance charge depends on a number of
variables that cause the charge to vary from Policy to Policy and from Deduction
Date to Deduction Date. We calculate the cost of insurance for the Basic Amount
at issue and for any increase in the Basic Amount. The cost of insurance charge
is equal to the Company's current monthly cost of insurance rate for the Insured
multiplied by the net amount at risk under the Policy for the Basic Amount at
issue or as increased. The net amount at risk is equal to the difference between
(1) the amount of insurance attributable to the Basic Amount at issue or as
increased, as applicable, on the Deduction Date at the start of the month
divided by 1.0032737, and (2) the Policy Account Value attributable to the Basic
Amount at issue or as increased, as applicable, on the Deduction Date at the
start of the month after the deduction of the part of the Monthly Deduction that
does not include the cost of insurance and the monthly charge for any Waiver of
Monthly Deduction rider. Your Policy describes more specifically how we
calculate this amount.
We base the cost of insurance rate for the Insured on his or her Age, sex and
applicable rate class. We currently place Insureds in the following rate classes
when we issue the Policy, based on our underwriting: a male or female or unisex
rate class where appropriate under applicable law (currently including the state
of Montana); and a tobacco or non-tobacco rate class. We place juveniles in a
male or female or unisex rate class. The original rate class applies to the
initial Basic Amount. If we approve an increase in Basic Amount, a different
rate class may apply to the increase, based on the Insured's circumstances at
the time of the increase.
We guarantee that the cost of insurance rates used to calculate the monthly cost
of insurance charge will not exceed the maximum cost of insurance rates set
forth in the Policy. We base the maximum cost of insurance rates on the
Insured's age last birthday at the start of the Policy Year, sex, and, for issue
ages 20 and over, tobacco use. If the Insured is age 20 and over on the Policy
Date or the effective date of any increase in Basic Amount, the Commissioners
1980 Standard Ordinary Non-Smoker Table applies if the Insured is classified as
non-tobacco; otherwise, the Commissioners 1980 Standard Ordinary Smoker
Mortality Table applies. If the Insured is under age 20 on the Policy Date or
the effective date of any increase in Basic Amount, the Commissioners 1980
Standard Ordinary Mortality Table applies. Modifications are made for rate
classes other than standard. See "Hypothetical Illustrations of Accumulated
Premiums, Policy Account Values, Cash Surrender Values, and Death Benefits" page
17, for examples showing the effects of the cost of insurance charge.
HOW YOUR POLICY ACCOUNT VALUES VARY
Policy Account Value. The Policy Account Value serves as a starting point for
calculating certain values under a Policy. It is the aggregate of the value of
your Policy in all of the Subaccounts of the Variable Account, the Fixed
Account, and values held in our general account to secure Policy loans. See
"Loan Benefits," page 15. We determine the Policy Account Value on the Policy
Date and thereafter on each Valuation Day. The Policy Account Value will vary to
reflect the performance of the Subaccounts to which you allocate amounts,
interest credited on amounts allocated to the Fixed Account and Loan Account,
charges, transfers, withdrawals, Policy loans, Policy loan interest, and Policy
loan repayments. It may be more or less than premiums paid.
Cash Value. The Cash Value on a Valuation Day is the Policy Account Value
reduced by any surrender charge that we would deduct if you surrendered the
Policy on that day.
Cash Surrender Value. The Cash Surrender Value on a Valuation Day is the Cash
Value reduced by any Loan Amount.
- ---------
12
<PAGE>
Subaccount Policy Value. On any Valuation Day, for each Subaccount the
Subaccount Policy Value is equal to the number of Subaccount units credited to
the Policy multiplied by their unit value for that Valuation Day. When you
allocate an amount to a Subaccount, either by Net Premium allocation, transfer
of Policy Account Value or repayment of a Policy loan, we credit your Policy
with units in that Subaccount. We determine the number of units by dividing the
dollar amount allocated, transferred or repaid to the Subaccount by the
Subaccount's unit value for the Valuation Day when we effect the allocation,
transfer or repayment. The number of Subaccount units credited to a Policy will
decrease when we take the allocated portion of the Monthly Deduction from the
Subaccount, take a Policy loan from the Subaccount, transfer an amount from the
Subaccount, take a withdrawal from the Subaccount, or surrender the Policy.
UNIT VALUES. A Subaccount's unit value varies to reflect the investment
experience of the underlying Fund, and may increase or decrease from one
Valuation Day to the next. We arbitrarily set the unit value for each
Subaccount at $10 when we established the Subaccount. For each Valuation
Period after the date of establishment, we determine the unit value by
multiplying the value of a unit for a Subaccount for the prior Valuation
Period by the net investment factor for the Subaccount for the current
valuation period.
NET INVESTMENT FACTOR. The net investment factor is an index we use to
measure the investment performance of a Subaccount from one Valuation Period
to the next. The net investment factor for any Subaccount for any Valuation
Period reflects the change in the net asset value per share of the Fund held
in the Subaccount from one Valuation Period to the next, adjusted for the
daily deduction of the mortality and expense risk charge from assets in the
Subaccount. If any "ex-dividend" date occurs during the Valuation Period,
the per share amount of any dividend or capital gain distribution is taken
into account. Also, if any taxes need to be reserved, a per share charge or
credit for any taxes reserved for, which is determined by us to have
resulted from the operations of the Subaccount, is taken into account.
Fixed Policy Account Value. The Fixed Policy Account Value on any date on or
after the Issue Date is equal to:
(1) the sum of the following amounts in the Fixed Account: Net Premium
allocations, Policy Account Value transfers, and interest accruals (if
the date is a Policy Anniversary it also includes any dividend payments);
minus
(2) the sum of any Monthly Deductions attributed to the Fixed Account, any
withdrawals or transfers (including any transfer processing fee or
withdrawal processing fee) from the Fixed Account, and Policy loans taken
from the Fixed Account.
DEATH BENEFITS
As long as the Policy remains in force, we will pay the Death Benefit once we
receive at our Home Office due proof of the Insured's death. See "Requesting
Payments," page 26. We will pay the Death Benefit to the Beneficiary.
Amount of Death Benefit Payable. The amount of Death Benefit payable is the
amount of insurance determined under the Death Benefit Option in effect on the
date of the Insured's death, PLUS any supplemental Death Benefit provided by
riders, MINUS any Loan Amount on that date, and if the date of death occurred
during a grace period, minus the past due Monthly Deductions.
Under certain circumstances, State Farm may further adjust the amount of the
Death Benefit. See "Incontestability," "Limited Death Benefit," and
"Misstatement of Age or Sex," page 27. If the Insured dies before we issue a
Policy, we limit the Death Benefit payable to $300,000, unless the insured is
under 15 days old in which case the Death Benefit payable will not exceed
$3,000.
Death Benefit Options. State Farm uses the Policy Account Value on the Insured's
date of death to determine the amount of insurance. Under Option 1, the Death
Benefit is the greater of (1) the Basic Amount plus any Net Premiums received
since the last Deduction Date, or (2) the applicable percentage amount of the
Policy Account Value based on the Insured's Age at the start of the current
Policy Year, as determined using the table of percentages prescribed by federal
income tax law. Under Option 2, the Death Benefit is the greater of (1) the
Basic Amount plus the Policy Account Value, or (2) the applicable percentage
amount of the Policy Account Value based on the Insured's Age at the start of
the current Policy Year, as determined using the table of percentages prescribed
by federal income tax law. The percentage is 250% to Age 40 and declines
thereafter as the Insured's Age increases. The table of percentages is shown
below. We reserve the right to change the table if the table of percentages
currently in effect becomes inconsistent with any federal income tax laws and/or
regulations. Under Option 1, the Death Benefit ordinarily will not change. Under
Option 2, the Death Benefit will vary directly with the investment performance
of the Policy Account Value. To see how and when investment performance may
begin to affect the Death Benefit, please see the hypothetical illustrations
beginning on page 17.
13-------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF PERCENTAGES OF POLICY ACCOUNT VALUE
- ------------------------------------------------------------------------------------
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
<S> <C> <C> <C> <C> <C>
0 - 40 250% 54 157% 68 117%
41 243% 55 150% 69 116%
42 236% 56 146% 70 115%
43 229% 57 142% 71 113%
44 222% 58 138% 72 111%
45 215% 59 134% 73 109%
46 209% 60 130% 74 107%
47 203% 61 128% 75 - 90 105%
48 197% 62 126% 91 104%
49 191% 63 124% 92 103%
50 185% 64 122% 93 102%
51 178% 65 120% 94 101%
52 171% 66 119% 95+ 100%
53 164% 67 118%
</TABLE>
Changing the Death Benefit Option. You select the Death Benefit Option when you
apply for the Policy. You may change the Death Benefit Option on your Policy
subject to the following rules:
You must submit each change by written request that we receive at our Home
Office, and
You may only change the Death Benefit Option once in any Policy Year.
The effective date of the change will be the date at the end of the Valuation
Period during which we receive the request for the change. We will send you
revised Policy schedule pages reflecting the new Death Benefit Option and the
effective date of the change.
If you request a change from Option 1 to Option 2, the Basic Amount will be
decreased by the Policy Account Value on the effective date of the change. When
you make a change from Option 2 to Option 1, the Basic Amount after the change
will be increased by the Policy Account Value on the effective date of the
change. The minimum monthly premium for the Death Benefit Guarantee will also
change when you change a Death Benefit Option. Changing the death benefit option
may have tax consequences and you should consult a tax advisor before doing so.
Changing the Basic Amount. You select the Basic Amount when you apply for the
Policy. You may change the Basic Amount, subject to the following conditions:
(1) State Farm will not permit any change that may result in your Policy
being disqualified as a life insurance contract under Section 7702 of the
Code.
(2) You may only make one change (increase or decrease) during a Policy
Year.
To increase the Basic Amount, contact an authorized State Farm agent. To
decrease the Basic Amount, submit a written request to our Home Office. Any
increase in the Basic Amount must be at least $25,000 and you must submit an
application, along with evidence of insurability satisfactory to State Farm.
There must be enough Cash Surrender Value to make a Monthly Deduction that
includes the cost of insurance for the increase.
A change in planned premiums may be advisable based on the increase in Basic
Amount. See "Planned Premiums," page 8. Also, the minimum monthly premium for
the Death Benefit Guarantee will increase. If we approve the increase in Basic
Amount, the increase will become effective on the date you apply for it and we
will adjust the Policy Account Value to the extent necessary to reflect a
portion of the Monthly Deduction attributable to the increase as of the
effective date and any intervening Deduction Date based on the increase in Basic
Amount. The surrender charge will increase upon an increase in Basic Amount. We
will not allow any increases after the Policy Anniversary when the Insured is
age 80.
Any decrease in the Basic Amount must be at least $10,000, and the Basic Amount
after the decrease must be at least $50,000. A decrease in Basic Amount will
become effective on the date at the end of the Valuation Period during which we
receive a written request at our Home Office. Also, the minimum monthly premium
for the Death Benefit Guarantee will decrease. State Farm will use any decrease
first to reduce the most recent increase, then the next most recent increases,
then the initial Basic Amount. We will not deduct a surrender charge upon a
decrease in Basic Amount. We will not reduce the surrender charge upon a
decrease in Basic Amount.
Changing the Basic Amount may have tax consequences and you should consult a tax
advisor before doing so.
- ---------
14
<PAGE>
Effect of Withdrawals on the Death Benefit. A withdrawal will affect your Death
Benefit in the following respects:
- - If Death Benefit Option 1 is in effect, the withdrawal will also reduce the
Basic Amount dollar-for-dollar. If the Basic Amount reflects increases in the
Initial Basic Amount, the withdrawal will reduce first the most recent
increase, and then the next most recent increase, if any, in reverse order,
and finally the Initial Basic Amount.
- - If Death Benefit Option 2 is in effect, the withdrawal will not affect the
Basic Amount.
Changing the Beneficiary. You designate the Beneficiary(ies) when you apply for
the Policy. You may change the designated Beneficiary by submitting a
satisfactory written request received by us. If the Insured dies and there is no
surviving Beneficiary, the Insured's estate will be the Beneficiary.
LOAN BENEFITS
You may borrow an amount(s) up to 90% of your Cash Value at any time. See
"Requesting Payments," page 26. You may make requests for Policy loans in
writing or by telephone (if we have your telephone authorization on file). See
"Requesting Payments," page 26. Outstanding Policy loans, including accrued
interest, reduce the amount available for new loans.
Loan Account. Making a loan does not affect the Policy Account Value. However,
we transfer an amount equal to the loan proceeds from the Policy Account Value
in the Variable Account and Fixed Account to the Loan Account, and hold this
amount as "collateral" for the loan. If you do not direct an allocation for this
transfer when requesting the loan we will take it on a pro rata basis. When you
repay a loan, we transfer an amount equal to the repayment from the Loan Account
to the Variable Account and Fixed Account and allocate this amount as you direct
when submitting the repayment. If you provide no direction, we will allocate the
amount in accordance with your standing instructions for Net Premium
allocations.
Interest. We will charge interest daily on any outstanding Policy loan at an
effective annual rate of 8.0%. Interest is due and payable at the end of each
Policy Year while a Policy loan is outstanding. On each Policy Anniversary, any
unpaid amount of loan interest accrued since the last Policy Anniversary becomes
part of the outstanding loan. We transfer an amount equal to the unpaid amount
of interest to the Loan Account from each Subaccount and the Fixed Account on a
pro-rata basis according to the respective values in each Subaccount and the
Fixed Account. On each Deduction Date, we will credit the amount in the Loan
Account with interest at a minimum guaranteed annual effective rate of 6.0%. On
each Deduction Date, we will transfer the interest so earned to the Subaccounts
and the Fixed Account in accordance with the instructions for Net Premium
allocations then in effect.
Loan Repayment. You may repay all or part of your Loan Amount at any time while
the Insured is living and the Policy is in force. You must send loan repayments
to our Home Office and we will credit the repayment at the end of the Valuation
Period during which we receive them. State Farm does not treat a loan repayment
as a premium payment and loan repayments are not subject to the 5% premium
charge.
Effect of Policy Loan. A Policy loan, whether or not repaid, will affect Policy
values over time because the investment results of the Subaccounts and current
interest rates credited on Policy Account Value in the Fixed Account will apply
only to the non-loaned portion of the Policy Account Value. The longer the loan
is outstanding, the greater the effect is likely to be. Depending on the
investment results of the Subaccounts or credited interest rates for the Fixed
Account while the Policy loan is outstanding, the effect could be favorable or
unfavorable. Policy loans, particularly if not repaid, could make it more likely
than otherwise for a Policy to terminate. If the Death Benefit becomes payable
while a Policy loan is outstanding, we will deduct the Loan Amount in
calculating the Death Benefit. If the Loan Amount exceeds the Cash Value on any
Deduction Date and the Death Benefit Guarantee is not in effect, the Policy will
be in default. We will send you, and any assignee of record, notice of the
default. You will have a 61-day grace period to submit a sufficient payment to
avoid lapse. A Policy loan may have tax consequences. See "Tax Considerations."
15-------
<PAGE>
SURRENDER BENEFITS
Full Surrender. You may surrender your Policy at any time for its Cash Surrender
Value. See "Requesting Payments," page 26. A surrender charge may apply. See
"Surrender Charge," page 11. Your Policy will terminate and cease to be in force
if you surrender it for a lump sum. You cannot later reinstate the Policy.
Surrendering your Policy may have tax consequences and you should consult a tax
advisor before doing so.
Withdrawals. You may make withdrawals under your Policy. See "Requesting
Payments," page 26. You may make withdrawal requests in writing or by telephone
(if we have your telephone authorization on file). See "Requesting Payments and
Telephone Transactions," page 26. The minimum withdrawal amount is $500. A
withdrawal must be less than the Cash Surrender Value on the day the request for
withdrawal is effective. You may not make more than four withdrawals during a
Policy Year. On each withdrawal, we will assess a withdrawal processing fee
equal to the lesser of $25 or 2% of the amount withdrawn. State Farm will deduct
this charge from your Policy Account Value along with the withdrawal amount
requested. When you request a withdrawal, you can direct us how to deduct the
withdrawal from your Policy Account Value. If you provide no directions, we will
deduct the withdrawal from your Policy Account Value in the Subaccounts and
Fixed Account on a pro-rata basis. Making a withdrawal under your Policy may
have tax consequences and you should consult a tax advisor before doing so.
- ---------
16
<PAGE>
HYPOTHETICAL ILLUSTRATIONS OF ACCUMULATED PREMIUMS, POLICY ACCOUNT VALUES, CASH
SURRENDER VALUES, AND DEATH BENEFITS
The following illustrations show how certain values under a sample Policy change
with assumed investment performance over an extended period of time. In
particular, they illustrate how Policy Account Values, Cash Surrender Values and
Death Benefits under a Policy covering an Insured of a given Age on the Policy
Date would vary over time if planned premiums were paid annually at the
beginning of each Policy Year and the return on the assets in the Subaccounts
was a uniform gross annual rate of 0%, 6% or 12%, before deduction of any fees
and charges, including Fund fees and charges. The tables also show planned
premiums accumulated at 5% interest.
The values under a Policy would be different from those shown if the returns
averaged 0%, 6% or 12% but fluctuated over and under those averages throughout
the years shown. The hypothetical investment rates of return are illustrative
only and should not be deemed a representation of past or future investment
rates of return. Actual rates of return for a particular Policy may be more or
less than the hypothetical investment rates of return used in the illustrations.
The illustrations assume an average annual expense ratio of .50% of the average
daily net assets of the Funds available under the Policies, based on the expense
ratios for the Fund expenses and fees, as shown in the table appearing above
under "Summary of the Policy." For information on Fund expenses and fees, see
the prospectus for the Funds accompanying this prospectus. The current charge
illustrations also reflect the 0.80% mortality and expense risk charge to the
Variable Account. The maximum charge illustrations reflect the maximum 0.90%
mortality and expense risk charge to the Variable Account. After deduction of
Fund expenses and fees and the mortality and expense risk charge, the
illustrated gross annual investment rates of return of 0%, 6% and 12% would
correspond to approximate net annual rates of return for the Subaccounts of
- -1.29%, 4.63% and 10.55%, respectively, for the current charge illustrations,
and -1.39%, 4.53%, and 10.44% respectively, for the maximum charge
illustrations.
The illustrations also reflect the Monthly Deduction for the hypothetical
Insured. Separate illustrations on each of the following pages reflect our
current charges and the higher maximum charges we have the contractual right to
charge. All the illustrations reflect the fact that we currently make no charges
for Federal or state income taxes against the Variable Account and assume no
Loan Amount or charges for supplemental benefits.
We base the illustrations on our sex distinct rates for non-tobacco users. Upon
request, we will furnish a comparable illustration based upon the proposed
Insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following tables.
17-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 961 1,025 1,088 703 767 830 100,000 100,000 100,000
2 2,691 1,905 2,092 2,287 1,389 1,576 1,771 100,000 100,000 100,000
3 4,138 2,831 3,203 3,606 2,315 2,687 3,090 100,000 100,000 100,000
4 5,657 3,737 4,358 5,057 3,221 3,842 4,541 100,000 100,000 100,000
5 7,252 4,624 5,558 6,654 4,108 5,042 6,138 100,000 100,000 100,000
6 8,928 5,489 6,805 8,410 4,973 6,289 7,894 100,000 100,000 100,000
7 10,686 6,333 8,100 10,343 5,920 7,687 9,931 100,000 100,000 100,000
8 12,533 7,153 9,443 12,471 6,844 9,134 12,161 100,000 100,000 100,000
9 14,472 7,951 10,838 14,814 7,744 10,631 14,607 100,000 100,000 100,000
10 16,508 8,724 12,284 17,394 8,621 12,181 17,291 100,000 100,000 100,000
15 28,322 12,192 20,361 34,861 12,192 20,361 34,861 100,000 100,000 100,000
20 43,399 14,894 30,052 63,682 14,894 30,052 63,682 100,000 100,000 100,000
25 62,642 16,511 41,636 111,225 16,511 41,636 111,225 100,000 100,000 149,041
30 87,201 16,337 55,457 188,632 16,337 55,457 188,632 100,000 100,000 230,131
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
18
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 906 968 1,030 648 710 772 100,000 100,000 100,000
2 2,691 1,793 1,973 2,160 1,277 1,457 1,644 100,000 100,000 100,000
3 4,138 2,657 3,013 3,398 2,141 2,497 2,882 100,000 100,000 100,000
4 5,657 3,498 4,090 4,755 2,982 3,574 4,239 100,000 100,000 100,000
5 7,252 4,316 5,204 6,243 3,800 4,688 5,727 100,000 100,000 100,000
6 8,928 5,109 6,355 7,874 4,593 5,839 7,358 100,000 100,000 100,000
7 10,686 5,875 7,544 9,661 5,463 7,131 9,248 100,000 100,000 100,000
8 12,533 6,616 8,772 11,623 6,306 8,462 11,313 100,000 100,000 100,000
9 14,472 7,329 10,040 13,776 7,122 9,833 13,569 100,000 100,000 100,000
10 16,508 8,013 11,348 16,140 7,909 11,245 16,037 100,000 100,000 100,000
15 28,322 10,943 18,512 31,995 10,943 18,512 31,995 100,000 100,000 100,000
20 43,399 12,809 26,709 57,811 12,809 26,709 57,811 100,000 100,000 100,000
25 62,642 12,972 35,784 100,290 12,972 35,784 100,290 100,000 100,000 134,389
30 87,201 10,312 45,533 168,714 10,312 45,533 168,714 100,000 100,000 205,831
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
19-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 960 1,023 1,087 702 765 829 100,960 101,023 101,087
2 2,691 1,900 2,087 2,281 1,384 1,571 1,765 101,900 102,087 102,281
3 4,138 2,822 3,193 3,594 2,306 2,677 3,078 102,822 103,193 103,594
4 5,657 3,722 4,340 5,035 3,206 3,824 4,519 103,722 104,340 105,035
5 7,252 4,600 5,529 6,618 4,084 5,013 6,102 104,600 105,529 106,618
6 8,928 5,456 6,762 8,355 4,940 6,246 7,839 105,456 106,762 108,355
7 10,686 6,286 8,038 10,261 5,874 7,625 9,848 106,286 108,038 110,261
8 12,533 7,092 9,358 12,352 6,782 9,048 12,043 107,092 109,358 112,352
9 14,472 7,871 10,723 14,648 7,665 10,516 14,442 107,871 110,723 114,648
10 16,508 8,623 12,133 17,167 8,520 12,029 17,064 108,623 112,133 117,167
15 28,322 11,927 19,876 33,970 11,927 19,876 33,970 111,927 119,876 133,970
20 43,399 14,329 28,789 60,799 14,329 28,789 60,799 114,329 128,789 160,799
25 62,642 15,426 38,641 103,587 15,426 38,641 103,587 115,426 138,641 203,587
30 87,201 14,381 48,629 171,547 14,381 48,629 171,547 114,381 148,629 271,547
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
20
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 904 966 1,028 646 708 770 100,904 100,966 101,028
2 2,691 1,787 1,967 2,154 1,271 1,451 1,638 101,787 101,967 102,154
3 4,138 2,646 3,001 3,384 2,130 2,485 2,868 102,646 103,001 103,384
4 5,657 3,480 4,068 4,730 2,964 3,552 4,214 103,480 104,068 104,730
5 7,252 4,289 5,169 6,201 3,773 4,653 5,685 104,289 105,169 106,201
6 8,928 5,069 6,303 7,808 4,553 5,787 7,292 105,069 106,303 107,808
7 10,686 5,821 7,470 9,563 5,408 7,057 9,151 105,821 107,470 109,563
8 12,533 6,543 8,670 11,482 6,234 8,361 11,173 106,543 108,670 111,482
9 14,472 7,235 9,903 13,579 7,028 9,697 13,373 107,235 109,903 113,579
10 16,508 7,894 11,169 15,871 7,791 11,066 15,768 107,894 111,169 115,871
15 28,322 10,631 17,939 30,935 10,631 17,939 30,935 110,631 117,939 130,935
20 43,399 12,137 25,188 54,317 12,137 25,188 54,317 112,137 125,188 154,317
25 62,642 11,678 32,099 90,287 11,678 32,099 90,287 111,678 132,099 190,287
30 87,201 8,104 37,122 145,282 8,104 37,122 145,282 108,104 137,122 245,282
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
21-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,894 2,020 2,147 1,258 1,384 1,511 100,000 100,000 100,000
2 5,381 3,743 4,114 4,501 2,471 2,842 3,229 100,000 100,000 100,000
3 8,275 5,546 6,283 7,081 4,274 5,011 5,809 100,000 100,000 100,000
4 11,314 7,297 8,525 9,910 6,025 7,253 8,638 100,000 100,000 100,000
5 14,505 8,998 10,846 13,015 7,726 9,574 11,743 100,000 100,000 100,000
6 17,855 10,645 13,246 16,424 9,373 11,974 15,152 100,000 100,000 100,000
7 21,373 12,233 15,725 20,169 11,215 14,707 19,151 100,000 100,000 100,000
8 25,066 13,762 18,287 24,290 12,999 17,524 23,526 100,000 100,000 100,000
9 28,945 15,228 20,935 28,827 14,720 20,427 28,319 100,000 100,000 100,000
10 33,017 16,628 23,671 33,831 16,374 23,417 33,577 100,000 100,000 100,000
15 56,644 22,374 38,699 68,067 22,374 38,699 68,067 100,000 100,000 100,000
20 86,798 25,289 56,432 125,817 25,289 56,432 125,817 100,000 100,000 145,948
25 125,284 23,757 78,634 220,068 23,757 78,634 220,068 100,000 100,000 235,472
30 174,402 15,253 109,520 374,987 15,253 109,520 374,987 100,000 114,996 393,736
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
22
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,748 1,870 1,992 1,112 1,234 1,356 100,000 100,000 100,000
2 5,381 3,436 3,789 4,156 2,164 2,517 2,884 100,000 100,000 100,000
3 8,275 5,059 5,753 6,506 3,787 4,481 5,234 100,000 100,000 100,000
4 11,314 6,612 7,761 9,057 5,340 6,489 7,785 100,000 100,000 100,000
5 14,505 8,090 9,809 11,828 6,818 8,537 10,556 100,000 100,000 100,000
6 17,855 9,490 11,897 14,842 8,218 10,625 13,570 100,000 100,000 100,000
7 21,373 10,807 14,022 18,124 9,789 13,005 17,107 100,000 100,000 100,000
8 25,066 12,039 16,187 21,707 11,276 15,424 20,944 100,000 100,000 100,000
9 28,945 13,181 18,389 25,625 12,672 17,881 25,116 100,000 100,000 100,000
10 33,017 14,224 20,625 29,915 13,970 20,371 29,660 100,000 100,000 100,000
15 56,644 17,586 32,156 58,813 17,586 32,156 58,813 100,000 100,000 100,000
20 86,798 16,424 43,872 108,121 16,424 43,872 108,121 100,000 100,000 125,420
25 125,284 6,745 55,200 188,761 6,745 55,200 188,761 100,000 100,000 201,974
30 174,402 0 65,374 319,843 0 65,374 319,843 0 100,000 335,835
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
23-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET -1.29% NET 4.63% NET 10.55% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,886 2,011 2,138 1,250 1,375 1,502 101,886 102,011 102,138
2 5,381 3,719 4,087 4,470 2,447 2,815 3,198 103,719 104,087 104,470
3 8,275 5,495 6,224 7,015 4,223 4,952 5,743 105,495 106,224 107,015
4 11,314 7,210 8,421 9,786 5,938 7,149 8,514 107,210 108,421 109,786
5 14,505 8,863 10,678 12,808 7,591 9,406 11,536 108,863 110,678 112,808
6 17,855 10,448 12,992 16,098 9,176 11,720 14,826 110,448 112,992 116,098
7 21,373 11,959 15,357 19,679 10,941 14,340 18,661 111,959 115,357 119,679
8 25,066 13,394 17,775 23,579 12,631 17,012 22,815 113,394 117,775 123,579
9 28,945 14,748 20,239 27,822 14,239 19,730 27,313 114,748 120,239 127,822
10 33,017 16,014 22,744 32,439 15,760 22,490 32,184 116,014 122,744 132,439
15 56,644 20,645 35,507 62,150 20,645 35,507 62,150 120,645 135,507 162,150
20 86,798 21,356 47,341 106,431 21,356 47,341 106,431 121,356 147,341 206,431
25 125,284 16,151 55,450 171,865 16,151 55,450 171,865 116,151 155,450 271,865
30 174,402 3,224 56,353 269,336 3,224 56,353 269,336 103,224 156,353 369,336
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
24
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ------------------------------------ ------------------------------------ ------------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET -1.39% NET 4.53% NET 10.44% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,738 1,859 1,980 1,102 1,223 1,344 101,738 101,859 101,980
2 5,381 3,405 3,754 4,118 2,133 2,482 2,846 103,405 103,754 104,118
3 8,275 4,995 5,679 6,421 3,723 4,407 5,149 104,995 105,679 106,421
4 11,314 6,501 7,628 8,899 5,229 6,356 7,627 106,501 107,628 108,899
5 14,505 7,918 9,595 11,563 6,646 8,323 10,291 107,918 109,595 111,563
6 17,855 9,238 11,571 14,423 7,966 10,299 13,151 109,238 111,571 114,423
7 21,373 10,456 13,550 17,493 9,438 12,532 16,476 110,456 113,550 117,493
8 25,066 11,568 15,527 20,789 10,805 14,764 20,026 111,568 115,527 120,789
9 28,945 12,566 17,492 24,324 12,057 16,983 23,815 112,566 117,492 124,324
10 33,017 13,438 19,430 28,110 13,184 19,176 27,856 113,438 119,430 128,110
15 56,644 15,442 28,104 51,178 15,442 28,104 51,178 115,442 128,104 151,178
20 86,798 11,916 32,734 81,983 11,916 32,734 81,983 111,916 132,734 181,983
25 125,284 0 28,068 120,697 0 28,068 120,697 0 128,068 220,697
30 174,402 0 4,550 164,091 0 4,550 164,091 0 104,550 264,091
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
25-------
<PAGE>
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS
Requesting Payments. You must send written requests for payment (except where we
authorize telephone requests) to our Home Office or give the requests to an
authorized State Farm agent for forwarding to our Home Office. We will
ordinarily pay any Death Benefit, loan proceeds or surrender or withdrawal
proceeds in a lump sum within seven days after receipt at our Home Office of all
the documents required for such a payment or, for surrenders and withdrawals, on
a later date if you so request. Other than the Death Benefit, which we determine
as of the date of the Insured's death, we will determine the amount as of the
end of the Valuation Period during which our Home Office receives all required
documents or, for surrenders and withdrawals, on a later date if you so request.
We generally will pay the Death Benefit through the State Farm Benefit
Management Account-Registered Trademark-, an interest bearing checking account.
We will send the State Farm Benefit Management Account-Registered Trademark-
checkbook to you within seven days after we receive all required documents. A
Beneficiary will have immediate access to the proceeds by writing a check on the
State Farm Benefit Management Account-Registered Trademark-. We will pay
interest on the amount in the State Farm Benefit Management
Account-Registered Trademark- from the date of the Insured's death to the date
the State Farm Benefit Management Account-Registered Trademark- is closed.
Neither the Federal Deposit Insurance Corporation nor any other agency insure
amounts in the State Farm Benefit Management Account-Registered Trademark-.
We may delay making a payment or processing a transfer request if:
(1) the disposal or valuation of the Variable Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for
other than a regular holiday or weekend, trading is restricted by the
SEC, or the SEC declares that an emergency exists as a result of which it
is not reasonably practicable for the Variable Account: (A) to dispose of
its securities; or (B) to determine the value of its net assets; or
(2) the SEC by order permits postponement of payment to protect State Farm's
Policy Owners.
We also may defer making payments attributable to a check that has not cleared,
and we may defer payment of proceeds from the Fixed Account for a withdrawal,
surrender or Policy loan request for up to six months from the date we receive
the request. However, we will not defer payment of a withdrawal or Policy loan
requested to pay a premium due on a State Farm policy.
The Policy offers a wide variety of optional ways of receiving proceeds payable
under the Policy other than in a lump sum. An authorized State Farm agent can
explain these options upon request. None of these options vary with the
investment performance of a Variable Account because they are all forms of
fixed-benefit annuities.
Telephone Transactions. You may make certain requests under the Policy by
telephone provided we have your written authorization on file at the Home
Office. These include requests for transfers, withdrawals, Policy loans, changes
in premium allocation designations, dollar-cost averaging changes and changes in
the portfolio rebalancing program. Our Home Office will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Such procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions, and/or tape recording of
telephone instructions. Your request for telephone transactions authorizes us to
record telephone calls. If we do not employ reasonable procedures, we may be
liable for any losses due to unauthorized or fraudulent instructions. However,
if we do employ reasonable procedures, we will not be liable for any losses due
to unauthorized or fraudulent instructions. We reserve the right to place
limits, including dollar limits, on telephone transactions.
OTHER POLICY BENEFITS AND PROVISIONS
Exchange Provision. You have the right to transfer all of your Policy Account
Value to the Fixed Account. During the first two Policy Years (or the first two
years after an increase in Basic Amount), we do not count such transfers for
purposes of determining whether a transfer processing fee applies.
- ---------
26
<PAGE>
Other Policy Provisions. The Policy contains provisions addressing the following
matters:
- DIVIDENDS. The Policy is participating. However, we do not anticipate
paying any dividends on the Policy.
- INCONTESTABILITY. The Policy limits our right to contest the Policy as
issued or as increased, for reasons of material misstatements contained in
the application, after it has been in force during the Insured's lifetime
for a minimum period, generally for two years from the Issue Date of the
Policy or effective date of the increase.
- LIMITED DEATH BENEFIT. The Policy limits the Death Benefit if the Insured
dies by suicide generally within two years after the Issue Date of the
Policy or effective date of the increase.
- MISSTATEMENT OF AGE OR SEX. State Farm will adjust the Death Benefit if
the application misstates the Insured's Age or sex.
Beneficiary. You may name the Beneficiary(ies) when you apply for the Policy.
The Beneficiary is entitled to the insurance benefits under the Policy. You may
change the Beneficiary or the order of payment during the Insured's lifetime by
providing a written request to the Home Office. We will effect your change on
the date you sign the request or on any later date specified in the request, but
the change will not affect any action we have taken before we receive the
request. When the Insured dies, we will make payment in equal shares to the
primary Beneficiary(ies) living when payment is made. If no Beneficiary is
living when the Insured dies, we will make a one sum payment to you, if you are
alive when payment is made. Otherwise, we will make a one sum payment to the
estate of the last survivor of you and all Beneficiaries.
Reinstatement. If you have not surrendered the Policy, you may reinstate the
Policy within five years after lapse, subject to compliance with certain
conditions, including the payment of a necessary premium and submission of
satisfactory evidence of insurability. See your Policy for further information.
Other Changes. At any time we may make such changes in the Policy as are
necessary: to assure compliance at all times with the definition of life
insurance prescribed by the Code; to make the Policy, our operations, or the
Variable Account's operations conform with any law or regulation issued by any
government agency to which they are subject; or to reflect a change in the
operation of the Variable Account, if allowed by the Policy. Only a State Farm
officer has the right to change the Policy. No agent has the authority to change
the Policy or waive any of its terms. A State Farm officer must sign all
endorsements, amendments, or riders in order for those documents to be valid.
Reports to Policy Owners. State Farm maintains records and accounts of all
transactions involving the Policy, the Variable Account, the Fixed Account and
the Loan Account. Each year, or more often if required by law, we will send you
a report showing information about your Policy for the period covered by the
report. State Farm also will send you an annual and a semi-annual report for
each Fund underlying a Subaccount to which you have allocated Policy Account
Value, as required by the 1940 Act. In addition, when you pay premiums (other
than by pre-authorized checking account deduction) or if you take out a Policy
loan, make transfers or make withdrawals, you will receive a written
confirmation of these transactions.
Assignment and Change of Owner. You may assign the Policy subject to its terms.
We are not deemed to know of an assignment unless we receive a written copy of
it at our Home Office. We assume no responsibility for the validity or effect of
any assignment. In certain circumstances, an assignment may be a taxable event.
See "Tax Considerations", page 32. When allowed by law, you may change the Owner
of the Policy by sending a written request to our Home Office while the Insured
is alive and the Policy is in force. The change will take effect the date you
sign the Written Request, but the change will not affect any action we have
taken before we receive the Written Request. A change of Owner does not change
the Beneficiary designation.
Supplemental Benefits. The following supplemental benefits are available and you
may add them to your Policy by rider. State Farm will deduct monthly charges for
these benefits from your Policy Account Value as part of the Monthly Deduction
(see page 11).
- GUARANTEED INSURABILITY OPTION RIDER. Allows you to increase the Basic
Amount on the specific option dates without evidence of insurability.
- DISABILITY WAIVER OF MONTHLY DEDUCTION RIDER. Provides for the waiver of
the Monthly Deductions upon total disability of the Insured for as long as
the disability continues.
- ADDITIONAL INSURED RIDER. Provides level term insurance coverage for the
Insured's spouse to spouse's age 85.
- ACCIDENTAL DEATH BENEFIT RIDER. Provides additional death benefit if
accidental death occurs prior to age 70.
- CHILDREN'S TERM RIDER. Provides term life insurance on your eligible
children.
Additional rules and limits apply to these supplemental benefits. Please ask
your authorized State Farm agent for further information or contact our Home
Office.
27-------
<PAGE>
STATE FARM AND THE FIXED ACCOUNT
State Farm Life Insurance Company. State Farm is an Illinois stock life
insurance company that is wholly-owned by State Farm Mutual Automobile Insurance
Company, an Illinois mutual insurance company. State Farm's home office is
located at One State Farm Plaza, Bloomington, Illinois 61710-0001. State Farm
was incorporated in 1929 and has been continuously engaged in the life insurance
business since that year. State Farm is subject to regulation by the Insurance
Department of the State of Illinois as well as by the insurance departments of
all other states and jurisdictions in which it does business. State Farm sells
insurance in 46 states and the District of Columbia. State Farm also sells
insurance in the Canadian provinces of Alberta, New Brunswick, and Ontario.
State Farm submits annual statements on its operations and finances to insurance
officials in such states and jurisdictions. The Policy described in this
prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
State Farm Directors and Officers. A board of directors manages State Farm. The
following table sets forth the name and principal occupations during the past
five years of each of State Farm's directors. Each person's address is One State
Farm Plaza, Bloomington, Illinois 61710-0001.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ------------------------ ---------------------------------------------------------------------------
<S> <C> <C>
Marvin D. Bower Director Retired
Edward B. Rust, Director; President; Chairman of the Board, CEO -- State Farm Mutual Automobile Insurance
Jr. Chairman of the Board Company; President and CEO -- State Farm Fire and Casualty Company;
President and CEO -- State Farm General Insurance Company; President --
State Farm County Mutual Insurance Company of Texas; Director -- State Farm
Lloyds, Inc.; Chairman of the Board, President and Treasurer -- State Farm
Companies Foundation; Director -- State Farm International Services, Inc.;
President and Director -- State Farm Life Insurance Company, State Farm
Annuity and Life Insurance Company, State Farm Life and Accident Assurance
Company, State Farm Investment Management Corp., State Farm Growth Fund,
Inc., State Farm Balanced Fund, Inc., State Farm Interim Fund, Inc., and
State Farm Municipal Bond Fund, Inc.; President, CEO and Director -- State
Farm VP Management Corp.; President, CEO and Trustee -- State Farm Variable
Product Trust (1997-present)
Roger B. Tompkins Director; Executive Vice Director and Executive Vice President -- State Farm Life Insurance Company,
President State Farm Annuity and Life Insurance Company, and State Farm Life and
Accident Assurance Company (1997-present); Vice President -- California
State Farm Mutual Automobile Insurance Company, State Farm Fire and
Casualty Company, State Farm General Insurance Company; Vice President and
Director (1997-present), -- State Farm VP Management Corp.
Darrell W. Director; Vice President Vice President and Actuary -- Health -- State Farm Mutual Automobile
Beernink and Actuary Insurance Company; Director, Vice President and Actuary -- State Farm Life
Insurance Company; Vice President and Actuary -- State Farm Annuity and
Life Insurance Company, and State Farm Life and Accident Assurance Company
Charles R. Wright Director; Executive Vice Director (1995-present) and Agency Vice President -- State Farm Mutual
President and Chief Automobile Insurance Company; -- State Farm Fire and Casualty Company,
Agency and Marketing State Farm General Insurance Company, State Farm International Services,
Officer Inc., State Farm Life Insurance Company, State Farm Annuity and Life
Insurance Company, and State Farm Life and Accident Assurance Company; Vice
President and Director (1997-present) -- State Farm VP Management Corp.
Wendy L. Gramm Director Director (1994-present) -- State Farm Mutual Automobile Insurance Company;
Director (1993-present) -- State Farm Life Insurance Company; Director
(1993-present) -- Enron Corp.; Self-employed consultant (1993-present)
</TABLE>
- ---------
28
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ------------------------ ---------------------------------------------------------------------------
<S> <C> <C>
Roger S. Joslin Director Director, Senior Vice President and Treasurer -- State Farm Mutual
Automobile Insurance Company; Director, Chairman of the Board and Treasurer
-- State Farm Fire and Casualty Company; Director, Vice President and
Treasurer -- State Farm General Insurance Company; Treasurer -- State Farm
County Mutual Insurance Company of Texas; Director, Vice President and
Treasurer -- State Farm Lloyds, Inc.; Assistant Treasurer State Farm
Companies Foundation; Director, Vice President and Treasurer State Farm
International Services, Inc., State Farm Investment Management Corp., State
Farm Growth Fund, Inc., State Farm Balanced Fund, Inc., State Farm Interim
Fund, Inc., and State Farm Municipal Bond Fund, Inc.; Director -- State
Farm Life Insurance Company, State Farm Annuity and Life Insurance Company,
and State Farm Life and Accident Assurance Company; Vice President,
Treasurer and Director (1997-present) -- State Farm VP Management Corp.;
Vice President, Treasurer and Trustee (1997-present) -- State Farm Variable
Product Trust
Kurt G. Moser Director; Senior Vice Vice President -- Investments -- State Farm Mutual Automobile Insurance
President -- Investments Company; Director and Vice President -- Investments State Farm Fire and
Casualty Company, State Farm General Insurance Company, State Farm Life
Insurance Company, State Farm Annuity and Life Insurance Company, and State
Farm Life and Accident Assurance Company; Vice President -- Investments --
State Farm County Mutual Insurance Company of Texas, State Farm Lloyds,
Inc., and State Farm International Services, Inc.; Investment Officer --
State Farm Indemnity Company; Underwriter -- State Farm Lloyds; Director
and Senior Vice President -- State Farm Investment Management Corp.; Senior
Vice President -- State Farm Growth Fund, Inc., State Farm Balanced Fund,
Inc., State Farm Interim Fund, Inc., and State Farm Municipal Bond Fund,
Inc.; Director -- State Farm VP Management Corp.; Vice President -- State
Farm Variable Product Trust (1997-present)
George L. Perry Director Director (1973-present) -- State Farm Mutual Automobile Insurance Company;
Director (1986-present) -- State Farm Life Insurance Company; Senior Fellow
(1970-present) -- Brookings Institute
Vincent J. Director Director, Vice Chairman of the Board, President and Chief Operating Officer
Trosino -- State Farm Mutual Automobile Insurance Company; Director and Vice
President -- State Farm Fire and Casualty Company, State Farm General
Insurance Company; Director -- State Farm Lloyds, Inc.; Assistant Secretary
-- State Farm Companies Foundation; Director -- State Farm International
Services, Inc., State Farm Life Insurance Company, State Farm Annuity and
Life Insurance Company, State Farm Life and Accident Assurance Company,
State Farm Investment Management Corp.
W. H. Knight, Jr. Director Director (1998-present) -- State Farm Life Insurance Company; Director
(1995-present) -- State Farm Fire and Casualty Company; Director
(1996-present) -- State Farm Mutual Automobile Insurance Company; Professor
(1983-1997), and Vice Provost (1997-present) -- University of Iowa.
Susan M. Philips Director Director (1998-present) -- State Farm Life Insurance Company; Director
(1998-present) -- State Farm Companies Foundation; Dean and Professor --
Finance, -- School of Business and Public Management (1998-present), The
George Washington University; Member of Board of Governors of the Federal
Reserve System (1991-1998)
Jerry Porras Director Director (1997-present) -- State Farm life Insurance Company; Director
(1997-present) -- State Farm General Insurance Company; Director
(1996-present) -- State Farm Mutual Automobile Insurance Company; Professor
-- Stanford University Graduate School of Business (1972-present)
</TABLE>
29-------
<PAGE>
The following table sets forth the names and principal occupations during the
past five years of the senior officers of State Farm (other than officers listed
above who are members of State Farm's Board of Directors). Each person's address
is One State Farm Plaza, Bloomington, Illinois 61710-0001.
SENIOR OFFICERS
<TABLE>
<CAPTION>
POSITION WITH STATE
NAME AND ADDRESS FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------- ---------------------- -------------------------------------------------------------------------
<S> <C> <C>
Nancy A. Behrens Vice President --Life Vice President -- Life Process Support (1999-present), Actuary
Process Support (1996-1998), -- Management Assistant (prior to 1996) State Farm Life and
Accident Assurance Company, State Farm Life Insurance Company
Kim M. Brunner Senior Vice President Vice President and General Counsel (1/99-present) -- and Vice President
and General Counsel and Regulatory General Counsel (1997-1998) -- State Farm General
Insurance Company; Vice President and General Counsel (9/98-present) --
State Farm Life and Accident Assurance Company, State Farm Annuity and
Life Insurance Company; Senior Vice President and General Counsel
(9/98-present) -- Vice President and Regulatory General Counsel
(1997-9/98) -- and Vice President-Counsel (1993-1997) -- State Farm
Mutual Automobile Insurance Company; Vice President and General Counsel
(1998-present), -- Vice President and Regulatory General Counsel
(9/98-present) -- State Farm Fire and Casualty Company
Mary Rebecca Blakeslee Vice President -- Vice President -- Life/Health Underwriting -- State Farm Life Insurance
Life/ Health Company; Executive Assistant, Regional Liaison, Division Manager,
Underwriting Underwriting Superintendent, Underwriting Supervisor -- Life Underwriting
-- State Farm Insurance Companies (1974 - 1997)
James G. Fisher Vice President -- Vice President -- Operations (1995 - present) -- State Farm Life
Operations Insurance Company; Executive Assistant (1994 - 1995), and Agency Director
(1988 - 1994) -- State Farm Insurance Companies
Danny L. Scott, M.D. Vice President and Vice President and Medical Director -- State Farm Life Insurance Company,
Medical Director State Farm Annuity and Life Insurance Company, and State Farm Life and
Accident Assurance Company
Laura P. Sullivan Vice President Vice President Counsel and Secretary of the Board -- State Farm Mutual
Counsel; and Secretary Automobile Insurance Company, State Farm Fire and Casualty Company;
Director Vice President Counsel and Secretary of the Board -- State Farm
General Insurance Company; Assistant Secretary Treasurer -- State Farm
County Mutual Insurance Company of Texas; Director and Assistant
Secretary -- State Farm Indemnity Company; Director, Vice President
Secretary -- State Farm Companies Foundation; Assistant Secretary --
State Farm International Services, Inc.; Vice President Counsel and
Secretary of the Board -- State Farm Life Insurance Company, State Farm
Annuity and Life Insurance Company, State Farm Life and Accident
Insurance Company
Dale R. Egeberg Vice President and Vice President and Controller -- Life -- State Farm Life Insurance
Controller -- Life Company, State Farm Annuity and Life Insurance Company, and State Farm
Life and Accident Assurance Company (1997 - present); -- Controller State
Farm Life Insurance Company, State Farm Annuity and Life Insurance
Company, and State Farm Life and Accident Assurance Company (through
1997)
Terry L. Huff Vice President -- Vice President -- Advanced Products (1998 - present), -- Assistant Vice
Advanced Products President (1997-1998), and Actuary (prior to 1997) -- State Farm Life
Insurance Company, State Farm Annuity and Life Insurance Company, and
State Farm Life and Accident Assurance Company
Max E. McPeek Vice President -- Vice President -- Compliance (1998 - present), -- Assistant Vice
Compliance President -- Compliance (1997-1998), Assistant Vice President (prior to
1997) -- State Farm Life Insurance Company, State Farm Annuity and Life
Insurance Company, and State Farm Life and Accident Assurance Company
</TABLE>
- ---------
30
<PAGE>
National Union Fire Insurance Company has issued a fidelity bond in the amount
of $5 million covering State Farm's directors, officers and employees.
State Farm's Fixed Account Option. The Fixed Account is part of State Farm's
general account assets. State Farm uses its general account assets to support
its insurance and annuity obligations other than those funded by separate
accounts. Subject to applicable law, State Farm has sole discretion over the
investment of the Fixed Account's assets.
Because of exemptive and exclusionary provisions, State Farm has not registered
interests in the Fixed Account under the Securities Act of 1933, nor has State
Farm registered the Fixed Account as an investment company under the 1940 Act.
Accordingly, neither the Fixed Account nor any interests therein are subject to
the provisions of these Acts and, as a result, the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this prospectus relating
to the Fixed Account. The disclosure regarding the Fixed Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in a
prospectus.
THE VARIABLE ACCOUNT AND THE TRUST
The Variable Account. State Farm established the Variable Account as a separate
investment account under Illinois law on December 9, 1996. State Farm owns the
assets in the Variable Account and is obligated to pay all benefits under the
Policies. State Farm uses the Variable Account to support the Policies as well
as for other purposes permitted by law.
The Variable Account is registered with the SEC as a unit investment trust under
the 1940 Act and qualifies as a "separate account" within the meaning of the
federal securities laws. Such registration does not involve any supervision by
the SEC of the management of the Variable Account or State Farm. State Farm has
established other separate investment accounts, of which State Farm Life
Insurance Company Variable Annuity Separate Account is registered with the SEC
under the 1940 Act.
The Variable Account is divided into Subaccounts, each of which currently
invests in shares of a specific Fund of State Farm Variable Product Trust. These
Subaccounts buy and redeem Fund shares at net asset value without any sales
charge. Any dividend from net investment income and distribution from realized
gains from security transactions of a Fund is reinvested at net asset value in
shares of the same Fund. Income, gains and losses, realized or unrealized, of a
Subaccount are credited to or charged against that Subaccount without regard to
any other income, gains or losses of State Farm. Assets equal to the reserves
and other contract liabilities with respect to each Subaccount are not
chargeable with liabilities arising out of any other business or account of
State Farm. If the assets exceed the required reserves and other liabilities,
State Farm may transfer the excess to its general account.
The Variable Account may include other Subaccounts that are not available under
the Policy and are not otherwise discussed in this prospectus. State Farm may
substitute another subaccount or insurance company separate account under the
Policy if, in State Farm's judgment, investment in a Subaccount should no longer
be possible or becomes inappropriate to the purposes of the Policies, or if
investment in another subaccount or insurance company separate account is in the
best interest of Owners. No substitution may take place without notice to Owners
and prior approval of the SEC and insurance regulatory authorities, to the
extent required by the 1940 Act and applicable law.
The Trust. State Farm Investment Management Corp. ("SFIM"), a wholly owned
subsidiary of State Farm Mutual Automobile Insurance Company, serves as
investment adviser to the Trust. SFIM has engaged Barclays Global Fund Advisors
as the investment sub-adviser to provide day-to-day portfolio management for the
Large Cap Equity Index Fund, the Small Cap Equity Index Fund, and the
International Equity Index Fund. Please see the accompanying prospectus for the
Trust for more information concerning the investment adviser and investment
sub-adviser.
Voting of Fund Shares. State Farm is the legal owner of shares held by the
Subaccounts and as such has the right to vote on all matters submitted to
shareholders of the Funds. However, as required by law, State Farm will vote
shares held in the Subaccounts at regular and special meetings of shareholders
of the Funds in accordance with instructions received from Owners with Policy
Account Value in the Subaccounts.
To obtain voting instructions from Owners, before a meeting of shareholders of
the Funds State Farm will send Owners voting instruction material, a voting
instruction form and any other related material. Shares held by a Subaccount for
which no timely instructions are received will be voted by State Farm in the
same proportion as those shares for which voting instructions are received.
Should the applicable federal securities laws, regulations or interpretations
thereof change so as to permit State Farm to vote shares of the Funds in its own
right, State Farm may elect to do so.
State Farm may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory agreement. In
addition, State Farm may under certain circumstances disregard voting
instructions that would require changes in the investment policy or investment
adviser of one or more of the Funds, provided that State Farm reasonably
31-------
<PAGE>
disapproves of such changes in accordance with applicable federal regulations.
If State Farm ever disregards voting instructions, State Farm will advise Owners
of that action and of the reasons for such action in the next report to Owners.
TAX CONSIDERATIONS
Introduction. The following summary provides a general description of the
Federal income tax considerations associated with the Policy and does not
purport to be complete or to cover all tax situations. This discussion is not
intended as tax advice. Please consult counsel or other competent tax advisors
for more complete information. This discussion is based upon State Farm's
understanding of the present Federal income tax laws. State Farm makes no
representation as to the likelihood of continuation of the present Federal
income tax laws or as to how the Internal Revenue Service (the "IRS") may
interpret such laws.
Tax Status of the Policy. In order to qualify as a life insurance contract for
Federal income tax purposes and to receive the tax treatment normally accorded
life insurance contracts under Federal tax law, a Policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, State Farm
believes that a Policy issued on the basis of a standard risk class should
satisfy the applicable requirements. There is less guidance with respect to
Policies issued on a substandard basis (i.e., a premium class involving higher
than standard mortality risk), and it is not clear whether such a Policy would
satisfy the applicable requirements, particularly if the Owner pays the full
amount of premiums permitted under the Policy. If it is subsequently determined
that a Policy does not satisfy the applicable requirements, State Farm may take
appropriate steps to bring the Policy into compliance with such requirements and
reserves the right to restrict Policy transactions in order to do so.
In certain circumstances, owners of variable life insurance contracts have been
considered for Federal income tax purposes to be the owners of the assets of the
Variable Account supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the contract
owners have been currently taxed on income and gains attributable to the
Variable Account assets. There is little guidance in this area, and some
features of the Policies, such as the flexibility of an Owner to allocate
premium payments and Policy Account Values, have not been explicitly addressed
in published rulings. While State Farm believes that the Policies do not give
Owners investment control over Variable Account assets, State Farm reserves the
right to modify the Policies as necessary to prevent an Owner from being treated
as the owner of the Variable Account assets supporting the Policy.
In addition, the Code requires that the investments of the Variable Account be
"adequately diversified" in order for the Policies to be treated as life
insurance contracts for Federal income tax purposes. State Farm intends that the
Variable Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. State Farm believes that the Death Benefit under a Policy should be
excludible from the gross income of the Beneficiary. Federal, state and local
gift, estate, transfer, and other tax consequences of ownership or receipt of
Policy proceeds depend on the circumstances of each Owner or Beneficiary.
Consult a tax advisor on these consequences.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new Policy or a
change in an existing Policy should consult a tax advisor.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Account Value until there is a distribution. When distributions from a
Policy occur, or when loans are taken out from or secured by (e.g., by
assignment), a Policy, the tax consequences depend on whether the Policy is
classified as a "Modified Endowment Contract."
Modified Endowment Contracts. Under the Internal Revenue Code, certain life
insurance contracts are classified as "Modified Endowment Contracts," with less
favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
Modified Endowment Contract. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy Years. Certain changes in a Policy after it is issued could also cause it
to be classified as a Modified Endowment Contract. A current or prospective
Owner should consult with a competent advisor to determine whether a Policy
transaction will cause the Policy to be classified as a Modified Endowment
Contract. State Farm will monitor the Policies, however, and will attempt to
notify an Owner on a timely basis if it believes that such Owner's Policy is in
jeopardy of becoming a Modified Endowment Contract.
Distributions from Modified Endowment Contracts. Policies classified as Modified
Endowment Contracts are subject to the following tax rules:
(1) All distributions, including distributions upon surrender and
withdrawals, will be treated as ordinary
- ---------
32
<PAGE>
income subject to tax up to an amount equal to the excess (if any) of the
unloaned Policy Account Value (Cash Surrender Value for surrenders)
immediately before the distribution plus prior distributions over the
Owner's total investment in the Policy at that time. "Total investment in
the Policy" means the aggregate amount of any premiums or other
considerations paid for a Policy, plus any previously taxed
distributions, minus any credited dividends.
(2) Loans taken from or secured by (e.g., by assignment), such a Policy are
treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount included in
income except where the distribution or loan is made when the Owner has
attained age 59 1/2 or is disabled, or where the distribution is part of
a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies)
of the Owner and the Owner's Beneficiary or designated Beneficiary.
Distributions from Policies that are not Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment Contract
are generally treated first as a recovery of an Owner's investment in the Policy
and only after the recovery of all investment in the Policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if Policy benefits are reduced during the first 15 Policy Years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a Modified Endowment Contract are
generally not treated as distributions.
Finally, neither distributions from nor loans from or secured by a Policy that
is not a Modified Endowment Contract are subject to the 10 percent additional
tax.
Policy Loans. In general, interest on a loan from a Policy will not be
deductible. Before taking out a Policy loan, an Owner should consult a tax
advisor as to the tax consequences.
Multiple Policies. All Modified Endowment Contracts that are issued by State
Farm (or its affiliates) to the same Owner during any calendar year are treated
as one Modified Endowment Contract for purposes of determining the amount
includible in the Owner's income when a taxable distribution occurs.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, Congress has adopted new rules relating
to life insurance owned by businesses. Any business contemplating the purchase
of a new Policy or a change in an existing Policy should consult a tax adviser.
Our Income Taxes. At the present time, we make no charge for any Federal, state
or local taxes (other than the charge for state and local premium taxes) that we
incur that may be attributable to the Variable Account or its Subaccounts. We do
have the right in the future to make additional charges for any such tax or
other economic burden resulting from the application of the tax laws that we
determine is attributable to the Variable Account or its Subaccounts.
Under current laws in several states, we may incur state and local taxes (in
addition to premium taxes). These taxes are not now significant and we are not
currently charging for them. If they increase, we may deduct charges for such
taxes.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the Policy
could change by legislation or otherwise. It is possible that any legislative
change could be retroactive (that is, effective prior to the date of the
change). Consult a tax advisor with respect to legislative developments and
their effect on the Policy.
ADDITIONAL INFORMATION
Sale of the Policies. State Farm VP Management Corp., a subsidiary of State Farm
Mutual Automobile Insurance Company, acts as the principal underwriter of the
Policies. State Farm VP Management Corp. also acts as principal underwriter for
State Farm Life Insurance Company Variable Annuity Separate Account, a separate
account also established by State Farm, and may act as principal underwriter for
other separate accounts established by affiliates of State Farm. State Farm VP
Management Corp. is a corporation organized under the laws of the state of
Delaware in 1996, is registered as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the National Association of Securities Dealers,
Inc. (the "NASD"). The Policies may not be available in all states. The Policies
are sold by certain registered representatives of State Farm VP Management Corp.
who are also appointed and licensed as State Farm insurance agents.
Commissions are payable to the broker-dealer under two alternative commission
schedules, depending on which schedule is elected by the registered
representatives. Under the first schedule, commissions will not exceed 40% of
the
33-------
<PAGE>
premiums received up to the Primary Compensation Premium (as defined in
agreements between State Farm VP Management Corp. and its registered
representatives) and 3 of all other premiums received. Under the second
schedule, commissions will not exceed 30% of the premiums received up to the
first Primary Compensation Premium, 15% of the premiums received up to the next
two Primary Compensation Premiums, and 4% of all other premiums received. In
addition, State Farm may pay incentive bonuses or expense reimbursements.
Other Information. State Farm has filed a registration statement under the
Securities Act of 1933 with the SEC relating to the offering described in this
prospectus. This prospectus does not include all the information set forth in
the registration statement. You may obtain the omitted information at the SEC's
principal office in Washington, D.C. by paying the SEC's prescribed fees. The
omitted information is also available at the SEC's Internet site
(http://www.sec.gov).
Insurance Marketplace Standards Association. State Farm Life Insurance Company
and State Farm Life and Accident Assurance Company are members of the Insurance
Marketplace Standards Association (IMSA). IMSA is an independent and voluntary
organization created by the American Council of Life Insurance (ACLI) to improve
customer confidence in the life insurance industry. Life insurers that are
members of IMSA agree to meet and maintain high standards of ethical conduct in
their dealings with consumers for individual life insurance and annuity
products.
Preparing for Year 2000. Like all financial services providers, State Farm, in
administering the Policies, utilizes systems that may be affected by Year 2000
transition issues and relies on service providers that also may be affected.
State Farm has developed, and is in the process of implementing, a Year 2000
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. We
are unable to predict the outcome of these efforts; however, as of the date of
this prospectus, it is not anticipated that Owners will experience negative
effects with respect to their Policies as a result of Year 2000 transition
implementation. Business application systems and external interfaces will be
tested, prioritized and remediated as necessary to provide continuous,
uninterrupted service. Our target date for completion is June, 1999 or earlier
for most activities, but there can be no assurance that State Farm will be
successful, or that interaction with other service providers will not impact
State Farm's services at that time.
Litigation. State Farm and its affiliates, like other life insurance companies,
are involved in lawsuits, including class action lawsuits. In some class action
and other lawsuits involving insurers, substantial damages have been sought
and/or material settlement payments have been made. Although we cannot predict
the outcome of any litigation with certainty, State Farm believes that at the
present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on the Variable Account or State Farm.
Legal Matters. The legal matters in connection with the Policy described in this
prospectus have been passed on by Kim M. Brunner, the Senior Vice President and
General Counsel of State Farm. Sutherland Asbill & Brennan LLP of Washington,
D.C. has provided advice on matters relating to the federal securities laws.
Relationships with the Companies that Maintain the Benchmark Indices.
Standard & Poor's
Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P
500-Registered Trademark-, Standard & Poor's 500 and 500 are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by State Farm and the
Trust. Neither the State Farm Variable Universal Life Policy, the Large Cap
Equity Index Fund, nor the Stock and Bond Balanced Fund (the "Product and the
Funds") is sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P").
S&P makes no representation or warranty, express or implied, to the owners of
the Product and the Funds or any member of the public regarding the advisability
of investing in securities generally or in the Product and Funds particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to State Farm and the Trust is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to State Farm, the Trust, the
Product, or the Funds. S&P has no obligation to take the needs of State Farm,
the Trust or the owners of the Product or the Funds into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Product or the Funds or the timing of the issuance or sale of the Product or
the Funds or in the determination or calculation of the equation by which the
Product or the Funds are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Product or the Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY STATE FARM, THE TRUST, OWNERS OF THE PRODUCT AND
FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P
- ---------
34
<PAGE>
500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Frank Russell Company
1) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell-TM- is a trademark of the Frank Russell
Company. The Small Cap Equity Index Fund is not promoted, sponsored or
endorsed by, nor in any way affiliated with Frank Russell Company. Frank
Russell Company is not responsible for and has not reviewed the prospectus
for the Small Cap Equity Index Fund nor any associated literature or
publications and Frank Russell Company makes no representation or warranty,
express or implied, as to their accuracy, or completeness, or otherwise.
2) Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change its Index. Frank Russell Company
has no obligation to take the needs of any particular fund or its
participants or any other product or person into consideration in
determining, composing or calculating the Index.
3) Frank Russell Company's publication of the Index in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index
is based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX OR ANY DATA INCLUDED IN THE INDEX. FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
INDEX OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF)
COMPRISING THE INDEX. FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR IMPLIED
WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING,
WITHOUT MEANS OF LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA OR ANY SECURITY (OR
COMBINATION THEREOF) INCLUDED THEREIN.
Morgan Stanley & Co. Incorporated
The Morgan Stanley Capital International Europe, Australia, and Far East Free
(EAFE-Registered Trademark- Free) Index is the exclusive property of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"). Morgan Stanley Capital
International is a service mark of Morgan Stanley and has been licensed for use
by the Trust. The International Equity Index Fund (the "Fund") is not sponsored,
endorsed, sold or promoted by Morgan Stanley. Morgan Stanley makes no
representation or warranty, express or implied, to the owners of this Fund or
any member of the public regarding the advisability of investing in funds
generally or in this Fund particularly or the ability of the Morgan Stanley
Capital International EAFE Free Index to track general stock market performance.
Morgan Stanley is the licensor of certain trademarks, service marks and trade
names of Morgan Stanley and of the Morgan Stanley Capital International EAFE
Free Index which is determined, composed and calculated by Morgan Stanley
without regard to the issuer of this Fund. Morgan Stanley has no obligation to
take the needs of the issuer of this Fund or the owners of this Fund into
consideration in determining, composing or calculating the Morgan Stanley
Capital International EAFE Free Index. Morgan Stanley is not responsible for and
has not participated in the determination of the timing of, prices at, or
quantities of this Fund to be issued or in the determination or calculation of
the equation by which this Fund is redeemable for cash. Morgan Stanley has no
obligation or liability to owners of this Fund in connection with the
administration, marketing or trading of this Fund. ALTHOUGH MORGAN STANLEY SHALL
OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE INDEX
FROM SOURCES WHICH MORGAN STANLEY CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR
ANY OTHER PARTY GUARANTEES THE ACCURACY AND /OR THE COMPLETENESS OF THE INDEX OR
ANY DATA INCLUDED THEREIN. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, THE
TRUST'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE FUND, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH
THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR
ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY
HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT,
35-------
<PAGE>
INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST
PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Experts. The statutory basis statements of admitted assets, liabilities, capital
and surplus of State Farm Life Insurance Company as of December 31, 1998 and
1997, and the related statutory basis statements of operations and changes in
capital and surplus, and cash flows for the years then ended, appearing in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, with offices in Chicago, Illinois, whose report thereon is set
forth elsewhere herein, and are included in reliance upon the authority of such
firm as experts in accounting and auditing. As stated in their report, State
Farm prepared these financial statements in conformity with the accounting
practices prescribed or permitted by the Insurance Department of the State of
Illinois (statutory basis), which practices differ from generally accepted
accounting principles (GAAP). The effect on the financial statements of the
variances between the statutory basis of accounting and GAAP, although not
reasonably determinable, are presumed to be material. Therefore, their report
contains an adverse opinion on the financial statements of State Farm in
conformity with GAAP, but an unqualified opinion in conformity with statutory
basis accounting. Actuarial matters included in this prospectus have been
examined by Gerry Brogla, F.S.A., Actuary of State Farm, whose opinion is filed
as an exhibit to the registration statement.
Financial Statements. The audited statutory basis statements of admitted assets,
liabilities, capital and surplus of State Farm Life Insurance Company as of
December 31, 1998 and 1997, and the related statutory basis statements of
operations and changes in capital and surplus, and cash flows for the years then
ended, as well as the Report of the Independent Accountants, appear in Appendix
B. The financial statements of State Farm should be considered only as bearing
on our ability to meet our obligations under the Policies. THEY SHOULD NOT BE
CONSIDERED AS BEARING ON THE INVESTMENT PERFORMANCE OF THE ASSETS HELD IN THE
VARIABLE ACCOUNT.
The audited GAAP basis statement of assets, liabilities and owners' equity of
the Variable Account as of December 31, 1998, and the related statement of
operations and changes in owners' equity for the period May 1, 1998
(commencement of operations) to December 31, 1998, as well as the Report of the
Independent Accountants, also appear in Appendix B.
- ---------
36
<PAGE>
APPENDIX A
EXAMPLE OF SURRENDER CHARGES
<TABLE>
<CAPTION>
POLICY ISSUED TO MALE AGE
POLICY ISSUED TO MALE AGE 35 50
---------------------------- --------------------------
$50,000
INCREASE $50,000
IN BASIC INCREASE
AMOUNT, IN BASIC
BEGINNING POLICY $100,000 AMOUNT,
- ------------------------ $100,000 BEGINNING OF INITIAL BEGINNING OF
POLICY POLICY INITIAL YEAR 16 (AGE BASIC YEAR 16 (AGE
YEAR MONTH BASIC AMOUNT 50) AMOUNT 65)
- ----------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1 1 $ 21.50* $ 0.00 $ 53.00* $ 0.00
1 6 129.00 0.00 318.00 0.00
1 12 258.00 0.00 636.00 0.00
2 6 387.00 0.00 954.00 0.00
2 12 516.00 0.00 1,272.00 0.00
3 1 516.00 0.00 1,272.00 0.00
4 1 516.00 0.00 1,272.00 0.00
5 1 516.00 0.00 1,272.00 0.00
6 1 516.00 0.00 1,272.00 0.00
7 1 412.80 0.00 1,017.60 0.00
8 1 309.60 0.00 763.20 0.00
9 1 206.40 0.00 508.80 0.00
10 1 103.20 0.00 254.40 0.00
11 1 0.00 0.00 0.00 0.00
12 1 0.00 0.00 0.00 0.00
13 1 0.00 0.00 0.00 0.00
14 1 0.00 0.00 0.00 0.00
15 1 0.00 0.00 0.00 0.00
16 1 0.00 26.50* 0.00 40.42*
16 6 0.00 159.00 0.00 242.50
16 12 0.00 318.00 0.00 485.00
17 6 0.00 477.00 0.00 727.50
17 12 0.00 636.00 0.00 970.00
18 1 0.00 636.00 0.00 970.00
19 1 0.00 636.00 0.00 970.00
20 1 0.00 636.00 0.00 970.00
21 1 0.00 636.00 0.00 970.00
22 1 0.00 508.80 0.00 776.00
23 1 0.00 381.60 0.00 582.00
24 1 0.00 254.40 0.00 388.00
25 1 0.00 127.20 0.00 194.00
26 1 0.00 0.00 0.00 0.00
</TABLE>
- ------------------------------
* In this example, the Surrender Charge increases by approximately this amount
each month through the first 2 years after issue or increase. The Surrender
Charge then remains level through the end of the 6th year. Starting at the
beginning of the 7th year after issue or increase, the surrender charge
decreases by 1/5 at the beginning of each year, until it is zero in the 11th
year.
37-------
<PAGE>
APPENDIX B
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL
AUTOMOBILE INSURANCE COMPANY)
REPORT ON AUDITS OF FINANCIAL STATEMENTS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
STATE FARM LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
REPORT ON AUDITS OF FINANCIAL STATEMENTS GAAP BASIS
FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
- ---------
38
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS................................ 40
FINANCIAL STATEMENTS:
Statements of Admitted Assets, Liabilities, Capital and Surplus
-- Statutory Basis as of December 31, 1998 and 1997........... 41
Statements of Operations -- Statutory Basis for the years ended
December 31, 1998 and 1997.................................... 42
Statements of Changes in Capital and Surplus -- Statutory Basis
for the years ended December 31, 1998 and 1997................ 43
Statements of Cash Flows -- Statutory Basis for the years ended
December 31, 1998 and 1997.................................... 44
NOTES TO FINANCIAL STATEMENTS -- Statutory Basis................. 45-52
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL FINANCIAL
INFORMATION..................................................... 54
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES.................. 55
SEPARATE ACCOUNT FINANCIAL STATEMENTS............................ 58-62
</TABLE>
39-------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life Insurance Company
Bloomington, Illinois
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of State Farm Life Insurance Company as of
December 31, 1998 and 1997, and the related statutory statements of operations,
of changes in capital and surplus, and of cash flows, for the years then ended.
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.
As described more fully in Note 2, these financial statements were prepared by
the Company in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Illinois (statutory-basis), which
practices differ from generally accepted accounting principles. When
statutory-basis financial statements are presented for purposes other than for
filing with a regulatory agency, generally accepted auditing standards require
that an auditor's report on them state whether they are presented fairly in
conformity with generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter referred to in the
preceding paragraph, the financial statements audited by us do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of State Farm Life Insurance Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for the years
then ended.
Also, in our opinion, the financial statements audited by us present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
State Farm Life Insurance Company as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the years then ended, on the
basis of accounting described in Note 2.
[SIG]
February 16, 1999
- ---------
40
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS -- STATUTORY
BASIS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
ADMITTED ASSETS
Bonds:
United States government $ 6,200,276,008 $ 6,720,781,363
Canadian government and subdivisions 391,217,223 398,657,638
Other governmental units 1,796,996,786 1,495,366,390
Public utilities 2,858,427,560 2,812,385,458
Industrial and other 7,543,386,897 6,300,644,082
--------------- ---------------
18,790,304,474 17,727,834,931
--------------- ---------------
Stocks:
Preferred 1,253,293 2,155,906
Unaffiliated common 597,397,907 244,848,830
Affiliated common 6,797,698 6,615,055
--------------- ---------------
605,448,898 253,619,791
--------------- ---------------
Mortgage loans 2,427,482,636 2,027,213,387
Real estate:
Held for investment 10,685,598 11,304,280
Policy loans 2,073,694,523 1,919,296,313
Cash (4,706,752) 4,802,627
Short-term investments 300,614,306 645,365,787
Other invested assets 204,825,301 322,798,982
--------------- ---------------
Total cash and invested assets 24,408,348,984 22,912,236,098
Premiums deferred and uncollected 95,246,120 96,008,759
Investment income due and accrued 413,070,675 395,085,497
Federal and foreign income tax recoverable (including from affiliates) 3,275,733 516,835
Other assets 16,547,370 20,105,448
Assets held in separate accounts 215,213,378 --
--------------- ---------------
Total admitted assets $25,151,702,260 $23,423,952,637
--------------- ---------------
--------------- ---------------
LIABILITIES
Aggregate reserves for life policies and contracts $16,224,026,895 $15,388,910,840
Reserve for contracts without life contingencies 1,104,279,781 994,015,338
Policy and contract claims 82,604,631 71,791,263
Policyholders' dividend accumulations 3,169,107,326 2,944,510,422
Dividends to policyholders payable in the following year 663,480,957 638,609,092
Advance premiums, deposits and other policy and contract liabilities 248,782,166 252,073,125
Interest maintenance reserve 28,203,854 16,427,385
Commissions payable 60,279,799 55,049,090
Federal income taxes (payable to affiliates) 132,896,145 70,538,823
Federal and foreign income taxes due or accrued 1,687,481 1,935,169
Other liabilities 395,574,011 168,010,569
Liabilities related to separate accounts 81,602,931 --
Asset valuation reserve 284,076,260 185,855,962
--------------- ---------------
Total liabilities 22,476,602,237 20,787,727,078
--------------- ---------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 30,000 shares authorized, issued and outstanding 3,000,000 3,000,000
Paid-in surplus 21,846,419 21,846,419
Unassigned surplus 2,650,253,604 2,611,379,140
--------------- ---------------
Total capital and surplus 2,675,100,023 2,636,225,559
--------------- ---------------
Total liabilities, capital and surplus $25,151,702,260 $23,423,952,637
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
41-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Income:
Premiums and annuity considerations $ 2,598,534,137 $ 2,422,821,798
Net investment income 1,769,735,980 1,644,237,854
Considerations for supplementary contracts and dividend accumulations 600,838,195 563,130,198
Other 751,058 916,486
--------------- ---------------
4,969,859,370 4,631,106,336
--------------- ---------------
Benefits and other expenses:
Death benefits 488,267,444 441,245,015
Surrender benefits and other fund withdrawals 776,633,240 664,651,241
Other benefits and claims 161,278,199 147,220,069
Payments on supplementary contracts and dividend accumulations 583,588,540 567,953,799
Net transfers to (from) separate accounts 72,452,664 --
Increase in policy and contract reserves 1,170,205,575 1,204,390,228
Commissions 217,256,334 207,175,706
General insurance expenses 374,840,095 301,450,840
Taxes, licenses and fees 50,875,036 53,914,441
--------------- ---------------
3,895,397,127 3,588,001,339
--------------- ---------------
Net gain from operations before dividends to policyholders and federal and foreign
income taxes 1,074,462,243 1,043,104,997
Dividends to policyholders 650,019,641 624,196,012
--------------- ---------------
Net gain from operations before federal and foreign income taxes 424,442,602 418,908,985
Federal and foreign income taxes incurred (excluding capital gains) 161,052,390 186,553,224
--------------- ---------------
Net gain from operations before net realized capital gains 263,390,212 232,355,761
Net realized capital gains or (losses) less capital gains tax of $29,007,290 and
$2,749,443 (excluding $12,990,443 and $2,071,867 transferred to the IMR) (20,512,698) (1,967,141)
--------------- ---------------
Net income $ 242,877,514 $ 230,388,620
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
- ---------
42
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Common stock:
Balance at beginning and end of year $ 3,000,000 $ 3,000,000
--------------- ---------------
Paid-in surplus:
Balance at beginning and end of year 21,846,419 21,846,419
--------------- ---------------
Unassigned surplus:
Balance at beginning of year 2,611,379,140 2,369,936,112
Net income 242,877,514 230,388,620
Net unrealized capital gains 61,619,720 19,152,936
Change in nonadmitted assets 1,544,606 (1,570,787)
Change in asset valuation reserve (98,220,298) (6,047,741)
Dividends to stockholder (parent company) (480,000) (480,000)
Surplus (contributed to) withdrawn from separate accounts (119,000,100) --
Other changes in surplus in separate accounts statement 135,533,022 --
Establishment of provision for class action settlement amounts (185,000,000) --
--------------- ---------------
Balance at end of year 2,650,253,604 2,611,379,140
--------------- ---------------
Total capital and surplus $ 2,675,100,023 $ 2,636,225,559
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements.
43-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $ 2,608,301,994 $ 2,445,761,120
Other premiums, considerations and deposits, allowances and reserve adjustments and
other income 602,297,940 563,915,979
Investment income received (excluding realized gains/losses and net of investment
expenses) 1,777,761,143 1,651,907,251
Life and accident and health benefits paid (499,753,913) (460,019,141)
Surrender benefits and other fund withdrawals paid (776,633,240) (664,651,241)
Other benefits to policyholders paid (723,399,865) (693,678,426)
Commissions, other expenses and taxes paid (excluding federal income taxes) (627,764,840) (533,578,148)
Dividends to policyholders paid (625,147,776) (597,792,170)
Federal and foreign income taxes paid (excluding tax on capital gains) (127,959,471) (186,443,506)
Other operating expenses paid (280,301) (178,857)
Net transfer from separate accounts (195,422,386) --
--------------- ---------------
Net cash from operations 1,411,999,285 1,525,242,861
--------------- ---------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 1,714,869,512 1,391,869,102
Stocks 33,444,243 3,961,534
Mortgage loans 155,435,830 186,077,028
Other invested assets 216,818,073 42,791,158
Net (losses) on cash and short-term investments (28,445) (11,652)
--------------- ---------------
Total investment proceeds 2,120,539,213 1,624,687,170
Tax on capital gains 2,749,474 387,837
--------------- ---------------
Total cash from investments 2,117,789,739 1,624,299,333
--------------- ---------------
Cost of investments acquired (long-term only):
Bonds 2,785,735,889 2,226,052,108
Stocks 310,877,793 28,986,558
Mortgage loans 552,320,858 473,272,062
Other invested assets 98,147,288 --
--------------- ---------------
Total investments acquired 3,747,081,828 2,728,310,728
--------------- ---------------
Increase in policy loans and premium notes 154,550,681 145,045,017
--------------- ---------------
Net cash from investments (1,783,842,770) (1,249,056,412)
--------------- ---------------
Cash from financing and miscellaneous sources:
Other cash provided 30,373,952 18,403,066
Dividends to stockholders paid (480,000) (480,000)
Other applications (net) (12,311,327) (15,086,991)
--------------- ---------------
Net cash from financing and miscellaneous sources 17,582,625 2,836,075
--------------- ---------------
Net change in cash and short-term investments (354,260,860) 279,022,524
Cash and short-term investments, beginning of year 650,168,414 371,145,890
--------------- ---------------
Cash and short-term investments, end of year $ 295,907,554 $ 650,168,414
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these statements
- ---------
44
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1. NATURE OF BUSINESS OPERATIONS
State Farm Life Insurance Company (the Company) is a wholly-owned subsidiary of
State Farm Mutual Automobile Insurance Company (SFMAIC). The Company is licensed
in 46 states, the District of Columbia and Canada for the provinces of Alberta,
New Brunswick and Ontario, and primarily markets individual life and annuity
products through an independent contractor agency force. The Company's
individual life insurance products include traditional whole life, universal
life, term insurance and variable universal life contracts which together
account for approximately 83% of premium revenue. Individual annuity products
including variable annuity contracts account for an additional 15%. The Company
also writes small amounts of group credit life and employee group life.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The accompanying financial statements have been prepared on a statutory basis in
accordance, in all material respects, with accounting practices prescribed in
the National Association of Insurance Commissioners (NAIC) Annual Statement
Instructions and Accounting Practices and Procedures manuals, as well as state
laws, regulations, and general administrative rules. Statutory basis accounting
also permits the use of accounting practices which differ from those prescribed
in the sources referred to above, when such practices are approved by the
insurance department of the insurer's state of domicile. State Farm Life
Insurance Company has used no such permitted accounting practices in the
preparation of these financial statements that would be deemed to have a
material effect on the determination of its financial position as of December
31, 1998 and 1997, or the results of its operations for the years then ended.
The preparation of financial statements 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant accounting practices include:
A. INVESTMENTS
Bonds and stocks are stated at values prescribed by the NAIC. In general, bonds
are stated at amortized cost, preferred stocks at cost unless the stock is of
lower quality, then stated at the lower of cost or market value, and common
stocks, other than investment in subsidiary, at market value. Under GAAP, equity
securities that have readily determinable fair values and debt securities would
be classified into three categories: held-to-maturity, trading and
available-for-sale. Held-to-maturity securities would be reported at amortized
cost. Trading securities would be reported at fair value, with unrealized gains
and losses included in earnings. Available-for-sale securities would be reported
at fair value, with unrealized gains and losses, net of applicable taxes,
reported in a separate component of unassigned surplus.
Prepayment assumptions for loan-backed bonds are internal estimates based on
historical prepayment patterns. Prepayment assumptions for structured securities
are based on estimates from various data reporting services. These assumptions
are consistent with the current interest rate and economic environment. The
retrospective adjustment method is used to value all securities.
Mortgage loans on real estate, all of which are first liens, are carried at the
aggregate unpaid principal balances. The Company had no voluntary reserves for
mortgage loans, in excess of those established for the asset valuation reserve,
at December 31, 1998 or 1997.
Real estate is carried at cost less accumulated depreciation. Depreciation is
computed principally on the straight-line method over the estimated useful lives
of the assets. Accumulated depreciation on such real estate is $14,302,902 and
$13,684,220 at December 31, 1998 and 1997, respectively.
Policy loans are stated at the aggregate of unpaid loan balances which are not
in excess of cash surrender values of related policies.
Short-term investments are stated at cost which approximates market. Other
invested assets consist principally of investments in limited partnerships and
are recorded under the equity method of accounting.
Investment in a wholly-owned subsidiary is carried at its statutory net equity.
Under GAAP reporting, all majority-owned subsidiaries would be consolidated. The
net change in the unrealized gain or loss of the wholly-owned subsidiary for the
years ended December 31, 1998 and 1997, as reflected in surplus, is $190,732 and
$196,815, respectively.
Investment income is recorded when earned. Realized gains and losses on sale or
maturity of investments are determined on the
45-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
basis of specific identification. Aggregate unrealized capital gains and losses
are credited or charged directly to unassigned surplus.
B. PREMIUMS DEFERRED AND UNCOLLECTED
Premiums deferred and uncollected represent modal premiums, either due and
uncollected or not yet due, where policy reserves have been provided on the
assumption that the full premium for the current policy year has been collected.
Also, where policy reserves have been provided on a continuous premium
assumption, premiums uncollected are similarly defined.
C. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS
Policy reserves on life insurance are based on statutory mortality and interest
requirements and are computed using principally net level and modified
preliminary term methods with interest rates ranging primarily from 2.5% to
5.5%. The use of a modified reserve basis partially offsets the effect of
immediately expensing policy acquisition costs. Policy reserves on annuities are
based on statutory mortality and interest requirements with interest rates
ranging primarily from 2.5% to 8.0%. GAAP reserves are based on mortality,
lapse, withdrawal and interest rates that are based on Company experience.
D. POLICYHOLDERS' DIVIDENDS
All of the Company's life insurance business is written on the participating
basis. Policyholders' dividends are determined annually by the Board of
Directors. Amounts declared and estimated to be payable to policyholders in the
forthcoming year have been included in the accompanying financial statements as
a liability based on approved dividend scales. Under GAAP, dividends are
anticipated and may be considered as a planned contractual benefit when
computing the value of future policy benefits.
E. FEDERAL AND FOREIGN INCOME TAXES
The Company's federal income tax return is consolidated with SFMAIC and its
affiliates.
The consolidated federal income tax liability is apportioned to each entity in
accordance with a written agreement. The allocation is based upon separate
return calculations with current credit for net losses and tax credits.
Intercompany federal income tax balances are settled as follows: 1) intercompany
federal income tax receivables and payables which relate to the current tax year
will be settled within ninety (90) days; 2) any refunds of federal income tax
will be settled within sixty (60) days of receipt of the refund; and 3) any
payments of federal income tax due will be settled within sixty (60) days of
payment of the tax due.
The Company's provision for federal income taxes is computed in accordance with
those sections of the Internal Revenue Code applicable to life insurance
companies and is based on income which is currently taxable. Under GAAP,
deferred federal income taxes would be provided for temporary differences
between the tax basis and financial statement basis of assets and liabilities.
F. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans
The Company and affiliated insurers sponsor two defined benefit plans covering
substantially all of its employees. One plan is for the United States employees
and the other is for Canadian employees.
For the United States plan, the Company's funding policy is to contribute (1) at
least the current service cost on a current basis and to fund any unfunded
liabilities over the appropriate period and (2) not more than the maximum amount
that may be deducted for federal income tax purposes.
For the Canadian plan, the Company's funding policy is to comply with the
funding requirements in Canada and to comply with the United States requirements
for foreign plans.
Contributions are allocated among participating companies based on ratios of
annual compensation rates.
Under GAAP, periodic net pension expense would be based on the cost of
incremental benefits for employee service during the period, interest on the
projected benefit obligation, actual return on plan assets and amortization of
actuarial gains and losses rather than the funding policy.
Other Postretirement Benefits
The Company and its affiliated insurers currently provide certain health care
and life insurance benefits pursuant to plans sponsored by its parent, SFMAIC.
Eligible former employees, eligible former agents, and their eligible dependents
currently may participate in these plans. For United States employees and
agents, health care benefits generally include comprehensive medical coverage.
For Canadian employees and agents, the health care benefits provided by the
Company supplement those provided by the Canadian government.
As a result of the policy promulgated by the NAIC concerning the treatment of
certain postretirement benefits, beginning in
- ---------
46
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1993, the Company changed its method of accounting for the costs of the
potential health care and life insurance benefits provided to those already
eligible or retired post-career associates to the accrual method, and elected to
amortize its transition obligation attributable to these potential benefits over
twenty years.
GAAP accounting for postretirement benefits requires an additional accrual for
the estimated cost of the potential benefit obligation under the plans for
active, but not yet eligible, employees and their dependents.
G. INTEREST MAINTENANCE RESERVE AND ASSET VALUATION RESERVE
Interest Maintenance Reserve (IMR) -- Realized capital gains and losses, due to
interest rate fluctuations, net of tax on short-term and long-term fixed income
investments are applied in this calculation. These gains and losses are
amortized into income over the approximate remaining life of the investment
sold. The IMR is not calculated under GAAP.
Asset Valuation Reserve (AVR) -- Realized gains and losses due to credit risk
fluctuations and unrealized gains and losses on applicable invested assets are
reflected in the calculation of this reserve. Changes in the AVR are charged or
credited directly to unassigned surplus and include no voluntary contributions
in 1998 or 1997. The AVR is not calculated under GAAP.
H. SEPARATE ACCOUNTS
The Company issues individual variable universal life and annuity contracts.
Deposits received in connection with these contracts are placed in the Company's
separate accounts and general accounts within certain limits.
A separate account is an accounting entity segregated as a discrete operation
within an insurance company. Assets held in separate accounts under variable
life and variable annuity contracts are invested as designated by the contract
holder in shares of mutual funds which are managed either by the Company or by
an outside manager.
Separate account assets are reported at market value and liabilities are
recorded at amounts equal to assets. Except for rights of the Company as a
result of surplus contributions made to the separate accounts, contract holders
are the only persons having rights to any assets in the separate accounts or to
income arising from such assets.
I. RECOGNITION OF PREMIUMS AND ANNUITY CONSIDERATIONS AND RELATED EXPENSES
Premiums and annuity considerations are recognized over the premium paying
period of the policies, whereas acquisition costs such as commissions and other
costs related to new business are expensed as incurred. For investment contracts
(those without mortality risk, such as immediate annuities with benefits paid
for a period certain) and contracts that permit the insured to change the amount
and timing of premium payments (such as universal life products), deposits are
recorded as revenue when received. Under GAAP, the deposits are recorded as
increases to liabilities and revenue is recognized as mortality and other
assessments are made to policyholders. Additionally, acquisition costs under
GAAP are capitalized and amortized over the policy period.
J. NONADMITTED ASSETS
Certain assets designated as "nonadmitted" assets aggregating $2,760,095 and
$4,304,701 at December 31, 1998 and 1997, respectively, are not recognized by
statutory accounting practices. These assets are excluded from the balance
sheet, and the net change in such assets is charged or credited directly to
unassigned surplus. GAAP would recognize such assets at the lower of cost or net
realizable value.
K. FOREIGN EXCHANGE
Foreign assets and liabilities stated in functional currencies are combined with
domestic assets and liabilities stated in U.S. dollars. A translation adjustment
for the excess of the Company's foreign assets over its foreign liabilities is
recognized as a net liability. GAAP would require the translation of functional
currencies to U.S. dollars for assets and liabilities prior to combination with
domestic assets and liabilities.
The preceding discussion highlights the significant variances between the
statutory accounting practices followed by the Company and GAAP. The effect of
these differences has not been determined but is presumed to be material.
47-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
3. BONDS AND OTHER DEBT SECURITIES
The amortized cost and estimated market values of investments in debt securities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
governmental corporations and agencies $ 7,971,636 $ 784,065 $ (788) $ 8,754,913
Obligations of states and political subdivisions 73,333 3,055 (1) 76,387
Debt securities issued by foreign governments 416,092 33,271 (31) 449,332
Corporate securities 10,629,858 575,792 (6,008) 11,199,642
------------ ----------- ---------- ------------
Total $ 19,090,919 $1,396,183 $(6,828) $ 20,480,274
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
governmental corporations and agencies $ 8,289,930 $ 654,647 $ (3,678) $ 8,940,899
Obligations of states and political subdivisions 45,579 2,727 -- 48,306
Debt securities issued by foreign governments 415,808 30,982 (229) 446,561
Corporate securities 9,621,884 397,067 (9,651) 10,009,300
------------ ----------- ---------- ------------
Total $ 18,373,201 $1,085,423 $(13,558) $ 19,445,066
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
</TABLE>
The amortized cost and estimated market value of debt securities, by contractual
maturity, are shown below (in thousands). Expected maturities will differ from
contractual maturity because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 1,812,129 $ 1,939,143
Due after one year through five years 9,345,742 10,009,979
Due after five years through ten years 5,817,738 6,243,441
Due after ten years 2,115,310 2,287,711
------------ ------------
Total $ 19,090,919 $ 20,480,274
------------ ------------
------------ ------------
</TABLE>
Gross proceeds and realized gains and losses on bonds sold at the discretion of
the Company for the year ended December 31, were (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Proceeds $ 359,351 $ 290,293
Gross gains 6,243 260
Gross losses (11) (1,807)
</TABLE>
At December 31, 1998, bonds carried at amortized cost of $473,729,514 were on
deposit with regulatory authorities.
- ---------
48
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
4. EQUITY INVESTMENTS
The cost of investments in preferred and common stocks and gross unrealized
gains and losses from those investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES
--------- ----------- -----------
<S> <C> <C> <C>
Preferred $ 1,384 $ -- $ (131)
Unaffiliated common 417,302 191,547 (11,451)
Affiliated common 3,500 3,298 --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES
--------- ----------- -----------
<S> <C> <C> <C>
Preferred $ 2,275 $ -- $ (119)
Unaffiliated common 137,893 108,591 (1,635)
Affiliated common 3,500 3,115 --
</TABLE>
Gross realized gains and losses consist of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------------
GAINS LOSSES GAINS LOSSES
--------- ----------- ----- -----------
<S> <C> <C> <C> <C>
Preferred $ 162 $ (25) $ 46 $ (6)
Unaffiliated common 1,056 (108) -- --
</TABLE>
5. INVESTMENT IN SUBSIDIARY
State Farm Annuity and Life Insurance Company (SFAL), a company authorized to
sell life and health insurance, is an affiliate of the Company through direct
100% ownership. To date however, SFAL has conducted no insurance business.
Summary financial position and operating results are noted below (in thousands).
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Admitted assets $ 6,873 $ 6,652
Liabilities 75 45
Capital and surplus 6,798 6,615
Net income 191 186
</TABLE>
6. NET INVESTMENT INCOME
The components of net investment income earned by type of investment for the
years ended December 31, 1998 and 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Bonds $ 1,339,653 $ 1,306,909
Mortgage loans 180,831 160,724
Policy loans 133,810 125,529
Short-term investments 28,864 28,602
Other 99,644 34,617
----------- -----------
Gross investment income 1,782,802 1,656,381
Investment (expenses) (12,447) (11,524)
Depreciation (619) (619)
----------- -----------
Net investment income $ 1,769,736 $ 1,644,238
----------- -----------
----------- -----------
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each significant class of financial instruments for which it is practicable to
estimate that value:
Bonds and Short-term Investments
Fair values for issues traded on public exchanges are based on the market price
in such exchanges at year end. For issues that are not traded on public
exchanges, fair values were estimated based on market comparables or internal
analysis.
Mortgage Loans
Fair values were estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Preferred Stocks and Unaffiliated Common Stocks
Fair values were determined by the Securities Valuation Office (SVO) of the NAIC
and approximate the values determined in public exchanges or comparable values.
For issues that were not evaluated by the SVO, fair values were estimated based
on market comparables or internal analysis.
Separate Accounts
The fair value of the assets held in separate accounts and corresponding
liabilities are estimated based on the fair value of the underlying assets.
49-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
Cash
The carrying amount is a reasonable estimate of fair value.
Structured Annuity Reserves and Other Similar Items
Fair values were estimated by discounting future annuity payments at the
interest rates in effect for similar contracts at year end.
Deferred Annuity Reserves
Fair values were approximated by the amount due to the annuity holder as if the
annuity contract was surrendered at year end.
Advance Premiums
Fair values were approximated by the amount due to the policyholder as if the
policy was surrendered at year end.
Settlement Options Without Life Contingencies
Settlement options without life contingencies are similar to demand deposits.
The fair value is the amount payable on demand at year end.
The estimated fair values and statement values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Bonds $ 20,179,631 $ 18,790,304 $ 18,799,860 $ 17,727,835
Bond reserves -- 48,096 -- 40,299
------------ ------------ ------------ ------------
$ 20,179,631 $ 18,742,208 $ 18,799,860 $ 17,687,536
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Mortgage loans $ 2,458,316 $ 2,427,483 $ 2,080,058 $ 2,027,213
Mortgage loan reserves -- 30,242 -- 34,699
------------ ------------ ------------ ------------
$ 2,458,316 $ 2,397,241 $ 2,080,058 $ 1,992,514
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Preferred stock $ 1,107 $ 1,253 $ 1,833 $ 2,156
Preferred stock reserves -- 35 -- 69
------------ ------------ ------------ ------------
$ 1,107 $ 1,218 $ 1,833 $ 2,087
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Unaffiliated common stock $ 597,398 $ 597,398 $ 244,849 $ 244,849
Unaffiliated common stock reserves -- 181,635 -- 73,455
------------ ------------ ------------ ------------
$ 597,398 $ 415,763 $ 244,849 $ 171,394
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash $ (4,707) $ (4,707) $ 4,803 $ 4,803
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Short-term investments $ 300,643 $ 300,614 $ 645,206 $ 645,366
Short-term reserves -- 783 -- 1,578
------------ ------------ ------------ ------------
$ 300,643 $ 299,831 $ 645,206 $ 643,788
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Separate Accounts $ 215,213 $ 215,213 $ -- $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Financial liabilities:
Structured annuity reserves and other similar
items $ 416,019 $ 386,801 $ 370,680 $ 355,565
Deferred annuity reserves 3,372,866 3,388,929 3,476,148 3,479,719
Advance premiums 62,594 63,237 69,107 70,967
Settlement options without life contingencies 717,479 717,479 638,451 638,451
Separate Accounts 81,603 81,603 -- --
</TABLE>
- ---------
50
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
8. FEDERAL INCOME TAXES
The difference between the Company's effective income tax rate and the statutory
rate for both 1998 and 1997 is primarily due to the non-deductible policyholder
dividends, gross deferred premiums, unamortized deferred acquisition costs, tax
reserves, and investment income associated with other invested assets.
The examinations of the Company's federal income tax returns through 1986 have
been closed by the Internal Revenue Service. Returns for 1987, 1988, 1989 and
1990 have been examined. Although a few issues remain open, no open issue would
have a material effect on surplus. Returns for 1991, 1992 and 1993 are currently
under examination. Although the audit is still in progress at this time, there
have been no individual issues or issues in the aggregate raised that would
require adjustments which would have a material effect on surplus.
9. PENSION PLANS AND OTHER
POSTRETIREMENT BENEFITS
A. Pension Plans
For the United States Plan, the pension cost allocated to the Company amounted
to $0 in both 1998 and 1997. A comparison of accumulated plan benefits,
determined in accordance with Statement of Financial Accounting Standards No.
35, and plan net assets for the non-contributory defined benefit pension plan of
the Company and its parent and other affiliates as of August 31, (the most
recent actuarial valuation date) is presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested $ 3,214,144 $ 2,857,267
Nonvested 62,938 59,984
----------- -----------
$ 3,277,082 $ 2,917,251
----------- -----------
----------- -----------
Net assets available for plan benefits $ 6,862,052 $ 6,611,785
----------- -----------
----------- -----------
</TABLE>
Benefits paid amounted to $141,934,614 and $116,085,398 in 1998 and 1997,
respectively. The assumed rate of return on plan assets used in determining the
actuarial present value of vested and nonvested accumulated plan benefits was 7%
for both 1998 and 1997. In addition, the discount rate was 7% for both 1998 and
1997. The rate of compensation increases ranged from 5.5% to 12.8% in 1998 and
1997 and varies by the attained age of the employee.
For the Canadian Plan, pension cost allocated to the Company amounted to $0 and
$16,337 in 1998 and 1997, respectively. A comparison of accumulated plan
benefits and net assets of the non-contributory defined benefit pension plan as
of August 31 (the most recent actuarial valuation date) is presented below (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Actuarial present value of
accumulated plan benefits $ 40,729 $ 37,016
--------- ---------
--------- ---------
Net assets available for plan benefits $ 96,406 $ 87,582
--------- ---------
--------- ---------
</TABLE>
Benefits paid amounted to $1,893,077 and $2,164,330 in 1998 and 1997,
respectively.
For both Plans, the Company elected to change its plan year to a calendar year
beginning January 1, 1999.
The Company participates with its affiliates in a qualified defined contribution
plan. Contributions recorded for the years ended December 31, 1998 and 1997,
were $2,472,958 and $1,248,856, respectively. Benefits, generally available upon
retirement, are paid from net assets available for plan benefits.
B. Other Postretirement Benefits
The Company's share of the net post-career benefit cost for the year ended
December 31, 1998, was $10,946,950 and included paid benefits, the expected cost
of the potential health care and life insurance benefits for newly eligible
post-career associates, interest cost and amortization of the transition
obligation and prior service costs.
At December 31, 1998 and 1997 respectively, the Company's share of the recorded
unfunded post-career benefit obligation attributable to the potential health
care and life insurance benefits for post-career associates was $43,267,840 and
$34,154,598. The Company's share of the remaining transition obligation for
these potential benefits was $32,875,524 and $35,290,443 at December 31, 1998
and 1997, respectively, which is being amortized over 20 years, beginning in
1993. The Company's share of unrecognized net (gains) or losses, resulting from
experience different from that assumed and/or
51-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
changes in actuarial assumptions, was $(2,448,963) at December 31, 1998. The
Company's share of the estimated cost of the potential benefit obligation under
the plans for active, but not yet eligible employees, agents, and their
qualifying dependents at January 1, 1998, was $56,459,209, which is not accrued
in these financial statements. At January 1, 1998 and 1997, the discount rate
used in determining the accumulated post-career benefit obligation attributable
to these potential benefits was 6.5% and 7%, respectively, and the 1998 health
care cost trend rate is 10% for the first year, graded to 6% over the following
five years.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the Company's share of
the post-career benefit obligation attributable to the potential health care
insurance benefits for post-career associates by $5,266,762 as of January 1,
1998, and the estimated eligibility and interest cost components of the net
periodic post-career benefit cost for 1998 by $1,018,046.
The Company participates with its affiliates in an unfunded deferred
compensation plan for highly compensated employees and independent contractor
agents. The established liabilities reflected in these statements were
$1,351,386 and $1,360,028 for 1998 and 1997, respectively.
10. OTHER RELATED PARTY TRANSACTIONS
The Company, its parent, and its affiliates share certain administrative,
occupancy and marketing expenses. Such expenses are allocated to the Company
based on time and usage studies and totaled approximately $200,377,081 and
$146,287,205 in 1998 and 1997, respectively.
At December 31, 1998 and 1997, total amounts owed to the parent company,
exclusive of federal and foreign income taxes were approximately $114,639,331
and $91,181,000, respectively. Total amounts owed to other affiliates were
approximately $45,054 and $34,000, respectively.
11. CONTINGENT LIABILITIES
On August 28, 1998, the Company entered into a Stipulation of Settlement with
attorneys for the plaintiffs in a class action lawsuit involving alleged
misleading life insurance sales practices in connection with the Company's sale
of traditional and universal life insurance policies in the United States from
1982 through 1997. The Company denies the allegations in this lawsuit but has
entered into a settlement in order to limit additional expense and burden upon
operations. The proposed settlement received court approval in a fairness
hearing concluded on February 11, 1999.
Pursuant to the terms of this proposed settlement, the Company has agreed to
provide policyowners in the class with options that include policy enhancement,
the right to purchase an enhanced value policy or enhanced value annuity and a
claim review process. While it is not possible to predict with certainty the
ultimate dollar amount that would be paid or credited to current and former
policyholders under the terms of this proposed settlement, the Company has
elected to record, on an estimated basis, a liability for such amount in the
December 31, 1998 financial statements. Also included in this liability is an
amount for estimated legal and administrative costs which will be incurred in
connection with the settlement. An amount of $185,000,000 has been included in
the liabilities of the Company as of December 31, 1998 for such provision with a
corresponding charge recorded in the Statement of Changes in Capital and
Surplus.
The Company is subject to liabilities of a contingent nature which may from time
to time arise. Such liabilities could result from sales practices, income tax
matters, guaranty fund assessments or other occurrences that take place in the
normal course of doing business. In addition, the life insurance industry has
not been exempt from the impact of an increasingly litigious environment which
is being experienced in the United States. Liabilities arising as a result of
these factors, or other such contingencies, that are not provided for elsewhere
in these financial statements are not reasonably estimable and are not
considered by management to be material in relation to the financial position of
the Company.
12. DIVIDEND RESTRICTIONS
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in Illinois without prior approval of the Insurance
Commissioner is subject to restrictions related to statutory surplus and net
income.
- ---------
52
<PAGE>
SUPPLEMENTAL SCHEDULE
- ---------
53
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION
To the Board of Directors
State Farm Life Insurance Company
Bloomington, Illinois
In our opinion, the accompanying supplemental schedule of assets and liabilities
as of and for the year ended December 31, 1998 is fairly stated in all material
respects in relation to the basic financial statements, taken as a whole, of
State Farm Life Insurance Company for the year ended December 31, 1998, which is
covered by our report dated February 16, 1999 presented in the first section of
this document. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. This information is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements.
February 16, 1999
54-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA
DECEMBER 31, 1998
The following is a summary of certain financial data (in thousands) included in
other exhibits and schedules subjected to audit procedures by independent
auditors and utilized by actuaries in the determination of reserves.
<TABLE>
<S> <C>
Investment income earned:
U.S. government bonds $ 501,234
Other bonds (unaffiliated) 838,419
Preferred stock (unaffiliated) 90
Common stocks (unaffiliated) 7,343
Mortgage loans 180,831
Real estate 2,487
Premium notes, policy loans and liens 133,810
Cash on hand and on deposit 360
Short-term investments 28,864
Other invested assets 89,364
-----------
Gross investment income $ 1,782,802
-----------
-----------
Real estate owned -- book value less encumbrances $ 10,686
-----------
-----------
Mortgage loans -- book value:
Residential mortgages $ 32,451
Commercial mortgages 2,395,032
-----------
Total mortgage loans $ 2,427,483
-----------
-----------
Mortgage loans by standing -- book value:
Good standing $ 2,383,394
-----------
-----------
Good standing with restructured terms $ 42,272
-----------
-----------
Overdue more than three months, not in
foreclosure $ 0
-----------
-----------
Foreclosure in process $ 1,817
-----------
-----------
</TABLE>
- ---------
55
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA CONTINUED
DECEMBER 31, 1998
<TABLE>
<S> <C>
Other long-term assets -- statement value $ 204,825
------------
------------
Bonds and stocks of parents, subsidiaries and
affiliates -- book value:
Common stocks $ 3,500
------------
------------
Bonds and short-term investments by class and
maturity:
Bonds by maturity -- statement value:
Due within one year or less $ 1,812,129
Over 1 year through 5 years 9,345,742
Over 5 years through 10 years 5,817,738
Over 10 years through 20 years 1,997,706
Over 20 years 117,604
------------
Total by maturity $ 19,090,919
------------
------------
Bonds by class -- statement value:
Class 1 $ 18,154,373
Class 2 838,852
Class 3 80,916
Class 4 16,778
Class 5 --
Class 6 --
------------
Total by class $ 19,090,919
------------
------------
Total bonds publicly traded $ 17,336,694
------------
------------
Total bonds privately placed $ 1,754,225
------------
------------
Preferred stocks -- statement value $ 1,253
------------
------------
Common stocks -- market value $ 604,196
------------
------------
Short-term investments -- book value $ 300,614
------------
------------
Cash on deposit $ (4,707)
------------
------------
</TABLE>
56-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA CONTINUED
DECEMBER 31, 1998
<TABLE>
<S> <C>
Life insurance in force:
Ordinary $ 334,502,665
-------------
-------------
Credit life $ 1,357,616
-------------
-------------
Group life $ 11,569,680
-------------
-------------
Amount of accidental death insurance in force
under ordinary policies $ 8,499,335
-------------
-------------
Life insurance policies with disability provisions
in force:
Ordinary $ 4,905
-------------
-------------
Group life (certificates) $ 121
-------------
-------------
Supplementary contracts in force:
Ordinary -- not involving life contingencies:
Amount on deposit $ 480,414
-------------
-------------
Income payable $ 2,710
-------------
-------------
Ordinary -- involving life contingencies:
Income payable $ 5,726
-------------
-------------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 98,788
-------------
-------------
Deferred -- fully paid account balance $ 3,367,718
-------------
-------------
Deferred -- not fully paid -- account balance $ 911
-------------
-------------
Deposit funds and dividend accumulations:
Deposit funds -- account balance $ 84,387
-------------
-------------
Dividend accumulations -- account balance $ 3,169,107
-------------
-------------
</TABLE>
- ---------
57
<PAGE>
[LOGO]
Issued By:
State Farm Life Insurance Company
(Not licensed in New York or Wisconsin)
Home Offices: Bloomington, Illinois
State Farm VP Management Corp.
(Underwriter & Distributor of Variable Products)
One State Farm Plaza
Bloomington, Illinois 61710-0001
231-3549 Printed in U.S.A.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of State Farm Life Insurance Company and
Policy Owners of State Farm Life Insurance Company Variable Life
Separate Account
In our opinion, the accompanying statement of assets and liabilities and owners'
equity and the related statement of operations and changes in owners' equity
present fairly, in all material respects, the financial position of State Farm
Life Insurance Company Variable Life Separate Account, (which includes Large Cap
Equity Index Fund, Small Cap Equity Index Fund, Bond Fund, Money Market Fund,
International Equity Index Fund, and the Stock and Bond Fund thereof) at
December 31, 1998, the results of their operations and the changes in their
owners' equity for the period May 1, 1998 (commencement of operations) to
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of State Farm Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
direct confirmation of the number of shares owned at December 31, 1998 with
State Farm Variable Product Trust, provides a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 12, 1999
- ---------
58
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES AND OWNERS' EQUITY
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments at market value:
State Farm Variable Product Trust Funds
Large Cap Equity Index Fund
949,986 shares (cost $9,788,390) $ 12,159,824
Small Cap Equity Index Fund
1,642,341 shares (cost $16,284,214) 15,667,933
Bond Fund
581,307 shares (cost $5,823,339) 5,900,265
Money Market Fund
5,553,301 shares (cost $5,553,301) 5,553,301
International Equity Index Fund
2,811,800 shares (cost $28,211,766) 32,701,228
Stock and Bond Fund
20,856 shares (cost $224,564) 237,971
---------------
Total investments 72,220,522
Total assets $ 72,220,522
---------------
---------------
LIABILITIES AND OWNERS' EQUITY
Owners' equity $ 72,220,522
---------------
Total liabilities and owners' equity $ 72,220,522
---------------
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
59-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN OWNERS' EQUITY
FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
----------------------------------------------------------------------------------
LARGE CAP SMALL CAP MONEY INTERNATIONAL STOCK AND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BOND
OPERATIONS: FUND FUND FUND FUND FUND FUND
- ---------------------------------------- ------------ ------------ ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Income:
Dividend Income $ 102,376 $ 421,664 $ 253,036 $ 239,996 $ 413,462 $ 1
------------ ------------ ----------- ----------- ------------ ---------
Expenses:
Mortality and expense risk charges 3,731 1,356 807 421 1,349 345
------------ ------------ ----------- ----------- ------------ ---------
Net investment income (loss) 98,645 420,308 252,229 239,575 412,113 (344)
------------ ------------ ----------- ----------- ------------ ---------
Realized net investment gain (loss) (7,415) (8,394) (615) 0 (4,930) (22)
Unrealized appreciation (depreciation),
net 2,371,434 (616,281) 76,926 0 4,489,462 13,407
------------ ------------ ----------- ----------- ------------ ---------
Realized and unrealized gain (loss) on
investments and capital gain
distributions, net 2,364,019 (624,675) 76,311 0 4,484,532 13,385
------------ ------------ ----------- ----------- ------------ ---------
Net increase (decrease) in owners'
equity from operations 2,462,664 (204,367) 328,540 239,575 4,896,645 13,041
------------ ------------ ----------- ----------- ------------ ---------
EQUITY TRANSACTIONS:
- ----------------------------------------
Proceeds from units purchased 2,194,313 879,430 626,103 356,157 820,222 226,139
Transfers (net) including transfers to
or from fixed account and policy loan
transfers 57,744 15,333 (40,626) (37,984) 8,869 4,064
Payments for surrenders and other
redemptions (54,897) (22,463) (13,752) (4,447) (24,508) (5,323)
Net increase (decrease) in equity
derived from policy holder
transactions 2,197,160 872,300 571,725 313,726 804,583 224,880
Increase in equity from surplus
contributed 7,500,000 15,000,000 5,000,000 5,000,000 27,000,000 50
------------ ------------ ----------- ----------- ------------ ---------
Total increase (decrease) in owners'
equity 12,159,824 15,667,933 5,900,265 5,553,301 32,701,228 237,971
Owners' equity at beginning of period 0 0 0 0 0 0
------------ ------------ ----------- ----------- ------------ ---------
Owners' equity at end of period $ 12,159,824 $ 15,667,933 $ 5,900,265 $ 5,553,301 $ 32,701,228 $ 237,971
------------ ------------ ----------- ----------- ------------ ---------
------------ ------------ ----------- ----------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
60
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. GENERAL INFORMATION
Organization:
The State Farm Life Insurance Company Variable Life Separate Account (the
"Separate Account") is a segregated investment account of the State Farm Life
Insurance Company (the "Company") and is registered with the Securities and
Exchange Commission as a unit investment trust pursuant to the provisions of the
Investment Company Act of 1940. The Separate Account was established by the
Company on December 9, 1996 and commenced operations on May 1, 1998.
Accordingly, it is an accounting entity wherein all segregated account
transactions are reflected. The assets of the Separate Account are invested in
one or more of the funds of the State Farm Variable Product Trust (the "Trust")
at the fund's net asset value in accordance with the selection made by the
policy owners.
Transactions with Sponsor:
A surplus contribution of $59,500,050 was made to the Separate Account by the
Company in 1998. As an investor in the Separate Account, the Company shares in
the investment performance of the Separate Account in relation to the portion of
its ownership of fund shares, which shares are subject to the same valuation
procedures as policy holders' shares. The market value of the Company's
investment in the Separate Account as surplus contributed was $66,805,224 at
December 31, 1998.
2. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets and liabilities at the date of the financial
statements. As a result, actual results reported as income and expenses could
differ from the estimates reported in the accompanying financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments:
Investments in the Separate Account are valued by using net asset values which
are based on the daily closing prices of the underlying securities in the
Separate Account's funds.
Securities Transactions and Investment Income:
Securities transactions are recorded on the trade date (the date the order to
buy or sell is executed). Dividend income is recorded on the ex-dividend date.
The cost of investments sold and the corresponding capital gains and losses are
determined on a specific identification basis. Net investment income and net
realized gains (losses) and unrealized appreciation (depreciation) on
investments are allocated to the policies on each valuation date based on each
policy's pro rata share of the assets of the fund as of the beginning of the
valuation date.
Accumulation Unit Valuation:
On each day the New York Stock Exchange (the "Exchange") is open for trading
(except for certain designated office-closed days), the accumulation unit value
is determined as of the earlier of 3:00 PM Central Time or the close of the
Exchange by dividing the policy holders' share of the value of each fund's
investments and other assets, less liabilities, by the number of policy owner
accumulation units outstanding in the respective fund.
Federal Income Tax:
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Separate Account are part of the
total operations of the Company and are not taxed as a separate entity.
Under Federal income tax law, net investment income and realized gains (losses)
are retained in the Separate Account and are not taxable until received by the
policy owner or beneficiary in the form of policy distributions.
4. EXPENSES AND DEDUCTIONS
A mortality and expense risk charge is deducted by the Company from the Separate
Account on a daily basis which is equal, on an annual basis, to 0.80% of the
daily net asset value of the policy holders' portion of assets in the Separate
Account. The charge may be adjusted after policy issue, but it is guaranteed not
to exceed 0.90% of net assets. These charges compensate the Company for assuming
these risks under the variable life contract. The disbursements for mortality
and expense risk and premium and death benefit guarantee risk charges amounted
to $8,009 during the period.
At the beginning of each policy month, the Company makes a deduction from the
cash value of the policy, which consists of
61-------
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
the cost of insurance for the policy and any additional benefits provided by
rider, if any, for the policy month. In addition, a $6 monthly expense charge
(maximum $8 per month) is deducted which reimburses the Company for
administrative expenses relating to the issuance and maintenance of the policy.
The total amount of monthly deductions during the period was $117,201.
A surrender charge may be deducted in the event of a surrender to reimburse the
Company for expenses incurred in connection with issuing a policy. The full
surrender charge will be increased monthly during the first two policy years,
stay constant during the third through sixth years and is reduced each year
after the sixth year until it reaches zero in the tenth policy year. The
surrender fees during the period were $389.
A withdrawal fee is assessed upon the partial withdrawal of funds which fee is
equal to the lesser of $25 or 2% of the amount withdrawn. Withdrawal fees during
the period amounted to $100.
The Company reserves the right to deduct a $25 transfer processing fee for each
transfer in excess of 12 during a policy year.
5. CONTINGENT LIABILITIES
If the assets of any fund exceed required reserves and other liabilities, the
Company may transfer such excess to its general account.
6. OWNERS' EQUITY
Owners' equity is represented by accumulation units in the related Separate
Account, as well as the value of the fund shares owned by the Company.
At December 31, 1998 ownership of the Separate Account was represented by the
following accumulation units and accumulation unit values and surplus
contributed: (Multiplication of amounts shown may not equal policy owners'
equity because of rounding.)
<TABLE>
<CAPTION>
POLICY OWNERS' EQUITY
UNIT UNITS POLICY OWNERS'
FUND VALUE OUTSTANDING EQUITY
- ----------------- ------ ----------- ---------------
<S> <C> <C> <C>
Large Cap $12.33 200,001 $2,465,026
Small Cap 9.69 98,259 952,046
Bond 10.59 54,368 575,734
Money Market 10.39 30,386 315,876
International 11.23 77,350 868,702
Stock and Bond 11.38 20,903 237,914
---------------
Total $5,415,298
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
POLICY OWNERS' SURPLUS TOTAL
FUND EQUITY CONTRIBUTED EQUITY
- ----------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Large Cap $2,465,026 $ 9,694,798 $ 12,159,824
Small Cap 952,046 14,715,887 15,667,933
Bond 575,734 5,324,531 5,900,265
Money Market 315,876 5,237,425 5,553,301
International 868,702 31,832,526 32,701,228
Stock and Bond 237,914 57 237,971
--------------- ------------ ------------
Total $5,415,298 $66,805,224 $ 72,220,522
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
- ---------
62
<PAGE>
Part II
1
<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Illinois Business Corporation Act Chapter 805 Section 5/8.75 is a
comprehensive provision that defines the power of Illinois corporations to
provide for the indemnification of its officers, directors, employees and
agents. This Section also authorizes Illinois corporations to purchase and
maintain insurance on behalf of directors, officers, employees or agents of the
corporation.
The Articles of Incorporation, as amended, and the Bylaws of State Farm
Life Insurance Company do not provide for the indemnification of officers,
directors, employees or agents of the Company.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
State Farm Life Insurance Company hereby represents that the fees and
charges deducted under the Policy, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by State Farm Life Insurance Company.
2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of ___ pages.
Undertaking to file reports.
Rule 484 undertaking.
Representation pursuant to Section 26(e)(2)(A).
The signatures.
Written consents of the following persons: William A. Montgomery, Esq.,
Gerry Brogla, F.S.A., PricewaterhouseCoopers LLP, and Sutherland Asbill &
Brennan LLP
The following exhibits, corresponding to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
1.
A.
(1) Resolution of the Board of Directors of State Farm Life Insurance
Company establishing State Farm Life Insurance Company Variable
Life Separate Account 1
(2) Not Applicable
(3) (a) Not Applicable
(b) Distribution Agreement
(c) Not Applicable
(4) Not applicable
(5) (a) Specimen Flexible Premium Variable Universal Life
Insurance Policy 1
(b) Policy Riders and Endorsements 1
(6) (a) Articles of Incorporation of State Farm Life Insurance
Company 1
(b) By-laws of State Farm Life Insurance Company 1
(7) Not applicable
(8) Participation agreement
(9) Not applicable
(10) Application form 3
(11) Description of issuance, transfer and redemption procedures 3
(12) Powers of Attorney 2
B. Not applicable
C. Not applicable
3
<PAGE>
2. Opinion and consent as to the legality of the securities being
registered 3
3. Not applicable
4. Not applicable
5. Not applicable
6. Opinion and consent of Gerry Brogla, F.S.A. as to actuarial matters
pertaining to the securities being registered
7. (a) Consent of PricewaterhouseCoopers LLP
(b) Consent of Sutherland, Asbill & Brennan LLP
- -----------------------------
1. Incorporated herein by reference to the initial registration statement on
Form S-6 (File No. 333-19521), filed on behalf of State Farm Life Insurance
Company Variable Life Separate Account on January 10, 1997.
2. Incorporated herein by reference to Pre-Effective Amendment No. 1 to a
Registration Statement on Form N-4 (File No. 333-19189), filed on behalf of
State Farm Life Insurance Company Variable Annuity Separate Account with the
Securities and Exchange Commission on October 10, 1997.
3. Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
registrant's registration statement on Form S-6 (File No. 333-19521),
filed with the Securities and Exchange Commission on January 30, 1998.
4
<PAGE>
SIGNATURES
As required by the requirements of the Securities Act of 1933, the
registrant, State Farm Life Insurance Company Variable Life Separate
Account, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this registration statement and has duly
caused this registration statement to be signed on its behalf, by the
in the City of Bloomington and the State of Illinois, on this 27th day of
April, 1999.
State Farm Life Insurance Company
Variable Life Separate Account
(Registrant)
(SEAL)
By: State Farm Life Insurance Company
(Depositor)
Attest: /s/ Terry L. Huff By: *
----------------- ---------------
Terry L. Huff Edward B. Rust, Jr.
President
State Farm Life Insurance Company
5
<PAGE>
As required by the Securities Act of 1933, this registration statement has
been signed below by the following persons in the capacities indicated on the
date(s) set forth below.
Signature Title Date
- --------- ----- ----
* President and Director --------------
- -------------------- (Principal Executive Officer)
Edward B. Rust, Jr.
* Executive Vice President and --------------
- -------------------- Director
Roger B. Tompkins
* Vice President and Controller --------------
- -------------------- (Principal Accounting Officer)
Dale R. Egeberg
* Director, Vice President and Actuary --------------
- -------------------- (Principal Financial Officer)
Darrell W. Beernink
* Director --------------
- --------------------
Marvin D. Bower
* Director --------------
- --------------------
Wendy L. Gramm
* Director --------------
- --------------------
Roger S. Joslin
Director --------------
- --------------------
W. H. Knight, Jr.
* Director and Senior Vice President --------------
- --------------------
Kurt G. Moser
* Director --------------
- --------------------
George L. Perry
Director --------------
- --------------------
Susan M. Phillips
Director --------------
- --------------------
Jerry Porras
* Director --------------
- --------------------
Vincent J. Trosino
* Director --------------
- --------------------
Charles R. Wright
* By /s/ Terry L. Huff April 27, 1999
--------------------------- --------------
Terry L. Huff Date
Pursuant to Power of Attorney
6
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 1st day of February, 1998 by and between State Farm
Life Insurance Company, an Illinois insurance company ("State Farm"), on its
behalf and on behalf of each separate account identified in Schedule 1 hereto,
and State Farm VP Management Corp. ("Distributor"), a Delaware corporation.
WITNESSETH
WHEREAS, Distributor is a broker-dealer that engages in the distribution of
variable insurance products and may engage in the distribution of other
investment products;
WHEREAS, State Farm desires to issue certain variable insurance products
described more fully below to the public through Distributor acting as principal
underwriter and distributor; and
WHEREAS, State Farm and Distributor acknowledge that Distributor may
distribute variable insurance products and other investment products for other
companies.
NOW, THEREFORE, in consideration of their mutual promises, State Farm and
Distributor hereby agree as follows:
1. DEFINITIONS
a. CONTRACTS -- The class or classes of variable insurance products set
forth on Schedule 2 to this Agreement as in effect at the time this
Agreement is executed, and such other classes of variable insurance
products that may be added to Schedule 2 from time to time in
accordance with Section 10.b of this Agreement, and including any
riders to such contracts and any other contracts offered in connection
therewith. For this purpose and under this Agreement generally, a
"class of Contracts" shall mean those Contracts issued by State Farm
on the same policy form or forms and covered by the same Registration
Statement.
b. REGISTRATION STATEMENT -- At any time that this Agreement is in
effect, each currently effective registration statement filed with the
SEC under the 1933 Act on a prescribed form, or currently effective
post-effective amendment thereto, as the case may be, relating to a
class of Contracts, including financial statements included in, and
all exhibits to, such registration statement or post-effective
amendment. For purposes of Section 8 of this Agreement, the term
"Registration Statement" means any document which is or at any time
was a Registration Statement within the meaning of this Section 1.b.
<PAGE>
c. PROSPECTUS -- The prospectus included within a Registration Statement,
except that, if the most recently filed version of the prospectus
(including any supplements thereto) filed pursuant to Rule 497 under
the 1933 Act subsequent to the date on which a Registration Statement
became effective differs from the prospectus included within such
Registration Statement at the time it became effective, the term
"Prospectus" shall refer to the most recently filed prospectus filed
under Rule 497 under the 1933 Act, from and after the date on which it
shall have been filed. For purposes of Section 8 of this Agreement,
the term "any Prospectus" means any document which is or at any time
was a Prospectus within the meaning of this Section 1.c.
d. FUND -- An investment company in which the Separate Account invests.
e. VARIABLE ACCOUNT -- A separate account supporting a class or classes
of Contracts and specified on Schedule 1 as in effect at the time this
Agreement is executed, or as it may be amended from time to time in
accordance with Section 10.b of this Agreement.
f. 1933 ACT -- The Securities Act of 1933, as amended.
g. 1934 ACT -- The Securities Exchange Act of 1934, as amended.
h. 1940 ACT -- The Investment Company Act of 1940, as amended.
i. SEC -- The Securities and Exchange Commission.
j. NASD -- The National Association of Securities Dealers, Inc.
k. REPRESENTATIVE -- An individual who is an associated person of
Distributor, as that term is defined in the 1934 Act.
l. APPLICATION -- An application for a Contract.
m. PREMIUM -- A payment made under a Contract by an applicant or
purchaser to purchase benefits under the Contract.
2. AUTHORIZATION AND APPOINTMENT
a. SCOPE OF AUTHORITY. State Farm hereby authorizes Distributor on an
exclusive basis, and Distributor accepts such authority, subject to
the registration requirements of the 1933 Act and the 1940 Act and
the provisions of the 1934 Act and conditions herein, to be the
distributor and principal underwriter for the sale of the Contracts to
the public in each state and other jurisdiction in which the
-2-
<PAGE>
Contracts may lawfully be sold during the term of this Agreement. The
Contracts shall be offered for sale and distribution at Premium rates
set from time to time by State Farm. Distributor shall use its best
efforts to market the Contracts actively subject to compliance with
applicable law, including the rules of the NASD. However, Distributor
shall not be obligated to sell any specific number or amount of
Contracts. Also, the parties acknowledge and agree that Distributor
may distribute variable insurance products and other investment
products for other companies.
b. LIMITS ON AUTHORITY. Distributor shall act as an independent
contractor and nothing herein contained shall constitute Distributor
or its agents, officers or employees as agents, officers or employees
of State Farm solely by virtue of their activities in connection with
the sale of the Contracts hereunder. Distributor and its
Representatives shall not have authority, on behalf of State Farm: to
make, alter or discharge any Contract or other insurance policy or
annuity entered into pursuant to a Contract; to waive any Contract
forfeiture provision; to extend the time of paying any Premium; or to
receive any monies or Premiums (except for the sole purpose of
forwarding monies or Premiums to State Farm). Distributor shall not
expend, nor contract for the expenditure of, the funds of State Farm.
Distributor shall not possess or exercise any authority on behalf of
State Farm other than that expressly conferred on Distributor by this
Agreement.
c. TRADEMARKS. An affiliate of State Farm, State Farm Mutual Automobile
Insurance Company, owns all right, title and interest in and to the
name, "State Farm," and has authorized State Farm to use and license
other persons to use such name. State Farm hereby grants to
Distributor a non-exclusive license to use the name "State Farm" in
its corporate name and in connection with its performance of the
services contemplated under this Agreement, subject to the termination
provisions in Section 9, and subject further to State Farm's right to
terminate this license at any time for any reason whatsoever. Upon
any such termination, Distributor shall promptly take steps to remove
the name "State Farm" from its corporate name and from all materials
bearing its name.
Distributor: (i) acknowledges and stipulates that State Farm's name is
a valid and enforceable trademark and/or service mark; and that
Distributor does not own State Farm's name and claims no rights
therein other than as a Distributor under this Agreement; (ii) agrees
never to contend otherwise in legal proceedings or in other
circumstances; and (iii) acknowledges and agrees that the use of State
Farm's name pursuant to this grant of license shall inure to the
benefit of State Farm.
-3-
<PAGE>
3. SOLICITATION ACTIVITIES
a. REPRESENTATIVES. No Representative shall solicit the sale of a
Contract unless at the time of such solicitation such individual is
duly registered with the NASD and duly licensed with all applicable
state insurance and securities regulatory authorities, and is duly
appointed as an insurance agent of State Farm.
b. SOLICITATION ACTIVITIES. All solicitation and sales activities
engaged in by Distributor and its Representatives with respect to the
Contracts shall be in compliance with all applicable federal and state
securities laws and regulations, as well as all applicable insurance
laws and regulations, and compliance manuals provided by State Farm.
In particular, without limiting the generality of the foregoing:
(1) Distributor shall train, supervise and be solely responsible for
the conduct of Representatives in their solicitation of
applications and Premiums and distribution of the Contracts
under, and shall supervise their compliance with, applicable
rules and regulations of any securities regulatory agencies that
have jurisdiction over variable insurance product activities.
(2) Neither Distributor nor any Representative shall offer, attempt
to offer, or solicit Applications for, the Contracts or deliver
the Contracts, in any state or other jurisdiction unless State
Farm has notified Distributor that such Contracts may lawfully be
sold or offered for sale in such state, and has not subsequently
revised such notice.
(3) Neither Distributor nor any Representative shall give any
information or make any representation in regard to a class of
Contracts in connection with the offer or sale of such class of
Contracts that is not in accordance with the Prospectus for such
class of Contracts, or in the then-currently effective prospectus
or statement of additional information for a Fund, or in current
advertising materials for such class of Contracts authorized by
State Farm.
(4) All Premiums paid by check or money order that are collected by
Distributor or any of its Representatives shall be remitted
promptly, and in any event within two business days after receipt
in full, together with any Applications, forms and any other
required documentation, to State Farm. Checks or money orders in
payment of Premiums shall be drawn to the order of State Farm.
If any Premium is held at any time by Distributor, Distributor
shall hold such Premium as an agent of State Farm and such
Premium shall be remitted promptly, and in any event within two
business days, to State Farm. Distributor acknowledges that all
such Premiums,
-4-
<PAGE>
whether by check, money order or wire, shall be the property of
State Farm. Distributor acknowledges that State Farm shall have
the unconditional right to reject, in whole or in part, any
Application or Premium.
c. SUITABILITY. State Farm and Distributor wish to ensure that the
Contracts sold by Distributor will be issued to purchasers for whom
the Contracts are suitable. Distributor shall require that the
Representatives have reasonable grounds to believe that a
recommendation to an applicant to purchase a Contract is suitable for
that applicant. Distributor shall review all applications for
suitability in accordance with Rule 2310 of the NASD Conduct Rules and
interpretations and guidance relating thereto. State Farm will review
all applications under the suitability standards set forth in variable
life insurance regulations adopted by states where the Contracts are
sold, and standards adopted by State Farm or as set forth in its
compliance and operational manuals. While not limited to the
following, a determination of suitability shall be based on
information furnished to a Representative after reasonable inquiry of
the applicant concerning his or her financial status, retirement
needs, reasons for purchasing a Contract, investment sophistication
and experience, other securities holdings, investment objectives
(including risk tolerance), investment time horizon and tax status.
d. REPRESENTATIONS AND WARRANTIES OF DISTRIBUTOR. Distributor represents
and warrants to State Farm that Distributor is and during the term of
this Agreement shall remain registered as a broker-dealer under the
1934 Act, admitted as a member with the NASD, and duly registered
under applicable state securities laws, and that Distributor is and
shall remain during the term of this Agreement in compliance with
Section 9(a) of the 1940 Act.
4. MARKETING MATERIALS
a. PREPARATION AND FILING. State Farm and Distributor shall together
design and develop all promotional, sales and advertising material
relating to the Contracts and any other marketing-related documents
for use in the sale of the Contracts, subject to review and approval
by Distributor of such material and documents in accordance with
Section 2210 of the NASD Conduct Rules. Distributor shall be
responsible for filing such material with the NASD and any state
securities regulatory authorities requiring such filings. State Farm
shall be responsible for filing all promotional, sales or advertising
material, as required, with any state insurance regulatory
authorities. State Farm shall be responsible for preparing the
Contract forms and filing them with applicable state insurance
regulatory authorities, and for preparing the Prospectuses and
Registration Statements and filing them with the SEC and state
regulatory authorities, to the extent required. The parties shall
notify each other expeditiously of any comments provided by the
-5-
<PAGE>
SEC, NASD or any securities or insurance regulatory authority on such
material, and will cooperate expeditiously in resolving and
implementing any comments, as applicable.
b. USE IN SOLICITATION ACTIVITIES. State Farm shall be responsible for
furnishing Distributor with such Applications, Prospectuses and other
materials for use by Distributor and Representatives in their
solicitation activities with respect to the Contracts. State Farm
shall notify Distributor of those states or jurisdictions which
require delivery of a statement of additional information with a
Prospectus to a prospective purchaser. Distributor or its
Representatives shall not use any promotional, sales or advertising
materials that have not been approved by State Farm.
5. COMPENSATION AND EXPENSES
a. COMPENSATION FOR SALES OF THE CONTRACTS. State Farm shall pay
compensation for sales of the Contracts in accordance with the
provisions of this Section 5 as follows:
(1) State Farm shall pay compensation for sales of the Contracts in
accordance with the Registered Representatives Agreements and the
compensation schedules attached thereto, and referenced in
Schedule 3 attached hereto as revised from time to time by
Distributor;
(2) State Farm will pay compensation to the Representatives as paying
agent on behalf of Distributor and will maintain the books and
records reflecting such payments in accordance with the
requirements of the 1934 Act on behalf of Distributor; and
(3) State Farm may delegate its responsibility to pay compensation or
commissions pursuant to this Section 5.a to any other insurer
affiliated with State Farm, in its discretion, provided such
insurer agrees to comply with the provisions hereof applicable to
the payment of such compensation or commissions.
b. EXPENSES RELATING TO THE CONTRACTS. Subject to the provisions of this
Section 5, State Farm shall pay any and all expenses in connection
with the Contracts including, but not limited to:
(1) the preparation and filing of each Registration Statement
(including each pre-effective and post-effective amendment
thereto) and the preparation and filing of each Prospectus
(including any preliminary and each definitive Prospectus);
-6-
<PAGE>
(2) the design, preparation and printing of all Prospectuses,
marketing materials, confirmations, reports and all other
materials prepared for or provided to Contract Owners or
prospective Contract Owners;
(3) the preparation, underwriting, issuance and administration of the
Contracts;
(4) any registration, qualification or approval or other filing of
the Contracts or Contract forms required under the securities or
insurance laws of the states in which the Contracts will be
offered; and
(5) all registration fees for the Contracts payable to the SEC.
c. EXPENSES OF DISTRIBUTOR. State Farm shall bear, as principal, all
expenses of Distributor, except for the responsibility and obligation
to pay compensation to Representatives, without any present or future
expectation or obligation of Distributor to incur such expenses as
principal, to pay for such expenses or to reimburse State Farm for
such expenses. Such expenses to be paid by State Farm shall include,
but not be limited to:
(1) all expenses for the preparation and filing of all contracts,
reports and other communications with federal, state and local
agencies;
(2) all legal fees, auditing fees and consulting fees;
(3) all fees and expenses associated with the licensing, training
and supervision of Representatives and other associated persons
of Distributor;
(4) all administrative, clerical, stenographic, data processing and
other support services expenses;
(5) all office supplies and equipment expenses;
(6) all expenses related to office space;
(7) all NASD, SEC and other regulatory registration fees, membership
fees and membership assessments for Distributor and for
Distributor's registered personnel;
(8) all state and local taxes; and
(9) all other corporate expenses of Distributor.
-7-
<PAGE>
It is understood that, if Distributor enters into a distribution
agreement with another company affiliated with State Farm, State
Farm's obligations pursuant to this Section 5.c shall be allocated
between State Farm and such other company based on existing insurance
or other regulations, agreements and procedures.
d. NO RIGHTS TO COMPENSATION. Representatives shall have no interest in
this Agreement or right to any compensation to be paid to or on behalf
of Distributor hereunder. Distributor and Representatives shall have
no right to withhold or deduct any commission from any premiums in
respect of the Contracts which either of them may collect.
6. COMPLIANCE
a. MAINTAINING REGISTRATION AND APPROVALS. State Farm shall be
responsible for maintaining the registration of the Contracts with the
SEC and any state securities regulatory authority with which such
registration is required, and for gaining and maintaining approval of
the Contract forms where required under the insurance laws and
regulations of each state or other jurisdiction in which the Contracts
are to be offered.
b. CONFIRMATIONS AND 1934 ACT COMPLIANCE. State Farm, as agent for
Distributor, shall confirm to each applicant for, and purchaser of, a
Contract in accordance with Rule 10b-10 under the 1934 Act acceptance
of Premiums and such other transactions as are required by Rule 10b-10
or administrative interpretations thereunder. State Farm shall
maintain and preserve books and records with respect to such
confirmations in conformity with the requirements of Rules 17a-3 and
17a-4 under the 1934 Act to the extent such requirements apply. The
books, accounts and records of State Farm, the Variable Account and
Distributor as to all transactions hereunder shall be maintained so as
to disclose clearly and accurately the nature and details of the
transactions. State Farm shall maintain, as agent for Distributor,
such books and records of Distributor pertaining to the offer and sale
of the Contracts and required by the 1934 Act as may be mutually
agreed upon by State Farm and Distributor, including but not limited
to maintaining a record of Representatives and of the payment of
commissions and other payments or service fees to Representatives. In
addition, State Farm, as agent for Distributor, shall maintain and
preserve such additional accounts, books and other records as are
required of State Farm and Distributor by the 1934 Act. State Farm
shall maintain all such books and records and hold such books and
records on behalf of and as agent for Distributor whose property they
are and shall remain, and acknowledges that such books and records are
at all times subject to inspection by the SEC in accordance with
Section 17(a) of the 1934 Act, NASD, and all other regulatory bodies
having jurisdiction.
-8-
<PAGE>
c. REPORTS. Distributor shall cause State Farm to be furnished with such
reports as State Farm may reasonably request for the purpose of
meeting its reporting and record keeping requirements under the 1933
Act, the 1934 Act and the 1940 Act and regulations thereunder as well
as the insurance laws of the State of Illinois and any other
applicable states or jurisdictions.
d. ISSUANCE AND ADMINISTRATION OF CONTRACTS. State Farm shall be
responsible for issuing the Contracts and administering the Contracts
and the Variable Account, provided, however, that Distributor shall
have full responsibility for the securities activities of all persons
employed by State Farm, engaged directly or indirectly in the Contract
operations, and for the training, supervision and control of such
persons to the extent of such activities.
7. INVESTIGATIONS AND PROCEEDINGS
a. COOPERATION. Distributor and State Farm shall cooperate fully in any
securities or insurance regulatory investigation or proceeding or
judicial proceeding arising in connection with the offering, sale or
distribution of the Contracts distributed under this Agreement.
Without limiting the foregoing, State Farm and Distributor shall
notify each other promptly of any customer complaint or notice of any
regulatory investigation or proceeding or judicial proceeding received
by either party with respect to the Contracts.
b. CUSTOMER COMPLAINTS. Distributor shall comply with the reporting
requirements imposed by Section 3070 of the NASD Rules of Conduct with
regard to the sales of the Contracts. Without limiting the foregoing,
Distributor shall notify the NASD if Distributor or persons associated
with Distributor are the subject of any written customer complaint
involving allegations of theft, forgery or misappropriation of funds
or securities, or is the subject of any claim for damages by a
customer, broker, or dealer which is settled for an amount exceeding
$15,000.
8. INDEMNIFICATION
a. BY STATE FARM. State Farm shall indemnify and hold harmless
Distributor and any officer, director or employee of Distributor
against any and all losses, claims, damages or liabilities, joint or
several (including any investigative, legal and other expenses
reasonably incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any claim asserted),
to which Distributor and/or any such person may become subject, under
any statute or regulation, any NASD rule or interpretation, at common
law or otherwise, insofar as such losses, claims, damages or
liabilities:
-9-
<PAGE>
(1) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, in
light of the circumstances in which they were made, contained in
any Registration Statement or in any Prospectus; provided that
State Farm shall not be liable in any such case to the extent
that such loss, claim, damage or liability arises out of, or is
based upon, an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon information
furnished in writing to State Farm by Distributor specifically
for use in the preparation of any such Registration Statement or
any amendment thereof or supplement thereto;
(2) result from any breach by State Farm of any provision of this
Agreement.
This indemnification agreement shall be in addition to any liability
that State Farm may otherwise have; provided, however, that no person
shall be entitled to indemnification pursuant to this provision if
such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty
by the person seeking indemnification.
b. BY DISTRIBUTOR. Distributor shall indemnify and hold harmless State
Farm and any officer, director or employee of State Farm against any
and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of,
any action, suit or proceeding or any claim asserted), to which State
Farm and/or any such person may become subject under any statute or
regulation, any NASD rule or interpretation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities:
(1) arise out of, or are based upon, any untrue statement or alleged
untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein
or necessary in order to make the statements therein not
misleading, in light of the circumstances in which they were
made, contained in any Registration Statement or in any
Prospectus; in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon
information furnished in writing by Distributor to State Farm
specifically for use in the preparation of any such Registration
Statement or any amendment thereof or supplement thereto;
(2) result from any breach by Distributor of any provision of this
Agreement;
-10-
<PAGE>
(3) result from Distributor's own misconduct or negligence.
This indemnification shall be in addition to any liability that
Distributor may otherwise have; provided, however, that no person
shall be entitled to indemnification pursuant to this provision if
such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty
by the person seeking indemnification.
c. GENERAL. Promptly after receipt by a party entitled to
indemnification ("indemnified person") under this Section 8 of notice
of the commencement of any action as to which a claim will be made
against any person obligated to provide indemnification under this
Section 8 ("indemnifying party"), such indemnified person shall notify
the indemnifying party in writing of the commencement thereof as soon
as practicable thereafter, but failure to so notify the indemnifying
party shall not relieve the indemnifying party from any liability
which it may have to the indemnified person otherwise than on account
of this Section 8. The indemnifying party will be entitled to
participate in the defense of the indemnified person but such
participation will not relieve such indemnifying party of the
obligation to reimburse the indemnified person for reasonable legal
and other expenses incurred by such indemnified person in defending
himself or itself.
The indemnification provisions contained in this Section 8 shall
remain operative in full force and effect, regardless of any
termination of this Agreement. A successor by law of Distributor or
State Farm, as the case may be, shall be entitled to the benefits of
the indemnification provisions contained in this Section 8.
9. TERMINATION. This Agreement shall terminate automatically if it is
assigned by Distributor without the prior written consent of State Farm.
This Agreement may be terminated at any time for any reason by either party
upon 60 days' written notice to the other party, without payment of any
penalty. (The term "assigned" shall not include any transaction exempted
from Section 15(b)(2) of the 1940 Act.) This Agreement may be terminated
at the option of either party to this Agreement upon the other party's
material breach of any provision of this Agreement or of any representation
or warranty made in this Agreement, unless such breach has been cured
within 10 days after receipt of notice of breach from the non-breaching
party. Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except the following: (1) the obligation to settle
accounts hereunder, including commissions on Premiums subsequently received
for Contracts in effect at the time of termination or issued pursuant to
Applications received by State Farm prior to termination; (2) the
provisions contained in Section 8 regarding indemnification; and (3) the
provisions contained in Section 3(b)(4) regarding the remittance of
premiums. In the event of any termination for any reason, all Prospectuses
or marketing materials held by Distributor shall promptly be returned to
-11-
<PAGE>
State Farm free from any claim or retention of rights by Distributor,
and any books and records held or maintained by State Farm on behalf of
Distributor shall be returned to Distributor free from any claim or
retention of rights by State Farm. Furthermore, if so requested by State
Farm, upon termination of this Agreement, Distributor shall eliminate
all reference to the name "State Farm," including removing the name from
Distributor's corporate name, and shall refrain from using the name
"State Farm" in any form or combination whatsoever, in connection with
its business activities.
10. MISCELLANEOUS
a. BINDING EFFECT. This Agreement shall be binding on, and shall inure
to the benefit of, the respective successors and assigns of the
parties hereto provided that neither party shall assign this Agreement
or any rights or obligations hereunder without the prior written
consent of the other party.
b. SCHEDULES. The parties to this Agreement may amend Schedules 1 and 2
to this Agreement from time to time to reflect additions of any class
of Contracts and Variable Accounts. The provisions of this Agreement
shall be equally applicable to each such class of Contracts and each
Variable Account that may be added to the Schedule, unless the context
otherwise requires. State Farm and Distributor may modify Schedule 3
as mutually agreed in writing from time to time. Any other change in
the terms or provisions of this Agreement shall be by written
agreement between State Farm and Distributor.
c. RIGHTS, REMEDIES, ETC, ARE CUMULATIVE. The rights, remedies and
obligations contained in this Agreement are cumulative and are in
addition to any and all rights, remedies and obligations, at law or in
equity, which the parties hereto are entitled to under state and
federal laws. Failure of either party to insist upon strict
compliance with any of the conditions of this Agreement shall not be
construed as a waiver of any of the conditions, but the same shall
remain in full force and effect. No waiver of any of the provisions
of this Agreement shall be deemed, or shall constitute, a waiver of
any other provisions, whether or not similar, nor shall any waiver
constitute a continuing waiver.
d. NOTICES. All notices hereunder are to be made in writing and shall be
given:
if to State Farm, to:
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
if to Distributor, to:
-12-
<PAGE>
State Farm VP Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
or such other address as such party may hereafter specify in writing.
Each such notice to a party shall be either hand delivered or
transmitted by registered or certified United States mail with return
receipt requested, or by overnight mail by a nationally recognized
courier, and shall be effective upon delivery.
e. INTERPRETATION; JURISDICTION. This Agreement constitutes the whole
agreement between the parties hereto with respect to the subject
matter hereof, and supersedes all prior oral or written
understandings, agreements or negotiations between the parties with
respect to such subject matter. No prior writings by or between the
parties with respect to the subject matter hereof shall be used by
either party in connection with the interpretation of any provision of
this Agreement.
f. SEVERABILITY. This is a severable Agreement. In the event that any
provision of this Agreement would require a party to take action
prohibited by applicable federal or state law or prohibit a party from
taking action required by applicable federal or state law, then it is
the intention of the parties hereto that such provision shall be
enforced to the extent permitted under the law, and, in any event,
that all other provisions of this Agreement shall remain valid and
duly enforceable as if the provision at issue had never been a part
hereof.
g. SECTION AND OTHER HEADINGS. The headings in this Agreement are
included for convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect their
construction or effect.
h. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and
the same instrument.
i. REGULATION. This Agreement shall be subject to the provisions of the
1933 Act, 1934 Act and 1940 Act and the regulations thereunder and the
rules and regulations of the NASD, from time to time in effect,
including the conditions of any exemptions therefrom as the SEC or
NASD may grant, and the terms hereof shall be interpreted and
construed in accordance therewith.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their authorized officers designated below as of the date specified
above.
STATE FARM LIFE INSURANCE COMPANY
By:/s/ Edward B. Rust, Jr
------------------------------------------
Name: Edward B. Rust, Jr.
----------------------------------------
Title: President
---------------------------------------
STATE FARM VP MANAGEMENT CORP.
By:/s/ Roger Joslin
------------------------------------------
Name: Roger S. Joslin
----------------------------------------
Title: Vice President, Treasurer
---------------------------------------
-14-
<PAGE>
SCHEDULE 1
Accounts of the Company
Effective as of the date the Agreement was executed, the following separate
accounts of State Farm are subject to the Agreement:
- --------------------------------------------------------------------------------
Date Established
by Board of SEC 1940 Act Type of Product
Name of Account Directors of the Registration Supported by
and Subaccounts Company Number Account
- --------------------------------------------------------------------------------
State Farm Life December 9, 1996 811-08001 Variable Annuity
Insurance Company
Variable Annuity
Separate Account
- --------------------------------------------------------------------------------
State Farm Life December 9, 1996 811-08013 Variable Life
Insurance Company
Variable Life
Separate Account
- --------------------------------------------------------------------------------
Effective as of _____________, the following separate accounts of State Farm are
hereby added to this Schedule 1 and made subject to the Agreement:
- --------------------------------------------------------------------------------
Date Established Type of Product
Name of Account by Board of SEC 1940 Act Supported by
and Subaccounts Directors of the Registration Account
Company Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Distributor and State Farm hereby amend this Schedule 1
in accordance with Section 10. b. of the Agreement.
- ---------------------------------- --------------------------------------
State Farm VP Management Corp. State Farm Life Insurance Company
<PAGE>
SCHEDULE 2
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
- --------------------------------------------------------------------------------
SEC 1933 Act
Contract Registration Name of Supporting
Marketing Name Number Account Annuity or Life
- --------------------------------------------------------------------------------
State Farm 333-19189 State Farm Life Annuity
Variable Deferred Insurance Company
Annuity Variable Annuity
Separate Account
- --------------------------------------------------------------------------------
State Farm 333-19521 State Farm Life Life
Variable Insurance Company
Universal Life Variable Life
Separate Account
- --------------------------------------------------------------------------------
Effective as of _______, the following classes of Contracts are hereby added to
this Schedule 2 and made subject to the Agreement:
- --------------------------------------------------------------------------------
Contract SEC 1933 Act Name of Supporting
Marketing Name Registration Account Annuity or Life
Number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the Distributor and State Farm hereby amend this Schedule 2
in accordance with Section 10.b. of the Agreement.
- ---------------------------------- --------------------------------------
State Farm VP Management Corp. State Farm Life Insurance Company
<PAGE>
SCHEDULE 3
COMPENSATION OF REPRESENTATIVES
Effective as of the date the Agreement was executed, compensation payable
to a Representative for the sale of Contracts shall be determined based on
the compensation schedules attached to the Registered Representatives
Agreement with such Representative as in effect at the time of the sale
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made and entered into this 12th day of December,
1997 by and between STATE FARM LIFE INSURANCE COMPANY, an Illinois corporation
(the "Company"), on its own behalf and on behalf of the segregated asset
accounts of the Company set forth on Schedule A attached hereto (each, an
"Account"; collectively, the "Accounts"), STATE FARM VARIABLE PRODUCT TRUST, a
Delaware business trust (the "Trust"), and STATE FARM INVESTMENT MANAGEMENT
CORP., a Delaware corporation ("SFIM").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Trust issues shares of beneficial interest (the "Shares")
registered under the Securities Act of 1933, as amended (the "1933 Act")
pursuant to a registration statement initially filed with the Securities and
Exchange Commission on February 27, 1997, as amended from time to time (the
"Registration Statement");
WHEREAS, the Trust has established six separate series of Shares, each
corresponding to a separate investment portfolio having its own investment
objective, and may establish additional series of Shares in the future (such
existing and future series are collectively referred to herein as the "Funds");
WHEREAS, the Trust is available to act as the investment vehicle for
the Accounts, and other separate accounts established in connection with
variable life insurance policies and variable annuity contracts issued by the
Company and its affiliates (the "Contracts");
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolutions of the Board of Directors of the
Company, to set aside and invest assets attributable to the Contracts that are
allocated to the Accounts (the Contracts and the Accounts covered by this
agreement, and the corresponding Funds covered by this agreement in which the
Accounts invest, are specified in Schedule A attached hereto as may be modified
from time to time);
WHEREAS, the Company has registered the Accounts as unit investment
trusts under the 1940 Act;
WHEREAS, SFIM, the Trust's investment adviser and principal
underwriter, is an investment adviser registered under the Investment Advisers
Act of 1940, as amended (the "Advisers Act") and all applicable state securities
laws, a broker-dealer registered under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and a member of the National Association of Securities
Dealers, Inc. (the "NASD"); and
1
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Trust, either directly or in conjunction with SFIM as its
principal underwriter, intends to make a continuous offering of its shares at
net asset value, and the Company has and intends to purchase the shares of the
Funds on behalf of the Accounts to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Trust, and SFIM agree as follows:
ARTICLE 1
SALE OF TRUST SHARES
1.1 The Trust and SFIM agree to sell to the Company those shares of
the Trust which the Accounts order, executing such orders on a daily basis at
the net asset value next computed after receipt by the Trust, SFIM, or their
designee for the order of the shares of the Trust. For purposes of this Section
1.1, the Company shall be the Trust's and SFIM's designee for receipt of such
orders from Contract owners and receipt by the Company shall constitute receipt
by the Trust and SFIM; PROVIDED, that either the Trust or SFIM receives notice
of such order by 7:30 a.m. Chicago time on the next following Business Day.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Trust calculates its net asset value pursuant to
the rules of the Securities and Exchange Commission (the "SEC").
1.2 The Trust and SFIM agree to make Trust shares available
indefinitely for purchase at the applicable net asset value per share by the
Company and the Accounts on those days on which the Trust calculates its net
asset value pursuant to rules of the SEC. The Trust shall use reasonable
efforts to calculate its net asset values on the days and at the times described
in the Trust's prospectus (as of the date hereof, as of the close of the New
York Stock Exchange on each day on which the New York Stock Exchange is open for
trading, but not on the Friday following Thanksgiving nor on December 26, 1997).
Notwithstanding the foregoing, the Board of Trustees of the Trust (the "Board")
may refuse to sell shares of any Fund to the Company and the Accounts, or
suspend or terminate the offering of shares of any Fund if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of its fiduciary
duties under federal and any applicable state laws, necessary in the best
interests of the shareholders of such Fund.
1.3 The Trust and SFIM agree that shares of the Trust will be sold
to the Company and the Accounts. In addition, shares of the Trust may be sold
to other insurance companies affiliated with the Company or their separate
accounts. Shares will not be sold to natural persons. Nothing herein shall
prohibit the Company from establishing separate accounts or sub-accounts other
than the Accounts which purchase shares from investment companies other than the
Trust.
2
<PAGE>
1.4 The Company shall pay for the Trust shares in federal funds
transmitted by wire on the next Business Day after an order to purchase shares
is made in accordance with the provisions of Section 1.1 hereof. For purpose of
Section 2.8, upon receipt by the Trust of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust. The amount of redemption proceeds payable pursuant
to Section 1.6 may be credited toward any purchase payments due pursuant to this
Section 1.4.
1.5 The Trust agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Trust held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Trust or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Trust for receipt of
requests for redemption from Contract owners and receipt by such designee shall
constitute receipt by the Trust; PROVIDED, that the Trust receives notice of
such request for redemption by 7:30 a.m. Chicago time on the next following
Business Day.
1.6 Payment of redemption proceeds will be in federal funds
transmitted by wire on the same Business Day the Trust receives notice of the
redemption order from the Company. The Trust reserves the right to delay
payment of redemption proceeds, but in no event may such payment be delayed
longer than the period permitted by the 1940 Act. If notification of redemption
is received after 7:30 a.m. Chicago time, payment for redeemed shares will be
made on the next following Business Day. For purpose of Section 2.8, upon
receipt by the Company of the federal funds so wired, such funds shall cease to
be the responsibility of the Trust and shall become the responsibility of the
Company; the Trust will not bear any responsibility whatsoever for the proper
disbursement or crediting of redemption proceeds. Purchase payments payable
pursuant to Section 1.4 may be credited toward any amounts of redemption
proceeds due pursuant to this Section 1.6.
1.7 Unless otherwise determined by the Board, issuance and transfer
of the Trust's shares will be by book entry only and share certificates will not
be issued to the Company or the Accounts. Shares ordered from the Trust will be
recorded in an appropriate title for the Accounts or the appropriate subaccounts
of the Accounts.
1.8 The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Trust's shares. The Company hereby
elects to receive all such dividends and distributions as are payable on the
Fund shares in additional shares of that Fund. The Trust shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.9 The Trust or its custodian shall make the net asset value per
share for each Fund available to the Company on each Business Day as soon as
reasonably practical
3
<PAGE>
after the net asset value per share is calculated and shall use its best efforts
to make such net asset value per share available by 6:00 p.m. Chicago time.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act, and that the Contracts will be issued,
sold, and distributed in material compliance with all applicable state and
federal laws, including without limitation the 1933 Act, the 1934 Act, and the
1940 Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law, that it has
legally and validly established the Accounts as segregated asset accounts under
Illinois law, and that it has registered the Accounts as unit investment trusts
in accordance with the provisions of the 1940 Act (unless exempt therefrom) to
serve as segregated investment accounts for the Contracts and that it will
maintain such registrations for so long as any Contracts are outstanding. The
Company shall amend the registration statements under the 1933 Act for the
Contracts and the registration statements under the 1940 Act for the Accounts
from time to time as required in order to effect the continuous offering of the
Contracts or as may otherwise be required by applicable law. The Company shall
register and qualify the Contracts for sale in accordance with the securities
laws of the various states only if and to the extent deemed necessary by the
Company.
2.2 The Company represents that it believes, in good faith, that
the Contracts are currently and at the time of issuance will be treated as life
insurance, endowment or annuity contracts under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), that it will make every
effort to maintain such treatment and that it will notify the Trust immediately
upon having a reasonable basis for believing that the Contracts have ceased to
be so treated or that they might not be so treated in the future.
2.3 The Trust and SFIM represent and warrant that Trust shares sold
pursuant to this agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in material compliance with the laws of
Delaware and all applicable federal and state securities laws. The Trust
further represents that it is and shall remain registered under the 1940 Act,
and that it shall amend the Registration Statement for its shares under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify the
shares for sale in accordance with the laws of the various states, including
those states designated by SFIM pursuant to its underwriting agreement with the
Trust, only if and to the extent deemed advisable by the Trust.
2.4 The Trust represents that each Fund of the Trust is currently
qualified or will be qualified as a Regulated Investment Company under
Subchapter M of the Code and that every effort will be made to maintain such
qualification (under Subchapter M or any successor
4
<PAGE>
or similar provision) and that the Trust will notify the Company orally
(followed by written notice) or by wire immediately upon having a reasonable
basis for believing that any Fund of the Trust has ceased to so qualify or that
any Fund might not so qualify in the future.
2.5 The Trust currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. However, if the
Trust were authorized to establish a 12b-1 plan, the Trust would undertake to
have the Board, of which a majority of trustees are not interested persons, as
defined in the 1940 Act, of the Trust, formulate and approve any plan under Rule
12b-1 to finance distribution expenses.
2.6 The Trust represents that it is lawfully organized and validly
existing under the laws of the State of Delaware and that it does and will
comply in all material respects with the 1940 Act.
2.7 SFIM represents that it is and shall remain duly registered as
an investment adviser and broker-dealer under all applicable federal and state
securities laws at all times when it is the Trust's investment adviser and
principal underwriter and that it shall perform its obligations for the Trust in
material compliance with any applicable state and federal securities laws and
NASD rules and regulations relating to broker-dealers.
2.8 The Trust, SFIM, and the Company each represents and warrants
that all of its directors, trustees, officers, employees, investment advisers,
and other individuals or entities dealing with the money and/or securities of
the Trust are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Trust in an amount not
less than the minimal coverage as required currently by Section 17(g) and Rule
17g-1 of the 1940 Act or related provisions as may be promulgated from time to
time. The aforesaid bond shall include coverage for larceny and embezzlement
and shall be issued by a reputable bonding company.
ARTICLE 3
PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1 At least annually, the Trust shall, at its expense or at the
expense of SFIM, as appropriate, provide the Company, free of charge, with as
many copies of the Trust's current prospectus as the Company may reasonably
request for distribution to both existing Contract owners and prospective
purchasers. If requested by the Company in lieu thereof, the Trust shall
provide such documentation (including a final "camera ready" copy of the new
prospectus as set in type at the Trust's expense) and other assistance as is
reasonably necessary in order for the parties hereto once each year (or more
frequently if the prospectus for the Trust is supplemented or amended) to have
the prospectus for the Contracts and the Trust's prospectus printed together in
one document; the expenses of such printing to be
5
<PAGE>
apportioned between the Company and the Trust (or SFIM, if appropriate) in
proportion to the number of pages of the Contract and Trust prospectuses, taking
account of other relevant factors affecting the expense of printing, such as
columns, charts, etc.; the Trust or SFIM will bear the cost of printing the
Trust's portion of such document, and the Company will bear the expenses of
printing the Accounts' portion of such document.
3.2 The Trust's prospectus shall state that the Statement of
Additional Information ("SAI") for the Trust is available from the Trust. The
Trust, at its expense or at the expense of SFIM, as appropriate, shall print and
provide the SAI to the Company (or a master of the SAI suitable for duplication
by the Company) for any Contract owner or prospective purchaser who requests the
SAI. The Company shall provide the SAI to any Contract owner or prospective
purchaser who requests it.
3.3 The Trust (or SFIM, as appropriate), at its expense, shall
provide the Company with copies of its proxy material, reports to shareholders
and other communications to shareholders in such quantity as the Company shall
reasonably require for distribution to Contract owners.
3.4 The Company shall: (a) solicit voting instructions from
Contract owners; (b) vote the Trust shares in accordance with instructions
received from Contract owners; and (c) vote Trust shares for which no
instructions have been received in the same proportion as Trust shares of such
Fund for which instructions have been received. The Company reserves the right
to vote Trust shares held in the Accounts in its own right, to the extent
permitted by law.
3.5 The process of soliciting Contract owners' voting instructions,
tabulating votes, and other shareholder voting procedures shall be conducted in
accordance with procedures adopted by the Company.
ARTICLE 4
SALES MATERIAL AND INFORMATION
4.1 The Company shall furnish, or shall cause to be furnished, to
the Trust or its designee, each piece of sales literature or other promotional
material in which the Trust is named, at least five (5) Business Days prior to
its use by the Company. No such material shall be used by the Company if the
Trust or its designee object to such use within five (5) Business Days after
receipt of such material.
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Trust shares, as such registration statement and
6
<PAGE>
prospectus may be amended or supplemented from time to time, or in reports or
proxy statements for the Trust which are in the public domain or approved by the
Trust for distribution to Contract owners, or in sales literature or other
promotional material approved by the Trust or its designee, except with the
permission of the Trust. The Trust or its designee agrees to respond to any
request for approval on a prompt and timely basis.
4.3 The Trust shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company and/or the Accounts is named, at least five (5)
Business Days prior to its use by the Trust. No such material shall be used by
the Trust if the Company or its designee object to such use within five (5)
Business Days after receipt of such material.
4.4 The Trust shall not give any information or make any
representations on behalf of the Company or concerning the Company, the
Accounts, or the Contracts other than information or representations contained
in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in reports for the Accounts which are in the public domain or
approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company. The Company or its
designee agrees to respond to any request for approval on a prompt and timely
basis.
4.5 The Company and the Trust may each request that the other
provide at least one complete copy of all registration statements, prospectuses,
SAIs, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for "no-action" letters, and
all amendments to any of the above, that relate to the Contracts, or to the
Trust or its shares, prior to or contemporaneously with the filing of such
document with the SEC or other regulatory authority. The Company or Trust shall
also each promptly inform the other of the results of any examination by the SEC
(or other regulatory authority) that relates to the Contracts, the Trust or its
shares, and the party that was the subject of the examination shall provide the
other party with a copy of any "deficiency letter" or other correspondence or
written report regarding any such examination.
4.6 For purposes of this Article 4, the phrase "sales literature or
other promotional material" means advertisements (defined as material published,
or designed for use in, a newspaper, magazine, or other periodical, radio,
television, telephone or tape recording, videotape display, signs or billboards,
motion pictures, telephone directories (other than routine listings), electronic
or other public media), sales literature (defined as any written or electronic
communication distributed or made generally available to customers or the public
that is not an advertisement as defined above, including, but not limited to,
circulars, research reports, market letters, performance reports or summaries,
form letters, telemarketing scripts, seminar texts, and reprints or excerpts of
any other advertisement, sales literature or published
7
<PAGE>
article), and educational or training materials or communications distributed or
made generally available to some or all agents or employees.
ARTICLE 5
FEES AND EXPENSES
5.1 No party hereto shall pay any fee or other compensation to any
other party hereto pursuant to this agreement, except that if the Trust or any
Fund adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to
finance distribution expenses, then, subject to obtaining any regulatory
approvals, the Trust may make payments to the Company, SFIM, or the Company's
principal underwriter for the Contracts if and in amounts agreed to by the Trust
in writing.
5.2 Each party shall reimburse each other party for expenses
initially paid by such other party but allocated to it in accordance with any
allocation of expenses specified in Article 3 hereof.
ARTICLE 6
DIVERSIFICATION AND RELATED LIMITATIONS
6.1 Subject to the Company's obligations under Section 2.2 hereof,
the Trust and SFIM each represent and warrant that the Trust will at all times
invest its assets in such a manner as to ensure that the Contracts will be
treated as annuity, endowment, or life insurance contracts under the Code and
the regulations issued thereunder. Without limiting the scope of the foregoing,
the Trust and SFIM will at all times ensure that the Trust complies with Section
817(h) of the Code and Treas. Reg. Section 1.817-5, as amended from time to
time, and any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations.
6.2 Trust shares will not be sold to any person or entity that
would result in the Contracts not being treated as annuity, endowment, or life
insurance contracts, in accordance with the statutes and regulations referred to
in Section 6.1 hereof.
8
<PAGE>
ARTICLE 7
POTENTIAL MATERIAL CONFLICTS
7.1 The Board shall monitor each Fund of the Trust for the
existence of any material irreconcilable conflict between the interests of the
variable annuity contract owners and the variable life policy owners of the
Company and/or affiliated companies (collectively, "contract owners") investing
indirectly in the Trust. The Trust represents that at all times at least a
majority of the trustees of the Trust shall not be interested persons, as
defined in the 1940 Act (the "disinterested trustees"). The Board shall have
the sole authority to determine if a material irreconcilable conflict exists,
and such determination shall be binding on the Company only if approved in the
form of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of any
such determination to the Company.
7.2 The Company agrees that it will be responsible for reporting
any potential or existing conflicts to the Board. The Company also agrees that,
if a material irreconcilable conflict arises, it will at its own cost remedy
such conflict up to and including: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Fund and reinvesting such assets in
a different investment medium, including (but not limited to) another Fund of
the Trust, or submitting to a vote of all affected contract owners whether to
withdraw assets from the Trust or any Fund and reinvesting such assets in a
different investment medium and, as appropriate, segregating the assets
attributable to any appropriate group of contract owners that votes in favor of
such segregation, or offering to any of the affected contract owners the option
of segregating the assets attributable to their contracts or policies; and/or
(b) establishing and registering a new management investment company and
segregating the assets underlying the Contracts, unless a majority of Contract
owners materially adversely affected by the conflict have voted to decline the
offer to establish and register a new management investment company.
7.3 A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately remedies any
material irreconcilable conflict. In the event that the Board determines that
any proposed action does not adequately remedy any material irreconcilable
conflict, the Company will withdraw each Account designated by the disinterested
trustees from investment in the Trust and terminate this agreement within six
(6) months after the Board informs the Company in writing of the foregoing
determination; PROVIDED, that such withdrawal and termination shall be limited
to the extent required to remedy any such material irreconcilable conflict as
determined by a majority of the disinterested trustees of the Board.
7.4 The Trust agrees that it will not enter into any participation
agreement with a life insurance company affiliated with the Company unless such
agreement includes a section substantially identical to this Article 7.
9
<PAGE>
ARTICLE 8
INDEMNIFICATION
8.1 INDEMNIFICATION BY THE COMPANY.
(a) The Company agrees to indemnify and hold harmless the
Trust and SFIM and each of the Trust's and SFIM's trustees, directors, and
officers and each person, if any, who controls the Trust or SFIM within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (collectively, the "Indemnified Parties" for purposes of this Section
8.1), against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company) or
litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Trust's shares or the Contracts and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material fact contained in the
registration statement or prospectus for the Contracts or contained in the
Contracts or sales literature for the Contracts (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, PROVIDED, that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished the Company by or on behalf of
the Trust or SFIM for use in the registration statement or prospectus for the
Contracts or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the Contracts or
Trust shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in the
registration statement, prospectus or sales literature of the Trust not supplied
by the Company, or persons under its control) or wrongful conduct of the Company
or persons under its control, with respect to the sale or distribution of the
Contracts or Trust shares;
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Trust or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
information furnished to the Trust or SFIM by or on behalf of the Company; or
10
<PAGE>
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Company in this agreement or
arise out of or result from any other material breach of this agreement by the
Company;
except to the extent provided in Sections 8.1(b) and 8.1(c) hereof.
(b) The Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Company in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision, except to the extent that failure to
notify results in failure of actual notice to the Company and the Company is
damaged solely as a result of failure to give notice. In case any such action
is brought against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Company to such party
of the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation, unless: (i) the Company and the Indemnified Party shall have
mutually agreed on the retention of such counsel; or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the Indemnified Party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. The Company shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the Company agrees to indemnify the
Indemnified Party from all and against any loss or liability by reason of such
settlement or judgment.
(c) The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Trust shares or the Contracts or the operation
of the Trust and the Indemnified Parties will provide the Company with all
relevant information and documents requested by the Company. For purposes of
this Section 8.1(c), the "commencement" of proceedings shall include any
informal or formal communications from the SEC or its staff (or the receipt of
information from any other persons or entities) indicating that enforcement
action by said Commission or staff may be contemplated or forthcoming; this
includes any information to the effect that any matter(s) has been referred to
the SEC's Division of Enforcement, or that any matter(s) is being discussed with
that Division.
11
<PAGE>
8.2 INDEMNIFICATION BY THE TRUST AND SFIM.
(a) The Trust and SFIM, in each case solely to the extent
relating to such party's responsibilities hereunder, agree to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act,
and any agents or employees of the foregoing (collectively, the "Indemnified
Parties" for purposes of this Section 8.2), against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of the Trust and SFIM) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Trust's shares or the Contracts and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the Trust (or any
amendment or supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, PROVIDED, that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information furnished
to the Trust by or on behalf of the Company for use in the registration
statement or prospectus for the Trust or in sales literature for the Trust (or
any amendment or supplement) or otherwise for use in connection with the sale of
the Contracts or Trust shares;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in the
registration statement, prospectus or sales literature for the Contracts not
supplied by the Trust, or persons under its control) or wrongful conduct of the
Trust or persons under its control, with respect to the sale or distribution of
the Contracts or Trust shares;
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Contracts, or any amendment thereof
or supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statement
or statements therein not misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on behalf of the Trust;
or
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Trust in this agreement or
arise out of or result from any other material breach of this agreement by the
Trust (including a failure, whether
12
<PAGE>
unintentional or in good faith or otherwise, to comply with the requirements
specified in Article 6 of this agreement);
except to the extent provided in Sections 8.2(b) and 8.2(c) hereof.
(b) Neither the Trust nor SFIM shall be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Trust or SFIM in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Trust or SFIM
of any such claim shall not relieve the Trust or SFIM from any liability which
it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision, except to the
extent that failure to notify results in the failure of actual notice to the
Trust or SFIM and the Trust or SFIM is damaged solely as a result of failure to
give such notice. In case any such action is brought against the Indemnified
Parties, the Trust and SFIM will be entitled to participate, at their own
expense, in the defense thereof. The Trust and SFIM also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Trust or SFIM to such party of its election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and neither the Trust nor
SFIM shall be liable to such party under this agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation, unless (i) the
Trust, SFIM and the Indemnified Party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include the Trust or SFIM and the Indemnified
Party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.
Neither the Trust nor SFIM shall be liable for any settlement of any proceeding
effected without their written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the Trust and SFIM agree to
indemnify the Indemnified Party from and against any loss or liability by reason
of such settlement or judgment.
(c) The Indemnified Parties will promptly notify both the
Trust and SFIM of the commencement of any litigation or proceedings against them
in connection with the issuance or sale of the Trust shares or the Contracts or
the operation of the Trust and the Indemnified Parties will provide the Trust or
SFIM with all relevant information and documents requested by the Trust or SFIM,
respectively. For purposes of this Section 8.1(c), the "commencement" of
proceedings shall include any informal or formal communications from the SEC or
its staff (or the receipt of information from any other persons or entities)
indicating that enforcement action by said Commission or staff may be
contemplated or forthcoming; this includes any information to the effect that
any matter(s) has been referred to
13
<PAGE>
the SEC's Division of Enforcement, or that any matter(s) is being discussed with
that Division.
8.3 A successor by law of the parties to this agreement shall be
entitled to the benefits of the indemnification contained in this Article 8.
The indemnification provisions contained in this Article 8 shall survive any
termination of this agreement.
ARTICLE 9
LIMITATIONS OF LIABILITY
9.1 LIMITATION OF LIABILITY OF COMPANY. The Company shall give the
Trust and SFIM the benefit of the Company's best judgment and efforts in
fulfilling its obligations under this agreement; PROVIDED, that the Company
shall not be liable for any error of judgment or import of law, or for any loss
suffered by the Trust or SFIM in connection with the matters to which this
agreement relates, except loss resulting from: (i) willful misfeasance, bad
faith or gross negligence on the part of the Company in the performance of its
obligations and duties under this agreement; (ii) its reckless disregard of its
obligations and duties under this agreement; or (iii) a breach of Section 2.2 of
this agreement.
9.2 LIMITATION OF LIABILITY OF SFIM. SFIM shall give the Trust and
the Company the benefit of SFIM's best judgment and efforts in fulfilling its
obligations under this agreement; PROVIDED, that SFIM shall not be liable for
any error of judgment or import of law, or for any loss suffered by the Trust or
the Company in connection with the matters to which this agreement relates,
except loss resulting from: (i) willful misfeasance, bad faith or gross
negligence on the part of SFIM in the performance of its obligations and duties
under this agreement; (ii) its reckless disregard of its obligations and duties
under this agreement; or (iii) a breach of Sections 2.4 or 6.1 of this
agreement.
9.3 LIMITATION OF LIABILITY OF TRUST. The Company and SFIM each
acknowledge that it has received notice of and accepts the limitations on the
Trust's liability as set forth in the Trust's Declaration of Trust, as amended
from time to time. In accordance therewith, the Company and SFIM agree that the
Trust's obligations hereunder shall be limited to the assets of the Funds, and
with respect to each Fund shall be limited to the assets of such Fund, and no
party shall seek satisfaction of any such obligation from any shareholder of the
Trust, nor from any trustee, officer, employee or agent of the Trust.
14
<PAGE>
ARTICLE 10
DURATION AND TERMINATION OF THIS AGREEMENT
10.1 EFFECTIVE DATE AND TERM. This agreement shall not become
effective unless and until it is approved by the Trust's Board. This agreement
shall come into full force and effect on the date which it is so approved,
provided that it shall not became effective as to any subsequently created Fund
until it has been approved by the Board specifically for such Fund.
10.2 TERMINATION.
(a) This agreement shall terminate with respect to one,
some, or all the Accounts, or one, some, or all Funds:
(i) at the option of any party upon six months'
advance written notice to the other party;
(ii) at the option of the Company to the extent that
shares of the Funds are not reasonably available to meet the requirements of the
Contracts or are not "appropriate funding vehicles" for the Contracts, as
determined by the Company reasonably and in good faith; PROVIDED, that prompt
notice of the election to terminate for such cause and an explanation of such
cause shall be furnished by the Company;
(iii) at the option of the Trust upon institution of
formal proceedings against the Company by the SEC or any insurance department or
any other regulatory body regarding the Company's duties under this agreement or
related to the sale of the Contracts, the operation of the Accounts, or the
purchase of the Trust shares;
(iv) at the option of the Company upon institution of
formal proceedings against the Trust or SFIM by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body;
(v) at the option of the Company or the Trust upon
receipt of any necessary regulatory approvals and/or the vote of the Contract
owners having an interest in the Accounts (or any subaccount) to substitute the
shares of another investment company for the corresponding Fund shares of the
Trust in accordance with the terms of the Contracts for which those Fund shares
had been selected to serve as the underlying investment media; PROVIDED, that
the Company will give 30 days' prior written notice to the Trust of the date of
any proposed vote or other action taken to replace the Trust's shares; or
(vi) at the option of the Company or the Trust, upon
the other party's material breach of any provision of this agreement.
15
<PAGE>
(b) Without limiting the generality of Section 10.1(a)(ii),
shares of a Fund would not be "appropriate funding vehicles" if, for example,
such shares did not meet the diversification or other requirements referred to
in Article 6 hereof, the Fund did not qualify under Subchapter M of the Code, as
referred to in Section 2.4 hereof, the investments or investment policies,
objectives, and/or limitations of the Fund would impose unanticipated risks on
the Company, or if the Company would be permitted to disregard policy owner
voting instructions under the 1940 Act or the rules promulgated thereunder.
10.3 Any notice pursuant to Section 10.1 shall specify the Fund or
Funds, Contracts and, if applicable, the Accounts as to which the agreement is
to be terminated.
10.4 It is understood and agreed that the right of any party hereto
to terminate this agreement pursuant to Section 10.1(a) may be exercised for
cause or for no cause.
10.5 Except as necessary to implement Contract owner initiated
transactions, or as required by state insurance laws or regulations, the Company
shall not redeem Trust shares attributable to the Contracts (as opposed to Trust
shares attributable to the Company's assets held in the Accounts), and the
Company shall not prevent Contract owners from allocating payments to a Fund
that was otherwise available under the Contracts, until thirty (30) days after
the Company shall have notified the Trust of its intention to do so.
10.6 Notwithstanding any termination of this agreement, the Trust
shall, at the option of the Company, continue to make available additional
shares of the Funds pursuant to the terms and conditions of this agreement for
all Contracts in effect on the effective date of termination of this agreement
(the "Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to transfer or reallocate investments
under the Contracts, redeem investments in the Trust and/or invest in the Trust
upon the making of additional purchase payments under the Existing Contracts.
ARTICLE 11
NOTICES
11.1 Any notice shall be sufficiently given when sent by registered
or certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Company:
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
16
<PAGE>
If to the Trust:
State Farm Variable Product Trust
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
If to SFIM:
State Farm Investment Management Corp.
One State Farm Plaza
Bloomington, Illinois 61710-0001
Attn: _____________________
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 APPLICABLE LAW.
(a) This agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of Delaware without
regard to conflicts of law principles or precedents.
(b) This agreement shall be subject to the provisions of the
1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant and the terms hereof shall be interpreted and construed in accordance
therewith.
12.2 SEVERABILITY. If any provision of this agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this agreement shall not be affected thereby.
12.3 CAPTIONS. The captions in this agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4 COUNTERPARTS. This agreement may be executed simultaneously in
multiple counterparts, each of which taken together shall constitute one and the
same instrument.
17
<PAGE>
12.5 SCHEDULES. The Schedules attached hereto, as modified from
time to time, are incorporated herein by reference and are part of this
agreement.
12.6 COOPERATION WITH AUTHORITIES. Each party hereto shall
cooperate with the other party and all appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance regulators)
and shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this agreement or the
transactions contemplated hereby.
12.7 CUMULATIVE RIGHTS. The rights, remedies and obligations
contained in this agreement are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity, which the parties hereto
are entitled to under state and federal laws.
12.8 AMENDMENTS. This agreement may be amended at any time upon the
consent of all of the parties.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to
be executed in their names and on their behalf by their duly authorized officers
all on the day and year first above written.
STATE FARM LIFE INSURANCE COMPANY
By: /s/ Kurt G. Moser
Title: Senior Vice President - Investments
STATE FARM VARIABLE PRODUCT TRUST
By: /s/ Edward B. Rust, Jr.
Title: President
STATE FARM INVESTMENT MANAGEMENT CORP.
By: /s/ Roger Joslin
Title: Vice President and Treasurer
19
<PAGE>
SCHEDULE A
Accounts, Contracts and Funds Subject
to the Participation Agreement
-----------------------------------------
STATE FARM LIFE INSURANCE COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT:
CONTRACT: State Farm Variable Deferred Annuity Policy*/
FUNDS: Money Market Fund**/
Large Cap Equity Index Fund**/
Small Cap Equity Index Fund**/
International Equity Index Fund**/
Bond Fund**/
Stock and Bond Balanced Fund**/
STATE FARM LIFE INSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT:
CONTRACT: State Farm Variable Universal Life Insurance Policy*/
FUNDS: Money Market Fund**/
Large Cap Equity Index Fund**/
Small Cap Equity Index Fund**/
International Equity Index Fund**/
Bond Fund**/
Stock and Bond Balanced Fund**/
- -------------------------
*/After effectiveness of registration statement for the Contract.
**/After effectiveness of registration statement for the Fund.
20
<PAGE>
State Farm Life Insurance Company
ONE STATE FARM PLAZA
Bloomington, Illinois 61710-0001
GERRY BROGLA, F.S.A.
ACTUARY
PHONE (309) 766-7957
FAX (309) 766-1827
February 2, 1999
Gentlemen:
This opinion is furnished in connection with the registration by State Farm
Life Insurance Company of its Variable Universal Life Insurance Policy ("the
Policy"), under the Securities Act of 1933 (the "Registration Statement"). The
prospectus included in the Registration Statement on Form S-6 describes the
Policy. I have reviewed the Policy form and I have participated in the
preparation and review of the Registration Statement and Exhibits thereto. In
my opinion:
(1) The illustrations of policy account values, cash surrender values, and
death benefits included in the section of the prospectus entitled,
"Hypothetical Illustrations of Accumulated Premiums, Policy Account
Values, Cash Surrender Values, and Death Benefits", based on the
assumptions stated in this section, are consistent with the provisions
of the Policy. The rate structure of the Policy has not been designed
so as to make the relationship between premiums and benefits, as shown
in the illustrations, appear more favorable to a prospective purchaser
of a Policy for males ages 35 and 50 than to prospective purchasers of
Policies on males of other ages or on females.
(2) The Example of Surrender Charges shown in Appendix A is consistent
with the provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Sincerely,
/s/ Gerry Brogla
Gerry Brogla, F.S.A.
Actuary
<PAGE>
Exhibit 7(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life Insurance Company
We consent to the inclusion in Post-Effective Amendment No. 4 to the
Registration Statement of State Farm Life Insurance Company Variable Life
Separate Account on Form S-6 (No. 333-19521) of our report dated February 16,
1999, on our audits of the statutory financial statements of State Farm Life
Insurance Company. We also consent to the reference to our Firm under the
caption "Experts" in the Prospectus.
PricewaterhouseCoopers LLP
Chicago, Illinois
April 23, 1999
<PAGE>
Exhibit 7.(b)
[Letterhead of Sutherland Asbill & Brennan LLP]
April 26, 1999
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the Form S-6 registration statement
for State Farm Life Insurance Company Variable Life Separate Account. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
------------------------
Stephen E. Roth, Esq.
