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As filed with the Securities and Exchange Commission on November 7, 1997
File No. 333-19189
File No. 811-08001
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 1 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 2 [X]
STATE FARM LIFE INSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
STATE FARM LIFE INSURANCE COMPANY
(Name of Depositor)
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (309) 766-0886
Laura P. Sullivan
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b) of Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED:
Individual variable deferred annuity policies.
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CROSS REFERENCE SHEET
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (Statement of Additional
Information) of registration statement of information required by Form N-4
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PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION
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1. Cover Page....................... Cover Page
2. Definitions...................... Index of Terms
3. Synopsis......................... Fee Table; Profile
4. Condensed Financial Information.. How is the performance of the Policy presented?
5. General
(a) Depositor.................... What other information should I know?
(b) Registrant................... What other information should I know?
(c) Portfolio Company............ What are my allocation options under the Policy?
(d) Fund Prospectus.............. Cover Page
(e) Voting Rights................ What other information should I know?
(f) Administrators............... What other information should I know?
6. Deductions and Expenses
(a) General...................... What are the expenses under the Policy?
(b) Sales Load %................. Fee Table; Example
(c) Special Purchase Plan........ How do I purchase a Policy?
(d) Commissions.................. What other information should I know?
(e) Fund Expenses................ Fee Table; Example
(f) Expenses - Registrant........ Fee Table; What are the expenses under the Policy?
(g) Organizational Expenses...... N/A
7. Contracts
(a) Persons with Rights.......... What is the Policy?; What are my annuity options?; How do I invest
in a Policy?; How do I access my money?; What other information
should I know?
(b)(i) Allocation of Purchase
Payments.................. What are my allocation options?
(ii) Transfers................ What are my allocation options?
(iii) Exchanges................ N/A
(c) Changes...................... What other information should I know?
(d) Inquiries.................... What other information should I know?
8. Annuity Period................... What are my annuity options?
9. Death Benefit.................... Does the Policy have a Death Benefit?
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10. Purchases and Contract Value
(a) Purchases.................... How do I purchase a Policy?
(b) Valuation.................... What are my allocation options under the Policy?
(c) Daily Calculation............ What are my allocation options under the Policy?
(d) Underwriter.................. What other information should I know?
11. Redemptions
(a) - By Owners.................. How do I access my money?
- By Annuitant............... What are my annuity options?
(b) Texas ORP.................... N/A
(c) Check Delay.................. N/A
(d) Lapse........................ N/A
(e) Free Look.................... What else should I know about the Policy?
12. Taxes........................... How will my investment in the Policy be taxed?
13. Legal Proceedings............... What other information should I know
about the Policy?
14. Table of Contents for the
Statement of Additional
Information.................... Table of Contents of the Statement of
Additional Information
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PART B
ITEM OF FORM N-4 PART B CAPTION
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15. Cover Page...................... Cover Page
16. Table of Contents............... Table of Contents
17. General Information and
History......................... N/A
18. Services
(a) Fees and Expenses of
Registrant................... N/A
(b) Management Contracts......... N/A
(c) Custodian.................... N/A
Independent Public
Accountant................... Experts
(d) Assets of Registrant......... N/A
(e) Affiliated Persons........... N/A
(f) Principal Underwriter........ Distribution of the Policies
19. Purchase of Securities
Being Offered................... Distribution of the Policies
Offering Sales Load............. N/A
20. Underwriters.................... Distribution of the Policies
21. Calculation of Performance
Data............................ Calculation of Historical Performance Data
22. Annuity Payments................ Annuity Payment Provisions
23. Financial Statements............ Financial Statements
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements and
Exhibits........................ Financial Statements and Exhibits
(a) Financial Statements......... (a) Financial Statements
(b) Exhibits..................... (b) Exhibits
25. Directors and Officers of
the Depositor................... Directors and Officers of the Depositor
26. Persons Controlled By or
Under Common Control
with the Depositor or Persons Controlled By or under Common Control with the Depositor
Registrant...................... or Registrant
27. Number of Contract Owners....... Number of policy owners
28. Indemnification................. Indemnification
29. Principal Underwriters.......... Principal Underwriter
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30. Location of Accounts and
Records......................... Location of Books and Records
31. Management Services............. Management Services
32. Undertakings.................... Undertakings and Representations
Signature Page.................. Signatures
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PROFILE DATED _________________, 1997
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE INSURANCE COMPANY VARIABLE
ANNUITY SEPARATE ACCOUNT
OF STATE FARM LIFE INSURANCE COMPANY
P.O. Box 2307
Bloomington, Illinois
61702-2307
Telephone:(888) 702-2307 (Toll free)
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
KNOW AND CONSIDER BEFORE PURCHASING A POLICY. THE POLICY IS MORE FULLY
DESCRIBED IN THE FULL PROSPECTUS THAT ACCOMPANIES THIS PROFILE. PLEASE READ
THAT PROSPECTUS CAREFULLY.
"We," "us," and "our" refer to State Farm Life Insurance Company.
"You" and "your" refer to the owner of a Policy.
1. WHAT IS THE POLICY? The Policy is a contract between you and us, State
Farm Life Insurance Company. We have designed the Policy to be both an
investment vehicle and a source of lifetime retirement income. You purchase the
Policy by paying an initial premium or by making periodic premium payments, or
both, and you add money when you can. When you want annuity payments to begin,
you choose an "Annuity Date," and we will start sending you payments. There are
also other ways to access your money, each of which is discussed below.
The Policy permits you to allocate premiums to six subdivisions, or
"subaccounts," of the State Farm Life Insurance Company Variable Annuity
Separate Account (the "Variable Account"). Each subaccount invests in a
corresponding investment portfolio (each, a "Fund") of the State Farm Variable
Product Trust. The value of the premiums you allocate to the Funds will
fluctuate depending on market conditions. Therefore, you bear the investment
risk on your Policy value in the Funds. If you allocate premiums to our fixed
account (the "Fixed Account"), we will guarantee principal and interest. The
Policy value you accumulate before the Annuity Date will determine the amount of
annuity payments you receive.
The Policy offers important features. The Funds are professionally managed.
Your earnings generally grow tax-free until withdrawn, but if you withdraw
money before you are 59 1/2 years old, you may have to pay income tax and an
additional 10% IRS tax penalty. When you decide you want to start receiving
annuity payments, you can choose an annuity option that will provide you with a
lifetime income.
2. WHAT ARE MY ANNUITY OPTIONS? When you want to begin receiving annuity
payments, you can choose from four annuity options. If you choose a "life
annuity," you will receive payments as long as the Annuitant lives (for example,
if you have named yourself as the Annuitant, you will receive payments for as
long as you live). If you choose a "life annuity with certain period," you will
receive payments as long as the Annuitant lives or to the end of the certain
period, if longer. If you choose a "joint and last survivor life annuity," you
will receive payments as long as the Annuitant or a second designated person
(such as your spouse) is alive. If you choose a "fixed year annuity," you will
receive payments for the number of years chosen.
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We will use the money you have accumulated under your Policy to provide
annuity payments. We will not deduct a surrender charge on annuitization if the
Policy has been in force at least five Policy Years and if the payments are made
under a "life annuity," "life annuity with certain period," or a "joint and last
survivor life annuity." You tell us how much of your money to apply to fixed
annuity payments and how much to apply to variable annuity payments. Policy
value that you apply to provide fixed annuity payments will be allocated to the
Fixed Account. Under a "life annuity," "life annuity with certain period," or a
"joint and last survivor life annuity," the amount of each annuity payment will
be the same. Under the "fixed years" annuity option, the payments will vary
depending on any additional interest that may be credited on the balance of the
account but will never be less than the minimum payment stated in the Policy.
Policy value that you apply to provide variable annuity payments will be
allocated to the Funds you select, and the amount of each annuity payment will
vary according to the investment performance of those Funds.
3. HOW DO I PURCHASE A POLICY?
You can purchase a Policy through any one of our authorized agents. Under
most circumstances, the minimum initial premium for a non-tax-qualified Policy
is $1,200 and $600 for tax-qualified Policies. (If you participate in one of our
special monthly payment plans, you may pay monthly premiums of $100 or more for
non-tax-qualified plans and $50 or more for tax-qualified plans). The minimum
initial premium requirements are higher if you are age 66 or more. You may pay
additional premiums of at least $50 at any time before the Annuity Date.
4. WHAT ARE MY ALLOCATION OPTIONS?
There are seven different allocation options under the Policy. You can
allocate premiums to one or more of the six "subaccounts" of the Variable
Account. Each subaccount, in turn, invests in a corresponding Fund of the State
Farm Variable Product Trust. The six Funds are:
Large Cap Equity Index Fund Stock and Bond Balanced Fund
Small Cap Equity Index Fund Bond Fund
International Equity Index Fund Money Market Fund
You can also allocate premiums to the Fixed Account. We will pay you
interest on your Policy value in the Fixed Account at an effective annual rate
of at least 3%.
5. WHAT ARE THE EXPENSES UNDER THE POLICY?
Insurance Charges. Once each year, we deduct a $30 Annual Administrative
Fee. We currently waive this charge if the amount of total premiums you have
paid is at least $50,000. We also deduct a daily mortality and expense risk
charge from the assets of the Variable Account, currently equal on an annual
basis to 1.15%.
Surrender Charge. State Farm may deduct a surrender charge when you make a
withdrawal or surrender the Policy, when you take annuity payments, or when
proceeds are paid upon your death (unless you are also the Annuitant). We will
not deduct a surrender charge on annuitization if the Policy has been in force
at least five Policy Years and if the payments are made under a "life annuity,"
"life annuity with certain period," or a "joint and last survivor life
annuity."
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No surrender charge is deducted when a Death Benefit is paid upon the
Annuitant's death, regardless of how many Policy years have elapsed or how the
Death Benefit is paid. The surrender charge is calculated as a percentage of the
amount withdrawn or surrendered. The applicable percentage is 7% in the first
Policy Year, and declines by 1% in each following Policy Year, until it reaches
0% in the eighth Policy Year.
Fund Expenses. There are Fund expenses, which range on an annual basis from
0.36% to 0.75% of the average daily value of your money invested in the Funds.
The following chart is designed to help you understand the expenses that
you will pay under the Policy. The column "Total Annual Insurance
Charges" shows the total of the $30 Annual Administrative Fee (which, for
purposes of the chart, is assumed to be 0.12% of the value of an average policy)
and the 1.15% mortality and expense risk charge. The column "Total Annual Fund
Charges" shows the investment charges for each Fund. The charges shown for each
Fund reflect the fact that the investment adviser to the Funds has agreed to
bear the expenses incurred by a Fund (other than the Stock and Bond Balanced
Fund and the International Equity Index Fund), other than the investment
advisory fee, that exceed 0.10% of such Fund's average daily net assets. 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 limitations
are voluntary and may be terminated by the adviser at any time. The column
"Total Annual Charges" shows the combined total of the Total Annual Insurance
Charges and Total Annual Fund Charges columns. The next two columns show you two
examples of the charges, in dollars, you would pay under a Policy for each
$1,000 you paid when you purchased the Policy. The examples assume that the
average Policy Accumulation Value is $25,000 so that the Annual Administrative
Fee is 0.12% and that your Policy earns 5% annually before charges. For more
information about the expenses under the Policy, refer to the "Fee Table" in the
full prospectus that accompanies this Profile.
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If you surrender
or annuitize All charges,
your Policy at the excluding surrender
end of 1 year you charges, assessed
would pay the over a 10 year
Total Annual Total Annual Total Annual following expenses period
Fund Insurance Charges Fund Charges Charges (1) (2)
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Large Cap Equity Index Fund 1.27% 0.36% 1.63% $89 $197
Small Cap Equity Index Fund 1.27% 0.50% 1.77% $91 $213
International Equity Index
Fund 1.27% 0.75% 2.02% $93 $240
Money Market Fund 1.27% 0.50% 1.77% $91 $213
Bond Fund 1.27% 0.60% 1.87% $92 $224
Stock and Bond Balanced
Fund 1.27% 0.46%/1/ 1.73% $90 $208
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/1/ The investment adviser to the Funds has agreed not to be paid an investment
advisory fee for performing its services for the Stock and Bond Balanced
Fund and has agreed to bear any other expenses incurred by the Stock and
Bond Balanced Fund. (The investment adviser may change this at any time.)
However, the investment adviser will receive investment advisory fees from
managing the underlying Funds in which the Stock and Bond Balanced Fund
invests -- the Large Cap Equity Index Fund and the Bond Fund. 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 can be
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 above. The underlying funds will also incur other expenses of
up to 0.10% (which is also reflected in the table above).
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6. HOW WILL MY INVESTMENT IN THE POLICY BE TAXED?
You should consult a qualified tax adviser with regard to your Policy.
Generally, taxation of earnings under variable annuities is deferred until
amounts are withdrawn and distributions made. The deferral of taxes on earnings
under variable annuity policies is designed to encourage long-term personal
savings and supplemental retirement plans. The taxable portion of a withdrawal
or distribution is taxed as ordinary income.
7. HOW DO I ACCESS MY MONEY?
Prior to the Annuity Date, if you want to take money out of your Policy,
you can choose among several different options. You can withdraw part of your
money. You can surrender the Contract, taking the proceeds as a single lump sum
payment or applying the proceeds to an annuity option. You can also take
withdrawals using our systematic withdrawal program. After the Annuity Date, if
you have selected the "fixed year" annuity option, you may request withdrawals.
Prior to the Annuity Date, a surrender charge may apply to withdrawals and
surrenders. The amount of the surrender charge ranges from 7% of the amount
withdrawn or surrendered in the first Policy Year to 0% in the eighth Policy
Year. Withdrawals and surrenders may be subject to income tax and to a tax
penalty.
8. HOW IS THE PERFORMANCE OF THE POLICY PRESENTED?
As of the date of this Profile, neither the Subaccounts nor the Funds
have commenced operations. Therefore, no performance data is presented.
9. DOES THE POLICY HAVE A DEATH BENEFIT?
The Policy offers a minimum Death Benefit if the Annuitant dies before the
Annuity Date. The amount of the Death Benefit will be the greater of (1) the sum
of all premiums paid less any withdrawals and less any applicable surrender
charges deducted, or (2) the value of your Policy. Both amounts will be
determined as of the date we receive due proof of death.
10. WHAT OTHER INFORMATION SHOULD I KNOW?
The Policy has several additional features that you may be interested in,
including the following.
FREE LOOK RIGHT. You should know that you have a "free-look right"; that
is, the right to return the Policy to us at our Home Office or to an authorized
State Farm agent and have us cancel the Policy within a certain number of days
(usually 10 days from the date you receive the Policy, but some states require
different periods). If you exercise this right, we will cancel the Policy as of
the day of mailing or delivery and send you a refund equal to the greater of (1)
the premiums paid under the Policy during the free-look period, or (2) your
Policy value (without the deduction of a surrender charge).
TRANSFERS. On or before the Annuity Date, you may transfer Policy value
from one Subaccount to another Subaccount(s) or to the Fixed Account. The
minimum amount of Policy value that may be transferred from a Subaccount is
$250, or, if less, the entire Policy value in that
4
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Subaccount. You may also transfer Policy value from the Fixed Account to
another Subaccount(s), but only once each Policy year and only during the 30-day
period following the end of each Policy year. The maximum amount that may be
transferred from the Fixed Account is generally the greater of 25% of the Policy
value in the Fixed Account or $1,000.
After the Annuity Date the only type of transfer permitted is a transfer of
annuity units from one Subaccount to another Subaccount. This is limited to four
transfers per year and only applies if variable annuity payments have been
elected.
DOLLAR-COST AVERAGING. Our dollar-cost averaging program permits you to
systematically transfer a set dollar amount from the Subaccount investing in the
Money Market Fund or the Subaccount investing in the Bond Fund to any
Subaccounts and/or the Fixed Account, subject to certain limitations. The
dollar-cost averaging method of investment is designed to reduce the risk of
making purchases only when the price of units in a Subaccount is high.
PORTFOLIO REBALANCING PROGRAM. The Portfolio Rebalancing program will
reallocate on a periodic basis your Policy value among the Subaccounts to return
to the percentages you have chosen. Certain limitations apply.
SYSTEMATIC WITHDRAWAL PROGRAM. Our systematic withdrawal program provides
an automatic monthly, quarterly, semi-annual or annual payment to you from the
amounts you have accumulated in the Subaccounts and/or the Fixed Account.
Surrender charges may apply and certain restrictions apply.
11. HOW CAN I MAKE INQUIRIES?
If you need further information about the Policy, please write us at our
home office, call us at (888) 702-2307 (Toll free), or contact an authorized
State Farm Agent. The address of our home office is:
State Farm Life Insurance Company
P.O. Box 2307
Bloomington, IL 61702-2307
Telephone: (888) 702-2307 (Toll free)
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PROSPECTUS DATED ___________________, 1997
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
OF STATE FARM LIFE INSURANCE COMPANY
P.O. Box 2307
Bloomington, Illinois 61702-2307
Telephone: (888) 702-2307 (Toll free)
UNLESS OTHERWISE INDICATED, THIS PROSPECTUS DESCRIBES THE OPERATION OF THE
POLICY BEFORE THE ANNUITY DATE. DEFINITIONS OF CERTAIN TERMS USED IN THIS
PROSPECTUS MAY BE FOUND BY REFERRING TO THE INDEX OF TERMS.
This prospectus describes an individual variable deferred annuity policy
(the "Policy") offered by State Farm Life Insurance Company ("State Farm," "we,"
"us," or "our"). The Policy is designed to be both an investment vehicle and a
source of lifetime retirement income. The purchaser of a Policy (the "Owner,"
"you," or "your") can purchase the Policy by making a minimum initial premium
payment, by making periodic payments under a special monthly purchase plan, or
both. The Owner then determines the amount and timing of additional premium
payments.
The Owner may allocate premiums and transfer Policy Accumulation Value to
the State Farm Life Insurance Company Variable Annuity Separate Account (the
"Variable Account") and also to State Farm's general account (the "Fixed
Account"), within certain limits. The Variable Account is divided into
subaccounts (each, a "Subaccount"). Each Subaccount invests in a corresponding
investment portfolio (each, a "Fund") of State Farm Variable Product Trust (the
"Trust"). The Funds currently available are the Large Cap Equity Index Fund,
Small Cap Equity Index Fund, International Equity Index Fund, Bond Fund, Money
Market Fund, and Stock and Bond Balanced Fund. The accompanying prospectus for
the Trust describes each of the Funds, including the risks of investing in each
Fund, and provides other information about the Trust.
The Policy provides for a Cash Surrender Value. Because this value is
based on the performance of the Funds, to the extent of allocations to the
Variable Account, there is no guaranteed Cash Surrender Value or guaranteed
minimum Cash Surrender Value. On any given day, the Cash Surrender Value could
be more or less than the premiums paid. The Policy also permits withdrawals,
within certain limits. The Policy provides additional benefits, including four
annuity options, a minimum Death Benefit upon the Annuitant's death, and dollar
cost averaging, portfolio rebalancing and systematic withdrawal programs.
This prospectus sets forth basic information about the Policy and the
Variable Account that a prospective purchaser ought to know before purchasing a
Policy. This prospectus should be read carefully and retained for future
reference. A prospectus for the State Farm Variable Product Trust must accompany
this prospectus and should be read in conjunction with this prospectus.
Additional information about the Policy and the Variable Account is
contained in the Statement of Additional Information, which has been filed with
the Securities and Exchange Commission. The Statement of Additional Information
is dated the same as this prospectus and is incorporated herein by reference.
The Table of Contents for the Statement of Additional Information is on page ___
of this prospectus. You may obtain a copy of the Statement of Additional
Information free of charge by writing to or calling State Farm at the address or
phone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED
BY THE FDIC, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; THEY ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
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<S> <C>
INDEX OF TERMS..................................................................
FEE TABLE.......................................................................
EXAMPLE.........................................................................
1. What is the Policy?...................................................
2. What are my annuity options?..........................................
3. How do I purchase a Policy?...........................................
Applying for a Policy............................................
Initial Premium..................................................
Issuance of a Policy.............................................
Exchange Privilege: Variable Deferred Annuity....................
Free-Look Right to Cancel Policy.................................
Making Additional Premium Payments...............................
4. What are my allocation options?.......................................
Premium Allocations..............................................
Subaccount Options...............................................
Fixed Account Option.............................................
Transfers........................................................
Dollar-Cost Averaging............................................
Portfolio Rebalancing Program....................................
Policy Accumulation Value........................................
Cash Surrender Value.............................................
Subaccount Policy Accumulation Value
Accumulation Unit Values.........................................
Net Investment Factor............................................
Fixed Policy Accumulation Value..................................
5. What are the expenses under the Policy?...............................
Surrender Charge.................................................
Annual Administrative Fee........................................
Transfer Processing Fee..........................................
Mortality and Expense Risk Charge................................
Fund Expenses....................................................
6. How will my investment in the Policy be taxed?........................
Introduction.....................................................
Tax Status of the Policies.......................................
Tax Treatment of Annuities.......................................
Taxation of Non-Qualified Policies...............................
Taxation of Qualified Policies...................................
Other Tax Consequences...........................................
7. How do I access my money?.............................................
Withdrawals......................................................
Surrenders.......................................................
Systematic Withdrawal Program....................................
Requesting Payments and Telephone Transactions...................
8. How is the performance of the Policy presented?.......................
9. Does the Policy have a Death Benefit?.................................
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10. What other information should I know?.................................
State Farm and the Variable Account..............................
Modification.....................................................
Distribution of the Policies.....................................
Legal Proceedings................................................
Reports to Policy Owners.........................................
Financial Statements.............................................
11. How do I make inquiries?..............................................
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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INDEX OF TERMS
ACCUMULATION UNIT - A unit of measure used to calculate Variable Policy
Accumulation Value.
ACCUMULATION UNIT VALUE - The value of a Subaccount's Accumulation Unit. A
Subaccount's Accumulation Unit Value varies to reflect the performance of the
underlying Fund, and may increase or decrease from Valuation Day to Valuation
Day.
ANNUITANT - The person whose life determines the Annuity Payments payable under
the Policy and whose death determines the Death Benefit.
ANNUITY DATE - You may choose this date, which can be no later than the Final
Annuity Date. If a Death Benefit is payable and an annuity option is chosen, the
Annuity Date will be the date we receive due proof of the Annuitant's death.
Payment intervals start on this date. The first annuity payment is at the end
of the first payment interval.
CASH SURRENDER VALUE - The Policy Accumulation Value less any applicable
Surrender Charge and less any applicable Annual Administrative Fee.
CODE - The United States Internal Revenue Code, as amended.
DOLLARS - Any money we pay, or which is paid to us, must be in United States
dollars.
FINAL ANNUITY DATE - The Policy Anniversary when the Annuitant is age 95 (85 in
Pennsylvania).
FIXED ACCOUNT - Part of our General Account to which Policy Accumulation Value
may be transferred or premium payments may be allocated under a Policy.
FIXED ANNUITY PAYMENT - An annuity payment supported by our General Account.
Under a "life annuity," "life annuity with certain period," or a "joint and last
survivor life annuity," the amount of each annuity payment will be the same.
Under the "fixed years" annuity option, the payments will vary depending on any
additional interest that may be credited on the balance of the account but will
never be less than the minimum stated in the Policy.
FIXED POLICY ACCUMULATION VALUE - The Policy Accumulation Value in the Fixed
Account.
GENERAL ACCOUNT - Our assets not allocated to the Variable Account or any other
separate account.
HOME OFFICE - P.O. Box 2307, Bloomington, Illinois 61702-2307. Telephone:
(888) 702-2307.
INITIAL PREMIUM PAYMENT - The amount shown in the Policy that was paid on the
Policy Date.
NET ASSET VALUE PER SHARE - The value per share of any Fund on any Valuation
Day. The method of computing the Net Asset Value Per Share is described in the
prospectus for the Trust.
PAYEE - If the Annuitant dies prior to the Annuity Date and a Death Benefit is
payable, the beneficiaries shown in the application, unless changed. If you
cash surrender the Policy, the persons that you have named. A payee can be
other than a natural person only if we agree.
POLICY ACCUMULATION VALUE - The sum of the Variable Policy Accumulation Value
and the Fixed Policy Accumulation Value.
POLICY DATE - The effective date of this Policy.
-1-
<PAGE>
POLICY MONTH, YEAR, OR ANNIVERSARY - Each Policy Month, Year, or Anniversary is
measured from the Policy Date.
REQUEST - A written request signed by the person making the request. Such
request must be sent to and received by us and be in a form acceptable to us.
We may, in our sole discretion, accept telephone requests in connection with
certain transactions, in accordance with rules and procedures established by us.
SEC - The United States Securities and Exchange Commission.
SUBACCOUNT - A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT POLICY ACCUMULATION VALUE - The Policy Accumulation Value in a
Subaccount.
SUCCESSOR OWNER - Your Successor Owner is named in the application if you are
not the Annuitant.
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. During 1997,
the Home Office is closed on the Friday after Thanksgiving and the day after
Christmas Day. During 1998, the Home Office is closed on the Friday after
Thanksgiving and the day before 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.
VARIABLE ACCOUNT - A separate account of ours consisting of Subaccounts to which
premium payments may be allocated or Policy Accumulation Value may be
transferred.
VARIABLE ANNUITY PAYMENT - An annuity payment that may vary in amount from one
payment to the next with the investment experience of one or more Subaccounts
you have chosen to support such payments.
VARIABLE POLICY ACCUMULATION VALUE - The sum of all Subaccount Policy
Accumulation Values.
-2-
<PAGE>
FEE TABLE
The purpose of this Fee Table is to assist you in understanding the expenses
that you will pay directly or indirectly when you invest in the Policy.
POLICY OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Surrender Charge/1/ % of Amount
Year Withdrawn
---- -----------
<S> <C>
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8
and over 0%
Transfer Processing Fee No charge for first 12 transfers in a Policy
Year; thereafter, $25 fee per
transfer may be charged
Annual Administrative Fee $30
(waived if total premiums paid are
at least $50,000)
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of Variable Account Value)
Mortality and Expense Risk Charge 1.15%/2/
</TABLE>
- ----------------------------
/1/ After the first Policy Year, you may withdraw a portion of your Policy
Accumulation Value without incurring a surrender charge. This amount is called
the "Free Withdrawal Amount." The Free Withdrawal Amount is equal to 10% of your
Policy Accumulation Value as of the previous Policy Anniversary. If the entire
10% is not withdrawn in a particular Policy Year, the unused Free Withdrawal
Amount does not carry over to the next Policy Year. The surrender charge may be
waived in certain additional circumstances. We cannot deduct more than 8 1/2% of
the total premiums you have paid under the Policy. See "Surrender Charge," page
___.
/2/ The amount shown in the Fee Table above reflects the mortality and
expense risk charge currently charged. The maximum mortality and expense risk
charge that we can charge is 1.25%. See "Mortality and Expense Risk Charge,"
page __.
-3-
<PAGE>
TABLE A
FUND ANNUAL EXPENSES (as a percentage of average daily net assets)
The investment advisory fees shown below are the actual amounts expected to be
incurred in the current fiscal year for each of the Funds, other than the Stock
and Bond Balanced Fund. (The expenses of the Stock and Bond Balanced Fund are
shown in Table B.) Other Expenses are based on estimated amounts for the current
fiscal year and 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. 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 can be
eliminated by the investment adviser at any time.
<TABLE>
<CAPTION>
===============================================================================================
Other Expenses Total Annual
Investment (after expense Expenses (after
Fund Advisory Fees limitation)/3/ expense limitation)/3/
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Cap Equity Index Fund 0.26% 0.10% 0.36%
Small Cap Equity Index Fund 0.40% 0.10% 0.50%
International Equity Index Fund 0.55% 0.20% 0.75%
Bond Fund 0.50% 0.10% 0.60%
Money Market Fund 0.40% 0.10% 0.50%
===============================================================================================
</TABLE>
/3/ Absent this expense limitation, estimated Other Expenses for the Large Cap
Equity Index Fund, Small Cap Equity Index Fund, International Equity Index Fund,
Bond Fund, and Money Market Fund would be 0.11%, 0.13%, 0.28%, 0.25%, and 0.35%,
respectively.
TABLE B
ANNUAL EXPENSES OF STOCK AND BOND BALANCED FUND (as a percentage of average
daily net assets)
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 can be 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.
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. The amounts shown for
these Other Expenses reflect the fact that the investment adviser to the Funds
has agreed to bear the expenses incurred by each underlying 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. This expense limitation
arrangement is voluntary and can be eliminated by the investment adviser at any
time.
<TABLE>
<CAPTION>
===============================================================================================
Other Expenses Total Annual
of Stock and Expenses of
Other Expenses of Bond Balanced Stock and Bond
Investment Advisory Underlying Funds Fund Balanced Fund
Fund Fees of Underlying (after expense (after expense (after expense
Funds limitation) limitation)/4/ limitation)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock and
Bond Balanced
Fund 0.36% .10% 0.0% 0.46%
===============================================================================================
</TABLE>
/4/ Absent this expense arrangement, estimated Other Expenses for the Stock
and Bond Balanced Fund would be 0.43%.
EXAMPLE
The purpose of the following Example is to demonstrate the expenses that
you would pay on a $1,000 investment in the Variable Account. The Example is
calculated based on the fees and charges shown in the tables above. For a more
complete description of these expenses, see "What are the expenses under the
Policy?" beginning on page ___ of this prospectus, and see the prospectus for
the Trust. The Example assumes that the average Policy Accumulation Value is
$25,000, so that the Annual Administration Fee is 0.12%. The tables above and
the Example do not reflect transfer processing fees. You might incur transfer
processing fees if you make more than twelve transfers in a Policy Year. See
"Transfer Processing Fee," page ___. The Example assumes you have invested all
your money in the Variable Account.
<TABLE>
<CAPTION>
=======================================================
You would pay the following
expenses on a $1,000 initial
premium, assuming a 5% annual 1. If you surrender or 2. If you do not
return on assets and the charges annuitize your Policy at surrender or annuitize
and expenses listed in the Fee the end of the stated your Policy at the end of
Table above: time period: the stated time period:
------------------------------------------------------------------------------------------
Fund 1 Year 3 Years 1 Year 3 Years
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Large Cap Equity Index Fund $ 89 $ 102 $ 17 $ 53
Small Cap Equity Index Fund $ 91 $ 107 $ 18 $ 57
International Equity Index Fund $ 93 $ 114 $ 21 $ 65
Bond Fund $ 92 $ 110 $ 19 $ 60
Money Market Fund $ 91 $ 107 $ 18 $ 57
Stock and Bond Balanced Fund $ 90 $ 105 $ 18 $ 56
==========================================================================================
</TABLE>
The Example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual rate of return is hypothetical and should not be considered a
representation of past or future annual returns, which may be greater or less
than this assumed rate.
-4-
<PAGE>
1. WHAT IS THE POLICY?
The Policy is an individual variable deferred annuity policy offered by us,
State Farm Life Insurance Company. Under the terms of the Policy, we promise to
pay you annuity payments after the Annuity Date. Until the Annuity Date, you may
pay premiums under the Policy, and you will generally not be taxed on increases
in the value of your Policy as long as you do not take distributions. When you
use the Policy in connection with a tax-qualified retirement plan, federal
income taxes may be deferred on your premium payments, as well as on increases
in the value of your Policy. See "How will my investment in the Policy be
taxed?," page __. The Policy may not be available in all states.
When you pay premiums, you can allocate those premiums to one or more of
the six subdivisions of the Variable Account, known as "Subaccounts." Premiums
allocated to a Subaccount will be invested solely in a Fund, as you direct. Your
Policy value in a Subaccount, called the "Subaccount Policy Accumulation Value,"
will vary according to the performance of the corresponding Fund. Depending on
market conditions, your Subaccount Policy Accumulation Value in each Subaccount
could increase or decrease. The total of the Subaccount Policy Accumulation in
each Subaccount is called the Variable Policy Accumulation Value.
You can also allocate premiums to our Fixed Account. Your Policy value in
the Fixed Account is called the Fixed Policy Accumulation Value. When you
allocate premium to the Fixed Account, we guarantee principal and interest. See
"Fixed Account Option," page ___.
You can request that we transfer Policy Accumulation Value from one account
to another, subject to certain conditions. See "Transfers," page __.
2. WHAT ARE MY ANNUITY OPTIONS?
You choose the Annuity Date when you want annuity payments to begin. The
Annuity Date must come on or before the Final Annuity Date, which is the Policy
Anniversary when the Annuitant is age 95 (85 in Pennsylvania). You select an
annuity option from those listed below, and indicate whether you want your
annuity payments to be fixed or variable or a combination of fixed and variable.
If an annuity option for the Cash Surrender Value is not chosen by the Final
Annuity Date, a "life annuity" (described below) will be used on that date. On
the Annuity Date, the Cash Surrender Value under the Policy will be used to
provide annuity payments. If your Policy has been in force for at least five
Policy Years, and you choose a "life annuity," "life annuity with certain
period," or a "joint and last survivor life annuity," no surrender charge will
be deducted. Unless you request otherwise, any money that you have invested in
the Subaccounts will be used to provide variable annuity income, and any money
that you have invested in the Fixed Account will be used to provide a fixed
annuity income.
Your first annuity payment, whether fixed or variable, will be based on the
amount of proceeds applied under the annuity option you have selected and on
"annuity purchase rates" based on the Annuitant's age and sex and, if
applicable, upon the age and sex of a second
-5-
<PAGE>
designated person. The annuity purchase rate that we apply will never be lower
than the rate shown in your Policy.
If you have told us you want fixed annuity payments, under a "life
annuity," "life annuity with certain period," or a "joint and last survivor life
annuity," the amount of each annuity payment will be the same. Under the "fixed
years" annuity option, the payments will vary depending on any additional
interest that may be credited on the balance of the account but will never be
less than the minimum payment stated in the Policy. If you told us you want
variable annuity payments, the amount of variable annuity payments will vary
according to the investment performance of the Funds you have selected to
support your variable annuity payments.
You can choose either 1, 3, 6, or 12 month intervals to receive annuity
payments. Payment intervals start on the Annuity Date. The first annuity payment
is made at the end of the first payment interval. If any payment would be less
than $100, we may change the payment interval to the next longer interval. If on
the Annuity Date the payment for the 12 month interval is less than $100, we may
pay the Cash Surrender Value on that date in one sum.
We may require satisfactory proof that the Annuitant is living when each
annuity payment is due. If proof is required, payments will stop until such
proof is given. If any payment is made by check and the Annuitant personally
endorses the check on or after the date on which such payment is due, no other
proof will be required.
If you have selected the "fixed years" annuity option, you may request
withdrawals at any time.
The available annuity options are:
. OPTION 1 - LIFE ANNUITY. Payments will be made to you at the end of
each payment interval as long as the Annuitant lives.
. OPTION 2 - LIFE ANNUITY WITH CERTAIN PERIOD. Payments will be made to
you at the end of each payment interval as long as the Annuitant lives
or to the end of the certain period, if longer. The certain period can
be any number of years from 5 to 20. You must choose the number of
years if you choose this option.
. OPTION 3 - JOINT AND LAST SURVIVOR LIFE ANNUITY. Payments will be paid
to you at the end of each payment interval as long as the Annuitant or
a second designated person is alive. You must name the second person
on or before the Annuity Date.
. OPTION 4 - FIXED YEARS. Payments will be made to you at the end of
each payment interval for the number of years chosen. You must choose
the number of years from 5 to 30.
You may elect State Farm's "Additional Deposit Rider." This feature is
available only in connection with certain tax-qualified Policies. The Additional
Deposit Rider permits you to make a single premium payment at the time you
select an Annuity Option in order to increase the amount of payment under the
annuity option you select. There is an additional charge deducted from the
premium payment.
-6-
<PAGE>
3. HOW DO I PURCHASE A POLICY?
APPLYING FOR A POLICY. To purchase a Policy, you must complete an
application and submit it to an authorized State Farm agent. You must pay an
initial premium at least equal to the minimum required and/or make periodic
payments under a special monthly payment plan. See "Initial Premium," below. We
reserve the right not to accept an application for any lawful reason.
INITIAL PREMIUM. The Policy may be purchased to use in connection with tax-
qualified plans, or it may be purchased on a non-tax-qualified basis. To
purchase a non-tax-qualified Policy, you may not be more than 85 years old on
the Policy Date. (You may not be more than 75 years old in Pennsylvania.) To
purchase a tax-qualified Policy, you must be at least 16 years old and not older
than 70 years old on the Policy Date. You must also make a minimum initial
premium payment or make periodic payments under a special monthly payment
plan, depending on how old you are and whether you are purchasing a tax-
qualified or non-tax-qualified Policy, as shown in the following table:
<TABLE>
<CAPTION>
=========================================
Issue Age 0-65 Issue Age
66 or more
-----------------------------------------------------------------------------------
<S> <C> <C>
Minimum initial premium required for $1,200 ($100 $5,000
non-tax-qualified policy per month for
special monthly
payment plan)
-----------------------------------------------------------------------------------
Minimum initial premium required for $600 ($50 per $25,000
tax-qualified policy month for
special monthly
payment plan)
===================================================================================
</TABLE>
ISSUANCE OF A POLICY. Once we receive your initial premium and your
completed application at our Home Office, we will usually issue your Policy
within two Valuation Days. However, if you did not give us all the information
we need, we will try to contact you to get the additional needed information. If
we cannot complete the application within five Valuation Days, we will either
send your money back or obtain your permission to keep your money until we
receive all the necessary information. The Policy Date of your Policy will be
the application date, except when the application date is the 29th, 30th, or
31st of any month. The Policy Date of these Policies will be the 28th of that
month.
EXCHANGE PRIVILEGE: VARIABLE DEFERRED ANNUITY. State Farm will permit the
policy owner of a State Farm deferred annuity contract which has not yet been
annuitized to exchange such contract for a Variable Deferred Annuity. If a State
Farm deferred annuity is exchanged for a State Farm Variable Deferred Annuity,
State Farm will waive any surrender charge on the deferred annuity. State Farm
can change this program at any time.
-7-
<PAGE>
FREE-LOOK RIGHT TO CANCEL POLICY. During your "free-look" period, you may
cancel your Policy. 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 method to State Farm or to
an authorized State Farm agent. You will receive a refund equal to the greater
of: (i) the premium payments made under the Policy during the free-look period;
or (ii) the Policy Accumulation Value (without the deduction of a surrender
charge) on the date the Policy is received at our Home Office (if the Policy is
returned to the Home Office) or by our agent (if the Policy is returned to the
agent) for cancellation. Immediately after mailing or delivery, the Policy will
be deemed void from the beginning.
MAKING ADDITIONAL PREMIUM PAYMENTS. You may pay additional premiums of $50
or more at any time before the Annuity Date. You may arrange for monthly
premiums to be paid via automatic deduction from your checking account. Any
premium received after the Policy Date will be credited to the Policy as of the
Valuation Day on which it is received at our Home Office. Premiums received on a
non-Valuation Day will be deemed received on the next succeeding Valuation Day.
We reserve the right to refuse a premium if total premiums paid in a Policy Year
would exceed $30,000.
4. WHAT ARE MY ALLOCATION OPTIONS?
PREMIUM ALLOCATIONS. When you apply for a Policy, you specify the
percentage of premium to be allocated to each Subaccount of the Variable Account
and to be allocated to the Fixed Account. You can change the allocation
percentages at any time by sending a satisfactory written or telephone request
to our Home Office (provided we have your telephone authorization on file). The
change will apply to all premiums received at the same time or after we receive
your request. Premium allocations must be in percentages totaling 100%, and each
allocation percentage must be a whole number.
Until the free-look period expires, all premiums are allocated to the Fixed
Account. At the end of this period, Policy Accumulation Value is transferred to
the Subaccounts and/or remains in the Fixed Account based on the premium
allocation percentages in effect at the time of the transfer. For this purpose,
we assume your free-look period begins 10 days after we issue your Policy. The
transfer from the Fixed Account to the Subaccounts upon the expiration of the
free-look period does not count as a transfer for any other purposes under the
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 as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). State Farm Investment Management Corp. ("SFIM") serves as the
investment adviser of the Trust and conducts the business and affairs of 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, Small
Cap, and International Equity Index Funds. The investment objective(s) of each
of the Funds in which Subaccounts invest are summarized below. There is no
assurance that these objectives will be met.
The LARGE CAP EQUITY INDEX FUND seeks to match the performance of the
Standard & Poor's Composite Index of 500 Stocks. This Fund will pursue its
objective by investing primarily on a capitalization-weighted basis in the
securities comprising the index.
-8-
<PAGE>
The SMALL CAP EQUITY INDEX FUND seeks to match the performance of the
Russell 2000 Small Stock Index. This Fund will pursue its objective by investing
primarily in a representative sample of stocks found in the index.
The INTERNATIONAL EQUITY INDEX FUND seeks to match the performance of the
Morgan Stanley Capital International Europe, Australia and Far East Free Index.
This Fund will pursue its objective by investing primarily in a representative
sample of stocks found in the index.
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 high
quality debt securities.
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. AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT. 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 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 Bond Fund.
Further information about the Funds is contained in the accompanying prospectus
for the Trust, which you should read in conjunction with this prospectus. See
also "The State Farm Fund," page __.
FIXED ACCOUNT OPTION. The Fixed Account is part of our General Account. It
is not a separate account. Amounts allocated to the Fixed Account are credited
with interest for the period of allocation at rates determined in our sole
discretion, but in no event will interest credited on these amounts be less than
an effective annual rate of 3% per year, compounded annually. The current
interest rate is the Guaranteed Interest Rate plus any excess interest rate. The
current interest rate and the guarantee period for that rate are determined
periodically. Each guarantee period will be at least one year. You assume the
risk that interest credited thereafter may not exceed the guaranteed rate of 3%
per year. See "State Farm's Fixed Account Option," page __. There are
significant limits on your right to transfer Policy Accumulation Value from the
Fixed Account. See "Transfers," below.
TRANSFERS. Prior to the earlier of the Annuity Date or the date the
Annuitant dies, you may transfer Policy Accumulation Value from and among the
Subaccounts at any time after the end of the free-look period. The minimum
amount of Policy Accumulation Value that may be transferred from a Subaccount is
$250, or, if less, the entire Policy Accumulation Value held in that Subaccount.
Fixed Policy Accumulation Value may be transferred from the Fixed Account to a
Subaccount or Subaccounts only once each Policy Year and only during the 30-day
period
-9-
<PAGE>
following the end of each Policy Year. Unused transfers from the Fixed Account
do not carry over to the next Policy Year. The maximum transfer amount is the
greater of 25% of the Fixed Policy Accumulation Value 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 Accumulation Value held in the Fixed Account.
After the Annuity Date, you may request to transfer annuity units from one
Subaccount to another Subaccount. This is limited to four transfers per year and
only if variable annuity payments have been elected.
Transfer requests may be made by satisfactory written or telephone request
if we have your written telephone authorization on file. A transfer will take
effect on the Valuation Day the request is received at the Home Office. Requests
received on a non-Valuation Day will be deemed received on the next succeeding
Valuation Day. State Farm may, however, defer transfers under the same
conditions that we may delay paying proceeds. See "Requesting Payments and
Telephone Transactions," page __. There is no limit on the number of transfers
from and among the Subaccounts. However, State Farm reserves the right to impose
a $25 transfer processing fee on each transfer in a Policy Year in excess of
twelve. For purposes of assessing the transfer processing 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 Policy 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
Accumulation 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 before the Annuity Date by sending us a written request. The minimum
transfer amount is $100 from the Money Market Subaccount or the Bond Subaccount,
as applicable. Once elected, it remains in effect from the date we receive your
request until the Annuity Date or 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. You
can request changes in writing 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
-10-
<PAGE>
to return to the percentages specified in your allocation instructions. You may
elect to participate in this program at any time before the Annuity Date by
sending a written request to our Home Office. Your request will be effective on
the Valuation Day on which we receive it. Requests received on a non-Valuation
Day will be deemed received on the next succeeding Valuation Day. Your
percentage allocations must be in whole percentages. You may start and stop
portfolio rebalancing at any time and make changes to your allocations by
written or telephone request, if we have your telephone authorization on file.
There is no additional charge for using this program. 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 program at any
time and for any reason. Portfolio rebalancing does not guarantee a profit or
protect against loss. Amounts in the Fixed Account may not be used in connection
with the portfolio rebalancing program. The portfolio rebalancing program is not
available while you are participating in the dollar-cost averaging program.
POLICY ACCUMULATION VALUE. The Policy Accumulation Value serves as a
starting point for calculating certain values under a Policy. It is the
aggregate of the Subaccount Policy Accumulation Values and the Fixed Policy
Accumulation Value credited to the Policy. The Policy Accumulation Value is
determined first on the Policy Date and thereafter on each Valuation Day. The
Policy Accumulation Value will vary to reflect the performance of the
Subaccounts to which premiums have been allocated, interest credited on amounts
allocated to the Fixed Account, charges, transfers, withdrawals, and full
surrenders. It may be more or less than premiums paid.
CASH SURRENDER VALUE. The Cash Surrender Value on a Valuation Day is the
Policy Accumulation Value, reduced by any applicable surrender charge that would
be deducted if the Policy were surrendered that day and any applicable Annual
Administrative Fee.
SUBACCOUNT POLICY ACCUMULATION VALUE. On any Valuation Day, the Subaccount
Policy Accumulation Value in a Subaccount is equal to the number of Accumulation
Units attributable to that Subaccount multiplied by the Accumulation Unit Value
for that Subaccount for that Valuation Day. When you allocate an amount to a
Subaccount, either by premium allocation or transfer of Policy Accumulation
Value, your Policy is credited with Accumulation Units in that Subaccount. The
number of Accumulation Units is determined by dividing the dollar amount
allocated or transferred to the Subaccount by the Subaccount's Accumulation Unit
Value for that Valuation Day. Similarly, when an amount is transferred from a
Subaccount, a withdrawal is taken from the Subaccount, or the Policy is
surrendered, the number of Accumulation Units is determined by dividing the
dollar amount transferred, withdrawn or surrendered by the Subaccount's
Accumulation Unit Value for that Valuation Day.
ACCUMULATION UNIT VALUES. A Subaccount's Accumulation Unit Value is the
value of its Accumulation Unit. Accumulation Unit Values vary to reflect the
investment experience of the underlying Fund, and may increase or decrease from
one Valuation Day to the next. The Accumulation Unit Value for each Subaccount
was arbitrarily set at $10 when the Subaccount was established. For each
Valuation Period after the date of establishment, the Accumulation Unit Value is
determined by multiplying the Accumulation Unit Value for a Subaccount for the
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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 used 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 ACCUMULATION VALUE. The Fixed Policy Accumulation Value on any
date after the Policy Date is equal to: (1) the sum of the following amounts in
the Fixed Account: premium allocations, Policy Accumulation Value transfers to
the Fixed Account, and interest accruals (if the date is a Policy Anniversary it
also includes any dividend payments); minus (2) the sum of any withdrawals and
any applicable surrender charges or transfers to the Fixed Account including any
applicable transfer processing fee from the Fixed Account, as well as the
applicable portion of the Annual Administrative Fee.
5. WHAT ARE THE EXPENSES UNDER THE POLICY?
State Farm deducts the charges described below. The charges are for the
services and benefits provided, costs and expenses incurred and risks assumed by
State Farm under or in connection with the Policies. Services and benefits
provided by State Farm include: the ability for Owners to make withdrawals and
surrenders under the Policy; the Annuitant's Death Benefit; the available
investment options, including dollar cost averaging, portfolio rebalancing, and
systematic withdrawal programs; administration of the annuity options available
under the Policy; and the distribution of various reports to Owners. Costs and
expenses incurred by State Farm include those associated with various overhead
and other expenses associated with providing the services and benefits provided
by the Policy, sales and marketing expenses, and other costs of doing business.
Risks assumed by State Farm include the risks that Annuitants may live for a
longer period of time than estimated when the annuity factors under the Policy
were established, the amount of the Annuitant's Death Benefit will be greater
than Policy Accumulation Value, and the risks that the costs of providing the
services and benefits under the Policies will exceed the charges deducted.
SURRENDER CHARGE
If you make a withdrawal or surrender the Policy during the first seven
Policy Years, State Farm may deduct a surrender charge calculated as a
percentage of the amount withdrawn or surrendered. The applicable percentage is
7% in the first Policy Year, and declines by 1% in each following Policy Year,
until it reaches 0% in the eighth Policy Year. We may also deduct a surrender
charge when you take annuity payments or when proceeds are paid upon the Owner's
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death (unless the Owner is also the Annuitant). However, we will not deduct a
surrender charge on annuitization if the Policy has been in force at least five
Policy Years and if the payments are made under a "life annuity," "life annuity
with certain period," or a "joint and last survivor life annuity." See "What are
my annuity options?," page __. No surrender charge is deducted when a Death
Benefit is paid upon the Annuitant's death, regardless of how many Policy Years
have elapsed or how the Death Benefit is paid. See "Does the Policy have a Death
Benefit?," page __.
If the Policy is surrendered, the surrender charge is deducted from the
Policy Accumulation Value in determining the Cash Surrender Value. If a
withdrawal is taken, the Surrender Charge is deducted from the Policy
Accumulation Value remaining after you have been paid the amount requested, and
the surrender charge will be calculated as the applicable percentage of the
total amount withdrawn. Unless you specify otherwise, we will deduct the
surrender charge from each Subaccount and the Fixed Account pro-rata. Each year
after the first Policy Year, you may withdraw a "Free Withdrawal Amount" without
incurring a surrender charge. For a table of surrender charges and a description
of the Free Withdrawal Amount, see the "Fee Table," page __.
EXAMPLE OF CALCULATION OF SURRENDER CHARGE. Assume the applicable surrender
charge percentage is 7% and you have requested a withdrawal of $100. You will
receive $100 and the surrender charge is $7.53, for a total withdrawal of
$107.53.
WAIVER OF SURRENDER CHARGE. We will not deduct a surrender charge if, at
the time we receive a request for a withdrawal or a surrender, we have received
due proof that the Annuitant is "Terminally Ill" or has been confined
continuously to an "Eligible Hospital" or "Eligible Nursing Home" for at least
three months before the date we receive the request. "Terminally Ill,"
"Eligible Hospital," and "Eligible Nursing Home" are defined in the Policy.
ANNUAL ADMINISTRATIVE FEE
We will deduct an annual administrative fee (1) on each Policy Anniversary,
(2) on the day of any surrender if the surrender is not on the Policy
Anniversary, or (3) on the Annuity Date if the Annuity Date is not on the
Policy Anniversary. We will waive this fee if total premiums of at least $50,000
have been paid under a Policy at the time the Annual Administrative Fee would
have otherwise been deducted. The fee will be deducted from each Subaccount and
the Fixed Account on a pro-rata basis.
TRANSFER PROCESSING FEE
We reserve the right to deduct a transfer processing fee of $25 for the
13th and each subsequent transfer during a Policy Year. For the purpose of
assessing the transfer processing fee, each written or telephone request is
considered to be one transfer, regardless of the number of Subaccounts affected
by the transfer. The transfer processing fee will be deducted from the
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Subaccount or the Fixed Account from which the transfer is made. If a transfer
is made from more than one Subaccount and/or the Fixed Account at the same time,
the transfer fee would be deducted pro-rata from the Subaccounts and/or the
Fixed Account. We reserve the right to waive the transfer processing fee.
MORTALITY AND EXPENSE RISK CHARGE
State Farm currently deducts a daily charge from the assets in the
Subaccounts attributable to the Policies at an effective annual rate of 1.15% of
net assets. This charge is guaranteed not to exceed an effective annual rate of
1.25% of net assets. This charge does not apply to Fixed Policy Accumulation
Value attributable to the Policies. This charge is factored into the net
investment factor. See "Net Investment Factor," page ___.
FUND EXPENSES
Because the Variable Account purchases shares of the various Funds, the net
assets of the Variable Account will reflect the investment advisory fees and
other operating expenses incurred by the Funds. A table of each Fund's advisory
fees and other expenses can be found in the front of this prospectus in the Fee
Table. For a description of each Fund's expenses, advisory fees and other
expenses, see the prospectus for the Trust.
6. HOW WILL MY INVESTMENT IN THE POLICY BE TAXED?
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
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. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon State Farm's understanding
of the present Federal income tax laws. No representation is made as to the
likelihood of continuation of the present Federal income tax laws or as to how
they may be interpreted by the Internal Revenue Service (the "IRS").
The Policy may be purchased on a non-tax-qualified basis ("Non-Qualified
Policy") or purchased on a tax-qualified basis ("Qualified Policy"). Qualified
Policies are designed for use by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), 408, or 408A of the Code. The ultimate effect of
federal income taxes on the amounts held under a Policy, or annuity payments,
depends on the type of retirement plan, on the tax and employment status of the
individual concerned, and on our tax status. In addition, certain requirements
must be satisfied in purchasing a Qualified Policy
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with proceeds from a tax-qualified plan and receiving distributions from a
Qualified Policy in order to continue receiving favorable tax treatment. Some
retirement plans are subject to distribution and other requirements that are not
incorporated into our Policy administration procedures. Owners, participants and
Beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Policies comply with applicable law.
Therefore, purchasers of Qualified Policies should seek competent legal and tax
advice regarding the suitability of a Policy for their situation. The following
discussion assumes that Qualified Policies are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE POLICIES
DIVERSIFICATION REQUIREMENTS. The Code requires that the investments of the
Variable Account be "adequately diversified" in order for the Policies to be
treated as annuity contracts for Federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
In certain circumstances, owners of variable annuity 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. When 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
transfer Policy Accumulation 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.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires any Non-Qualified Policy to
contain certain provisions specifying how your interest in the Policy will be
distributed in the event of your death. The Non-Qualified Policies contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such provisions and modify them if necessary to assure that they comply
with the applicable requirements when such requirements are clarified by
regulation or otherwise.
Other rules may apply to Qualified Policies.
The following discussion assumes that the Policies will qualify as annuity
contracts for Federal income tax purposes.
TAX TREATMENT OF ANNUITIES
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IN GENERAL. We believe that if you are a natural person you will not be
taxed on increases in the value of a Policy until a distribution occurs or until
annuity payments begin. (For these purposes, the agreement to assign or pledge
any portion of the Policy Accumulation Value, and, in the case of a Qualified
Policy, any portion of an interest in the qualified plan, generally will be
treated as a distribution.)
TAXATION OF NON-QUALIFIED POLICIES.
NON-NATURAL PERSON. The Owner of any annuity contract who is not a natural
person generally must include in income any increase in the excess of the Policy
Accumulation Value over the "investment in the contract" (generally, the
premiums or other consideration paid for the contract) during the taxable year.
There are some exceptions to this rule and a prospective Owner that is not a
natural person may wish to discuss these with a tax adviser. The following
discussion generally applies to Policies owned by natural persons.
WITHDRAWALS. When a withdrawal from a Non-Qualified Policy occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the Policy Accumulation Value immediately
before the distribution over the Owner's investment in the Policy at that time.
In the case of a surrender under a Non-Qualified Policy, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
Non-Qualified Policy, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
. made on or after the taxpayer reaches age 59 1/2;
. made on or after the death of an Owner;
. attributable to the taxpayer's becoming disabled; or
. made as part of a series of substantially equal periodic payments for
the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and
special rules may be applicable in connection with the exceptions enumerated
above. A tax adviser should be consulted with regard to exceptions from the
penalty tax.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payment option elected under an annuity contract, a portion of each annuity
payment is generally not taxed and the remainder is taxed as ordinary income.
The non-taxable portion of an annuity payment is generally determined in a
manner that is designed to allow you to recover your investment in the Policy
ratably on a tax-free basis over the expected stream of annuity payments, as
determined when annuity payments start. Once your investment in the Policy has
been fully recovered, however, the full amount of each annuity payment is
subject to tax as ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
Policy because of your death or the death of the Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same
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manner as a surrender of the contract, or (ii) if distributed under a payment
option, they are taxed in the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A POLICY. A transfer or assignment
of ownership of a Policy, the designation of an Annuitant, the selection of
certain Annuity Dates, or the exchange of a Policy may result in certain tax
consequences to you that are not discussed herein. An Owner contemplating any
such transfer, assignment or exchange, should consult a tax advisor as to the
tax consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding for
the recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
MULTIPLE POLICIES. All annuity contracts that are issued by State Farm (or
its affiliates) to the same Owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
Owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED POLICIES
The Policies are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; aggregate distributions in excess of a specified
annual amount; and in other specified circumstances. Therefore, no attempt is
made to provide more than general information about the use of the Policies with
the various types of qualified retirement plans. Policy Owners, Annuitants, and
Beneficiaries are cautioned that the rights of any person to any benefits under
these qualified retirement plans may be subject to the terms and conditions of
the plans themselves, regardless of the terms and conditions of the Policy, but
we shall not be bound by the terms and conditions of such plans to the extent
such terms contradict the Policy, unless the Company consents.
DISTRIBUTIONS. Annuity payments are generally taxed in the same manner as
under a Non-Qualified Policy. When a withdrawal from a Qualified Policy occurs,
a pro rata portion of the amount received is taxable, generally based on the
ratio of the Owner's investment in the
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Policy (generally, the premiums or other consideration paid for the Policy) to
the participant's total accrued benefit balance under the retirement plan. For
Qualified Policies, the investment in the contract can be zero. Distributions
from certain qualified plans are generally subject to mandatory withholding.
Brief descriptions follow of the various types of qualified retirement
plans in connection with a Policy. We will endorse the Policy as necessary to
conform it to the requirements of such plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement plans
may permit the purchase of the Policies to accumulate retirement savings under
the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Policy is assigned or transferred to
any individual as a means to provide benefit payments, unless the plan complies
with all legal requirements applicable to such benefits prior to transfer of the
Policy. Employers intending to use the Policy with such plans should seek
competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that can be contributed, the deductible amount of the contribution,
the persons who may be eligible, and the time when distributions commence. Also,
distributions from certain other types of qualified retirement plans may be
"rolled over" or transferred on a tax-deferred basis into an IRA. There are
significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans (SIMPLE), under which certain employers may, effective
January 1, 1997, provide contributions to IRAs on behalf of their employees,
subject to special restrictions. Employers may establish Simplified Employee
Pension (SEP) Plans to provide IRA contributions on behalf of their employees.
Sales of the Policy for use with IRAs may be subject to special requirements of
the IRS.
ROTH IRAs. Effective January 1, 1998, section 408A of the Code permits
certain eligible individuals to contribute to a Roth IRA. Contributions to a
Roth IRA, which are subject to certain limitations, are not deductible, and must
be made in cash or as a rollover or transfer from another Roth IRA or other IRA.
A rollover from or conversion of an IRA to a Roth IRA may be subject to tax, and
other special rules may apply. Distributions from a Roth IRA generally are not
taxed, except that, once aggregate distributions exceed contributions to the
Roth IRA, income tax and a 10% penalty tax may apply to distributions made (1)
before age 59 1/2 (subject to certain exceptions) or (2) during the five taxable
years starting with the year in which the first contribution is made to the Roth
IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premium payments made, within certain limits, on a Policy that
will provide an annuity for the employee's retirement. These premium payments
may be subject to FICA (social security) tax.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under the Policies are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this prospectus. Further, the
Federal income tax consequences discussed herein reflect our understanding of
current law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of Ownership or receipt of distributions
under a Policy depend on the individual circumstances of each Owner or recipient
of the distribution. A competent tax adviser should be consulted for further
information.
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7. HOW DO I ACCESS MY MONEY?
You may make withdrawals or a full surrender under the Policy. Proceeds are
also payable upon the death of the Owner or the Annuitant. See "Does the Policy
have a Death Benefit?," page ___. When you surrender the Policy or when proceeds
are payable on the death of an Owner or Annuitant, you can request that the
proceeds be paid under an annuity option. See "What are my annuity options?,"
page ___.
WITHDRAWALS
You may request to withdraw part of the Cash Surrender Value at any time
prior to the earlier of the Annuity Date or the date the Annuitant dies. (If you
have elected the "fixed years" annuity option, you may request withdrawals after
the Annuity Date. See "What are my annuity options?," page __.) Requests for
withdrawals may be made in writing or by telephone, if we have your telephone
authorization on file. See "Requesting Payments and Telephone Transactions,"
page __. Any withdrawal must be at least $500. We will pay you the withdrawal
amount in one sum. Under certain circumstances, payments of proceeds from a
withdrawal or surrender may be delayed. See "Requesting Payments," page __.
When you request a withdrawal, you can direct how the withdrawal will be
deducted from your Policy Accumulation Value. If you provide no directions, the
withdrawal will be deducted from your Policy Accumulation Value in the
Subaccounts and Fixed Account on a pro-rata basis.
SURRENDERS
You may request surrender of the Policy at any time prior to the earlier of
the Annuity Date or the date the Annuitant dies. (If you have elected the "fixed
years" annuity option, you may request a surrender after the Annuity Date. See
"What are my annuity options?," page __.) The Policy will terminate on the date
we receive your request or such later date as you might request. We will pay you
the Cash Surrender Value in one sum unless you choose an annuity option. After
five Policy Years, if you choose a "life annuity," "life annuity with certain
period," or a "joint and last survivor life annuity," no surrender charge is
deducted. Under certain circumstances, payments of proceeds from a withdrawal or
surrender may be delayed. See "Requesting Payments," page __.
SYSTEMATIC WITHDRAWAL PROGRAM
The systematic withdrawal program provides an automatic monthly, quarterly,
semi-annual, or annual payment to you from the amounts you have accumulated in
the Subaccounts and/or the Fixed Account. The minimum payment is $100. You may
elect to participate in the systematic withdrawal program at any time before the
Annuity Date by sending a written request to our Home Office. Once we have
received your request, the program will begin and will remain in effect until
your Policy Accumulation Value drops to zero, unless you cancel or make changes
in the program. Withdrawals under the systematic withdrawal program will be
deducted from your Policy Accumulation Value in the Subaccounts and the Fixed
Account on a pro-rata basis. You may cancel or
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make changes in the program at any time by sending us a written request or by
telephone if we have your telephone authorization on file.
We will assess any applicable surrender charge on these withdrawals. See
"Surrender Charge," page __. We do not deduct any other charges for this
program. We reserve the right to discontinue offering the systematic withdrawal
program at any time and for any reason.
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS
REQUESTING PAYMENTS. Written requests for payment (except when telephone
requests are authorized by us) must be sent to our Home Office or given to an
authorized State Farm agent for forwarding to our Home Office. We will
ordinarily pay any Death Benefit, withdrawal, or surrender proceeds within seven
days after receipt at our Home Office of all the documents required for such a
payment. The amount will be determined as of the date our Home Office receives
all required documents. A Death Benefit generally will be paid through the State
Farm Benefit Management Account,(R) an interest bearing checking account. We
will send the State Farm Benefit Management Account(R) 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.(R) Interest will be paid on the amount in the State Farm
Benefit Management Account(R) from the date due proof of death is received at
the Home Office to the date the State Farm Benefit Management Account(R) is
closed. Amounts in the State Farm Benefit Management Account(R) are not insured
by the Federal Deposit Insurance Corporation or any other agency.
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; 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 or surrender request for up
to six months from the date we receive the request. However, Cash Surrender
Value paid under an annuity option will not be deferred.
TELEPHONE TRANSACTIONS. You may make certain requests under the Policy by
telephone if we have a written telephone authorization on file. These include
requests for transfers, withdrawals, changes in premium allocation instructions,
dollar-cost averaging changes, changes in the portfolio rebalancing program and
systematic withdrawal changes. 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 reasonable procedures are not employed, we may be
liable for any losses due to unauthorized or fraudulent instructions. If
reasonable procedures are employed, 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.
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8. HOW IS THE PERFORMANCE OF THE POLICY PRESENTED?
We may advertise or include in sales literature yields, effective yields
and total returns for the Subaccounts. Effective yields and total returns for
the Subaccounts are based on the investment performance of the corresponding
Portfolio of the Funds. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND DO
NOT INDICATE OR PROJECT FUTURE PERFORMANCE. We may also advertise or include in
sales literature a Subaccount's performance compared to certain performance
rankings and indexes compiled by independent organizations, and we may present
performance rankings and indexes without such a comparison. More detailed
information about performance data appears in the Statement of Additional
Information.
The yield of the Subaccount investing in the Money Market Fund refers to
the annualized income generated by an investment in the Subaccount over a
specified seven-day period. The yield is calculated by assuming that the income
generated for that seven-day period is generated each seven-day period over a
52-week period. The effective yield is calculated similarly but, when
annualized, the income earned by an investment in the Subaccount is assumed to
be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Subaccount (except the Money Market Subaccount) refers to
the annualized income generated by an investment in the Subaccount over a
specified 30-day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30-day or one-month period is
generated each period over a 12-month period.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time. Average annual total return of a Subaccount tells you the return you
would have experienced if you allocated a $1,000 premium to a Subaccount for the
specified period. "Standardized" average annual total return reflects all
historical investment results, less all charges and deductions applied against
the Subaccount, including any surrender charge that would apply if you
terminated the Policy at the end of each period indicated, but excluding any
deductions for premium taxes. "Non-Standard" average annual total return
information may be presented, computed on the same basis as described above,
except that deductions will not include the Surrender Charge. In addition, we
may from time to time disclose average annual total return in non-standard
formats and cumulative total return for a Subaccount.
We may, from time to time, also disclose yield, standard total returns, and
non-standard total returns for the Funds. We may also disclose yield, standard
total returns, and non-standard total returns of funds or other accounts managed
by the Adviser or Subadviser with investment objectives similar to those of the
Funds, and Subaccount performance based on that performance data. Non-standard
performance will be accompanied by standard performance.
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In advertising and sales literature, the performance of each Subaccount may
be compared to the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment series of mutual funds with investment objectives similar
to each of the Subaccounts. Advertising and sales literature may also present
the performance of the Standard & Poor's Index of 500 Common Stocks, a widely
used measure of stock performance, either by itself or compared to the
performance of one or more Subaccounts. This unmanaged index assumes the
reinvestment of dividends but does not reflect any "deduction" for the expense
of operating or managing an investment portfolio. Other independent ranking
services and indexes may also be used as a source of performance comparison or
presentation. We may also report other information, including the effect of tax-
deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts.
9. DOES THE POLICY HAVE A DEATH BENEFIT?
If the Annuitant dies before the Annuity Date and a Death Benefit is
payable, the amount paid will be the greater of (1) the sum of all premiums paid
less any withdrawals and less any applicable surrender charges, and (2) the
Policy Accumulation Value. Both amounts will be calculated on the date we
receive due proof of the Annuitant's death. If the Death Benefit is payable and
an annuity option is chosen, the Annuity Date will be the date we receive due
proof of the Annuitant's death. The beneficiary must choose the annuity option
as well as whether the annuity payments are to be fixed or variable or a
combination of fixed and variable. See "What are my annuity options?," page ___.
If no annuity option has been chosen for the Death Benefit to be paid, or if the
annuity option chosen is not available, the Death Benefit generally will be paid
through the State Farm Benefit Management Account. See "Requesting Payments,"
page ___. For a discussion of the order for payment to beneficiaries, as well as
how beneficiaries are designated, see "Annuity Payment Provision" in the
Statement of Additional Information.
If the Owner dies before the Annuity Date, unless the Owner is the
Annuitant, the Cash Surrender Value of the Policy will be payable. For a
discussion of the rules for paying the proceeds upon the death of an Owner, see
"Death of Owner" in the Statement of Additional Information.
10. WHAT OTHER INFORMATION SHOULD I KNOW?
STATE FARM AND THE VARIABLE 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. 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
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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'S FIXED ACCOUNT OPTION. The Fixed Account is part of State
Farm's general account assets. State Farm's general account assets are used to
support our 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 assets of the Fixed Account.
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED
ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR HAS THE
FIXED ACCOUNT BEEN REGISTERED 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. 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. The Variable Account is used 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 Life
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 the 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
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subaccount or insurance company separate account under the Policies 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 STATE FARM FUND. State Farm Investment Management Corp. ("SFIM"), a
wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company,
serves as investment adviser to the State Farm Fund. 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. For more information
concerning the investment adviser and investment sub-adviser, please see the
accompanying prospectus for the Trust.
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
Accumulation 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 materials, 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.
MODIFICATION
We may modify the Policy as follows: (1) to conform the Policy, our
operations, or the operation of the Variable Account to the requirements of any
law (or regulation issued by a government agency) to which we, the Policy, or
the Variable Account is subject; (2) to assure continued qualification of the
Policy as an annuity under the Code; or (3) to reflect a change in the operation
of the Variable Account, if allowed by the Policy. If we modify the Policy, we
will make the appropriate endorsement to the Policy.
DISTRIBUTION 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. 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
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available in all states. State Farm VP Management Corp. receives commissions
of up to 2.5% of premiums paid in connection with the sale of the
Policies.
The Policies are sold by certain registered representatives of State Farm
VP Management Corp. who are also appointed and licensed as insurance agents.
These registered representatives receive commissions for selling Policies
calculated as a percentage of premiums. Registered representatives who meet
certain productivity and profitability standards may be eligible for additional
compensation.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
the assets of the Variable Account are subject. We are not involved in any
litigation that is of material importance in relation to our total assets or
that relates to the Variable Account.
REPORTS TO POLICY OWNERS
State Farm maintains records and accounts of all transactions involving the
Policy, the Variable Account, and the Fixed Account. Each year, or more often if
required by law, you will be sent a report showing information about your Policy
for the period covered by the report. You will also be sent an annual and a
semi-annual report for each Fund underlying a Subaccount to which you have
allocated Policy Accumulation Value, as required by the 1940 Act. In addition,
when you pay premiums (other than by pre-authorized checking account deduction),
or if you make transfers or withdrawals, you will receive a confirmation of
these transactions.
FINANCIAL STATEMENTS
The audited statutory basis statements of admitted assets, liabilities and
surplus for the Company as of December 31, 1996 and 1995, and the related
statutory basis statements of income and changes in surplus, and cash flows for
the years then ended, as well as the Report of the Independent Accountants, are
contained in the Statement of Additional Information. The financial statements
of the Company 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. Unaudited
interim financial statements for the Company as of March 31, 1997 and as of June
30, 1997 have also been provided.
No financial statements are presented for the Variable Account because, as of
the date of this prospectus, the Variable Account had not yet commenced
operations, had no assets, and had incurred no liabilities.
11. HOW CAN I MAKE INQUIRIES?
Inquiries regarding a policy may be made by writing to us at our Home
Office, by calling us at (888) 702-2307 (Toll free), or by contacting an
authorized State Farm agent.
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Additional information about the policies and the Variable Account is
contained in the Statement of Additional Information. You can obtain a free copy
of the Statement of Additional Information by writing to us at the address shown
on the front cover or by calling 1-(888)-702-2307(Toll free). The following is
the Table of Contents for the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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ADDITIONAL POLICY PROVISIONS
The Policy.............................................................
Ownership..............................................................
Incontestability.......................................................
Error in Age or Sex....................................................
Participation..........................................................
Assignment.............................................................
CALCULATION OF HISTORICAL PERFORMANCE DATA..................................
Money Market Subaccount Yields.........................................
Other Subaccount Yields................................................
Average Annual Total Returns...........................................
Effect of the Annual Administrative Fee on Performance Data............
Other Total Returns....................................................
Use of Indexes.........................................................
Other Information......................................................
NET INVESTMENT FACTOR.......................................................
ANNUITY PAYMENT PROVISIONS..................................................
Amount of Fixed Annuity Payments.......................................
Amount of Variable Annuity Payments....................................
Annuity Units..........................................................
Annuity Unit Value.....................................................
PAYMENT OF PROCEEDS UPON DEATH OF OWNER OR ANNUITANT........................
Death of Owner.........................................................
Death of Annuitant.....................................................
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...........................
SAFEKEEPING OF ACCOUNT ASSETS...............................................
DISTRIBUTION OF THE POLICIES................................................
LEGAL MATTERS...............................................................
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<TABLE>
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EXPERTS.....................................................................
OTHER INFORMATION...........................................................
FINANCIAL STATEMENTS........................................................
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
DATED _____________ __, 1997
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE INSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
OF STATE FARM LIFE INSURANCE COMPANY
P.O. Box 2307
Bloomington, Illinois 61702-2307
--------------------
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the variable deferred annuity policy (the "Policy")
offered by State Farm Life Insurance Company ("State Farm, "we," "us," or
"our"). You may obtain a copy of the Prospectus dated ________________ by
calling 1-888-702-2307 (Toll free) or by writing to our Home Office at the above
address. Terms used in the current Prospectus for the Contract are incorporated
into and made a part of this Statement of Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES
FOR THE POLICY AND THE FUNDS.
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STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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ADDITIONAL POLICY PROVISIONS...............................................
The Policy............................................................
Ownership.............................................................
Incontestability......................................................
Error in Age or Sex...................................................
Participation.........................................................
Assignment............................................................
CALCULATION OF HISTORICAL PERFORMANCE DATA.................................
Money Market Subaccount Yields........................................
Other Subaccount Yields...............................................
Average Annual Total Returns..........................................
Effect of the Annual Administrative Fee on Performance Data...........
Other Total Returns...................................................
Use of Indexes........................................................
Other Information.....................................................
NET INVESTMENT FACTOR......................................................
ANNUITY PAYMENT PROVISIONS.................................................
Amount of Fixed Annuity Payments......................................
Amount of Variable Annuity Payments...................................
Annuity Units.........................................................
Annuity Unit Value....................................................
PAYMENT OF PROCEEDS UPON DEATH OF OWNER OR ANNUITANT.......................
Death of Owner........................................................
Death Of Annuitant....................................................
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS..........................
SAFEKEEPING OF ACCOUNT ASSETS..............................................
DISTRIBUTION OF THE POLICIES...............................................
LEGAL MATTERS..............................................................
EXPERTS....................................................................
OTHER INFORMATION..........................................................
FINANCIAL STATEMENTS.......................................................
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ADDITIONAL POLICY PROVISIONS
THE POLICY
The Policy contains the Basic Plan, any amendments, endorsements, and
riders, and a copy of the application. The Policy is the entire contract.
Only an officer has the right to change the Policy. No agent has the
authority to change the Policy or to waive any of its terms. All endorsements,
amendments, or riders must be signed by an officer to be valid.
OWNERSHIP
You, as the Owner, are named in the application. You may exercise any
provision of the Policy only by request and while the Annuitant is alive. Your
Successor Owner is named in the application if you are not the Annuitant.
You may change the Owner or Successor Owner by sending us a request while
the Annuitant is alive. We have the right to request the Policy to make the
change on it. The change will take effect the day you sign the request, but the
change will not affect any action we have taken before we receive the request. A
change of Owner or Successor Owner does not change the beneficiary designation.
No more than two Owners and/or Successor Owners can be named.
INCONTESTABILITY
We will not contest the Policy. Any rider has its own incontestability
provision.
ERROR IN AGE OR SEX
If the Annuitant's, Payee's, or second designated person's date of birth or
sex is not correct, every benefit will be such as premiums paid would have
bought at the correct age or sex, based on the rates at the date of issue. We
may require proof of the Annuitant's, Payee's, second designated person's age
and sex before annuity payments start. Any overpayment with compound interest at
6% a year will be charged against the Policy. This amount will be deducted from
any annuity payments due after the error is found. Any underpayment with
compound interest at 6% a year will be paid to you in one sum.
PARTICIPATION
We do not expect to pay dividends on the Policy. However, we may apportion
and pay dividends each year. All dividends apportioned will be derived from the
divisible surplus of our participating business. Any such dividends will be paid
only at the end of the Policy Year. There is no right to a partial or pro rated
dividend prior to the end of the Policy Year. We will
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transfer the dividend to the Policy Accumulation Value at the end of the Policy
Year. Unless specified by you, the amount transferred is allocated to each
Subaccount and the Fixed Account on a pro-rata basis.
ASSIGNMENT
You may assign the Policy or any interest in it. We will recognize an
assignment only if it is in writing and filed with us. We are not responsible
for the validity or effect of any assignment. An assignment may limit the
interest of any Beneficiary.
CALCULATION OF HISTORICAL PERFORMANCE DATA
From time to time, State Farm may disclose yields, total returns, and other
performance data of the Subaccounts and the Funds. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
standards defined by the SEC.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, advertisements and sales literature may quote the
current annualized yield of the Subaccount investing in the Money Market Fund of
the State Farm Variable Product Trust (the "State Farm Fund") for a seven-day
period in a manner that does not take into consideration any realized or
unrealized gains or losses on shares of the Money Market Fund (the "Money Market
Subaccount").
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Policy having a balance of one Accumulation
Unit of the Money Market Subaccount at the beginning of the period, dividing
such net change in account value by the value of the hypothetical account at the
beginning of the period to determine the base period return, and annualizing
this quotient on a 365-day basis. The net change in account value reflects: 1)
net income from the Money Market Fund attributable to the hypothetical account;
and 2) charges and deductions imposed under the Policy which are attributable to
the hypothetical account. The charges and deductions include the per unit
charges for the hypothetical account for the Annual Administrative Fee, and the
mortality and expense risk charge. For purposes of calculating current yields
for a Policy, an average per unit Annual Administrative Fee is used based on the
$30 Annual Administrative Fee. Current Yield is calculated according to the
following formula:
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Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Money Market Fund (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation) for the seven-day
period attributable to a hypothetical account having a balance of
one Accumulation Unit.
ES = per unit expenses attributable to the hypothetical account for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
/365/7/
Effective yield = (1 + ((NCS-ES)/UV)) - 1
Where:
NCS = the net change in the value of the Money Market Fund (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation) for the seven-day
period attributable to a hypothetical account having a balance of
one Accumulation Unit.
ES = per unit expenses attributable to the hypothetical account for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
Because of the charges and deductions imposed under the Policy, the yield
for the Money Market Subaccount is lower than the yield for the Money Market
Fund.
The current and effective yields on amounts held in the Money Market
Subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Fund, the types and quality of portfolio
securities held by the Money Market Fund and the Money Market Fund's operating
expenses. Yields on amounts held in the Money Market Subaccount may also be
presented for periods other than a seven-day period.
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Yield calculations do not take into account the Surrender Charge that is
assessed on certain withdrawals of Policy Accumulation Value.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) under the Policy for 30-day or one-month periods. The annualized
yield of a Subaccount refers to income generated by the Subaccount during a 30-
day or one-month period and is assumed to be generated each period over a 12-
month period.
The yield is computed by: 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of Accumulation Units outstanding for the period; by 3)
compounding that yield for a six-month period; and by 4) multiplying that result
by 2. Expenses attributable to the Subaccount include the Annual Administrative
Fee and the mortality and expense risk charge. The yield calculation assumes an
Annual Administrative Fee of $30 per Policy deducted at the end of each Policy
Year. For purposes of calculating the 30-day or one-month yield, an average
Annual Administrative Fee based on the average Policy Accumulation Value in the
Subaccount is used to determine the amount of the charge attributable to the
Subaccount for the 30-day or one-month period. The 30-day or one-month yield is
calculated according to the following formula:
Yield = 2 X (((NI - ES)/(U X UV)) + 1)/6/ - 1)
Where:
NI = net income of the portfolio for the 30-day or one-month period
attributable to the Subaccount's Accumulation Units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the 30-
day or one-month period.
Because of the charges and deductions imposed under the Policies, the yield
for the Subaccount is lower than the yield for the corresponding Fund.
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The yield on the amounts held in the Subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A Subaccount's
actual yield is affected by the types and quality of portfolio securities held
by the corresponding Fund and that Fund's operating expenses.
Yield calculations do not take into account the Surrender Charge that is
assessed on certain withdrawals and surrenders of Policy Accumulation Value.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns for one or more of the Subaccounts for various
periods of time.
When a Subaccount or Fund has been in operation for 1, 5, and 10 years,
respectively, the average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from time
to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Policy to the redemption value of that investment as of the last day of
each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount Unit
Values which State Farm calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the Annual
Administrative Fee. The calculation assumes that the Annual Administrative Fee
is $30 per year per Policy deducted at the end of each Policy Year. For purposes
of calculating average annual total return, an average per-dollar per-day Annual
Administrative Fee attributable to the hypothetical account for the period is
used. The calculation also assumes surrender of Policy Accumulation Value at the
end of the period for the return quotation taking into account the applicable
Free Withdrawal Amount. The total return is calculated according to the
following formula:
TR = ((ERV/P)/1/N/) - 1
Where:
TR = the average annual total return net of Subaccount recurring
charges.
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ERV = the ending redeemable value (net of any applicable Surrender
Charge) of the hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Subaccounts commenced
operations. Such performance information for the Subaccounts is calculated based
on the performance of the various funds and the assumption that the Subaccounts
were in existence for the same periods as those indicated for the funds, with
the level of Policy charges that were in effect at the inception of the
Subaccounts.
EFFECT OF THE ANNUAL ADMINISTRATIVE FEE ON PERFORMANCE DATA
The Policy provides for a $30 Annual Administrative Fee (waived for
Policies with respect to which total premiums paid are at least $50,000) that is
deducted from the Subaccounts and the Fixed Account pro-rata. For purposes of
reflecting the Annual Administrative Fee in yield and total return quotations,
the average Policy Accumulation Value is assumed to be $25,000, so that the
Annual Administrative Fee is 0.12%.
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect deduction of the Surrender
Charge. Other total returns are calculated in exactly the same way as average
annual total returns described above, except that the ending redeemable value of
the hypothetical account for the period is replaced with an ending value for the
period that does not take into account any charges on amounts withdrawn.
State Farm may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges
for the period.
ERV = The ending redeemable value of the hypothetical investment at the
end of the period.
P = A hypothetical single payment of $1,000.
USE OF INDEXES
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From time to time, the performance of certain historical indexes may be
presented in advertisements or sales literature. The performance of these
indexes may be compared to the performance of certain Subaccounts or Funds, or
may be presented without such a comparison.
OTHER INFORMATION
The following is a partial list of those publications which may be cited in
the Funds' sales literature and/or shareholder materials which contain articles
describing investment results or other data relative to one or more of the
Subaccounts. Other publications may also be cited.
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Changing Times Consumer Reports
Economist Financial Planning
Forbes Fortune
Inc. Institutional Investor
Insurance Forum Insurance Sales
Insurance Week Journal of Accountancy
Journal of the American Society of Journal of Commerce
CLU & ChFC
Life Insurance Selling Life Association News
MarketFacts Manager's Magazine
National Underwriter Money
Morningstar, Inc. Nation's Business
New Choices (formerly 50 Plus) New York Times
Pension World Pensions & Investments
Rough Notes Round the Table
U.S. Banker VARDs
Wall Street Journal Working Woman
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied 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 is equal to (1)
divided by (2) and subtracting (3) from the result, where:
(1) is the result of:
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(a) the Net Asset Value Per Share of the Fund held in the Subaccount
determined at the end of the current Valuation Period; plus
(b) the per share amount of any dividend or capital gain distribution
made by the Fund held in the Subaccount, if the "ex-dividend"
date occurs during the Valuation period; plus or minus
(c) a per share charge or credit for any taxes reserved for
(2) is the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the prior Valuation Period,
(3) is a daily factor representing the mortality and expense risk charge
deducted from the Subaccount adjusted for the number of days in the
Valuation Period. Such charge will not exceed an annual rate of 1.25%
of the daily net asset value of the Variable Account.
ANNUITY PAYMENT PROVISIONS
AMOUNT OF FIXED ANNUITY PAYMENTS. On the Annuity Date, the amount you have
chosen to apply to provide fixed annuity payments will be applied under the
annuity option you have chosen. For a "life annuity;" "life annuity with certain
period," or a "joint and last survivor life annuity," the annuity option payment
factor in effect on the Annuity Date times that amount will be the dollar amount
of each payment. Each of these payments will be equal and will not change. For
the "fixed years" annuity option, the annuity option payment factor guaranteed
in the Policy times that amount will be the minimum amount of each payment. Each
of these payments may be higher if any additional interest has been credited on
the balance of the account.
The annuity option payment factor used to determine the amount of the fixed
annuity payments will not be less than the guaranteed minimum annuity payment
factors shown in the Policy.
AMOUNT OF VARIABLE ANNUITY PAYMENTS. These payments will vary in amount.
The dollar amount of each payment attributable to each Subaccount is the number
of Annuity Units for each Subaccount times the Annuity Unit Value of that
Subaccount. The sum of the dollar amounts for each Subaccount is the amount of
the total variable annuity payment. The Annuity Unit Value for each payment will
be determined no earlier than five Valuation Days preceding the date the annuity
payment is due. We guarantee the payment will not vary due to changes in
mortality or expenses.
ANNUITY UNITS. On the Annuity Date, the number of Annuity Units for an
applicable Subaccount is determined by multiplying (1) by (2) and dividing the
result by (3), where:
(1) is the part of the Cash Surrender Value or Death Benefit on that date
applied under that Subaccount;
(2) is the Guaranteed Minimum Payment Factor for the Annuity Option
chosen; and
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(3) is the Annuity Unit Value for the Subaccount for the Valuation Period
ending on that date.
ANNUITY UNIT VALUE. The Annuity Unit Values for each Subaccount were
arbitrarily set initially at $10 when that Subaccount began operation.
Thereafter, the Annuity Unit Value for every Valuation Period is the Annuity
Unit Value at the end of the previous Valuation Day times the Net Investment
Factor times the Annuity Interest Factor. The Annuity Interest Factor is used to
neutralize the Assumed Investment Rate of 3 1/2% a year used to determine the
annuity option payment factors. The Assumed Investment Rate is significant in
determining the amount of each variable annuity payment and the amount by which
each variable annuity payment varies from one payment to the next.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
1. Accumulation unit value for current
valuation period.............................................. 11.12
2. Accumulation unit value for immediately
preceding valuation period.................................... 11.10
3. Annuity unit value for immediately preceding
valuation period.............................................. 20.00
4. Factor to compensate for the assumed
investment rate of 3.5%....................................... .9999
5. Annuity unit value of current valuation
period ((1) / (2)) x (3) x (4)................................ 20.03
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
1. Number of accumulation units at Maturity Date.................. 10,000
2. Accumulation unit value........................................ 11.12
3. Adjusted Policy Accumulation Value (1)x(2)..................... 111,200
4. Monthly annuity payment per $1,000
of adj. Policy Accumulation Value............................. 5.82
5. Monthly annuity payment (3)x(4) / 1,000........................ 647.18
6. Annuity unit value at Maturity Date............................ 20.03
7. Number of annuity units (5)/(6)................................ 32.3105
8. Assume annuity unit value at the end of
first month equal to.......................................... 20.20
9. First monthly annuity payment (7)x(8).......................... 652.67
10. Assume annuity unit value at the end of second month equal to.. 19.90
11. Second monthly annuity payment (7)x(10)........................ 642.98
12. Assume annuity unit value at the end of third month equal to... 20.50
13. Third monthly annuity payment (7)x(12)......................... 662.37
-9-
<PAGE>
PAYMENT OF PROCEEDS UPON DEATH OF OWNER OR ANNUITANT
DEATH OF OWNER
The Code requires the following distributions under an annuity when you
die.
(1) If you die before the Annuity Date, you are not the Annuitant, and you
either have not named a Successor Owner or your named Successor Owner
is not a living natural person, the Cash Surrender Value must be paid
within 5 years after your date of death.
(2) If you die before the Annuity Date, you are the Annuitant, and you
either have not named any beneficiary or your named beneficiary is not
a living natural person, the death benefit must be paid within 5 years
after your date of death.
(3) If you die before the Annuity Date, you are not the Annuitant, and
your sole Successor Owner is a person other than your spouse, your
Successor Owner may elect to have the Cash Surrender Value paid under
an annuity option or any other method of payment then provided by us
other than an interest only method of payment. The election must be
made and payments must start within one year after your death and must
not extend beyond the life expectancy of your Successor Owner. If no
election is made within this time, distribution will be made within
five years after your date of death.
(4) If you die before the Annuity Date, you are the Annuitant, and your
sole named surviving primary beneficiary is a person other than your
spouse, your surviving primary beneficiary may elect to have the Death
Benefit paid under an annuity option or any other method of payment
then provided by us other than an interest only method of payment. The
election must be made and payments must start within one year after
your death and must not extend beyond the life expectancy of your
primary beneficiary. If no election is made within this time,
distribution will be made within five years after your date of death.
(5) If you die before the Annuity Date, you are not the Annuitant, and
your sole Successor Owner is your surviving spouse, your surviving
spouse becomes the Owner.
(6) If you die before the Annuity Date, you are the Annuitant, and your
surviving spouse is your sole named primary beneficiary, your spouse
will replace you as Owner and may replace you as Annuitant. If your
-10-
<PAGE>
spouse does not elect to replace you as Annuitant, the Death Benefit
must be paid to your spouse under an annuity option or any other
method of payment then provided by us for an owner. For purposes of
the preceding sentence, the election must be made, payments must start
within one year after your death, and must not extend beyond your
spouse's life expectancy; however, if your spouse does not choose a
method of payment within this time, distribution will be made under
Annuity Option 1.
(7) If you die on or after the Annuity Date and you are not the Annuitant,
any remaining payments must be paid to your Successor Owner at least
as fast as the method of payment in effect at your death.
(8) If you die on or after the Annuity Date and you are the Annuitant, any
remaining payments must be paid to the beneficiary at least as fast as
the method of payment in effect at your death.
If you are not a living natural person, the Annuitant will be treated as
the Owner for purposes of this provision. If you are not a living natural person
and there is a change in the Annuitant, such change shall be treated as the
death of the Owner for purposes of this provision. If the Policy has two owners,
the first death of either owner is treated as the death of the owner for
purposes of this provision. For purposes of this provision, the amount of any
distribution will be determined on that date of such distribution.
Notwithstanding anything in the Policy to the contrary, the surviving joint
owner will be treated as the Successor Owner of the Policy.
DEATH OF ANNUITANT
DEATH OF ANNUITANT WHO IS NOT AN OWNER. If the Annuitant dies before the
Annuity Date while you are alive, the Death Benefit will be paid as provided in
the following provisions. If the method of payment chosen is not available or no
method of payment is chosen, payment will be in one sum.
If the Annuitant dies on or after the Annuity Date while you are alive, any
remaining payments must be paid to you at least as fast as the method of payment
in effect on the Annuitant's date of death.
BENEFICIARY DESIGNATION. This is as shown in the application. It includes
the name of the beneficiary and the order and method of payment. If you name
"estate" as a beneficiary, it means the executors or administrators of the last
survivor of you and all beneficiaries. If you name "children" of a person as a
beneficiary, only children born to or legally adopted by that person as of the
Annuitant's date of death will be included.
-11-
<PAGE>
We may rely on an affidavit as to the ages, names, and other facts about
all beneficiaries. We will incur no liability if we act on such affidavit.
CHANGE OF BENEFICIARY DESIGNATION. You may make a change while the
Annuitant is alive by sending us a request. The change will take effect the date
the request is signed and will replace previous beneficiary designations for the
Policy, but the change will not affect any action we have taken before we
receive the request. We have the right to request your Policy to make the
change.
After the Annuitant's death, anyone who has the right to make a withdrawal
may change the method of payment or may select one of the annuity options, and
may name a successor to their interest. The successor payee may be their estate.
ORDER OF PAYMENT. When the Annuitant dies (1) before the Annuity Date and
a death benefit is payable or (2) on or after the Annuity Date, you are the
Annuitant, and payments continue to the beneficiary, we will make such
payment(s) in equal shares to the primary beneficiaries living when payment is
made. If a primary dies after the first payment is made, we will pay that
primary's unpaid share in equal shares to the other primaries living when
payment is made. If the last primary dies, we will make payment in equal shares
to the successor beneficiaries living when payment is made. If a successor dies
while receiving payments, we will pay that successor's unpaid share in equal
shares to the other successors living when payment is made. If, at any time, no
primary or successor is alive, we will make a one sum payment in equal shares to
the final beneficiaries. If, at any time, no beneficiary is living, we will make
a one sum payment to you, if living when payment is made. Otherwise, we will
make a one sum payment to the estate of the last survivor of you and all
beneficiaries. "When payment is made" means (1) the date that a periodic payment
is due or (2) the date that a request is signed for a cash withdrawal or a one
sum payment. You may change this order of payment by sending us a request while
the Annuitant is alive.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
Where permitted by applicable law, we may:
(1) create new separate accounts;
(2) combine separate accounts, including the Variable Account;
(3) add new Subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
(4) make any Subaccount available to such classes of policies as we may
determine;
(5) add new funds or remove existing funds;
-12-
<PAGE>
(6) substitute new funds for any existing Fund if shares of the Fund are
no longer available for investment or if we determine investment in a
Fund is no longer appropriate in the light of the purposes of the
Variable Account;
(7) deregister the Variable Account under the Act if such registration is
no longer required; and
(8) operate the Variable Account as a management investment company under
the Act or in any other form permitted by law.
The investment policy of the Variable Account will only be changed with the
approval of the insurance supervisory official of the state in Illinois, our
State of domicile. The investment policy of the Variable Account is to invest in
one or more investment companies. The process for such approval is on file.
SAFEKEEPING OF ACCOUNT ASSETS
State Farm holds the title to the assets of the Subaccount. The assets are
kept physically segregated and held separate and apart from State Farm's General
Account assets and from the assets in any other separate account.
Records are maintained of all purchases and redemptions of Fund shares held
by each of the Subaccounts.
A fidelity bond in the amount of $5 million covering State Farm's
directors, officers, and employees has been issued by National Union Fire
Insurance Company.
DISTRIBUTION OF THE POLICIES
State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois
61710, acts as the principal underwriter of the Policies. The Policies are
offered to the public on a continuous basis. We do not anticipate discontinuing
the offering of the Policies, but reserve the right to discontinue the offering.
LEGAL MATTERS
All matters relating to Illinois law pertaining to the Policies, including
the validity of the Policies and State Farm's authority to issue the Policies,
have been passed upon by William A. Montgomery, Senior Vice President and
General Counsel of State Farm. Sutherland, Asbill & Brennan LLP of Washington,
D.C. has provided advice on certain matters relating to the federal securities
laws.
-13-
<PAGE>
EXPERTS
The statutory basis statements of admitted assets, liabilities and surplus
of State Farm Life Insurance Company as of December 31, 1996 and 1995, and the
related statutory basis statements of income and changes in surplus, and cash
flows for the years then ended, appearing in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., independent
accountants, 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, these financial statements were prepared by the
Company 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 a qualified opinion on the financial
statements of the Company in conformity with GAAP, but an unqualified opinion in
conformity with statutory basis accounting.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Policies discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
SEC.
FINANCIAL STATEMENTS
State Farm's financial statements that follow should be considered only as
bearing on State Farm's ability to meet its obligations under the Policies.
They should not be considered as bearing on the investment performance of the
assets held in the Variable Account. No financial statements have been included
for the Variable Account because, as of the date of this Statement of Additional
Information, the Variable Account had not yet commenced operations, had no
assets, and had incurred no liabilities.
-14-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
REPORT ON AUDIT OF FINANCIAL STATEMENTS - STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
-15-
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life Insurance Company
Bloomington, Illinois
We have audited the accompanying statements of admitted assets, liabilities,
capital and surplus - statutory basis of State Farm Life Insurance Company as of
December 31, 1996 and 1995, and the related statements of operations and changes
in capital and surplus - statutory basis and cash flows - statutory basis 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 audits 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 discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of State Farm Life Insurance Company as of December 31, 1996 and 1995, or the
results of its operations or its cash flows for the years then ended.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
State Farm Life Insurance Company as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then ended, on the
basis of accounting described in Note 2.
Our audit was conducted for the purpose of expressing an opinion on the
statutory financial statements taken as a whole. The Supplemental Schedule of
Assets and Liabilities is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic statutory financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic statutory financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
statutory financial statements taken as a whole.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 18, 1997
-16-
<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
<TABLE>
<CAPTION>
December 31, 1996 and 1995
ADMITTED ASSETS
1996 1995
---- ----
<S> <C> <C>
Bonds:
United States Government $ 6,860,623,000 $ 6,515,198,370
Canadian Government and subdivisions 379,881,699 363,854,322
Other governmental units 1,158,967,461 434,770,091
Public utilities 2,758,841,298 2,685,227,901
Industrial and other 5,758,389,561 5,681,259,956
--------------- ---------------
$16,916,703,019 $15,680,310,640
Stocks:
Preferred 2,242,844 2,289,969
Unaffiliated common 193,409,806 131,668,698
Affiliated common 6,418,240 6,228,323
--------------- ---------------
202,070,890 140,186,990
--------------- ---------------
Mortgage loans 1,740,788,533 1,668,173,228
--------------- ---------------
Real estate:
Held for investment 11,922,963 12,541,645
--------------- ---------------
Policy loans 1,774,279,034 1,630,193,391
Cash 13,538,051 26,659,775
Short-term investments 357,607,839 363,005,489
Other invested assets 362,587,340 332,998,579
--------------- ---------------
Total cash and invested assets 21,379,497,669 19,854,069,737
Premiums deferred and uncollected 101,923,216 107,359,413
Investment income due and accrued 378,330,344 358,672,696
Federal income tax recoverable
(including from affiliates) 673,112 1,574,254
Other assets 19,170,462 21,264,939
--------------- ---------------
Total admitted assets $21,879,594,803 $20,342,941,039
=============== ===============
<CAPTION>
LIABILITIES
1996 1995
---- ----
<S> <C> <C>
Aggregate reserves for life policies and contracts $14,484,460,302 $13,500,396,672
Reserve for contracts without life contingencies 901,529,520 798,544,863
Policy and contract claims 67,641,434 64,949,107
Policyholders' dividend accumulations 2,734,155,442 2,524,922,896
Dividends to policyholders payable in the following year 612,205,250 589,097,732
Advance premiums, deposits and other policy and
contract liabilities 244,645,952 245,800,822
Interest maintenance reserve 14,485,937 18,593,739
Commissions payable 29,545,491 31,724,749
Federal income taxes (payable to affiliates) 66,267,037 65,053,120
Federal income taxes due or accrued 3,891,909 1,700,622
Other liabilities 146,175,777 132,527,202
Asset valuation reserve 179,808,221 159,408,833
--------------- ---------------
Total Liabilities 19,484,812,272 18,132,720,357
--------------- ---------------
<CAPTION>
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 2,369,936,112 2,185,374,263
--------------- ---------------
Total capital and surplus 2,394,782,531 2,210,220,682
--------------- ---------------
Total liabilities, capital and surplus $21,879,594,803 $20,342,941,039
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
-17-
<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, 1996 and 1995
-------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income:
Premiums and annuity considerations $2,355,457,573 $2,370,508,675
Net investment income 1,547,424,397 1,459,422,136
Considerations for supplementary contracts and dividend accumulations 560,830,376 516,286,483
Other 1,741,434 1,440,506
-------------- --------------
4,465,453,780 4,347,657,800
-------------- --------------
Benefits and other expenses:
Death benefits 422,531,096 383,051,488
Surrender benefits and other fund withdrawals 591,718,769 457,394,012
Other benefits and claims 144,693,150 122,342,813
Payments on supplementary contracts and dividend accumulations 540,037,211 494,584,567
Increase in policy and contract reserves 1,271,972,866 1,450,860,892
Commissions 176,118,214 216,945,641
General insurance expenses 271,396,836 251,871,575
Taxes, licenses and fees 56,230,565 50,760,753
-------------- --------------
3,474,698,707 3,427,811,741
-------------- --------------
Net gain from operations before dividends to policyholders
and federal income taxes 990,755,073 919,846,059
Dividends to policyholders 600,978,261 577,950,900
-------------- --------------
Net gain from operations after dividends to policyholders and
before federal income taxes 389,776,812 341,895,159
Federal and foreign income taxes incurred (excluding capital gains) 186,631,211 173,547,098
-------------- --------------
Net gain from operations after dividends to policyholders and
federal income taxes and before realized gains 203,145,601 168,348,061
Net realized capital gains or (losses) less capital gains tax of
$387,878 and $763,542 (excluding ($3,593,909) and
$5,821,383 transferred to the IMR) (15,264,507) (6,786,711)
-------------- --------------
Net income $ 187,881,094 $ 161,561,350
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-18-
<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, 1996 and 1995
-------
<TABLE>
<CAPTION>
1996 1995
---- ----
<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 2,185,374,263 2,019,610,890
Net income 187,881,094 161,561,350
Net unrealized capital gains 29,049,906 30,325,928
Change in nonadmitted assets (485,675) 2,231,889
Change in asset valuation reserve (20,399,388) (27,155,103)
Dividends to stockholder (parent company) (480,000) (480,000)
Change in voluntary investment reserve 8,258,253 (720,691)
Change in reserve on account of change in valuation basis (19,262,341) 0
-------------- --------------
Balance at end of year 2,369,936,112 2,185,374,263
-------------- --------------
Total capital and surplus $2,394,782,531 $2,210,220,682
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-19-
<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, 1996 and 1995
--------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $2,371,362,482 $2,379,986,546
Other premiums, considerations and
deposits, allowances and reserve
adjustments, and other income 562,058,203 517,197,511
Investment income received (excluding
realized gains/losses and net of
investment expenses) 1,550,920,836 1,451,810,879
Life and accident and health
benefits paid (443,355,755) (400,558,369)
Surrender benefits and other fund
withdrawals paid (591,718,769) (457,394,012)
Other benefits to policyholders paid (662,294,112) (594,463,187)
Commissions, other expenses and taxes paid
(excluding federal income taxes) (502,124,919) (513,766,712)
Dividends to policyholders paid (577,870,743) (543,867,712)
Federal income taxes paid (excluding tax
on capital gains) (178,577,250) (256,454,656)
Other operating expenses paid (233,124) (190,783)
-------------- --------------
Net cash from operations 1,528,166,849 1,582,299,505
-------------- --------------
Cash from investments:
Proceeds from investments sold, matured
or repaid:
Bonds 1,242,543,086 1,096,682,510
Stocks 6,712,066 425,524
Mortgage loans 221,661,198 154,518,097
Other invested assets 38,587,669 34,502,131
Net gains on cash and short-term
investments 29,114 25,688
-------------- --------------
Total investment proceeds 1,509,533,133 1,286,153,950
Tax on capital gains 4,135,492 (21,437,819)
-------------- --------------
Total cash from investments 1,505,397,641 1,307,591,769
-------------- --------------
Cost of investments acquired (long-term
only):
Bonds 2,510,563,797 2,334,276,726
Stocks 33,987,140 25,519,509
Mortgage loans 328,347,558 309,612,823
Other invested assets 45,710,481 16,101,056
-------------- --------------
Total investments acquired 2,918,608,976 2,685,510,114
-------------- --------------
Increase (decrease) in policy loans and
premium notes 144,134,406 133,373,747
-------------- --------------
Net cash from investments (1,557,345,741) (1,511,292,092)
-------------- --------------
Cash from financing and miscellaneous
sources:
Other cash provided 16,652,380 23,221,397
Dividends to stockholders paid (480,000) (480,000)
Other applications (net) (5,512,862) (11,082,179)
-------------- --------------
Net cash from financing and miscellaneous
sources 10,659,518 11,659,218
Net change in cash and short-term
investments (18,519,374) 82,666,631
Cash and short-term investments, beginning
of year 389,665,264 306,998,633
-------------- --------------
Cash and short-term investments, end of year $ 371,145,890 $ 389,665,264
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
-20-
<PAGE>
STATE FARM LIFE 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 and term insurance which together
account for approximately 83% of premium revenue. Individual annuity
products 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, 1996 and
December 31, 1995, or the results of its operations for the years then
ended.
Statutory basis accounting is a comprehensive basis of accounting other
than generally accepted accounting principles (GAAP).
The preparation of financial statements in conformity with statutory
accounting practices 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 equity.
-21-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
2. Summary of Significant Accounting Practices, continued
------------------------------------------------------
A. Investments, continued
----------------------
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
voluntary reserves for mortgage loans, in excess of those established
for the asset valuation reserve, in the amount of $0 and $8,258,253
at December 31, 1996 and 1995, respectively.
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 $13,065,538 and $12,446,856 at December 31, 1996
and 1995, 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, 1996
and 1995, as reflected in surplus, is $189,917 and $199,073,
respectively.
Investment income is recorded when earned. Realized gains and losses
on sale or maturity of investments are determined on the 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.
-22-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
2. Summary of Significant Accounting Practices, continued
------------------------------------------------------
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%. 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 ninety (90) days of receipt of the refund; and 3) any
payments of federal income tax due will be settled within ninety (90)
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.
-23-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
2. Summary of Significant Accounting Practices, continued
------------------------------------------------------
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 1993, the
Company changed its method of accounting for the costs of the
potential health care and life insurance benefits provided to 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.
-24-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
2. Summary of Significant Accounting Practices, continued
------------------------------------------------------
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 a voluntary contribution in 1996 of $0
and $943,808 in 1995. The AVR is not calculated under GAAP.
H. 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. Under GAAP, certain of the Company's premium and annuity
considerations and initial reserves (e.g. on universal life policies)
would be excluded from income and the change in reserves.
Additionally, acquisition costs under GAAP are capitalized and
amortized over the policy period.
The discussion above 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.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
-25-
<PAGE>
STATE FARM LIFE 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:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $ 8,096,425,157 $ 531,907,891 ($27,458,222) $ 8,600,874,826
Obligations of states and
political subdivisions 42,570,677 2,427,503 (64) 44,998,116
Debt securities issued by
foreign governments 396,886,866 33,910,579 (70,117) 430,727,328
Corporate securities 8,738,428,158 291,083,163 (60,606,944) 8,968,904,377
--------------- -------------- ------------ ---------------
Totals $17,274,310,858 $ 859,329,136 ($88,135,347) $18,045,504,647
=============== ============== ============ ===============
</TABLE>
<TABLE>
December 31, 1995
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government
corporations and agencies $ 6,970,727,109 $ 839,830,662 ($6,631,793) $ 7,803,925,978
Obligations of states and
political subdivisions 56,521,044 5,129,125 (8,814) 61,641,355
Debt securities issued by
foreign governments 372,250,495 24,592,536 (58,609) 396,784,422
Corporate securities 8,643,817,482 529,224,549 (19,560,792) 9,153,481,239
--------------- -------------- ------------ ---------------
Totals $16,043,316,130 $1,398,776,872 ($26,260,008) $17,415,832,994
=============== ============== ============ ===============
</TABLE>
-26-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
-------------
3. Bonds and Other Debt Securities, continued
------------------------------------------
The amortized cost and estimated market value of debt securities, by
contractual maturity, are shown below. 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, 1996
-----------------
Estimated
Amortized Market
Cost Value
--------------- ---------------
<S> <C> <C>
Due in one year or less $ 1,545,473,243 $ 1,562,406,972
Due after one year through five years 5,665,388,673 5,820,013,957
Due after five years through ten years 7,859,356,966 8,314,775,985
Due after ten years 2,204,091,976 2,348,307,733
--------------- ---------------
Totals $17,274,310,858 $18,045,504,647
=============== ===============
</TABLE>
Gross proceeds and realized gains and losses on bonds sold at the discretion
of the Company for the year ended December 31, were:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Proceeds $273,806,295 $226,475,143
Gross gains 42,275 4,009,992
Gross losses 10,137,892 56,594
</TABLE>
At December 31, 1996, bonds carried at amortized cost of $419,084,758 were
on deposit with regulatory authorities.
-27-
<PAGE>
STATE FARM LIFE 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:
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Gross Gross
Unrealized Unrealized
Cost Gains Losses
------------ ----------- ----------
<S> <C> <C> <C>
Preferred $ 2,402,781 $ 0 $ 159,937
Unaffiliated common 112,700,098 83,168,541 2,458,833
Affiliated common 3,500,000 2,918,240 0
December 31, 1995
-----------------
Preferred $ 2,455,156 $ 0 $ 165,188
Unaffiliated common 83,599,178 48,626,612 557,092
Affiliated common 3,500,000 2,728,323 0
</TABLE>
Gross realized gains and losses consist of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
Preferred $ 18,789 $0 $54,195 $74,811
Unaffiliated common 1,754,686 4 1 26,411
</TABLE>
-28-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
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.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Admitted assets $6,463,414 $6,260,393
Liabilities 44,958 32,164
Capital and surplus 6,418,456 6,228,229
Net income 191,801 200,546
</TABLE>
6. Net Investment Income
---------------------
The components of net investment income earned by type of investment for
the years ended December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Bonds $1,248,460,909 $1,179,531,113
Mortgage loans 151,689,415 146,782,359
Policy loans 113,871,892 106,382,488
Short-term investments 21,799,607 20,470,410
Other 23,225,880 18,811,147
-------------- --------------
Gross investment income 1,559,047,703 1,471,977,517
Investment expenses (11,004,624) (11,936,699)
Depreciation (618,682) (618,682)
-------------- --------------
Net investment income $1,547,424,397 $1,459,422,136
============== ==============
</TABLE>
-29-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
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.
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 Annuities
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.
-30-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
--------------
7. Fair Value of Financial Instruments, continued
----------------------------------------------
The estimated fair values and statement values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Fair Statement Fair Statement
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Bonds $17,688,083,312 $16,916,703,019 $17,052,655,435 $15,680,310,641
Bond reserves 0 82,797,270 0 81,961,420
--------------- --------------- --------------- ---------------
$17,688,083,312 $16,833,905,749 $17,052,655,435 $15,598,349,221
=============== =============== =============== ===============
Mortgage loans $ 1,746,961,499 $ 1,740,788,533 $ 1,740,347,531 $ 1,668,173,228
Mortgage loan reserves 0 8,818,835 0 17,737,208
--------------- --------------- --------------- ---------------
$ 1,746,961,499 $ 1,731,969,698 $ 1,740,347,531 $ 1,650,436,020
=============== =============== =============== ===============
Preferred stock $ 1,731,383 $ 2,242,844 $ 1,782,230 $ 2,289,969
Preferred stock reserves 0 67,150 0 79,664
--------------- --------------- --------------- ---------------
$ 1,731,383 $ 2,175,694 $ 1,782,230 $ 2,210,305
=============== =============== =============== ===============
Unaffiliated common stock $ 193,409,806 $ 193,409,806 $ 131,668,699 $ 131,668,699
Unaffilited common stock reserves 0 58,022,941 0 39,500,610
--------------- --------------- --------------- ---------------
$ 193,409,806 $ 135,386,865 $ 131,668,699 $ 92,168,089
=============== =============== =============== ===============
Cash $ 13,538,051 $ 13,538,051 $ 26,659,775 $ 26,659,775
Short-term investments $ 357,421,335 $ 357,607,839 $ 363,177,559 $ 363,005,489
Short-term reserves 0 1,785,221 0 2,424,216
--------------- --------------- --------------- ---------------
$ 357,421,335 $ 355,822,618 $ 363,177,559 $ 360,581,273
=============== =============== =============== ===============
Financial liabilities:
Structured annuity reserves
and other similar items $ 316,103,692 $ 314,935,733 $ 294,946,081 $ 269,951,731
Deferred annuity reserves 3,500,004,263 3,505,031,240 3,459,658,569 3,465,810,423
Advance premiums 74,418,449 75,352,648 79,366,680 80,619,602
Settlement options without life
contingencies 586,593,787 586,593,787 528,593,132 528,593,132
</TABLE>
8. Federal Income Taxes
--------------------
The difference between the Company's effective income tax rate and the
statutory rate for both 1996 and 1995 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 examination of the Company's federal income tax returns through 1987
has been closed by the Internal Revenue Service. Returns for 1988, 1989 and
1990 have been examined. Although several issues remain open, no open issue
would have a material effect on unassigned surplus. Returns for 1991, 1992
and 1993 are currently under examination. At this time, there have been no
issues raised that would require adjustments which would have a material
effect on unassigned surplus.
-31-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
------------
9. Pension Plans and Other Postretirement Benefits
-----------------------------------------------
Pension Plans
Plan benefits are based on years of credited service up to 35 years and the
employee's rate of annual compensation during the 5 consecutive years of
highest compensation for both the United States and Canadian plans.
For the United States Plan, the pension cost allocated to the Company for
its employees amounted to $5,004,649 and $5,065,602 in 1996 and 1995,
respectively. A comparison of accumulated plan benefits, determined in
accordance with Statement of Financial Accounting Standards No. 35, and
plan net assets for the noncontributory defined benefit pension plan of the
Company and its parent and other affiliates as of August 31, 1996 (the most
recent actuarial valuation date) and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of accumulated
plan benefits:
Vested $2,620,702,754 $2,374,429,130
Nonvested 56,123,860 54,312,168
-------------- --------------
$2,676,826,614 $2,428,741,298
============== ==============
Net assets available for plan benefits $5,235,032,043 $4,514,976,310
============== ==============
</TABLE>
The assumed rate of return used in determining the actuarial present value
of vested and nonvested accumulated plan benefits was 7% as of August 31,
1996 and 1995.
For the Canadian Plan, pension cost allocated to the Company amounted to
$99,300 and $96,392 in 1996 and 1995, respectively. A comparison of
accumulated plan benefits and net assets of the non-contributory defined
benefit pension plan as of August 31, 1996 (the most recent actuarial
valuation date), and 1995 is presented below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated
plan benefits $34,439,874 $31,575,750
=========== ===========
Net assets available for plan benefits $69,278,013 $57,750,656
=========== ===========
</TABLE>
-32-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
---------------
9. Pension Plans and Other Postretirement Benefits, continued
----------------------------------------------------------
Pension Plans, continued
The Company participates with its affiliates in a qualified defined
contribution plan for which substantially all employees are eligible.
Contributions are based on the performance of the Company and its
affiliates as well as matching a percentage of employee contributions (up
to specified limits). Such contributions for the years ended December 31,
1996 and 1995, were $1,199,686 and $1,213,322, respectively. Benefits,
generally available upon retirement, are paid from net assets available for
plan benefits.
Other Postretirement Benefits
The Company's share of the net post-career benefit cost for the year ended
December 31, 1996, was $8,193,662 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.
At December 31, 1996 and 1995 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 $25,324,027 and $18,431,865. The transition obligation for
these potential benefits is being amortized over twenty years, beginning in
1993. The Company's share of the remaining transition obligation was
$47,574,926 and $51,393,712 at December 31, 1996, and 1995 respectively.
The Company's share of unrecognized net gains or losses, resulting from
experience different from that assumed and/or changes in actuarial
assumptions was $5,850,177. 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,
1996, was $62,193,498 which is not accrued in these financial statements.
The discount rate used in determining the accumulated post-career benefit
obligation attributable to these potential benefits is 7%, and the health
care cost trend rate is 12%, graded to 6% over the following 6 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
$6,087,178 as of January 1, 1996 and the estimated eligibility and interest
cost components of the net periodic post-career benefit cost for 1996 by
$472,916.
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 $1,367,353 and $1,379,176 for 1996 and 1995, respectively.
-33-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - STATUTORY BASIS
----------------
10. 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
$139,469,237 and $110,066,000 in 1996 and 1995, respectively.
At December 31, 1996, and 1995, total amounts owed to the parent company,
exclusive of federal income taxes, were approximately $59,517,000, and
$57,131,000, respectively. Total amounts owed to other affiliates were
approximately $24,000 and $65,000, respectively.
11. Contingent Liabilities
----------------------
The Company is subject to liabilities of a contingent nature which may from
time to time arise. Such liabilities could result from 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.
-34-
<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, 1996 and 1995
The following is a summary of certain financial data included in other exhibits
and schedules subjected to audit procedures by independent auditors and utilized
by actuaries in the determination of reserves.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investment Income Earned
US government bonds $ 526,222,953 $ 530,370,735
Other bonds (unaffiliated) 722,237,956 649,160,378
Preferred stocks (unaffiliated) 133,756 150,028
Common stocks (unaffiliated) 2,654,918 1,858,728
Mortgage loans 151,689,415 146,782,359
Real estate 2,419,973 2,419,973
Premium notes, policy loans and liens 113,871,892 106,382,488
Cash on hand and on deposit 381,271 284,642
Short-term investments 21,799,607 20,470,410
Other invested assets 17,635,963 14,097,776
-------------- --------------
Gross investment income $1,559,047,703 $1,471,977,517
============== ==============
Real Estate Owned - Book Value less Encumbrances $ 11,922,963 $ 12,541,645
============== ==============
Mortgage Loans - Book Value
Residential mortgages $ 61,970,068 $ 77,178,594
Commercial mortgages 1,678,818,465 1,590,994,634
-------------- --------------
Total mortgage loans $1,740,788,533 $1,668,173,228
============== ==============
Mortgage Loans By Standing - Book Value
Good standing $1,674,419,922 $1,540,752,912
============== ==============
Good standing with restructured terms $ 65,507,684 $ 74,122,559
============== ==============
Overdue more than three months, not in
foreclosure $ 117,142 $ 0
============== ==============
Foreclosure in process $ 743,785 $ 53,297,758
============== ==============
</TABLE>
-35-
<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, 1996 and 1995
(cont.)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Other Long Term Assets - Statement Value $ 362,566,588 $ 332,000,513
=============== ===============
Bonds and Stocks of Parents, Subsidiaries
and Affiliates -
Book Value
Common stocks $ 3,500,000 $ 3,500,000
=============== ===============
Bonds and Short-Term Investments by Class
and Maturity:
Bonds by Maturity - Statement Value
Due within one year or less $ 1,545,473,243 $ 1,353,529,467
Over 1 year through 5 years 5,665,388,673 4,921,657,600
Over 5 years through 10 years 7,859,356,966 7,490,031,716
Over 10 years through 20 years 2,142,286,717 2,208,744,124
Over 20 years 61,805,259 69,353,223
--------------- ---------------
Total by Maturity $17,274,310,858 $16,043,316,130
=============== ===============
Bonds by Class - Statement Value
Class 1 $16,782,010,348 $15,574,776,151
Class 2 398,415,262 372,208,191
Class 3 50,639,729 51,865,916
Class 4 43,106,036 44,465,872
Class 5 139,483 0
Class 6 0 0
--------------- ---------------
Total by Class $17,274,310,858 $16,043,316,130
=============== ===============
Total Bonds Publicly Traded $16,195,677,203 $14,955,364,286
=============== ===============
Total Bonds Privately Placed $ 1,078,633,655 $ 1,087,951,844
=============== ===============
Preferred Stocks - Statement Value $ 2,242,844 $ 2,289,969
=============== ===============
Common Stocks - Market Value $ 199,828,046 $ 137,897,021
=============== ===============
Short Term Investments - Book Value $ 357,607,839 $ 363,005,489
=============== ===============
Cash on Deposit $ 13,538,051 $ 24,843,116
=============== ===============
</TABLE>
-36-
<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, 1996 and 1995
(cont.)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Life Insurance In Force
Ordinary $289,668,061,000 $272,642,931,000
================ ================
Credit life $ 1,627,843,000 $ 1,438,251,000
================ ================
Group life $ 10,687,281,000 $ 10,397,714,000
================ ================
Amount of Accidental Death Insurance In
Force Under Ordinary Policies $ 8,680,207,000 $ 8,635,791,000
================ ================
Life Insurance Policies with Disability
Provisions in Force:
Ordinary 4,651,198 4,558,531
================ ================
Group life (certificates) 115,674 115,584
================ ================
Supplementary Contracts in Force:
Ordinary - not involving life contingencies
Amount on deposit $ 430,414,898 $ 408,002,563
================ ================
Income payable $ 2,490,316 $ 2,343,956
================ ================
Ordinary - involving life contingencies
Income payable $ 5,078,079 $ 4,760,377
================ ================
Annuities:
Ordinary
Immediate - amount of income payable $ 80,315,611 $ 70,432,775
================ ================
Deferred - fully paid account balance $ 3,480,300,066 $ 3,440,441,081
================ ================
Deferred - not fully paid - account
balance $ 798,077 $ 1,061,282
================ ================
Deposit Funds and Dividend Accumulations:
Deposit funds - account balance $ 100,153,807 $ 105,613,220
================ ================
Dividend accumulations - account balance $ 2,734,155,442 $ 2,524,922,896
================ ================
</TABLE>
-37-
<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 - UNAUDITED
As of March 31, 1997
<TABLE>
<CAPTION>
Admitted Assets 1997
---------------
<S> <C>
Bonds:
United States Government $ 6,871,361,744
Canadian Government and subdivisions 385,802,391
Other governmental units 1,257,549,838
Public utilities 2,755,074,704
Industrial and other 5,927,839,623
---------------
$17,197,628,300
Stocks:
Preferred 2,245,150
Unaffiliated common 187,927,075
Affiliated common 6,418,240
---------------
196,590,465
---------------
Mortgage Loans 1,826,715,389
---------------
Real estate:
Held for investment 11,768,292
---------------
Policy loans 1,805,922,862
Cash 1,327,104
Short-term investments 295,202,369
Other invested assets 366,255,488
---------------
Total cash and invested assets 21,701,410,269
Premiums deferred and uncollected 108,218,140
Investment income due and accrued 402,392,346
Federal income tax recoverable
(including from affiliates) 417,145
Other assets 24,493,885
---------------
Total admitted assets $22,236,931,785
===============
Liabilities
Aggregate reserves for life policies and contracts $14,749,602,137
Reserve for contracts without life contingencies 920,731,877
Policy and contract claims 68,543,611
Policyholders' dividend accumulations 2,792,772,032
Dividends to policyholders payable in the following year 621,311,134
Advance premiums, deposits and other policy and contract
liabilities 251,213,590
Interest maintenance reserve 14,230,951
Commissions payable 20,701,168
Federal income taxes (payable to affiliates) 35,595,289
Federal income taxes due or accrued 2,460,449
Other liabilities 165,601,674
Asset valuation reserve 175,089,850
---------------
Total Liabilities 19,817,853,762
---------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 30,000 shares authorized,
issued and outstanding 3,000,000
Paid-in surplus 21,846,419
Unassigned surplus 2,394,231,604
---------------
Total capital and surplus 2,419,078,023
---------------
Total liabilities, capital and surplus $22,236,931,785
===============
</TABLE>
-38-
<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 - UNAUDITED
for the quarter ended March 31, 1997
------------
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Common stock:
Balance at beginning and end of period $ 3,000,000
--------------
Paid-in surplus:
Balance at beginning and end of period 21,846,419
--------------
Unassigned surplus:
Balance at beginning of year 2,369,936,112
Net income 31,551,358
Net unrealized capital gains (10,062,830)
Change in nonadmitted assets (1,791,408)
Change in asset valuation reserve 4,718,371
Dividends to stockholder (parent company) (120,000)
--------------
Balance at end of period 2,394,231,604
--------------
Total capital and surplus $2,419,078,023
==============
</TABLE>
-39-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company)
STATEMENTS OF CASH FLOWS - STATUTORY BASIS - UNAUDITED
for the quarter ended March 31, 1997
---------------
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Cash from operations:
Premiums and annuity considerations $ 630,314,432
Other premiums, considerations and deposits, allowances and reserve adjustments, and other income 150,096,527
Investment income received (excluding realized gains/losses and net of investment expenses) 383,067,137
Life and accident and health benefits paid (112,533,535)
Surrender benefits and other fund withdrawals paid (171,442,403)
Other benefits to policyholders paid (175,399,432)
Commissions, other expenses and taxes paid (excluding federal income taxes) (138,917,337)
Dividends to policyholders paid (169,455,177)
Federal income taxes paid (excluding tax on capital gains) (69,301,049)
Other operating expenses paid (3,053)
-------------
Net cash from operations 326,426,110
-------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 279,245,356
Stocks 985,105
Mortgage loans 37,712,614
Other invested assets 0
Net gains on cash and short-term investments (3,481)
-------------
Total investment proceeds 317,939,594
Tax on capital gains 387,869
-------------
Total cash from investments 317,551,725
-------------
Cost of investments acquired (long-term only):
Bonds 567,683,863
Stocks 3,987,766
Mortgage loans 123,315,766
Other invested assets 2,339,939
-------------
Total investments acquired 697,327,413
-------------
Increase (decrease) in policy loans and premium notes 31,643,828
Net cash from investments (411,419,515)
-------------
Cash from financing and miscellaneous sources:
Other cash provided 22,427,767
Dividends to stockholders paid (120,000)
Other applications (net) (11,930,778)
-------------
Net cash from financing and miscellaneous sources 10,376,989
Net change in cash and short-term investments (74,616,416)
Cash and short-term investments, beginning of year 371,145,890
-------------
Cash and short-term investments, end of period $ 296,529,473
=============
</TABLE>
-40-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company)
STATEMENTS OF OPERATIONS - STATUTORY BASIS - UNAUDITED
for the quarter ended March 31, 1997
-------------
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Income:
Premiums and annuity considerations $ 629,602,751
Net investment income 399,086,298
Considerations for supplementary contracts and dividend accumulations 149,991,465
Other 147,813
--------------
1,178,828,327
--------------
Benefits and other expenses:
Death benefits 105,903,116
Surrender benefits and other fund withdrawals` 171,442,403
Other benefits and claims 38,683,185
Payments on supplementary contracts and dividend accumulations 145,644,466
Increase in policy and contract reserves 343,483,189
Commissions 49,419,035
General insurance expenses 64,613,723
Taxes, licenses and fees 11,571,607
--------------
930,760,724
--------------
Net gain from operations before dividends to policyholders and
federal income taxes 248,067,602
Dividends to policyholders 178,561,061
--------------
Net gain from operations after dividends to policyholders and before
federal income taxes 69,506,542
Federal and foreign income taxes incurred (excluding capital gains) 37,337,659
--------------
Net gain from operations after dividends to policyholders and 32,168,882
federal income taxes and before realized gains
Net realized capital gains or (losses) less capital gains tax of
$504,015 (excluding ($211,767) transferred to the IMR) (617,524)
--------------
Net income $ 31,551,358
==============
</TABLE>
-41-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTE TO FINANCIAL STATEMENTS
The statement of admitted assets, liabilities, capital and surplus--statutory
basis as of March 31, 1997 and the statement of changes in capital and surplus,
operations, and cash flows--statutory basis for the three-month period ending
March 31, 1997 are unaudited. The interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for fair presentation of the financial
position, changes in capital and surplus, results of operations and cash flows
for the interim periods. The results of operations for the interim period should
not be considered indicative of results to be expected for the full year.
-42-
<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 - UNAUDITED
As of June 30, 1997
<TABLE>
<CAPTION>
Admitted Assets
1997
----------------
<S> <C>
Bonds:
United States Government $ 6,840,960,050
Canadian Government and subdivisions 387,737,808
Other governmental units 1,321,824,485
Public utilities 2,756,931,379
Industrial and other 6,006,467,237
---------------
$17,313,920,959
Stocks:
Preferred 2,242,844
Unaffiliated common 222,570,381
Affiliated common 6,418,240
---------------
231,231,465
---------------
Mortgage Loans 1,894,099,970
---------------
Real estate:
Held for investment 11,613,621
---------------
Policy loans 1,843,095,179
Cash (6,165,698)
Short-term investments 455,468,674
Other invested assets 359,460,106
---------------
Total cash and invested assets 22,102,724,276
Premiums deferred and uncollected 104,451,778
Investment income due and accrued 391,571,406
Federal income tax recoverable
(including from affiliates) 880,514
Other assets 25,221,633
---------------
Total admitted assets $22,624,849,607
===============
Liabilities
Aggregate reserves for life policies and contracts $14,975,461,894
Reserve for contracts without life contingencies 934,893,614
Policy and contract claims 68,598,297
Policyholders' dividend accumulations 2,843,525,883
Dividends to policyholders payable in the following year 628,281,437
Advance premiums, deposits and other policy and contract
liabilities 247,813,537
Interest maintenance reserve 14,398,268
Commissions payable 27,381,106
Federal income taxes (payable to affiliates) 32,850,121
Federal income taxes due or accrued 2,619,893
Other liabilities 162,676,659
Asset valuation reserve 195,533,467
---------------
Total Liabilities 20,134,034,176
---------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 30,000 shares authorized,
issued and outstanding 3,000,000
Paid-in surplus 21,846,419
Unassigned surplus 2,465,969,012
---------------
Total capital and surplus 2,490,815,431
---------------
Total liabilities, capital and surplus $22,624,849,607
===============
</TABLE>
-43-
<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 - UNAUDITED
for the quarter ended June 30, 1997
------------
<TABLE>
<CAPTION>
June 30, 1997
---------------
<S> <C>
Common stock:
Balance at beginning and end of period $ 3,000,000
--------------
Paid-in surplus:
Balance at beginning and end of period 21,846,419
--------------
Unassigned surplus:
Balance at beginning of year 2,369,936,112
Net income 96,058,365
Net unrealized capital gains 17,840,135
Change in nonadmitted assets (1,900,354)
Change in asset valuation reserve (15,725,246)
Dividends to stockholder (parent company) (240,000)
--------------
Balance at end of period 2,465,969,012
--------------
Total capital and surplus $2,490,815,431
==============
</TABLE>
-44-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company)
STATEMENTS OF CASH FLOWS - STATUTORY BASIS - UNAUDITED
for the quarter ended June 30, 1997
---------------
<TABLE>
<CAPTION>
June 30, 1997
---------------
<S> <C>
Cash from operations:
Premiums and annuity considerations 1,245,987,617
Other premiums, considerations and deposits, allowances and reserve adjustments, and other income income 288,590,594
Investment income received (excluding realized gains/losses and net of investment expenses) 806,868,313
Life and accident and health benefits paid (225,340,316)
Surrender benefits and other fund withdrawals paid (343,109,309)
Other benefits to policyholders paid (352,787,352)
Commissions, other expenses and taxes paid (excluding federal income taxes) (273,663,391)
Dividends to policyholders paid (315,785,963)
Federal income taxes paid (excluding tax on capital gains) (125,308,408)
Other operating expenses paid (100,431)
--------------
Net cash from operations 705,351,354
--------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 600,563,169
Stocks 3,793,904
Mortgage loans 75,980,243
Other invested assets 5,611,094
Net gains on cash and short-term investments 959
Miscellaneous proceeds 888
--------------
Total investment proceeds 685,950,257
Tax on capital gains 387,868
--------------
Total cash from investments 685,562,389
--------------
Cost of investments acquired (long-term only):
Bonds 1,010,759,874
Stocks 12,877,279
Mortgage loans 228,621,270
Other invested assets 2,339,939
--------------
Total investements acquired 1,254,598,362
--------------
Increase (decrease) in policy loans and premium notes 68,816,144
Net cash from investments (637,852,117)
--------------
Cash from financing and miscellaneous sources:
Other cash provided 23,626,129
Dividends to stockholders paid (240,000)
Other applications (net) (12,728,279)
--------------
Net cash from financing and miscellaneous sources 10,657,850
Net change in cash and short-term investments 78,157,086
Cash and short-term investments, beginning of year 371,145,889
--------------
Cash and short-term investments, end of period $ 449,302,976
==============
</TABLE>
-45-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
(a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company)
STATEMENTS OF OPERATIONS - STATUTORY BASIS - UNAUDITED
for the quarter ended June 30, 1997
-------------
<TABLE>
<CAPTION>
June 30, 1997
--------------
<S> <C>
Income:
Premiums and annuity considerations $1,240,187,470
Net investment income 805,329,473
Considerations for supplementary contracts and dividend accumulations 288,399,265
Other 252,192
--------------
2,334,168,400
--------------
Benefits and other expenses:
Death benefits 215,749,920
Surrender benefits and other fund withdrawals` 343,109,308
Other benefits and claims 73,051,989
Payments on supplementary contracts and dividend accumulations 290,847,699
Increase in policy and contract reserves 632,061,426
Commissions 98,117,249
General insurance expenses 138,270,982
Taxes, licenses and fees 24,351,708
--------------
1,815,560,281
--------------
Net gain from operations before dividends to policyholders and
federal income taxes 518,608,119
Dividends to policyholders 331,862,150
--------------
Net gain from operations after dividends to policyholders and before
federal income taxes 186,745,969
Federal and foreign income taxes incurred (excluding capital gains) 89,915,755
--------------
Net gain from operations after dividends to policyholders and
federal income taxes and before realized gains 96,830,214
Net realized capital gains or (losses) less capital gains tax of
$884,187 (excluding ($27,092) transferred to the IMR) (771,849)
--------------
Net income $ 96,058,365
==============
</TABLE>
-46-
<PAGE>
STATE FARM LIFE INSURANCE COMPANY
NOTE TO FINANCIAL STATEMENTS
The statement of admitted assets, liabilities, capital and surplus--statutory
basis as of June 30, 1997 and the statement of changes in capital and surplus,
operations, and cash flows--statutory basis for the three-month period ending
June 30, 1997 are unaudited. The interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for fair presentation of the financial
position, changes in capital and surplus, results of operations and cash flows
for the interim periods. The results of operations for the interim period should
not be considered indicative of results to be expected for the full year.
-47-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B.
(b) Exhibits
(1) Resolutions of the Board of Directors of State Farm Life Insurance
Company ("State Farm") establishing the State Farm Life Insurance
Company Variable Annuity Separate Account (the "Variable Account").*
(2) Not Applicable.
(3) Distribution Agreement.**
(4) (a) Form of Policy.**
(b) Riders to Form of Policy**
(5) Application.**
(6) (a) Articles of Incorporation of State Farm.*
(b) By-Laws of State Farm.*
(7) Not Applicable.
(8) Form of Participation Agreement.**
(9) Opinion and Consent of Counsel.
(10) (a) Consent of Sutherland, Asbill & Brennan.
(b) Consent of Coopers & Lybrand L.L.P.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney**
________________
* Incorporated by reference to the Registrants' initial registration
statement filed with the Securities and Exchange Commission on January
3, 1997 (File No. 333-19189).
** Incorporated by reference to the Registrant's Pre-Effective Amendment
No. 1 filed with the Securities and Exchange Commission on October 10,
1997 (File No. 333-19189).
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
BUSINESS ADDRESS/*/ Position with State Farm
---------------- ------------------------
<S> <C>
Marvin D. Bower Chairman of the Board and Director
Edward B. Rust, Jr. Director; President
Roger B. Tompkins Director: Executive Vice President
Darrell W. Beernink Director; Vice President and Actuary
Charles R. Wright Director; Agency Vice President
Robert S. Eckley Director
Wendy L. Gramm Director
Roger S. Joslin Director
Kurt G. Moser Director; Vice President - Investments
George L. Perry Director
Don D Rood Director
Curtis W. Tarr Director
Vincent J. Trosino Director
Mary Rebecca Blakeslee Vice President - Life/Health Underwriting
James G. Fisher Vice President - Operations
James A. Malay Vice President - Policyholder Systems
William A. Montgomery Senior Vice President and General Counsel
Danny L. Scott, M.D. Vice President and Medical Director
Laura P. Sullivan Vice President - Counsel; and Secretary
Dale R. Egeberg Vice President and Controller - Life
Robert Myer Vice President - Life/Health Field Services
</TABLE>
* The principal business address of all the persons listed above is One State
Farm Plaza, Bloomington, Illinois 61710-0001.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
State Farm Mutual Automobile Insurance Company
State Farm County Mutual Insurance Company of Texas (Common
Management)
State Farm General Insurance Company (100% Ownership)
State Farm Fire and Casualty Company (100% Ownership)
State Farm Life Insurance Company (100% Ownership)
State Farm Annuity and Life Insurance Company (100% Ownership)
State Farm Life and Accident Assurance Company (100% Ownership)
State Farm Indemnity Company (100% Ownership)
Amberjack, Ltd. (100% Ownership)
Fiesta Jack, Ltd. (100% Ownership)
State Farm Lloyds, Inc. (100% Ownership)
State Farm Investment Management Corp. (100% Ownership)
State Farm International Services, Inc. (100% Ownership)
State Farm VP Management Corp. (100% Ownership)
Insurance Placement Services, Inc. (100% Ownership)
ITEM 27. NUMBER OF POLICY OWNERS
As of the date of the prospectus included in this post-effective
amendment, there were no policy owners.
ITEM 28. INDEMNIFICATION
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.
ITEM 29. PRINCIPAL UNDERWRITER
(a) State Farm VP Management Corp. ("State Farm VP") is the
registrant's principal underwriter.
<PAGE>
(b) Officers and Directors of State Farm VP.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With the Underwriter
- ------------------ ---------------------
<S> <C>
Edward B. Rust, Jr. Director; President, CEO
Roger S. Joslin Director; Vice President and
Treasurer; CFO
Kurt G. Moser Director
Charles R. Wright Director; Vice President,
Sales and Marketing
Roger B. Tompkins Director; Vice President,
Administration; COO
Ralph O. Bolt Assistant Vice President,
Sales and Marketing
David R. Grimes Assistant Vice President,
Financial; Secretary
Terry L. Huff Assistant Vice President,
Administration; Manager, OSJ
Patricia L. Dysart Assistant Secretary; Counsel
</TABLE>
* The principal business address of all of the persons listed above is One
State Farm Plaza, Bloomington, Illinois 61710-0001.
ITEM 30. LOCATION OF BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be
kept by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by State Farm at One State Farm Plaza,
Bloomington, Illinois 61710-0001.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
registration statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for as
long as purchase payments under the Policies offered herein are
being accepted.
(b) The registrant undertakes that it will include either (1) as part
of any application to purchase a Policy offered by the
prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or
similar written communication affixed to or included in the
prospectus that the applicant can remove and send to State Farm
for a Statement of Additional Information.
(c) The registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made
available under this Form N-4 promptly upon written or oral
request to State Farm at the address or phone number listed in
the prospectus.
(d) State Farm represents that in connection with its offering of the
Policies as funding vehicles for retirement plans meeting the
requirements of Section 403(b) of the Internal Revenue Code of
1986, it is relying on a no-action letter dated November 28,
1988, to the American Council of Life Insurance (Ref. No. IP-6-
88) regarding Sections 22(e), 27(c)(1), and 27(d) of the
Investment Company Act of 1940, and that paragraphs numbered (1)
through (4) of that letter will be complied with.
(e) State Farm represents that the fees and charges under the
Policies, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the
risks assumed by State Farm.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the registrant certifies that it meets the requirements of Securities Act
Rule 485 for effectiveness of this post-effective amendment and has caused this
post-effective amendment to be signed on its behalf, in the City of Bloomington,
and the State of Illinois, on this 3rd day of November, 1997.
State Farm Life Insurance Company
Variable Annuity Separate Account (Registrant)
Attest: /s/ Patricia Dysart By: *
- ---------------------------- ------------------------------
Edward B. Rust, Jr.
President
State Farm Life Insurance Company
By: State Farm Life Insurance Company (Depositor)
Attest: /s/ Patricia Dysart By: *
- ---------------------------- ------------------------------
Edward B. Rust, Jr.
President
State Farm Life Insurance Company
<PAGE>
As required by the Securities Act of 1933, this post-effective amendment
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
* President and Director
- -----------------------
Edward B. Rust, Jr. (Principal Executive Officer)
* Vice President and Actuary;
- -----------------------
Darrell W. Beernink Director
(Principal Financial Officer)
* Vice President and Controller - Life
- -----------------------
Dale R. Egeberg (Principal Accounting Officer)
* Director
- -----------------------
Darrell W. Beernink
* Director
- -----------------------
Marvin D. Bower
Director
- -----------------------
Roger B. Tompkins
* Director
- -----------------------
Robert S. Eckley
* Director
- -----------------------
Wendy L. Gramm
* Director
- -----------------------
Roger S. Joslin
* Director
- -----------------------
Kurt G. Moser
* Director
- -----------------------
George L. Perry
* Director
- -----------------------
Don D Rood
* Director
- -----------------------
Curtis W. Tarr
* Director
- -----------------------
Vincent J. Trosino
* Director
- -----------------------
Charles R. Wright
* By /s/ Terry Huff Date: November 3, 1997
-----------------
Terry Huff
Pursuant to Power
of Attorney
<PAGE>
Exhibit 9
[STATE FARM LIFE INSURANCE COMPANY LETTERHEAD]
November 5, 1997
Ladies and Gentlemen:
As Senior Vice President and General Counsel of State Farm Life Insurance
Company (the "Company"), I have general supervision of the Company's legal
affairs. In connection with the proposed registration under the Securities Act
of 1933, as amended, of certain individual variable deferred annuity contracts
(the "Contracts") to be issued by the Company through the State Farm Life
Insurance Company Variable Annuity Separate Account (the "Separate Account")
(File No. 333-19189), I have been advised by members of our legal staff
concerning the establishment of the Separate Account by the Board of Directors
of the Company on December 9, 1996 as a separate account for assets applicable
to variable annuity contracts, pursuant to the provisions of 215 ILCS 5/245.21
of the Illinois Insurance Laws. I have further been advised by members of our
legal staff concerning such other matters of law as I deem necessary for this
opinion, and I advise you that:
1. The Separate Account is a separate account of the Company duly
created and validly existing pursuant to the laws of the State of Illinois.
2. The Contracts, when issued in accordance with the Prospectus
constituting a part of the Registration Statement and upon compliance with
applicable local law, will be legal and binding obligations of the Company in
accordance with their respective terms.
3. The portion of the assets held in the Separate Account equal to
reserves and other contract liabilities with respect to the Separate Account are
not chargeable with liabilities arising out of any other business the Company
may conduct.
I consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of my name under the heading "Legal Matters" in the
Statement of Additional Information constituting a part of the Registration
Statement.
Very truly yours,
/s/ William A. Montgomery
--------------------------------
William A. Montgomery
Senior Vice President and
General Counsel
<PAGE>
Exhibit 10(a)
[LETTERHEAD OF SUTHERLAND, ASBILL & BRENNAN, L.L.P.]
November 7, 1997
State Farm Life Insurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Re: State Farm Life Insurance Company
Variable Annuity Separate Account
---------------------------------
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of Post-
Effective Amendment No. 1 to Form N-4 for State Farm Life Insurance Company
Variable Annuity 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.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
-----------------------------
Stephen E. Roth
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
EXHIBIT 10(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life Insurance Company
We consent to the inclusion in Post-Effective Amendment No.1 to the Registration
Statement of State Farm Life Insurance Company Variable Annuity Separate Account
on Form N-4 (File No. 333-19189) of our report dated February 18, 1997, 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 Statement of Additional Information.
Coopers & Lybrand L.L.P
Chicago, Illinois
November 7, 1997
