<PAGE> 1
As filed with the Securities and Exchange Commission on August 13, 1999
File No. 333-47363
File No. 811-08681
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 2 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2
LSW VARIABLE ANNUITY ACCOUNT I
(Exact Name of Registrant)
LIFE INSURANCE COMPANY OF THE SOUTHWEST
(Name of Depositor)
1300 West Mockingbird Lane
Dallas, Texas 75247-4921
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (800) 228-4579
D. Russell Morgan, Esq.
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
X immediately upon filing pursuant to paragraph (b) of Rule 485
- ------
on pursuant to paragraph (b) of Rule 485
- ------
60 days after filing pursuant to paragraph (a) of Rule 485
- ------
---------------
<PAGE> 2
LIFE INSURANCE COMPANY OF THE SOUTHWEST
LSW VARIABLE ANNUITY ACCOUNT I
HOME 0FFICE
1300 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75427-4921
1-800-228-4579
RetireMax Variable Annuity
The RetireMax Variable Annuity policies described in this prospectus are
individual flexible premium deferred variable annuity policies supported by the
LSW Variable Annuity Account I, a separate account of Life Insurance Company of
the Southwest ("LSW", "we", "our" or "us"). We allocate net Premium Payments to
either the Fixed Account or to the Variable Account. The Variable Account is
divided into 17 Subaccounts. Each Subaccount invests in shares of one of the
underlying fund options (each a "Fund") described below:
<TABLE>
<CAPTION>
FUNDS INVESTMENT ADVISOR
- ----- ------------------
<S> <C>
ALGER AMERICAN FUND
Alger American Small Capitalization Portfolio Fred Alger Management, Inc.
Alger American Growth Portfolio Fred Alger Management, Inc.
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio Fidelity Investments
Growth Portfolio Fidelity Investments
High Income Portfolio Fidelity Investments
Overseas Portfolio Fidelity Investments
VARIABLE INSURANCE PRODUCTS FUND II
Index 500 Portfolio Fidelity Investments
Contrafund Portfolio Fidelity Investments
THE MARKET STREET FUND
Growth Portfolio Sentinel Advisors Company
Sentinel Growth Portfolio Sentinel Advisors Company
Aggressive Growth Portfolio Sentinel Advisors Company
Bond Portfolio Sentinel Advisors Company
Managed Portfolio Sentinel Advisors Company
Money Market Portfolio Sentinel Advisors Company
International Portfolio Boston Company Asset Management Inc.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Fund II Strong Capital Management, Inc.
STRONG SPECIAL FUND II, INC. Strong Capital Management, Inc.
</TABLE>
This Prospectus provides you with the basic information you should know
before investing. You should read it and keep it for future reference. A
Statement of Additional Information dated August 13, 1999 containing further
information about the Policies and the Variable Account is filed with the
Securities and Exchange Commission. You can obtain a copy without charge from
Life Insurance Company of the Southwest by calling 1-800-228-4579, or writing to
LSW at the address shown above.
You may also obtain prospectuses for each of the Fund options identified
above without charge by calling or writing to the above telephone number or
address.
Investments in these Policies are not deposits or obligations of, and are
not guaranteed or endorsed by, the adviser of any of the underlying Funds
identified above, the U.S. government, or
1
<PAGE> 3
any bank or bank affiliate. Investments are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency.
It may not be a good decision to purchase a Policy as a replacement for
another type of variable annuity if you already own another flexible premium
deferred variable annuity.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy or adequacy of the Prospectus. Any
representation to the contrary is a criminal offense.
The Statement of Additional Information, dated August 13, 1999, is
incorporated into this Prospectus by reference. The Table of Contents for the
Statement of Additional Information appears on page of the Prospectus.
The date of this Prospectus is August 13, 1999.
2
<PAGE> 4
TABLE OF CONTENTS
SUMMARY
SUMMARY OF POLICY EXPENSES......................................................
UNDERLYING FUND ANNUAL EXPENSES.................................................
ACCUMULATION UNIT VALUES........................................................
LIFE INSURANCE COMPANY OF THE SOUTHWEST, THE VARIABLE
ACCOUNT, AND THE FUNDS..........................................................
Life Insurance Company of the Southwest.............................
The Variable Account................................................
The Funds...........................................................
DETAILED DESCRIPTION OF POLICY PROVISIONS.......................................
Issuance of the Policy..............................................
Premium Payments....................................................
The Initial Premium Payment..........................
Subsequent Premium Payments..........................
Allocation of Net Premium Payments...................
Transfers...........................................................
Value of a Variable Account Accumulation Unit.......................
Net Investment Factor................................
Determining the Accumulation Value..................................
Annuitization.......................................................
Maturity Date........................................
Election of Payment Options..........................
Frequency and Amount of Annuity Payments.............
Annuitization - Variable Account....................................
Value of an Annuity Unit.............................
Assumed Investment Rate..............................
Annuitization - Fixed Account.......................................
Annuity Payment Options.............................................
Death of Owner......................................................
Death of Annuitant Prior to the Annuitization Date..................
Generation-Skipping Transfers.......................................
Ownership Provisions................................................
CHARGES AND DEDUCTIONS..........................................................
Deductions from the Variable Account................................
Contingent Deferred Sales Charge....................................
Administration Charge...............................................
Annual Policy Fee...................................................
Transfer Charge.....................................................
Premium Taxes.......................................................
Charge for Optional Enhanced Death Benefit Rider....................
Other Charges.......................................................
POLICY RIGHTS...................................................................
Free Look...........................................................
Loan Privilege - Qualified Policies and Certain Tax Sheltered
Annuities.........................................................
Surrender and Withdrawal............................................
Payments............................................................
Surrenders and Withdrawals Under a Tax Sheltered Annuity Policy.....
Telephone Transaction Privilege.....................................
Available Automated Fund Management Features........................
Dollar Cost Averaging................................
Portfolio Rebalancing................................
Systematic Withdrawals...............................
Policy Rights Under Certain Plans...................................
3
<PAGE> 5
THE FIXED ACCOUNT...............................................................
Minimum Guaranteed and Current Interest Rates....................
OPTIONAL ENHANCED DEATH BENEFIT RIDER...........................................
FEDERAL INCOME TAX CONSIDERATIONS...............................................
Taxation of Non-Qualified Policies...............................
Taxation of Qualified Policies...................................
Possible Tax Law Changes.........................................
Charge for Tax Provisions........................................
GENDER NEUTRALITY...............................................................
VOTING RIGHTS...................................................................
CHANGES TO VARIABLE ACCOUNT.....................................................
ADVERTISING.....................................................................
DISTRIBUTION OF THE POLICIES....................................................
STATEMENTS AND REPORTS..........................................................
OWNER INQUIRIES.................................................................
LEGAL PROCEEDINGS...............................................................
GLOSSARY........................................................................
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION........................
4
<PAGE> 6
SUMMARY
This summary provides a brief description of some of the features and
charges of the Policy. You will find more detailed information in the rest of
this Prospectus, the Statement of Additional Information and the Policy. Please
keep the Policy and its riders or endorsements, if any, together with the
application. Together they are the entire agreement between you and us.
HOW DO I PURCHASE A POLICY?
Generally, you may purchase a Policy if you are age 85 and younger. See
"Issuance of a Policy", page . The initial Premium Payment must be at least
$5,000 for Non-Qualified Policies, and generally must be at least $2,000 for
Qualified Policies. We will also accept Policies contemplating monthly payments
of at least $100 by salary reduction, deduction or electronic funds transfer.
CAN I MAKE ADDITIONAL PREMIUM PAYMENTS?
You may make additional Premium Payments at any time. They must be at least $100
($50 for IRA's). We may also accept lower Premium Payments at our discretion if
the Premium Payments are remitted electronically. The total of all Premium
Payments under Policies issued on the life of any one Annuitant may not exceed
$1,000,000 without our prior consent (see "Premium Payments," page ).
HOW DOES THE "FREE LOOK" RIGHT TO EXAMINE THE POLICY WORK?
To be sure that you are satisfied with the Policy, you have a ten day
free look right to examine the Policy. Some states may require a longer period.
Within ten days of the day you receive the Policy, you may return it to our Home
Office at the address shown on the cover page of this Prospectus. When we
receive your Policy, we will void the Policy and refund the Accumulation Value
plus any charges assessed when the Policy was issued, unless otherwise required
by state and/or federal law.
In the case of IRA's and Policies issued in states that require the
return of Premium Payments, we will refund the greater of: (i) Premium Payments,
or (ii) Accumulation Value plus any amount deducted for state premium taxes. In
these cases, we may require that all Accumulation Value allocated to the
Variable Account initially be held in the Market Street money market Subaccount
(see "Free Look", page ). At the end of the free look period, we will allocate
Accumulation Value among the Subaccounts of the Variable Account based on the
allocation percentages you specify in the application. For this purpose, we
assume the free look period ends 20 days after the date the Policy is issued.
WHAT IS THE PURPOSE OF THE VARIABLE ACCOUNT?
The Variable Account is a separate investment account that consists of 17
Subaccounts. Before the Accumulation Value is applied to a payment option,
amounts in the Variable Account
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<PAGE> 7
will vary according to the investment performance of the Funds in which your
elected Subaccounts are invested. You may allocate Net Premium Payments among
the Fixed Account and the 17 Subaccounts. The assets of each Subaccount are
invested in the corresponding portfolios of the Funds that are listed on the
cover page of this Prospectus (see "The Variable Account" and "Underlying Fund
Options", pages and ).
We cannot give any assurance that any Subaccount will achieve its
investment objectives. You bear the entire investment risk on the value of your
Policy which you allocate to the Variable Account. The value of your Policy may
be more or less than the premiums paid.
HOW DOES THE FIXED ACCOUNT WORK?
You may allocate all or part of your Net Premium Payments or make
transfers from the Variable Account to the Fixed Account. Accumulation Value
held in the Fixed Account will earn an effective interest rate of at least 3.0%
(see "The Fixed Account", page ).
WHEN WILL I RECEIVE PAYMENTS?
After the Accumulation Value is transferred to a payment option, we will
pay proceeds according to the Annuity Payment Option you select. If the
Accumulation Value at the Annuitization date is less than $3,500, the
Accumulation Value may be distributed in one lump sum instead of annuity
payments. If any annuity payment would be less than $100, we have the right to
change the frequency of payments to intervals that result in payments of at
least $100. In no event will annuity payments be less frequent than annually
(see "Annuitization - Frequency and Amount of Annuity Payments", page ).
WHAT HAPPENS IF THE OWNER DIES BEFORE ANNUITIZATION?
If (1) any Owner dies before the Accumulation Value is transferred to a
payment option ("Annuitization"); (2) the Enhanced Death Benefit Rider is not
elected; and (3) the owner has not reached age 81, we will pay the Beneficiary
the greater of (a) the Accumulation value, or (b) the Net Premium payments made
to the Policy (less all withdrawals and applicable premium tax charge). For more
information, see "Death of Owner", page .
WHAT HAPPENS IF THE ANNUITANT DIES BEFORE ANNUITIZATION?
If the Annuitant (who is not an Owner) dies before the Accumulation Value
is transferred to a payment option, we will pay the Beneficiary a Death Benefit
equal to the cash Surrender Value, unless the Owner takes another available
action (see "Death of Annuitant Prior to the Annuitization Date, page ).
CAN I MAKE A WITHDRAWAL FROM MY POLICY?
You may withdraw part or all of the Cash Surrender Value at any time
before the Policy is Annuitized (see "Surrender and Withdrawal", page ). A
Withdrawal or a surrender may result in federal income tax, including a federal
penalty tax (see "Federal Income Tax Considerations", page ).
6
<PAGE> 8
WHAT CHARGES WILL I PAY?
Contingent Deferred Sales Charge: We do not deduct a sales charge from
Premium Payments. However, if you surrender the Policy or make a Withdrawal, we
will generally deduct from the Accumulation Value a Contingent Deferred Sales
Charge not to exceed 7% of the lesser of the total of all Net Premium Payments
made within 84 months prior to the date of the request to surrender or the
amount surrendered. After the Policy is 15 years old, there is never a
Contingent Deferred Sales Charge, even on Premium Payments made within 84 months
of a surrender or Withdrawal (see "Contingent Deferred Sales Charge", page ).
Annual Contract Fee: We deduct an Annual Policy Fee of $30.00 payable on
the Date of Issue and at each policy Anniversary thereafter as long as the
Accumulation Value is less than $50,000 (see "Annual Policy Fee," page ).
Administration Charge: We also deduct an Administration Charge each day
at an annual rate of 0.15% from the assets of the Variable Account (see
"Deductions from the Variable Account," page ).
Mortality and Expense Risk Charge: We deduct a mortality and expense risk
charge each day from the assets of the Variable Account at an annual rate of
1.25% (see "Deductions from the Variable Account," page ).
Charge for Optional Enhanced Death Benefit Rider: If you elect this
Rider, we deduct an annual charge of 0.20% of the Accumulation Value for this
option (see "Charge for Optional Enhanced Death Benefit Rider," page ).
Premium Taxes: If a governmental entity imposes premium taxes, we will
make a deduction for premium taxes in a corresponding amount. Certain states
impose a premium tax. Premium taxes may range up to 3.5% (see "Premium Taxes,"
page ).
Investment Management Fees: Charges for investment management services
and operating expenses are deducted daily from each portfolio of each Fund (see
"Underlying Fund Annual Expenses, page, and the accompanying Fund
prospectuses).
ARE THERE ANY OTHER POLICY PROVISIONS?
For information concerning other important Policy provisions, see "Policy
Rights and Privileges" and the remainder of this Prospectus.
HOW WILL THE POLICY BE TAXED?
For a brief discussion of our current understanding of the federal tax
laws concerning us and the Policy, see "Federal Income Tax Considerations,"
page .
WHAT IF I HAVE QUESTIONS?
We will be happy to answer your questions about the Policy or our
procedures. Call or write to us at the phone number or address on the cover page
of this Prospectus. All inquires should include the Policy number and the names
of the Owner and the Annuitant.
If you have questions concerning your investment strategies, please
contact your registered representative.
7
<PAGE> 9
SUMMARY OF POLICY EXPENSES
TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.........................................................................None
Premium Taxes ........................................................................................See below(1)
Contingent Deferred Sales Charge (as a percentage of Net Premium Payments surrendered or withdrawn)(2)
Number of Completed Years from Date of Premium Payment
</TABLE>
<TABLE>
<S> <C>
0................................................................................................7%
1................................................................................................6%
2................................................................................................5%
3................................................................................................4%
4................................................................................................3%
5................................................................................................2%
6................................................................................................1%
7................................................................................................0%
After the fifteenth Policy Anniversary, no Contingent Deferred Sales Charge will apply.
</TABLE>
<TABLE>
<S> <C>
ANNUAL EXPENSES (deducted daily as a percentage of Variable Account Accumulation Value)
Mortality Risk Charge(3)................................................................................0.85%
Expense Risk Charge(3)..................................................................................0.40%
Administration Charge(3)................................................................................0.15%
-----
Total Basic Variable Account Annual Percentage Expenses.................................................1.40%
Annual Policy Fee(4)....................................................................................$30
Charge for Optional Enhanced Death Benefit Rider(5).....................................................0.20%
</TABLE>
(1) States may assess premium taxes on the Policies. LSW will make a
deduction for premium taxes at the time it pays premium taxes to the
applicable taxing authority. See "Premium Taxes", page .
(2) Each Policy Year, the Owner may withdraw without a Contingent Deferred
Sales Charge ("CDSC") an amount equal to 10% of the Accumulation Value as
of the most recent Policy Anniversary. In addition, any amount withdrawn
in order for the Policy to meet minimum Distribution requirements under
the Code shall be free of the CDSC. Withdrawals may be restricted for
Policies issued pursuant to the terms of a Tax Sheltered Annuity. This
CDSC-free Withdrawal privilege does not apply in the case of full
surrenders unless otherwise required by law, and is non-cumulative; that
is, free amounts not taken during any given Policy Year cannot be taken
as free amounts in a subsequent Policy Year (see "Contingent Deferred
Sales Charge", page ).
(3) The Mortality Risk Charge, the Expense Risk Charge and the Administration
Charge set forth above apply exclusively to allocations made to the
Subaccount(s). Such charges do not apply to, and will not be assessed
against, allocations made to the Fixed Account.
(4) The Annual Policy Fee is assessed only upon Policies which as of the Date
of Issue, or applicable Policy Anniversary, have an Accumulation Value
plus any outstanding loan and accrued interest of less than $50,000, and
is not assessed on Policy Anniversaries after the Annuitization Date.
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<PAGE> 10
(5) This charge, which applies to the Accumulation Value plus the amount of
any outstanding loan and accrued interest, is assessed only if the Owner
has elected the Enhanced Death Benefit Rider. See "Optional Enhanced
Death Benefit Rider", page .
UNDERLYING FUND ANNUAL EXPENSES(6) (as a percentage of underlying Fund net
assets, and after expense reimbursement, if applicable)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Management Other Total Mutual
- -------------------------------------------------------------------------------------------------------
Fees, Expenses, Fund Expenses,
- -------------------------------------------------------------------------------------------------------
after expense after expense after expense
- -------------------------------------------------------------------------------------------------------
reimbursement reimbursement reimbursement
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89%
- -------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio 0.75% 0.04% 0.79%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income Portfolio 0.49% 0.08% 0.57%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth Portfolio 0.59% 0.07% 0.66%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income Portfolio 0.58% 0.12% 0.70%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.15% 0.89%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.04% 0.28%
- -------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.07% 0.66%
- -------------------------------------------------------------------------------------------------------
Market Street Growth Portfolio 0.32% 0.14% 0.46%
- -------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth Portfolio 0.50% 0.32% 0.82%
- -------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth Portfolio 0.41% 0.20% 0.61%
- -------------------------------------------------------------------------------------------------------
Market Street Managed Portfolio 0.40% 0.17% 0.57%
- -------------------------------------------------------------------------------------------------------
Market Street Bond Portfolio 0.35% 0.18% 0.53%
- -------------------------------------------------------------------------------------------------------
Market Street International Portfolio 0.75% 0.25% 1.00%
- -------------------------------------------------------------------------------------------------------
Market Street Money Market Portfolio 0.25% 0.15% 0.40%
- -------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 1.00% 0.20% 1.20%
- -------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund 1.00% 0.20% 1.20%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(6) The Fund expenses shown above are assessed at the underlying Fund level
and are not direct charges against Variable Account assets or reductions
from Accumulation Values. These underlying Fund expenses are taken into
consideration in computing each underlying Fund's net asset value, which
is the share price used to calculate the unit values of the Variable
Account. The management fees and other expenses are more fully described
in the prospectuses for each individual underlying Fund. The information
relating to the underlying Fund expenses was provided by the underlying
Fund and was not independently verified by LSW. In the absence of any fee
waivers or expense reimbursements, the Management Fees, Other Expenses,
and Total Expenses of the Funds listed below would have been as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Management Other Total Mutual
- -----------------------------------------------------------------------------------------------
Fees Expenses Fund Expenses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity VIP Fund-Equity Income Portfolio 0.49% 0.09% 0.58%
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth Portfolio 0.59% 0.09% 0.68%
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.17% 0.91%
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.11% 0.35%
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.11% 0.70%
- -----------------------------------------------------------------------------------------------
Market Street Growth Portfolio 0.32% 0.15% 0.47%
- -----------------------------------------------------------------------------------------------
Market Street Sentinel Growth Portfolio 0.50% 0.33% 0.83%
- -----------------------------------------------------------------------------------------------
Market Street Aggressive Growth Portfolio 0.41% 0.21% 0.62%
- -----------------------------------------------------------------------------------------------
Market Street Managed Portfolio 0.40% 0.18% 0.58%
- -----------------------------------------------------------------------------------------------
Market Street Bond Portfolio 0.35% 0.20% 0.55%
- -----------------------------------------------------------------------------------------------
Market Street Money Market Portfolio 0.25% 0.17% 0.42%
- -----------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund 1.00% 0.60% 1.60%
- -----------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
The following chart depicts the dollar amount of expenses that would be incurred
under this Policy assuming a $1000 investment and 5% annual return, and no
election of the optional Enhanced Death
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<PAGE> 11
Benefit Rider. THESE DOLLAR FIGURES ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESSER THAN THOSE SHOWN BELOW.
<TABLE>
<CAPTION>
IF YOU SURRENDER YOUR IF YOU DO NOT SURRENDER IF YOU ANNUITIZE YOUR
CONTRACT AT THE END OF YOUR CONTRACT AT THE END OF CONTRACT AT THE END OF
THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
Subaccount* 1 Yr. 3 Yrs. 1 Yr. 3 Yrs. 1 Yr.** 3 Yrs.
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization $94 $123 $24 $73 $24 $73
- --------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 93 120 23 70 23 70
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 91 113 21 63 21 63
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 91 116 21 66 21 66
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 92 117 22 67 22 67
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 94 123 24 73 24 73
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 88 105 18 55 18 55
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 91 116 21 66 21 66
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 89 110 19 60 19 60
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 93 121 23 71 23 71
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 91 115 21 65 21 65
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 91 113 21 63 21 63
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 90 112 20 62 20 62
- --------------------------------------------------------------------------------------------------------------------------------
Market Street International 95 126 25 76 25 76
- --------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 89 108 19 58 19 58
- --------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 97 132 27 82 27 82
- --------------------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth 97 132 27 82 27 82
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For an Owner who has elected the Enhanced Death Benefit Rider (see "Optional
Enhanced Death Benefit Rider", page ), and again assuming a $1000 investment
and 5% annual return, the chart below depicts the annual expenses that would be
incurred under this Policy:
<TABLE>
<CAPTION>
IF YOU SURRENDER YOUR IF YOU DO NOT SURRENDER IF YOU ANNUITIZE YOUR
CONTRACT AT THE END OF YOUR CONTRACT AT THE END OF CONTRACT AT THE END OF
THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
Subaccount* 1 Yr. 3 Yrs. 1 Yr. 3 Yrs. 1 Yr.** 3 Yrs.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization $96 $129 $26 $79 $26 $79
- ---------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 95 126 25 76 25 76
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 93 119 23 69 23 69
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 93 122 23 72 23 72
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 94 123 24 73 24 73
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 96 129 26 79 26 79
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 90 111 20 61 20 61
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 93 122 23 72 23 72
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 91 116 21 66 21 66
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 95 127 25 77 25 77
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 93 121 23 71 23 71
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 93 119 23 69 23 69
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 92 118 22 68 22 68
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street International 97 132 27 82 27 82
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 91 114 21 64 21 64
- ---------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 99 138 29 88 29 88
- ---------------------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth 99 138 29 88 29 88
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 12
*For purposes of computing the Annual Policy Fee, the Annual Policy Fee has been
converted into a per-dollar per-day charge. The per-dollar per-day charge has
been estimated based on the distribution of LSW's non-variable single premium
deferred annuity block of business, and works out to 0.06% per annum. The Annual
Policy Fee is waived for Policies with Accumulation Values in excess of $50,000.
**The Policy may not be annuitized in the first five years from the Date of
Issue.
The purpose of the Summary of Policy Expenses and Example is to assist
you in understanding the various costs and expenses that will be borne directly
or indirectly when investing in the Policy. The expenses of the Variable Account
as well as those of the underlying Funds are reflected in the Example. For more
complete descriptions of the expenses of the Variable Account, see "Charges and
Deductions", page . For more complete information regarding expenses paid
out of the assets of the underlying Funds, see the underlying Fund prospectuses.
Deductions for premium taxes may also apply but are not reflected in the Example
shown above (see "Premium Taxes", page ). Certain states impose a premium tax,
currently ranging up to 3.5%.
ACCUMULATION UNIT VALUES
No accumulation unit values for the Subaccounts exist, as the Subaccounts
have not commenced operations.
LIFE INSURANCE COMPANY OF THE SOUTHWEST,
THE VARIABLE ACCOUNT, AND THE FUNDS
LIFE INSURANCE COMPANY OF THE SOUTHWEST
LSW, a stock life insurance company founded on March 7, 1955 under Texas
law, is authorized to transact life insurance and annuity business in Texas, and
in 48 other states and the District of Columbia. Its address is 1300 West
Mockingbird Lane, Dallas, Texas 75427-4921. Its assets support the Policy's
benefits. Financial Statements for LSW are contained in the Statement of
Additional Information.
THE VARIABLE ACCOUNT
The Variable Account was established by LSW on December 4, 1997, under
Texas law. LSW has registered the Variable Account with the Securities and
Exchange Commission as a unit investment trust pursuant to the provisions of the
Investment Company Act. Such registration does not involve supervision of the
management of the Variable Account or LSW by the Securities and Exchange
Commission.
The Variable Account is a separate investment account of LSW and is not
chargeable with liabilities arising out of any other business LSW may conduct.
LSW does not guarantee the investment performance of the Variable Account.
Obligations under the Policies are obligations of LSW. Income, gains and losses,
whether or not realized, from the assets of the Variable Account are credited to
or charged against the Variable Account without regard to other income, gains,
or losses of LSW.
Net Premium Payments are allocated within the Variable Account among one
or more Subaccounts made up of shares of the Fund options designated by the
Owner. A separate Subaccount is established within the Variable Account for each
of the Fund options.
11
<PAGE> 13
THE FUNDS
You may choose from among a number of different Subaccount options.
Summary information, including the investment objectives for each of the Funds
held in the Subaccounts is set forth below. THERE CAN BE NO ASSURANCE THAT THE
INVESTMENT OBJECTIVES WILL BE ACHIEVED.
The investment objectives and policies of certain Funds are similar
to the investment objectives and policies of other funds that may be managed
by the same investment adviser or manager. The investment results of the Funds,
however, may differ from the results of such other funds. There can be no
assurance, and no representation is made, that the investment results of any of
the Funds will be comparable to the investment results of any other fund, even
if the other fund has the same investment adviser or manager.
THE ALGER AMERICAN FUND
The Alger American Fund is a "series" type Fund registered with the
SEC as a diversified open-end management investment company issuing a number of
series or classes of shares, each of which represents an interest in a Portfolio
of the Alger American Fund. It was organized on April 6, 1988 as a Massachusetts
business trust. Fred Alger Management, Inc., acts as the Fund's investment
advisor.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, at least 65% in companies with a total market
capitalization within the range of companies included in the Russell
2000 Growth Index or the S&P SmallCap 600 Index, updated quarterly
(both of the above indexes are broad indexes of small capitalization
stocks).
ALGER AMERICAN GROWTH PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, at least 65% in companies with a total market
capitalization of $1 billion or greater.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fund is an open-end, diversified, management investment company
organized as a Massachusetts business trust on November 13, 1981. Fidelity
Management & Research Company ("FMR") is the Fund's manager.
-EQUITY-INCOME PORTFOLIO
Investment Objective: To seek reasonable income by investing
primarily in income-producing equity securities. In choosing these
securities FMR also will consider the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which
exceeds the composite yield on the securities comprising the
Standard & Poor's 500 Composite Stock Price Index.
-GROWTH PORTFOLIO
Investment Objective: Seeks to achieve capital appreciation. This
Portfolio will invest in the securities of both well-known and
established companies, and smaller, less well-known companies which
may have a narrow product line or whose securities are thinly
traded. These latter securities will often involve greater risk than
may be found in the
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ordinary investment security. FMR's analysis and expertise plays an
integral role in the selection of securities and, therefore, the
performance of the Portfolio. Many securities which FMR believes
would have the greatest potential may be regarded as speculative,
and investment in the Portfolio may involve greater risk than is
inherent in other underlying Funds. It is also important to point
out that the Portfolio makes most sense for you if you can afford to
ride out changes in the stock market, because it invests primarily
in common stocks. FMR also can make temporary investments in
securities such as investment-grade bonds, high-quality preferred
stocks and short-term notes, for defensive purposes when it believes
market conditions warrant.
-HIGH INCOME PORTFOLIO
Investment Objective: Seeks to obtain a high level of current income
by investing primarily in high-risk, lower-rated, high-yielding,
fixed-income securities, while also considering growth of capital.
The Portfolio manager will seek high current income normally by
investing the Portfolio's assets as follows:
- at least 65% in income-producing debt securities and
preferred stocks, including convertible securities; and
- up to 20% in common stocks and other equity securities
when consistent with the Portfolio's primary objective
or acquired as part of a unit combining fixed-income and
equity securities.
The Portfolio's investment strategy may provide the opportunity for
higher than average yields by investing in securities with higher
than average risk, such as lower rated and unrated debt and
comparable equity instruments. For a discussion of the risks
associated with such investments, please see the "Risks of Lower
Rated Debt Securities" section of the Portfolio's prospectus.
-OVERSEAS PORTFOLIO
Investment Objective: To seek long term growth of capital primarily
through investments in foreign securities. The Overseas Portfolio
provides a means for investors to diversify their own portfolios by
participating in companies and economies outside of the United
States.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Variable Insurance Products Fund II is an open-end, diversified,
management investment company organized as a Massachusetts business trust on
March 21, 1988. FMR is the Fund's manager.
-INDEX 500 PORTFOLIO
Investment Objective: To seek to match the total return of the
Standard & Poors' Composite Index of 500 Stocks ("S&P 500") while
keeping expenses low. FMR normally invests at least 80% of the
fund's assets in equity securities of companies that compose the S&P
500.
-CONTRAFUND PORTFOLIO
Investment Objective: To seek capital appreciation by investing
primarily in companies that the Fund manager believes to be
undervalued due to an overly pessimistic appraisal by the public.
This strategy can lead to investments in domestic or foreign
companies, small and large, many of which may not be well known. The
Fund primarily invests in
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common stock and securities convertible into common stock, but it
has the flexibility to invest in any type of security that may
produce capital appreciation.
MARKET STREET FUND, INC.
The Market Street Fund, Inc. is a "series" type Fund registered with
the SEC as a diversified open-end management investment company issuing a number
of series or classes of shares, each of which represents an interest in a
Portfolio of the Fund. It was incorporated under Maryland law on March 21, 1985.
Sentinel Advisors Company acts as the Fund's investment advisor for all
portfolios except the International Fund, whose investment advisor is
Providentmutual Investment Management Company, and whose subadvisor is The
Boston Company Asset Management, Inc.
GROWTH PORTFOLIO
Investment Objective: To seek intermediate and long-term growth of
capital. A reasonable level of income is an important secondary objective. This
Portfolio pursues its objectives by investing primarily in common stocks of
companies believed to offer above-average growth potential over both the
intermediate and the long term.
SENTINEL GROWTH PORTFOLIO
Investment Objective: To seek long-term growth of capital through
equity participation in companies having growth potential believed by
its investment adviser to be more favorable than the U.S. economy as a
whole, with a focus on relatively well-established companies.
AGGRESSIVE GROWTH PORTFOLIO
Investment Objective: To seek to achieve a high level of long-term
capital appreciation by investing in securities of a diverse group of
smaller emerging companies.
BOND PORTFOLIO
Investment Objective: To seek to generate a high level of current
income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
MANAGED PORTFOLIO
Investment Objective: To seek to realize as high a level of
long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a
combination thereof.
INTERNATIONAL PORTFOLIO
Investment Objective: To seek long-term growth of capital
principally through investments in a diversified portfolio of marketable
equity securities of established non-United States companies.
MONEY MARKET PORTFOLIO
Investment Objective: To seek to provide maximum current income
consistent with capital preservation and liquidity by investing in
high-quality money market instruments. AN INVESTMENT IN THE MONEY MARKET
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND
THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.
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<PAGE> 16
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Variable Insurance Funds, Inc. is an open-end management
investment company incorporated in the State of Wisconsin on December 28, 1990.
Strong Capital Management, Inc. is the investment advisor to the Funds.
-Mid Cap Growth
Investment Objective: To seek capital growth. It invests primarily
in equity securities that the advisor believes have above-average
growth prospects.
STRONG SPECIAL FUND II, INC.
The Strong Special Fund II, Inc. is a diversified, open-end
management company, incorporated in Wisconsin on December 28, 1990.
Strong Capital Management, Inc. is the investment advisor for the
Fund.
Investment Objective: To seek capital appreciation through
investments in a diversified portfolio of equity securities.
AGREEMENTS
LSW has entered into or may enter into agreements with Funds
pursuant to which the adviser or distributor pays LSW a fee based upon an annual
percentage of the average net asset amount invested on behalf of the Variable
Account and our other separate accounts. These percentages may differ and we may
be paid a greater percentage by some investment advisers or distributors than
other advisers or distributors. These agreements reflect administrative services
we provide.
CONFLICTS OF INTEREST
The Funds may also be available to registered separate accounts
offering variable annuity and variable life products of other participating
insurance companies, as well as to the Variable Account and other separate
accounts of LSW. Although we do not anticipate any disadvantages to this, there
is a possibility that a material conflict may arise between the interest of the
Variable Account and one or more of the other separate accounts participating in
the underlying Funds. A conflict may occur due to a change in law affecting the
operations of variable life and variable annuity separate accounts, differences
in the voting instructions of the Owners and those of other companies, or some
other reason. In the event of conflict, we will take any steps necessary to
protect Owners and variable annuity payees, including withdrawal of the Variable
Account from participation in the underlying Fund or Funds which are involved in
the conflict.
DETAILED DESCRIPTION OF POLICY PROVISIONS
ISSUANCE OF A POLICY
The Policy is available to Owners up to and including age 85 on the
Date of Issue. If the Policy is issued to Joint Owners, then the oldest Joint
Owner must be 85 years of age or younger on the Date of Issue. If the Owner is
not a natural person, then the age of the Annuitant must meet the requirements
for Owners.
In order to purchase a Policy, an individual must forward an
application to us through a licensed LSW agent who is also a registered
representative of Equity Services, Inc. ("ESI"), the principal underwriter of
the Policies, or another broker/dealer having a Selling Agreement with ESI or a
broker/dealer having a Selling Agreement with such a broker/dealer.
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PREMIUM PAYMENTS
The Initial Premium Payment. In general, the initial Premium Payment
must be at least $5,000 for Non-Qualified Policies, and must be at least $2,000
for Qualified Policies. We will also accept Policies contemplating monthly
payments of at least $100 by salary reduction, deduction or electronic funds
transfer. In such a case, if no payments are received on a Policy for six
consecutive months and the aggregate Premium Payments made are less than the
normal $2,000 or $5,000 minimums, we may at our option cancel the Policy and
return the Accumulated Value, with no deduction for a CDSC, to the Owner.
We may also at our discretion permit initial Premium Payments lower than the
above minimums for groups.
Subsequent Premium Payments. Subsequent Premium Payments may be made
at any time, but must be at least $100. We may accept lower Premium Payments at
our discretion for groups or if the Premium Payments are remitted
electronically. We will price subsequent Premium Payments to the Variable
Account on the basis of the Accumulation Unit Value next computed for the
appropriate Subaccount after the additional Premium Payment is received.
The total of all Premium Payments under Policies issued on the life
of any one Annuitant may not exceed $1,000,000 without our prior consent.
We do not process Premium Payments or any other transactions on the
following days: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, the day after Thanksgiving and
Christmas Day. In addition, Premium payments will not be allocated and
transactions will not be effected to the Money Market Subaccount on Columbus Day
and Veterans Day.
Allocation of Net Premium Payments. In the application for the
Policy, the Owner will indicate how Net Premium Payments are to be allocated
among the Subaccounts of the Variable Account and/or the Fixed Account. These
allocations may be changed at any time by the Owner by written notice to us at
our Home Office, or if you have elected the telephone transaction privilege, by
telephone (see "Telephone Transaction Privilege", page ). The percentages
of Net Premium Payments that may be allocated to any Subaccount or to the
Fixed Account must be in whole numbers of not less than 5%, and the sum of the
allocation percentages must be 100%. We will allocate the initial Net Premium
Payment within two business days after we receive it, if the application and all
information necessary for processing the order are complete.
If the application is not properly completed, we will retain the
initial Premium Payment for up to five business days while attempting to
complete the application. If the application is not complete at the end of the
five day period, we will inform the applicant of the reason for the delay and
the initial Premium Payment will be returned immediately, unless you
specifically consent to our retaining the initial Premium Payment until the
application is complete. Once the application is complete, we allocate the
initial Net Premium Payment as designated by the Owner within two business days.
Notwithstanding the foregoing, in jurisdictions where we must refund
the greater of (1) aggregate Premium Payments or (2) Accumulation Value (plus
any amount deducted for state premium taxes) in the event you exercise the free
look right, any portion of the initial Net Premium Payment to be allocated to
the Variable Account will be allocated to the Market Street Money Market
Subaccount during the free look period. At the end of that period, the amount in
the Market Street Money Market Subaccount will be allocated to the Subaccounts
as designated by you in proportion to the allocation percentage for each
Subaccount set forth in the Net Premium Payment allocation schedule then in
effect. We assume the free look period ends 20 days after the date the Contract
is issued.
We allocate subsequent Net Premium Payments as of the Valuation Date
we receive such Net Premium Payments, based on your allocation percentages then
in effect. At the time of allocation, we apply Net Premium Payments to the
purchase of Fund shares. The net asset value of the shares purchased are
converted into Accumulation Units.
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The Subaccount values will vary with their investment experience.
You bear the entire investment risk. You should periodically review your
allocation percentages in light of market conditions and your overall financial
objectives.
TRANSFERS
You may transfer the Accumulation Value among the Subaccounts of the
Variable Account, and between the Variable Account and the Fixed Account
(subject to the limitations set forth below) by making a written transfer
request. If you elect the telephone transaction privilege, you may make
transfers by telephone. See "Telephone Transaction Privilege", page .
Transfers are made as of the Valuation Day that the request for transfer is
received at the Home Office. Transfers to or from the Subaccounts of the
Variable Account may be postponed under certain circumstances. See "Payments,"
page .
We currently allow transfers to the Fixed Account of all or any part
of the Variable Account Accumulation Value, without charge or penalty. We
reserve the right to restrict transfers to the Fixed Account to 25% of the
Variable Account Accumulation Value during any Policy Year.
You may, (only once per year and within 45 days after the end of the
calendar year) transfer a portion of the unloaned value in the Fixed Account to
the Variable Account. Prior to the end of the calendar year, we determine the
maximum percentage that may be transferred from the Fixed Account. This
percentage will be at least 10% of the Contract Value in the Fixed Account.
After a transfer from the Fixed Account to the Variable Account, we reserve the
right to require that the value transferred remain in the Variable Account for
at least one year before it may be transferred back to the Fixed Account.
We do not permit transfers between the Variable Account and the
Fixed Account after the Annuitization Date.
We have no current intention to impose a transfer charge in the
foreseeable future. However, we reserve the right, upon prior notice, to impose
a transfer charge of $25 for each transfer in excess of twelve transfers in any
one Policy Year. See "Transfer Charge", page .
VALUE OF A VARIABLE ACCOUNT ACCUMULATION UNIT
We set the value of a Variable Account Accumulation Unit for each
Subaccount at $10 when the Subaccounts commenced operations. We determine the
value for any subsequent Valuation Period by multiplying the Accumulation Unit
value for each Subaccount for the immediately preceding Valuation Period by the
Net Investment Factor for the Subaccount during the subsequent Valuation Period.
The value of an Accumulation Unit may increase or decrease from Valuation Period
to Valuation Period. No minimum Accumulation Unit value is guaranteed. The
number of Accumulation Units will not change as a result of investment
experience.
Net Investment Factor. Each Subaccount of the Variable Account has
its own Net Investment Factor.
- - The Net Investment Factor measures the daily investment performance of that
Subaccount.
- The Net Investment Factor may be greater or less than one; therefore, the
value of an Accumulation Unit may increase or decrease.
- Changes in the Net Investment Factor may not be directly proportional to
changes in the net asset value of underlying Fund shares, because of the
deduction for the Mortality Risk Charge, the Expense Risk Charge and the
Administration Charge.
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Fund shares are valued at their net asset value. The Net Investment
Factor allows for the monthly reinvestment of daily dividends, in the case of
the Market Street Money Market Portfolio.
DETERMINING THE ACCUMULATION VALUE
The Accumulation Value is the sum of:
1) the value of all Variable Account Accumulation Units, and
2) amounts allocated and credited to the Fixed Account, minus any
outstanding loans on the Policy and accrued interest on such
loans.
When charges or deductions are made against the Accumulation Value,
we deduct an appropriate number of Accumulation Units from the Variable Account
and an appropriate amount from the Fixed Account in the same proportion that
your interest in the Variable Account and Fixed Account bears to your total
Accumulation Value. Value held in the Fixed Account is not subject to Variable
Account charges (Mortality and Expense Risk and Administration Charges), but may
be subject to Contingent Deferred Sales Charges, the Annual Policy Fee, optional
Enhanced Death Benefit Rider charge, and premium taxes, if applicable.
ANNUITIZATION
Maturity Date. The Maturity Date is the date on which
annuity payments are scheduled to begin. You select the Maturity Date on the
application. The earliest Maturity Date must be at least 5 years after the Date
of Issue, unless otherwise approved. If no specific Maturity Date is selected,
the Maturity Date will be date you reach age 90 (the Annuitant's age 90 if the
Owner is not a natural person); or, if later, ten years after the Date of
Issue.
If you request in writing (see "Ownership Provisions", page ),
and we approve the request, the Maturity Date may be accelerated or deferred.
Election of Payment Options. You may, with prior written notice and
at any time prior to the Annuitization Date, elect one of the Annuity Payment
Options. We apply the Accumulation Value in each Subaccount (less any premium
tax previously unpaid) to provide a Variable Annuity payment. We apply the
Accumulation Value in the Fixed Account (less any premium tax previously unpaid)
to provide a Fixed Annuity payment.
If an election of an Annuity Payment Option is not on file with LSW
on the Annuitization Date, we will pay the proceeds as Option 3 - Payments for
Life with 120 months certain. You may elect, revoke or change an Annuity Payment
Option at any time before the Annuitization Date with 30 days prior written
notice. The Annuity Payment Options available are described below.
Frequency and Amount of Annuity Payments. We pay annuity payments as
monthly installments, unless you select annual, semi-annual or quarterly
installments. If the amount to be applied under any Annuity Payment Option is
less than $3,500, we have the right to pay such amount in one lump sum in lieu
of the payments otherwise selected. In addition, if the payments selected would
be or become less than $100, we have the right to change the frequency of
payments that will result in payments of at least $100. In no event will we make
payments under an annuity option less frequently than annually.
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ANNUITIZATION - VARIABLE ACCOUNT
We will determine the dollar amount of the first Variable Annuity
payment by dividing the Variable Account Accumulation Value on the Annuitization
Date by 1,000 and applying the result as set forth in the applicable Annuity
Table. The amount of each Variable Annuity payment depends on the age of the
Chosen Human Being at the time the first payment is due, and the sex of the
Chosen Human Being, if applicable, unless otherwise required by law.
Variable Annuity payments vary in amount in accordance with the
investment performance of the Variable Account.
- - To establish the number of Annuity Units representing the monthly annuity
payment,
- the dollar amount of the first annuity payment as determined above
is divided by the value of an Annuity Unit on the Annuitization
Date;
- The number of Annuity Units remains fixed during the annuity
payment period;
- The dollar amount of the second and subsequent payments is not
predetermined and may change from month to month; and
- The dollar amount of each subsequent payment is determined by
multiplying the fixed number of Annuity Units by the value of an
Annuity Unit for the Valuation Period in which the payment is due.
Once payments have begun, future payments will not reflect any
changes in mortality experience.
Value of an Annuity Unit. The value of an Annuity Unit for a
Subaccount is set at $10 when the first underlying Fund shares are purchased.
The value of an Annuity Unit for a Subaccount for any subsequent Valuation
Period is determined by
(1) multiplying the value of an Annuity Unit for the
immediately preceding Valuation Period by the applicable Net
Investment Factor for the Valuation Period for which the value of an
Annuity Unit is being calculated, and
(2) multiplying the result by an interest factor to
neutralize the assumed investment rate of 3.5% per annum (see "Net
Investment Factor", page ).
Assumed Investment Rate. A 3.5% Assumed Investment Rate is built
into the Annuity Tables contained in the Policies. A higher assumption would
mean a higher initial payment but more slowly rising or more rapidly falling
subsequent payments. A lower assumption would have the opposite effect. If the
actual investment return is at the annual rate of 3.5%, the annuity payments
will be level.
ANNUITIZATION - FIXED ACCOUNT
A Fixed Annuity is an annuity with payments which are guaranteed as
to dollar amount during the annuity payment period. We determine the amount of
the periodic Fixed Annuity payments by applying the Fixed Account Accumulation
Value to the applicable Annuity Table in accordance with the Annuity Payment
Option elected. This is done at the Annuitization Date on an age nearest
birthday basis.
We do not credit discretionary interest to Fixed Annuity payments
during the annuity payment period for annuity options based on life
contingencies. The Annuitant must rely on the Annuity Tables applicable to the
Policies to determine the amount of the Fixed Annuity payments.
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ANNUITY PAYMENT OPTIONS
Any of the following Annuity Payment Options may be elected:
Option 1-Payments for a Stated Time. We will make monthly payments
for the number of years selected, which may range from 5 years to 30
years.
Option 2-Payments for Life-An annuity payable monthly during the
lifetime of a Chosen Human Being (who may be named at the time of
election of the Payment Option), ceasing with the last payment due
prior to the death of the Chosen Human Being. IT WOULD BE POSSIBLE
UNDER THIS OPTION FOR THE PAYEE TO RECEIVE ONLY ONE ANNUITY PAYMENT
IF THE CHOSEN HUMAN BEING DIES BEFORE THE SECOND ANNUITY PAYMENT
DATE, TWO ANNUITY PAYMENTS IF THE CHOSEN HUMAN BEING DIES BEFORE THE
THIRD ANNUITY PAYMENT DATE, AND SO ON.
Option 3-Payments for Life with Period Certain - An annuity that if
at the death of the Chosen Human Being payments have been made for
less than 10 or 20 years, as selected, we guarantee to continue
annuity payments during the remainder of the selected period to the
Payee, or another recipient as chosen by the Payee at the time the
Annuity Payment Option is selected. In the alternative, the
recipient may, at any time, elect to have the present value of the
guaranteed number of annuity payments remaining paid in a lump sum,
computed as of the date on which notice of death of the Chosen Human
Being is received by us at our Home Office.
We may allow other Annuity Payment Options.
Some of the stated Annuity Payment Options may not be available in
all states. You may request an alternative non-guaranteed option by giving
notice in writing prior to Annuitization. If we approve your request, it will be
permitted under the Policy.
IRA's and Tax Sheltered Annuities are subject to the minimum
Distribution requirements set forth in the Code.
Under Payment Option 1, you may change to any other Payment Option
at any time. At the time of the change, remaining value will be applied to the
new Payment Option to determine the amount of the new payments. Under Payment
Option 1, you may also fully surrender the Policy at any time or make
Withdrawals at any time or from time to time. A surrender or Withdrawal will be
subject to any applicable Contingent Deferred Sales Charge at the time of the
surrender or Withdrawal.
DEATH OF OWNER
If you or a Joint Owner dies prior to the Annuitization Date, then
we will pay (unless the Enhanced Death Benefit Rider has been elected) a Death
Benefit to the Beneficiary.
If you or a Joint Owner dies prior to attaining age 81, the Death
Benefit shall be equal to the greater of:
(a) the Accumulation Value, or
(b) the Net Premium Payments made to the Policy minus all
Withdrawals (including any CDSC deducted in connection with
such Withdrawals) and any outstanding loan on the Policy and
accrued interest,
and, in the case of both (a) and (b), minus any applicable premium tax charge to
be assessed upon distribution, will be paid to the Beneficiary.
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If you or a Joint Owner dies after attaining age 81, then the
Death Benefit shall be equal to the Accumulation Value, minus any applicable
premium tax charge.
Unless the Beneficiary is the deceased Owner's (or Joint Owner's)
spouse, the Death Benefit must be distributed within five years of such Owner's
death. The Beneficiary may elect to receive Distribution in the form of a life
annuity or an annuity for a period not exceeding his or her life expectancy.
Such annuity must begin within one year following the date of the Owner's death,
and is currently available only as a Fixed Annuity. If the Beneficiary is the
spouse of the deceased Owner (or Joint Owner), then the Policy may be continued
without any required Distribution. If the deceased Owner (or Joint Owner) and
the Annuitant are the same person, the death of that person will be treated as
the death of the Owner for purposes of determining the Death Benefit payable.
Qualified Policies may be subject to specific rules set forth in the
Plan, Policy, or Code concerning Distributions upon the death of the Owner.
DEATH OF ANNUITANT PRIOR TO THE ANNUITIZATION DATE
If an Annuitant who is not an Owner dies prior to the Annuitization
Date, the Policy will mature, and a Death Benefit equal to the Cash Surrender
Value of the Policy will be payable to the Beneficiary. If the Owner is a
natural person and a contingent Annuitant has been named or the Owner names a
contingent Annuitant within 90 days of the Annuitant's death, the Policy may be
continued without any required Distribution. If no Beneficiary is named (or if
the Beneficiary predeceases the Annuitant), then the Death Benefit will be paid
to the Owner. If the Owner is not a natural person, then the death of the
Annuitant will be treated as if it were the death of the Owner, and the
disposition of the Policy will follow the death of the Owner provisions set
forth above.
In any case where a Death Benefit is paid, the value of the Death
Benefit will be determined as of the Valuation Day coinciding with or next
following the date we receive in writing:
(1) due proof of the Annuitant's or an Owner's (or Joint Owner's)
death,
(2) an election for either a single sum payment or an Annuity
Payment Option (currently only Fixed Annuities are available in
these circumstances); and
(3) any form required by state insurance laws.
If a single sum payment is requested, we will make payment in accordance with
any applicable laws and regulations governing the payment of Death Benefits. If
an Annuity Payment Option is requested, the Beneficiary must make an election
during the 90-day period commencing with the date we receive written notice, and
as otherwise required by law. If no election has been made by the end of such
90-day period commencing with the date we receive written notice or as otherwise
required by law, the Death Benefit will be paid in a single sum payment.
If any Owner is not an individual, the Death Benefit will be paid to the
Beneficiary on the death of any Annuitant.
GENERATION-SKIPPING TRANSFERS
We may determine whether the Death Benefit or any other payment
constitutes a direct skip as defined in Section 2612 of the Code, and the amount
of the tax on the generation-skipping transfer resulting from such direct skip.
If applicable, the payment will be reduced by any tax LSW is required to pay by
Section 2603 of the Code.
A direct skip may occur when property is transferred to or a Death
Benefit is paid to an individual two or more generations younger than the Owner.
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OWNERSHIP PROVISIONS
Unless otherwise provided, the Owner has all rights under the
Policy. IF THE PURCHASER NAMES SOMEONE OTHER THAN HIMSELF OR HERSELF AS THE
OWNER, THE PURCHASER WILL HAVE NO RIGHTS UNDER THE POLICY. If Joint Owners are
named, each Joint Owner possesses an undivided interest in the Policy. The death
of any Joint Owner will trigger the provisions of the Policy relating to the
death of the Owner. Unless otherwise provided, when Joint Owners are named, the
exercise of any ownership right in the Policy (including the right to surrender
the Policy or make a Withdrawal, to change the Owner, the Annuitant, a
Contingent Annuitant, the Beneficiary, the Annuity Payment Option or the
Maturity Date) requires a written indication of an intent to exercise that
right, signed by all Joint Owners.
Prior to the Annuitization Date, the Owner may name a new Owner.
Such change may be subject to state and federal gift taxes, and may also result
in current federal income taxation (see "Federal Income Tax Considerations",
page "). Any change of Owner will automatically revoke any prior Owner
designation. Any request for change of Owner must be (1) made by proper written
application, (2) received and recorded by LSW at its Home Office, and (3) may
include a signature guarantee as specified in the "Surrender and Withdrawal"
provision on page . The change is effective on the date the written request is
signed. A new choice of Owner will not apply to any payment made or action we
take prior to the time it was received and recorded.
The Owner may request a change in the Annuitant or contingent
Annuitant before the Annuitization Date. Such a request must be made in writing
on a form acceptable to us and must be signed by the Owner and the person to be
named as Annuitant or contingent Annuitant. Any such change is subject to
underwriting and approval by us.
CHARGES AND DEDUCTIONS
All of the charges described in this section apply to Variable
Account allocations. Allocations to the Fixed Account are subject to Contingent
Deferred Sales Charges, the Annual Policy Fee and Premium Tax deductions and the
charge for the Enhanced Death Benefit Rider, if applicable. The Fixed Account is
not subject to the Mortality Risk Charge, the Expense Risk Charge or the
Administration Charge.
We deduct the charges described below to compensate us for our costs and
expenses, services provided and risks assumed under the Policies. We incur
certain costs and expenses for the distribution and administration of the
Policies and for providing the benefits payable thereunder. More particularly,
the administrative services include:
- - processing applications for and issuing the Policies;
- - processing purchases and redemptions of Fund shares as required
(including automatic withdrawal services);
- - maintaining records;
- - administering annuity payouts;
- - furnishing accounting and valuation services (including the calculation
and monitoring of daily Subaccount values);
- - reconciling and depositing cash receipts;
- - providing Policy confirmations;
- - providing toll-free inquiry services, and
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<PAGE> 24
- - furnishing telephone transaction privileges.
The risks we assume include:
(1) the risk that the actual life-span of persons receiving annuity
payments under Policy guarantees will exceed the assumptions
reflected in our guaranteed rates (these rates are incorporated in
the Policy and cannot be changed);
(2) the risk that Death Benefits, or the Enhanced Death Benefit under
the optional Enhanced Death Benefit Rider, will exceed the actual
Accumulation Value;
(3) the risk that more Owners than expected will qualify for waivers
of the Contingent Deferred Sales Charge; and
(4) the risk that our costs in providing the services will exceed our
revenues from the Policy charges (which we cannot change).
The amount of a charge will not necessarily correspond to the costs
associated with providing the services or benefits indicated by the designation
of the charge. For example, the Contingent Deferred Sales Charge collected may
not fully cover all of the distribution expenses we incur.
We may make a profit from a charge, and any profit may be used to
finance distribution expenses.
DEDUCTIONS FROM THE VARIABLE ACCOUNT
We deduct from the Variable Account an amount, computed daily, which is
equal to an annual rate of 1.40% of the daily net asset value. The charge
consists of a 0.15% Administration Charge, a 0.85% Mortality Risk Charge, and a
0.40% Expense Risk Charge.
CONTINGENT DEFERRED SALES CHARGE
We may pay commissions of up to 6.5% of Premium Payments (7.0%
during certain promotional periods) for the sale of the Policy; however, we make
no deduction for a sales charge from the Premium Payments for these Policies.
However, during the period prior to the fifteenth Policy Anniversary, if a
Withdrawal is made or a Policy or a Policy is surrendered, we will, with
certain exceptions, deduct a Contingent Deferred Sales Charge ("CDSC") not to
exceed 7% of the lesser of the total of all Net Premium Payments made within 84
months prior to the date of the request to surrender, or the amount withdrawn.
No CDSC will apply after the fifteenth Policy Anniversary, even with respect to
Premium Payments made within 84 months of a Withdrawal or surrender.
The CDSC is calculated by multiplying the applicable CDSC
percentages noted below by the Net Premium Payments that are withdrawn or
surrendered. For purposes of calculating the CDSC, Withdrawals or surrenders are
considered to come first from the oldest Net Premium Payment made to the Policy,
then the next oldest Net Premium Payment and so forth. No CDSC is ever assessed
with respect to a Withdrawal or surrender of earnings on Net Premium Payments.
For tax purposes, a surrender is usually treated as a withdrawal of earnings
first. This charge will apply in the amounts set forth below to Net Premium
Payments within the time periods set forth.
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<PAGE> 25
The CDSC applies to Net Premium Payments as follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED CONTINGENT DEFERRED NUMBER OF COMPLETED CONTINGENT DEFERRED
YEARS FROM DATE OF SALES CHARGE YEARS FROM DATE OF SALES CHARGE
NET PREMIUM PAYMENT PERCENTAGE NET PREMIUM PAYMENT PERCENTAGE
- ------------------- ---------- ------------------- ----------
<S> <C> <C> <C>
0 7% 4 3%
1 6% 5 2%
2 5% 6 1%
3 4% 7+ 0%
</TABLE>
In any Policy Year after the first Policy Year, you may make
Withdrawals without a CDSC of an aggregate amount equal to 10% of the
Accumulation Value as of the most recent Policy Anniversary. Unless otherwise
required by applicable state law, this CDSC-free Withdrawal privilege does not
apply to full surrenders of the Policy, and if a full surrender is made within
one year of exercising a CDSC-free Withdrawal, then the CDSC which would have
been assessed at the time of the Withdrawal will be assessed at the time of
surrender. The CDSC-free feature is also non-cumulative. This means that free
amounts not taken during any given Policy Year cannot be taken as free amounts
in a subsequent Policy Year. In addition, any amount withdrawn in order to meet
minimum Distribution requirements under the Code shall be free of CDSC. In the
first Policy Year a CDSC-free Withdrawal is available only by setting up a
monthly systematic Withdrawal program for an amount not exceeding the annual
CDSC-free Withdrawal amount (see "Available Automated Fund Management
Features-Systematic Withdrawals", page ). You may be subject to a tax
penalty if you take Withdrawals prior to age 59 1/2 (see "Federal Income Tax
Considerations).
In addition, no CDSC will be deducted:
(1) upon the Annuitization of Policies,
(2) upon payment of a death benefit pursuant to the
death of the Owner,
(3) from any values which have been held under a Policy
for at least 84 months, or
(4) as noted above, after the fifteenth Policy
Anniversary.
No CDSC applies upon the transfer of value among the Subaccounts or between the
Fixed Account and the Variable Account.
When a Policy is held by a charitable remainder trust, the amount
which may be withdrawn from this Policy without application of a CDSC, after the
first Policy Year, shall be the larger of (a) or (b), where:
(a) is the amount which would otherwise be available for Withdrawal
without application of a CDSC; and where
(b) is the difference between the Accumulation Value as of the last
Policy Anniversary and the Net Premium Payments made to the Policy,
less all Withdrawals and less any outstanding loan and accrued
interest, as of the last Policy Anniversary.
We will waive the CDSC if the Owner dies, or if the Owner annuitizes
(in such a case, however, the Owner may not elect a settlement option under
which he or she has the right to receive a lump sum prior to seven years after
the date of the last Premium Payment, unless a CDSC is paid at the time of
payment of the lump sum).
We will also waive the CDSC if, following the first Policy
Anniversary, you are confined to an eligible nursing home (as defined in the
Policy) for at least the 90 consecutive days ending on the date of the
Withdrawal request.
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<PAGE> 26
ANNUAL POLICY FEE
For Policies with an Accumulation Value plus any outstanding loan and
accrued interest of less than $50,000 as of the Date of Issue, or any subsequent
Policy Anniversary prior to the Annuitization Date, we will assess an Annual
Policy Fee of $30.00. This fee will be assessed annually in advance on the Date
of Issue and thereafter on each Policy Anniversary on which the Accumulation
Value plus any outstanding loans and accrued interest is less than $50,000. No
Annual Policy Fee will be assessed after the Annuitization Date. This fee will
be taken pro rata from all Subaccounts of the Variable Account and the unloaned
portion of the Fixed Account.
TRANSFER CHARGE
Currently, unlimited free transfers are permitted among the Subaccounts,
and transfers between the Fixed Account and the Variable Account are permitted
free of charge within the limits described on page . We have no present
intention to impose a transfer charge in the foreseeable future. However, we
reserve the right to impose in the future a transfer charge of $25 on each
transfer in excess of twelve transfers in any Policy Year.
If we impose a transfer charge, we will deduct it from the amount being
transferred. All transfers requested on the same Valuation Day are treated as
one transfer transaction. Any future transfer charge will not apply to transfers
resulting from loans, and any transfers made pursuant to the Dollar Cost
Averaging and Portfolio Rebalancing features. These transfers will not count
against the twelve free transfers in any Policy Year.
PREMIUM TAXES
If a governmental entity imposes premium taxes, we will make a
deduction for premium taxes in a corresponding amount. Certain states impose a
premium tax, currently ranging up to 3.5%. We will pay premium taxes at the time
imposed under applicable law. Where we are required to pay this premium tax when
a premium is paid, we may deduct an amount equal to premium taxes from the
Premium Payment. In the remaining states which assess premium taxes, we will
make a deduction for premium taxes at the time it pays premium taxes to the
applicable taxing authority.
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER
Annual charges are made if you elect the optional Enhanced Death
Benefit Rider. See "Optional Enhanced Death Benefit Rider," page . The annual
charge for the Enhanced Death Benefit Rider is 0.20% of Accumulation Value as of
the date the charge is deducted plus the amount of any outstanding loan and
accrued interest. The annual charge will be deducted at issue (or at the time of
election, if elected after issue), and then on each Policy Anniversary
thereafter, up to and including age 80 on an age-nearest-birthday basis as of
the relevant Policy Anniversary. After age 80, we discontinue the charge. We
will make the charge pro rata from the Subaccounts of the Variable Account and
the unloaned portion of the Fixed Account.
REDUCTION OF CHARGES
The CDSC, Annual Policy Charge and Expense Risk Charge described
above may be reduced or eliminated for Policies issued in circumstances where
the Company estimates that it will incur lower distribution or administrative
expenses or perform fewer sales or administrative services than those originally
contemplated in establishing the level of these charges. Lower distribution and
administrative expenses may be the result of economies associated with (a) the
use of mass enrollment procedures, (b) the performance of administrative or
enrollment functions by an employer, (c) the use by an employer of automated
techniques in submitting Premium Payments or information related to Premium
Payments on behalf of its employees, or (d) any other circumstances which reduce
distribution or administrative expenses. The exact amount of
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<PAGE> 27
the CDSC, Annual Policy Charge or Expense Risk Charge applicable to a particular
Policy will be stated in that Policy.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset
value. The net asset value of those shares reflect management fees and expenses
already deducted from the assets of the Funds. Information on the fees and
expenses for the Funds is set forth in "Underlying Fund Annual Expenses" on
page .
More detailed information is contained in the Funds' prospectuses
which accompany this prospectus.
POLICY RIGHTS
FREE LOOK
You may revoke the Policy at any time between the Date of Issue and
the date 10 days after receipt of the Policy, and receive a refund of the
Accumulation Value plus any charges assessed at issue, including the Annual
Policy Fee, charge for the optional Enhanced Death Benefit Rider, and any
premium tax, unless otherwise required by state and/or federal law. Some states
may require a longer free look period. Where the Accumulation Value is refunded,
you will have borne the investment risk and been entitled to the benefit of the
investment performance of the chosen Subaccounts during the time the Policy was
in force.
In the case of IRA's and states that require the return of Premium
Payments, we will refund the greater of: (i) Premium Payments or (ii)
Accumulation Value plus any amount we have deducted for state premium taxes. LSW
may require that all Accumulation Value allocated to the Variable Account
initially be held in the Market Street Money Market Subaccount. At the end of
the free look period, we will allocate Accumulation Value among the Subaccounts
based on the allocation percentages specified in the application. For this
purpose, we assume the free look period ends 20 days after the date the Policy
is issued.
In order to revoke the Policy, it must be mailed or delivered to our
Home Office. Mailing or delivery must occur on or before 10 days after receipt
of the Policy for revocation to be effective, except where we require the
allocation of Accumulation Value to the Market Street Money Market Subaccount
for the free look period. In order to revoke the Policy, if it has not been
received, written notice must be mailed or delivered to our Home Office.
The liability of the Variable Account under this provision is
limited to the Accumulation Value in each Subaccount on the date of revocation.
Any additional amounts refunded to you will be paid by us.
LOAN PRIVILEGE - QUALIFIED POLICIES AND TAX SHELTERED ANNUITIES
Prior to the Annuitization Date, if you own a Qualified Policy under
section 401(a) (which includes section 401(k) plans) or 403(a) of the Code, or a
section 403(b) Tax Sheltered Annuity Policy, you may receive a loan, subject to
the terms of the Policy, the Plan, and the Code, which may impose restrictions
on loans.
Loans from eligible Policies are available beginning one year after
the Date of Issue. You may borrow a minimum of $1500. The maximum loan balance
which may be outstanding at any time is 50% of the Accumulation Value, but not
more than $50,000. The $50,000 limit will be reduced by the highest loan
balances owed during the prior one-year period, which may be more than the
amount outstanding at the time of the loan if an interest payment or principal
repayment has been made. Only one loan may be outstanding with respect to any
one Policy at any time. Loans may only be secured by the Accumulation Value.
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<PAGE> 28
All loans are made from the Collateral Fixed Account. An amount
equal to the principal amount of the loan will be transferred to the Collateral
Fixed Account. Unless you otherwise instruct, we will transfer to the Collateral
Fixed Account an amount equaling the loan from the Subaccounts of the Variable
Account and unloaned portion of the Fixed Account in the same proportion that
such amounts bear to the total Accumulation Value. No CDSC is deducted at the
time of the loan, or on any transfers to the Collateral Fixed Account. If you
provide specific instructions, loan amounts must be taken first from the
Variable Account, and may only be taken from the unloaned portion of the Fixed
Account to the extent that the Accumulation Value in the Variable Account is
insufficient to provide the loan. If we cannot process the loan in accordance
with your instructions, then the loan will not be processed until we receive
further instructions from you.
Until the loan has been repaid in full, that portion of the
Collateral Fixed Account equal to the outstanding loan balance shall be credited
on each Policy Anniversary with interest at an annual rate declared from time to
time by LSW, but will never be less than an annual rate of 3.0%. Specific loan
terms are disclosed at the time of loan application or loan issuance.
Loans must be repaid in substantially level payments, not less
frequently than quarterly, within five years. Loans used to purchase the your
principal residence must be repaid within 15 years. During the loan term, the
outstanding balance of the loan will continue to accrue interest at an annual
rate specified in the loan agreement. Once established, this interest rate will
be fixed for the life of the loan. Loan repayments will consist of principal and
interest in amounts set forth in the loan agreement. Loan principal repayments
will, on the date they are received, be allocated among the Fixed Account and
Subaccounts of the Variable Account in accordance with the allocation of Net
Premium Payments then in effect.
If you surrender the Policy while the loan is outstanding, you will
receive the Cash Surrender Value. If the Owner/Annuitant dies while the loan is
outstanding, the Death Benefit will also be reduced to reflect the amount of the
loan outstanding plus accrued interest. If annuity payments start while the loan
is outstanding, the Accumulation Value will be reduced by the amount of the
outstanding loan plus accrued interest. Until the loan is repaid, we may
restrict any transfer of the Policy which would otherwise qualify as a transfer
as permitted in the Code.
If a loan payment is not made when due, interest will continue to
accrue. If a loan payment is not made within 31 days of when it was due, then
the entire balance of the loan is considered in default. This amount may be
taxable to the borrower, and may be subject to the early withdrawal tax penalty.
If you are not eligible to take a distribution pursuant to the Policy or plan
provisions, the deemed distribution will be reportable for tax purposes, but
will not be offset against the Policy Value until such time as a distribution
may be made.
Loans may also be subject to additional limitations or restrictions
under the terms of the employer's plan. Loans permitted under this Policy may
still be taxable in whole or part if the participant has additional loans from
other plans or policies. We will calculate the maximum nontaxable loan based on
the information provided by the participant or the employer.
All payments received from you will be considered loan repayments.
Any payments received from your employer will be considered premium payments
unless specifically identified as loan repayments. We reserve the right to
modify the terms or procedures associated with the loan privilege in the event
of a change in the laws or regulations relating to the treatment of loans. We
also reserve the right to assess a loan processing fee. IRA's and Non-Qualified
Policies are not eligible for loans. (See "Non-Qualified Policies", page and
"Individual Retirement Annuities", page )
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<PAGE> 29
SURRENDER AND WITHDRAWAL
At any time prior to the Annuitization Date (or thereafter if
Payment Option 1 has been elected) you may, by sending us a proper written
application we deem in good order, surrender the Policy. "Proper written
application" means that you must request the surrender in writing and include
the Policy. We may require that the signature(s) be guaranteed by a member firm
of a major stock exchange or other depository institution qualified to give such
a guaranty.
We will, upon receipt of any such written request, pay to you the
Cash Surrender Value. The Cash Surrender Value will be reduced by any applicable
CDSC (see "Contingent Deferred Sales Charge"), as well as any outstanding loan
and accrued interest and, in certain states, a premium tax charge (see "Premium
Taxes", page ). The Cash Surrender Value may be more or less than the total
of Premium Payments you made, depending on the market value of the underlying
Fund shares, the amount of any applicable CDSC, and other factors.
We will normally not permit Withdrawal or surrender of Premium
Payments made by check within the 15 calendar days prior to the date the request
for Withdrawal or surrender is received.
At any time before the death of the Owner and after 30 days from the
Date of Issue, the Owner may make a Withdrawal of a portion of the Cash
Surrender Value. The minimum Withdrawal is $500. At least $3500 in Accumulation
Value must remain after any Withdrawal.
Generally, Withdrawals in the first Policy Year and Withdrawals in
excess of 10% of the Accumulation Value as of the most recent Policy Anniversary
in any Policy Year prior to the sixteenth Policy Year are subject to the CDSC.
See "Contingent Deferred Sales Charge", page . However, see "Available
Automated Fund Management Features-Systematic Withdrawals" page , for
information on a limited means of making systematic Withdrawals in the first
year free of the CDSC. Withdrawals will be deemed to be taken from Net Premium
Payments in chronological order, with the oldest Net Premium Payment being
withdrawn first. This method will tend to minimize the amount of the CDSC.
The Withdrawal will be taken from the Subaccounts based on your
instructions at the time of the Withdrawal. During the first Policy Year, we may
require that Withdrawals be taken pro rata from the Subaccounts and the unloaned
portion of the Fixed Account. If you provide specific instructions, amounts must
be deducted first from the Variable Account and may only be deducted from the
unloaned portion of the Fixed Account to the extent that the Accumulation Value
in the Variable Account is insufficient to accomplish the Withdrawal. If
specific allocation instructions are not provided, the Withdrawal will be
deducted pro rata from the Subaccounts and from the unloaned portion of the
Fixed Account. Any CDSC associated with a Withdrawal will be deducted from the
Subaccounts and from the Fixed Account based on the allocation percentages of
the Withdrawal. Any amount of CDSC that we deduct from a Subaccount which is in
excess of the available value in that Subaccount will be deducted pro rata among
the remaining Subaccounts and the unloaned portion of the Fixed Account. If the
Withdrawal cannot be processed in accordance with your instructions, then it
will not be processed until we receive further instructions.
A surrender or a Withdrawal may have tax consequences. See "Federal
Income Tax Considerations", page .
PAYMENTS
We will pay any funds surrendered or withdrawn from the Variable
Account within 7 days of receipt of your request. However, we reserve the right
to suspend or postpone the date of any payment or transfer of any benefit or
values for any Valuation Period:
(1) when the New York Stock Exchange ("Exchange") is closed,
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<PAGE> 30
(2) when trading on the Exchange is restricted,
(3) when an emergency exists as a result of which disposal of
securities held in the Variable Account is not reasonably
practicable or it is not reasonably practicable to determine the
value of the Variable Account's net assets, or
(4) during any other period when the Securities and Exchange
Commission, by order, so permits for the protection of security
holders.
The applicable rules and regulations of the Securities and Exchange Commission
shall govern as to whether the conditions prescribed in (2) and (3) exist.
We reserve the right to delay payment of any amounts allocated to
the Fixed Account which are payable as a result of a surrender, Withdrawal or
loan for up to six months after we receive a written request in a form
satisfactory to us.
SURRENDERS AND WITHDRAWALS UNDER A TAX SHELTERED ANNUITY POLICY
Where the Policy has been issued as a Tax Sheltered Annuity, the
Owner may surrender or make a Withdrawal of part or all of the Accumulation
Value at any time this Policy is in force prior to the earlier of the
Annuitization Date or the death of the Designated Annuitant except as provided
below:
(a) The surrender or Withdrawal of Accumulation Value attributable to
contributions made pursuant to a salary reduction agreement (within
the meaning of Code Section 402(g)(3)(A) or (C)), or transfers from
a Custodial Account described in Section 403(b)(7) of the Code, may
be executed only:
1. when the Owner attains age 59 1/2, separates from service,
dies, or becomes disabled (within the meaning of Code
Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Code
Section 401 (k)), provided that any surrender of
Accumulation Value in the case of hardship may not include
any income attributable to salary reduction contributions.
(b) The surrender and Withdrawal limitations described in (a) above
for Tax Sheltered Annuities apply to:
1. salary reduction contributions to Tax Sheltered Annuities
made for plan years beginning after December 31, 1988;
2. earnings credited to such policies after the last plan year
beginning before January 1, 1989, on amounts attributable
to salary reduction contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts
(except that earnings, and employer contributions as of
December 31, 1988 in such Custodial Accounts may be
withdrawn in the case of hardship).
(c) Any Distribution other than the above, including exercise of a
contractual ten-day free look provision (when available) may result
in the immediate application of taxes and penalties and/or
retroactive disqualification of a Qualified Policy or Tax Sheltered
Annuity.
A premature Distribution may not be eligible for rollover treatment.
To assist in preventing disqualification in the event of a ten-day free look,
LSW will agree to transfer the proceeds to another policy which meets the
requirements of Section 403(b) of the Code, upon proper direction by the Owner.
The foregoing is LSW's understanding of the withdrawal
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<PAGE> 31
restrictions which are currently applicable under Section 403(b)(11) and Revenue
Ruling 90-24. Such restrictions are subject to legislative change and/or
reinterpretation from time to time. Distributions pursuant to Qualified Domestic
Relations Orders will not be considered to be a violation of the restrictions
stated in this provision.
The Policy surrender and Withdrawal provisions may also be modified
pursuant to the plan terms and Code tax provisions for Qualified Policies.
TELEPHONE TRANSACTION PRIVILEGE
If you elect the telephone transaction privilege, you may make
changes in Net Premium Payment allocation, transfers, initiate dollar cost
averaging or portfolio rebalancing, and, in the case of Tax Deferred Annuity
Policies, take loans of up to $10,000, by providing instructions to us at our
Home Office over the telephone. You can make the election either on the
application for the Policy or by providing a proper written authorization to us.
You may, if you so choose, authorize your LSW agent, to make telephone
transactions. We reserve the right to suspend telephone transaction privileges
at any time and for any reason.
We employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If we follow these procedures we will not
be liable for any losses due to unauthorized or fraudulent instructions. We may
be liable for any such losses if those reasonable procedures are not followed.
The procedures to be followed for telephone transfers will include one
or more of the following:
(1) requiring some form of personal identification prior to acting on
instructions received by telephone,
(2) providing written confirmation of the transaction, and
(3) making a tape recording of the instructions given by telephone.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer the following free automated fund management
features. However, we are not legally obligated to continue to offer these
features, and we may cease offering one or more of such features at any time,
after providing 60 days prior written notice to all Owners who are currently
utilizing the features being discontinued. Only one automated fund management
feature is available under any single Policy at one time.
Dollar Cost Averaging. This feature permits you to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. You may elect it at issue by marking the appropriate box on the
initial application, and completing the appropriate instructions, or after issue
by filling out similar information on a change request form and sending it to
us.
If you elect this feature, each month on the Monthly Policy Date we will
take the amount to be transferred from the Money Market Subaccount and transfer
it to the Subaccount or Subaccounts designated to receive the funds. This
procedure starts with the Monthly Policy Date next succeeding the Date of Issue,
or next succeeding the date of an election subsequent to purchase and stops when
the amount in the Money Market Fund is depleted. The minimum monthly transfer by
Dollar Cost Averaging is $100, except for the transfer which reduces the amount
in the Money Market Subaccount to zero. You may discontinue Dollar Cost
Averaging at any time by sending an appropriate change request form to us.
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This feature allows you to move funds into the various investment
classes on a more gradual and systematic basis than the frequency on which
Premium Payments ordinarily are made. The periodic investment of the same amount
will result in higher numbers of units being purchased when unit prices are
lower, and lower numbers of units being purchased when unit prices are higher.
Over time, this will result in a lower cost per unit than the average of the
unit costs on the days on which the automated purchases are made. This technique
will not assure a profit or protect against a loss in declining markets. For the
dollar cost averaging technique to be effective, amounts should be available for
allocation from the Money Market Subaccount through periods of low price levels
as well as higher price levels.
Portfolio Rebalancing. This feature permits you to automatically
rebalance the value in the Subaccounts on a monthly, quarterly, semi-annual or
annual basis, based on the premium allocation percentages in effect at the time
of the rebalancing. You may elect it at issue by marking the appropriate box on
the initial application, or, after issue, by completing a change request form
and sending it to us.
In Policies utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer takes place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages.
This procedure starts with the Monthly Policy Date three, six or twelve months
after the Date of Issue, and continues on each Monthly Policy Date three, six or
twelve months thereafter. Policies electing Portfolio Rebalancing after issue
will have the first automated transfer occur as of the Monthly Policy Date on or
next following the date that the election is received. Subsequent rebalancing
transfers occur every three, six or twelve months thereafter. You may
discontinue Portfolio Rebalancing at any time by submitting an appropriate
change request form.
If you change the Policy's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing results in periodic transfers out of Subaccounts
that have had relatively favorable investment performance, and into Subaccounts
which have had relatively unfavorable investment performance.
Systematic Withdrawals. At any time after one year from the Date of
Issue, if the Accumulation Value at the time of initiation of the program is at
least $15,000, you may elect in writing to take systematic Withdrawals of a
specified dollar amount (of at least $100) on a monthly, quarterly, semi-annual
or annual basis. You may provide specific instructions as to how the systematic
Withdrawals are to be taken, but the Withdrawals must be taken first from the
Subaccounts, and may only be taken from the unloaned portion of the Fixed
Account to the extent that the Accumulation Value in the Variable Account is
insufficient to accomplish the Withdrawal. If you have not provided specific
instructions, or if specific instructions cannot be carried out, we will process
the Withdrawals by taking Accumulation Units from all of the Subaccounts in
which you have an interest and the unloaned portion of the Fixed Account, on a
pro rata basis. Each systematic Withdrawal is subject to federal income taxes.
In addition, a 10% federal penalty tax may be assessed on systematic Withdrawals
if you are under age 59 1/2. If you direct, we will withhold federal income
taxes from each systematic Withdrawal. A systematic Withdrawal program
terminates automatically when a systematic Withdrawal would cause the remaining
Accumulation Value to be $3,500 or less. If this happens, then the systematic
Withdrawal transaction causing the Accumulation Value to fall below $3500 will
not be processed. You may discontinue systematic Withdrawals at any time by
notifying us in writing.
A CDSC may apply to systematic Withdrawals in accordance with the
considerations set forth in "Contingent Deferred Sales Charge", page . If you
withdraw amounts pursuant to a systematic Withdrawal program, then you may
withdraw in each Policy Year after the first Policy Year without a CDSC an
amount up to 10% of the Accumulation Value as of the most recent Policy
Anniversary. Both Withdrawals you request and Withdrawals pursuant to a
systematic Withdrawal program will count toward the limit of the amount that may
be withdrawn in any
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Policy Year free of the CDSC. In addition, any amount withdrawn to meet minimum
Distribution requirements under the Code shall be free of CDSC.
Limited systematic Withdrawals are also available in the first
Policy Year (but after 30 days from issue). These systematic Withdrawals are
limited to monthly systematic Withdrawal programs only. The maximum aggregate
amount for the remaining months of the first Policy Year is 10% of the
Accumulation Value. These systematic Withdrawals will not be subject to a CDSC.
The other rules for systematic Withdrawals made after the first Policy Year,
including the $15,000 minimum Accumulation Value, minimum $100 payment, and
allocation rules, will apply to these systematic Withdrawals.
POLICY RIGHTS UNDER CERTAIN PLANS
Policies may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Policy rest with the Owner, which
may be the employer or other obligor under the plan, and benefits available to
participants under the plan are governed solely by the provisions of the plan.
Accordingly, some of the options and elections under the Policy may not be
available to participants under the provisions of the plan. In such cases,
participants should contact their employers for information regarding the
specifics of the plan.
THE FIXED ACCOUNT
Net Premium Payments under the Fixed Account portion of the Policy
and transfers to the Fixed Account portion are part of our general account,
which support insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the general account are not registered
under the Securities Act of 1933 ("Securities Act"), nor is the general account
registered as an investment company under the Investment Company Act.
Accordingly, neither the general account nor any interest therein are generally
subject to the provisions of the Securities Act or Investment Company Act, and
we have been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosures in this prospectus which relate to the
guaranteed interest portion. Disclosures regarding the Fixed Account portion of
the Policy and the general account, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The Fixed Account is made up of all our general assets, other than
those in the Variable Account and any other segregated asset account. Fixed
Account Net Premium Payments will be allocated to the Fixed Account by election
of the Owner at the time of purchase or by a later change in allocation of Net
Premium Payments. We will invest the assets of the Fixed Account in those assets
we choose and allowed by applicable law.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Accumulation Value held in the Fixed Account which is not held
in a Collateral Fixed Account is guaranteed to accumulate at a minimum effective
annual interest rate of 3.0%. We may credit the non-loaned Accumulation Value in
the Fixed Account with current rates in excess of the minimum guarantee but we
are not obligated to do so. We have no specific formula for determining current
interest rates. Since we, in our sole discretion, anticipate changing the
current interest rate from time to time, allocations to the Fixed Account made
at different times are likely to be credited with different current interest
rates. We declare an interest rate each month to apply to amounts allocated or
transferred to the Fixed Account in that month. The rate declared on such
amounts remains in effect for twelve months. At the end of the 12-month period,
we reserve the right to declare a new current interest rate on such amounts and
accrued interest thereon (which may be a different current interest rate than
the current interest rate on new allocations to the Fixed Account on that date).
We determine any interest credited on the amounts in the Fixed Account in excess
of the minimum guaranteed rate of 3.0% per year in our
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<PAGE> 34
discretion. You assume the risk that interest credited may not exceed the
guaranteed minimum rate. Amounts allocated to the Fixed Account do not share in
the investment performance of our general account or any portion thereof.
Amounts deducted from the unloaned portion of the Fixed Account for
Optional Benefits charges, the Annual Policy Fee, loans or transfers to the
Variable Account are, for the purpose of crediting interest, accounted for on a
last in, first out basis. Amounts deducted from the unloaned portion of the
Fixed Account for Withdrawals are accounted for on a first in, first out basis
for such purpose.
LSW reserves the right to change the method of crediting interest
from time to time, provided that such changes do not have the effect of reducing
the guaranteed rate of interest below 3.0% per annum or shorten the period for
which the interest rate applies to less than 12 months.
OPTIONAL ENHANCED DEATH BENEFIT RIDER
You may at your option include the Enhanced Death Benefit Rider in
your Policy. It is subject to the restrictions and limitations set forth in the
Rider. Election of this optional benefit involves an additional cost. This Rider
may not be available in all states. If you elected the Enhanced Death Benefit
Rider, then the following enhanced death benefit will be payable to the
Beneficiary if you (or the first of Joint Owners) die prior to reaching age 81
(on an age nearest birthday basis):
the highest of
(a) Accumulation Value;
(b) the total of all Net Premium Payments, less all Withdrawals, and
less any outstanding loan and accrued interest, and
(c) the largest Accumulation Value as of any prior Policy
Anniversary after the Enhanced Death Benefit Rider was
applicable to the Policy, plus any Net Premium Payments and
less any Withdrawals (including any CDSC deducted in
connection with such Withdrawals), loan and accrued interest
since such Policy Anniversary (we calculate this as of the
date we receive due proof of death.
Any applicable premium tax charge payable on your death will be applied to
reduce the value of the above determined enhanced death benefit (see "Premium
Taxes, page ).
If you (or the first of Joint Owners) dies at age 81 or later, the
death benefit will not be enhanced and will be an amount equal to Accumulation
Value, less any applicable premium tax charge.
The Enhanced Death Benefit Rider is available at issue if you are
age 75 and younger. It is available after issue if you are age 75 or younger
only on a Policy Anniversary, and only if at the time of the Rider is requested
the Accumulation Value is greater than the total of all Net Premium Payments
less all Withdrawals.
The annual charge for this Rider is 0.20% of Accumulation Value.
After you reach age 80, on an age nearest birthday basis, we discontinue the
charge. See "Charge for Optional Enhanced Death Benefit Rider", page .
We distribute the Enhanced Death Benefit in the same manner as the
normal Death Benefit. See "Death of Owner", page .
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<PAGE> 35
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is general in nature and is not intended as
tax advice. Each person concerned should consult a competent tax advisor. No
attempt is made to consider any applicable state tax or other tax laws.
If you invest in a variable annuity as part of a pension plan or
employer-sponsored retirement program, your policy is called a Qualified Policy.
If your annuity is independent of any formal retirement or pension plan, it is
termed a Non-Qualified Policy. The tax rules applicable to Qualified Policies
vary according to the type of retirement plan and the terms and conditions of
the plan.
TAXATION OF NON-QUALIFIED POLICIES
Non-Natural Person. If a non-natural person (e.g., a corporation or
a trust) owns a Non-Qualified Policy, the taxpayer generally must include in
income any increase in the excess of the account value over the investment in
the Policy (generally, the premiums or other consideration paid for the
contract) during the taxable year. There are some exceptions to this rule and if
you are contemplating a prospective owner that is not a natural person, you
should discuss these exceptions 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 account value immediately before the
distribution over the Owner's investment in the Policy (generally, the premiums
or other consideration paid for the Policy, reduced by the amount previously
distributed from the Policy that was not subject to tax) 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
Policy.
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. You should
consult a tax adviser with regard to exceptions from the penalty tax.
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<PAGE> 36
Annuity Payments. Although tax consequences may vary depending on
the payout 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 manner as a surrender of
the Policy, or (ii) if distributed under a payout 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 maturity 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 policies that are issued by us (or
our 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 tax rules applicable to Qualified Policies vary according to the
type of retirement plan and the terms and conditions of the plan. Your rights
under a Qualified Policy may be subject to the terms of the retirement plan
itself, regardless of the terms of the Qualified Policy. Adverse tax
consequences may result if you do not ensure that contributions, distributions
and other transactions with respect to the Policy comply with the law.
Individual Retirement Accounts (IRAs), as defined in Section 408 of
the Internal Revenue Code (Code), permit individuals to make annual
contributions of up to the lesser of $2,000 or 100% of adjusted gross income.
The contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain pension plans may be "rolled
over" into an IRA on a tax-deferred basis without regard to these limits.
Amounts in the IRA (other than nondeductible contributions) are taxed when
distributed from the IRA. A 10% penalty tax generally applies to distributions
made before age 59 1/2, unless certain exceptions apply. The Internal Revenue
Service has not reviewed the Policy for qualification as an IRA, and has not
addressed in a ruling of general applicability whether a death benefit provision
such as the optional Enhanced Death Benefit provision in the Policy comports
with IRA qualification requirements.
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<PAGE> 37
SIMPLE IRAs permit certain small employers to establish SIMPLE plans
as provided by Section 408(p) of the Code, under which employees may elect to
defer to a SIMPLE IRA a percentage of compensation up to $6,000 (as increased
for cost of living adjustments). The sponsoring employer is required to make
matching or non-elective contributions on behalf of employees. Distributions
from SIMPLE IRAs are subject to the same restrictions that apply to IRA
distributions and are taxed as ordinary income. Subject to certain exceptions,
premature distributions prior to age 59 1/2 are subject to a 10 percent penalty
tax, which is increased to 25 percent if the distribution occurs within the
first two years after the commencement of the employee's participation in the
plan.
Roth IRAs, as described in Code section 408A, permit certain
eligible individuals to contribute to make non-deductible contributions to a
Roth IRA 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 is generally subject
to tax and other special rules apply. You may wish to consult a tax adviser
before combining any converted amounts with any other Roth IRA contributions,
including any other conversion amounts from other tax years. Distributions from
a Roth IRA generally are not taxed, except that, once aggregate distributions
exceed contributions to the Roth IRA, income tax and a 10% penalty tax may apply
to distributions made (1) before age 59 1/2 (subject to certain exceptions) or
(2) during the five taxable years starting with the year in which the first
contribution is made to any Roth IRA. A 10% penalty tax may apply to amounts
attributable to a conversion from an IRA if they are distributed during the five
taxable years beginning with the year in which the conversion was made.
Corporate pension and profit-sharing plans under Section 401(a) of
the Code allow corporate employers to establish various types of retirement
plans for employees, and self-employed individuals to establish qualified plans
for themselves and their employees. Adverse tax consequences to the retirement
plan, the participant or both may result if the Policy is transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all the requirements applicable to such benefits prior to transferring the
Policy. The Policy includes an Enhanced Death Benefit that in some cases may
exceed the greater of the premium payments or the account value. The Death
Benefit could be characterized as an incidental benefit, the amount of which is
limited in any pension or profit-sharing plan. Because the Death Benefit may
exceed this limitation, employers using the Policy in connection with such plans
should consult their tax adviser.
Tax Sheltered Annuities under section 403(b) of the Code allow
employees of certain Section 501(c)(3) organizations and public schools to
exclude from their gross income the premium payments made, within certain
limits, on a contract that will provide an annuity for the employee's
retirement. These premium payments may be subject to FICA (social security) tax.
Distributions of (1) salary reduction contributions made in years beginning
after December 31, 1988; (2) earnings on those contributions; and (3) earnings
on amounts held as of the last year beginning before January 1, 1989, are not
allowed prior to age 59 1/2, separation from service, death or disability.
Salary reduction contributions may also be distributed upon hardship, but would
generally be subject to penalties.
Section 457 Plans, while not actually providing for a qualified plan
as that term is normally used, provides for certain deferred compensation plans
with respect to service for state governments, local governments, political
subdivisions, agencies, instrumentalities and certain
36
<PAGE> 38
affiliates of such entities, and tax exempt organizations. The Policy can be
used with such plans. Under such plans a participant may specify the form of
investment in which his or her participation will be made. All such investments,
however, are owned by and are subject to, the claims of the general creditors of
the sponsoring employer. In general, all amounts received under a section 457
plan are taxable and are subject to federal income tax withholding as wages.
Other Tax Issues. Qualified Policies have minimum distribution rules
that govern the timing and amount of distributions. You should refer to your
retirement plan, adoption agreement, or consult a tax advisor for more
information about these distribution rules.
Distributions from Qualified Policies generally are subject to
withholding for the Owner's federal income tax liability. The withholding rate
varies according to the type of distribution and the Owner's tax status. The
Owner will be provided the opportunity to elect not have tax withheld from
distributions.
"Eligible rollover distributions" from section 401(a) plans are
subject to a mandatory federal income tax withholding of 20%. An eligible
rollover distribution is the taxable portion of any distribution from such a
plan, except certain distributions such as distributions required by the Code or
distributions in a specified annuity form. The 20% withholding does not apply,
however, if the Owner chooses a "direct rollover" from the plan to another
tax-qualified plan or IRA.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there
is always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Policy.
We have the right to modify the Policy in response to legislative
changes that could otherwise diminish the favorable tax treatment that annuity
policy owners currently receive. We make no guarantee regarding the tax status
of any Policy and do not intend the above discussion as tax advice.
CHARGE FOR TAX PROVISIONS
LSW is no longer required to maintain a capital gain reserve
liability on Non-Qualified Policies since capital gains attributable to assets
held in the Variable Account for such Policies are not taxable to LSW. However,
LSW reserves the right to implement and adjust the tax charge in the future, if
the tax laws change.
GENDER NEUTRALITY
In 1983, the United States Supreme Court held that optional annuity
benefits provided under an employee's deferred compensation plan could not,
under Title VII of the Civil Rights Act of 1964 vary between men and women on
the basis of sex. The Court applied its decision to benefits derived from
contributions made on or after August 1, 1983. Lower federal courts have since
held that the Title VII prohibition of sex-distinct benefits may apply at an
earlier date. In addition, some states prohibit using sex-distinct mortality
tables.
The Policy uses sex-distinct actuarial tables, unless state law
requires the use of sex-neutral actuarial tables. As a result, the Policy
generally provides different benefits to men and
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<PAGE> 39
women of the same age. Employers and employee organizations which may consider
buying Policies in connection with any employment-related insurance or benefits
program should consult their legal advisors to determine whether the Policy is
appropriate for this purpose.
VOTING RIGHTS
Voting rights under the Policies apply only with respect to Net
Premium Payments or accumulated amounts allocated to the Variable Account.
In accordance with our view of present applicable law, we vote the
shares of the Funds held in the Variable Account at regular and special meetings
of the shareholders of the Funds. These shares are voted in accordance with your
instructions if you have an interest in the Variable Account. If the Investment
Company Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result we determine that we are
permitted to vote the shares of the Funds in our own right, we may elect to do
so.
The person having the voting interest under a Policy is the Owner.
The number of Fund shares attributable to each Owner is determined by dividing
the Owner's interest in each Subaccount by the net asset value of the Fund
corresponding to the Subaccount.
We determine the number of shares which a person has the right to
vote on a date we choose not more than 90 days prior to the meeting of the Fund.
We solicit voting instructions by written communication at least 21 days prior
to such meeting.
We vote Fund shares held in the Variable Account as to which no
timely instructions are received in the same proportions as the voting
instructions we receive with respect to all Policies participating in the
Variable Account.
Each person having a voting interest will receive periodic reports
relating to the Funds, proxy material and a form with which to give such voting
instructions.
CHANGES TO VARIABLE ACCOUNT
We reserve the right to create one or more new separate accounts,
combine or substitute separate accounts, or to add new investment Funds for use
in the Policies at any time. In addition, if the shares of the Funds described
in this prospectus should no longer be available for investment by the Variable
Account or if, in our judgment, further investment in such Fund shares should
become inappropriate, we may eliminate Subaccounts, combine two or more
Subaccounts or substitute one or more Funds for other Fund shares already
purchased or to be purchased in the future by Net Premium Payments under the
Policy. No substitution of securities in the Variable Account may take place
without prior approval of the Securities and Exchange Commission, and under such
requirements as it may impose. We may also operate the Variable Account as a
management investment company under the Investment Company Act, deregister the
Variable Account under the Investment Company Act (if such registration is no
longer required), transfer all or part of the assets of the Variable Account to
another separate account or to the Fixed Account (subject to obtaining all
necessary regulatory approvals), and make any other changes reasonably necessary
under the Investment Company Act or applicable state law.
ADVERTISING
YIELD
A "yield" and "effective yield" may be advertised for the Market
Street Money Market Portfolio Subaccount. "Yield" is a measure of the net
dividend and interest income earned over a specific seven-day period (which
period will be stated in the advertisement) expressed as a percentage of the
offering price of the Subaccount's units. Yield is an annualized figure, which
means that it is assumed that the Subaccount generates the same level of net
income over a 52-week period. The "effective yield" is calculated similarly but
includes the effect of assumed
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<PAGE> 40
compounding, calculated under rules prescribed by the Securities and Exchange
Commission. The effective yield will be slightly higher than yield due to this
compounding effect.
PERFORMANCE
We may also from time to time advertise the performance of the
Subaccounts of the Variable Account relative to the performance of other
variable annuity Subaccounts or underlying Funds with similar or different
objectives, or the investment industry as a whole. Other investments to which
the Subaccounts may be compared include, but are not limited to: precious
metals; real estate; stocks and bonds; closed-end funds; CDs; bank money market
deposit accounts and passbook savings; and the Consumer Price Index.
MARKET COMPARISONS. The Subaccounts of the Variable Account may also
be compared to certain market indexes, which may include, but are not limited
to: S&P 500; Shearson/Lehman Intermediate Government/Corporate Bond Index;
Shearson/Lehman Long-Term Government/Corporate Bond Index; Donoghue Money Fund
Average; U.S. Treasury Note Index; Bank Rate Monitor National Index of 2 Year CD
Rates; and Dow Jones Industrial Average.
Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/ Wiesenberger, Morningstar,
Donoghue's; magazines such as Money, Forbes, Kiplinger's Personal Finance
Magazine, Financial World, Consumer Reports, Business Week, Time, Newsweek,
National Underwriter, U.S. News and World Report; rating services such as LIMRA,
Value, Best's Agent Guide, Western Annuity Guide, Comparative Annuity Reports;
and other publications such as the Wall Street Journal, Barron's, Investor's
Daily, and Standard & Poor's Outlook. In addition, Variable Annuity Research &
Data Service (The VARDS Report) is an independent rating service that ranks over
500 variable annuity funds based upon total return performance. These rating
services and publications rank the performance of the Funds against all funds
over specified periods and against funds in specified categories. The rankings
may or may not include the effects of sales or other charges.
RATING SERVICES. We are also ranked and rated by independent
financial rating services, among which are A.M. Best and Duff & Phelps. The
purpose of these ratings is to reflect our financial strength or claims-paying
ability. The ratings are not intended to reflect the investment experience or
financial strength of the Variable Account. We may advertise these ratings from
time to time. In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations, individuals or other
parties which recommend us or the Policies. Furthermore, we may occasionally
include in advertisements comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets, or discussions of
alternative investment vehicles and general economic conditions.
HISTORICAL PERFORMANCE. We may from time to time advertise several
types of historical performance for the Subaccounts of the Variable Account. We
may advertise for the Subaccounts "Standardized Average Annual Total Return",
calculated in a manner prescribed by the Securities and Exchange Commission,
nonstandardized and adjusted historic "total return".
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN. "Standardized Average
Annual Total Return" will show the percentage rate of return of a hypothetical
initial investment of $1,000 for at least the most recent one, five and ten
year period, or for a period covering the time the Subaccount has been in
existence, if the Subaccount has not been in existence for one of the
prescribed periods. This calculation will reflect the deduction of all
applicable charges made to the Policies except for premium taxes, which may be
imposed by certain states.
As of December 31, 1998, the Subaccounts had not yet commenced operations.
Once the Subaccounts have been in operation for a full year, we will begin to
calculate Standardized Average Annual Total Return for the Subaccounts.
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<PAGE> 41
OTHER TOTAL RETURNS. Other "total returns" include nonstandardized
Subaccount average annual total returns and adjusted historic fund average
annual total return.
Nonstandardized Subaccount Average Annual Total Return.
-------------------------------------------------------
Nonstandardized subaccount "average annual total return" will be calculated in a
similar manner and for the same time periods as the standardized average annual
total return but will assume an initial investment of $10,000 and will not
reflect the deduction of any applicable CDSC, which, if reflected, would
decrease the level of performance shown. The CDSC is not reflected because the
Policies are designed for long term investment. An assumed initial investment of
$10,000 will be used because that figure more closely approximates the size of a
typical Policy than does the $1,000 figure used in calculating the Standardized
Average Annual Total Return quotations. Nonstandardized Subaccount performance
data will only be disclosed if Standardized Average Annual Total Return for the
Subaccounts for the required periods is also disclosed.
ADJUSTED HISTORIC FUND AVERAGE ANNUAL TOTAL RETURN. In addition,
historic performance data may be presented for the Funds since their inception,
reduced by some or all of the fees and charges under the Policies. Such adjusted
historic Fund performance includes data that precedes the inception date of the
Subaccounts. This data is designed to show performance that would have resulted
if the Policy had been in existence during that time. Adjusted historic Fund
performance data will be shown only if standardized average annual total return
for the Subaccounts is also shown.
The charts below show adjusted historic fund average annual total
return for the indicated periods. For the purposes of calculating Adjusted
Historic Fund Average Annual Total Return, the Mortality and Expense Risk Charge
of 1.25%, the Administration Charge of 0.15%, the Annual Policy Fee of $30, and
(if so indicated) the applicable CDSC were deducted.
Based on the method of calculation described above, the Adjusted
Historic Fund Average Annual Total Return for the periods ending December 31,
1998 were:
ADJUSTED HISTORIC FUND AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS NOT ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS NOT DEDUCTED)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.90% 11.50% 18.10% 17.20% 9/21/88
Alger American Growth 46.00% 22.10% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 10.00% 17.10% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 37.50% 20.00% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -5.70% 7.20% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 11.10% 8.10% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 26.50% 22.00% N/A 19.50% 8/27/92
Fidelity VIP Fund II-Contrafund 28.10% N/A N/A 26.80% 1/3/95
Market Street Growth 11.90% 16.00% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 13.80% N/A N/A 19.10% 3/18/96
Market Street Aggressive Growth 6.30% 10.80% N/A 12.10% 5/1/89
Market Street Managed 10.90% 11.50% 9.70% 8.70% 12/12/85
Market Street Bond 6.70% 4.90% 6.50% 7.20% 2/24/84
Market Street International 8.60% 7.40% N/A 7.80% 11/1/91
Market Street Money Market 3.80% 3.50% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 11.90% 15.30% N/A 17.40% 5/8/92
Strong Mid Cap Growth Fund 26.80% N/A N/A 27.40% 12/31/96
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
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ADJUSTED HISTORIC FUND AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS NOT ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS DEDUCTED)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.90% 11.10% 18.10% 17.20% 9/21/88
Alger American Growth 39.00% 21.90% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 3.00% 16.80% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 30.50% 19.70% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -12.70% 6.80% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 4.10% 7.70% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 19.50% 21.70% N/A 19.40% 8/27/92
Fidelity VIP Fund II-Contrafund 21.10% N/A N/A 26.30% 1/3/95
Market Street Growth 4.90% 15.60% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 6.80% N/A N/A 17.70% 3/18/96
Market Street Aggressive Growth -0.70% 10.40% N/A 12.10% 5/1/89
Market Street Managed 3.90% 11.10% 9.70% 8.70% 12/12/85
Market Street Bond -0.30% 4.40% 6.50% 7.20% 2/24/84
Market Street International 1.60% 6.90% N/A 7.80% 11/1/91
Market Street Money Market -3.20% 3.00% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 4.90% 15.00% N/A 17.30% 5/8/92
Strong Mid Cap Growth Fund 19.80% N/A N/A 25.40% 12/31/96
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
ADJUSTED HISTORIC FUND AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS NOT DEDUCTED)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.70% 11.30% 17.90% 16.90% 9/21/88
Alger American Growth 45.70% 21.90% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 9.80% 16.90% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 37.20% 19.80% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -5.90% 7.00% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 10.90% 7.90% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 26.20% 21.70% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 27.90% N/A N/A 26.60% 1/3/95
Market Street Growth 11.70% 15.70% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 13.60% N/A N/A 18.80% 3/18/96
Market Street Aggressive Growth 6.10% 10.60% N/A 11.90% 5/1/89
Market Street Managed 10.70% 11.20% 9.50% 8.50% 12/12/85
Market Street Bond 6.50% 4.70% 6.30% 7.00% 2/24/84
Market Street International 8.40% 7.20% N/A 7.60% 11/1/91
Market Street Money Market 3.60% 3.30% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 11.70% 15.10% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 26.60% N/A N/A 27.10% 12/31/96
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
41
<PAGE> 43
ADJUSTED HISTORIC FUND AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS DEDUCTED)
<TABLE>
<CAPTION>
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.70% 10.90% 17.90% 16.90% 9/21/88
Alger American Growth 38.70% 21.60% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 2.80% 16.50% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 30.20% 19.50% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -12.90% 6.60% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 3.90% 7.50% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 19.20% 21.50% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 20.90% N/A N/A 26.10% 1/3/95
Market Street Growth 4.70% 15.40% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 6.60% N/A N/A 17.50% 3/18/96
Market Street Aggressive Growth -0.90% 10.20% N/A 11.90% 5/1/89
Market Street Managed 3.70% 10.80% 9.50% 8.50% 12/12/85
Market Street Bond -0.50% 4.20% 6.30% 7.00% 2/24/84
Market Street International 1.40% 6.70% N/A 7.60% 11/1/91
Market Street Money Market -3.40% 2.80% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 4.70% 14.80% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 19.60% N/A N/A 25.20% 12/31/96
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
All performance information and comparative material advertised by
LSW is historical in nature and is not intended to represent or guarantee future
results. An Owner's Accumulation Value at redemption may be more or less than
original cost.
42
<PAGE> 44
DISTRIBUTION OF THE POLICIES
The principal underwriter for the Policies is ESI, which is an
SEC-registered broker-dealer firm which is a member of the National Association
of Securities Dealers, Inc. ESI is a wholly-owned subsidiary of National Life
Insurance Company, which owns a majority of the outstanding stock of LSW. ESI
was formed in Vermont on October 7, 1968. Its address is National Life Drive,
Montpelier, Vermont 05604. ESI distributes a full line of securities products,
including mutual funds, unit investment trusts, and variable insurance
contracts, and provides individual securities brokerage services. The maximum
commission payable for selling the Policies will generally be 6.5%; however,
during an introductory period of approximately six months to be announced by
LSW, the maximum commission payable on Policies purchased will be 7.0%.
Commissions are lower with respect to Premium Payments received after the tenth
Policy Anniversary.
FINANCIAL STATEMENTS
LSW's audited statutory basis financial statements as of and for
the years ended December 31, 1998 and 1997, and unaudited statutory basis
financial statements as of and for the three month period ended March 31, 1999,
which are included in the Statement of Additional Information, should be
considered only as bearing on LSW'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.
STATEMENTS AND REPORTS
We will mail to you, at your last known address of record, any
statements and reports required by applicable laws or regulations. You should
give us prompt notice of any address change. We will send a confirmation
statement to you each time a transaction is made affecting your Variable Account
Accumulation Value, such as making additional Premium Payments, transfers,
exchanges or Withdrawals. Quarterly statements are also mailed detailing the
Policy activity during the calendar quarter. Instead of receiving an immediate
confirmation of transactions made pursuant to some types of periodic payment
plans (such as a dollar cost averaging program) or salary reduction arrangement,
you may receive confirmation of such transactions in their quarterly statements.
You should review the information in these statements carefully. All errors or
corrections must be reported to us immediately to assure proper crediting to
your Policy. We will assume all transactions are accurately reported on
quarterly statements or confirmation statements unless you notify us otherwise
within 30 days after receipt of the statement.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like all financial services providers, LSW utilizes computer systems that
may be effected by Year 2000 transition issues, and LSW relies on service
providers, including the Funds, that also may be affected. LSW has developed,
and is in the process of implementing, a Year 2000 transition plan, and is
confirming that its service providers are also so engaged. The resources that
are being devoted to this effort are substantial. It is difficult to predict
with precision whether the amount of resources ultimately devoted, or the
outcome of these efforts, will have any negative impact on LSW. However, as of
the date of this prospectus, it is not anticipated that any Policy Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of Year 2000 transition implementation. LSW
currently believes that its computer systems are Year 2000 compliant, but there
can be no assurance that LSW will be successful, or that interaction with other
service providers will not impair LSW's services at that time.
OWNER INQUIRIES
You may direct inquiries to LSW by writing to us at 1300 West
Mockingbird Lane, Dallas, Texas 75247-4921, or calling 1-800-228-4579.
43
<PAGE> 45
LEGAL PROCEEDINGS
There are no material legal proceedings involving LSW or the
Variable Account which are likely to have a material adverse effect upon the
Variable Account or upon the ability of LSW to meet its obligations under the
Policies. ESI is not engaged in any litigation of any material nature.
LSW is a party to ordinary routine litigation incidental to its
business, none of which is expected to have a material adverse effect upon its
ability to meet its obligations under the Policies.
GLOSSARY
ACCUMULATION UNIT- An accounting unit of measure used to calculate the Variable
Account Accumulation Value prior to the Annuitization Date.
ACCUMULATION VALUE- The sum of the value of all Variable Account Accumulation
Units attributable to the Policy, plus any amount held under the Policy in the
Fixed Account, minus any outstanding loans on the Policy and accrued interest on
such loans.
ANNUITANT- A person named in the Policy who is expected to become, at
Annuitization, the person upon whose continuation of life any annuity payments
involving life contingencies depends. Unless the Owner is a different individual
who is age 85 or younger, this person must be age 85 or younger at the time of
Policy issuance unless LSW has approved a request for an Annuitant of greater
age. The Owner may change the Annuitant prior to the Annuitization Date, as set
forth in the Policy.
ANNUITIZATION- The period during which annuity payments are actually received.
ANNUITIZATION DATE- The date on which annuity payments actually commence.
ANNUITY PAYMENT OPTION- The chosen form of annuity payments. Several options are
available under the Policy.
ANNUITY UNIT- An accounting unit of measure used to calculate the value of
Variable Annuity payments.
BENEFICIARY- The Beneficiary is the person designated to receive certain
benefits under the Policy upon the death of the Owner or Annuitant prior to the
Annuitization Date. The Beneficiary can be changed by the Owner as set forth in
the Policy.
CASH SURRENDER VALUE- An amount equal to Accumulation Value, minus any
applicable Contingent Deferred Sales Charge, minus any applicable premium tax
charge.
CHOSEN HUMAN BEING- An individual named at the time of Annuitization upon whose
continuation of life any annuity payments involving life contingencies depends.
CODE- The Internal Revenue Code of 1986, as amended.
COLLATERAL FIXED ACCOUNT- The portion of the Fixed Account which holds value
which secures a loan on the Policy.
DATE OF ISSUE- The date shown as the Date of Issue on the Data Page of the
Policy.
DEATH BENEFIT- The benefit payable to the Beneficiary upon the death of the
Owner or the Annuitant.
DISTRIBUTION- Any payment of part or all of the Accumulation Value.
FIXED ACCOUNT- The Fixed Account is made up of all assets of LSW other than
those in the Variable Account or any other segregated asset account of LSW.
FIXED ANNUITY- An annuity providing for payments which are guaranteed by LSW as
to dollar amount during Annuitization.
FUND- A registered management investment company in which the assets of a
Subaccount of the Variable Account will be invested.
HOME OFFICE- The main office of LSW located at 1300 West Mockingbird Lane,
Dallas, Texas.
INDIVIDUAL RETIREMENT ANNUITY (IRA)- An annuity which qualifies for favorable
tax treatment under Section 408 of the Code. The Policies will not be issued to
Education IRA's.
INVESTMENT COMPANY ACT - The Investment Company Act of 1940, as amended from
time to time.
JOINT OWNERS- Two or more persons who own the Policy as tenants in common or as
joint tenants. If joint owners are named, references to "Owner" in this
prospectus will apply to both of the Joint Owners.
MATURITY DATE- The date on which annuity payments are scheduled to commence. The
Maturity Date is shown on the Data Page of the Policy, and is subject to change
by the Owner, within any applicable legal limits, subject to LSW's approval.
MONTHLY POLICY DATE- The day in each calendar month which is the same day of the
month as the Date of Issue, or the last day of any month having no such date,
except that whenever the Monthly Policy Date would otherwise fall on a date
other than a Valuation Day, the Monthly Policy Date will be deemed to be the
next Valuation Day.
NON-QUALIFIED POLICY- A Policy which does not qualify for favorable tax
treatment under the provisions of Sections 401 or 403(a) (Qualified Plans), 408
(IRAs) or 403(b) (Tax-Sheltered Annuities) of the Code.
OWNER ("YOU") - The Owner is the person who possesses all rights under the
Policy, including the right to designate and change any designations of the
Owner, Annuitant, Beneficiary, Annuity Payment Option, and the Maturity Date,
when permitted under the terms of the Policy and the Code.
PAYEE- The person who is designated at the time of Annuitization to receive the
proceeds of the Policy upon Annuitization.
POLICY- The RetireMax individual flexible premium variable annuity policy
described in this prospectus.
POLICY ANNIVERSARY- An anniversary of the Date of Issue of the Policy.
POLICY YEAR- Each year the Policy remains in force commencing with the Date of
Issue.
PREMIUM PAYMENT- A deposit of new value into the Policy. The term "Premium
Payment" does not include transfers between the Variable Account and Fixed
Account, or among the Subaccounts.
NET PREMIUM PAYMENTS- The total of all Premium Payments made under the Policy,
less any premium tax deducted from premiums.
QUALIFIED POLICY - A Policy which qualifies for favorable tax treatment under
the provisions of Sections 401 or 403(a) (Qualified Plans), 408 (IRAs), 408A
(Roth IRAs) 403(b) (Tax-Sheltered Annuities) or 457 of the Code.
QUALIFIED PLANS- Retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Code.
SUBACCOUNTS- Separate and distinct divisions of the Variable Account that
purchase shares of underlying Funds. Separate Accumulation Units and Annuity
Units are maintained for each Subaccount.
TAX SHELTERED ANNUITY- An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Code.
VALUATION DAY- Each day the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is restricted.
Unless otherwise indicated, when an event occurs or a transaction is to be
effected on a day that is not a Valuation Day, it will be effected on the next
Valuation Day.
VALUATION PERIOD- The time between two successive Valuation Days.
VARIABLE ACCOUNT- The LSW Variable Annuity Account I, a separate investment
account of LSW into which Net Premium Payments under the Policies are allocated.
The Variable Account is divided into Subaccounts, each of which invests in the
shares of a separate underlying Fund.
VARIABLE ANNUITY- An annuity the accumulated value of which varies with the
investment experience of a separate account.
WITHDRAWAL- A payment made at the request of the Owner pursuant to the right to
withdraw a portion of the Accumulation Value of the Policy.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Life Insurance Company of the Southwest...............................
Additional Policy Provisions..........................................
The Policy................................................
Misstatement of Age or Sex................................
Dividends.................................................
Assignment................................................
Calculation of Yields and Total Returns...............................
Money Market Subaccount Yields............................
Other Subaccount Yields...................................
Average Annual Total Returns..............................
Other Total Returns.......................................
Effect of the Annual Policy Fee on Performance Data.......
Distribution of the Policies .........................................
Safekeeping of Account Assets.........................................
State Regulation......................................................
Records and Reports...................................................
Legal Matters.........................................................
Experts...............................................................
Other Information.....................................................
Financial Statements.................................................. F-1
44
<PAGE> 46
LIFE INSURANCE COMPANY OF THE SOUTHWEST
LSW VARIABLE ANNUITY ACCOUNT I
RETIREMAX VARIABLE ANNUITY POLICY
STATEMENT OF ADDITIONAL INFORMATION
OFFERED BY
LIFE INSURANCE COMPANY OF THE SOUTHWEST
1300 WEST MOCKINGBIRD LANE
DALLAS, TEXAS 75247-4921
This Statement of Additional Information expands upon subjects
discussed in the current Prospectus for the RetireMax Variable Annuity Policy
("Policy") offered by Life Insurance Company of the Southwest. You may obtain a
copy of the Prospectus dated August 13, 1999 by calling 1-800-228-4579, or
writing to Life Insurance Company of the Southwest, 1300 West Mockingbird Lane,
Dallas, Texas 75247-4921. Definitions of terms used in the current Prospectus
for the Policy are incorporated in this Statement of Additional Information.
This Statement of Additional Information is
not a Prospectus and should be read only in
conjunction with the Prospectus for the Policy.
Dated August 13, 1999
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<S> <C>
Life Insurance Company of the Southwest....................................
Additional Policy Provisions...............................................
The Policy..........................................................
Misstatement of Age or Sex..........................................
Dividends...........................................................
Assignment..........................................................
Calculation of Yields and Total Returns....................................
Money Market Subaccount Yields......................................
Other Subaccount Yields.............................................
Average Annual Total Returns........................................
Other Total Returns.................................................
Effect of the Annual Policy Fee on Performance Data.................
Tax Status of the Policy...................................................
Distribution of the Policies ..............................................
Safekeeping of Account Assets..............................................
State Regulation...........................................................
Records and Reports........................................................
Legal Matters..............................................................
Experts
Other Information..........................................................
Financial Statements....................................................... F-1
</TABLE>
<PAGE> 48
LIFE INSURANCE COMPANY OF THE SOUTHWEST
Life Insurance Company of the Southwest ("LSW") has operated as a stock
life insurance company since 1955 domiciled in the State of Texas, and has done
business continuously as "Life Insurance Company of the Southwest."
ADDITIONAL POLICY PROVISIONS
The Policy
The entire contract is made up of the Policy and the application. The
statements made in the application are deemed representations and not
warranties. LSW cannot use any statement in defense of a claim or to void the
Policy unless it is contained in the application and a copy of the application
is attached to the Policy at issue.
Misstatement of Age or Sex
If the age or sex of the Chosen Human Being has been misstated, the
amount which will be paid is that which is appropriate to the correct age and
sex.
Dividends
The Policy is participating; however, no dividends are expected to be
paid on the Policy. If dividends are ever declared, they will be paid in cash.
Assignment
Where permitted, the Owner may assign some or all of the rights under
the Policy at any time during the lifetime of the Annuitant prior to the
Annuitization Date. Such assignment will take effect upon receipt and recording
by LSW at its Home Office of a written notice executed by the Owner. LSW assumes
no responsibility for the validity or tax consequences of any assignment. LSW
shall not be liable as to any payment or other settlement made by LSW before
recording of the assignment. Where necessary for the proper administration of
the terms of the Policy, an assignment will not be recorded until LSW has
received sufficient direction from the Owner and assignee as to the proper
allocation of Policy rights under the assignment.
Any portion of Accumulation Value which is pledged or assigned shall be
treated as a Distribution and shall be included in gross income to the extent
that the cash value exceeds the investment in the Policy for the taxable year in
which assigned or pledged. In addition, any Accumulation Values assigned may,
under certain conditions, be subject to a tax penalty equal to 10% of the amount
which is included in gross income. Assignment of the entire Accumulation Value
may cause the portion of the Accumulation Value which exceeds the total
investment in the Policy and previously taxed amounts to be included in gross
income for federal income tax purposes each year that the assignment is in
effect. Qualified Policies are not eligible for assignment.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, LSW may disclose yields, total returns, and other
performance data pertaining to the Policies or a Subaccount. Such performance
data will be computed, or accompanied by performance data computed, in
accordance with the standards defined by the Securities and Exchange Commission.
1
<PAGE> 49
Because of the charges and deductions imposed under a Policy, the yield
for the Subaccounts will be lower than the yield for their respective
Portfolios. The calculations of yields, total returns, and other performance
data do not reflect the effect of any premium tax that may be applicable to a
particular Policy. Premium taxes currently rate from 0% to 3.5% of premium based
on the state in which the Policy is sold.
Money Market Subaccount Yields
From time to time, advertisements and sales literature may quote the
current annualized yield of the Money Market Subaccount for a seven-day period
in a manner which does not take into consideration any realized or unrealized
gains or losses, or income other than investment income, on shares of the Market
Street Money Market Portfolio or on its portfolio securities.
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 and exclusive of income other than investment
income) at the end of the seven-day period in the value of a hypothetical
account under a Policy having a balance of 1 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 Portfolio
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: 1)
the Annual Policy Fee; 2) Administration Charge; and 3) the Mortality and
Expense Risk Charge. For purposes of calculating current yields for a Policy, an
average per unit Annual Policy Fee is used based on the $30 Annual Policy Fee
deducted at the beginning of each Policy Year. For the class of Policies with
the Enhanced Death Benefit Rider, the charge for that optional benefit will be
included. Current Yield will be calculated according to the following formula:
Current Yield = ((NCS - ES) /UV) x (365/7)
Where:
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and
depreciation and exclusive of income other than
investment income) for the seven-day period
attributable to a hypothetical account having a
balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical account
for the seven-day period.
UV = The unit value on the first day of the seven-day period.
The effective yield of the Money Market Subaccount determined on a
compounded basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
365/7
Effective Yield = (1 + (NCS - ES)/UV)) - 1
Where:
2
<PAGE> 50
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and
depreciation and exclusive of income other than
investment income) for the seven-day period
attributable to a hypothetical account having a
balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven day period.
UV = The unit value on 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 will be lower than the yield for the
Market Street Money Market Portfolio.
The current yield for the Money Market Subaccount as of December 31,
1998 was %, and the effective yield for that Subaccount as of the same date was
%. These yields were calculated based on the performance of the Market Street
Money Market Portfolio for the seven days ended December 31, 1998, and the
assumption that the Money Market Subaccount was in existence for this period
with the level of Policy charges that was in effect at the inception of the
Money Market Subaccount.
The current and effective yields on amounts held in the Money Market
Subaccount normally will fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Market Street Money Market Portfolio, the types of
quality of portfolio securities held by the Market Street Money Market Portfolio
and the Market Street Money Market Portfolio's operating expenses. Yields on
amounts held in the Money Market Subaccount may also be presented for periods
other than a seven-day period.
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) for a Policy for 30-day or one-month periods. The annualized
yield of a Subaccount refers to income generated by the Subaccount over a
specific 30-day or one-month period. Because the yield is annualized, the yield
generated by a Subaccount during a 30-day or one-month period is assumed to be
generated each period over a 12-month period.
The yield is computed by: 1) dividing the net investment income of the
Portfolio attributable to the Subaccount units less Subaccount expenses for the
period; by (2) the maximum offering price per unit on the last day of the period
times the daily average number of units outstanding for the period; 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 Policy Fee, the
Administration Charge and the Mortality and Expense Risk Charge. For the class
of Policies with the Enhanced Death Benefit Rider, the charge for that optional
benefit will be included. For purposes of calculating the 30-day or one -month
yield, an average Annual Policy Fee per dollar of Accumulation Value in the
Variable Account 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:
3
<PAGE> 51
6
Yield = 2 x (((NI - ES)/(U x UV)) + 1) -1)
Where:
NI = net income of the Portfolio for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (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 will be lower than the yield for the corresponding
Fund.
The yield on the amounts held in the Subaccounts normally will
fluctuate over time. Therefore, the disclosed yield for any given past period is
not an indication or representation of future yields or rates of return. The
Subaccount's actual yield is affected by the types and quality of portfolio
securities held by the Fund and its operating expenses.
Yield calculations do not take into account the CDSC under the Policy
equal to from 1% to 7% of premiums paid during the seven years prior to the
surrender or Withdrawal (including the year in which the surrender is made) on
amounts surrendered or withdrawn under the Policy (however, there will never be
a CDSC after the fifteenth Policy Year). A Surrender Charge will not be imposed
on Withdrawals in any Policy Year on an amount up to 10% of the Accumulation
Value as of the most recent Policy Anniversary. However, if a Policy is
subsequently surrendered within a year after taking a Withdrawal that benefits
from the CDSC-free provision, then a CDSC will be assessed at the time of the
surrender as if the surrender had been taken as a single step.
Standardized Average Annual Total Returns for the Subaccounts
Sales literature or advertisements may quote average annual
total return for the Subaccounts for various periods of time. When the
Subaccounts have been in operation for 1, 5 and 10 years, respectively, such
standardized average annual total return for these periods will be provided.
Standardized average annual total return for other periods of time may, from
time to time, also be disclosed.
Standardized 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 month-end practicable,
considering the type and media of the communication and will be stated in the
communication.
Standardized average annual total return is calculated using Subaccount
unit values which LSW calculates on each Valuation Day based on the performance
of the Subaccount's underlying Fund, the deductions for the Mortality and
Expense Risk Charge, the deductions for the asset-based Administration Charge
and the annualized Policy Fee. For purposes of
4
<PAGE> 52
calculating average annual total return, an average per dollar Annual Policy
Fee attributable to the hypothetical account for the period is used. The
calculation also assumes surrender of the Policy at the end of the period for
the return quotation. Total returns will therefore reflect a deduction of the
CDSC for any period less than seven years. The standardized average annual
total return will then be calculated according to the following formula:
TR = ( ( ERV/P) 1/N) - 1
Where:
TR = the average annual total return net of Subaccount
recurring charges.
ERV= the ending redeemable value (net of any applicable CDSC)
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.
Standardized average annual total return may be calculated either
taking into account or not taking into account the impact of the Enhanced Death
Benefit Rider.
Other Total Returns
Nonstandard Subaccount Average Annual Total Return. From time to
time, sales literature or advertisements may also quote nonstandardized average
annual total returns for the Subaccounts that do not reflect the CDSC. These
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 surrendered or withdrawn, and
that the initial investment is assumed to be $10,000 rather than $1,000. Such
information will also be set forth in the Prospectus.
Cumulative Subaccount Total Return. LSW 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.
5
<PAGE> 53
Adjusted Historic Fund Average Annual Total Return. Sales literature
or advertisements may quote adjusted average annual total returns for the Funds
since their inception reduced by some or all of the fees and charges under the
Policy. Such adjusted historic fund performance includes data that precedes
the inception dates of the Subaccounts. This data is designed to show the
performance that would have resulted if the Policy had been in existence during
that time.
When the standard performance data for the Subaccounts is available,
nonstandardized Subaccount and adjusted historic Fund performance data will be
disclosed together with the standard performance data for the required periods.
The Funds have provided the total return information, which includes
the adjusted historic Fund average annual total return information used to
calculate the adjusted historic fund total returns of the Funds for periods
prior to the inception of the Subaccounts. The Alger American Fund, Variable
Insurance Products Fund, Variable Insurance Product Fund II, Strong Special
Fund II, Inc., and Strong Variable Insurance Funds, Inc. are not affiliated
with LSW.
Such adjusted historic fund average annual total return information
for the Funds is set forth in the Prospectus.
Effect of the Annual Policy Fee on Performance Data
The Policy provides, for all Policies with an Accumulation Value of
less than $50,000 on the Date of Issue or any subsequent Policy Anniversary,
for a $30 Annual Policy Fee to be deducted annually at the beginning of each
Policy Year, from the Subaccounts and the unloaned portion of the Fixed Account
based on the proportion that the value of each such account bears to the total
Accumulation Value. For purposes of reflecting the Annual Policy Fee in the
yield and total return quotations, the Annual Policy Fee is converted into a
per-dollar per-day charge. The per-dollar per-day charge has been estimated
based on the distribution of LSW's non-variable single premium deferred annuity
block of business. The per-dollar per-day average charge will then be adjusted
to reflect the basis upon which the particular quotation is calculated.
TAX STATUS OF THE POLICIES
Tax law imposes several requirements that variable annuities must
satisfy in order to receive the tax treatment normally accorded to annuity
contracts.
Diversification Requirements. The Internal Revenue Code (Code)
requires that the investments of each investment division of the separate
account underlying the Policies be "adequately diversified" in order for the
Policies to be treated as annuity contracts for Federal income tax purposes.
It is intended that each investment division, through the fund in which it
invests, will satisfy these diversification requirements.
Owner Control. 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 separate 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 our Policies, such as the flexibility of an owner to
allocate premium payments and transfer amounts among the investment divisions
of the separate account, have not been explicitly addressed in published
rulings. While we believe that the Policies do not give Owners investment
control over separate account assets, we reserve the right to modify the
Policies as necessary to prevent an Owner from being treated as the Owner of
the separate account assets supporting the Policy.
6
<PAGE> 54
Required Distributions. In order to be treated as an annuity contract
for Federal income tax purposes, Section 72(s) of 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 the death of an owner of the
Policy. Specifically, section 72(s) requires that (a) if any owner dies on or
after the annuity starting date, but prior to the time the entire interest in
the contract has been distributed, the entire interest in the contract will be
distributed at least as rapidly as under the method of distribution being used
as of the date of such owner's death; and (b) if any owner dies prior to the
annuity starting date, the entire interest in the contract will be distributed
within five years after the date of such owner's death. These requirements will
be considered satisfied as to any portion of a owner's interest which is payable
to or for the benefit of a designated beneficiary and which is distributed over
the life of such designated beneficiary or over a period not extending beyond
the life expectancy of that beneficiary, provided that such distributions begin
within one year of the owner's death. The designated beneficiary refers to a
natural person designated by the owner as a beneficiary and to whom ownership of
the contract passes by reason of death. However, if the designated beneficiary
is the surviving spouse of the deceased owner, the contract may be continued
with the surviving spouse as the new owner.
The Non-Qualified Policy 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.
DISTRIBUTION OF THE POLICIES
The principal underwriter for the Policies is Equity Services, Inc.,
(ESI). One National Life Drive, Montpelier, Vermont 05604, a wholly-owned
subsidiary of National Life Insurance Company, the parent company of LSW. The
Policies will be offered on a continuous basis and will be sold by licensed
insurance agents in the states where the Policies may lawfully be sold. Such
agents will be representatives of broker-dealers registered under the Securities
Exchange Act of 1934 who are members of the National Association of Securities
Dealers, Inc. Broker-dealers other than Equity Services, Inc. will have executed
Selling Agreements with Equity Services, Inc. LSW paid no commissions to ESI
last year as no Policies were sold.
SAFEKEEPING OF ACCOUNT ASSETS
LSW holds the title to the assets of the Variable Account. The assets
are kept physically segregated and held separate and apart from LSW'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.
STATE REGULATION
LSW is subject to regulation and supervision by the Insurance Department
of the State of Texas which periodically examines its affairs. It is also
subject to the insurance laws and
7
<PAGE> 55
regulations of all jurisdictions where it is authorized to do business. A copy
of the Policy form has been filed with, and where required approved by,
insurance officials in each jurisdiction where the Policies are sold. LSW is
required to submit annual statements of its operations, including financial
statements, to the insurance departments of the various jurisdictions in which
it does business for the purposes of determining solvency and compliance with
local insurance laws and regulations.
RECORDS AND REPORTS
LSW will maintain all records and accounts relating to the Variable
Account. As presently required by the Investment Company Act of 1940 and
regulations promulgated thereunder, reports containing such information as may
be required under the Act or by any other applicable law or regulation will be
sent to Policy Owners semi-annually at the last address known to the Company.
LEGAL MATTERS
All matters relating to Texas law pertaining to the Policies, including
the validity of the Policies and LSW's authority to issue the Policies, have
been passed upon by Susan Jennings, General Counsel of LSW. Sutherland, Asbill &
Brennan LLP of Washington, D.C. has provided advice on certain matters relating
to the Federal securities laws.
EXPERTS
The statutory basis financial statements of LSW as of and for the years
ended December 31, 1998 and 1997, which are included in this Statement of
Additional Information and in the registration statement, have been audited by
PricewaterhouseCoopers LLP, independent auditors, of 160 Federal Street,
Boston, MA 02110 as set forth in their report included herein, and
are included herein in reliance upon such report and upon the authority of such
firm as experts in accounting and auditing.
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 at 450 Fifth Street, N.W., Washington, DC 20549.
FINANCIAL STATEMENTS
LSW's statutory basis financial statements as of December 31, 1998 and
1997 and the Unaudited Balance Sheet (Statutory Basis), Statement of Operations
and Surplus (Statutory Basis) and Statement of Cash Flow (Statutory Basis) For
the Three Months Ended March 31, 1999, which are included in this Statement of
Additional Information, should be considered only as bearing on LSW'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.
8
<PAGE> 56
LIFE INSURANCE COMPANY OF THE SOUTHWEST
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
March 5, 1999
To the Board of Directors of
Life Insurance Company of the Southwest
We have audited the accompanying statements of admitted assets,
liabilities, capital stock and surplus (statutory basis) of Life
Insurance Company of the Southwest (the "Company") as of December
31, 1998 and 1997, and the related statements of income, of changes
in capital and surplus, and of 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 audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 2, these financial statements were prepared in
conformity with accounting practices prescribed or permitted by the
Texas Department of Insurance, which practices differ from generally
accepted accounting principles. The effects on the financial
statements of the variances between such practices and generally
accepted accounting principles are material; they are more fully
described in Note 3.
In our opinion, because of the effects of the matters referred to in
the preceding paragraph, the financial statements audited by us do
not present fairly, in conformity with generally accepted accounting
principles, the financial position of Life Insurance Company of the
Southwest at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended.
Also, in our opinion, the financial statements audited by us present
fairly, in all material respects, the admitted assets, liabilities,
and capital and surplus of Life Insurance Company of the Southwest
at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended, on the basis of accounting
described in Note 2.
<PAGE> 58
LIFE INSURANCE COMPANY OF THE SOUTHWEST
STATUTORY STATEMENTS OF ADMITTED ASSETS,
LIABILITIES, CAPITAL STOCK AND SURPLUS (IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and short-term investments $ 64,739 $ 56,421
Bonds, at amortized cost 1,649,088 1,529,853
Preferred stock 35,198 -
S&P 500 options - long position 9,238 5,583
Futures contracts 463 630
Mortgage loans on real estate 248,063 238,097
Policy loans 84,648 81,136
Real estate - acquired in satisfaction of debt 876 1,827
Other invested assets 33,430 26,200
---------- ----------
Total cash and invested assets 2,125,743 1,939,747
Due and deferred premiums 1,577 1,688
Due and accrued investment income 29,501 27,679
Other assets 3,102 2,963
---------- ----------
TOTAL ADMITTED ASSETS $2,159,923 $1,972,077
========== ==========
LIABILITIES, CAPITAL STOCK AND SURPLUS
Liabilities:
Aggregate reserves for life and annuity policies $1,963,443 $1,787,109
Policy and contract claims 614 795
Premium and other deposit funds 819 1,242
Other contract liabilities 902 408
S&P options - short position 3,723 1,526
Asset valuation reserve (AVR) 13,436 13,559
Interest maintenance reserve (IMR) 5,793 7,026
Broker deposits on loaned securities 39,925 6,620
Other liabilities 12,560 42,597
---------- ----------
Total liabilities 2,041,215 1,860,882
---------- ----------
CAPITAL STOCK AND SURPLUS:
Common stock, $10 par value per share; 300,000 shares
authorized, issued and outstanding in 1998 and 1997 3,000 3,000
Paid-in surplus 32,425 32,425
Unassigned surplus 83,283 75,770
---------- ----------
Total capital and surplus 118,708 111,195
---------- ----------
TOTAL LIABILITIES, CAPITAL STOCK AND SURPLUS $2,159,923 $1,972,077
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 59
LIFE INSURANCE COMPANY OF THE SOUTHWEST
STATUTORY STATEMENTS OF INCOME (IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
INCOME:
Premiums and annuity considerations $ 271,666 $ 305,435
Net investment income 156,134 138,051
Other (expense) income (337) 1,552
--------- ---------
Total income 427,463 445,038
--------- ---------
BENEFIT AND EXPENSES:
Death and annuity benefits 24,821 22,611
Surrender benefits 172,640 161,420
Other policyholder benefits 984 626
Increase in reserves 175,719 200,143
--------- ---------
Total benefits 374,164 384,800
--------- ---------
Commissions 20,920 24,638
General insurance expenses 11,226 11,827
Taxes, licenses and fees 1,680 2,093
Other 10 (10)
--------- ---------
Total benefits and expenses 408,000 423,348
--------- ---------
Net gain from operations before dividends to
policyholders and federal income taxes 19,463 21,690
Dividends to policyholders 41 49
--------- ---------
Net gain from operations before federal income taxes 19,422 21,641
Provision for federal income taxes 4,871 6,397
--------- ---------
Net gain from operations 14,551 15,244
Net realized capital losses (1,237) (1,533)
--------- ---------
NET INCOME $ 13,314 $ 13,711
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 60
LIFE INSURANCE COMPANY OF THE SOUTHWEST
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK
AND SURPLUS (IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1996 $ 95,258
Net income 13,711
Net unrealized capital gains 1,490
Dividends paid or accrued to stockholder (1,000)
Change in nonadmitted assets (171)
Change in asset valuation reserve 2,472
Other (565)
---------
BALANCE AT DECEMBER 31, 1997 $ 111,195
Net income 13,314
Net unrealized capital gains (903)
Dividends paid to stockholder (2,669)
Change in nonadmitted assets (2,130)
Change in asset valuation reserve 123
Other (222)
---------
BALANCE AT DECEMBER 31, 1998 $ 118,708
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 61
LIFE INSURANCE COMPANY OF THE SOUTHWEST
STATUTORY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums and other considerations received $ 272,714 $ 305,630
Net investment income received 145,175 136,216
Death and accident and health benefit payments (4,055) (3,441)
Surrender benefits paid (172,640) (161,420)
Other benefit payments (21,806) (19,232)
Dividends paid to policyholders (79) (95)
Federal income taxes paid (6,136) (5,244)
Commissions, expenses and taxes paid (33,278) (38,243)
Other (14) (199)
--------- ---------
Net cash provided by operations 179,881 213,972
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured or repaid 501,796 338,663
Cost of investments acquired (665,873) (541,707)
Increase in policy loans (3,512) (6,452)
--------- ---------
Net cash used for investing activities (167,589) (209,496)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholder (2,669) (2,923)
Loaned securities financing (30,919) 30,919
Interest on indebtedness (1,427) -
--------- ---------
Net cash provided from financing activities (35,015) 27,996
Reclass of 1997 negative cash to other liabilities (5,132) 5,132
OTHER SOURCES AND APPLICATIONS, NET 36,173 (3,750)
--------- ---------
31,041 1,382
Net increase in cash and short-term investments 8,318 33,854
Cash and short-term investments at beginning of year 56,421 22,567
--------- ---------
Cash and short-term investments at end of year $ 64,739 $ 56,421
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 62
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
1. GENERAL INFORMATION
Life Insurance Company of the Southwest (the Company) is a life
insurance company domiciled in the state of Texas. The Company is a
wholly owned subsidiary of Insurance Investors Life Insurance Company
(IIL), which in turn, is a wholly owned subsidiary of LSW National
Holdings, Inc. (LSWNH). The voting equity of LSWNH at December 31, 1998
and 1997 is as follows:
<TABLE>
<S> <C>
National Financial Services, Inc. 66.67%
SwissRe Investments 25.00
Hannover Reinsurance 8.33
------
100.00%
======
</TABLE>
The Company writes life and annuity policies in 49 states and the
District of Columbia and is subject to regulation by the Texas
Department of Insurance (state of domicile) and the insurance
regulatory authorities of other states in which it is licensed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance
with statutory accounting practices prescribed or permitted by the
Texas Department of Insurance, which vary in some respects from
generally accepted accounting principles (GAAP). The more significant
of these differences are as follows:
INVESTMENTS
Investments are valued in accordance with the requirements of the
National Association of Insurance Commissions (NAIC). Bonds and
preferred stocks are carried at amortized cost and cost, respectively.
Realized gains and losses on the disposal of investments, net of
amounts deferred as part of the IMR, are recognized in net income on
the specific identification basis. S&P 500 options are carried at
amortized cost with gains and losses recognized upon the sale or
expiration of the option. Futures contracts on the S&P 500 are carried
at quoted market values with gains or losses recognized in income.
Mortgage loans are carried at their aggregate unpaid principal balance
net of an allowance for doubtful accounts. Real estate is carried at
cost less accumulated depreciation net of an allowance for market
decline.
CASH AND SHORT TERM INVESTMENTS
Cash includes funds on deposit, amounts due from banks and certificates
of deposit. Short-term investments are carried at cost, which
approximates fair value. The Company considers all highly liquid
investments purchased with a remaining maturity of one year or less to
be short-term investments.
FUTURE POLICY BENEFIT RESERVES AND OTHER CONTRACT RESERVES
6
<PAGE> 63
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
Aggregate reserves for future policy benefits for ordinary life
policies have been computed under the net level premium method or the
Commissioner's Reserve Valuation Method using mortality tables and
interest rates as prescribed by state regulatory authorities, without
consideration of withdrawals. Interest rate assumptions range from
2-1/2% to 6%. Mortality rates are obtained from statutory mortality
tables, primarily the 1941 C.S.O., 1958 C.S.O., and 1980 C.S.O. tables.
Policy liabilities for future policy benefits on universal life
policies, annuities, and endowments, comprise approximately 97% of all
aggregate reserves for future policy benefits at December 31, 1998 and
1997, respectively. Annuities, which comprise approximately 91% and
90% of all aggregate reserves for future policy benefits at December
31, 1998 and 1997, respectively, are computed under the Commissioners
Annuity Reserve Method. Universal life and endowments are computed
under the Commissioner's Reserve Valuation Method.
Policy and contract claims reserves include all reported but unpaid
claims and an estimate of claims incurred but not reported, based on
Company experience.
FEDERAL INCOME TAXES
The Company will file a consolidated tax return for the year ended
December 31, 1998. The federal tax return will be consolidated with
the Company's parent, Insurance Investors Life Insurance Company, LSW
National Holdings, Inc. The method of allocation between the companies
is subject to a written agreement, which has been approved by the Texas
Commissioner of Insurance and the Company's board of directors.
Allocations are limited to the Company's separate return tax
liabilities computed as if it had filed a separate tax return.
REINSURANCE
Reinsurance premiums, commissions, loss and expense reimbursements and
reserves related to reinsured business are accounted for on a basis
consistent with those used in accounting for the original policies
issued and the terms of the reinsurance contract.
USE OF ESTIMATES
The preparation of financial statements in accordance with statutory
accounting practices prescribed or permitted by the Texas Department of
Insurance requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. RECONCILIATION BETWEEN STATUTORY
ACCOUNTING PRINCIPLES AND GAAP
7
<PAGE> 64
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
The effects on the financial statements of the variances between
practices prescribed and permitted by the Texas Department of Insurance
and generally accepted accounting principles are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
STATUTORY CAPITAL AND SURPLUS $ 118,708 $ 111,195
Cost of insurance acquired (COIA) 4,555 6,033
Deferred policy acquisition costs (DAC) 90,857 78,953
Deferred income taxes (6,511) (5,484)
Excess of cost over net assets 2,728 2,988
Future policy benefit reserves (126,514) (96,238)
Unrealized holding gains 39,986 31,774
Asset valuation reserves 13,436 13,559
Interest maintenance reserves 5,793 7,026
Guaranty funds assessment (3,477) (4,218)
Other 23,400 7,950
--------- ---------
Total differences 44,253 42,343
--------- ---------
GAAP STOCKHOLDERS' EQUITY $ 162,961 $ 153,538
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
STATUTORY NET INCOME $ 13,314 $ 13,711
Annuity premiums (266,315) (300,194)
Policy revenues 5,693 5,102
Reinsurance (2,186) (2,958)
Policy reserve increase 40,157 95,776
Surrender benefits 170,806 159,513
Deferred policy acquisition expenses 23,399 22,828
Amortization of DAC, COIA, and goodwill (13,236) (9,666)
Annuity benefits 21,022 18,710
Intrinsic value of S&P 500 options 11,076 4,397
Taxes 1,848 917
Other 1,175 355
--------- ---------
Total differences (6,561) (5,220)
--------- ---------
GAAP NET INCOME $ 6,753 $ 8,491
========= =========
</TABLE>
4. INVESTMENTS
8
<PAGE> 65
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
BONDS
At December 31, 1998 and 1997, the amortized cost and estimated market
value of investments in debt securities are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government securities $ 67,825 $ 1,567 $ 225 $ 69,167
Government agencies, authorities
& subdivisions 38,534 2,056 29 40,561
Public utilities 185,160 5,348 291 190,217
Corporate 771,650 27,657 5,845 793,462
Private placements 153,370 4,581 3,483 154,468
Mortgage-backed securities 432,549 9,724 666 441,607
---------- ---------- ---------- ----------
Total $1,649,088 $ 50,933 $ 10,539 $1,689,482
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government securities $ 44,495 $ 2,030 $ 165 $ 46,360
Government agencies, authorities
& subdivisions 95,401 1,274 736 95,939
Public utilities 199,119 2,053 1,044 200,128
Corporate 652,270 19,745 2,391 669,624
Private placements 123,365 4,284 1,202 126,447
Mortgage-backed securities 415,203 8,081 825 422,459
---------- ---------- ---------- ----------
Total $1,529,853 $ 37,467 $ 6,363 $1,560,957
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities
9
<PAGE> 66
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 20,839 $ 21,066
Due after one year through five years 294,034 299,368
Due after five years through ten years 755,952 777,600
Due after ten years 145,714 149,840
Mortgage-backed securities 432,549 441,608
---------- ----------
Totals $1,649,088 $1,689,482
========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1998 were
$263,473,815. Gross gains of $5,267,417 and gross losses of $3,615,956
were realized on those sales.
Proceeds from sales of investments in debt securities during 1997 were
$248,616,938. Gross gains of $1,781,942 and gross losses of $1,367,331
were realized on those sales.
As required by law, at December 31, 1998 and 1997, the Company
maintains $2,593,213 and $2,595,502, respectively, of investments on
deposit with various state insurance departments.
LOANED SECURITIES
In 1998 and 1997, the Company participated in certain security lending
transactions. It is the Company's policy to hold as collateral 103% of
the market value of the loaned security, which exceeds statutory
requirements. At December 31, 1998 and 1997, the collateral held
related to these transactions is $39,925,000 and $6,620,000,
respectively, and is included in deposits on loaned securities.
REPURCHASE AGREEMENTS
The Company also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings, due to the fact the
securities received at the end of the repurchase period are identical
to the securities transferred. The repurchase liability is included
in other liabilities and was $30,919,000 at December 31, 1997. There
were no open transactions at December 31, 1998.
MORTGAGE LOANS AND REAL ESTATE
10
<PAGE> 67
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company's mortgage loans and real
estate investments were distributed as follows:
<TABLE>
<CAPTION>
MORTGAGE LOANS REAL ESTATE
GEOGRAPHIC REGION 1998 1997 1998 1997
--- ----- ----- -----
<S> <C> <C> <C> <C>
New England 0.4% 0.4% -% -
Middle Atlantic 8.8 7.5 - -
East North Central 1.3 0.9 - -
West North Central 2.9 3.8 - -
South Atlantic 17.3 16.2 75.9 41.1
East South Central 9.3 5.5 - -
West South Central 24.3 29.6 24.1 15.2
Mountain 18.0 21.7 - -
Pacific 17.7 14.4 - 43.7
--- ----- ----- -----
Total 100% 100.0% 100.0% 100.0
=== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOANS REAL ESTATE
PROPERTY TYPE 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Residential 0.7% 0.8% 9.5% 8.0
Apartment 2.2 3.5 - -
Retail 5.9 9.5 - -
Office Building 61.0 55.5 75.9 81.5
Industrial 27.9 27.7 - -
Hotel/Motel 0.3 0.4 - -
Other Commercial 2.0 2.6 14.6 10.5
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0
===== ===== ===== =====
</TABLE>
The Company has recorded allowances for uncollectible balances of $400,000
against mortgage loans as of December 31, 1997. Such allowances are
recorded when collectibility, in whole or in part, is in doubt and also to
establish a general allowance for the mortgage portfolio. There was no
allowance at December 31, 1998.
Mortgage loans are collateralized by the related properties with the
amount of such mortgage loans generally being less than 75% of the
properties' estimated fair values at the time the loans are made. The
interest rates charged for loans made in 1998 ranged from 7.06 % to
8.125%.
11
<PAGE> 68
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
The Company has recorded allowances for market value declines of
$370,000 and $1,065,000 against real estate acquired in the
satisfaction of debt as of December 31, 1998 and 1997, respectively.
Such allowances are recorded when collectibility on the sale of the
acquired real estate, in whole or in part, is in doubt and when market
value (net of estimated cost of sale) is lower than recorded book value.
INVESTMENT INCOME
Net investment income for the years ended December 31, 1998 and 1997
are from the following sources:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Bonds $ 114,063 $ 104,255
Preferred stock 945 -
Mortgage loans 21,889 20,684
Real estate 331 477
Policy loans 4,780 4,512
Short-term investments 3,078 2,029
Derivative instruments 11,836 5,630
Other 1,807 1,731
Amortization of IMR 2,315 2,549
--------- ---------
Gross investment income 161,044 141,867
Less investment expenses (4,910) (3,816)
--------- ---------
Net investment income $ 156,134 $ 138,051
========= =========
</TABLE>
REALIZED GAINS AND LOSSES
Net realized capital gains (losses) for the years ended December 31,
1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Bonds $ 1,707 $ 414
Preferred stock (56) -
Mortgage loans (311) -
Real estate (624) (2,178)
Other 11 (18)
------- -------
727 (1,782)
Less amounts transferred to IMR 1,082 173
Federal income tax benefit (882) 422
------- -------
Net realized capital losses $(1,237) $(1,533)
======= =======
</TABLE>
12
<PAGE> 69
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table represents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
STATEMENT FAIR STATEMENT FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $ 64,739 $ 64,739 $ 56,421 $ 56,421
Investment securities 1,684,286 1,723,751 1,529,853 1,560,957
Mortgage loans 248,063 253,659 238,097 242,076
Policy loans 84,648 84,648 81,136 81,136
Real estate 876 981 1,827 1,912
Surplus notes 33,430 35,051 26,200 26,870
S&P options - long position 9,238 32,923 5,583 13,459
Futures contracts 463 122 630 630
FINANCIAL LIABILITIES:
Interest sensitive reserves 1,913,793 1,904,891 1,736,757 1,725,923
S&P options - short position 3,723 8,526 1,526 1,526
</TABLE>
The following assumptions were used to estimate the fair value of each
class of financial instruments:
Cash and short-term investments: The statement value approximates fair
value due to the relatively short period to maturity of the instruments.
Investment securities: The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for
those or similar investments. Fair values for private placement
securities not provided by an independent pricing service are estimated
by the Company.
Mortgage loans: The fair value of mortgage loans has been determined
based on certain assumptions, such as a level interest rate and
prepayments.
Policy loans: The fair value of policy loans has been determined based
on the face values of the policy loans
Real estate: The fair value of real estate has been determined based on
internal and external appraisals and discounted cash flow models using
interest rate assumptions applicable to the specific properties.
13
<PAGE> 70
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
Surplus notes: The fair value of surplus note assets is based on quotes
provided by an independent pricing service, if available. Fair values
for surplus note assets not provided by an independent pricing service
are estimated by the Company.
S&P 500 Call options: The fair value of call options is based on quoted
market values at the date of reporting.
Futures contracts: The fair value of futures contracts is based on
quoted market values at the date of reporting.
Interest sensitive reserves: The fair value of annuities and universal
life has been based on the cash surrender values of the policies.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company may invest in various derivative instruments, including
equity options and futures contracts based on the S&P 500 Index, in
order to hedge its obligation with respect to indexed annuities and
life insurance. These derivative instruments are purchased from
national exchanges or counterparties (over-the-counter) that conform to
the Company's policies and guidelines regarding derivative
instruments. The standard positions involves contracts of one year or
less duration and, except for periodic purchases and sales of contracts
for hedging purposes, are held to maturity.
Investments in these types of instruments generally involve the
following types of risk: in the case of over-the-counter options, there
is no guarantees that markets will exist for these investments if the
Company desired to close out a position; exchanges may impose trading
limits which may inhibit the Company's ability to close out positions
in exchange-listed instruments; and, if the Company has an open
position with a dealer that becomes insolvent, the Company may
experience a loss. The Company analyzes its position in derivative
instruments relative to its annuity and insurance requirements each
market day.
Cash is required, depending on market movement, when (1) buying an
option or (2) closing an option that may have been written pursuant to
hedging activities. Counterparties may make a single net payment at
maturity. Initial acquisition of instruments and subsequent balancing
are performed solely for the purpose of hedging liabilities presented
by indexed annuities.
The Company recorded amortization of options of $8,852,294 and
$3,151,330 during 1998 and 1997, respectively, which is netted against
investment income.
14
<PAGE> 71
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
7. FEDERAL INCOME TAXES
A reconciliation between reported tax expense and the amount computed
by applying the statutory federal income tax rate of 35% to income
before federal income taxes and net realized capital gains for the
years ended December 31, 1998 and 1997, respectively, follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Tax expense at statutory rate $ 6,797 $ 7,575
Difference in statutory reserves and tax reserves 59 102
Amortization (accretion) of bond (premium) discount (1,028) (829)
Capitalization of policy acquisition
costs for tax 90 277
Amortization of interest maintenance reserve (810) (892)
Other (237) 164
------- -------
Reported provision for federal income taxes $ 4,871 $ 6,397
======= =======
</TABLE>
At December 31, 1998, the Company had accumulated approximately
$5,687,968 in its "policyholders' surplus account." This is a special
memorandum tax account into which certain amounts not previously taxed,
under prior tax laws, were accumulated. No new additions will be made
to this account. Federal income taxes will become payable thereon at
the current tax rate (a) when and if distributions to the shareholder,
other than stock dividends and other limited exceptions, are made in
excess of the accumulated previously taxed income; or (b) when a
company ceases to be a life insurance company as defined by the
Internal Revenue Code and such termination is not due to another life
insurance company acquiring its assets in a nontaxable transaction.
The Company does not anticipate any transactions that would cause any
part of this amount to become taxable.
8. REINSURANCE
The Company reinsures portions of certain policies it writes, thereby
providing greater diversification of risk and minimizing exposure on
larger policies. The Company cedes risks on a coinsurance and a yearly
renewable term basis in excess of the retention limits of $75,000 for
ordinary life and endowment products, excluding the participating
ordinary life product, and $150,000 for universal life and single
premium endowment products with a minimum cession of $25,000. Risks
are ceded on a 50% modified coinsurance basis for certain participating
ordinary life products and a 100% modified coinsurance basis for all
Equity Indexed Universal Life Policies. The aggregate reserves for
life and annuity policies, policy and contract claims, premiums and
annuity considerations, and benefits and reserve changes are shown
after reduction for reinsurance ceded to other companies.
A contingent liability exists with respect to reinsurance in the event
that the reinsurance companies should be unable to meet their
obligations under the reinsurance agreements. Any contingent liability
with modified coinsurance is reduced since the coinsurer places funds
on deposit with the
15
<PAGE> 72
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
Company. Funds held under reinsurance agreements were approximately
$94,823 and $91,325 at December 31, 1998 and 1997, respectively.
The following amounts were ceded to reinsurers as of and for the years
ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Aggregate reserves for life and annuity policies $4,263 $3,776
====== ======
Policy and contract claims liability $ 128 $ 259
====== ======
Premiums and annuity considerations $2,172 $2,933
====== ======
Policy and contract claims incurred $ 351 $ 443
====== ======
</TABLE>
9. POLICY AND BENEFIT RESERVES
The withdrawal characteristics of the Company's annuity actuarial
reserves and deposit liabilities at December 31, 1998 and 1997 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Subject to discretionary
withdrawal with adjustment:
- at book value less
surrender charge $ 943,230 52.5% $ 814,031 50.3%
Subject to discretionary
withdrawal without adjustment:
- at book value 827,696 46.1% 778,832 48.2%
Not subject to discretionary
withdrawal provision 26,254 1.4% 23,933 1.5%
------------ ------------ ------------ ------------
Total annuity actuarial reserves
and deposit liabilities (gross) 1,797,180 100.0% 1,616,796 100.0%
Reinsurance ceded 182 283
------------ ------------
Total annuity actuarial reserves
and deposit liabilities (net) $ 1,797,362 $ 1,617,079
============ ============
</TABLE>
16
<PAGE> 73
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
10. NON-ADMITTED ASSETS
Certain assets designated as non-admitted by accounting practices
prescribed or permitted by the Texas Department of Insurance, have been
excluded from admitted assets and charged directly to capital stock and
surplus. These amounts at December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Guaranty fund assessment $ 500 $ 500
Software 2,095 82
Other assets 975 858
------ ------
Total non-admitted assets $3,570 $1,440
====== ======
</TABLE>
11. CAPITAL AND SURPLUS
The Company is required by the state of Texas to maintain capital and
surplus of at least $2,000,000.
Dividends on Company stock are paid as declared by its board of
directors. According to the bylaws of the Company, all statutory
profits earned upon the nonparticipating class of business may be paid
out as dividends to stockholders. However, not more than 10% of the
statutory profits on participating business may be paid out as
dividends to stockholders.
The Company paid $ 2,669,200 and $2,923,000 in dividends to its
immediate parent, IIL, in 1998 and 1997, respectively. The maximum
amount of dividends that can be paid without the approval of the Texas
Department of Insurance is 10% of surplus or 100% of prior year net
income, whichever is greater. In making the determination of the
maximum dividend payable, the aggregate dividends paid over the past
twelve months must be taken into account. The amount of dividend
payment for 1999, based on 1998 results, would be limited to $
13,313,582.
11. BENEFIT PLAN
The Company has a 401(k) defined contribution plan covering
substantially all employees. Company contributions under the 401(k)
plan include a Company base contribution, equal to 3% of annual
compensation (up to but not exceeding Internal Revenue Service
compensation limits), and the Company matches employee contributions at
a rate of 50% (to a maximum of 3% of compensation). Employees may make
voluntary contributions not to exceed the lesser of $9,500 or 10% of
annual compensation. Additionally, the Company contributes 3% of
compensation in excess of the Social Security taxable wage base (up to
but not exceeding the Internal Revenue Service compensation limits).
Company contributions approximated $295,243 and $287,000 for the years
ended December 31, 1998 and 1997, respectively.
17
<PAGE> 74
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- ------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
The Company entered into several service agreements with the parent of
National Financial Services, National Life Insurance Company of Vermont
(NLV). These agreements provide the Company with various administrative
services, the most significant of which are investment advisory services,
tax preparation and planning and data processing and telecommunications.
During 1998 and 1997, the Company incurred fees associated with these
agreements of $1,326,671 and $1,253,570, respectively. Amounts payable to
NLV at December 31, 1998 and 1997 were $116,350 and $69,550, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company has $14,755,000 in commitments outstanding at December 31,
1998 to fund additional commercial mortgage loans.
In the ordinary course of its operations, the Company has been named as
defendant in various legal actions seeking payments for denied claims
and monetary damages. It is management's opinion that the ultimate
liability, if any, resulting from the disposition of these matters will
not have a materially adverse effect on the Company's financial
position.
14. CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which will replace the current Accounting and
Practice Procedures manual as the NAIC's primary guidance on statutory
accounting. The NAIC is now considering amendments to the Codification
guidance that would also be effective upon implementation. The NAIC
has recommended an effective date of January 1, 2001. The Codification
provides guidance where statutory accounting has been silent and
changes current statutory accounting in some areas, e.g. deferred
income taxes are recorded.
It is not known whether the State of Texas will adopt the Codification,
and whether the Texas Department of Insurance will make any changes to
that guidance. The Company has not estimated the potential effect of
the Codification guidance if adopted by the State of Texas. However,
the actual effect of adoption could differ as changes are made to the
Codification guidance, prior to its recommended effective date of
January 1, 2001.
18
<PAGE> 75
LIFE INSURANCE COMPANY OF THE SOUTHWEST
UNAUDITED BALANCE SHEET (STATUTORY BASIS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(In Thousands) 03/31/1999 12/31/1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and short-term investments $ 69,811 $ 64,739
Bonds 1,686,475 1,649,088
Preferred stocks 35,198 35,198
Common stocks 0 0
Mortgage loans 261,599 248,063
Policy loans 85,187 84,648
Real estate investments 869 876
Other invested assets 42,411 43,131
- -----------------------------------------------------------------------------------------
Total cash and invested assets 2,181,550 2,125,743
Due and deferred premiums 1,464 1,577
Due and accrued investment income 31,558 29,501
Federal income taxes receivable 0 0
Other assets 2,910 3,102
- -----------------------------------------------------------------------------------------
Total assets $ 2,217,482 $ 2,159,923
=========================================================================================
LIABILITIES:
Policy and other contract reserves $ 2,014,863 $ 1,963,443
Policyholders' deposits 831 820
Claims in process of settlement 739 1,480
Policyholders' dividends 38 42
Interest maintenance reserve 4,963 5,793
Federal income taxes payable 3,677 705
Asset valuation reserve 15,549 13,436
Broker deposits on loaned securities 41,950 39,925
Other liabilities 14,813 15,571
- -----------------------------------------------------------------------------------------
Total liabilities 2,097,423 2,041,215
- -----------------------------------------------------------------------------------------
SURPLUS:
Common capital stock 3,000 3,000
Gross paid in and contributed capital 32,425 32,425
Unassigned funds (surplus) 84,634 83,283
- -----------------------------------------------------------------------------------------
Total capital and surplus 120,059 118,708
- -----------------------------------------------------------------------------------------
Total liabilities, capital and surplus $ 2,217,482 $ 2,159,923
=========================================================================================
</TABLE>
-1-
<PAGE> 76
LIFE INSURANCE COMPANY OF THE SOUTHWEST
UNAUDITED STATEMENT OF OPERATIONS AND SURPLUS (STATUTORY BASIS)
FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In Thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
INCOME:
Insurance income $ 62,837 $ 69,425
Net investment income 47,299 37,976
Other income 6 9
- -------------------------------------------------------------------------------
Total income 110,142 107,410
- -------------------------------------------------------------------------------
EXPENSES:
Benefits 38,739 45,671
Increase in reserves 51,430 48,246
Commissions and operating expenses 8,352 8,638
- -------------------------------------------------------------------------------
Total expenses 98,521 102,555
- -------------------------------------------------------------------------------
Net gain from operations before dividends and
federal income taxes 11,621 4,855
Dividends to policyholders 14 7
- -------------------------------------------------------------------------------
Net gain from operations before federal income
taxes 11,607 4,848
Federal income tax expense 3,239 954
- -------------------------------------------------------------------------------
Net gain from operations 8,368 3,894
Net realized losses 0 (438)
- -------------------------------------------------------------------------------
NET INCOME 8,368 3,456
Unrealized (losses) gains (981) 695
Increase in asset valuation reserve (2,113) (858)
Dividends to stockholders (2,600) (2,367)
Other adjustments to surplus, net (1,324) (520)
- -------------------------------------------------------------------------------
Increase in surplus 1,350 406
SURPLUS:
Beginning of year 118,708 111,194
- -------------------------------------------------------------------------------
End of period $ 120,058 $ 111,600
===============================================================================
</TABLE>
-2-
<PAGE> 77
LIFE INSURANCE COMPANY OF THE SOUTHWEST
UNAUDITED STATEMENT OF CASH FLOWS (STATUTORY BASIS)
FOR THE THREE MONTHS ENDED MARCH 31,
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In Thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance income received $ 62,839 $ 70,551
Net investment and other income received 40,316 33,690
Benefits paid (38,779) (45,731)
Commissions and operating expenses paid (8,578) (9,019)
Federal income taxes paid (500) (1,774)
Dividends paid to policyholders (17) (16)
- --------------------------------------------------------------------------------
Net cash provided by operations 55,281 47,701
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured or repaid:
Bonds 43,021 112,046
Stocks 0 0
Mortgage loans 9,939 12,840
Real estate and other investments 16,107 15,580
Cost of investments acquired:
Bonds (81,597) (146,771)
Stocks 0 (5,000)
Mortgage loans (23,475) (19,685)
Real estate and other investments (12,920) (22,863)
Net decrease in policy loans (539) (558)
- --------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities (49,464) (54,411)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds (repaid) borrowed 0 (1,109)
OTHER SOURCES AND APPLICATIONS, NET (745) (3,163)
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
and short-term investments 5,072 (10,982)
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year 64,739 51,289
- --------------------------------------------------------------------------------
End of period $ 69,811 $ 40,307
================================================================================
</TABLE>
-3-
<PAGE> 78
PART C
OTHER INFORMATION
<PAGE> 79
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements and schedule included in Part B:
Independent Auditor's Report.
Balance Sheets (Statutory Basis)
as of December 31, 1998 and 1997.
Statements of Operations and
Surplus (Statutory Basis) for the years ended
December 31, 1998 and 1997.
Statements of Cash Flow
(Statutory Basis) for the years ended
December 31, 1998 and 1997.
Notes to Financial Statements.
Unaudited Balance Sheet (Statutory Basis); unaudited Statement
of Operations (Statutory Basis) & Unaudited Statement of Cash
Flows (statutory basis) for the Three Months ended March 31,
1999
(b) Exhibits
(1) Resolution of the Depositor's Board of
Directors authorizing the establishment of
the Registrant. 1
(2) Not Applicable.
(3) Form of Distribution Agreement between the
Variable Account/Registrant and Principal
Underwriter. 2
(4) (a) The form of the variable annuity
policy. 2
(b) Form of Enhanced Death Benefit
Rider.2
(c) Form of NIMCRUT Endorsement 2
(d) Form of TDA Endorsement 2
(e) Form of IRA Endorsement 2
(5) Variable Annuity Application 2
(6) (a) Articles of Incorporation of
Depositor 1
(b) By-Laws of Depositor. 1
(7) Not Applicable.
(8) (a) Form of Amendment to Participation
Agreement by and among Market Street Fund,
Inc., Life Insurance Company of the Southwest
and Equity Services, Inc. 2
C-1
<PAGE> 80
(b) Form of Amendment to Participation
Agreement by and among Variable Insurance
Products Fund, Fidelity Distributors
Corporation and Life Insurance Company of the
Southwest. 2
(c) Form of Amendment to Participation
Agreement by and among The Alger American
Fund, Life Insurance Company of the
Southwest and Fred Alger and Company. 2
(d) Form of Participation
Agreement by and among Life Insurance
Company of the Southwest, LSW Variable
Annuity Account I and Strong Variable
Insurance Funds, Inc., Strong Fund II, Inc.,
and Strong Funds Distributors, Inc. 2
(e) Form of Amendment to Participation
Agreement by and among Variable Insurance
Products Fund II, Fidelity Distributors
Corporation and Life Insurance Company of the
Southwest. 2
(9) Opinion and Consent of Susan J. Jennings,
General Counsel of Life Insurance Company of
the Southwest.
(10) (a) Consent of Sutherland Asbill &
Brennan LLP
(b) Consent of PricewaterhouseCoopers LLP
(11) Not Applicable.
(12) Not Applicable.
(13) Performance Advertising Calculation
Schedules. 2
1. Incorporated herein by reference to the N-4 Registration Statement (File No.
333-47363) for LSW Variable Annuity Account I filed March 5, 1998
2. Incorporated herein by reference to Pre-Effective Amendment No. 1 to the N-4
Registration Statement (file No. 333-47363) for LSW Variable Annuity Account I
filed July 31, 1998.
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Name and Principal Business Address* Position with Depositor
- ------------------------------------ -----------------------
<S> <C>
Wade H. Mayo President, Chief Executive
Officer and Director
Carl J. Lutz Senior Vice President and
Director
James A. Mallon Chairman of the Board and Director
National Life Drive
Montpelier, Vermont 05604
</TABLE>
C-2
<PAGE> 81
<TABLE>
<S> <C>
Karl-Heinz Klaeser Director
200 Crescent Court
Suite 300
Dallas, TX 75201
Rodney A. Buck Director
National Life Drive
Montpelier, Vermont 05604
Joseph M. Rob Director
National Life Drive
Montpelier, Vermont 05604
D. Russell Morgan Director
National Life Drive
Montpelier, Vermont 05604
Susan J. Jennings Vice President, General Counsel and
Secretary
Micheal F. Goni Managing Vice President - Finance
</TABLE>
*Unless otherwise indicated, the principal business address is 1300 West
Mockingbird Lane, Dallas, Texas 75247-4921.
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant.
A list of all persons directly or indirectly controlled by or under
common control with National Life Insurance Company, the two thirds
owner of LSW, is as set forth below:
National Life Insurance Company owns 100% of Administrative Services,
Inc. and National Financial Services, Inc. National Financial
Services, Inc. owns 100% of LSW National Holdings, Inc.; LSW
National Holdings, Inc. owns 100% of Insurance Investors Life
Insurance Company; Insurance Investors Life Insurance Company owns
100% of LSW.
National Life Insurance Company owns 100% of National Life Investment
Management Company, Inc. National Life Investment Management
Company, Inc. owns 100% of Sentinel Advisors, Inc., Equity Services,
Inc. and NL Capital Management, Inc. Equity Services, Inc. owns 100%
of Sentinel Administrative Service Corporation. Sentinel
Administrative Service Corporation is the majority partner of
Sentinel Administrative Service Company and Sentinel Advisors, Inc.
is the majority partner of Sentinel Advisors Company.
National Life Investment Management Company, Inc. is the majority
partner of Sentinel Management Company, and Sentinel Financial
Services Company. Sentinel Management Company owns 100% of American
Guaranty & Trust Company.
All of National Life Insurance Company, Administrative Services,
Inc., National Financial Services, Inc., LSW National Holdings, Inc.,
National Life Investment Management Company, Inc., NL Capital
Management, Inc., Equity Services, Inc., and Sentinel Administrative
Service Corporation are corporations organized under the laws of
Vermont. Insurance Investors Life Insurance Company is a corporation
organized under the laws of Texas.
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Sentinel Advisors, Inc. and American Guaranty & Trust Company are
corporations organized under the laws of Delaware.
Each of Sentinel Management Company, Sentinel Advisors Company,
Sentinel Financial Services Company and Sentinel Administrative
Service Company is a general partnership formed under Vermont law.
Item 27. Number of Contract Owners
As of January 31, 1999, no policies have been sold.
Item 28. Indemnification
The By-Laws of Depositor provide, in part in Article 7, as
follows:
7.1 Indemnification.
(a) The Corporation shall indemnify and hold harmless
any officer, director, employee or agent of the Corporation
to the fullest extent permitted under Title 11A, Chapter 8,
Subchapter 5 of the Vermont Statutes Annotated, as the same
may be amended from time to time. Any repeal or
modification of this Section 7.1 or of Title 11A, Chapter
8, Subchapter 5 of the Vermont Statutes Annotated shall not
adversely affect any right of indemnification of any
officer, director or employee of the Corporation existing
at any time prior to such repeal or modification.
Provided, however, that the Corporation shall not be
required to indemnify a person in connection with a
proceeding initiated by such person, including a
counterclaim or crossclaim, unless the proceeding was
authorized by the Board of Directors.
(b) The Corporation may pay or reimburse the reasonable
expenses incurred in defending any proceeding in advance of
its final disposition if the Corporation has received in
advance an undertaking by the person receiving such payment
or reimbursement to repay all amounts advanced if it should
be ultimately determined that he or she is not entitled to
be indemnified under this article or otherwise. The
Corporation may require security for any such undertaking.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 29 Principal Underwriter
(a) Equity Services, Inc. (ESI) is the principal underwriter for
LSW Variable Annuity Account I, National Life Variable Annuity Account II and
National Variable Life Insurance Account.
(b) The following information is furnished with respect to the
officers and directors of ESI:
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<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* with ESI
- ------------------- --------
<S> <C>
Joseph M. Rob Chairman, President & Chief Executive Officer & Director
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Vice President - Financial Products
Budd A. Shedaker Assistant Vice President - Communications
Gregory D. Teese Vice President - Compliance
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
Patrick E. Welch Director
Thomas H. MacLeay Director
Rodney A. Buck Director
</TABLE>
*Unless otherwise indicated, principal business address is One National Life
Drive, Montpelier, Vermont 05604.
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the rules thereunder are maintained by
Life Insurance Company of the Southwest at 1300 West Mockingbird Lane, Dallas,
Texas 75247-4921, or One National Life Drive, Montpelier, Vermont 05604.
Item 31. Management Services
All management contracts are discussed in Part A or Part B.
Item 32 Undertakings
(a) Registrant hereby undertakes to 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 sixteen (16) months old for so long as payments under the
variable annuity contracts may be accepted.
(b) Registrant hereby undertakes to include either (1) as part of
any application to purchase a contract offered by the Prospectus, a space that
an applicant can check to request a Statement of Additional Information, or (2)
a postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant hereby undertakes to deliver any Statement of
Additional Information and any financial statement required to be made
available under this form promptly upon written or oral request.
(d) Reliance on No-Action Letter Regarding Section 403(b)
Retirement Plan. Life Insurance Company of the Southwest and the
Registrant/Variable Account rely on a no-action letter issued by the Division
of Investment Management to the American Council of Life Insurance on November
28, 1988 and represent that the conditions enumerated therein have been or will
be complied with.
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<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, LSW Variable Annuity
Account I, certifies that it meets all the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933, and has duly caused this Post Effective Amendment No. 2 to the
Registration Statement to be signed on its behalf, in the City of Dallas and
the State of Texas, on the 11th day of August, 1999.
LSW VARIABLE ANNUITY ACCOUNT I
(Registrant)
Attest: By: /s/ SJJ /s/ WHM
---------------- -------------------------
Susan J. Jennings Wade H. Mayo, President &
Secretary Chief Executive Officer
Life Insurance Company of the Southwest
By: LIFE INSURANCE COMPANY OF THE SOUTHWEST
(Depositor)
Attest: By: /s/ SJJ /s/ WHM
---------------- -------------------------
Susan J. Jennings Wade H. Mayo, President &
Secretary Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to the Registration Statement has been signed
below by the following persons in the capacities indicated on the date(s) set
forth below.
Signature Title Date
- --------- ----- ----
/s/ WHM 8/11/99
- ------------------ President -----------
Wade H. Mayo and Chief Executive Officer,
and Director
/s/ JAM 8/11/99
- ------------------ Chairman of the Board and -----------
James A. Mallon Director
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<PAGE> 85
/s/ MFG 8/11/99
- ------------------ Managing Vice President - Finance -----------
Michael F. Goni (Chief Accounting Officer)
/s/ RAB 8/11/99
- ------------------ Director -----------
Rodney A. Buck
/s/ CJL 8/11/99
- ------------------ Senior Vice President and Director -----------
Carl J. Lutz
/s/ JMR 8/11/99
- ------------------ Director -----------
Joseph M. Rob
/s/ DRM 8/11/99
- ------------------ Director -----------
D. Russell Morgan
/s/ WAS 8/11/99
- ------------------ Director -----------
William A. Smith
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<PAGE> 1
LSW LETTERHEAD
August 13, 1999
The Board of Directors
Life Insurance Company of the Southwest
1300 West Mockingbird Lane
Dallas, Texas 75356-9080
Re: Variable Annuity Registration Statement
Post Effective Amendment No. 2
Ladies and Gentlemen:
With reference to the Registration Statement on Form N-4 as amended,
filed by Life Insurance Company of the Southwest and LSW Variable Annuity
Account I with the Securities and Exchange Commission covering individual
variable annuity contracts, I have examined such documents and such laws as I
considered necessary and appropriate and on the basis of such examination, it is
my opinion that:
1. Life Insurance Company of the Southwest is duly organized and
validly existing under the laws the State of Texas, and has
been duly authorized to issue individual variable annuity
contracts by the Department of Insurance of the State of
Texas.
2. LSW Variable Annuity Account I is a duly authorized and
existing separate account established pursuant to the
provisions of Article 3.75, Section 1, Texas Insurance Code
3. The individual variable annuity contracts, when issued as
contemplated by said Form N-4 Registration Statement, will
constitute legal, validly existing issued and binding
obligations of Life Insurance Company of the Southwest.
I hereby consent to the filing of this opinion as an Exhibit to said
Form N-4 Registration Statement and to the use of my name under the
caption "Legal Matters" in the Registration Statement.
Sincerely,
/s/ SJJ
Susan J. Jennings
General Counsel
<PAGE> 1
[SUTHERLAND ASBILL & BRENNAN LLP LETTERHEAD]
STEPHEN E. ROTH
DIRECT LINE: (202) 383-0158
Internet: [email protected]
August 13, 1999
VIA EDGARLINK
Board of Directors
Life Insurance Company of the Southwest
1300 West Mockingbird Lane
Dallas, TX 75247-4921
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. 2 to the registration statement on Form N-4 for
LSW Variable Annuity Account I (File No. 333-47363). 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> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No.2 to the registration
statement on Form N-4 of our report dated March 5, 1999 relating to the
statutory basis financial statements of Life Insurance Company of the Southwest
which appear in such Statement of Additional Information. We also consent to
the reference to us under the heading "Experts" in such Statement of Additional
Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 13, 1999
