<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1998
FILE NO. 333-61899
FILE NO. 811-08967
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. / /
------------------------
EQUITRUST LIFE ANNUITY ACCOUNT II
(Exact Name of Registrant)
EQUITRUST LIFE INSURANCE COMPANY
(Name of Depositor)
5400 University Avenue
West Des Moines, Iowa 50266
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: 1-888-349-4656
------------------------
STEPHEN M. MORAIN, ESQUIRE
5400 University Avenue
West Des Moines, Iowa 50266
(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
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
SECURITIES BEING OFFERED: FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY
CONTRACTS
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULES 481(a) AND 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
<TABLE>
<CAPTION>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
1. Cover Page..................................... Cover Page
2. Definitions.................................... Definitions
3. Synopsis....................................... Expense Tables; Summary
4. Condensed Financial Information................ Yields and Total Returns
5. General
(a) Depositor................................. EquiTrust Life Insurance Company
(b) Registrant................................ EquiTrust Life Annuity Account II
(c) Portfolio Company......................... Investment Options
(d) Fund Prospectus........................... Investment Options
(e) Voting Rights............................. Voting Rights
(f) Administrators............................ N/A
6. Deductions and Expenses
(a) General................................... Charges and Deductions; Summary
(b) Sales Load %.............................. Charges and Deductions; Summary
(c) Special Purchase Plan..................... N/A
(d) Commissions............................... Distribution of the Contracts
(e) Expenses -- Registrant.................... Charges and Deductions; Summary
(f) Fund Expenses............................. Investment Options; Charges and Deductions
(g) Organizational Expenses................... N/A
7. Contracts
(a) Persons with Rights....................... Summary; Addition, Deletion or Substitution of Investments;
Description of Annuity Contract; Payment Options; Voting Rights
(b) (i) Allocation of Purchase
Payments........................... Summary; Premiums; Free-Look Period; Allocation of Premiums
(ii) Transfers.......................... Summary; Transfer Privilege
(iii) Exchanges.......................... Transfers, Assignments or Exchanges of a Contract
(c) Changes................................... Additions, Deletions or Substitutions of Investments; Description of
Annuity Contract; Modification;
(d) Inquiries................................. Cover page; Inquiries
8. Annuity Period................................. Summary; Payment Options
9. Death Benefit.................................. Death Benefit Before the Retirement Date; Death Benefit After the
Retirement Date
10. Purchases and Contract Value
(a) Purchases................................. Summary; Issuance of a Contract; Premiums; Free Look Period;
Allocation of Premiums; Variable Cash Value;
(b) Valuation................................. Definitions; Variable Cash Value;
(c) Daily Calculation......................... Definitions; Variable Cash Value;
(d) Underwriter............................... Issuance of a Contract; Distribution of the Contracts
11. Redemptions
(a) -- By Owners.............................. Summary; Transfer Privilege; Surrenders and Partial Surrenders;
Proceeds on the Retirement Date; Payments; Payment Options; Federal
Tax Matters
-- By Annuitant........................... Summary; Transfer Privilege; Surrenders and Partial Surrenders;
Proceeds on the Retirement Date; Payments; Payment Options; Federal
Tax Matters
(b) Taxes ORP................................. N/A
(c) Check Delay............................... Payments
(d) Lapse..................................... N/A
(e) Free Look................................. Summary; Free Look Period
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C> <C> <C>
12. Taxes.......................................... Summary; Federal Tax Matters
13. Legal Proceedings.............................. Legal Proceedings
14. Table of Contents for the Statement of
Additional Information......................... Statement of Additional Information
Table of Contents
PART B
<CAPTION>
ITEM OF FORM N-4 PART B CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
15. Cover Page..................................... Cover Page
16. Table of Contents.............................. Table of Contents
17. General Information and History................ N/A
18. Services
(a) Fees and Expenses of Registrant........... N/A
(b) Management Contracts...................... N/A
(c) Custodian................................. N/A
Independent Public Accountant............. Experts
(d) Assets of Registrant...................... N/A
(e) Affiliated Persons........................ N/A
(f) Principal Underwriter..................... Distribution of the Contracts (prospectus)
19. Purchase of Securities
Being Offered................................. Distribution of the Contracts (prospectus)
Offering Sales Load........................... N/A
20. Underwriters................................... Distribution of the Contracts (prospectus)
21. Calculation of Performance Data................ Calculation of Yields and Total Returns; Yields and Total Returns
(prospectus)
22. Annuity Payments............................... Payment Options (prospectus)
23. Financial Statements........................... Financial Statements
PART C -- OTHER INFORMATION
<CAPTION>
ITEM OF FORM N-4 PART C CAPTION
- ----------------------------------------------------- ----------------------------------------------------------------------
<C> <S> <C> <C> <C>
24. Financial Statements and Exhibits.............. Financial Statements and Exhibits
(a) Financial Statements...................... (a) Financial Statements
(b) Exhibits.................................. (b) Exhibits
25. Directors and Officers of the Depositor........ Directors and Officers of EquiTrust Life Insurance Company
26. Persons Controlled By or Under Common Control
with the Depositor or Registrant............... Persons Controlled By or In Common Control with the Depositor or
Registrant
27. Number of Contractowners....................... Number of owners
28. Indemnification................................ Indemnification
29. Principal Underwriters......................... Principal Underwriter
30. Location of Accounts and Records............... Location of Books and Records
31. Management Services............................ Management Services
32. Undertakings................................... Undertakings and Representations
Signature Page................................. Signatures
</TABLE>
<PAGE>
PROSPECTUS
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EquiTrust Life Annuity Account II
Individual Flexible Premium Deferred
Variable Annuity Contract
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This Prospectus describes the individual flexible premium deferred variable
annuity contract (the "Contract") being offered by EquiTrust Life Insurance
Company (the "Company"). The Contract may be sold to or in connection with
retirement plans, including those that qualify for special federal tax treatment
under the Internal Revenue Code.
Premiums and accumulated values are allocated, as designated by the owner, to
one or more of the subaccounts of the EquiTrust Life Annuity Account II (the
"Account"), the Declared Interest Option, or both. The assets of each Subaccount
will be invested solely in shares of the corresponding Investment Options: Value
Growth Portfolio, High Grade Bond Portfolio, High Yield Bond Portfolio, Money
Market Portfolio and Blue Chip Portfolio of EquiTrust Variable Insurance Series
Fund; Equity Income Portfolio, Mid-Cap Growth Portfolio, New America Growth
Portfolio and Personal Strategy Balanced Portfolio of T. Rowe Price Equity
Series, Inc.; International Stock Portfolio of T. Rowe Price International
Series, Inc.; or Dreyfus Variable Investment Fund: Capital Appreciation
Portfolio, Dreyfus Variable Investment Fund: Disciplined Stock Portfolio,
Dreyfus Variable Investment Fund: Growth and Income Portfolio, Dreyfus Variable
Investment Fund: International Equity Portfolio and Dreyfus Variable Investment
Fund: Small Cap Portfolio. The accompanying prospectus for each Fund describes
the investment objectives and attendant risks of each Investment Option. The
accumulated value of the Contracts prior to the retirement date, except for
amounts in the Declared Interest Option, will vary according to the investment
performance of each Investment Option in which the selected Subaccounts are
invested. THE OWNER BEARS THE ENTIRE INVESTMENT RISK ON AMOUNTS ALLOCATED TO THE
ACCOUNT.
This Prospectus sets forth basic information about the Contract and the Account
that a prospective investor should know before investing. Additional information
about the Contract and the Account is contained in the Statement of Additional
Information, which has been filed with the Securities and Exchange Commission.
The Statement of Additional Information is dated the same as this Prospectus and
is incorporated herein by reference. The table of contents for the Statement of
Additional Information is on page 31 of this Prospectus. You may obtain a copy
of the Statement of Additional Information free of charge by writing or calling
the Company at the address or phone number shown below.
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PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR EACH
FUND'S INVESTMENT OPTIONS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Issued By
EquiTrust Life Insurance Company
5400 University Avenue
West Des Moines, Iowa 50266
1-888-349-4656
THE DATE OF THIS PROSPECTUS IS
, 1998
<PAGE>
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TABLE OF CONTENTS
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PAGE
DEFINITIONS............................................................... 3
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EXPENSE TABLES............................................................ 4
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SUMMARY................................................................... 7
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THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS............................... 8
EquiTrust Life Insurance Company................................ 8
EquiTrust Life Annuity Account II............................... 8
Investment Options.............................................. 9
Addition, Deletion or Substitution of Investments............... 11
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DESCRIPTION OF ANNUITY CONTRACT........................................... 12
Issuance of a Contract.......................................... 12
Premiums........................................................ 12
Free-Look Period................................................ 12
Allocation of Premiums.......................................... 12
Variable Accumulated Value...................................... 13
Transfer Privilege.............................................. 14
Partial Withdrawals and Surrenders.............................. 14
Special Transfer and Withdrawal Options......................... 15
Death Benefit Before the Retirement Date........................ 15
Death Benefit After the Retirement Date......................... 16
Proceeds on the Retirement Date................................. 16
Payments........................................................ 16
Modification.................................................... 17
Reports to Owners............................................... 17
Inquiries....................................................... 17
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THE DECLARED INTEREST OPTION.............................................. 17
Minimum Guaranteed and Current Interest Rates................... 18
Transfers From Declared Interest Option......................... 18
Payment Deferral................................................ 18
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CHARGES AND DEDUCTIONS.................................................... 19
Surrender Charge (Contingent Deferred Sales Charge)............. 19
Annual Administrative Charge.................................... 20
Transfer Processing Fee......................................... 20
Mortality and Expense Risk Charge............................... 20
Investment Option Expenses...................................... 20
Premium Taxes................................................... 20
Other Taxes..................................................... 20
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PAYMENT OPTIONS........................................................... 20
Election of Options............................................. 21
Description of Options.......................................... 21
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YIELDS AND TOTAL RETURNS.................................................. 21
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FEDERAL TAX MATTERS....................................................... 23
Introduction.................................................... 23
Tax Status of the Contract...................................... 24
Taxation of Annuities........................................... 25
Transfers, Assignments or Exchanges of a Contract............... 27
Withholding..................................................... 27
Multiple Contracts.............................................. 27
Taxation of Qualified Plans..................................... 27
Possible Charge for the Company's Taxes......................... 29
Other Tax Consequences.......................................... 29
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DISTRIBUTION OF THE CONTRACTS............................................. 29
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LEGAL PROCEEDINGS......................................................... 30
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VOTING RIGHTS............................................................. 30
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YEAR 2000................................................................. 31
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FINANCIAL STATEMENTS...................................................... 31
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STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS..................... 32
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2
<PAGE>
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DEFINITIONS
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<TABLE>
<S> <C>
ACCOUNT.................. EquiTrust Life Annuity Account II.
ACCUMULATED VALUE........ The total amount invested under the Contract. It
is the sum of the values of the Contract in each
Subaccount of the Account plus the value of the
Contract in the Declared Interest Option.
ANNUITANT................ The person or persons whose life (or lives)
determines the annuity benefits payable under the
Contract and whose death determines the death
benefit.
BENEFICIARY.............. The person to whom the proceeds payable on the
death of the owner/annuitant will be paid.
BUSINESS DAY............. Each day that the New York Stock Exchange is open
for trading, except the day after Thanksgiving,
the day before Christmas (in 1998) and any day on
which the Home Office is closed because of a
weather-related or comparable type of emergency
and is unable to segregate orders and redemption
requests received on that day.
THE CODE................. The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY..... Same date in each Contract Year as the Contract
Date.
CONTRACT DATE............ The date on which a properly completed application
is received by the Company at the Home Office. It
is the date set forth on the data page of the
Contract which is used to determine Contract Years
and Contract Anniversaries.
CONTRACT YEAR............ A twelve-month period beginning on the Contract
Date or on a Contract Anniversary.
DECLARED INTEREST An investment option under the Contract funded by
OPTION.................. the Company's General Account. It is not part of,
nor dependent upon, the investment performance of
the Account.
DUE PROOF OF DEATH....... Proof of death satisfactory to the Company. Such
proof may consist of the following if acceptable
to the Company:
(a) a certified copy of the death certificate;
(b) a certified copy of a court decree reciting a
finding of death; or
(c) any other proof satisfactory to the Company.
FUND..................... An open-end diversified management investment
company in which the Account invests.
GENERAL ACCOUNT.......... The assets of the Company other than those
allocated to the Account or any other separate
account of the Company.
HOME OFFICE.............. The principal offices of the Company at 5400
University Avenue, West Des Moines, Iowa 50266.
INVESTMENT OPTION........ A separate investment portfolio of a Fund.
NET ACCUMULATED VALUE.... The accumulated value less any applicable
surrender charge.
NON-QUALIFIED CONTRACT... A Contract that is not a "Qualified Contract."
OWNER.................... The person who owns the Contract and who is
entitled to exercise all rights and privileges
provided in the Contract.
QUALIFIED CONTRACT....... A Contract that is issued in connection with plans
that qualify for special federal income tax
treatment under Sections 401, 403(b) or 408 of the
Code.
RETIREMENT DATE.......... The date when the accumulated value will be
applied under a payment option, if the annuitant
is still living.
SEC...................... U.S. Securities and Exchange Commission.
SUBACCOUNT............... A subdivision of the Account, the assets of which
are invested in a corresponding Investment Option.
VALUATION PERIOD......... The period that starts at the close of business
(3:00 p.m. central time) on one Business Day and
ends at the close of business on the next
succeeding Business Day.
WRITTEN NOTICE........... A written request or notice in a form satisfactory
to the Company which is signed by the owner and
received at the Home Office.
</TABLE>
3
<PAGE>
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EXPENSE TABLES
- --------------------------------------------------------------------------------
The following expense information assumes that the entire accumulated value is
variable accumulated value.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Premiums................ None
Surrender Charge (contingent deferred sales
charge) as a percentage of the amount
surrendered:
</TABLE>
<TABLE>
<CAPTION>
CONTRACT YEAR* SURRENDER CHARGE
- -------------------- -----------------
<S> <C>
1................... 6%
2................... 5
3................... 4
4................... 3
5................... 2
6................... 1
7 and after......... 0
</TABLE>
* After the first Contract Year, the owner may make partial withdrawals of up
to 10% of the accumulated value on the most recent Contract Anniversary
without incurring a surrender charge. If the Contract is subsequently
surrendered during the Contract Year, a surrender charge will be applied to
the partial withdrawals taken. The amount that may be withdrawn without
incurring a surrender charge is NOT cumulative from Contract Year to
Contract Year.
<TABLE>
<S> <C>
Transfer Processing Fee........................... None*
</TABLE>
* The Company does not charge a fee for the first twelve transfers in a
Contract Year. The Company may charge $25 for each subsequent transfer in a
Contract Year.
<TABLE>
<S> <C>
ANNUAL ADMINISTRATIVE CHARGE...................... $30
ACCOUNT ANNUAL EXPENSES (as a percentage of
average net assets)
Mortality and Expense Risk Charge............... 1.40%
Other Account Expenses.......................... None
Total Account Expenses........................ 1.40%
</TABLE>
ANNUAL INVESTMENT OPTION EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER TOTAL
EXPENSES EXPENSES
ADVISORY (AFTER WAIVER OR (AFTER WAIVER OR
INVESTMENT OPTION FEE REIMBURSEMENT) REIMBURSEMENT)
- -------------------------------------------------- ------------ ------------------------- --------------------------
<S> <C> <C> <C>
EquiTrust Variable Insurance Series Fund**
Value Growth.................................... 0.45% 0.10% 0.55%(1)
High Grade Bond................................. 0.30% 0.22% 0.52%
High Yield Bond................................. 0.45% 0.12% 0.57%(1)
Money Market.................................... 0.25% 0.23% 0.48%(1)
Blue Chip....................................... 0.20% 0.13% 0.33%
T. Rowe Price Equity Series, Inc.
Equity Income................................... 0.85% 0.00% 0.85%(2)
Mid-Cap Growth.................................. 0.85% 0.00% 0.85%(2)
New America Growth.............................. 0.85% 0.00% 0.85%(2)
Personal Strategy Balanced...................... 0.90% 0.00% 0.90%(2)
T. Rowe Price International Series, Inc.
International Stock............................. 1.05% 0.00% 1.05%(2)
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio.................. 0.75%(3) 0.05% 0.80%(4)
Disciplined Stock Portfolio..................... 0.75% 0.27% 1.02%(4)
Growth and Income Portfolio..................... 0.75% 0.05% 0.80%(4)
International Equity Portfolio.................. 0.75% 0.31% 1.06%(4)
Small Cap Portfolio............................. 0.75% 0.03% 0.78%(4)
</TABLE>
- ------------------------
** The annual investment option expenses for each Investment Option of the Fund
are net of certain reimbursements by the Fund's investment adviser.
Operating expenses (including the investment advisory fee but excluding
4
<PAGE>
brokerage, interest, taxes and extraordinary expenses) of an Investment
Option that exceed 1.50% of the Investment Option's average daily net assets
for any fiscal year are reimbursed by the Fund's investment adviser up to
the amount of the advisory fee. In addition, the investment adviser has
voluntarily agreed to reimburse each Portfolio for expenses that exceed
0.65%. Absent the reimbursements, the total expenses for the Investment
Options for the 1997 fiscal year would have been: Value Growth 0.58%, High
Grade Bond 0.57%, High Yield Bond 0.65% and Money Market 0.55%.
(1) Total annual investment option expenses have been restated for the reduction
in management fees from 0.50% to 0.45% for the Value Growth and High Yield
Bond Investment Options and 0.30% to 0.25% for the Money Market Investment
Option, effective May 1, 1997.
(2) Total annual investment option expenses are an all-inclusive fee and pay for
investment management services and other operating costs.
(3) The advisory fee is a combined investment advisory and sub-investment
advisory fee.
(4) Total expenses were not reduced for the 1997 fiscal year by any waiver or
reimbursement.
The above tables are intended to assist the owner of a Contract in understanding
the costs and expenses that he or she will bear directly or indirectly. The
tables reflect the expenses for the Account based on the actual expenses for
each Investment Option for the 1997 fiscal year. For a more complete description
of the various costs and expenses see "Charges and Deductions" and the
prospectus for each Investment Option which accompany this Prospectus.
EXAMPLES: An owner would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
1. If the Contract is surrendered or is annuitized at the end of the
applicable time period:
<TABLE>
<CAPTION>
3 5 10
SUBACCOUNT 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth.................................... $ 111 $ 194 $ 277 $ 524
High Grade Bond................................. 111 193 276 521
High Yield Bond................................. 112 195 278 526
Money Market.................................... 111 192 274 517
Blue Chip....................................... 109 188 266 501
T. Rowe Price Equity Series, Inc.
Equity Income................................... 114 203 292 555
Mid-Cap Growth.................................. 114 203 292 555
New America Growth.............................. 114 203 292 555
Personal Strategy Balanced...................... 115 204 295 560
T. Rowe Price International Series, Inc.
International Stock............................. 116 209 302 574
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio.................. 116 210 303 577
Disciplined Stock Portfolio..................... 116 208 300 571
Growth and Income Portfolio..................... 114 202 290 550
International Equity Portfolio.................. 116 209 302 575
Small Cap Portfolio............................. 114 201 289 548
</TABLE>
5
<PAGE>
2. If the Contract is not surrendered or annuitized at the end of the
applicable time period:
<TABLE>
<CAPTION>
3 5 10
SUBACCOUNT 1 YEAR YEARS YEARS YEARS
- -------------------------------------------------- ------ ------ ------ -------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth.................................... $ 50 $ 151 $ 254 $ 524
High Grade Bond................................. 49 150 253 521
High Yield Bond................................. 50 152 255 526
Money Market.................................... 49 149 251 517
Blue Chip....................................... 48 144 243 501
T. Rowe Price Equity Series, Inc.
Equity Income................................... $ 53 $ 160 $ 270 $ 555
Mid-Cap Growth.................................. 53 160 270 555
New America Growth.............................. 53 160 270 555
Personal Strategy Balanced...................... 53 162 272 560
T. Rowe Price International Series, Inc.
International Stock............................. 55 166 280 574
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio.................. 55 167 281 577
Disciplined Stock Portfolio..................... 54 165 278 571
Growth and Income Portfolio..................... 52 159 267 550
International Equity Portfolio.................. 55 166 280 575
Small Cap Portfolio............................. 52 158 266 548
</TABLE>
The examples provided above assume that no transfer charges or premium taxes
have been assessed. The examples also assume that the annual administrative
charge is $30 and that the accumulated value per contract is $10,000, which
translates the administrative charge into an assumed .30% charge for the
purposes of the examples based on a $1,000 investment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. THE ASSUMED 5% ANNUAL RATE OF RETURN IS HYPOTHETICAL AND SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE
GREATER OR LESS THAN THIS ASSUMED RATE.
6
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
THE CONTRACT ISSUANCE OF A CONTRACT. Contracts may be sold in
connection with retirement plans which may or may not
qualify for special federal tax treatment under the Code.
There is no maximum age for owners on the Contract date.
(See "Issuance of a Contract.")
FREE-LOOK PERIOD. The owner has the right to return the
Contract within 20 days after he or she receives it. The
returned Contract will become void. The Company will
return to the owner an amount equal to the greater of the
premiums paid or the accumulated value on the date the
returned Contract is received at the Home Office plus
administrative charges and charges deducted from the
Account. (See "Free-Look Period.")
PREMIUMS. The minimum amount which the Company will
accept as an initial premium is $1,000. Subsequent
premiums of not less than $50 may be paid under the
Contract. (See "Premiums.")
ALLOCATION OF PREMIUMS. Premiums under a Contract will
be allocated, as designated by the owner, to one or more
Subaccounts, the Declared Interest Option, or both. The
initial premium will be allocated to the Money Market
Subaccount for a 10-day period following the Contract
date. At the end of that period, the amount in the Money
Market Subaccount will be allocated among the Subaccounts
and the Declared Interest Option in accordance with the
owner's percentage allocation in the application. The
assets of each Subaccount will be invested solely in a
corresponding Investment Option. The accumulated value,
except for amounts in the Declared Interest Option, will
vary according to the investment performance of the
Investment Option in which the selected Subaccounts are
invested. Interest will be credited to amounts in the
Declared Interest Option at a guaranteed minimum rate of
3% per year, or a higher current interest rate declared
by the Company. (See "Allocation of Premiums.")
TRANSFERS. On or before the retirement date, the owner
may transfer all or part of the amount in a Subaccount
or the Declared Interest Option to another Subaccount or
the Declared Interest Option subject to certain
restrictions.
The total amount transferred each time must be at least
$100 or the entire amount in the Subaccount, if less.
Transfers out of the Declared Interest Option must be for
no more than 25% of the accumulated value in that option.
No fee is currently charged for the first twelve
transfers during a Contract year, but the Company may
assess a transfer processing fee of $25 for each
subsequent transfer during a Contract year. (See
"Transfer Privilege.")
PARTIAL WITHDRAWAL. Upon written notice at any time
before the retirement date, the owner may withdraw part
of the accumulated surrender value subject to certain
limitations. (See "Partial Withdrawals.")
SURRENDER. Upon written notice received on or before the
retirement date, the owner may surrender the Contract
and receive its net accumulated value. (See "Surrender.")
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS The following charges and deductions are assessed under
the Contract:
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE). No
charge for sales expense is deducted from premiums at
the time premiums are paid. However, if a Contract has
not been in force for six full Contract years, upon
surrender, partial withdrawal or the application of the
accumulated value to certain payment options under
certain circumstances, a surrender charge is deducted
from the amount surrendered, withdrawn or from the
remaining accumulated value.
For the first Contract year, the charge is 6% of the
amount surrendered. Thereafter, the surrender charge
decreases by 1% each subsequent Contract year. In no
event will the total surrender charge on any Contract
exceed 8.5% of the total premiums paid under the
Contract. (See "Charge for Partial Withdrawal or
Surrender.")
7
<PAGE>
Subject to certain restrictions, for partial withdrawals
in each Contract year after the first Contract year, up
to 10% of the accumulated value on the most recent
Contract Anniversary may be withdrawn without a current
surrender charge. If the Contract is subsequently
surrendered during the Contract Year, a surrender charge
will be applied to partial withdrawals taken. (See
"Amounts Not Subject to Surrender Charge.") The surrender
charge may be waived as provided in the Contracts. (See
"Waiver of Surrender Charge.")
ANNUAL ADMINISTRATIVE CHARGE. On the Contract date and
on each Contract anniversary prior to the retirement
date, the Company deducts an annual administrative charge
of $30 from the accumulated value. (See "Annual
Administrative Charge.")
MORTALITY AND EXPENSE RISK CHARGE. The Company deducts a
daily mortality and expense risk charge to compensate it
for assuming certain mortality and expense risks. The
charge is deducted from the assets of the Account at an
annual rate of 1.40% (approximately 1.01% for mortality
risk and 0.39% for expense risks). (See "Mortality and
Expense Risk Charge.")
INVESTMENT OPTION EXPENSES. Because the Account
purchases shares of the various Investment Options, the
assets of the Account will reflect the investment
advisory fee and other operating expenses incurred by the
Investment Options. A table of each Investment Option's
advisory fee and other expenses can be found in the
Expense Tables at the front of this prospectus. For a
description of each Investment Option's advisory fee and
other expenses, see the prospectuses for the Investment
Options of the Funds.
- --------------------------------------------------------------------------------
ANNUITY PROVISIONS On the retirement date, the accumulated value (less any
applicable surrender charge) will be applied under a
payment option, unless the owner chooses to receive the
net accumulated value in a lump sum. Payments under these
options do not depend upon the Account's performance.
(See "Payment Options.")
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS Generally, a distribution (including a surrender, partial
withdrawal or death benefit payment) may result in
taxable income. In certain circumstances, a 10% penalty
tax may apply. For further discussion of the federal
income status of variable annuity contracts, see "Federal
Tax Matters."
- --------------------------------------------------------------------------------
OTHER CONTRACTS
The Company offers other variable annuity contracts that
invest in the same Investment Options of the Funds. These
contracts may have different charges that could affect
Subaccount performance, and may offer different benefits
more suitable to a person's needs. To obtain more
information about these contracts, contact the Company.
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THE COMPANY, ACCOUNT AND INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
EQUITRUST LIFE INSURANCE COMPANY
The Company is a stock life insurance company
incorporated in the State of Iowa on June 3, 1966. The
Company is principally engaged in the offering of life
insurance policies and annuity contracts and is admitted
to do business in 38 states--Alabama, Alaska, Arizona,
Arkansas, California, Colorado, Delaware, Florida,
Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas,
Louisiana, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia,
Washington, Wisconsin and Wyoming. The principal offices
of the Company are at 5400 University Avenue, West Des
Moines, Iowa 50266
- --------------------------------------------------------------------------------
EQUITRUST LIFE ANNUITY ACCOUNT II
The Account was established by the Company as a separate
account on January 6, 1998. The Account will receive and
invest premiums paid under the Contracts. In addition,
the Account may receive and invest premiums for any other
variable annuity contracts issued in the future by the
Company.
Although the assets in the Account are the property of
the Company, the assets in the Account attributable to
the Contracts are not chargeable with liabilities arising
out of any other business which the Company may conduct.
The assets of the Account are available to cover the
general liabilities of the Company only to the extent
that the Account's assets exceed its liabilities arising
under the Contracts and any other
8
<PAGE>
contracts supported by the Account. The Company has the
right to transfer to the general account any assets of
the Account which are in excess of such reserves and
other contract liabilities. All obligations arising under
the Contracts are general corporate obligations of the
Company.
The Account currently is divided into fifteen Subaccounts
but may, in the future, include additional subaccounts.
Each Subaccount invests exclusively in shares of a single
corresponding Investment Option. Income and realized and
unrealized gains or losses from the assets of each
Subaccount are credited to or charged against that
Subaccount without regard to income, gains or losses from
any other Subaccount.
The Account has been registered as a unit investment
trust under the Investment Company Act of 1940 (the "1940
Act") and meets the definition of a separate account
under the federal securities laws. Registration with the
Securities and Exchange Commission does not involve
supervision of the management or investment practices or
policies of the Account or the Company by the SEC. The
Account is also subject to the laws of the State of Iowa
which regulate the operations of insurance companies
domiciled in Iowa.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS The Account invests in shares of the Investment Options.
The Investment Options currently include the Value Growth
Portfolio, High Grade Bond Portfolio, High Yield Bond
Portfolio, Money Market Portfolio and Blue Chip Portfolio
of EquiTrust Variable Insurance Series Fund; the Equity
Income Portfolio, Mid-Cap Growth Portfolio, New America
Portfolio and Personal Strategy Balanced Portfolio of T.
Rowe Price Equity Series, Inc. and International Stock
Portfolio of T. Rowe Price International Series, Inc.;
and the Dreyfus Variable Investment Fund: Capital
Appreciation Portfolio, Dreyfus Variable Investment Fund:
Disciplined Stock Portfolio, Dreyfus Variable Investment
Fund: Growth and Income Portfolio, Dreyfus Variable
Investment Fund: International Equity Portfolio and
Dreyfus Variable Investment Fund: Small Cap Portfolio.
The Account may, in the future, provide for additional
investment options. Each Investment Option has its own
investment objectives and the income and losses for each
Investment Option will be determined separately.
Each of these Investment Options was formed as an
investment vehicle for insurance company separate
accounts. The investment objectives and policies of
certain Investment Options are similar to the investment
objectives and policies of other portfolios that may be
managed by the same investment adviser, sub-investment
adviser or manager. The investment results of the
Investment Options, however, may be higher or lower than
the results of such other portfolios. There can be no
assurance, and no representation is made, that the
investment results of any of the Investment Options will
be comparable to the investment results of any other
portfolio, even if the other portfolio has the same
investment adviser, sub-investment adviser or manager.
The investment objectives and policies of each Investment
Option are summarized below. There is no assurance that
any Investment Option will achieve its stated objectives.
More detailed information, including a description of
risks and expenses, may be found in the prospectus for
each Investment Option, which must accompany or precede
this Prospectus and which should be read carefully and
retained for future reference.
EQUITRUST VARIABLE INSURANCE SERIES FUND
EquiTrust Investment Management Services, Inc. is the
investment adviser to the Fund. The Fund is comprised of
six portfolios, the following five of which are available
under the Contract:
VALUE GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation. The Portfolio pursues
this objective by investing primarily in equity
securities of companies that the investment adviser
believes have a potential to earn a high return on
capital and/or in equity securities that the
investment adviser believes are undervalued by the
market place. Such equity securities may include
common stock, preferred stock and securities
convertible or exchangeable into common stock.
9
<PAGE>
HIGH GRADE BOND PORTFOLIO. This Portfolio seeks as
high a level of current income as is consistent with
an investment in a high grade portfolio of debt
securities. The Portfolio will pursue this objective
by investing primarily in debt securities rated AAA,
AA or A by Standard & Poor's or Aaa, Aa or A by
Moody's Investors Service, Inc. and in securities
issued or guaranteed by the United States government
or its agencies or instrumentalities.
HIGH YIELD BOND PORTFOLIO. This Portfolio seeks as a
primary objective, as high a level of current income
as is consistent with investment in a portfolio of
fixed-income securities rated in the lower categories
of established rating services. As a secondary
objective, the Portfolio seeks capital appreciation
when consistent with its primary objective. The
Portfolio pursues these objectives by investing
primarily in fixed-income securities rated Baa or
lower by Moody's Investors Service, Inc. and/or BBB
or lower by Standards & Poor's, or in unrated
securities of comparable quality. AN INVESTMENT IN
THIS PORTFOLIO MAY ENTAIL GREATER THAN ORDINARY
FINANCIAL RISK. (See the Fund Prospectus "Principal
Risk Factors--Special Considerations--High Yield
Bonds.")
MONEY MARKET PORTFOLIO. This Portfolio seeks maximum
current income consistent with liquidity and
stability of principal. The Portfolio will pursue
this objective by investing in high quality
short-term money market instruments. AN INVESTMENT IN
THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
BLUE CHIP PORTFOLIO. This Portfolio seeks growth of
capital and income. The Portfolio pursues this
objective by investing primarily in common stocks of
well-capitalized, established companies. Because this
Portfolio may be invested heavily in particular
stocks or industries, an investment in this Portfolio
may entail relatively greater risk of loss.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price Associates, Inc. is the investment adviser to the Fund.
EQUITY INCOME PORTFOLIO. This Portfolio seeks to
provide substantial dividend income and long-term
capital appreciation by investing primarily in
established companies considered by the adviser to
have favorable prospects for both increasing
dividends and capital appreciation.
MID-CAP GROWTH PORTFOLIO. This Portfolio seeks
long-term capital appreciation by investing primarily
in common stocks of medium-sized (mid-cap) growth
companies which offer the potential for above-average
earnings growth.
NEW AMERICA GROWTH PORTFOLIO. This Portfolio seeks
long-term capital growth by investing primarily in
common stocks of U.S. growth companies operating in
service industries.
PERSONAL STRATEGY BALANCED PORTFOLIO. This Portfolio
seeks the highest total return over time consistent
with an emphasis on both capital appreciation and
income.
T. ROWE PRICE INTERNATIONAL SERIES, INC.
Rowe Price-Fleming International, Inc. is the investment adviser to the Fund.
INTERNATIONAL STOCK PORTFOLIO. This Portfolio seeks
to provide capital appreciation through investments
primarily in established companies based outside the
United States.
10
<PAGE>
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Corporation serves as the investment adviser
to the Fund. Fayez Sarofim and Co. serves as the
sub-investment adviser to the Dreyfus Variable Investment
Fund: Capital Appreciation Portfolio. The following Fund
portfolios are available under the Contract.
DREYFUS VARIABLE INVESTMENT FUND: CAPITAL
APPRECIATION PORTFOLIO. This Portfolio primarily
seeks long-term capital growth, consistent with the
preservation of capital; current income is a
secondary investment objective. This Portfolio
invests primarily in the common stocks of domestic
and foreign issuers.
DREYFUS VARIABLE INVESTMENT FUND: DISCIPLINED STOCK
PORTFOLIO. This Portfolio seeks to provide investment
results that are greater than the total return
performance of publicly-traded common stocks in the
aggregate, as represented by the Standard & Poor's
500 Composite Stock Price Index. The Portfolio will
use quantitative statistical modeling techniques to
construct a portfolio in an attempt to achieve its
investment objective, without assuming undue risk
relative to the broad stock market.
DREYFUS VARIABLE INVESTMENT FUND: GROWTH AND INCOME
PORTFOLIO. This Portfolio seeks to provide long-term
capital growth, current income and growth of income,
consistent with reasonable investment risk by
investing primarily in equity securities, debt
securities and money market instruments of domestic
and foreign issuers.
DREYFUS VARIABLE INVESTMENT FUND: INTERNATIONAL
EQUITY PORTFOLIO. This Portfolio seeks to maximize
capital growth through investments in equity
securities of foreign issuers located throughout the
world.
DREYFUS VARIABLE INVESTMENT FUND: SMALL CAP
PORTFOLIO. This Portfolio seeks maximum capital
appreciation by investing primarily in common stocks
of domestic and foreign issuers. The Portfolio will
be particularly alert to companies considered by the
adviser to be emerging smaller-sized companies which
are believed to be characterized by new or innovative
products, services or processes which should enhance
prospects for growth in future earnings.
The Funds currently sell shares: (a) to the Account as
well as to separate accounts of insurance companies that
may or may not be affiliated with the Company or each
other; and (b) to separate accounts to serve as the
underlying investment for both variable insurance
policies and variable annuity contracts. The Company
currently does not foresee any disadvantages to owners
arising from the sale of shares to support variable
annuity contracts and variable life insurance policies,
or from shares being sold to separate accounts of
insurance companies that may or may not be affiliated
with the Company. However, the Company will monitor
events in order to identify any material irreconcilable
conflicts that might possibly arise. In the event of such
a conflict, the Company would determine what action, if
any, should be taken in response to the conflict. In
addition, if the Company believes that a Fund's response
to any such conflicts insufficiently protects owners, it
will take appropriate action on its own, including
withdrawing the Account's investment in that Fund. (See
the Fund prospectuses for more detail.)
The Company may receive compensation from an affiliate(s)
of one or more of the Funds based upon an annual
percentage of the average assets held in the Investment
Options by the Company. These amounts are intended to
compensate the Company for administrative and other
services provided by the Company to the Funds and/or
affiliate(s).
Each Fund is registered with the SEC as an open-end,
diversified management investment company. Such
registration does not involve supervision of the
management or investment practices or policies of the
Fund by the SEC.
- --------------------------------------------------------------------------------
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable
law, to make additions to, deletions from or
substitutions for the shares that are held in the Account
or that the Account may purchase. If the shares of an
Investment Option are no longer available for investment
or if, in the Company's judgment, further investment in
any Investment Option should become inappropriate in view
of the purposes of the Account, the Company may redeem
the shares, if any, of that Investment Option and
11
<PAGE>
substitute shares of another Investment Option. The
Company will not substitute any shares attributable to a
Contract's interest in a Subaccount without notice and
prior approval of the SEC and state insurance
authorities, to the extent required by the 1940 Act or
other applicable law.
The Company also reserves the right to establish
additional subaccounts of the Account, each of which
would invest in shares corresponding to an Investment
Option or in shares of another investment company having
a specified investment objective. The Company may, in its
sole discretion, establish new subaccounts or eliminate
or combine one or more Subaccounts if marketing needs,
tax considerations or investment conditions warrant. Any
new subaccounts may be made available to existing
Contract owners on a basis to be determined by the
Company. Subject to obtaining any approvals or consents
required by applicable law, the assets of one or more
Subaccounts may be transferred to any other Subaccount
if, in the sole discretion of the Company, marketing, tax
or investment conditions warrant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, change the
Contract to reflect the substitution or change. If the
Company deems it to be in the best interest of Contract
owners and annuitants, and subject to any approvals that
may be required under applicable law, the Account may be
operated as a management investment company under the
1940 Act, it may be deregistered under that Act if
registration is no longer required, it may be combined
with other Company separate accounts or its assets may be
transferred to another separate account of the Company.
In addition, the Company may, when permitted by law,
restrict or eliminate any voting rights of owners or the
persons who have such rights under the Contracts.
- --------------------------------------------------------------------------------
DESCRIPTION OF ANNUITY CONTRACT
- --------------------------------------------------------------------------------
ISSUANCE OF A CONTRACT In order to purchase a Contract, application must be made
to the Company through a licensed representative of the
Company, who is also a registered representative of
EquiTrust Marketing Services, Inc. ("EquiTrust
Marketing") (formerly FBL Marketing Services, Inc.), a
broker-dealer having a selling agreement with EquiTrust
Marketing or a broker-dealer having a selling agreement
with such broker-dealer. The Contract Date will be the
date the properly completed application is received by
the Company at its Home Office. If this date is the 29th,
30th or 31st of any month, the Contract Date will be the
28th of such month. Contracts may be sold to or in
connection with retirement plans that do not qualify for
special tax treatment as well as retirement plans that
qualify for special tax treatment under the Code. There
is no maximum age for owners on the Contract date.
- --------------------------------------------------------------------------------
PREMIUMS The minimum initial premium which the Company will accept
is $1,000. Subsequent premium payments may be paid at any
time during the annuitant's lifetime and before the
retirement date and must be for at least $50.
At the time of application, a premium reminder notice
schedule may be selected based on an annual, semi-annual
or quarterly payment. The owner will receive a premium
reminder notice at the specified interval. The owner may
change the amount and schedule of the premium reminder
notice. Also, under the Automatic Payment Plan, the owner
can select a monthly payment schedule pursuant to which
premium payments will be automatically deducted from a
bank account or other source rather than being "billed."
The Contract will not necessarily lapse even if premiums
are not paid.
- --------------------------------------------------------------------------------
FREE-LOOK PERIOD The Contract provides for an initial "free-look" period.
The owner has the right to return the Contract within 20
days of receiving it. When the Company receives the
returned Contract at its Home Office, it will cancel the
Contract and refund to the owner an amount equal to the
greater of the premiums paid under the Contract or the
sum of the accumulated value as of the date the returned
Contract is received by the Company at its Home Office
plus the amount of the annual administration charge and
any charges deducted from the Account.
- --------------------------------------------------------------------------------
ALLOCATION OF PREMIUMS If the application for a Contract is properly completed
and is accompanied by all the information necessary to
process it, including payment of the initial premium, the
initial premium will be allocated to the Money Market
Subaccount within two business days of receipt of such
premium by the Company at its Home Office. If the
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<PAGE>
application is not properly completed, the Company
reserves the right to retain the premium for up to five
business days while it attempts to complete the
application. If the application is not complete at the
end of the 5-day period, the Company will inform the
applicant of the reason for the delay and the initial
premium will be returned immediately, unless the
applicant specifically consents to the Company retaining
the premium until the application is complete.
At the time of application, the owner selects how the
initial premium is to be allocated among the Subaccounts
and the Declared Interest Option. Any allocation must be
for at least 10% of a premium payment and be in whole
percentages.
The initial premium will be allocated to the Money Market
Subaccount for a 10-day period following the Contract
date. After the expiration of the 10-day period, the
amount in the Money Market Subaccount will be allocated
among the Subaccounts and the Declared Interest Option in
accordance with the owner's percentage allocation in the
application. Any subsequent premiums will be allocated at
the end of the valuation period in which the subsequent
premium is received by the Company in the same manner,
unless the allocation percentages are changed. Subsequent
premiums will be allocated in accordance with the
allocation schedule in effect at the time the premium
payment is received. However, owners may direct
individual payments to a specific Subaccount or the
Declared Interest Option (or any combination thereof)
without changing the existing allocation schedule.
The allocation schedule may be changed by the owner at
any time by written notice. Changing the allocation
schedule will not change the allocation of existing
accumulated values among the Subaccounts or the Declared
Interest Option.
The accumulated values allocated to a Subaccount will
vary with that Subaccount's investment experience, and
the owner bears the entire investment risk. Owners should
periodically review their premium allocation schedule in
light of market conditions and their overall financial
objectives.
- --------------------------------------------------------------------------------
VARIABLE ACCUMULATED VALUE
The variable accumulated value will reflect the
investment experience of the selected Subaccounts, any
premiums paid, any surrenders or partial withdrawals, any
transfers and any charges assessed in connection with the
Contract. There is no guaranteed minimum variable
accumulated value, and, because a Contract's variable
accumulated value on any future date depends upon a
number of variables, it cannot be predetermined.
CALCULATION OF VARIABLE ACCUMULATED VALUE. The variable
accumulated value is determined at the end of each
valuation period. The value will be the aggregate of the
values attributable to the Contract in each of the
Subaccounts, determined for each Subaccount by
multiplying that Subaccount's unit value for the relevant
valuation period by the number of Subaccount units
allocated to the Contract.
DETERMINATION OF NUMBER OF UNITS. Any amounts allocated
to the Subaccounts will be converted into Subaccount
units. The number of units to be credited to a Contract
is determined by dividing the dollar amount being
allocated to a Subaccount by the unit value for that
Subaccount at the end of the valuation period during
which the amount was allocated. The number of units in
any Subaccount will be increased at the end of the
valuation period by any premiums allocated to the
Subaccount during the current valuation period and by any
amounts transferred to the Subaccount from another
Subaccount or the Declared Interest Option during the
current valuation period. The number of units in any
Subaccount will be decreased at the end of the valuation
period by any amounts transferred from that Subaccount to
another Subaccount or the Declared Interest Option, any
amounts withdrawn during the current valuation period,
any surrender charge assessed upon a partial withdrawal
or surrender and the annual administrative charge, if
assessed during the current valuation period.
DETERMINATION OF UNIT VALUE. The unit value for each
Subaccount's first valuation period is set at $10. The
unit value for a Subaccount is calculated for each
subsequent valuation period by dividing (a) by (b) where:
(a) is the net result of:
1. the value of the net assets in the
Subaccount at the end of the preceding valuation
period; plus
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<PAGE>
2. the investment income, dividends and
capital gains, realized or unrealized, credited to
the Subaccount during the current valuation
period; minus
3. the capital losses, realized or
unrealized, charged against the Subaccount during
the current valuation period; minus
4. any amount charged for taxes or any amount
set aside during the valuation period as a
provision for taxes attributable to the
Subaccount; minus
5. the daily amount charged for mortality and
expense risks for each day of the current
valuation period; and
(b) the number of units outstanding at the end of
the preceding valuation period.
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TRANSFER PRIVILEGE Before the retirement date, an owner may transfer all or
part of an amount in a Subaccount to another Subaccount
or the Declared Interest Option at any time, or transfer
up to 25% of an amount in the Declared Interest Option to
one or more Subaccounts. However, if a transfer request
would reduce the amount in the Declared Interest Option
below $1,000, the owner may transfer the entire amount
from the Declared Interest Option. The minimum transfer
amount must be the lesser of $100 or the entire amount in
that Subaccount or the Declared Interest Option.
The transfer will be made as of the business day on or
next following the day written notice requesting such
transfer is received at the Home Office. There is no
limit on the number of transfers that can be made among
or between Subaccounts or the Declared Interest Option.
(See "Transfers from Declared Interest Option.")
There is no charge for the first twelve transfers during
a Contract Year. The Company may charge $25 for each
subsequent transfer during a Contract Year. For the
purpose of assessing the transfer processing fee, all
transfer requests received in a valuation period will be
considered to be one transfer, regardless of the
Subaccounts or Declared Interest Option affected. Unless
paid in cash, the transfer processing fee will be
deducted on a pro-rata basis from the Subaccounts or
Declared Interest Option to which the transfer is made.
Transfers may be made based upon instructions given by
telephone, provided the appropriate election has been
made at the time of application or proper authorization
is provided to the Company. The Company reserves the
right to suspend telephone transfer privileges at any
time, for any class of Contracts, for any reason.
- --------------------------------------------------------------------------------
PARTIAL WITHDRAWALS AND SURRENDERS
PARTIAL WITHDRAWALS. At any time before the retirement
date, an owner may make a partial withdrawal of the
accumulated value. The minimum amount which may be
withdrawn is $500; the maximum amount is that which would
leave the remaining accumulated value equal to or less
than $2,000. A partial withdrawal request that would
reduce the accumulated value to $2,000 or less will be
treated as a full surrender of the Contract. The Company
will withdraw the amount requested from the accumulated
value as of the Business Day on or next following the day
written notice requesting the partial withdrawal is
received at the Home Office. Any applicable surrender
charge will, at the election of the owner, be deducted
from the remaining accumulated value or be deducted from
the amount withdrawn. (See "Surrender Charge.")
The owner may specify the amount of the partial
withdrawal to be made from certain Subaccounts or the
Declared Interest Option. If the owner does not so
specify, or if the amount in the designated Subaccount(s)
or Declared Interest Option is inadequate to comply with
the request, the partial withdrawal will be made from
each Subaccount and the Declared Interest Option based on
the proportion that the value in such Subaccount bears to
the total accumulated value on the date the request is
received at the Home Office.
A partial withdrawal may have adverse federal income tax
consequences, including a penalty tax. (See "Taxation of
Annuities.")
SURRENDER. At any time before the retirement date, the
owner may request a surrender of the contract for its
net accumulated value. The net accumulated value will be
determined as of the Business Day on or next following
the date written notice
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<PAGE>
requesting surrender and the Contract are received at the
Home Office. The net accumulated value will be paid in a
lump sum unless the owner requests payment under a
payment option. A surrender may have adverse federal
income tax consequences. (See "Taxation of Annuities.")
SURRENDER AND PARTIAL WITHDRAWAL RESTRICTIONS. The
owner's right to make surrenders and partial withdrawals
is subject to any restrictions imposed by applicable law
or employee benefit plan.
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF
CONTRACTS. There are certain restrictions on surrenders
and partial withdrawals of Contracts used as funding
vehicles for Code Section 403(b) retirement plans.
Section 403(b)(11) of the Code restricts the distribution
under Section 403(b) annuity contracts of: (i) elective
contributions made in years beginning after December 31,
1988; (ii) earnings on those contributions; and (iii)
earnings in such years on amounts held as of the last
year beginning before January 1, 1989. Distributions of
those amounts may only occur upon the death of the
employee, attainment of age 59 1/2, separation from
service, disability or financial hardship. In addition,
income attributable to elective contributions may not be
distributed in the case of hardship.
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SPECIAL TRANSFER AND WITHDRAWAL OPTIONS
DOLLAR COST AVERAGING. Dollar Cost Averaging is a
special type of automatic transfer. Under this option,
an owner may periodically transfer a specified amount in
a Subaccount or the Declared Interest Option into up to
ten other Subaccounts or the Declared Interest Option.
The use of Dollar Cost Averaging is subject to all the
same provisions and limitations as regular transfers
described above and is considered in the twelve free
transfers during a Contract Year.
SYSTEMATIC WITHDRAWALS. The Systematic Withdrawal option
allows for automatic partial withdrawals. Under this
option, specified amounts may be periodically withdrawn
from the Contract's accumulated value. The owner may
specify the allocation of the withdrawals among the
Subaccounts and Declared Interest Option. The use of the
Systematic Withdrawal option is subject to all the same
provisions and limitations as regular partial withdrawals
described above.
The Company prohibits the use of these two options at the
same time.
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DEATH BENEFIT BEFORE THE RETIREMENT DATE
DEATH OF OWNER. If an owner dies prior to the retirement
date, any surviving owner becomes the sole owner. If
there is no surviving owner, the annuitant becomes the
new owner unless the deceased owner was also the
annuitant. If the sole deceased owner was also the
annuitant, then the provisions relating to the death of
an annuitant (described below) will govern unless the
deceased owner was one of two joint annuitants. (In the
latter event, the surviving annuitant becomes the owner.)
The following options are available to the sole surviving
owners or new owners:
1. If the owner is the spouse of the deceased
owner, he or she may continue the Contract as the new
owner.
2. If the owner is not the spouse of the
deceased owner:
(a) he or she may elect to receive the net
accumulated value in a single sum within 5 years
of the deceased owner's death; or
(b) he or she may elect to receive the net
accumulated value paid out under one of the
annuity payment options, with payments beginning
within one year after the date of the owner's
death and with payments being made over the
lifetime of the owner, or over a period that does
not exceed the life expectancy of the owner.
Under either of these options, sole surviving owners or
new owners may exercise all ownership rights and
privileges from the date of the deceased owner's death
until the date that the net accumulated value is paid.
DEATH OF AN ANNUITANT. If the annuitant dies before the
retirement date, the Company will pay the death benefit
under the Contract to the beneficiary. If there is no
surviving beneficiary, the Company will pay the death
benefit to the owner or the owner's estate. If the
annuitant's age on the Contract Date was less than 76,
the death benefit is equal to the greater of the sum of
the premiums paid less the sum of all partial withdrawal
reductions (including applicable surrender charges), the
accumulated value on the date the Company receives due
proof of the annuitant's death, or the
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<PAGE>
accumulated value on the most recent Contract Anniversary
(plus subsequent premiums paid and less subsequent
partial withdrawals). If the annuitant's age on the
Contract Date was 76 or older, the death benefit is equal
to the greater of the sum of the premiums paid less the
sum of all partial withdrawal reductions (including
applicable surrender charges) as of the date the Company
receives due proof of death, or the accumulated value as
of the date the Company receives due proof of death.
A partial withdrawal reduction is defined as a) the death
benefit immediately prior to withdrawal times b) the
amount of the partial withdrawal (including applicable
surrender charges) divided by c) the accumulated value
immediately prior to withdrawal.
There is no death benefit payable if the annuitant dies
after the retirement date. The death benefit will be paid
to the beneficiary in a lump sum unless the owner or
beneficiary elects a payment option.
If the annuitant who is also the the owner dies, the
provisions described immediately above apply except that
the beneficiary may only apply the death benefit payment
to an annuity payment option if:
1. payments under the option begin within 1 year
of the annuitant's death; and
2. payments under the option are payable over
the beneficiary's life or over a period not greater
than the beneficiary's life expectancy.
If the owner's spouse is the designated beneficiary, the
Contract may be continued with such surviving spouse as
the new owner.
- --------------------------------------------------------------------------------
DEATH BENEFIT AFTER THE RETIREMENT DATE
If an owner dies on or after the retirement date, any
surviving owner becomes the sole owner. If there is no
surviving owner, the payee receiving annuity payments
becomes the new owner. Such owners will have the rights
of owners during the annuity period, including the right
to name successor payees if the deceased owner had not
previously done so.
If the annuitant dies before 120 payments have been
received, any remaining payments will be paid to the
beneficiary. There is no death benefit payable if the
annuitant dies after the retirement date.
Other rules may apply to a Qualified Contract.
- --------------------------------------------------------------------------------
PROCEEDS ON THE RETIREMENT DATE
The retirement date is selected by the owner. For
Non-Qualified Contracts, the retirement date may not be
after the later of the annuitant's age 70 or 10 years
after the Contract date. For Qualified Contracts, the
retirement date must be no later than the annuitant's age
70 1/2 or such other date as meets the requirements of
the Code.
On the retirement date, the proceeds will be applied
under the life income annuity payment option with ten
years guaranteed, unless the owner chooses to have the
proceeds paid under another payment option or in a lump
sum. (See "Payment Options.") If a payment option is
elected, the amount that will be applied is the
accumulated value less any applicable surrender charge.
If a lump sum payment is chosen, the amount paid will be
the net accumulated value on the retirement date.
The retirement date may be changed subject to these
limitations: the owner's written notice must be received
at the Home Office at least 30 days before the current
retirement date; the requested retirement date must be a
date that is at least 30 days after receipt of the
written notice; and the requested retirement date must be
no later than the annuitant's 70th birthday or any
earlier date required by law.
- --------------------------------------------------------------------------------
PAYMENTS Any surrender, partial withdrawal or death benefit will
usually be paid within seven days of receipt of a written
request, any information or documentation reasonably
necessary to process the request and, in the case of a
death benefit, receipt and filing of due proof of death.
However, payments may be postponed if:
1. the New York Stock Exchange is closed, other
than customary weekend and holiday closings, or
trading on the exchange is restricted as determined
by the SEC; or
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<PAGE>
2. the SEC permits by an order the postponement
for the protection of owners; or
3. the SEC determines that an emergency exists
that would make the disposal of securities held in
the Account or the determination of the value of the
Account's net assets not reasonably practicable.
If a recent check or draft has been submitted, the
Company has the right to delay payment until it has
assured itself that the check or draft has been honored.
The Company has the right to defer payment of any
surrender, partial withdrawal or transfer from the
Declared Interest Option for up to six months from the
date of receipt of written notice for such a surrender,
withdrawal or transfer. If payment is not made within 30
days after receipt of documentation necessary to complete
the transaction, or such shorter period as required by a
particular jurisdiction, interest will be added to the
amount paid from the date of receipt of documentation at
3% or such higher rate required for a particular state.
- --------------------------------------------------------------------------------
MODIFICATION Upon notice to the owner, the Company may modify the
Contract if:
1. necessary to make the Contract or the Account
comply with any law or regulation issued by a
governmental agency to which the Company is subject;
or
2. necessary to assure continued qualification
of the Contract under the Code or other federal or
state laws relating to retirement annuities or
variable annuity contracts; or
3. necessary to reflect a change in the
operation of the Account; or
4. the modification provides additional Account
and/or fixed accumulation options.
In the event of most such modifications, the Company will
make appropriate endorsement to the Contract.
- --------------------------------------------------------------------------------
REPORTS TO OWNERS At least annually, the Company will mail to each owner,
at such owner's last known address of record, a report
containing the accumulated value (including the
accumulated value in each Subaccount and the Declared
Interest Option) of the Contract, premiums paid and
charges deducted since the last report, partial
withdrawals made since the last report and any further
information required by any applicable law or regulation.
- --------------------------------------------------------------------------------
INQUIRIES Inquiries regarding a Contract may be made by writing to
the Company at its Home Office.
- --------------------------------------------------------------------------------
THE DECLARED INTEREST OPTION
- --------------------------------------------------------------------------------
An owner may allocate some or all of the premiums and
transfer some or all of the accumulated value to the
Declared Interest Option, which is part of the General
Account and pays interest at declared rates guaranteed
for each Contract year (subject to a minimum guaranteed
interest rate of 3%). The principal, after deductions, is
also guaranteed. The Company's General Account supports
its insurance and annuity obligations.
IN COMPLIANCE WITH SPECIFIC STATE INSURANCE REGULATIONS,
THE DECLARED INTEREST OPTION IS NOT AVAILABLE IN ALL
STATES. A REGISTERED REPRESENTATIVE CAN PROVIDE
INFORMATION ON THE AVAILABILITY OF THIS INVESTMENT
OPTION.
The Declared Interest Option has not been, and is not
required to be, registered with the SEC under the
Securities Act of 1933 (the "1933 Act"), and neither the
Declared Interest Option nor the Company's General
Account has been registered as an investment company
under the 1940 Act. Therefore, neither the Company's
General Account, the Declared Interest Option, nor any
interests therein are generally subject to regulation
under the 1933 Act or the 1940 Act. The disclosures
relating to these accounts which are included in this
Prospectus are for the owner's information and
17
<PAGE>
have not been reviewed by the SEC. However, such
disclosures may be subject to certain generally
applicable provisions of Federal securities laws relating
to the accuracy and completeness of statements made in
prospectuses.
The portion of the accumulated value allocated to the
Declared Interest Option (the "Declared Interest Option
accumulated value") will be credited with rates of
interest, as described below. Since the Declared Interest
Option is part of the General Account, the Company
assumes the risk of investment gain or loss on this
amount. All assets in the General Account are subject to
the Company's general liabilities from business
operations.
- --------------------------------------------------------------------------------
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Declared Interest Option cash value is guaranteed to
accumulate at a minimum effective annual interest rate of
3%. The Company intends to credit the Declared Interest
Option accumulated value with current rates in excess of
the minimum guarantee but is not obligated to do so.
These current interest rates are influenced by, but do
not necessarily correspond to, prevailing general market
interest rates. Any interest credited on the amounts in
the Declared Interest Option in excess of the minimum
guaranteed rate of 3% per year will be determined in the
sole discretion of the Company. The owner, therefore,
assumes the risk that interest credited may not exceed
the guaranteed rate.
From time to time, the Company establishes new current
interest rates for the Declared Interest Option under the
Contracts. The rate applicable for a particular Contract
is the rate in effect on the most recent Contract
anniversary. This rate remains unchanged for that
Contract until the next Contract anniversary (i.e., for
the entire Contract year). During each Contract year, the
entire Declared Interest Option accumulated value
(including amounts allocated or transferred to the
Declared Interest Option during that year) is credited
with the interest rate in effect for that Contract year.
Once credited, interest becomes part of the Declared
Interest Option accumulated value.
The Company 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% per annum or shorten the period
for which the current interest rate applies to less than
a Contract year (except for the year in which such amount
is received or transferred).
CALCULATION OF DECLARED INTEREST OPTION ACCUMULATED
VALUE. The Declared Interest Option accumulated value at
any time is equal to amounts allocated and transferred to
it, plus interest credited less amounts deducted,
transferred or withdrawn.
- --------------------------------------------------------------------------------
TRANSFERS FROM DECLARED INTEREST OPTION
An unlimited number of transfers are allowed from the
Declared Interest Option to any or all of the Subaccounts
in each Contract year. The amount transferred from the
Declared Interest Option may not exceed 25% of the
Declared Interest Option accumulated value on the date of
transfer, unless the balance after the transfer would be
less than $1,000, in which case the entire amount may be
transferred.
- --------------------------------------------------------------------------------
PAYMENT DEFERRAL The Company has the right to defer payment of any
surrender, partial withdrawal or transfer from the
Declared Interest Option up to six months from the date
of receipt of the written notice for surrender or
transfer.
18
<PAGE>
- --------------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No charge for sales expenses is deducted from
premiums at the time premiums are paid. However, within
certain time limits described below, a surrender charge
(contingent deferred sales charge) is deducted from the
accumulated value if a partial withdrawal or surrender is
made before the retirement date. Also, as described
below, a surrender charge may be deducted from amounts
applied to certain payment options.
In the event surrender charges are not sufficient to
cover sales expenses, the loss will be borne by the
Company; conversely, if the amount of such charges proves
more than enough, the excess will be retained by the
Company.
CHARGE FOR PARTIAL WITHDRAWAL OR SURRENDER. During the
first six Contract years, if a partial withdrawal or
surrender is made, the applicable surrender charge will
be as follows:
CONTRACT YEAR IN CHARGE AS PERCENTAGE
WHICH SURRENDER OCCURS OF AMOUNT SURRENDERED
------------------------- ---------------------
1........................ 6%
2........................ 5
3........................ 4
4........................ 3
5........................ 2
6........................ 1
7 and after.............. 0
No surrender charge is deducted if the partial withdrawal
or surrender occurs after six full Contract years.
In no event will the total surrender charges assessed
under a Contract exceed 8.5% of the total premiums paid
under that Contract.
If the Contract is being surrendered, the surrender
charge is deducted from the accumulated value in
determining the net accumulated value. For a partial
withdrawal, the surrender charge may, at the election of
the owner, be deducted from the accumulated value
remaining after the amount requested is withdrawn or be
deducted from the amount of the withdrawal requested.
AMOUNTS NOT SUBJECT TO SURRENDER CHARGE. For partial
withdrawals in each Contract year after the first
Contract year, up to 10% of the accumulated value on the
most recent Contract Anniversary may be withdrawn without
a current surrender charge. If the Contract is
subsequently surrendered during the Contract Year, a
surrender charge will be applied to partial withdrawals
taken during that Contract Year, as well as to the amount
surrendered.
Any amounts surrendered in excess of 10% of the
accumulated value will be assessed a surrender charge.
This right is not cumulative from Contract year to
Contract year.
SURRENDER CHARGE AT THE RETIREMENT DATE. If any payment
option is selected at the retirement date other than
options 2-5 described below (see "Payment Options"), the
surrender charge is assessed against the accumulated
value applied to that option. If payment options 3 or 5
are selected, no surrender charge is assessed and if
payment options 2 or 4 are selected, the surrender charge
is applied by adding the fixed number of years for which
payments will be made under the option to the number of
Contract years since the Contract date and using this sum
in the surrender charge table.
WAIVER OF SURRENDER CHARGE. Upon written notice from the
owner before the retirement date, the surrender charge
may be waived after the first Policy Year on any partial
withdrawal or surrender if the annuitant is terminally
ill as defined in the Contract, stays in a qualified
nursing center for 90 days, or is required to satisfy
Internal Revenue Code minimum distribution requirements.
19
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL ADMINISTRATIVE CHARGE
On the Contract date and on each Contract anniversary
prior to the retirement date, the Company deducts from
the accumulated value an annual administrative charge of
$30 to reimburse it for administrative expenses relating
to the Contract. (If the Contract date falls on
Thanksgiving, the Friday following Thanksgiving or the
weekend following Thanksgiving; or on the 27th or 28th
day of February, 1999, the annual administrative charge
will be deducted on the preceding Business Day.) The
charge will be deducted from each Subaccount and the
Declared Interest Option based on the proportion that the
value in each such Subaccount bears to the total
accumulated value. No annual administrative charge is
payable during the annuity payment period.
- --------------------------------------------------------------------------------
TRANSFER PROCESSING
FEE There is no charge for the first twelve transfers during
a Contract Year. The Company may charge $25 for each
subsequent transfer during a Contract year. Unless paid
in cash, the transfer processing fee will be deducted on
a pro-rata basis from the Subaccounts or Declared
Interest Option to which the transfer is made.
- --------------------------------------------------------------------------------
MORTALITY AND EXPENSE RISK CHARGE
To compensate the Company for assuming mortality and
expense risks, the Company deducts a daily mortality and
expense risk charge from the assets of the Account. The
charge is at an annual rate of 1.40% (daily rate of
0.0038091%) (approximately 1.01% for mortality risk and
0.39% for expense risk). The Company may realize a profit
from this charge.
The mortality risk the Company assumes is that annuitants
may live for a longer period of time than estimated when
the guarantees in the Contract were established. Because
of these guarantees, each payee is assured that longevity
will not have an adverse effect on the annuity payments
received. The mortality risk that the Company assumes
also includes a guarantee to pay a death benefit if the
owner/annuitant dies before the retirement date. The
expense risk that the Company assumes is the risk that
the administrative fees and transfer fees may be
insufficient to cover actual future expenses.
- --------------------------------------------------------------------------------
INVESTMENT OPTION EXPENSES
Because the Account purchases shares of the Investment
Options, the net assets of the Account will reflect the
investment advisory fees and other operating expenses
incurred by each Investment Option. (See the Expense
Tables in this prospectus and the accompanying Investment
Option prospectuses.)
- --------------------------------------------------------------------------------
PREMIUM TAXES Currently, no charge or deduction is made under the
Contracts for premium taxes. The Company reserves the
right, however, to deduct such taxes from accumulated
value. Various states and other governmental entities
levy a premium tax, currently ranging up to 3.5%, on
annuity contracts issued by insurance companies. Premium
tax rates are subject to change, from time to time, by
legislative and other governmental action.
- --------------------------------------------------------------------------------
OTHER TAXES Currently, no charge is made against the Account for any
federal, state or local taxes that the Company incurs or
that may be attributable to the Account or the Contracts.
The Company may, however, make such a charge in the
future for any such tax or economic burden on the Company
resulting from the application of the tax laws that it
determines to be properly attributable to the Account or
Contracts.
- --------------------------------------------------------------------------------
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
The Contract ends on the retirement date, at which time
the accumulated value (or, under certain options, the net
accumulated value) will be applied under a payment
option, unless the owner elects to receive the net
accumulated value in a single sum. If an election of a
payment option has not been filed at the Home Office on
the retirement date, the proceeds will be paid as a life
income annuity with payments for ten years guaranteed.
Prior to the retirement date, the owner can have the
entire net accumulated value applied under a payment
option, or a beneficiary can have the death benefit
applied under a payment option. The Contract must be
surrendered so that the applicable amount can be paid in
a lump sum or a supplemental contract for the applicable
payment option can be issued.
20
<PAGE>
The payment options available are described below. The
term "payee" means a person who is entitled to receive
payment under that option. The payment options are fixed,
which means that each option has a fixed and guaranteed
amount to be paid during the annuity payment period that
is not in any way dependent upon the investment
experience of the Account.
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS An option may be elected, revoked or changed at any time
before the retirement date while the annuitant is living.
If an election is not in effect at the annuitant's death
or if payment is to be made in one sum under an existing
election, the beneficiary may elect one of the options
after the death of the owner/annuitant.
An election of payment options and any revocation or
change must be made by written notice and signed by the
owner or beneficiary, as appropriate.
The Company reserves the right to refuse the election of
a payment option other than paying the proceeds in a lump
sum if: 1) the total payments together would be less than
$2,000; 2) each payment would be less than $20; or 3) the
payee is an assignee, estate, trustee, partnership,
corporation or association.
- --------------------------------------------------------------------------------
DESCRIPTION OF OPTIONS
OPTION 1--INTEREST INCOME. To have the proceeds left
with the Company to earn interest at a rate to be
determined by the Company. Interest will be paid every
month or every 3, 6 or 12 months as the payee selects.
Under this option, the payee may withdraw part or all of
the proceeds at any time.
OPTION 2--INCOME FOR A FIXED TERM. To have the proceeds
paid out in equal installments for a fixed number of
years.
OPTION 3--LIFE INCOME OPTION WITH TERM CERTAIN. To have
the proceeds paid in equal amounts (at intervals elected
by the payee) during the payee's lifetime with the
guarantee that payments will be made for a period of not
less than the specified number of years. Under this
option, at the death of a payee having no beneficiary (or
where the beneficiary died prior to the payee), the
present value of the current dollar amount on the date of
death of any remaining guaranteed payments will be paid
in one sum to the executors or administrators of the
payee's estate. Also under this option, if any
beneficiary dies while receiving payment, the present
value of the current dollar amount on the date of death
of any remaining guaranteed payments will be paid in one
sum to the executors or administrators of the
beneficiary's estate. Calculation of such present value
shall be no less than 3%.
OPTION 4--INCOME FOR FIXED AMOUNT. To have the proceeds
paid out in equal installments (at intervals elected by
the payee) of a specific amount. The payments will
continue until all the proceeds plus interest have been
paid out.
OPTION 5--JOINT AND TWO-THIRDS TO SURVIVOR MONTHLY LIFE
INCOME. To have proceeds paid out in equal installments
for as long as two joint payees live. When one payee
dies, installments of two-thirds of the first installment
will be paid to the surviving payee until he or she dies.
The amount of each payment will be determined from the
tables in the Contract which apply to the particular
option using the payee's age and sex. Age will be
determined from the last birthday at the due date of the
first payment.
ALTERNATE PAYMENT OPTION. In lieu of one of the above
options, the cash value, cash surrender value or death
benefit, as applicable, may be settled under any other
payment option made available by the Company or requested
and agreed to by the Company.
- --------------------------------------------------------------------------------
YIELDS AND TOTAL RETURNS
- --------------------------------------------------------------------------------
From time to time, the Company may advertise or include
in sales literature yields, effective yields and total
returns for the Subaccounts. THESE FIGURES ARE BASED ON
HISTORICAL EARNINGS AND DO NOT INDICATE OR PROJECT
FUTURE PERFORMANCE. Each Subaccount may, from time to
time, advertise or include in sales literature
performance relative to
21
<PAGE>
certain performance rankings and indices compiled by
independent organizations. More detailed information as
to the calculation of performance, as well as comparisons
with unmanaged market indices, appears in the Statement
of Additional Information.
Effective yields and total returns for the Subaccounts
are based on the investment performance of the
corresponding Investment Option. Each Investment Option's
performance in part reflects the Investment Option's
expenses. (See the accompanying Investment Option
prospectuses.)
The yield of the Money Market Subaccount refers to the
annualized income generated by an investment in the
Subaccount over a specified seven-day period. The yield
is calculated by assuming that the income generated for
that seven-day period is generated each seven-day period
over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly
but, when annualized, the income earned by an investment
in the Subaccount is assumed to be reinvested. The
effective yield will be slightly higher than the yield
because of the compounding effect of this assumed
reinvestment.
The yield of a Subaccount (except the Money Market
Subaccount) refers to the annualized income generated by
an investment in the Subaccount over a specified 30-day
or one-month period. The yield is calculated by assuming
that the income generated by the investment during that
30-day or one-month period is generated each period over
a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return
quotations assuming an investment under a Contract has
been held in the Subaccount for various periods of time.
When a Subaccount has been in operation for one, five and
ten years, respectively, the total return for these
periods will be provided. For periods prior to the date
the Account commenced operations, performance information
will be calculated based on the performance of the
Investment Options and the assumption that the
Subaccounts were in existence for the same periods as
those indicated for the Investment Options, with the
level of Contract charges that were in effect at the
inception of the Subaccounts for the Contracts.
The average annual total return quotations represent the
average annual compounded rates of return that would
equate an initial investment of $1,000 under a Contract
to the redemption value of that investment as of the last
day of each of the periods for which total return
quotations are provided. Average annual total return
information shows the average percentage change in the
value of an investment in the Subaccount from the
beginning date of the measuring period to the end of that
period. This standardized version of average annual total
return reflects all historical investment results less
all charges and deductions applied against the Subaccount
(including any surrender charge that would apply if an
owner terminated the Contract at the end of each period
indicated, but excluding any deductions for premium
taxes).
In addition to the standard version described above,
total return performance information computed on two
different non-standard bases may be used in
advertisements or sales literature. Average annual total
return information may be presented, computed on the same
basis as described above, except deductions will not
include the surrender charge. In addition, the Company
may, from time to time, disclose cumulative total return
for Contracts funded by Subaccounts.
From time to time, yields, standard average annual total
returns and non-standard total returns for the Fund's
Investment Options may be disclosed, including such
disclosures for periods prior to the date the Account
commenced operations.
Non-standard performance data will only be disclosed if
the standard performance data for the required periods is
also disclosed. For additional information regarding the
calculation of other performance data, please refer to
the Statement of Additional Information.
22
<PAGE>
In advertising and sales literature, the performance of
each Subaccount may be compared to the performance of
other variable annuity issuers in general, or to the
performance of particular types of variable annuities
investing in mutual funds or investment portfolios of
mutual funds with investment objectives similar to each
of the Subaccounts. Lipper Analytical Services, Inc.
("Lipper") and the Variable Annuity Research Data Service
("VARDS") are independent services which monitor and rank
the performance of variable annuity issuers in each of
the major categories of investment objectives on an
industry-wide basis.
Lipper's rankings include variable life insurance issuers
as well as variable annuity issuers. VARDS rankings
compare only variable annuity issuers. The performance
analyses prepared by Lipper and VARDS each rank such
issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales
charges, redemption fees or certain expense deductions at
the separate account level into consideration. In
addition, VARDS prepares risk rankings, which consider
the effects of market risk on total return performance.
This type of ranking provides data as to which funds
provide the highest total return within various
categories of funds defined by the degree of risk
inherent in their investment objectives.
Advertising and sales literature may also compare the
performance of each Subaccount to the Standard & Poor's
Index of 500 Common Stocks, a widely used measure of
stock performance. This unmanaged index assumes the
reinvestment of dividends but does not reflect any
"deduction" for the expense of operating or managing an
investment portfolio. Other independent ranking services
and indices may also be used as a source of performance
comparison.
The Company may also report other information including
the effect of tax-deferred compounding on a Subaccount's
investment returns, or returns in general, which may be
illustrated by tables, graphs or charts. All income and
capital gains derived from Subaccount investments are
reinvested and can lead to substantial long-term
accumulation of assets, provided that the underlying
Portfolio's investment experience is positive.
- --------------------------------------------------------------------------------
FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED
AS TAX ADVICE
- --------------------------------------------------------------------------------
INTRODUCTION This discussion is not intended to address the tax
consequences resulting from all of the situations in
which a person may be entitled to or may receive a
distribution under the annuity contract issued by the
Company. Any person concerned about these tax
implications should consult a competent tax adviser
before initiating any transaction. This discussion is
based upon the Company's understanding of the present
Federal income tax laws, as they are currently
interpreted by the Internal Revenue Service. No
representation is made as to the likelihood of the
continuation of the present federal income tax laws or of
the current interpretation by the Internal Revenue
Service. Moreover, no attempt has been made to consider
any applicable state or other tax laws.
The Contract may be purchased on a non-qualified basis
("Non-Qualified Contract") or purchased and used in
connection with plans qualifying for favorable tax
treatment ("Qualified Contract"). The Qualified Contract
is designed for use by individuals whose premium payments
are comprised solely of proceeds from and/or
contributions under retirement plans which are intended
to qualify as plans entitled to special income tax
treatment under Sections 401(a), 403(b), or 408 of the
Internal Revenue Code of 1986, as amended (the "Code").
The ultimate effect of federal income taxes on the
amounts held under a Contract, or annuity payments, and
on the economic benefit to the owner, the annuitant or
the beneficiary depends on the type of retirement plan,
on the tax and employment status of the individual
concerned, and on the Company's tax status. In addition,
certain requirements must be satisfied in purchasing a
Qualified Contract with proceeds from a tax-qualified
plan and receiving distributions from a Qualified
Contract in order to continue receiving
23
<PAGE>
favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax
advice regarding the suitability of a Contract for their
situation, the applicable requirements and the tax
treatment of the rights and benefits of a Contract. The
following discussion assumes that Qualified Contracts are
purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special
federal income tax treatment.
- --------------------------------------------------------------------------------
TAX STATUS OF THE CONTRACT
The Company believes that the Contract will be subject to
tax as an annuity contract under the Code, which
generally means that any increase in Account Value will
not be taxable until amounts are received from the
Contract, either in the form of Annuity payments or in
some other form. In order to be subject to annuity
contract treatment for tax purposes, the Contract must
meet the following Code requirements:
DIVERSIFICATION REQUIREMENTS. Section 817(h) of the Code
provides that separate account investments underlying a
contract must be "adequately diversified" in accordance
with Treasury regulations in order for the contract to
qualify as an annuity contract under Section 72 of the
Code. The Account, through each Portfolio of the Fund,
intends to comply with the diversification requirements
prescribed in regulations under Section 817(h) of the
Code, which affect how the assets in the various
Subaccounts may be invested. Although the Company does
not have control over the Fund in which the Account
invests, we believe that each Portfolio in which the
Account owns shares will meet the diversification
requirements.
OWNER CONTROL. In certain circumstances, owners of
variable annuity contracts may be considered the owners,
for federal income tax purposes, of the assets of the
separate account used to support their contracts. In
those circumstances, income and gains from the separate
account assets would be includible in the variable
annuity contract owner's gross income. Several years ago,
the IRS stated in published rulings that a variable
contract owner will be considered the owner of separate
account assets if the contract owner possesses incident
of ownership in those assets, such as the ability to
exercise investment control over the assets. More
recently, the Treasury Department announced, in
connection with the issuance of regulations concerning
investment diversification, that those regulations "do
not provide guidance concerning the circumstances in
which investor control of the investments of a segregated
asset account may cause the investor (I.E., the contract
owner), rather than the insurance company, to be treated
as the owner of the assets in the account." This
announcement also states that guidance would be issued by
way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular
subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Contracts are similar to,
but different in certain respects from, those described
by the Service in rulings in which it was determined that
contract owners were not owners of separate account
assets. For example, the owner of a Contract has the
choice of one or more Subaccounts in which to allocate
premiums and Contract values, and may be able to transfer
among Subaccounts more frequently than in such rulings.
These differences could result in the contract owner
being treated as the owner of the assets of the Account.
In addition, the Company does not know what standards
will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to
issue. The Company therefore reserves the right to modify
the Contract as necessary to attempt to prevent the
contract owner from being considered the owner of the
assets of the Account.
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
Contract to provide that: (a) if any owner dies on or
after the retirement date but prior to the time the
entire interest in the contract has been distributed, the
remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution
being used as of the date of that owner's death; and (b)
if any owner dies prior to the annuity commencement date,
the entire interest in the Contract will be distributed
within five years after the date of the owner's death.
These requirements will be considered satisfied as to any
portion of the owner's interest which is payable to or
for
24
<PAGE>
the benefit of a "designated beneficiary" and which is
distributed over the life of such beneficiary or over a
period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin
within one year of that owner's death. The owner's
"designated beneficiary" is the person designated by such
owner as a beneficiary and to whom ownership of the
contract passes by reason of death and must be a natural
person. However, if the owner's "designated beneficiary"
is the surviving spouse of the owner, the Contract may be
continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions which are
intended to comply with the requirements of Section 72(s)
of the Code, although no regulations interpreting these
requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to
assure that they comply with the requirements of Code
Section 72(s) when clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will
qualify as annuity contracts for federal income tax
purposes.
- --------------------------------------------------------------------------------
TAXATION OF ANNUITIES
IN GENERAL. Section 72 of the Code governs taxation of
annuities in general. The Company believes that an owner
who is a natural person is not taxed on increases in the
value of a Contract until distribution occurs by
withdrawing all or part of the cash value (e.g., partial
surrenders and surrenders) or as annuity payments under
the payment option elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any
portion of the cash value (and in the case of a Qualified
Contract, any portion of an interest in the qualified
plan) generally will be treated as a distribution. The
taxable portion of a distribution (in the form of a
single sum payment or payment option) is taxable as
ordinary income.
NON-NATURAL OWNER. The owner of any annuity contract who
is not a natural person generally must include in income
any increase in the excess of the cash value over the
"investment in the contract" during the taxable year.
There are some exceptions to this rule. Certain Contracts
will generally be treated as held by a natural person if
(a) the nominal owner is a trust or other entity which
holds the contract as an agent for a natural person (but
not in the case of certain non-qualified deferred
compensation arrangements); (b) the Contract is acquired
by an estate of a decedent by reason of the death of the
decedent; (c) The Contract is issued in connection with
certain Qualified Plans; (d) the Contract is purchased by
an employer upon the termination of certain Qualified
Plans; (e) the Contract is used in connection with a
structured settlement agreement; and (f) the Contract is
purchased with a single purchase payment when the annuity
starting date (as defined in the tax law) is no later
than a year from the purchase of the Contract and
substantially equal periodic payments are made, not less
frequently than annually, during the the annuity period.
A prospective owner that is not a natural person may wish
to discuss these with a competent tax adviser.
The following discussion generally applies to Contracts
owned by natural persons.
PARTIAL WITHDRAWALS. In the case of a partial withdrawal
from a Qualified Contract, under Section 72(e) of the
Code, a ratable portion of the amount received is
taxable, generally based on the ratio of the "investment
in the contract" to the participant's total accrued
benefit or balance under the retirement plan. The
"investment in the contract" generally equals the
portion, if any, of any premium payments paid by or on
behalf of the individual under a Contract which was not
excluded from the individual's gross income. For
Contracts issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax
rules may be available for certain distributions from
Qualified Contracts.
25
<PAGE>
In the case of a partial withdrawal from a Non-Qualified
Contract, under Section 72(e) amounts received are
generally first treated as taxable income to the extent
that the cash value immediately before the partial
withdrawal exceeds the "investment in the contract" at
that time. Any additional amount withdrawn is not
taxable.
In the case of a surrender under a Qualified or
Non-Qualified Contract, the amount received generally
will be taxable only to the extent it exceeds the
"investment in the contract."
Section 1035 of the Code provides that no gain or loss
shall be recognized on the exchange of one annuity
contract for another. If the surrendered contract was
issued prior to August 14, 1982, the tax rules formerly
provided that the surrender was taxable only to the
extent the amount received exceeds the owner's investment
in the contract will continue to apply to amounts
allocable to investments in that contract prior to August
14, 1982. In contrast, contracts issued after January 19,
1985 in a Code Section 1035 exchange are treated as new
contracts for purposes of the penalty and
distribution-at-death rules. Special rules and procedures
apply to Section 1035 transactions. Prospective owners
wishing to take advantage of Section 1035 should consult
their tax adviser.
ANNUITY PAYMENTS. Although tax consequences may vary
depending on the payment option elected under an annuity
contract, under Code Section 72(b), generally (prior to
recovery of the investment in the contract) gross income
does not include that part of any amount received as an
annuity under an annuity contract that bears the same
ratio to such amount as the investment in the contract
bears to the expected return at the annuity starting
date. Stated differently, prior to recovery of the
investment in the contract, generally, there is no tax on
the amount of each payment which represents the same
ratio that the "investment in the contract" bears to the
total expected value of the annuity payments for the term
of the payment; however, the remainder of each income
payment is taxable. After the "investment in the
contract" is recovered, the full amount of any additional
annuity payments is taxable.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be
distributed from a Contract because of the death of the
owner. 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 contract or (ii) if distributed under a
payment option, they are taxed in the same way as annuity
payments. For these purposes, the investment in the
Contract is not affected by the owner's death. That is,
the investment in the Contract remains the amount of any
purchase payments which were not excluded from gross
income.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a
distribution pursuant to a Non-Qualified Contract, there
may be imposed a federal penalty tax equal to 10% of the
amount treated as taxable income. In general, however,
there is no penalty on distributions:
1. made on or after the taxpayer reaches age
59 1/2;
2. made on or after the death of the holder (or
if the holder is not an individual, the death of the
primary annuitant);
3. attributable to the taxpayer becoming
disabled;
4. as part of a series of substantially equal
periodic payments (not less frequently than annually)
for the life (or life expectancy) of the taxpayer or
the joint lives (or joint life expectancies) of the
taxpayer and his or her designated beneficiary;
5. made under certain annuities issued in
connection with structured settlement agreements;
26
<PAGE>
6. made under an annuity contract that is
purchased with a single premium when the retirement
date is no later than a year from purchase of the
annuity and substantially equal periodic payments are
made, not less frequently than annually, during the
annuity payment period; and
7. any payment allocable to an investment
(including earnings thereon) made before August 14,
1982 in a contract issued before that date.
Other tax penalties may apply to certain distributions
under a Qualified Contract.
Legislation has been proposed in 1998 that, if enacted,
would adversely modify the federal taxation of certain
insurance and annuity contracts. For example, one
proposal would tax transfers among investment options and
tax exchanges involving variable contracts. A second
proposal would reduce the "investment in the contract"
under cash value life insurance and certain annuity
contracts by certain amounts, thereby increasing the
amount of income for purposes of computing gain. Although
the likelihood of there being any changes is uncertain,
there is always the possibility that the tax treatment of
the Contracts could change by legislation or other means.
Moreover, it is also possible that any change could be
retroactive (that is, effective prior to the date of the
change). You should consult a tax adviser with respect to
legislative developments and their effect on the
Contract.
- --------------------------------------------------------------------------------
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of
an annuitant, payee or other beneficiary who is not also
the owner, the selection of certain retirement dates or
the exchange of a Contract may result in certain tax
consequences to the owner that are not discussed herein.
An owner contemplating any such transfer, assignment,
selection or exchange of a Contract should contact a
competent tax adviser with respect to the potential tax
effects of such a transaction.
- --------------------------------------------------------------------------------
WITHHOLDING Distributions from Contracts 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 and section 403(b) tax-sheltered annuities 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.
- --------------------------------------------------------------------------------
MULTIPLE CONTRACTS All non-qualified deferred annuity contracts entered into
after October 21, 1988 that are issued by the Company (or
its affiliates) to the same owner during any calendar
year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under
Section 72(e). This rule could affect the time when
income is taxable and the amount that might be subject to
the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue
regulations that prevent the avoidance of Section 72(e)
through the serial purchase of annuity contracts or
otherwise. There may also be other situations in which
the Treasury may conclude that it would be appropriate to
aggregate two or more annuity contracts purchased by the
same owner. Accordingly, a Contract owner should consult
a competent tax adviser before purchasing more than one
annuity contract.
- --------------------------------------------------------------------------------
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of
qualified plans. The tax rules applicable to participants
in these qualified plans vary according to the type of
plan and the terms and conditions of the plan itself.
Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse
tax consequences may result from contributions in excess
of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do
not conform to specified commencement and minimum
distribution rules; and in other specified circumstances.
Therefore, no attempt is made to provide more than
27
<PAGE>
general information about the use of the Contracts with
the various types of qualified retirement plans. Contract
owners, the annuitants, and beneficiaries are cautioned
that the rights of any person to any benefits under these
qualified retirement plans may be subject to the terms
and conditions of the plans themselves, regardless of the
terms and conditions of the Contract, but the Company
shall not be bound by the terms and conditions of such
plans to the extent such terms contradict the Contract,
unless the Company consents. Some retirement plans are
subject to distribution and other requirements that are
not incorporated into our Contract administration
procedures. Owners, participants and beneficiaries are
responsible for determining that contributions,
distributions and other transactions with respect to the
Contracts comply with applicable law. For qualified plans
under Section 401(a), 403(a), 403(b), and 457, the Code
requires that distributions generally must commence no
later than the later of April 1 of the calendar year
following the calendar year in which the owner (or plan
participant) (i) reaches age 70 1/2 or (ii) retires, and
must be made in a specified form or manner. If the plan
participant is a "5 percent owner" (as defined in the
Code), distributions generally must begin no later than
April 1 of the calendar year following the calendar year
in which the owner (or plan participant) reaches age
70 1/2. For IRAs described in Section 408, distributions
generally must commence no later than the later of April
1 of the calendar year following the calendar year in
which the owner (or plan participant) reaches age 70 1/2.
Brief descriptions follow of the various types of
qualified retirement plans available in connection with a
Contract. The Company will amend the Contract as
necessary to conform it to the requirements of the Code.
CORPORATE PENSION AND PROFIT SHARING PLANS AND H.R. 10
PLANS. Section 401(a) of the Code permits corporate
employers to establish various types of retirement plans
for employees, and permits self-employed individuals to
establish these plans for themselves and their employees.
These retirement plans may permit the purchase of the
Contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the
plan, to the participant or both may result if this
Contract is assigned or transferred to any individual as
a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such
benefits prior to transfer of the Contract. Employers
intending to use the Contract with such plans should seek
competent advice.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code
permits eligible individuals to contribute to an
individual retirement program known as an "Individual
Retirement Annuity" or "IRA". These IRAs are subject to
limits on the amount that may be contributed, the persons
who may be eligible and on the time when distributions
may commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over"
on a tax-deferred basis into an IRA. Sales of the
Contract for use with IRAs may be subject to special
requirements of the Internal Revenue Service. Earnings in
an IRA are not taxed until distribution. IRA
contributions are limited each year to the lesser of
$2,000 or 100% of the owner's adjusted gross income and
may be deductible in whole or in part depending on the
individual's income. The limit on the amount contributed
to an IRA does not apply to distributions from certain
other types of qualified plans that are "rolled over" on
a tax-deferred basis into an IRA. Amounts in the IRA
(other than nondeductible contributions) are taxed when
distributed from the IRA. Distributions prior to age
59 1/2 (unless certain exceptions apply) are subject to a
10% penalty tax.
Employers may establish Simplified Employee Pension (SEP)
Plans to provide IRA contributions on behalf of their
employees. In addition to all of the general Code rules
governing IRAs, such plans are subject to certain Code
requirements regarding participation and amounts of
contributions.
SIMPLE RETIREMENT ACCOUNTS. Beginning January 1, 1997,
certain small employers may establish Simple Retirement
Accounts as provided by Section 408(p) of the Code, under
which employees may elect to defer up to $6,000 (as
increased for cost of living adjustments) as a percentage
of compensation. The sponsoring employer is required
28
<PAGE>
to make a matching contribution on behalf of contributing
employees. Distributions from a Simple Retirement Account
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% penalty tax, which is
increased to 25% if the distribution occurs within the
first two years after the commencement of the employee's
participation in the plan. The failure of the Simple
Retirement Account to meet Code requirements may result
in adverse tax consequences.
ROTH IRAS. Effective January 1, 1998, section 408A of
the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA,
which are subject to certain limitations, are not
deductible and must be made in cash or as a rollover or
transfer from another Roth IRA or other IRA. A rollover
from or conversion of an IRA to a Roth IRA may be subject
to tax and other special rules may apply. You should
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 the Roth IRA.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code
allows employees of certain Section 501(c)(3)
organizations and public schools to exclude from their
gross income the premiums paid, within certain limits, on
a Contract that will provide an annuity for the
employee's retirement. These premiums may be subject to
FICA (social security) tax. Code section 403(b)(11)
restricts the distribution under Code section 403(b)
annuity contracts of: (1) elective contributions made in
years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on
amounts held as of the last year beginning before January
1, 1989. Distribution of those amounts may only occur
upon death of the employee, attainment of age 59 1/2,
separation from service, disability, or financial
hardship. In addition, income attributable to elective
contributions may not be distributed in the case of
hardship.
RESTRICTIONS UNDER QUALIFIED CONTRACTS. Other
restrictions with respect to the election, commencement
or distribution of benefits may apply under Qualified
Contracts or under the terms of the plans in respect of
which Qualified Contracts are issued.
- --------------------------------------------------------------------------------
POSSIBLE CHARGE FOR THE COMPANY'S TAXES
At the present time, the Company makes no charge to the
Subaccounts for any Federal, state or local taxes that
the Company incurs which may be attributable to such
Subaccounts or the Contracts. The Company, however,
reserves the right in the future to make a charge for any
such tax or other economic burden resulting from the
application of the tax laws that it determines to be
properly attributable to the Subaccounts or to the
Contracts.
- --------------------------------------------------------------------------------
OTHER TAX CONSEQUENCES As noted above, the foregoing comments about the Federal
tax consequences under these Contracts are not
exhaustive, and special rules are provided with respect
to other tax situations not discussed in the Prospectus.
Further, the Federal income tax consequences discussed
herein reflect the Company's understanding of current law
and the law may change. Federal estate and state and
local estate, inheritance and other tax consequences of
ownership or receipt of distributions under a Contract
depend on the individual circumstances of each owner or
recipient of the distribution. A competent tax adviser
should be consulted for further information.
- --------------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
The Contracts will be offered to the public on a
continuous basis. The Company does not anticipate
discontinuing the offering of the Contracts, but reserves
the right to discontinue the offering. Applications for
Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell the
Company's variable
29
<PAGE>
annuity contracts and who are also registered
representatives of EquiTrust Marketing, broker-dealers
having selling agreements with EquiTrust Marketing or
broker-dealers having selling agreements with such
broker-dealers. EquiTrust Marketing (formerly FBL
Marketing Services, Inc.) is registered with the SEC
under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association
of Securities Dealers, Inc.
EquiTrust Marketing acts as the Principal Underwriter, as
defined in the 1940 Act, of the Contracts for the Account
pursuant to an Underwriting Agreement between the Company
and EquiTrust Marketing. EquiTrust Marketing is not
obligated to sell any specific number of Contracts.
EquiTrust Marketing's principal business address is the
same as that of the Company.
The Company may pay broker-dealers with selling
agreements up to an amount equal to 8.5% of the premiums
paid under a Contract during the first Contract year, 3%
of the premiums paid in the second through ninth Contract
years and 1% of the premiums paid in the tenth and
subsequent Contract years. The Company also may pay other
distribution expenses such as production incentive
bonuses, agent's insurance and pension benefits, and
agency expense allowances. These distribution expenses do
not result in any additional charges against the
Contracts that are not described under "Charges and
Deductions."
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company, like other life insurance companies, is
involved in lawsuits. Currently, there are no class
action lawsuits naming the Company as a defendant or
involving the Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the
outcome of any litigation cannot be predicted with
certainty, the Company believes that at the present time,
there are no pending or threatened lawsuits that are
reasonably likely to have a material adverse impact on
the Account or the Company.
- --------------------------------------------------------------------------------
VOTING RIGHTS
- --------------------------------------------------------------------------------
In accordance with its view of current applicable law,
the Company will vote the Fund shares held in the Account
at regular and special shareholder meetings of the Funds,
in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts.
If, however, the 1940 Act or any regulation thereunder
should be amended, or if the present interpretation
thereof should change, or the Company otherwise
determines that it is allowed to vote the shares in its
own right, it may elect to do so.
The number of votes that an owner has the right to
instruct will be calculated separately for each
Subaccount, and may include fractional votes. An owner
holds a voting interest in each Subaccount to which the
accumulated value is allocated. The owner only has voting
interest prior to the retirement date. For each owner,
the number of votes attributable to a Subaccount will be
determined by dividing the accumulated value attributable
to that owner's Contract in that Subaccount by the net
asset value per share of the Investment Option in which
that Subaccount invests.
30
<PAGE>
The number of votes of an Investment Option which are
available to the owner will be determined as of the date
coincident with the date established by that Investment
Option for determining shareholders eligible to vote at
the relevant meeting for that Fund. Voting instructions
will be solicited by written communication prior to such
meeting in accordance with procedures established by each
Fund. Each owner having a voting interest in a Subaccount
will receive proxy materials and reports relating to any
meeting of shareholders of the Investment Option in which
that Subaccount invests.
Fund shares as to which no timely instructions are
received and shares held by the Company in a Subaccount
as to which no owner has a beneficial interest will be
voted in proportion to the voting instructions which are
received with respect to all Contracts participating in
that Subaccount. Voting instructions to abstain on any
item to be voted upon will be applied to reduce the total
number of votes eligible to be cast on a matter.
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
Like other investment funds, financial and business
organizations and individuals around the world, the
Account could be adversely affected if the computer
systems used by the Company and other service providers
do not properly process and calculate date-related
information and data from and after January 1, 2000. In
1997, the Company completed a comprehensive assessment of
the Year 2000 issue and developed a plan to address the
issue in a timely manner. The Company has and will
utilize both internal and external resources to
reprogram, or replace, and test the software for Year
2000 modifications. The Company anticipates completing
the Year 2000 project no later than December 31, 1998,
and prior to any anticipated impact on its operating
systems.
The date on which the Company believes it will complete
the Year 2000 modifications is based on management's best
estimates, which were derived utilizing numerous
assumptions of future events. The Company also recognizes
there are outside influences and dependencies relative to
its Year 2000 effort, over which is has little or no
control. However, the Company is putting effort into
ensuring these considerations will have minimal impact.
These would include the continued availability of certain
resources, third party modification plans and many other
factors. However, there can be no guarantee that these
estimates will be achieved and actual results could
differ from those anticipated.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The statutory-basis balance sheets of the Company at
December 31, 1997 and 1996, and the related
statutory-basis statements of operations, changes in
capital and surplus and cash flows for the years then
ended, as well as the related Report of Independent
Auditors are contained in the Statement of Additional
Information. The unaudited statutory-basis balance sheet
of the Company at June 30, 1998, the related unaudited
statutory-basis statement of changes in capital and
surplus for the six months then ended, and the related
unaudited statements of operations and cash flows for the
six months ended June 30, 1998 and 1997 are also included
in the Statement of Additional Information.
It is anticipated that the Account will commence
operations in 1998; accordingly, no financial statements
currently exist.
31
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE COMPANY..................................... 1
- --------------------------------------------------------------------------------
ADDITIONAL CONTRACT PROVISIONS............................................ 1
The Contract.................................................... 1
Incontestability................................................ 1
Misstatement of Age or Sex...................................... 1
Non-Participation............................................... 1
- --------------------------------------------------------------------------------
CALCULATION OF YIELDS AND TOTAL RETURNS................................... 1
Money Market Subaccount Yields.................................. 1
Other Subaccount Yields......................................... 3
Average Annual Total Returns.................................... 4
Other Total Returns............................................. 6
Effect of the Administrative Charge on Performance Data......... 6
- --------------------------------------------------------------------------------
LEGAL MATTERS............................................................. 6
- --------------------------------------------------------------------------------
EXPERTS................................................................... 7
- --------------------------------------------------------------------------------
OTHER INFORMATION......................................................... 7
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS...................................................... 7
- --------------------------------------------------------------------------------
32
<PAGE>
-------------------------------------------------------------------------------
TEAR AT PERFORATION
If you would like a copy of the Statement of Additional Information, please
complete the information below and detach and mail this card to the Company at
the address shown on the cover of this prospectus.
Name ___________________________________________________________________________
Address ________________________________________________________________________
City, State, Zip _______________________________________________________________
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
EQUITRUST LIFE INSURANCE COMPANY
5400 University Avenue
West Des Moines, Iowa 50266
1-888-349-4656
EQUITRUST LIFE ANNUITY ACCOUNT II
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to the
information described in the Prospectus for the flexible premium deferred
variable annuity contract (the "Contract") offered by EquiTrust Life Insurance
Company (the "Company"). This Statement of Additional Information is not a
Prospectus, and it should be read only in conjunction with the Prospectuses for
the Contract, and the selected Investment Options of EquiTrust Variable
Insurance Series Fund, T. Rowe Price Equity Series, Inc., T. Rowe Price
International Series, Inc. and Dreyfus Variable Investment Fund. The Prospectus
for the Contract is dated the same as this Statement of Additional information.
You may obtain a copy of the Prospectuses by writing or calling us at our
address or phone number shown above.
, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION ABOUT THE COMPANY..................................... 1
ADDITIONAL CONTRACT PROVISIONS............................................ 1
The Contract............................................................ 1
Incontestability........................................................ 1
Misstatement of Age or Sex.............................................. 1
Non-Participation....................................................... 1
CALCULATION OF YIELDS AND TOTAL RETURNS................................... 1
Money Market Subaccount Yields.......................................... 1
Other Subaccount Yields................................................. 3
Average Annual Total Returns............................................ 4
Other Total Returns..................................................... 6
Effect of the Administrative Fee On Performance Data.................... 6
LEGAL MATTERS............................................................. 6
EXPERTS................................................................... 7
OTHER INFORMATION......................................................... 7
FINANCIAL STATEMENTS...................................................... 7
</TABLE>
<PAGE>
GENERAL INFORMATION ABOUT THE COMPANY
One hundred percent of the outstanding voting shares of the Company are owned by
Farm Bureau Life Insurance Company which is 100% owned by FBL Financial Group,
Inc. At December 31, 1997, Iowa Farm Bureau Federation owned 66.36% of the
outstanding voting stock of FBL Financial Group, Inc.
Iowa Farm Bureau Federation is an Iowa not-for-profit corporation, the members
of which are county Farm Bureau organizations and their individual members. Iowa
Farm Bureau Federation is primarily engaged, through various divisions and
subsidiaries, in the formulation, analysis and promotion of programs (at local,
state, national and international levels) that are designed to foster the
educational, social and economic advancement of its members. The principal
offices of Iowa Farm Bureau Federation are at 5400 University Avenue, West Des
Moines, Iowa 50266.
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The application and all other attached papers are part of the Contract. The
statements made in the application are deemed representations and not
warranties. The Company will not use any statement in defense of a claim or to
void the Contract unless it is contained in the application.
INCONTESTABILITY
The Company will not contest the Contract from its Contract date.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the annuitant has been misstated, the amount which will
be paid is that which the proceeds would have purchased at the correct age and
sex.
NON-PARTICIPATION
The Contracts are not eligible for dividends and will not participate in the
Company's divisible surplus.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, the Company may disclose yields, total returns and other
performance data pertaining to the contracts for a Subaccount. Such performance
data will be computed, or accompanied by performance data computed, in
accordance with the standards defined by the SEC.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, advertisements and sales literature may quote the current
annualized yield of the 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 Money Market
Investment Option or on its portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive or realized gains and losses on the sale of securities and unrealized
appreciation and depreciation and income other than investment income) at the
end of the seven-day period in the value of a hypothetical account under a
Contract 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.
1
<PAGE>
The net change in account value reflects: 1) net income from the Investment
Option attributable to the hypothetical account; and 2) charges and deductions
imposed under the Contract which are attributable to the hypothetical account.
The charges and deductions include the per unit charges for the hypothetical
account for: 1) the annual administrative fee and 2) the mortality and expense
risk charge. For purposes of calculating current yields for a Contract, an
average per unit administrative fee is used based on the $30 administrative fee
deducted at the beginning of each Contract Year. Current Yield will be
calculated according to the following formula:
<TABLE>
<S> <C> <C>
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Investment Option (exclusive or realized gains
or losses on the sale of securities and unrealized appreciation and depreciation
and 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 for the first day of the seven-day period.
Effective Yield = (1 + ((NCS-ES)/UV)) TO THE POWER OF 365/7 - 1
Where:
NCS = the net change in the value of the Investment Option (exclusive of realized gains
or losses on the sale of securities and unrealized appreciation and depreciation
and 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 for the first day of the seven-day period.
</TABLE>
Because of the charges and deductions imposed under the Contract, the yield for
the Money Market Subaccount will be lower than the yield for the Money Market
Investment Option.
2
<PAGE>
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 Money Market Investment Option, the types of quality of portfolio
securities held by the Money Market Investment Option and the Money Market
Investment Option 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 Contract for 30-day or one month periods. The annualized yield
or a subaccount refers to income generated by the 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 net investment income of the Investment
Option 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 administrative
fee and the mortality and expense risk charge. The yield calculation assumes an
administrative fee of $30 per year per Contract deducted at the beginning of
each Contract year. For purposes of calculating the 30-day or one-month yield,
an average administrative fee per dollar of Contract value in the Account issued
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:
<TABLE>
<S> <C> <C>
Yield = 2 X ((NI - ES)/(U X UV)) + 1) TO THE POWER OF 6 - 1
Where:
NI = net income of the Investment Option 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 of the last day in the 30-day one-month period.
</TABLE>
3
<PAGE>
Because of the charges and deductions imposed under the Contracts, the yield for
the subaccount will be lower that the yield for the corresponding Investment
Option.
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. A subaccount's
actual yield is affected by the types and quality of Investment Option
securities held by the corresponding Investment Option and its operating
expenses.
Yield calculations do not take into account the Surrender Charge under the
Contract equal to 1% to 6% of the amount withdrawn or surrendered during the
first six Contract years. For partial withdrawals in each Contract year after
the first Contract year, up to 10% of the accumulated value on the most recent
Contract Anniversary may be withdrawn without a current surrender charge.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns for one or more of the subaccounts for various periods of
time.
When a subaccount has been in operation for 1, 5 and 10 years, respectively, the
average annual total return for these periods will be provided. Average annual
total returns for other periods of time may, from time to time, also be
disclosed.
Standard average annual total returns represent the average annual compounded
rates of return that would equate an initial investment of $1,000 under a
Contract 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 that will be stated in the
communication.
4
<PAGE>
Standard average annual total returns will be calculated using subaccount unit
values which the Company calculates on each valuation day based on the
performance of the subaccount's underlying portfolio, the deductions for the
mortality and expense risk charge, and the annual administrative fee. The
calculation assumes that the administrative fee is $30 per year per Contract
deducted at the beginning of each Contract year. For purposes of calculating
average annual total return, an average per dollar administrative fee
attributable to the hypothetical account for the period is used. The calculation
also assumes surrender of the Contract at the end of the period for the return
quotation. Total returns will therefore reflect a deduction of the surrender
charge for any period less than seven years. The total return will then be
calculated according to the following formula:
<TABLE>
<S> <C> <C>
TR = ((ERV/P)/N)-1
Where:
TR = the average annual total return net of subaccount recurring charges.
EHV = the ending redeemable value (net of any applicable surrender charge) of the
hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
</TABLE>
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Account commenced
operations. Such performance information for the subaccounts will be calculated
based on the performance of the Investment Option and the assumption that the
subaccounts were in existence for the same periods as those indicated for the
Investment Option, with the level of Contract charges that were in effect at the
inception of the subaccounts.
Such average annual total return information for the Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE PERIOD
1-YEAR 5-YEAR 10-YEAR FROM DATE OF
PERIOD PERIOD PERIOD INCEPTION OF
ENDED ENDED ENDED INVESTMENT OPTION
SUBACCOUNT 12/31/97 12/31/97 12/31/97 TO 12/31/97
- ----------------------------------------------------------------- ----------- ----------- ----------- ---------------------
<S> <C> <C> <C> <C>
EquiTrust Variable Insurance Series Fund
Value Growth................................................... (3.90)% 11.06% 10.63% 7.51%
High Grade Bond................................................ 0.04 4.60 7.45 7.92
High Yield Bond................................................ 1.87 7.86 9.68 9.89
Money Market (1)............................................... (5.13) 1.29 -- 2.64
Blue Chip (2).................................................. 17.21 16.65 -- 17.44
T. Rowe Price Equity Series, Inc.
Equity Income (3).............................................. 18.65 -- -- 20.82
Mid-Cap Growth (4)............................................. 8.60 -- -- 8.63
New America Growth (3)......................................... 10.92 -- -- 20.25
Personal Strategy Balanced (5)................................. 7.84 -- -- 16.38
T. Rowe Price International Series, Inc.
International Stock (3)........................................ (7.11) -- -- 4.42
Dreyfus Variable Investment Fund
Capital Appreciation Portfolio (6)............................. 17.85 -- -- 17.26
Disciplined Stock Portfolio (7)................................ 20.05 -- -- 25.17
Growth and Income Portfolio (8)................................ 6.01 -- -- 21.74
International Equity Portfolio (8)............................. (0.59) -- -- 3.37
Small Cap Portfolio (9)........................................ 6.55 23.72 -- 42.42
</TABLE>
- ------------------------------
(1) The Money Market Portfolio commenced operations on February 20, 1990.
(2) The Blue Chip Portfolio commenced operations on October 15, 1990.
(3) The Equity Income, New America Growth and International Stock Portfolios
commenced operations on March 31, 1994.
(4) The Mid-Cap Growth Portfolio commenced operations on December 31, 1996.
(5) The Personal Strategy Balanced Portfolio commenced operations on December
30, 1994.
(6) The Capital Appreciation Portfolio commenced operations on April 5, 1993.
(7) The Disciplined Stock Investment Portfolio commenced operations on April
30, 1996.
(8) The Growth and Income and International Equity Portfolios commenced
operations on May 2, 1994.
(9) The Small Cap Portfolio commenced operations on August 31, 1990.
5
<PAGE>
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the surrender charge. 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.
The Company may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
<TABLE>
<S> <C> <C>
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.
</TABLE>
EFFECT OF THE ADMINISTRATIVE FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual administrative fee to be deducted
annually at the beginning of each Contract Year, from the subaccounts and the
Declared Interest Option based, on the proportion that the value of each such
account bears to the total cash value. For purposes of reflecting the
administrative fee in yield and total return quotations, the annual charge is
converted into a per-dollar per-day charge based on the average contract value
in the Account of all Contracts on the last day of the period for which
quotations are provided. The per-dollar per-day average charge will then be
adjusted to reflect the basis upon which the particular quotation is calculated.
LEGAL MATTERS
All matters relating to Iowa law pertaining to the Contracts, including the
validity of the Contracts and the Company's authority to issue the Contracts,
have been passed upon by Stephen M. Morain, Esquire, Senior Vice President and
General Counsel of the Company. Sutherland, Asbill & Brennan LLP, Washington
D.C. has provided advice on certain matters relating to the federal securities
laws.
6
<PAGE>
EXPERTS
The statutory-basis financial statements of the Company at December 31, 1997 and
1996 and for the years then ended, appearing herein, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such reports given
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 Contracts 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 Contracts and other legal instruments
are intended to be summaries. For a complete statement of the terms of these
documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
The Company's financial statements included in this Statement of Additional
Information should be considered only as bearing on the Company's ability to
meet its obligations under the Contracts. They should not be considered as
bearing on the investment performance of the assets held in the Account.
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
EquiTrust Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of EquiTrust
Life Insurance Company (the Company), formerly known as Continental Western Life
Insurance Company, as of December 31, 1997 and 1996, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flow 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 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, State of Iowa,
which practices differ from generally accepted accounting principles. The
variances between such practices and generally accepted accounting principles
and the effects on the accompanying financial statements are described in Note
1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of the Company at December 31, 1997 or 1996, or the results of its operations or
its cash flow for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1997 and 1996, and the results of its operations and its cash flow
for the years then ended, in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, State of Iowa.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 16, 1998
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1998 1997 1996
------------ ------ --------
(UNAUDITED)
<S> <C> <C> <C>
ADMITTED ASSETS
United States Government and agencies
bonds $24,252 $5,515 $301,430
Common stocks -- -- 82
Mortgage loans -- -- 31,697
Policy loans -- -- 30,643
Real estate -- -- 1,730
Cash and short-term investments 6,405 2,593 17,926
Other invested assets 45 -- --
------------ ------ --------
Cash and invested assets 30,702 8,108 383,508
Property and equipment -- -- 235
Investment income due and accrued 217 54 3,702
Premiums deferred and uncollected, less
loading (1996--$307,000) -- -- 3,018
Other admitted assets 2 -- 1,719
------------ ------ --------
Total admitted assets $30,921 $8,162 $392,182
------------ ------ --------
------------ ------ --------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policy and contract liabilities $ -- $ -- $349,067
Accrued expenses and other liabilities 19 -- 6,078
Deferred compensation (NOTE 7) -- -- 1,464
Federal income taxes 25 1 --
Asset valuation reserve 20 -- 2,216
Interest maintenance reserve 54 57 --
------------ ------ --------
Total liabilities 118 58 358,825
Capital and surplus:
Common stock, $1,500 par
value--authorized 2,500 shares;
issued and outstanding 2,000 shares 3,000 3,000 3,000
Additional paid-in capital 27,748 5,125 7,510
Unassigned surplus 55 (21) 22,847
------------ ------ --------
Total capital and surplus 30,803 8,104 33,357
------------ ------ --------
Total liabilities and capital and
surplus $30,921 $8,162 $392,182
------------ ------ --------
------------ ------ --------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
---------------- ----------------
1998 1997 1997 1996
------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Premiums and other revenues:
Life and annuity premiums $ -- $ -- $ -- $28,381
Accident and health premiums -- -- -- 983
Net investment income 324 241 473 26,144
Amortization of the interest
maintenance reserve 3 -- 3 (1,231)
Other revenues -- -- -- 938
------ ------ ------ -------
Total premiums and other revenues 327 241 476 55,215
Benefits paid or provided:
Death and annuity benefits -- -- -- 37,002
Accident and health benefits -- -- -- 875
------ ------ ------ -------
Total benefits paid or provided -- -- -- 37,877
Insurance expenses and other deductions:
Commissions -- -- -- 3,207
General expenses 130 1 -- 5,059
Insurance taxes, licenses and fees 44 14 -- 1,382
------ ------ ------ -------
Total insurance expenses and other
deductions 174 15 -- 9,648
------ ------ ------ -------
Gain from operations before federal
income taxes
and net realized capital gains 153 226 476 7,690
Federal income taxes 57 79 148 1,625
------ ------ ------ -------
Net gain from operations before net
realized capital gains 96 147 328 6,065
Net realized capital gains -- -- -- 591
------ ------ ------ -------
Net income $ 96 $ 147 $ 328 $ 6,656
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN UNASSIGNED TOTAL CAPITAL
STOCK CAPITAL SURPLUS AND SURPLUS
------ ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $3,000 $ 7,510 $ 15,475 $ 25,985
Net income for 1996 -- -- 6,656 6,656
Change in difference between cost and
admitted asset investment amounts -- -- (16) (16)
Decrease in nonadmitted assets -- -- 1,318 1,318
Increase in asset valuation reserve -- -- (591) (591)
Other -- -- 5 5
------ ---------- ---------- -------------
Balance at December 31, 1996 3,000 7,510 22,847 33,357
Transfer of assets to TMG Life
Insurance Company under assumption
reinsurance agreement -- (2,823) (22,847) (25,670)
Net income for 1997 -- -- 328 328
Increase in nonadmitted assets -- -- (349) (349)
Other -- 438 -- 438
------ ---------- ---------- -------------
Balance at December 31, 1997 3,000 5,125 (21) 8,104
Net income for six month period ended
June 30, 1998 (Unaudited) -- -- 96 96
Increase in asset valuation reserve
(Unaudited) -- -- (20) (20)
Capital contributions (Unaudited) -- 22,623 -- 22,623
------ ---------- ---------- -------------
Balance at June 30, 1998 (Unaudited) $3,000 $27,748 $ 55 $ 30,803
------ ---------- ---------- -------------
------ ---------- ---------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW--STATUTORY BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER
30 31
--------------------- ---------------------
1998 1997 1997 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and considerations, net of
reinsurance $ -- $ -- $ -- $ 30,013
Net investment income 177 169 440 23,104
Benefits paid -- -- -- (44,572)
Commissions, general insurance expenses
and taxes (171) (1) -- (8,459)
Federal income taxes (33) -- (180) (2,023)
Other income received less other
expenses -- -- -- 733
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities (27) 168 260 (1,199)
INVESTING ACTIVITIES
Proceeds from investments sold, matured,
or repaid:
Bonds -- -- 5,793 131,843
Mortgage loans -- -- -- 855
Real estate -- -- -- 5,114
--------- --------- --------- ---------
Total investment proceeds -- -- 5,793 137,812
Cost of investments acquired:
Bonds (18,750) -- (5,518) (138,785)
Mortgage loans -- -- -- (5,533)
--------- --------- --------- ---------
Total investments acquired (18,750) -- (5,518) (144,318)
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities (18,777) 168 275 (6,506)
FINANCING ACTIVITIES
Capital contributions 22,623 -- -- --
Other cash applied (33) (15,918) (15,868) --
--------- --------- --------- ---------
Net change in cash and short-term
investments 3,813 (15,750) (15,333) (7,705)
Cash and short-term investments at
beginning of period 2,592 17,926 17,926 25,631
--------- --------- --------- ---------
Cash and short-term investments at end
of period $ 6,405 $ 2,176 $ 2,593 $ 17,926
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
EquiTrust Life Insurance Company (the Company), formerly Continental Western
Life Insurance Company, is a life insurance company domiciled in the state of
Iowa and licensed in 38 states. All in force policies, annuities and
certificates of the Company were ceded to TMG Life Insurance Company (TMG Life),
formerly an affiliated company, through an assumption reinsurance agreement as
of January 1, 1997. At December 31, 1997, the Company had no insurance in force.
The Company was purchased by Farm Bureau Life Insurance Company (Farm Bureau) on
December 30, 1997, and became a wholly owned subsidiary of Farm Bureau which, in
turn, is wholly owned by FBL Financial Group, Inc. The Company was previously
wholly owned by TMG Life which is owned by The Mutual Group (U.S.), Inc. [TMG
(U.S.)], which itself is a wholly owned subsidiary of The Mutual Life Assurance
Company of Canada.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
BASIS OF PRESENTATION
The financial statements have been prepared in conformity with accounting
practices prescribed or permitted by the Insurance Division, Department of
Commerce, State of Iowa (Insurance Division). Such practices differ from
generally accepted accounting principles (GAAP). The more significant variances
from GAAP are as follows: (a) costs of acquiring new business are expensed as
incurred rather than deferred and amortized over the life of the policies; (b)
carrying values of bonds designated under GAAP as available-for-sale securities
are based on values specified by the National Association of Insurance
Commissioners (NAIC) rather than fair values; (c) policy reserves on traditional
life products are based on statutory mortality and interest rates rather than
expected mortality and interest rates; (d) reinsurance amounts are netted
against the corresponding amounts rather than reported gross; (e) policy
reserves on universal life and investment products are stated using statutory
discounting methodologies rather than at full account values; (f) deferred
income taxes are not provided for the differences between the financial
statement and income tax bases of assets and liabilities; (g) after-tax net
realized capital gains or losses attributed to changes in interest rates are
deferred and amortized over the remaining life of the investment rather than
recognized as pre-tax gains or losses in the statement of operations when the
sale is completed; (h) declines in the estimated realizable value of investments
are recognized through a formula-determined reserve carried as a liability whose
changes are charged directly to surplus rather than reducing the carrying value
of the related investment and recognizing realized losses in the statements of
operations; (i) certain assets designated as "nonadmitted," principally agents'
debit balances and furniture and equipment, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus; (j) revenues for
universal life and investment products consist of premiums received rather than
policy charges; (k) pension expense is recognized in accordance with rules and
regulations permitted by the Employee Retirement Income Security Act of 1974
rather than Statement of Financial Accounting Standards (SFAS) No. 87,
"Employers' Accounting for Pensions"; (l) accrued postretirement benefits other
than pensions do not include a provision for benefits that are not fully vested;
and (m) assets and liabilities continue to be shown at historical values rather
than restated fair values when a change in ownership occurs.
The National Association of Insurance Commissioners (NAIC) is in the process of
codifying statutory accounting practices (Codification). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company used to prepare
its statutory-basis financial statements. Codification, which was approved by
the NAIC in 1998, will require adoption by the various states before it becomes
the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, the State of Iowa must adopt Codification as the
prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Division. At this time, it is unclear
whether the State of Iowa will adopt Codification.
PERMITTED PRACTICE
The statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Insurance Division.
"Prescribed" statutory accounting practices include regulations and general
administrative rules, as well as a variety of publications of the NAIC.
"Permitted" statutory accounting practices encompass all practices that are not
prescribed, may differ from insurance company to insurance company, and may
change in the future.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has received approval from the Insurance Division to account for the
disposition of many of the balance sheet items related to the assumption
reinsurance agreement as a change in surplus rather than reporting their effect
in the income statement. The majority of the assets and liabilities of the
Company were transferred to TMG Life effective January 1, 1997, leaving only
that amount of invested assets, capital and surplus required to maintain minimum
capital. An analysis of these transferred amounts follows (in thousands):
<TABLE>
<S> <C>
Assets:
Bonds $ 295,713
Common stocks 82
Mortgage loans 31,697
Real estate 1,730
Policy loans 30,643
Cash and short-term investments 16,333
Other admitted assets 8,297
---------
Total 384,495
Less liabilities 358,825
---------
Net transferred $ 25,670
---------
---------
Capital and surplus:
Contributed capital $ 2,823
Unassigned surplus 22,847
---------
Total $ 25,670
---------
---------
</TABLE>
INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1998 and for the six-month periods ended
June 30, 1998 and 1997 and related disclosures in these notes have not been
audited. The interim financial statements have been prepared in accordance with
statutory accounting principles. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals unless noted otherwise herein)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
INVESTMENTS
Investment values have been determined in accordance with methods adopted by the
NAIC. Bonds are valued at amortized cost or NAIC designated value. The amortized
cost for loan-backed bonds is valued using the interest method including
anticipated prepayments.
Prepayment assumptions are obtained from internal estimates and are based on the
current interest rate and economic environment. The retrospective adjustment
method is used to value all such securities except for interest-only securities,
which are valued using the prospective method. Common stocks are reported at
market value. Real estate is carried at cost less encumbrances and accumulated
depreciation is calculated on a straight-line basis over the estimated useful
lives of the properties. Short-term investments are valued at cost which
approximates market. Mortgage loans and policy loans are valued at the unpaid
principal balance.
As required by the NAIC, the Company maintains an Asset Valuation Reserve (AVR),
a separately stated liability on the statutory balance sheet which is computed
under a prescribed formula to provide for possible credit losses and declines in
the value of bonds, stocks, mortgage loans, real estate, short-term investments
and other invested assets. Changes to the AVR are reported directly on the
statement of changes in capital and surplus.
Interest income from bonds and mortgage loans is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Accrual of
interest is nonadmitted on investments that have become 90 days past due or if
management doubts the collectibility of principal
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or interest on an investment that is currently performing. Investments are
restored to accrual status when brought current, or when management no longer
doubts the ultimate collectibility of principal and interest. Mortgage loan
origination fees are deferred and recognized as income over the life of the
loan.
Net unrealized gains or losses in the carrying value of investments are
reflected in unassigned surplus. Realized gains and losses are determined by
specific identification of cost of investments sold and are recorded in the
statement of operations net of tax and net of amounts transferred to the
Interest Maintenance Reserve (IMR). The IMR is maintained as prescribed by the
NAIC and represents the accumulation of deferred after-tax net realized capital
gains and losses from sales of investments that are attributable to changes in
interest rates. These deferred gains and losses are amortized into income over
the remaining period to maturity. Amortization of the IMR is reported in the
statement of operations.
CASH AND SHORT-TERM INVESTMENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of twelve months or less to be
short-term investments.
POLICY RESERVES
Future policy benefit reserves on life policies are provided principally under
the Commissioners' Reserve Valuation Method using primarily 1958 and 1980
Commissioners' Standard Ordinary mortality tables assuming interest rates from
2 1/2 to 6 percent. All reserves are calculated using the mean reserve method.
Liabilities for future policy benefits on annuity policies are generally based
on policy values including interest additions at current rates.
The Company had no insurance in force as of December 31, 1997. The Company had
insurance in force of $174,086,000 for which gross premiums were less than the
net valuation premiums required by the Insurance Division as of December 31,
1996. Policy reserves of $401,000 were held by the Company to cover these
deficiencies at December 31, 1996. Tabular interest, tabular less actual reserve
released, tabular cost, and tabular interest on funds not involving life
contingencies are determined by formula as prescribed by the NAIC.
POLICY AND CONTRACT CLAIMS
The liabilities for insurance claims are determined using estimates of the
ultimate net cost of all reported and unreported claims which are unpaid at year
end. Although it is not possible to measure the degree of variability inherent
in such estimates, management believes that the liabilities for insurance claims
are adequate. The estimates are reviewed periodically and adjusted as necessary
with such adjustments being reflected in current operations.
PREMIUMS
Premiums for traditional life policies are recognized as revenue when due.
Premiums for accident and health policies are recognized ratably over the period
of insurance coverage. Universal life insurance and annuity premiums are
recognized as revenue when received.
REINSURANCE
The Company cedes reinsurance and participates in various pools and
associations. These reinsurance arrangements allow management to control
exposure to potential losses arising from large risks. Reinsurance premiums,
commissions, expense reimbursements, and reserves related to reinsured business
are accounted for on bases consistent with those used in accounting for the
original policies issued and with the terms of the reinsurance contracts.
Premiums, benefits and expenses, premiums receivable, and policy reserves are
reported in the financial statements net of reinsured amounts.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the related property.
FEDERAL INCOME TAXES
Federal income taxes have been provided on income currently taxable in
accordance with the provisions of the Internal Revenue Code that relate to life
insurance companies.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating the
fair value of each class of financial instruments.
INVESTMENTS
Fair values for bonds and stocks are generally based on quoted market prices.
Fair values for mortgage loans are calculated as the net present value of future
loan payments, which are assumed to be received in accordance with the terms of
the contracts, using discount rates based on the Treasury yield curve and the
Company's current mortgage pricing. Fair values for policy loans are estimated
through discounted cash flow analyses using interest rates reflective of current
asset yields and assumed annual repayment rates. The recorded values of cash,
short-term investments and accrued investment income approximate their fair
value.
INVESTMENT-TYPE CONTRACTS
The Company underwrites certain investment-type contracts comprising mainly
individual annuities and supplementary contracts without life contingencies. The
fair value of liabilities related to these contracts, included in annuity
reserves, was determined using a price behavior model that projects monthly cash
flows and calculates their present value under various interest rate assumptions
using the Treasury yield curve and specific assumptions for mortality, lapse
rates, policy loads, crediting rates, expenses and surrender charges that are
particular to each type of annuity product. Probabilities assigned to the
interest rate assumptions are used to calculate the expected present value of
the cash flows.
The fair values of contract liabilities are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The carrying amounts and fair values of the Company's financial instruments were
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Investments:
Bonds $ 5,515 $ 5,555 $ 301,430 $ 305,507
Common stocks -- -- 82 82
Mortgage loans -- -- 31,697 33,731
Policy loans -- -- 30,643 30,171
Cash and short-term investments 2,593 2,593 17,926 17,926
Accrued investment income 54 54 3,702 3,702
LIABILITIES
Investment-type contracts -- -- 78,412 90,183
</TABLE>
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
3. INVESTMENTS
The amortized cost and the fair or comparable value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
At December 31, 1997--U.S. Treasury $ 5,515 $ 40 $ -- $ 5,555
--------------------------------------------------
Total bonds $ 5,515 $ 40 $ -- $ 5,555
--------------------------------------------------
--------------------------------------------------
At December 31, 1996:
U.S. Treasury $ 111,757 $ 827 $ 78 $ 112,506
U.S. government agencies, states and political
subdivisions 89,530 1,987 243 91,274
Industrial and other 100,143 2,311 727 101,727
--------------------------------------------------
Total bonds $ 301,430 $ 5,125 $ 1,048 $ 305,507
--------------------------------------------------
--------------------------------------------------
</TABLE>
At December 31, 1997, the Company's bond investment was rated as a Class 1 by
the NAIC (i.e.; investment grade bonds) and is due to mature in 1999.
Proceeds from investments in bonds sold, redeemed or otherwise disposed of
during 1997 and 1996 were $5,793,000 and $498,858,000, respectively. Gross gains
of $94,000 and $902,000 were realized in 1997 and 1996, respectively. Gross
losses of $1,029,000 were realized on those dispositions in 1996. Substantially
all 1997 and 1996 gains and losses from bonds were transferred to the IMR. On
January 1, 1997, bonds with an admitted asset value of $295,713,000 were
transferred to TMG Life as part of the assumption reinsurance agreement. No gain
or loss was realized on the transfer.
At December 31, 1997, bonds and cash with an admitted asset value of $8,108,000
were on deposit with state insurance departments to meet regulatory
requirements.
The Company sold its home office building during 1996 for a gain of $909,000.
This gain is included with net realized gains on investments in the
statutory-basis statement of operations.
Components of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1997 1996
--------------------
<S> <C> <C>
(IN THOUSANDS)
Bonds $ 407 $ 21,156
Mortgage loans -- 2,680
Short-term investments 70 1,989
Amortization of interest maintenance reserve -- 1,285
--------------------
477 27,110
Less investment expenses (4) (966)
--------------------
Net investment income $ 473 $ 26,144
--------------------
--------------------
</TABLE>
Realized capital gains are reported net of federal income taxes and amounts
transferred to the IMR as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1997 1996
--------------------
<S> <C> <C>
(IN THOUSANDS)
Realized capital gains $ 94 $ 782
Less amount transferred (to) from IMR (61) 83
--------------------
33 865
Less federal income taxes on realized capital
gains before effect
of transfer to IMR (33) (274)
--------------------
Net realized capital gains $ -- $ 591
--------------------
--------------------
</TABLE>
At December 31, 1996, the Company had a nonadmitted IMR asset of $663,000.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
4. STATUTORY CAPITAL AND SURPLUS RESTRICTIONS
Prior approval of insurance regulatory authorities is required for payment of
dividends to the Company's stockholder which exceed an annual limitation. During
1998, the Company may pay dividends to its stockholder of approximately $510,000
without prior approval of the Insurance Division.
5. FEDERAL INCOME TAXES
The Company files a separate tax return. The Company's taxable income differs
from gain from operations before income taxes as reported in the financial
statements due to differences in reporting investment income, policy reserves,
depreciation, agents' deferred compensation, premium income, expenses, realized
gains and losses and the impact of differences in asset valuations.
6. REINSURANCE
Prior to January 1, 1997, the maximum amount the Company retained on any one
life was $500,000 of basic life coverage. The Company retained all its risk on
accidental death insurance risks with an issue limit of $200,000. Amounts in
excess of retention limits were reinsured with other life insurance companies
under reinsurance treaties principally on yearly renewable term and coinsurance
bases.
The effect of ceded reinsurance on the Company's statutory-basis financial
statements in 1996 was as follows (in thousands):
<TABLE>
<S> <C>
Premiums receivable $ 550
Policy reserves and liabilities:
Life 30,552
Annuity 24,070
Policy and contract claims 305
Premiums:
Life 5,147
Annuity 217
Policy benefits paid or provided:
Life 2,098
Annuity (2,462)
</TABLE>
On January 1, 1997, the Company entered into an assumption reinsurance agreement
with TMG Life. Under the agreement, TMG Life assumed all of the Company's rights
and obligations for policies, annuities and certificates issued by the Company
prior to January 1, 1997.
7. RETIREMENT AND COMPENSATION PLANS
Prior to January 1, 1997, the Company participated in several benefit programs
sponsored by TMG (U.S.). In conjunction with execution of the assumption
reinsurance agreement, all of the Company's employees became employees of TMG
(U.S.). As the Company had no employees during 1997, no contributions were made
to any benefit plans for the year ended December 31, 1997 and all liabilities
associated with the benefit plans were assumed by TMG (U.S.).
Prior to January 1, 1997, the Company participated in a noncontributory
defined-benefit plan sponsored by TMG (U.S.) covering substantially all of its
employees. Benefits provided were based on years of service and the employee's
compensation. Funding and accounting policies were to contribute annually the
maximum amount that can be currently deducted for income tax purposes. Total
contributions to the plan were $466,000 for the year ended December 31, 1996.
The funded status of the TMG (U.S.) plan was determined using an effective date
of January 1, 1996, an interest rate of 7.0% compounded annually and a salary
scale of 5.5%. At December 31, 1996, the Company's separately determined
accumulated benefit obligation under the Plan was $1,812,000. The net assets
available for benefits at December 31, 1996 were $1,381,000. The Company is not
obligated under the TMG (U.S.) plan subsequent to the sale of the Company to
Farm Bureau Life Insurance Company.
Prior to January 1, 1997, the Company participated in a 401(k) savings plan
sponsored by TMG (U.S.). Participating employees were allowed to contribute up
to 12% of their base compensation to the 401(k) plan. The Company would match
50% of the amount contributed by each employee up to the first 6% of
compensation and also made discretionary contributions. Participants are
immediately vested in Company contributions. Company contributions to the 401(k)
plan were $40,000 for the year ended December 31, 1996.
<PAGE>
EQUITRUST LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
7. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
Prior to January 1, 1997, the Company provided defined postretirement health and
life insurance benefits on a noncontributory basis. Eligible employees were
those with ten or more years of service who retired under the TMG Life pension
plan. Health insurance benefits for retirees under age 65 were the same as for
active employees provided the retiree maintained continuity of coverage. For
retirees attaining age 65, health insurance was available as a Medicare
supplement. Life insurance benefits are 100% of final earnings in the first year
of retirement, reducing 10% per year to a minimum benefit of $10,000. The
estimated net postretirement benefit cost for the year ended December 31, 1996
was $15,000.
At December 31, 1996, the unfunded postretirement benefit obligation for
retirees and other fully eligible or vested plan participants was $353,000. The
estimated postretirement benefit obligation for active nonvested employees was
$441,000 at December 31, 1996. The discount rate used in determining the
accumulated postretirement benefit was 7.0% in 1996 and the health care cost
trend rate was 6.0% graded to 5.5% over 8 years. Effective January 1, 1997, TMG
(U.S.) assumed all liabilities related to the postretirement benefits.
Prior to January 1, 1997, the Company sponsored a deferred compensation plan for
its agents. Benefit expenses related to the plan were $172,000 for the year
ended December 31, 1996. The liability accrued at December 31, 1996 under this
plan was $1,218,000. At December 31, 1996, the Company had liabilities of
$246,000 related to a discontinued employee deferred compensation plan, the
activity under which consists of interest accumulations and withdrawals.
8. RELATED-PARTY TRANSACTIONS
During 1997 and 1996, the Company paid to TMG (U.S.) investment advisory and
management fees of $4,000 and $422,000, respectively.
TMG Life provided group health insurance to the Company prior to January 1,
1997. Premiums paid by the Company to TMG Life were $80,000 for the year ended
December 31, 1996. TMG (U.S.) provided the Company with administrative services
and computer facilities for which it was charged a fee of $502,000 for the year
ended December 31, 1996. The Company provided TMG Life with underwriting, policy
issuing and administrative services, for which it charged a fee of $876,000 for
the year ended December 31, 1996. No fees were paid or received by the Company
during 1997 for such services.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits and other contingencies that have
arisen from the normal conduct of business. Contingent liabilities arising from
litigation and other matters are not considered material to the financial
position of the Company. TMG Life, as part of the sale agreement, has assumed
all accrued, absolute and contingent liabilities that may arise out of or
related to the business of the Company prior to December 30, 1997. At June 30,
1998, management is not aware of any claims which would result in a material
loss to the Company.
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B.
(b) Exhibits
<TABLE>
<C> <C> <S>
(1) Certified resolution of the board of directors of
EquiTrust Life Insurance Company (the "Company")
establishing EquiTrust Life Annuity Account II (the
"Account").(1)
(2) Not Applicable.
(3) (a) Form of Underwriting agreement among the Company,
the Account and EquiTrust Marketing Services, Inc.
("EquiTrust Marketing").(1)
(b) Form of Sales Agreement.(1)
(c) Form of Wholesaling Agreement.(1)
(4) Contract Form.(1)
(5) Contract Application.(1)
(6) (a) Articles of Incorporation of the Company.(1)
(b) By-Laws of the Company.(1)
(7) Not Applicable.
(8) (a) Participation agreement relating to EquiTrust
Variable Insurance Series Fund.(1)
(b) Participation agreement relating to Dreyfus
Variable Investment Fund.(1)
(c) Participation agreement relating to T. Rowe Price
Equity Series, Inc. and T. Rowe Price International
Series, Inc.(1)
(9) Opinion and Consent of Stephen M. Morain, Esquire.(1)
(10) (a) Consent of Sutherland, Asbill & Brennan, LLP.(1)
(b) Consent of Ernst & Young LLP.(1)
(c) Opinion and Consent of Christopher G. Daniels, FSA,
MSAA, Life Product Development and Pricing Vice
President.(1)
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney.(1)
</TABLE>
- ------------------------
(1) Incorporated by reference to the initial filing of this Registration
Statement (File No. 333-61899) on August 20, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE COMPANY
Incorporated herein by reference to the prospectus in the Form S-6 registration
statement (File No. 333-45813) for certain variable life insurance contracts
issued by the Company and filed with the Commission on July 23, 1998.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. All of the Company's outstanding voting
common stock is owned by FBL Financial Group, Inc. This Company and its
affiliates are described more fully in the prospectus included in this
registration statement. Various companies and other entities controlled by FBL
Financial Group, Inc., may therefore be considered to be under common control
with the registrant or the Company. Such other companies and entities, together
with the identity of the owners of their common stock (where applicable), are
set forth on the following diagram.
SEE ORGANIZATION CHART ON FOLLOWING PAGE
1
<PAGE>
FBL FINANCIAL GROUP, INC.
OWNERSHIP CHART
01-01-98
[CHART]
2
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of the date of the prospectus included in this registration statement, no
Contracts have been sold.
ITEM 28. INDEMNIFICATION
Article XII of the Company's By-Laws provides for the indemnification by the
Company of any person who is a party or who is threatened to be made a party to
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or enterprise, against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Article
XII also provides for the indemnification by the Company of any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or another enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification will be made in respect of any claim,
issue, or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the Company
unless and only to the extent that the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court shall deem
proper.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) EquiTrust Marketing Services, Inc. is the registrant's principal
underwriter and also serves as the principal underwriter of certain variable
annuity contracts and variable life insurance policies issued by other separate
accounts of the Company or its life insurance company affiliates supporting
other variable products, or to variable annuity and variable life insurance
separate accounts of insurance companies not affiliated with the Company.
(b) Officers and Directors of EquiTrust Marketing Services, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Stephen M. Morain General Counsel and Assistant Secretary, Iowa Farm Bureau Federation;
Senior Vice President, General Counsel and Director General Counsel, Secretary and Director, Farm Bureau Management
Corporation; Senior Vice President, General Counsel and Director, FBL
Financial Group, Inc.; Senior Vice President and General Counsel, Farm
Bureau Life Insurance Company and other affiliates of the foregoing.
Holds various positions with affiliates of the foregoing. Director,
Computer Aided Design Software, Inc., and Iowa Business Development
Finance Corporation Chairman, Edge Technologies, Inc.
William J. Oddy Chief Operating Officer, FBL Financial Group, Inc., Farm Bureau Life
Chief Operating Officer and Director Insurance Company, Western Farm Bureau Life Insurance Company and other
affiliates of the foregoing. Holds various positions with affiliates of
the foregoing.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Dennis M. Marker Investment Vice President, Administration, FBL Financial Group, Inc.
Investment Vice President, Administration, Secretary Holds various positions with affiliates of the foregoing.
and Director
Thomas R. Gibson Chief Executive Officer and Director, FBL Financial Group, Inc.; Chief
Chief Executive Officer and Director Executive Officer, Farm Bureau Life Insurance Company, Western Farm
Bureau Life Insurance Company and other affiliates of the foregoing.
Holds various positions with affiliates of the foregoing.
Timothy J. Hoffman Chief Property/Casualty Officer, FBL Financial Group, Inc.; Vice
Vice President and Director President, Farm Bureau Life Insurance Company, Western Farm Bureau Life
Insurance Company and other affiliates of the foregoing. Holds various
positions with affiliates of the foregoing.
James W. Noyce Chief Financial Officer, Farm Bureau Life Insurance Company, FBL
Chief Financial Officer, Treasurer and Director Financial Group, Inc., Western Farm Bureau Life Insurance Company and
other affiliates of the foregoing. Holds various positions with
affiliates of the foregoing.
Thomas E. Burlingame Vice President - Associate General Counsel, FBL Financial Group, Inc.
Director Holds various positions with affiliates of the foregoing.
F. Walter Tomenga Vice President - Corporate Affairs and Marketing Services, FBL Financial
Director Group, Inc. Holds various positions with affiliates of the foregoing.
Lynn E. Wilson Vice President - Life Sales, FBL Financial Group, Inc. Holds various
President and Director positions with affiliates of the foregoing.
Lou Ann Sandburg Vice President - Investments and Assistant Treasurer, FBL Financial
Vice President, Investments and Director Group, Inc., Farm Bureau Life Insurance Company, Western Farm Bureau
Life Insurance Company and other affiliates of the foregoing. Holds
various positions with affiliates of the foregoing.
James P. Brannen Tax and Investment Accounting Vice President, FBL Financial Group, Inc.
Tax and Investment Accounting Vice President Holds various positions with affiliates of the foregoing.
Sue A. Cornick Market Conduct and Mutual Funds Vice President and Assistant Secretary,
Market Conduct and Mutual Funds Vice President and EquiTrust Investment Management Services, Inc., EquiTrust Money Market
Assistant Secretary Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust Variable
Insurance Series Fund.
Kristi Rojohn Assistant Mutual Funds Manager and Assistant Secretary, EquiTrust
Assistant Mutual Funds Manager and Assistant Secretary Investment Management Services, Inc.; Assistant Secretary, EquiTrust
Money Market Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust
Variable Insurance SeriesFund.
Elaine A. Followwill Compliance Assistant and Assistant Secretary, EquiTrust Investment
Compliance Assistant and Assistant Secretary Management Services, Inc.; Assistant Secretary, EquiTrust Money Market
Fund, Inc., EquiTrust Series Fund, Inc. and EquiTrust Variable
Insurance Series Fund
Roger F. Grefe Investment Management Vice President, FBL Financial Group, Inc. and
Investment Management Vice President EquiTrust Investment Management Services, Inc.
Robert Rummelhart Fixed Income Vice President, FBL Financial Group, Inc. and EquiTrust
Fixed Income Vice President Investment Management Services, Inc.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS* POSITIONS AND OFFICES
- ------------------------------------------------------ ------------------------------------------------------------------------
<S> <C>
Charles T. Happel Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
Laura Kellen Beebe Portfolio Manager, EquiTrust Investment Management Services, Inc.
Portfolio Manager
</TABLE>
- ------------------------
* The principal business address of all of the persons listed above is 5400
University Avenue, West Des Moines, Iowa 50266.
ITEM 30. LOCATION BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be kept by
Section 31(a) of the Investment Company Act of 1940 and rules thereunder, are
maintained by the Company at 5400 University Avenue, West Des Moines, Iowa
50266.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this registration
statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective amendment
to this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
16 months old for as long as purchase payments under the contracts offered
herein are being accepted.
(b) The registrant undertakes that it will 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
post card or similar written communication affixed to or included in the
prospectus that the applicant can remove and send to the Company for a statement
of additional information.
(c) The registrant undertakes to deliver any statement of additional
information and any financial statements required to be made available under
this Form N-4 promptly upon written or oral request to the Company at the
address or phone number listed in the prospectus.
(d) The Company represents that in connection with its offering of the
contracts as funding vehicles for retirement plans meeting the requirements of
Section 403(b) of the Internal Revenue Code of 1986, it is relying on a no-
action letter dated November 28, 1988, to the American Council of Life Insurance
(Ref. No. IP-6-88) regarding Sections 22(e), 27(c)(1), and 27(d) of the
Investment Company Act of 1940, and that paragraphs numbered (1) through (4) of
that letter will be complied with.
(e) The Company represents that the aggregate charges under the Contracts
are reasonable in relation to the services rendered, the expenses expected to be
incurred and the risks assumed by the Company.
5
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, EquiTrust Life Annuity Account II has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized in the City of West Des Moines, State of Iowa, on the 20th day
of October, 1998.
EquiTrust Life Insurance Company
EquiTrust Life Annuity Account II
By: /s/ EDWARD M. WIEDERSTEIN
-------------------------------------
Edward M. Wiederstein
PRESIDENT
EquiTrust Life Insurance Company
Attest: /s/ RICHARD D. HARRIS
-------------------------------------
Richard D. Harris
SENIOR VICE PRESIDENT AND
SECRETARY-TREASURER
EquiTrust Life Insurance Company
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the dates set
forth below.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ EDWARD M. WIEDERSTEIN President and Director
- ----------------------------------- [Principal Executive October 20, 1998
Edward M. Wiederstein Officer]
Senior Vice President and
/s/ RICHARD D. HARRIS Secretary-Treasurer
- ----------------------------------- [Principal Financial October 20, 1998
Richard D. Harris Officer]
/s/ JAMES W. NOYCE Chief Financial Officer
- ----------------------------------- [Principal Accounting October 20, 1998
James W. Noyce Officer]
- ----------------------------------- Vice President and October 20, 1998
Thomas R. Gibson* Director
- ----------------------------------- Director October 20, 1998
Timothy J. Hoffman*
- ----------------------------------- Director October 20, 1998
Stephen M. Morain*
- ----------------------------------- Director October 20, 1998
William J. Oddy*
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, EquiTrust Life
Annuity Account II, has duly caused this Registration Statement to be signed on
its behalf by the undersigned thereunto duly authorized in the City of West Des
Moines, State of Iowa, on the 20th day of October, 1998.
EquiTrust Life Annuity Account II
(Registrant)
By: EquiTrust Life Insurance Company
(Depositor)
By: /s/ EDWARD M. WIEDERSTEIN
-------------------------------------
Edward M. Wiederstein
PRESIDENT
EquiTrust Life Insurance Company
/s/ STEPHEN M. MORAIN Attorney-In-Fact, Pursuant to
* -----------------------------------, Power of Attorney.
Stephen M. Morain
