<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
File No. 333-57579
File No. 811-08831
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 2 [X]
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
(Exact Name of Registrant)
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(Name of Depositor)
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (309) 766-0886
Laura P. Sullivan
State Farm Life and Accident Assurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland Asbill & Brennan 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 the Registration Statement.
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 30, 1999 pursuant to paragraph (b) of Rule 485
[ ] 80 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED:
Individual variable deferred annuity policies.
<PAGE>
PROFILE DATED MAY 1, 1999
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE AND ACCIDENT ASSURANCE
COMPANY VARIABLE ANNUITY SEPARATE ACCOUNT
OF STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
P.O. BOX 2307
BLOOMINGTON, ILLINOIS, 61702-2307
TELEPHONE: (888) 702-2307 (TOLL FREE)
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD
KNOW AND CONSIDER BEFORE PURCHASING A POLICY. THE FULL PROSPECTUS THAT
ACCOMPANIES THIS PROFILE MORE FULLY DESCRIBES THE POLICY. PLEASE READ THAT
PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
"We," "us," and "our" refer to State Farm Life and Accident Assurance Company.
"You" and "your" refer to the owner of a Policy.
1. WHAT IS THE POLICY?
The Policy is a contract between you and State Farm Life and Accident Assurance
Company. State Farm designed the Policy to be both an investment vehicle and a
source of lifetime retirement income. You purchase the Policy by paying an
initial premium or by making periodic premium payments, or both, and you add
money when you can. When you want annuity payments to begin, you choose an
"Annuity Date," and we will start sending you payments. This profile also
discusses other ways to access your money.
The Policy permits you to allocate premiums to six subdivisions, or
"subaccounts," of the State Farm Life and Accident Assurance Company Variable
Annuity Separate Account (the "Variable Account"). Each subaccount invests in a
corresponding investment portfolio (each, a "Fund") of the State Farm Variable
Product Trust. The value of the premiums you allocate to the Funds will
fluctuate depending on market conditions. Therefore, you bear the investment
risk on your Policy value in the Funds. If you allocate premiums to our fixed
account (the "Fixed Account"), we will guarantee principal and interest. The
Policy value you accumulate before the Annuity Date will determine the amount of
annuity payments you receive.
The Policy offers important features. The Funds are professionally managed. Your
earnings generally grow tax-free until withdrawn, but if you withdraw money
before you are 59 1/2 years old, you may have to pay income tax and an
additional 10% tax penalty. When you decide you want to start receiving annuity
payments, you can choose an annuity option that will provide you with a lifetime
income.
2. WHAT ARE MY ANNUITY OPTIONS?
When you want to begin receiving annuity payments, you can choose from four
annuity options:
LIFE ANNUITY -- You will receive payments as long as the Annuitant lives (for
example, if you have named yourself as the Annuitant, you will receive payments
for as long as you live).
LIFE ANNUITY WITH CERTAIN PERIOD -- You will receive payments as long as the
Annuitant lives or to the end of the certain period, if longer.
JOINT AND LAST SURVIVOR LIFE ANNUITY -- You will receive payments as long as the
Annuitant or a second designated person (such as your spouse) is alive.
FIXED YEAR ANNUITY -- You will receive payments for the number of years you
select.
We will use the money you accumulate under your Policy to provide annuity
payments.
You tell us how much of your money to apply to fixed annuity payments and how
much to apply to variable annuity payments. We will allocate Policy value that
you apply to provide fixed annuity payments to the Fixed Account. Under a "life
annuity," "life annuity with certain period," or a "joint and last survivor life
annuity," the amount of each annuity payment will be the same. Under the "fixed
years" annuity option, the payments will never be less than the minimum payment
stated in the Policy.
We will allocate Policy value that you apply to provide variable annuity
payments to the Funds you select, and the amount of each annuity payment will
vary according to the investment performance of those Funds.
3. HOW DO I PURCHASE A POLICY?
You can purchase a Policy through any one of our authorized agents. Under most
circumstances, the minimum initial premium for a non-tax-qualified Policy is
$1,200 and $600 for tax-qualified Policies. (If you participate in one of our
special monthly payment plans, you may pay monthly premiums of $100 or more for
non-tax-qualified plans and $50 or more for tax-qualified plans). The minimum
initial premium requirements are higher if you are age 66 or more. You may pay
additional premiums of at least $50 at any time before the Annuity Date.
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You may purchase a tax-qualified Policy if you are at least 16 years old and not
older than age 70 (age 85 for a Roth IRA, age 80 for a Roth IRA in New York).
You may purchase a non-tax-qualified Policy if you are not more than 85 years
old (80 years old in New York).
4. WHAT ARE MY ALLOCATION OPTIONS?
There are seven different allocation options under the Policy. You can allocate
premiums to one or more of the six "subaccounts" of the Variable Account. Each
subaccount, in turn, invests in a corresponding Fund of the State Farm Variable
Product Trust. The six Funds are:
- Large Cap Equity Index Fund
- Small Cap Equity Index Fund
- International Equity Index Fund
- Stock and Bond Balanced Fund
- Bond Fund
- Money Market Fund
You can also allocate premiums to the Fixed Account. We will pay you interest on
your Policy value in the Fixed Account at an effective annual rate of at least
3%.
5. WHAT ARE THE EXPENSES UNDER THE POLICY?
Insurance Charges. Once each year, we deduct a $30 Annual Administrative Fee. We
currently waive this charge if the amount of total premiums you have paid is at
least $50,000.
We also deduct a daily mortality and expense risk charge from the assets of the
Variable Account, currently equal on an annual basis to 1.15%.
Surrender Charge. State Farm may deduct a surrender charge (1) when you make a
withdrawal or surrender the Policy, (2) when you take annuity payments, or (3)
when we pay proceeds upon your death (unless you are also the Annuitant). We
will not deduct a surrender charge on annuitization if the Policy has been in
force at least five Policy Years and if the payments are made under a "life
annuity," "life annuity with certain period," or a "joint and last survivor life
annuity." We do not deduct a surrender charge when a Death Benefit is paid upon
the Annuitant's death, regardless of how many Policy years have elapsed or how
the Death Benefit is paid. We calculate the surrender charge as a percentage of
the amount withdrawn or surrendered. The applicable percentage is 7% in the
first Policy Year, and declines by 1% in each following Policy Year, until it
reaches 0% in the eighth Policy Year.
Fund Expenses. There are Fund expenses, which, in 1998, ranged on an annual
basis from 0.32% to 0.75% of the average daily value of your money invested in
the Funds.
The following chart is designed to help you understand the expenses that you
will pay under the Policy.
The column "Total Annual Insurance Charges" shows the total of the $30 Annual
Administrative Fee (which, for purposes of the chart, is assumed to be 0.77% of
the value of an average Policy which is assumed to be $3,900) and the 1.15%
mortality and expense risk charge.
The column "Total Annual Fund Charges" shows the investment charges for each
Fund. The charges shown for each Fund reflect the fact that the investment
adviser to the Funds has agreed to bear the expenses incurred by a Fund (other
than the Stock and Bond Balanced Fund and the International Equity Index Fund),
other than the investment advisory fee, that exceed 0.10% of such Fund's average
daily net assets. The investment adviser to the Funds has agreed to bear the
expenses incurred by the International Equity Index Fund, other than the
investment advisory fee, that exceed 0.20% of that Fund's average daily net
assets. These expense limitations are voluntary and the adviser may terminate
them at any time.
The column "Total Annual Charges" shows the combined total of the Total Annual
Insurance Charges and Total Annual Fund Charges columns.
The next two columns show you two examples of the charges, in dollars, you would
pay under a Policy for each $1,000 you paid when you purchased the Policy. The
examples use the average Policy Accumulation Value of $3,900 and assume that the
Annual Administrative Fee is 0.77% and that your Policy earns 5% annually before
charges. For more information about the expenses under the Policy, refer to the
"Fee Table" in the full prospectus that accompanies this Profile.
<TABLE>
<CAPTION>
IF YOU SURRENDER
OR ANNUITIZE ALL CHARGES
TOTAL YOUR POLICY AT THE EXCLUDING
ANNUAL END OF 1 YEAR YOU SURRENDER CHARGES,
INSURANCE TOTAL ANNUAL TOTAL WOULD PAY THE ASSESSED OVER
FUND(1) CHARGES FUND CHARGES ANNUAL CHARGES FOLLOWING EXPENSES A 10 YEAR PERIOD
<S> <C> <C> <C> <C> <C>
Large Cap Equity Index
Fund 1.92% 0.32% 2.24% $ 95 $ 263
Small Cap Equity Index
Fund 1.92% 0.50% 2.42% $ 97 $ 281
International Equity
Index Fund 1.92% 0.75% 2.67% $ 99 $ 306
Money Market Fund 1.92% 0.43% 2.35% $ 96 $ 274
Bond Fund 1.92% 0.57% 2.49% $ 98 $ 288
Stock and Bond
Balanced Fund 1.92% 0.42%(1) 2.34% $ 96 $ 273
</TABLE>
(1) The investment adviser to the Funds has agreed not to be paid an investment
advisory fee for performing its services for the Stock and Bond Balanced
Fund and has agreed to bear any other expenses incurred by the Stock and
Bond Balanced Fund. (The investment adviser may change this at any time.)
However, the investment adviser will receive investment advisory fees from
managing the underlying Funds in which the Stock and Bond Balanced Fund
invests -- the Large Cap Equity Index Fund and the Bond Fund. Under normal
circumstances, the Stock and Bond Balanced Fund will attempt to maintain
approximately 60% of its net assets in shares of the Large Cap Equity Index
Fund and approximately 40% of its net assets in shares of the Bond Fund.
Based on these percentages, an approximate investment advisory fee can be
derived for the Stock and Bond Balanced Fund. This derived fee is used for
the purpose of showing the Stock and Bond Balanced Fund's annual expenses in
the table above. The underlying funds will also incur other expenses of up
to 0.10% (up to 0.20% for the International Equity Index Fund) which are
also reflected in the table above.
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2
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6. HOW WILL MY INVESTMENT IN THE POLICY BE TAXED?
You should consult a qualified tax adviser with regard to your Policy.
Generally, taxation of earnings under variable annuities is deferred until
amounts are withdrawn and distributions made. The deferral of taxes on earnings
under variable annuity policies is designed to encourage long-term personal
savings and supplemental retirement plans. The taxable portion of a withdrawal
or distribution is taxed as ordinary income and in certain circumstances may be
subject to a 10% penalty tax.
7. HOW DO I ACCESS MY MONEY?
Prior to the Annuity Date, you can choose among several different options if you
want to take money out of your Policy:
- You can withdraw part of your money (a surrender charge may apply).
- You can surrender the Contract, taking the proceeds as a single lump sum
payment or applying the proceeds to an annuity option (a surrender charge
may apply).
- You can also take withdrawals using our systematic withdrawal program (a
surrender charge may apply).
After the Annuity Date, if you have selected the "fixed year" annuity option,
you may request withdrawals.
The amount of the surrender charge that may apply to withdrawals and surrenders
you take before the Annuity Date ranges from 7% of the amount withdrawn or
surrendered in the first Policy Year to 0% in the eighth Policy Year.
Withdrawals and surrenders may be subject to income tax and to a tax penalty.
8. HOW IS THE PERFORMANCE OF THE POLICY PRESENTED?
The value of your Policy will fluctuate depending on the investment performance
of the Funds in which your selected Subaccounts invest. As of December 31, 1998,
The Subaccounts had not completed one full year of operations. Therefore, no
performance data is presented.
9. DOES THE POLICY HAVE A DEATH BENEFIT?
The Policy offers a minimum Death Benefit if the Annuitant dies before the
Annuity Date. The amount of the Death Benefit will be the greater of (1) the sum
of all premiums paid less any withdrawals and less any applicable surrender
charges deducted, or (2) the value of your Policy. We will determine both
amounts as of the end of the Valuation Period during which we receive due proof
of death.
10. WHAT OTHER INFORMATION SHOULD I KNOW?
The Policy has several additional features, including the following:
Free-Look Right. You have a "free-look right"; that is, the right to return the
Policy to us at our Home Office or to an authorized State Farm agent and have us
cancel the Policy within a certain number of days (usually 10 days from the date
you receive the Policy, but some states require different periods). If you
exercise this right, we will cancel the Policy as of the day of mailing or
delivery and send you a refund equal to the greater of (1) the premiums paid
under the Policy, or (2) your Policy value (without the deduction of a surrender
charge). We allocate all premiums to the Fixed Account during the free-look
period. For this purpose, we assume your free-look period starts 10 days after
we issue your Policy.
Transfers. On or before the Annuity Date, you may transfer Policy value from one
Subaccount to another Subaccount(s) or to the Fixed Account. The minimum amount
of Policy value that may be transferred from a Subaccount is $250, or, if less,
the entire Policy value in that Subaccount. You may also transfer Policy value
from the Fixed Account to another Subaccount(s), but only once each Policy year
and only during the 30-day period following the end of each Policy year. The
maximum amount that you may transfer from the Fixed Account is generally the
greater of 25% of the Policy value in the Fixed Account or $1,000.
After the Annuity Date the only type of transfer permitted is a transfer of
annuity units from one Subaccount to another Subaccount. This is limited to four
transfers per year and only applies if variable annuity payments have been
elected.
Dollar-Cost Averaging. Our dollar-cost averaging program permits you to
systematically transfer a set dollar amount from the Subaccount investing in the
Money Market Fund or the Subaccount investing in the Bond Fund to any
Subaccounts and/or the Fixed Account, subject to certain limitations.
Portfolio Rebalancing Program. The Portfolio Rebalancing program will reallocate
on a periodic basis your Policy value among the Subaccounts to return to the
percentages you have chosen. Certain limitations apply.
Systematic Withdrawal Program. Our systematic withdrawal program provides an
automatic monthly, quarterly, semi-annual or annual payment to you from the
amounts you have accumulated in the Subaccounts and/or the Fixed Account.
Surrender charges may apply and certain restrictions apply.
11. HOW CAN I MAKE INQUIRIES?
If you need further information about the Policy, please write us at our home
office, call us at (888) 702-2307 (toll free), or contact an authorized State
Farm Agent. The address of our home office is:
State Farm Life and Accident Assurance Company
P.O. Box 2307
Bloomington, IL 61702-2307
Telephone: (888) 702-2307 (Toll free)
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<PAGE>
PROSPECTUS DATED MAY 1, 1999
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
OF STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
P.O. BOX 2307
BLOOMINGTON, ILLINOIS 61702-2307
TELEPHONE: (888) 702-2307 (TOLL FREE)
UNLESS OTHERWISE INDICATED, THIS PROSPECTUS DESCRIBES THE POLICY'S OPERATION
BEFORE THE ANNUITY DATE. PLEASE REFER TO THE INDEX OF TERMS FOR DEFINITIONS OF
CERTAIN TERMS USED IN THIS PROSPECTUS.
State Farm Life and Accident Assurance Company ("State Farm," "we," "us," or
"our") is offering the individual variable deferred annuity policy described in
this prospectus. State Farm designed the variable annuity policy (the "Policy")
to be both an investment vehicle and a source of lifetime retirement income. The
purchaser of a Policy (the "Owner," "you," or "your") can purchase the Policy by
making a minimum initial premium payment, by making periodic payments under a
special monthly purchase plan, or both.
You may purchase a tax-qualified Policy if you are at least 16 years old and not
older than age 70 (age 85 for a Roth IRA, age 80 for a Roth IRA in New York).
You may purchase a non-tax-qualified Policy if you are not more than 85 years
old (80 years old in New York).
The Owner determines the amount and timing of additional premium payments, and
may allocate premiums and transfer Policy Accumulation Value
- to the State Farm Life and Accident Assurance Company Variable Annuity
Separate Account (the "Variable Account"), and
- to State Farm's general account (the "Fixed Account").
The Variable Account is divided into subaccounts (each, a "Subaccount"). Each
Subaccount invests in a corresponding investment portfolio ("Fund") of State
Farm Variable Product Trust (the "Trust"). The Funds currently available are:
- Large Cap Equity Index Fund
- Small Cap Equity Index Fund
- International Equity Index Fund
- Bond Fund
- Money Market Fund
- Stock and Bond Balanced Fund
The accompanying prospectus for the Trust describes each of the portfolios,
including the risks of investing in each portfolio, and provides other
information about the Trust.
The Policy provides for a Cash Surrender Value. Because this value is based on
the performance of the Funds, to the extent of allocations to the Variable
Account, there is no guaranteed Cash Surrender Value or guaranteed minimum Cash
Surrender Value. On any given day, the Cash Surrender Value could be more or
less than the premiums paid. The Policy also permits withdrawals, within certain
limits.
The Policy provides additional benefits including:
- four annuity options
- a minimum Death Benefit upon the Annuitant's death
- dollar cost averaging, portfolio rebalancing and systematic withdrawal
programs.
This prospectus sets forth information about the Policy and the Variable Account
that you should know before purchasing a Policy. Please read this prospectus
carefully and retain it for future reference. A prospectus or prospectus profile
for the State Farm Variable Product Trust must accompany this prospectus and
should be read in conjunction with this prospectus.
A Statement of Additional Information ("SAI") contains additional information
about the Policy and the Variable Account. We filed the SAI with the Securities
and Exchange Commission and the SAI has the same date as this prospectus. The
SAI is incorporated herein by reference. The Table of Contents for the SAI is on
page 18 of this prospectus. You may obtain a free copy of the SAI by writing to
or calling State Farm at the address or phone number shown above. The SEC
maintains an Internet site at http://www.sec.gov that contains the SAI, material
incorporated by reference, and other information regarding the Policy and the
Variable Account.
INTERESTS IN THE POLICIES AND SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF OR GUARANTEED BY A BANK, AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THE
POLICIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Index of Terms 2
Fee Table 3
EXAMPLE 4
Condensed Financial Information 4
1. What is the Policy? 5
2. What are my Annuity Options? 5
3. How Do I Purchase A Policy? 6
Applying for a Policy 6
Initial Premium 6
Issuance of a Policy 6
Exchange Privilege: Variable Deferred Annuity 6
Free-Look Right to Cancel Policy 6
Making Additional Premium Payments 7
4. What Are My Allocation Options? 7
Premium Allocations 7
Subaccount Options 7
Fixed Account Option 8
Transfers 8
Dollar-Cost Averaging 8
Portfolio Rebalancing Program 8
Policy Accumulation Value 9
Cash Surrender Value 9
Subaccount Policy Accumulation Value 9
Accumulation Unit Value 9
Net Investment Factor 9
Fixed Policy Accumulation Value 9
5. What are the Expenses Under the Policy? 9
Surrender Charge 10
Annual Administrative Fee 10
Transfer Processing Fee 10
Mortality and Expense Risk Charge 10
Fund Expenses 10
6. How Will My Investment in the Policy
be Taxed? 10
Introduction 10
Tax Status of the Policies 11
Tax Treatment of Annuities 11
Taxation of Non-Qualified Policies 11
Taxation of Qualified Policies 12
Other Tax Consequences 13
7. How Do I Access My Money? 13
Withdrawals 13
Surrenders 14
Systematic Withdrawal Program 14
Requesting Payments and Telephone
Transactions 14
8. How Is the Performance of the Policy
Presented? 14
9. Does the Policy Have A Death Benefit? 15
10. What Other Information Should I Know? 15
State Farm and the Variable Account 15
Preparing for Year 2000 17
Modification 17
Distribution of the Policies 17
Legal Proceedings 17
Reports to Policy Owners 17
Insurance Marketplace Standards Association 17
Financial Statements 17
11. How Can I Make Inquiries? 17
Table of Contents of the Statement of Additional
Information 18
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS.
THIS PROSPECTUS CONSTITUTES AN OFFERING
ONLY IN THOSE JURISDICTIONS WHERE SUCH OFFERING
MAY LAWFULLY BE MADE.
1 -------
<PAGE>
INDEX OF TERMS
ACCUMULATION UNIT -- A unit of measure used to calculate Variable Policy
Accumulation Value.
ACCUMULATION UNIT VALUE -- The value of a Subaccount's Accumulation Unit. A
Subaccount's Accumulation Unit Value varies to reflect the performance of the
underlying Fund, and may increase or decrease from Valuation Day to Valuation
Day.
ANNUITANT -- The person whose life determines the Annuity Payments payable under
the Policy and whose death determines the Death Benefit.
ANNUITY DATE -- You may choose this date, which can be no later than the Final
Annuity Date. If a Death Benefit is payable and an annuity option is chosen, the
Annuity Date will be the date at the end of the Valuation Period during which we
receive due proof of the Annuitant's death. Payment intervals start on this
date. The first annuity payment is at the end of the first payment interval.
CASH SURRENDER VALUE -- The Policy Accumulation Value less any applicable
Surrender Charge and less any applicable Annual Administrative Fee.
CODE -- The United States Internal Revenue Code of 1986, as amended.
FINAL ANNUITY DATE -- The Policy Anniversary when the Annuitant is age 95 (90 in
New York).
FIXED ACCOUNT -- Part of our General Account to which you may transfer Policy
Accumulation Value or allocate premium payments under a Policy.
FIXED ANNUITY PAYMENT -- An annuity payment supported by our General Account.
Under a "life annuity," "life annuity with certain period," or a "joint and last
survivor life annuity," the amount of each annuity payment will be the same.
Under the "fixed years" annuity option, the payments will never be less than the
minimum stated in the Policy.
FIXED POLICY ACCUMULATION VALUE -- The Policy Accumulation Value in the Fixed
Account.
GENERAL ACCOUNT -- Our assets not allocated to the Variable Account or any other
separate account.
HOME OFFICE -- P.O. Box 2307, Bloomington, Illinois 61702-2307. Telephone: (888)
702-2307 (toll free).
INITIAL PREMIUM PAYMENT -- The amount shown in the Policy that you paid on the
Policy Date.
NET ASSET VALUE PER SHARE -- The value per share of any Fund on any Valuation
Day. The prospectus for the Trust describes the method of computing the Net
Asset Value Per Share.
PAYEE -- If the Annuitant dies prior to the Annuity Date and a Death Benefit is
payable, the payee is the beneficiary(ies) shown in the application, unless
changed. If you cash surrender the Policy, the payee is the person(s) that you
have named. A payee can be other than a natural person only if we agree.
POLICY ACCUMULATION VALUE -- The sum of the Variable Policy Accumulation Value
and the Fixed Policy Accumulation Value.
POLICY DATE -- The effective date of this Policy.
POLICY MONTH, YEAR, OR ANNIVERSARY -- Each Policy Month, Year, or Anniversary is
measured from the Policy Date.
REQUEST -- A written request signed by the person making the request. Such
request must be sent to and received by us and be in a form acceptable to us. We
may, in our sole discretion, accept telephone requests in connection with
certain transactions, in accordance with rules and procedures we establish.
SEC -- The United States Securities and Exchange Commission.
SUBACCOUNT -- A subdivision of the Variable Account, the assets of which are
invested in a corresponding Fund.
SUBACCOUNT POLICY ACCUMULATION VALUE -- The Policy Accumulation Value in a
Subaccount.
SUCCESSOR OWNER -- Your Successor Owner is named in the application if you are
not the Annuitant.
VALUATION DAY -- Each day on which both the New York Stock Exchange and the Home
Office are open for business except for a day that a Subaccount's corresponding
Fund does not value its shares. The New York Stock Exchange is currently closed
on weekends and on the following holidays: New Year's Day; Reverend Dr. Martin
Luther King Jr. Holiday; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
VALUATION PERIOD -- The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT -- A separate account of ours consisting of Subaccounts to
which you may allocate premium payments or transfer Policy Accumulation Value.
VARIABLE ANNUITY PAYMENT -- An annuity payment that may vary in amount from one
payment to the next with the investment experience of one or more Subaccounts
you have chosen to support such payments.
VARIABLE POLICY ACCUMULATION VALUE -- The sum of all Subaccount Policy
Accumulation Values.
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2
<PAGE>
FEE TABLE
The purpose of this Fee Table is to assist you in understanding the expenses
that you will pay directly or indirectly when you invest in the Policy.
POLICY OWNER TRANSACTION EXPENSES
Surrender Charge (1)
<TABLE>
<CAPTION>
YEAR % OF AMOUNT WITHDRAWN
<S> <C>
1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
8 and over 0%
Transfer Processing Fee No charge for first 12
transfers
in a Policy Year;
thereafter, State Farm may
charge a $25 fee per
transfer
Annual Administrative Fee $30 (waived if total
premiums paid are at least
$50,000)
VARIABLE ACCOUNT ANNUAL
EXPENSES
(AS A PERCENTAGE OF VARIABLE
ACCOUNT VALUE)
Mortality and Expense Risk
Charge 1.15%(2)
</TABLE>
(1) After the first Policy Year, you may withdraw a portion of your Policy
Accumulation Value without incurring a surrender charge. This amount is
called the "Free Withdrawal Amount." The Free Withdrawal Amount is equal
to 10% of your Policy Accumulation Value as of the previous Policy
Anniversary. If the entire 10% is not withdrawn in a particular Policy
Year, the unused Free Withdrawal Amount does not carry over to the next
Policy Year. The surrender charge may be waived in certain additional
circumstances. We cannot deduct more than 8 1/2% of the total premiums
you have paid under the Policy. See "Surrender Charge," page 10.
(2) The amount shown in the Fee Table reflects the mortality and expense
risk charge currently charged. The maximum mortality and expense risk
charge that we can charge is 1.25%. See "Mortality and Expense Risk
Charge," page 10.
TABLE A
FUND ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
The investment advisory fees shown below are the actual amounts incurred in the
fiscal year ended December 31, 1998 for each of the Funds. The Stock and Bond
Balanced Fund invests primarily in the Large Cap Equity Index Fund and the Bond
Fund. The Stock and Bond Balanced Fund will not pay investment advisory fees
directly, but will indirectly bear its share of the investment advisory fees
incurred by the Large Cap Equity Index Fund and the Bond Fund. Therefore, the
investment results of the Stock and Bond Balanced Fund will be net of these
fees. The relative amounts that the Stock and Bond Balanced Fund invests in the
Large Cap Equity Index Fund and the Bond Fund at any one time will fluctuate,
but under normal circumstances, the Stock and Bond Balanced Fund will attempt to
maintain approximately 60% of its net assets in shares of the Large Cap Equity
Index Fund and approximately 40% of its net assets in shares of the Bond Fund.
Based on these percentages, an approximate investment advisory fee was derived
for the Stock and Bond Balanced Fund. This derived fee is used for the purpose
of showing the Stock and Bond Balanced Fund's annual expenses in the table below
and for purposes of the Example below.
By investing in the Large Cap Equity Index Fund and the Bond Fund, the Stock and
Bond Balanced Fund will indirectly bear its share of those underlying Funds'
Other Expenses and will incur its own Other Expenses. Other Expenses reflect the
fact that the investment adviser to the Funds has agreed to bear the expenses
incurred by each Fund (other than the International Equity Index Fund), other
than the investment advisory fee, that exceed 0.10% of such Fund's average daily
net assets, and that the investment adviser to the Funds has
3 -------
<PAGE>
agreed to bear all of the Stock and Bond Balanced Fund's own Other Expenses. The
investment adviser to the Funds has agreed to bear the expenses incurred by the
International Equity Index Fund, other than the investment advisory fee, that
exceed 0.20% of that Fund's average daily net assets. These expense limitation
arrangements are voluntary and the investment adviser can eliminate them at any
time.
<TABLE>
<CAPTION>
OTHER EXPENSES TOTAL ANNUAL EXPENSES
INVESTMENT (AFTER EXPENSE LIMITATION) (AFTER EXPENSE LIMITATION)
FUND ADVISORY FEES (3) (3)
<S> <C> <C> <C>
Large Cap Equity Index
Fund 0.26% 0.06% 0.32%
Small Cap Equity Index
Fund 0.40% 0.10% 0.50%
International Equity Index
Fund 0.55% 0.20% 0.75%
Money Market Fund 0.40% 0.03% 0.43%
Bond Fund 0.50% 0.07% 0.57%
Stock and Bond Balanced
Fund 0.36% 0.06% 0.42%
</TABLE>
(3) Absent this expense limitation, Other Expenses for the Small Cap Equity
Index Fund, International Equity Index Fund, and Money Market Fund would be
0.15%, 0.38%, and 0.12%, respectively. During the year ended December 31,
1998, the investment advisor reimbursed a greater amount of expenses of the
Money Market Fund than required under the agreement, further reducing that
Fund's other expenses to 0.03%.
EXAMPLE
The purpose of the following Example is to demonstrate the expenses that you
would pay on a $1,000 investment in the Variable Account. The Example is
calculated based on the fees and charges shown in the tables above. For a more
complete description of these expenses, see "What are the expenses under the
Policy?" beginning on page 9 of this prospectus, and see the prospectus for the
Trust. The Example uses the average Policy Accumulation Value of $3,900, so that
the Annual Administration Fee is 0.77%. The tables above and the Example do not
reflect transfer processing fees. You might incur transfer processing fees if
you make more than twelve transfers in a Policy Year. See "Transfer Processing
Fee," page 10. The Example assumes you have invested all your money in the
Variable Account.
<TABLE>
<CAPTION>
YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INITIAL
PREMIUM, ASSUMING A 5% ANNUAL
RETURN ON ASSETS AND THE CHARGES 1. IF YOU SURRENDER OR ANNUITIZE YOUR POLICY AT 2. IF YOU DO NOT SURRENDER OR
AND EXPENSES LISTED IN THE FEE ANNUITIZE YOUR POLICY AT THE END OF
TABLE ABOVE: THE END OF THE STATED TIME PERIOD: THE STATED TIME PERIOD:
SUBACCOUNT 1 YR 3 YRS 5 YRS 10 YRS 1 YR 3 YRS 5 YRS
<S> <C> <C> <C> <C> <C> <C> <C>
Large Cap Equity Index $ 95 $ 121 $ 154 $ 263 $ 23 $ 72 $ 123
Small Cap Equity Index $ 97 $ 126 $ 163 $ 281 $ 25 $ 77 $ 132
International Equity Index $ 99 $ 133 $ 175 $ 306 $ 28 $ 85 $ 145
Bond $ 98 $ 128 $ 166 $ 288 $ 26 $ 79 $ 136
Money Market $ 96 $ 124 $ 159 $ 274 $ 24 $ 75 $ 128
Stock and Bond Balanced $ 96 $ 123 $ 159 $ 273 $ 24 $ 75 $ 128
<CAPTION>
YOU WOULD PAY THE FOLLOWING
EXPENSES ON A $1,000 INITIAL
PREMIUM, ASSUMING A 5% ANNUAL
RETURN ON ASSETS AND THE CHARGES
AND EXPENSES LISTED IN THE FEE
TABLE ABOVE:
SUBACCOUNT 10 YRS
<S> <C>
Large Cap Equity Index $ 263
Small Cap Equity Index $ 281
International Equity Index $ 306
Bond $ 288
Money Market $ 274
Stock and Bond Balanced $ 273
</TABLE>
Please do not consider the Example as a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual rate of return is hypothetical and you should not consider it a
representation of past or future annual returns, which may be greater or less
than this assumed rate.
CONDENSED FINANCIAL INFORMATION
The following table shows the value of an Accumulation Unit for each Subaccount
and how it has changed since the Variable Account began operations through the
fiscal year ended December 31, 1998. Please read the information in conjunction
with the financial statements, related notes and other financial information in
the Statement of Additional Information.
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION
ACCUMULATION UNIT ACCUMULATION UNIT UNITS
VALUE AT VALUE AT OUTSTANDING AT
SUBACCOUNT BEGINNING OF YEAR END OF YEAR END OF YEAR
<S> <C> <C> <C>
Large Cap Equity Index 10.00 12.29 2,268,942
Small Cap Equity Index 10.00 9.66 1,165,425
International Equity Index 10.00 11.20 1,082,872
Money Market 10.00 10.36 780,326
Bond 10.00 10.56 1,087,169
Stock and Bond Balanced 10.00 11.35 472,461
</TABLE>
FINANCIAL STATEMENTS -- The Statement of Additional Information includes
financial statements for the Variable Account and State Farm, and the reports of
the independent accountants.
- ---------
4
<PAGE>
1. WHAT IS THE POLICY?
The Policy is an individual variable deferred annuity policy that State Farm
Life and Accident Assurance Company offers. Under the terms of the Policy, we
promise to pay you annuity payments after the Annuity Date. Until the Annuity
Date, you may pay premiums under the Policy, and you will generally not be taxed
on increases in the value of your Policy as long as you do not take
distributions. When you use the Policy in connection with a tax-qualified
retirement plan, federal income taxes may be deferred on your premium payments,
as well as on increases in the value of your Policy. See "How Will My Investment
in the Policy be Taxed?," page 10. The Policy may not be available in all
states.
When you pay premiums, you can allocate those premiums to one or more of the six
subdivisions (also known as "Subaccounts") of the Variable Account. When you
allocate premiums to a Subaccount(s), we will invest those premiums solely in
the Fund(s), as you direct. Your Policy value in a Subaccount, called the
"Subaccount Policy Accumulation Value," will vary according to the performance
of the corresponding Fund(s). Depending on market conditions, your Subaccount
Policy Accumulation Value in each Subaccount could increase or decrease. The
total of the Subaccount Policy Accumulation in each Subaccount is called the
Variable Policy Accumulation Value.
You can also allocate premiums to our Fixed Account. Your Policy value in the
Fixed Account is called the Fixed Policy Accumulation Value. When you allocate
premium to the Fixed Account, we guarantee principal and interest. See "Fixed
Account Option," page 8.
You can request that we transfer Policy Accumulation Value from one account to
another, subject to certain conditions. See "Transfers," page 8.
2. WHAT ARE MY ANNUITY OPTIONS?
- You choose the Annuity Date when you want annuity payments to begin. The
Annuity Date must come on or before the Final Annuity Date, which is the
Policy Anniversary when the Annuitant is age 95 (90 in New York). You
select an annuity option from those listed below, and indicate whether you
want your annuity payments to be fixed or variable or a combination of
fixed and variable.
- If you do not select an annuity option for the Cash Surrender Value by the
Final Annuity Date, we will pay you the Cash Surrender Value under Annuity
Option 1.
- On the Annuity Date, we will use the Cash Surrender Value under the Policy
to provide annuity payments.
If your Policy has been in force for at least five Policy Years, and you choose
a "life annuity," "life annuity with certain period," or a "joint and last
survivor life annuity," we will not deduct a surrender charge. Unless you
request otherwise, we will provide variable annuity income using any money that
you have invested in the Subaccounts, and we will provide a fixed annuity income
using any money that you have invested in the Fixed Account.
We will base your first annuity payment, whether fixed or variable, on the
amount of proceeds applied under the annuity option you have selected and on
"annuity purchase rates" based on the Annuitant's age and sex and, if
applicable, upon the age and sex of a second designated person. The annuity
purchase rate that we apply will never be lower than the rate shown in your
Policy.
If you have told us you want fixed annuity payments, under a "life annuity,"
"life annuity with certain period," or a "joint and last survivor life annuity,"
the amount of each annuity payment will be the same. Under the "fixed years"
annuity option, the payments will never be less than the minimum payment stated
in the Policy.
If you told us you want variable annuity payments, the amount of variable
annuity payments will vary according to the investment performance of the Funds
you have selected to support your variable annuity payments.
You can choose either 1, 3, 6, or 12 month intervals to receive annuity
payments. Payment intervals start on the Annuity Date. The first annuity payment
is made at the end of the first payment interval. If any payment would be less
than $100, we may change the payment interval to the next longer interval. If on
the Annuity Date the payment for the 12 month interval is less than $100, we may
pay the Cash Surrender Value on that date in one sum.
5 -------
<PAGE>
We may require satisfactory proof that the Annuitant is living when each annuity
payment is due. If proof is required, payments will stop until such proof is
given. If any payment is made by check and the Annuitant personally endorses the
check on or after the date on which such payment is due, no other proof will be
required.
If you have selected the "fixed years" annuity option, you may request
withdrawals at any time.
The available annuity options are:
Option 1 -- Life Annuity. Payments will be made to you at the end of each
payment interval as long as the Annuitant lives.
Option 2 -- Life Annuity with Certain Period. Payments will be made to you at
the end of each payment interval as long as the Annuitant lives or to the end of
the certain period, if longer. The certain period can be any number of years
from 5 to 20. You must choose the number of years if you choose this option.
However, for payments under a tax-qualified plan, the certain period cannot
exceed the life expectancy of the Owner.
Option 3 -- Joint and Last Survivor Life Annuity. Payments will be paid to you
at the end of each payment interval as long as the Annuitant or a second
designated person is alive. You must name the second person on or before the
Annuity Date.
Option 4 -- Fixed Years. Payments will be made to you at the end of each payment
interval for the number of years chosen. You must choose the number of years
from 5 to 30. However, for payments under a tax-qualified plan, the number of
years chosen cannot exceed the life expectancy of the Owner.
You may elect State Farm's "Additional Deposit Rider." This feature is available
only in connection with certain tax-qualified Policies. The Additional Deposit
Rider permits you to make a single premium payment at the time you select an
Annuity Option in order to increase the amount of payment under the annuity
option you select. We deduct an additional charge from the premium payment for
this rider.
3. HOW DO I PURCHASE A POLICY?
Applying for a Policy. To purchase a Policy, you must
- complete an application and submit it to an authorized State Farm agent,
and
- pay an initial premium at least equal to the minimum required and/or make
periodic payments under a special monthly payment plan.
See "Initial Premium," below. We reserve the right to reject an application for
any lawful reason.
Initial Premium. You may purchase the Policy to use in connection with
tax-qualified plans, or on a non-tax-qualified basis.
- To purchase a non-tax-qualified Policy, you may not be more than 85 years
old (80 years old in New York) on the Policy Date.
- To purchase a tax-qualified Policy, you must be at least 16 years old and
not older than 70 years old (85 years old for Roth IRA, 80 for a Roth IRA
in New York) on the Policy Date.
You must also make a minimum initial premium payment or make periodic payments
under a special monthly payment plan, depending on how old you are and whether
you are purchasing a tax-qualified or non-tax-qualified Policy, as shown in the
following table:
<TABLE>
<CAPTION>
ISSUE AGE ISSUE AGE
0-65 66 OR MORE
<S> <C> <C>
Minimum initial premium
required for
non-tax-qualified policy $1,200 $ 5,000
($100 PER
MONTH
FOR SPECIAL
MONTHLY
PAYMENT PLAN)
Minimum initial premium
required for
tax-qualified policy $600 $ 25,000
($50 PER MONTH ($2,000 FOR
FOR SPECIAL ROTH IRA)
MONTHLY
PAYMENT PLAN)
</TABLE>
Issuance of a Policy. Once we receive your initial premium and your completed
application at our Home Office, we will usually issue your Policy within two
Valuation Days. However, if you did not give us all the information we need, we
will try to contact you to get the additional needed information. If we cannot
complete the application within five Valuation Days, we will either send your
money back or obtain your permission to keep your money until we receive all the
necessary information.
The Policy Date of your Policy will be the date we receive the initial premium,
except when we receive the premium on the 29th, 30th, or 31st of any month. The
Policy Date of these Policies will be the 28th of that month.
Exchange Privilege: Variable Deferred Annuity. State Farm will permit the policy
owner of a State Farm deferred annuity contract which has not yet been
annuitized to exchange such contract for a Policy. If you exchange a State Farm
deferred annuity for a Policy, State Farm will waive any surrender charge on the
deferred annuity. We can change this program at any time.
Free-Look Right to Cancel Policy. During your "free-look" period, you may cancel
your Policy. The free-look period expires 10 days after you receive your Policy.
Some states may require a longer period. If you decide to cancel the Policy, you
must return it by mail or other delivery method to State Farm or
- ---------
6
<PAGE>
to an authorized State Farm agent. Immediately after mailing or delivery, the
Policy will be deemed void from the beginning. You will receive a refund equal
to the greater of:
(1) the premium payments made under the Policy during the free-look
period; or
(2) the Policy Accumulation Value (without the deduction of a surrender
charge) at the end of the Valuation Period when we receive the Policy at our
Home Office (if you return the Policy to the Home Office), or when our agent
receives the Policy (if you return the Policy to the agent) for
cancellation.
Making Additional Premium Payments. You may pay additional premiums of $50 or
more at any time before the Annuity Date. You may arrange to pay monthly
premiums via automatic deduction from your checking account. For any premium we
receive after the Policy Date, State Farm will credit the premium to the Policy
as of the end of the Valuation Period when we receive the premium at our Home
Office. We reserve the right to refuse a premium if total premiums paid in a
Policy Year would exceed $30,000.
4. WHAT ARE MY ALLOCATION OPTIONS?
Premium Allocations. When you apply for a Policy, you specify the percentage of
premium you wish to allocate to each Subaccount of the Variable Account and to
the Fixed Account.
- Premium allocations must be in percentages totaling 100%, and each
allocation percentage must be a whole number.
- You can change the allocation percentages at any time by sending a
satisfactory written or telephone request to our Home Office (provided we
have your telephone authorization on file). The change will apply to all
premiums received at the same time or after we receive your request.
Until the free-look period expires, we allocate all premiums to the Fixed
Account. At the end of this period, we transfer Policy Accumulation Value to the
Subaccounts and/or leave it in the Fixed Account based on the premium allocation
percentages in effect at the time of the transfer. For this purpose, we assume
your free-look period begins 10 days after we issue your Policy. The transfer
from the Fixed Account to the Subaccounts upon the expiration of the free-look
period does not count as a transfer for any other purposes under the Policy.
Subaccount Options. The Variable Account has six Subaccounts, each investing in
a specific Fund of the Trust. The Trust is a series-type fund registered with
the Securities and Exchange Commission as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
State Farm Investment Management Corp. ("SFIM") serves as the investment adviser
of the Trust and conducts the business and affairs of the Trust. SFIM has
engaged Barclays Global Fund Advisors as the investment sub-adviser to provide
day-to-day portfolio management for the Large Cap, Small Cap, and International
Equity Index Funds. The paragraphs below summarize the investment objective(s)
of each of the Funds in which Subaccounts invest. There is no assurance that any
Fund will meet its objective(s).
- The Large Cap Equity Index Fund seeks to match the performance of the
Standard & Poor's Composite Index of 500 Stocks-Registered Trademark-(2).
This Fund will pursue its objective by investing primarily on a
capitalization-weighted basis in the securities that make up the S&P 500.
- The Small Cap Equity Index Fund seeks to match the performance of the
Russell 2000 Small Stock Index-Registered Trademark-(3). This Fund will
pursue its objective by investing primarily in a representative sample of
stocks found in the Russell 2000.
- The International Equity Index Fund seeks to match the performance of the
Morgan Stanley Capital International Europe, Australia and Far East Free
Index-Registered Trademark- (the "EAFE Free")(4). This Fund will pursue
its objective by investing primarily in a representative sample of stocks
found in the EAFE Free.
- The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and
capital gains. This Fund will pursue its objective by investing primarily
in good quality bonds issued by domestic companies.
- The Stock and Bond Balanced Fund seeks long-term growth of capital,
balanced with current income. This Fund will pursue its objective by
investing primarily in the Trust's Large Cap Equity Index Fund and the
Bond Fund.
- The Money Market Fund seeks to maximize current income to the extent
consistent with the preservation of capital and maintenance of liquidity.
This Fund will
(2) Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P
500-Registered Trademark-, Standard & Poor's 500 and 500 are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by State Farm and the
Trust. Neither the State Farm Variable Deferred Annuity Policy, the Large Cap
Equity Index Fund, nor the Stock and Bond Balanced Fund (the "Product and the
Funds") is sponsored, endorsed, sold or promoted by Standard & Poor's, and
Standard & Poor's makes no representation regarding the advisability of
investing in the Product and the Funds. (For more information regarding the S&P
500 Index, see "Relationships with the Companies that Maintain the Benchmark
Indices" in this prospectus.)
(3) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell is a trademark of the Frank Russell Company.
The Small Cap Equity Index Fund (the "Fund") is not sponsored, endorsed, sold or
promoted by the Frank Russell Company, and the Frank Russell Company makes no
representation regarding the advisability of investing in the Fund. (For more
information regarding the Russell 2000 Index, see "Relationships with the
Companies that Maintain the Benchmark Indices" in this prospectus.)
(4) The Morgan Stanley Capital International Europe, Australia and Far East Free
(EAFE-Registered Trademark- Free) Index is the exclusive property of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"). Morgan Stanley Capital
International is a service mark of Morgan Stanley and has been licensed for use
by the Trust. The International Equity Index Fund (the "Fund") is not sponsored,
endorsed, sold or promoted by Morgan Stanley and Morgan Stanley makes no
representation regarding the advisability of investing in the Fund. (For more
information regarding the Morgan Stanley Capital International EAFE Free Index,
see "Relationships with the Companies that Maintain the Benchmark Indices" in
this prospectus.)
7 -------
<PAGE>
pursue its objective by investing exclusively in high quality money market
instruments. THE U.S. GOVERNMENT DOES NOT INSURE OR GUARANTEE AN
INVESTMENT IN THE MONEY MARKET FUND. This Fund will attempt to maintain a
stable net asset value of $1.00 per share, BUT THERE CAN BE NO ASSURANCE
THAT THE FUND WILL BE ABLE TO DO SO.
The accompanying prospectus for the Trust contains further information about the
Funds. Please read the Trust's prospectus in conjunction with this prospectus.
See also "The Trust," page 16.
Fixed Account Option. The Fixed Account is part of our General Account. It is
not a separate account. We credit amounts you allocate to the Fixed Account with
interest for the period of allocation at rates determined in our sole
discretion, but in no event will interest credited on these amounts be less than
an effective annual rate of 3% per year, compounded annually. The current
interest rate is the Guaranteed Interest Rate plus any excess interest rate. We
determine periodically the current interest rate and the guarantee period for
that rate. Each guarantee period will be at least one year. You assume the risk
that interest credited thereafter may not exceed the guaranteed rate of 3% per
year. See "State Farm's Fixed Account Option," page 16. There are significant
limits on your right to transfer Policy Accumulation Value from the Fixed
Account. See "Transfers," below.
Transfers. Prior to the earlier of the Annuity Date or the date the Annuitant
dies, you may transfer Policy Accumulation Value from and among the Subaccounts
at any time after the end of the free-look period. The minimum amount that you
may transfer from a Subaccount is $250, or, if less, the entire Policy
Accumulation Value held in that Subaccount.
You may transfer Fixed Policy Accumulation Value from the Fixed Account to a
Subaccount or Subaccounts only once each Policy Year and only during the 30-day
period following the end of each Policy Year. Unused transfers from the Fixed
Account do not carry over to the next Policy Year. The maximum transfer amount
is the greater of 25% of the Fixed Policy Accumulation Value on the date of the
transfer or $1,000, unless waived by us. The minimum amount transferred must be
at least $250, or, if less, the entire Fixed Policy Accumulation Value.
After the Annuity Date, you may request to transfer annuity units from one
Subaccount to another Subaccount. This is limited to four transfers per year and
only if variable annuity payments have been elected.
You can make transfer requests by satisfactory written or telephone request (if
we have your written telephone authorization on file). A transfer will take
effect at the end of the Valuation Period when we receive the request at our
Home Office. State Farm may, however, defer transfers under the same conditions
that we may delay paying proceeds. See "Requesting Payments and Telephone
Transactions," page 14. There is no limit on the number of transfers from and
among the Subaccounts. However, State Farm reserves the right to impose a $25
transfer processing fee on each transfer in a Policy Year in excess of twelve.
For purposes of assessing the transfer processing fee, each transfer request is
considered one transfer, regardless of the number of Subaccounts the transfer
affects. Any unused "free" transfers do not carry over to the next Policy Year.
State Farm reserves the right to modify, restrict, suspend or eliminate the
transfer privileges, including telephone transfer privileges, at any time, for
any reason.
Dollar-Cost Averaging. The dollar-cost averaging program permits you to
systematically transfer on a monthly, quarterly, semi-annual, or annual basis a
set dollar amount from either the Subaccount investing in the Money Market Fund
(the "Money Market Subaccount") or the Subaccount investing in the Bond Fund
(the "Bond Subaccount") to any combination of Subaccounts and/or the Fixed
Account. If the Money Market Subaccount or the Bond Subaccount is the Subaccount
from which you make the transfer, you cannot also use that Subaccount as one of
the Subaccounts in this combination. The dollar-cost averaging method of
investment is designed to reduce the risk of making purchases only when the
price of Accumulation Units is high, but you should carefully consider your
financial ability to continue the program over a long enough period of time to
purchase units when their value is low as well as when it is high. Dollar-cost
averaging does not assure a profit or protect against a loss.
You may elect to participate in the dollar-cost averaging program at any time
before the Annuity Date by sending us a written request. The minimum transfer
amount is $100 from the Money Market Subaccount or the Bond Subaccount, as
applicable. Once elected, dollar-cost averaging remains in effect from the date
we receive your request until the Annuity Date or until the value of the
Subaccount from which transfers are being made is depleted, or until you cancel
the program by written request or by telephone, if we have your telephone
authorization on file. You can request changes in writing or by telephone, if we
have your telephone authorization on file. There is no additional charge for
dollar-cost averaging. A transfer under this program is not considered a
transfer for purposes of assessing a transfer processing fee. Dollar-cost
averaging is not available while you are participating in the portfolio
rebalancing program. We reserve the right to discontinue offering the
dollar-cost averaging program at any time and for any reason.
Portfolio Rebalancing Program. Once you allocate your money among the
Subaccounts, the performance of each Subaccount may cause your allocation to
shift. You may instruct us to automatically rebalance (on a monthly, quarterly,
semi-annual, or annual basis) the value of your Policy in the Subaccounts to
return to the percentages specified in your allocation instructions. You may
elect to participate in this program at any time before the Annuity Date by
sending a written request to our Home Office. Your request will be effective
when we receive it. Your percentage allocations must be in whole percentages.
You may start and stop portfolio rebalancing at any time and make changes to
your allocations by written or telephone request, if we have your telephone
authorization on file. There is no
- ---------
8
<PAGE>
additional charge for using this program. We do not consider a transfer under
this program as a transfer for purposes of assessing a transfer processing fee.
We reserve the right to discontinue offering the program at any time and for any
reason. Portfolio rebalancing does not guarantee a profit or protect against
loss. You may not use amounts in the Fixed Account in connection with the
portfolio rebalancing program. The portfolio rebalancing program is not
available while you are participating in the dollar-cost averaging program.
Policy Accumulation Value. The Policy Accumulation Value serves as a starting
point for calculating certain values under a Policy. It is the aggregate of the
Subaccount Policy Accumulation Values and the Fixed Policy Accumulation Value
credited to the Policy. State Farm determines the Policy Accumulation Value
first on the Policy Date and thereafter on each Valuation Day. The Policy
Accumulation Value will vary to reflect the performance of the Subaccounts to
which you have allocated premiums, interest credited on amounts allocated to the
Fixed Account, charges, transfers, withdrawals, and full surrenders. It may be
more or less than premiums paid.
Cash Surrender Value. The Cash Surrender Value on a Valuation Day is the Policy
Accumulation Value, reduced by any applicable surrender charge that would be
deducted if the Policy were surrendered that day and any applicable Annual
Administrative Fee.
Subaccount Policy Accumulation Value. On any Valuation Day, the Subaccount
Policy Accumulation Value in a Subaccount is equal to the number of Accumulation
Units attributable to that Subaccount multiplied by the Accumulation Unit Value
for that Subaccount for that Valuation Day. When you allocate an amount to a
Subaccount, either by premium allocation or transfer of Policy Accumulation
Value, we credit your Policy with Accumulation Units in that Subaccount. We
determine the number of Accumulation Units by dividing the dollar amount
allocated or transferred to the Subaccount by the Subaccount's Accumulation Unit
Value for that Valuation Day. Similarly, when you transfer an amount from a
Subaccount, take a withdrawal from the Subaccount, or surrender the Policy, we
determine the number of Accumulation Units by dividing the dollar amount
transferred, withdrawn or surrendered by the Subaccount's Accumulation Unit
Value for that Valuation Day.
Accumulation Unit Value. A Subaccount's Accumulation Unit Value is the value of
its Accumulation Unit. Accumulation Unit Values vary to reflect the investment
experience of the underlying Fund, and may increase or decrease from one
Valuation Day to the next. The Accumulation Unit Value for each Subaccount was
arbitrarily set at $10 when we established the Subaccount. For each Valuation
Period after the date of establishment, we determine the Accumulation Unit Value
by multiplying the Accumulation Unit Value for a Subaccount for the prior
Valuation Period by the net investment factor for the Subaccount for the current
Valuation Period.
Net Investment Factor. The net investment factor is an index used to measure the
investment performance of a Subaccount from one Valuation Period to the next.
The net investment factor for any Subaccount for any Valuation Period reflects
the change in the net asset value per share of the Fund held in the Subaccount
from one Valuation Period to the next, adjusted for the daily deduction of the
mortality and expense risk charge from assets in the Subaccount. If any
"ex-dividend" date occurs during the Valuation Period, the per share amount of
any dividend or capital gain distribution is taken into account. Also, if any
taxes need to be reserved, a per share charge or credit for any taxes reserved
for, which is determined by us to have resulted from the operations of the
Subaccount, is taken into account.
Fixed Policy Accumulation Value. The Fixed Policy Accumulation Value on any date
after the Policy Date is equal to: (1) the sum of the following amounts in the
Fixed Account: premium allocations, Policy Accumulation Value transfers to the
Fixed Account, and interest accruals (if the date is a Policy Anniversary it
also includes any dividend payments); minus (2) the sum of any withdrawals and
any applicable surrender charges or transfers to the Fixed Account including any
applicable transfer processing fee from the Fixed Account, as well as the
applicable portion of the Annual Administrative Fee.
5. WHAT ARE THE EXPENSES UNDER THE POLICY?
State Farm deducts the charges described below. The charges are for the services
and benefits State Farm provides, costs and expenses State Farm incurs, and the
risks State Farm assumes under or in connection with the Policies.
- Services and benefits we provide include: (1) the ability for Owners to
make withdrawals and surrenders under the Policy; (2) the Annuitant's
Death Benefit; (3) the available investment options, including dollar cost
averaging, portfolio rebalancing, and systematic withdrawal programs; (4)
administration of the annuity options available under the Policy; and (5)
the distribution of various reports to Owners.
- Costs and expenses we incur include those associated with various overhead
and other expenses associated with providing the services and benefits
provided by the Policy, sales and marketing expenses, and other costs of
doing business.
- Risks we assume include the risks that: (1) Annuitants may live for a
longer period of time than estimated when we established the annuity
factors under the Policy; (2) the amount of the Annuitant's Death Benefit
will be greater than Policy Accumulation Value; and (3) the costs of
providing the services and benefits under the Policies will exceed the
charges deducted.
We may profit from charges deducted, such as the mortality and expense risk
charge, and we may use that profit for any purpose, including the payment of
distribution charges.
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SURRENDER CHARGE
If you make a withdrawal or surrender the Policy during the first seven Policy
Years, State Farm may deduct a surrender charge calculated as a percentage of
the amount withdrawn or surrendered. The applicable percentage is 7% in the
first Policy Year, and declines by 1% in each following Policy Year, until it
reaches 0% in the eighth Policy Year. We may also deduct a surrender charge when
you take annuity payments or when proceeds are paid upon the Owner's death
(unless the Owner is also the Annuitant). However, we will not deduct a
surrender charge on annuitization if the Policy has been in force at least five
Policy Years and if the payments are made under a "life annuity," "life annuity
with certain period," or a "joint and last survivor life annuity." See "What are
my annuity options?" page 5. We do not deduct a surrender charge when a Death
Benefit is paid upon the Annuitant's death, regardless of how many Policy Years
have elapsed or how the Death Benefit is paid. See "Does the Policy have a Death
Benefit?" page 15.
If you surrender the Policy, we deduct the surrender charge from the Policy
Accumulation Value in determining the Cash Surrender Value. If you take a
withdrawal, we deduct the surrender charge from the Policy Accumulation Value
remaining after we pay you the amount requested, and we calculate the surrender
charge as the applicable percentage of the total amount withdrawn. Unless you
specify otherwise, we will deduct the surrender charge from each Subaccount and
the Fixed Account pro-rata. Each year after the first Policy Year, you may
withdraw a "Free Withdrawal Amount" without incurring a surrender charge. For a
table of surrender charges and a description of the Free Withdrawal Amount, see
the "Fee Table," page 3.
Example of Calculation of Surrender Charge. Assume the applicable surrender
charge percentage is 7% and you have requested a withdrawal of $500. You will
receive $500 and the surrender charge is $37.63, for a total withdrawal of
$537.63.
Waiver of Surrender Charge. Except in New York, we will not deduct a surrender
charge if, at the time we receive a request for a withdrawal or a surrender, we
have received due proof that the Annuitant is "Terminally Ill" or has been
confined continuously to an "Eligible Hospital" or "Eligible Nursing Home" for
at least three months before the date we receive the request. "Terminally Ill,"
"Eligible Hospital," and "Eligible Nursing Home" are defined in the Policy.
ANNUAL ADMINISTRATIVE FEE
We will deduct an annual administrative fee (1) on each Policy Anniversary, (2)
on the day of any surrender if the surrender is not on the Policy Anniversary,
or (3) on the Annuity Date if the Annuity Date is not on the Policy Anniversary.
We will waive this fee if total premiums of at least $50,000 have been paid
under a Policy at the time the Annual Administrative Fee would have otherwise
been deducted. We will deduct the fee from each Subaccount and the Fixed Account
on a pro-rata basis.
TRANSFER PROCESSING FEE
We reserve the right to deduct a transfer processing fee of $25 for the 13th and
each subsequent transfer during a Policy Year. For the purpose of assessing the
transfer processing fee, we consider each written or telephone request to be one
transfer, regardless of the number of Subaccounts affected by the transfer. We
will deduct the transfer processing fee from the Subaccount or the Fixed Account
from which the transfer is made. If a transfer is made from more than one
Subaccount and/or the Fixed Account at the same time, we will deduct the
transfer fee pro-rata from the Subaccounts and/or the Fixed Account. We reserve
the right to waive the transfer processing fee.
MORTALITY AND EXPENSE RISK CHARGE
State Farm currently deducts a daily charge from the assets in the Subaccounts
attributable to the Policies at an annual rate of 1.15% of net assets. We
guarantee that this charge will not exceed an annual rate of 1.25% of net
assets. This charge does not apply to Fixed Policy Accumulation Value
attributable to the Policies. We factor this charge into the net investment
factor. See "Net Investment Factor," page 9.
FUND EXPENSES
Because the Variable Account purchases shares of the various Funds, the net
assets of the Variable Account will reflect the investment advisory fees and
other operating expenses incurred by the Funds. A table of each Fund's advisory
fees and other expenses can be found in the front of this prospectus in the Fee
Table. For a description of each Fund's expenses, advisory fees and other
expenses, see the prospectus for the Trust.
6. HOW WILL MY INVESTMENT IN THE POLICY BE TAXED?
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE.
INTRODUCTION
The following summary provides a general description of the Federal income tax
considerations associated with the Policy and does not purport to be complete or
to cover all tax situations. This discussion is not intended as tax advice. You
should consult counsel or other competent tax advisers for more complete
information. This discussion is based upon State Farm's understanding of the
present Federal income tax laws. No representation is made as to the likelihood
of continuation of the present Federal income tax laws or as to how they may be
interpreted by the Internal Revenue Service (the "IRS").
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You may purchase the Policy on a non-tax-qualified basis ("Non-Qualified
Policy") or purchased on a tax-qualified basis ("Qualified Policy"). Qualified
Policies are designed for use by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under Sections 401(a), 403(b), 408, or 408A of the Code. The ultimate effect of
federal income taxes on the amounts held under a Policy, or annuity payments,
depends on the type of retirement plan, on the tax and employment status of the
individual concerned, and on our tax status. In addition, certain requirements
must be satisfied in purchasing a Qualified Policy with proceeds from a
tax-qualified plan and receiving distributions from a Qualified Policy in order
to continue receiving favorable tax treatment. Some retirement plans are subject
to distribution and other requirements that are not incorporated into our Policy
administration procedures. Owners, participants and Beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Policies comply with applicable law. Therefore,
purchasers of Qualified Policies should seek competent legal and tax advice
regarding the suitability of a Policy for their situation. The following
discussion assumes that Qualified Policies are purchased with proceeds from
and/or contributions under retirement plans that qualify for the intended
special federal income tax treatment.
TAX STATUS OF THE POLICIES
Diversification Requirements. The Code requires that the investments of the
Variable Account be "adequately diversified" in order for the Policies to be
treated as annuity contracts for Federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
In certain circumstances, owners of variable annuity contracts have been
considered for Federal income tax purposes to be the owners of the assets of the
Variable Account supporting their contracts due to their ability to exercise
investment control over those assets. When this is the case, the contract owners
have been currently taxed on income and gains attributable to the variable
account assets. There is little guidance in this area, and some features of the
Policies, such as the flexibility of an Owner to allocate premium payments and
transfer Policy Accumulation Values, have not been explicitly addressed in
published rulings. While State Farm believes that the Policies do not give
Owners investment control over Variable Account assets, State Farm reserves the
right to modify the Policies as necessary to prevent an Owner from being treated
as the owner of the Variable Account assets supporting the Policy.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires any Non-Qualified Policy to
contain certain provisions specifying how your interest in the Policy will be
distributed in the event of your death. The Non-Qualified Policies contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such provisions and modify them if necessary to assure that they comply
with the applicable requirements when such requirements are clarified by
regulation or otherwise. See "Death of Owner" rules in the Statement of
Additional Information for a further discussion of the rules for paying proceeds
upon an Owner's death.
Other required distribution rules may apply to Qualified Policies.
The following discussion assumes that the Policies will qualify as annuity
contracts for Federal income tax purposes.
TAX TREATMENT OF ANNUITIES
We believe that if you are a natural person you will not be taxed on increases
in the value of a Policy until a distribution occurs or until annuity payments
begin. (For these purposes, the agreement to assign or pledge any portion of the
Policy Accumulation Value, and, in the case of a Qualified Policy, any portion
of an interest in the qualified plan, generally will be treated as a
distribution.)
TAXATION OF NON-QUALIFIED POLICIES
Non-Natural Person. The Owner of any annuity contract who is not a natural
person generally must include in income any increase in the excess of the Policy
Accumulation Value over the "investment in the contract" (generally, the
premiums or other consideration paid for the contract) during the taxable year.
There are some exceptions to this rule and a prospective Owner that is not a
natural person may wish to discuss these with a tax adviser. The following
discussion generally applies to Policies owned by natural persons.
Withdrawals. When a withdrawal from a Non-Qualified Policy occurs, the amount
received will be treated as ordinary income subject to tax up to an amount equal
to the excess (if any) of the Policy Accumulation Value immediately before the
distribution over the Owner's investment in the Policy at that time.
In the case of a surrender under a Non-Qualified Policy, the amount received
generally will be taxable only to the extent it exceeds the Owner's investment
in the Contract.
Penalty Tax on Certain Withdrawals. In the case of a distribution from a
Non-Qualified Policy, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2;
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic payments for the
life (or life expectancy) of the taxpayer.
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Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. Consult a
tax adviser with regard to exceptions from the penalty tax.
Annuity Payments. Although tax consequences may vary depending on the payment
option elected under an annuity contract, a portion of each annuity payment is
generally not taxed and the remainder is taxed as ordinary income. The non-
taxable portion of an annuity payment is generally determined in a manner that
is designed to allow you to recover your investment in the Policy ratably on a
tax-free basis over the expected stream of annuity payments, as determined when
annuity payments start. Once your investment in the Policy has been fully
recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a Policy
because of your death or the death of the Annuitant. Generally, such amounts are
includible in the income of the recipient as follows: (1) if distributed in a
lump sum, they are taxed in the same manner as a surrender of the contract, or
(2) if distributed under a payment option, they are taxed in the same way as
annuity payments.
Transfers, Assignments or Exchanges of a Policy. A transfer or assignment of
ownership of a Policy, the designation of an Annuitant, the selection of certain
Annuity Dates, or the exchange of a Policy may result in certain tax
consequences to you that are not discussed herein. An Owner contemplating any
such transfer, assignment or exchange, should consult a tax adviser as to the
tax consequences.
Withholding. Annuity distributions are generally subject to withholding for the
recipient's federal income tax liability. Recipients can generally elect,
however, not to have tax withheld from distributions.
Multiple Policies. All annuity contracts that State Farm (or its affiliates)
issues to the same Owner during any calendar year are treated as one annuity
contract for purposes of determining the amount includible in such Owner's
income when a taxable distribution occurs.
TAXATION OF QUALIFIED POLICIES
The Policies are designed for use with several types of qualified plans. The tax
rules applicable to participants in these qualified plans vary according to the
type of plan and the terms and conditions of the plan itself. Special favorable
tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from: contributions in excess
of specified limits; distributions prior to age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and in other specified circumstances. Therefore, no
attempt is made to provide more than general information about the use of the
Policies with the various types of qualified retirement plans. Policy Owners,
Annuitants, and Beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Policy, but we shall not be bound by the terms and conditions of such plans
to the extent such terms contradict the Policy, unless the Company consents.
Distributions. Annuity payments are generally taxed in the same manner as under
a Non-Qualified Policy. When a withdrawal from a Qualified Policy occurs, a pro
rata portion of the amount received is taxable, generally based on the ratio of
the Owner's investment in the Policy (generally, the premiums or other
consideration paid for the Policy) to the participant's total accrued benefit
balance under the retirement plan. For Qualified Policies, the investment in the
contract can be zero. For Roth IRAs, distributions are generally not taxed,
except as described below.
For qualified plans under Section 401(a) and 403(b), 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) (1) reaches age 70 1/2 or (2) 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. Roth IRAs under Section 408A do not require
distributions at any time prior to the Owner's death.
Withholding. Distributions from certain qualified plans generally are subject to
withholding for the Owner's federal income tax liability. The withholding rates
vary according to the type of distribution and the Owner's tax status. The Owner
may be provided the opportunity to elect not to 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 that are
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.
Brief descriptions follow of the various types of qualified retirement plans in
connection with a Policy. We will endorse the Policy as necessary to conform it
to the requirements of such plan.
Corporate and Self-Employed Pension and Profit Sharing Plans. Section 401(a) of
the Code permits corporate employers to
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establish various types of retirement plans for employees, and permits
self-employed individuals to establish these plans for themselves and their
employees. These retirement plans may permit the purchase of the Policies to
accumulate retirement savings under the plans. Adverse tax or other legal
consequences to the plan, to the participant, or to both may result if this
Policy is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Policy. Employers intending
to use the Policy with such plans should seek competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." These IRAs are subject to limits on
the amount that can be contributed, the deductible amount of the contribution,
the persons who may be eligible, and the time when distributions commence. Also,
distributions from certain other types of qualified retirement plans may be
"rolled over" or transferred on a tax-deferred basis into an IRA. There are
significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans (SIMPLE), under which certain employers may provide
contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. Sales of the Policy for
use with IRAs may be subject to special requirements of the IRS.
Roth IRAs. Section 408A of the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA, which are subject to
certain limitations, are not deductible, and must be made in cash or as a
rollover or transfer from another Roth IRA or other IRA. A rollover from or
conversion of an IRA to a Roth IRA may be subject to tax, and other special
rules may apply. Distributions from a Roth IRA generally are not taxed, except
that, once aggregate distributions exceed contributions to the Roth IRA, income
tax and a 10% penalty tax may apply to distributions made (1) before age 59 1/2
(subject to certain exceptions) or (2) during the five taxable years starting
with the year in which the first contribution is made to any Roth IRA. A 10%
penalty tax may apply to amounts attributable to a conversion from an IRA if
they are distributed during the five taxable years beginning with the year in
which the conversion was made.
Tax Sheltered Annuities. Section 403(b) of the Code allows employees of certain
Section 501(c)(3) organizations and public schools to exclude from their gross
income the premium payments made, within certain limits, on a Policy that will
provide an annuity for the employee's retirement. These premium payments may be
subject to FICA (social security) tax. Distributions of (1) salary reduction
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings on amounts held as of the last year
beginning before January 1, 1989, are not allowed prior to age 59 1/2,
separation from service, death or disability. Salary reduction contributions may
also be distributed upon hardship, but would generally be subject to penalties.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences under
the Policies are not exhaustive, and special rules are provided with respect to
other tax situations not discussed in this prospectus. Further, the Federal
income tax consequences discussed herein reflect our understanding of current
law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of Ownership or receipt of distributions
under a Policy depend on the individual circumstances of each Owner or recipient
of the distribution. Consult a competent tax adviser for further information.
Possible Changes in Taxation. Although the likelihood of legislative change is
uncertain, there is always the possibility that the tax treatment of the
Policies could change by legislation or other means. It is also possible that
any change could be retroactive (that is, effective prior to the date of the
change). Consult a tax adviser with respect to legislative developments and
their effect on the Policy.
7. HOW DO I ACCESS MY MONEY?
You may make withdrawals or a full surrender under the Policy. Proceeds are also
payable upon the death of the Owner or the Annuitant. See "Does the Policy have
a Death Benefit?," page 15. When you surrender the Policy or when proceeds are
payable on the death of an Owner or Annuitant, you can request that the proceeds
be paid under an annuity option. See "What are my annuity options?," page 5.
WITHDRAWALS
You may request to withdraw part of the Cash Surrender Value at any time prior
to the earlier of the Annuity Date or the date the Annuitant dies. (If you have
elected the "fixed years" annuity option, you may request withdrawals after the
Annuity Date. See "What are my annuity options?," page 5.) You may make requests
for withdrawals in writing or by telephone, if we have your telephone
authorization on file. See "Requesting Payments and Telephone Transactions,"
page 14. Any withdrawal must be at least $500. We will pay you the withdrawal
amount in one sum. Under certain circumstances, we may delay payments of
proceeds from a withdrawal or surrender. See "Requesting Payments and Telephone
Transactions," page 14.
When you request a withdrawal, you can direct how to deduct the withdrawal from
your Policy Accumulation Value. If you provide no directions, we will deduct the
withdrawal from your Policy Accumulation Value in the Subaccounts and Fixed
Account on a pro-rata basis.
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SURRENDERS
You may request surrender of the Policy at any time prior to the earlier of the
Annuity Date or the date the Annuitant dies. (If you have elected the "fixed
years" annuity option, you may request a surrender after the Annuity Date. See
"What are my annuity options?," page 5.) The Policy will terminate on the date
we receive your request or such later date as you might request. We will pay you
the Cash Surrender Value in one sum unless you choose an annuity option. After
five Policy Years, if you choose a "life annuity," "life annuity with certain
period," or a "joint and last survivor life annuity," we will not deduct a
surrender charge. Under certain circumstances, we may delay payments of proceeds
from a withdrawal or surrender. See "Requesting Payments and Telephone
Transactions," below.
SYSTEMATIC WITHDRAWAL PROGRAM
The systematic withdrawal program provides an automatic monthly, quarterly,
semi-annual, or annual payment to you from the amounts you have accumulated in
the Subaccounts and/or the Fixed Account. The minimum payment is $100. You may
elect to participate in the systematic withdrawal program at any time before the
Annuity Date by sending a written request to our Home Office. Once we have
received your request, the program will begin and will remain in effect until
your Policy Accumulation Value drops to zero, unless you cancel or make changes
in the program. We will deduct withdrawals under the systematic withdrawal
program from your Policy Accumulation Value in the Subaccounts and the Fixed
Account on a pro-rata basis. You may cancel or make changes in the program at
any time by sending us a written request or by telephone if we have your
telephone authorization on file.
We will assess any applicable surrender charge on these withdrawals. See
"Surrender Charge," page 10. We do not deduct any other charges for this
program. We reserve the right to discontinue offering the systematic withdrawal
program at any time and for any reason.
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS
Requesting Payments. You must send written requests for payment (except when we
authorize telephone requests) to our Home Office or give them to an authorized
State Farm agent for forwarding to our Home Office. We will ordinarily pay any
Death Benefit, withdrawal, or surrender proceeds within seven days after receipt
at our Home Office of all the documents required for such a payment. We will
determine the payment amount as of the end of the Valuation Period during which
our Home Office receives all required documents. If no annuity option has been
chosen for a Death Benefit to be paid, or if the annuity option chosen is not
available, we will pay a Death Benefit generally through the State Farm Benefit
Management Account-Registered Trademark-, an interest bearing checking account.
We will send the State Farm Benefit Management Account-Registered Trademark-
checkbook to you within seven days after we receive all required documents. A
Beneficiary will have immediate access to the proceeds by writing a check on the
State Farm Benefit Management Account-Registered Trademark-. We will pay
interest on the amount in the State Farm Benefit Management Account-Registered
Trademark- from the date we receive due proof of death at the Home Office to the
date we close the State Farm Benefit Management Account-Registered Trademark-.
Amounts in the State Farm Benefit Management Account-Registered Trademark- are
not insured by the Federal Deposit Insurance Corporation or any other agency.
We may delay making a payment or processing a transfer request if:
- the disposal or valuation of the Variable Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for
other than a regular holiday or weekend, trading is restricted by the SEC,
or the SEC declares that an emergency exists; or
- the SEC by order permits postponement of payment to protect State Farm's
Policy Owners.
We also may defer making payments attributable to a check that has not cleared,
and we may defer payment of proceeds from the Fixed Account for a withdrawal or
surrender request for up to six months from the date we receive the request.
However, Cash Surrender Value paid under an annuity option will not be deferred.
Telephone Transactions. You may make certain requests under the Policy by
telephone if we have a written telephone authorization on file. These include
requests for transfers, withdrawals, changes in premium allocation instructions,
dollar-cost averaging changes, changes in the portfolio rebalancing program and
systematic withdrawal changes.
Our Home Office will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
instructions received by telephone, providing written confirmation of such
transactions, and/or tape recording of telephone instructions. Your request for
telephone transactions authorizes us to record telephone calls. If we do not
employ reasonable procedures, we may be liable for any losses due to
unauthorized or fraudulent instructions. If we do employ reasonable procedures,
we will not be liable for any losses due to unauthorized or fraudulent
instructions. We reserve the right to place limits, including dollar limits, on
telephone transactions.
8. HOW IS THE PERFORMANCE OF THE POLICY PRESENTED?
State Farm may advertise or include in sales literature yields, effective yields
and total returns for the Subaccounts. Effective yields and total returns for
the Subaccounts are based on the investment performance of the corresponding
Portfolio of the Funds. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND DO
NOT INDICATE OR PROJECT FUTURE
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PERFORMANCE. We may also advertise or include in sales literature a Subaccount's
performance compared to certain performance rankings and indexes compiled by
independent organizations, and we may present performance rankings and indexes
without such a comparison. More detailed information about performance data
appears in the Statement of Additional Information.
The yield of the Subaccount investing in the Money Market Fund refers to the
annualized income generated by an investment in the Subaccount over a specified
seven-day period. The yield is calculated by assuming that the income generated
for that seven-day period is generated each seven-day period over a 52-week
period. The effective yield is calculated similarly but, when annualized, the
income earned by an investment in the Subaccount is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
The yield of a Subaccount (except the Money Market Subaccount) refers to the
annualized income generated by an investment in the Subaccount over a specified
30-day or one-month period. The yield is calculated by assuming that the income
generated by the investment during that 30-day or one-month period is generated
each period over a 12-month period.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time. Average annual total return of a Subaccount tells you the return you
would have experienced if you allocated a $1,000 premium to a Subaccount for the
specified period. "Standardized" average annual total return reflects all
historical investment results, less all charges and deductions applied against
the Subaccount, including any surrender charge that would apply if you
terminated the Policy at the end of each period indicated, but excluding any
deductions for premium taxes. "Non-Standard" average annual total return
information may be presented, computed on the same basis as described above,
except that deductions will not include the Surrender Charge. In addition, we
may from time to time disclose average annual total return in non-standard
formats and cumulative total return for a Subaccount.
We may, from time to time, also disclose yield, standard total returns, and
non-standard total returns for the Funds. We may also disclose yield, standard
total returns, and non-standard total returns of funds or other accounts managed
by the Adviser or Subadviser with investment objectives similar to those of the
Funds, and Subaccount performance based on that performance data. Non-standard
performance will be accompanied by standard performance.
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
underlying funds, or investment series of underlying funds with investment
objectives similar to each of the Subaccounts. Advertising and sales literature
may also present the performance of the Standard & Poor's-Registered
Trademark-Index of 500 Common Stocks, a widely used measure of stock
performance, either by itself or compared to the performance of one or more
Subaccounts. This unmanaged index assumes the reinvestment of dividends but does
not reflect any "deduction" for the expense of operating or managing an
investment portfolio. Other independent ranking services and indexes may also be
used as a source of performance comparison or presentation. We may also report
other information, including the effect of tax-deferred compounding on a
Subaccount's investment returns, or returns in general, which may be illustrated
by tables, graphs, or charts.
9. DOES THE POLICY HAVE A DEATH BENEFIT?
If the Annuitant dies before the Annuity Date and a Death Benefit is payable,
the amount paid will be the greater of (1) the sum of all premiums paid less any
withdrawals and less any applicable surrender charges, and (2) the Policy
Accumulation Value.
We will calculate both amounts as of the end of the Valuation Period during
which we receive due proof of the Annuitant's death. If the Death Benefit is
payable and an annuity option is chosen, the Annuity Date will be the date at
the end of the Valuation Period during which we receive due proof of the
Annuitant's death. The beneficiary must choose the annuity option as well as
whether the annuity payments are to be fixed or variable or a combination of
fixed and variable. See "What are my annuity options?," page 5. If no annuity
option has been chosen for the Death Benefit to be paid, or if the annuity
option chosen is not available, the Death Benefit generally will be paid through
the State Farm Benefit Management Account-Registered Trademark-. See "Requesting
Payments and Telephone Transactions," page 14. For a discussion of the order for
payment to beneficiaries, as well as how beneficiaries are designated, see
"Payment of Proceeds Upon Death of Owner or Annuitant" in the Statement of
Additional Information.
If any Owner dies before the Annuity Date, unless the Owner is the Annuitant,
the Cash Surrender Value of the Policy will be payable. There are certain
exceptions to this rule. For a discussion of the rules for paying the proceeds
upon the death of an Owner, see "Death of Owner" in the Statement of Additional
Information.
10. WHAT OTHER INFORMATION SHOULD I KNOW?
STATE FARM AND THE VARIABLE ACCOUNT
State Farm Life and Accident Assurance Company. State Farm is an Illinois stock
life insurance company that is wholly-owned by State Farm Mutual Automobile
Insurance Company, an
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Illinois mutual insurance company. State Farm's Home Office is located at One
State Farm Plaza, Bloomington, Illinois 61710-0001. State Farm was incorporated
in 1960 and has been continuously engaged in the life insurance business since
that year. State Farm is subject to regulation by the Insurance Department of
the State of Illinois as well as by the insurance departments of all other
states and jurisdictions in which it does business. State Farm sells insurance
in New York and Wisconsin and is also licensed in Illinois and Connecticut.
State Farm submits annual statements on its operations and finances to insurance
officials in such states and jurisdictions. The Policy described in this
prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
State Farm's Fixed Account Option. The Fixed Account is part of State Farm's
general account assets. State Farm's general account assets are used to support
our insurance and annuity obligations other than those funded by separate
accounts. Subject to applicable law, State Farm has sole discretion over the
investment of the assets of the Fixed Account.
BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, WE HAVE NOT REGISTERED
INTERESTS IN THE FIXED ACCOUNT UNDER THE SECURITIES ACT OF 1933 NOR HAVE WE
REGISTERED THE FIXED ACCOUNT AS AN INVESTMENT COMPANY UNDER THE 1940 ACT.
ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN ARE SUBJECT TO
THE PROVISIONS OF THESE ACTS AND, AS A RESULT, THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING
TO THE FIXED ACCOUNT. THE DISCLOSURE REGARDING THE FIXED ACCOUNT MAY, HOWEVER,
BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN A
PROSPECTUS.
The Variable Account. State Farm established the Variable Account as a separate
investment account under Illinois law on December 9, 1996. State Farm owns the
assets in the Variable Account and is obligated to pay all benefits under the
Policies. State Farm uses the Variable Account to support the Policies as well
as for other purposes permitted by law. The Variable Account is registered with
the SEC as a unit investment trust under the 1940 Act and qualifies as a
"separate account" within the meaning of the federal securities laws. Such
registration does not involve any supervision by the SEC of the management of
the Variable Account or State Farm. State Farm has established other separate
investment accounts, of which State Farm Life and Accident Assurance Company
Variable Life Separate Account is registered with the SEC under the 1940 Act.
The Variable Account is divided into Subaccounts, each of which currently
invests in shares of a specific Fund of the Trust. These Subaccounts buy and
redeem Fund shares at net asset value without any sales charge. Any dividend
from net investment income and distribution from realized gains from security
transactions of a Fund is reinvested at net asset value in shares of the same
Fund. Income, gains and losses, realized or unrealized, of a Subaccount are
credited to or charged against that Subaccount without regard to any other
income, gains or losses of State Farm. Assets equal to the reserves and other
contract liabilities with respect to each Subaccount are not chargeable with
liabilities arising out of any other business or account of State Farm. If the
assets exceed the required reserves and other liabilities, State Farm may
transfer the excess to its general account.
The Variable Account may include other Subaccounts that are not available under
the Policy and are not otherwise discussed in this prospectus. State Farm may
substitute another subaccount or insurance company separate account under the
Policies if, in State Farm's judgment, investment in a Subaccount should no
longer be possible or becomes inappropriate to the purposes of the Policies, or
if investment in another subaccount or insurance company separate account is in
the best interest of Owners. No substitution may take place without notice to
Owners and prior approval of the SEC and insurance regulatory authorities, to
the extent required by the 1940 Act and applicable law.
The Trust. State Farm Investment Management Corp. ("SFIM"), a wholly owned
subsidiary of State Farm Mutual Automobile Insurance Company, serves as
investment adviser to the Trust. SFIM has engaged Barclays Global Fund Advisors
as the investment sub-adviser to provide day-to-day portfolio management for the
Large Cap Equity Index Fund, the Small Cap Equity Index Fund, and the
International Equity Index Fund. For more information concerning the investment
adviser and investment sub-adviser, please see the accompanying prospectus for
the Trust.
Voting of Fund Shares. State Farm is the legal owner of shares held by the
Subaccounts and as such has the right to vote on all matters submitted to
shareholders of the Funds. However, as required by law, State Farm will vote
shares held in the Subaccounts at regular and special meetings of shareholders
of the Funds in accordance with instructions received from Owners with Policy
Accumulation Value in the Subaccounts. To obtain voting instructions from
Owners, before a meeting of shareholders of the Funds, State Farm will send
Owners voting instruction materials, a voting instruction form and any other
related material. Shares held by a Subaccount for which no timely instructions
are received will be voted by State Farm in the same proportion as those shares
for which voting instructions are received. Should the applicable federal
securities laws, regulations or interpretations thereof change so as to permit
State Farm to vote shares of the Funds in its own right, State Farm may elect to
do so.
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PREPARING FOR YEAR 2000
Like all financial services providers, State Farm, in administering the
Policies, utilizes systems that may be affected by Year 2000 transition issues
and relies on service providers that also may be affected. State Farm has
developed, and is in the process of implementing, a Year 2000 transition plan,
and is confirming that its service providers are also so engaged. The resources
that are being devoted to this effort are substantial. We are unable to predict
the outcome of these efforts; however, as of the date of this prospectus, it is
not anticipated that Owners will experience negative effects with respect to
their Policies as a result of Year 2000 transition implementation. Business
application systems and external interfaces will be tested, prioritized and
remediated as necessary to provide continuous, uninterrupted service. Our target
date for completion is June, 1999 or earlier for most activities, but there can
be no assurance that State Farm will be successful, or that interaction with
other service providers will not impact State Farm's services at that time.
MODIFICATION
We may modify the Policy as follows:
- to conform the Policy, our operations, or the operation of the Variable
Account to the requirements of any law (or regulation issued by a
government agency) to which we, the Policy, or the Variable Account is
subject;
- to assure continued qualification of the Policy as an annuity under the
Code; or
- to reflect a change in the operation of the Variable Account, if allowed
by the Policy.
DISTRIBUTION OF THE POLICIES
State Farm VP Management Corp., a subsidiary of State Farm Mutual Automobile
Insurance Company, acts as the principal underwriter of the Policies. State Farm
VP Management Corp. is a corporation organized under the laws of the state of
Delaware in 1996, is registered as a broker-dealer under the Securities Exchange
Act of 1934, and is a member of the National Association of Securities Dealers,
Inc. (the "NASD"). The Policies may not be available in all states. State Farm
VP Management Corp. receives commissions of up to 2.5% of premiums paid in
connection with the sale of the Policies. Up to an additional 2.5% of premium is
paid on the first $2,000 of first-year premium.
The Policies are sold by certain registered representatives of State Farm VP
Management Corp. who are also appointed and licensed as insurance agents. These
registered representatives receive commissions for selling Policies calculated
as a percentage of premiums. Registered representatives who meet certain
productivity and profitability standards may be eligible for additional
compensation.
LEGAL PROCEEDINGS
State Farm and its affiliates, like other life insurance companies, are involved
in lawsuits, including class action lawsuits. In some class action and other
lawsuits involving insurers, substantial damages have been sought and/or
material settlement payments have been made. Although we cannot predict the
outcome of any litigation with certainty, State Farm believes that at the
present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on the Variable Account or State Farm.
REPORTS TO POLICY OWNERS
State Farm maintains records and accounts of all transactions involving the
Policy, the Variable Account, and the Fixed Account. Each year, or more often if
required by law, you will be sent a report showing information about your Policy
for the period covered by the report. You will also be sent an annual and a
semi-annual report for each Fund underlying a Subaccount to which you have
allocated Policy Accumulation Value, as required by the 1940 Act. In addition,
when you pay premiums (other than by pre-authorized checking account deduction),
or if you make transfers or withdrawals, you will receive a confirmation of
these transactions.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
State Farm Life Insurance Company and State Farm Life and Accident Assurance
Company are members of the Insurance Marketplace Standards Association (IMSA).
IMSA is an independent and voluntary organization created by the American
Council of Life Insurance (ACLI) to improve customer confidence in the life
insurance industry. Life insurers that are members of IMSA agree to meet and
maintain high standards of ethical conduct in their dealings with consumers for
individual life insurance and annuity products.
FINANCIAL STATEMENTS
The Statement of Additional Information contains the audited statutory basis
statements of admitted assets, liabilities, capital and surplus for State Farm
as of December 31, 1998 and 1997, and the related statutory basis statements of
operations and changes in capital and surplus, and cash flows for the years then
ended, as well as the Report of the Independent Accountants. You should consider
the financial statements of State Farm only as bearing on our ability to meet
our obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Variable Account.
The Statement of Additional Information also contains the audited GAAP basis
statements of assets, liabilities and owners' equity for the Variable Account as
of December 31, 1998, and the related statement of operations and changes in
owners' equity for the period September 1, 1998 (commencement of operations) to
December 31, 1998, as well as the Report of the Independent Accountants.
11. HOW CAN I MAKE INQUIRIES?
You may make inquiries regarding a Policy by writing to us at our Home Office,
by calling us at (888) 702-2307 (Toll free), or by contacting an authorized
State Farm agent.
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TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains additional information about
the Policies and the Variable Account. The following is the Table of Contents
for the Statement of Additional Information. You can obtain a free copy of the
Statement of Additional Information by writing to us at our Home Office or
calling us at 1-(888) 702-2307 (Toll free).
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Policy Provisions
The Policy
Ownership
Incontestability
Error in Age or Sex
Participation
Assignment
Calculation of Historical Performance
Data
Money Market Subaccount Yields
Other Subaccount Yields
Average Annual Total Returns
Effect of the Annual Administrative
Fee on Performance Data
Other Total Returns
Use of Indexes
Other Information
Net Investment Factor
Annuity Payment Provisions
Amount of Fixed Annuity Payments
Amount of Variable Annuity Payments
Annuity Units
Annuity Unit Value
Payment of Proceeds Upon Death of
Owner or Annuitant
Death of Owner
Death Of Annuitant
Addition, Deletion or Substitution of
Investments
Safekeeping of Account Assets
Distribution of the Policies
Legal Matters
Experts
Other Information
Relationships with the Companies that
Maintain the Benchmark Indices
Financial Statements
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
DATED May 1, 1999
STATE FARM VARIABLE DEFERRED ANNUITY POLICY
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY VARIABLE ANNUITY
SEPARATE ACCOUNT
OF STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
P.O. Box 2307
Bloomington, Illinois 61702-2307
--------------------
This Statement of Additional Information expands upon subjects discussed
in the current Prospectus for the variable deferred annuity policy (the
"Policy") offered by State Farm Life and Accident Assurance Company ("State
Farm, "we," "us," or "our"). You may obtain a copy of the Prospectus dated
May 1, 1999 by calling 1-888-702-2307 (Toll free) or by writing to our Home
Office at the above address. Terms used in the current Prospectus for the
Contract are incorporated into and made a part of this Statement of
Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES
FOR THE POLICY AND THE FUNDS.
Form 231-3555 Printed in U.S.A.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL POLICY PROVISIONS............................................... 1
The Policy............................................................ 1
Ownership............................................................. 1
Incontestability...................................................... 1
Error in Age or Sex................................................... 1
Participation......................................................... 1
Assignment............................................................ 2
CALCULATION OF HISTORICAL PERFORMANCE DATA................................. 2
Money Market Subaccount Yields........................................ 2
Other Subaccount Yields............................................... 4
Average Annual Total Returns.......................................... 5
Effect of the Annual Administrative Fee on Performance Data........... 6
Other Total Returns................................................... 6
Use of Indexes........................................................ 6
Other Information..................................................... 7
NET INVESTMENT FACTOR...................................................... 7
ANNUITY PAYMENT PROVISIONS................................................. 8
Amount of Fixed Annuity Payments...................................... 8
Amount of Variable Annuity Payments................................... 8
Annuity Units......................................................... 8
Annuity Unit Value.................................................... 9
PAYMENT OF PROCEEDS UPON DEATH OF OWNER OR ANNUITANT....................... 10
Death of Owner........................................................ 10
Death Of Annuitant.................................................... 11
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS.......................... 12
SAFEKEEPING OF ACCOUNT ASSETS.............................................. 13
DISTRIBUTION OF THE POLICIES............................................... 13
LEGAL MATTERS.............................................................. 13
EXPERTS.................................................................... 14
OTHER INFORMATION.......................................................... 14
RELATIONSHIPS WITH THE COMPANIES THAT MAINTAIN THE BENCHMARK INDICES....... 14
FINANCIAL STATEMENTS....................................................... 15
</TABLE>
<PAGE>
ADDITIONAL POLICY PROVISIONS
THE POLICY
The Policy contains the Basic Plan, any amendments, endorsements, and
riders, and a copy of the application. The Policy is the entire contract.
Only an officer has the right to change the Policy. No agent has the
authority to change the Policy or to waive any of its terms. All endorsements,
amendments, or riders must be signed by an officer to be valid.
OWNERSHIP
You, as the Owner, are named in the application. You may exercise any
provision of the Policy only by request and while the Annuitant is alive. Your
Successor Owner is named in the application if you are not the Annuitant.
You may change the Owner or Successor Owner by sending us a request while
the Annuitant is alive. We have the right to request the Policy to make the
change on it. The change will take effect the day you sign the request, but the
change will not affect any action we have taken before we receive the request. A
change of Owner or Successor Owner does not change the beneficiary designation.
No more than two Owners and/or Successor Owners can be named.
INCONTESTABILITY
We will not contest the Policy. Any rider has its own incontestability
provision.
ERROR IN AGE OR SEX
If the Annuitant's, Payee's, or second designated person's date of birth or
sex is not correct, every benefit will be such as premiums paid would have
bought at the correct age or sex, based on the rates at the date of issue. We
may require proof of the Annuitant's, Payee's, second designated person's age
and sex before annuity payments start. Any overpayment with compound interest at
6% a year will be charged against the Policy. This amount will be deducted from
any annuity payments due after the error is found. Any underpayment with
compound interest at 6% a year will be paid to you in one sum.
PARTICIPATION
We do not expect to pay dividends on the Policy. However, we may apportion
and pay dividends each year. All dividends apportioned will be derived from the
divisible surplus of our participating business. Any such dividends will be paid
only at the end of the Policy Year. There is no right to a partial or pro rated
dividend prior to the end of the Policy Year. We will
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transfer the dividend to the Policy Accumulation Value at the end of the Policy
Year. Unless specified by you, the amount transferred is allocated to each
Subaccount and the Fixed Account on a pro-rata basis.
ASSIGNMENT
You may assign a nonqualified Policy or any interest in it. We will
recognize an assignment only if it is in writing and filed with us. We are
not responsible for the validity or effect of any assignment. An assignment
may limit the interest of any Beneficiary.
CALCULATION OF HISTORICAL PERFORMANCE DATA
From time to time, State Farm may disclose yields, total returns, and other
performance data of the Subaccounts and the Funds. Such performance data will be
computed, or accompanied by performance data computed, in accordance with the
standards defined by the SEC.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, advertisements and sales literature may quote the
current annualized yield of the Subaccount investing in the Money Market Fund of
the State Farm Variable Product Trust (the "Trust") for a seven-day
period in a manner that does not take into consideration any realized or
unrealized gains or losses or income other than investment income on shares of
the Money Market Fund (the "Money Market Subaccount").
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation and income other than investment
income) at the end of the seven-day period in the value of a hypothetical
account under a Policy having a balance of one Accumulation Unit of the Money
Market Subaccount at the beginning of the period, dividing such net change in
account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient
on a 365-day basis. The net change in account value reflects: 1) net income
from the Money Market Fund attributable to the hypothetical account; and 2)
charges and deductions imposed under the Policy which are attributable to the
hypothetical account. The charges and deductions include the per unit charges
for the hypothetical account for the Annual Administrative Fee, and the
mortality and expense risk charge. For purposes of calculating current yields
for a Policy, an average per unit Annual Administrative Fee is used based on
the $30 Annual Administrative Fee. Current Yield is calculated according to
the following formula:
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Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Money Market Fund (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation and income other than
investment income) for the seven-day period attributable to a
hypothetical account having a balance of one Accumulation Unit.
ES = per unit expenses attributable to the hypothetical account for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
/365/7/
Effective yield = (1 + ((NCS-ES)/UV)) - 1
Where:
NCS = the net change in the value of the Money Market Fund (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation and income other than
investment income) for the seven-day period attributable to a
hypothetical account having a balance of one Accumulation Unit.
ES = per unit expenses attributable to the hypothetical account for
the seven-day period.
UV = the unit value for the first day of the seven-day period.
Because of the charges and deductions imposed under the Policy, the yield
for the Money Market Subaccount is lower than the yield for the Money Market
Fund.
The current and effective yields on amounts held in the Money Market
Subaccount normally fluctuate on a daily basis. THEREFORE, THE DISCLOSED YIELD
FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Fund, the types and quality of portfolio
securities held by the Money Market Fund and the Money Market Fund's operating
expenses. Yields on amounts held in the Money Market Subaccount may also be
presented for periods other than a seven-day period.
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Yield calculations do not take into account the Surrender Charge that is
assessed on certain withdrawals of Policy Accumulation Value.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) under the Policy for 30-day or one-month periods. The annualized
yield of a Subaccount refers to income generated by the Subaccount during a 30-
day or one-month period and is assumed to be generated each period over a 12-
month period.
The yield is computed by: 1) dividing the net investment income of the Fund
attributable to the Subaccount units less Subaccount expenses for the period; by
2) the maximum offering price per unit on the last day of the period times the
daily average number of Accumulation Units outstanding for the period; by 3)
compounding that yield for a six-month period; and by 4) multiplying that result
by 2. Expenses attributable to the Subaccount include the Annual Administrative
Fee and the mortality and expense risk charge. The yield calculation assumes an
Annual Administrative Fee of $30 per Policy deducted at the end of each Policy
Year. For purposes of calculating the 30-day or one-month yield, an average
Annual Administrative Fee based on the average Policy Accumulation Value in the
Subaccount is used to determine the amount of the charge attributable to the
Subaccount for the 30-day or one-month period. The 30-day or one-month yield is
calculated according to the following formula:
Yield = 2 X (((NI - ES)/(U X UV)) + 1)/6/ - 1)
Where:
NI = net income of the portfolio for the 30-day or one-month period
attributable to the Subaccount's Accumulation Units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the 30-
day or one-month period.
Because of the charges and deductions imposed under the Policies, the yield
for the Subaccount is lower than the yield for the corresponding Fund.
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The yield on the amounts held in the Subaccounts normally fluctuates over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. A Subaccount's
actual yield is affected by the types and quality of portfolio securities held
by the corresponding Fund and that Fund's operating expenses.
Yield calculations do not take into account the Surrender Charge that is
assessed on certain withdrawals and surrenders of Policy Accumulation Value.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns for one or more of the Subaccounts for various
periods of time.
When a Subaccount has been in operation for 1, 5, and 10 years,
respectively, the average annual total return for these periods will be
provided. Average annual total returns for other periods of time may, from
time to time, also be disclosed.
Standard average annual total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Policy to the redemption value of that investment as of the last day of
each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent calendar quarter-end
practicable, considering the type of the communication and the media through
which it is communicated.
Standard average annual total returns are calculated using Subaccount Unit
Values which State Farm calculates on each Valuation Day based on the
performance of the Subaccount's underlying Fund, the deductions for the
mortality and expense risk charge, and the deductions for the Annual
Administrative Fee. The calculation assumes that the Annual Administrative Fee
is $30 per year per Policy deducted at the end of each Policy Year. For purposes
of calculating average annual total return, an average per-dollar per-day Annual
Administrative Fee attributable to the hypothetical account for the period is
used. The calculation also assumes surrender of Policy Accumulation Value at the
end of the period for the return quotation taking into account the applicable
Free Withdrawal Amount. The total return is calculated according to the
following formula:
TR = ((ERV/P)/1/N/) - 1
Where:
TR = the average annual total return net of Subaccount recurring
charges.
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ERV = the ending redeemable value (net of any applicable Surrender
Charge) of the hypothetical account at the end of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
From time to time, sales literature or advertisements may present historic
performance data for an investment portfolio in which a Subaccount invests,
shown since the portfolio's inception reduced by some or all of the fees and
charges under the Policy. Such adjusted historic performance would include
data that precedes the inception date of the Subaccount. This data is designed
to show the performance that would have resulted if the Policy had been in
existence during that time. This type of non-standard performance data will
only be disclosed if standard performance data for the required periods is
also disclosed.
EFFECT OF THE ANNUAL ADMINISTRATIVE FEE ON PERFORMANCE DATA
The Policy provides for a $30 Annual Administrative Fee (currently waived
for Policies with respect to which total premiums paid are at least
$50,000) that is deducted from the Subaccounts and the Fixed Account
pro-rata. For purposes of reflecting the Annual Administrative Fee in yield
and total return quotations, the average Policy Accumulation Value of $3,900
is used so that the Annual Administrative Fee is 0.77%.
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect deduction of the Surrender
Charge. Other total returns are calculated in exactly the same way as average
annual total returns described above, except that the ending redeemable value of
the hypothetical account for the period is replaced with an ending value for the
period that does not take into account any charges on amounts withdrawn.
State Farm may disclose cumulative total returns in conjunction with the
standard formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges
for the period.
ERV = The ending redeemable value of the hypothetical investment at the
end of the period.
P = A hypothetical single payment of $1,000.
USE OF INDEXES
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From time to time, the performance of certain historical indexes may be
presented in advertisements or sales literature. The performance of these
indexes may be compared to the performance of certain Subaccounts or Funds, or
may be presented without such a comparison.
OTHER INFORMATION
The following is a partial list of those publications which may be cited in
the Funds' sales literature and/or shareholder materials which contain articles
describing investment results or other data relative to one or more of the
Subaccounts. Other publications may also be cited.
Broker World Financial World
Across the Board Advertising Age
American Banker Barron's
Best's Review Business Insurance
Business Month Business Week
Economist Consumer Reports
Forbes Financial Planning
Inc. Fortune
Insurance Forum Institutional Investor
Insurance Week Insurance Sales
Journal of the American Society of Journal of Accountancy
CLU & ChFC Journal of Commerce
Kiplinger's Personal Finance Life Association News
Life Insurance Selling Manager's Magazine
MarketFacts Money
National Underwriter Nation's Business
Morningstar, Inc. New York Times
New Choices (formerly 50 Plus) Pensions & Investments
Pension World Round the Table
Rough Notes VARDs
U.S. Banker Working Woman
Wall Street Journal
NET INVESTMENT FACTOR
The Net Investment Factor is an index applied to measure the investment
performance of a Subaccount from one Valuation Period to the next. The Net
Investment Factor for any Subaccount for any Valuation Period is equal to (1)
divided by (2) and subtracting (3) from the result, where:
(1) is the result of:
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(a) the Net Asset Value Per Share of the Fund held in the Subaccount
determined at the end of the current Valuation Period; plus
(b) the per share amount of any dividend or capital gain distribution
made by the Fund held in the Subaccount, if the "ex-dividend"
date occurs during the Valuation period; plus or minus
(c) a per share charge or credit for any taxes reserved for
(2) is the Net Asset Value Per Share of the Fund held in the Subaccount,
determined at the end of the prior Valuation Period,
(3) is a daily factor representing the mortality and expense risk charge
deducted from the Subaccount adjusted for the number of days in the
Valuation Period. Such charge will not exceed an annual rate of 1.25%
of the daily net asset value of the Variable Account.
ANNUITY PAYMENT PROVISIONS
AMOUNT OF FIXED ANNUITY PAYMENTS. On the Annuity Date, the amount you have
chosen to apply to provide fixed annuity payments will be applied under the
annuity option you have chosen. For a "life annuity;" "life annuity with certain
period," or a "joint and last survivor life annuity," the annuity option payment
factor in effect on the Annuity Date times that amount will be the dollar amount
of each payment. Each of these payments will be equal and will not change. For
the "fixed years" annuity option, the annuity option payment factor guaranteed
in the Policy times that amount will be the minimum amount of each payment. Each
of these payments may be higher if any additional interest has been credited on
the balance of the account.
The annuity option payment factor used to determine the amount of the fixed
annuity payments will not be less than the guaranteed minimum annuity payment
factors shown in the Policy.
AMOUNT OF VARIABLE ANNUITY PAYMENTS. These payments will vary in amount.
The dollar amount of each payment attributable to each Subaccount is the number
of Annuity Units for each Subaccount times the Annuity Unit Value of that
Subaccount. The sum of the dollar amounts for each Subaccount is the amount of
the total variable annuity payment. The Annuity Unit Value for each payment will
be determined no earlier than five Valuation Days preceding the date the annuity
payment is due. We guarantee the payment will not vary due to changes in
mortality or expenses.
ANNUITY UNITS. On the Annuity Date, the number of Annuity Units for an
applicable Subaccount is determined by multiplying (1) by (2) and dividing the
result by (3), where:
(1) is the part of the Cash Surrender Value or Death Benefit on that date
applied under that Subaccount;
(2) is the Guaranteed Minimum Payment Factor for the Annuity Option
chosen; and
-8-
<PAGE>
(3) is the Annuity Unit Value for the Subaccount at the end of the
Valuation Period encompassing that date.
ANNUITY UNIT VALUE. The Annuity Unit Values for each Subaccount were
arbitrarily set initially at $10 when that Subaccount began operation.
Thereafter, the Annuity Unit Value for every Valuation Period is the Annuity
Unit Value at the end of the previous Valuation Day times the Net Investment
Factor times the Annuity Interest Factor. The Annuity Interest Factor is used to
neutralize the Assumed Investment Rate of 3 1/2% a year used to determine the
annuity option payment factors. The Assumed Investment Rate is significant in
determining the amount of each variable annuity payment and the amount by which
each variable annuity payment varies from one payment to the next.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
1. Accumulation unit value for current
valuation period.............................................. 11.12
2. Accumulation unit value for immediately
preceding valuation period.................................... 11.10
3. Annuity unit value for immediately preceding
valuation period.............................................. 20.00
4. Factor to compensate for the assumed
investment rate of 3.5%....................................... .9999
5. Annuity unit value of current valuation
period ((1) / (2)) x (3) x (4)................................ 20.03
ILLUSTRATION OF VARIABLE ANNUITY PAYMENTS
1. Number of accumulation units at Maturity Date.................. 10,000
2. Accumulation unit value........................................ 11.12
3. Adjusted Policy Accumulation Value (1)x(2)..................... 111,200
4. Monthly annuity payment per $1,000
of adj. Policy Accumulation Value............................. 5.82
5. Monthly annuity payment (3)x(4) / 1,000........................ 647.18
6. Annuity unit value at Maturity Date............................ 20.03
7. Number of annuity units (5)/(6)................................ 32.3105
8. Assume annuity unit value at the end of
first month equal to.......................................... 20.20
9. First monthly annuity payment (7)x(8).......................... 652.67
10. Assume annuity unit value at the end of second month equal to.. 19.90
11. Second monthly annuity payment (7)x(10)........................ 642.98
12. Assume annuity unit value at the end of third month equal to... 20.50
13. Third monthly annuity payment (7)x(12)......................... 662.37
-9-
<PAGE>
PAYMENT OF PROCEEDS UPON DEATH OF OWNER OR ANNUITANT
DEATH OF OWNER
The Code requires the following distributions under an annuity when you
die.
(1) If you die before the Annuity Date, you are not the Annuitant, and you
either have not named a Successor Owner or your named Successor Owner
is not a living natural person, the Cash Surrender Value must be paid
within 5 years after your date of death.
(2) If you die before the Annuity Date, you are the Annuitant, and you
either have not named any beneficiary or your named beneficiary is not
a living natural person, the death benefit must be paid within 5 years
after your date of death.
(3) If you die before the Annuity Date, you are not the Annuitant, and
your sole Successor Owner is a person other than your spouse, your
Successor Owner may elect to have the Cash Surrender Value paid under
an annuity option or any other method of payment then provided by us
other than an interest only method of payment. The election must be
made and payments must start within one year after your death and must
not extend beyond the life expectancy of your Successor Owner. If no
election is made within this time, distribution will be made within
five years after your date of death.
(4) If you die before the Annuity Date, you are the Annuitant, and your
sole named surviving primary beneficiary is a person other than your
spouse, your surviving primary beneficiary may elect to have the Death
Benefit paid under an annuity option or any other method of payment
then provided by us other than an interest only method of payment. The
election must be made and payments must start within one year after
your death and must not extend beyond the life expectancy of your
primary beneficiary. If no election is made within this time,
distribution will be made within five years after your date of death.
(5) If you die before the Annuity Date, you are not the Annuitant, and
your sole Successor Owner is your surviving spouse, your surviving
spouse becomes the Owner.
(6) If you die before the Annuity Date, you are the Annuitant, and your
surviving spouse is your sole named primary beneficiary, your spouse
will replace you as Owner and may replace you as Annuitant. If your
-10-
<PAGE>
spouse does not elect to replace you as Annuitant, the Death Benefit
must be paid to your spouse under an annuity option or any other
method of payment then provided by us for an owner. For purposes of
the preceding sentence, the election must be made, payments must start
within one year after your death, and must not extend beyond your
spouse's life expectancy; however, if your spouse does not choose a
method of payment within this time, distribution will be made under
Annuity Option 1.
(7) If you die on or after the Annuity Date and you are not the Annuitant,
any remaining payments must be paid to your Successor Owner at least
as fast as the method of payment in effect at your death.
(8) If you die on or after the Annuity Date and you are the Annuitant, any
remaining payments must be paid to the beneficiary at least as fast as
the method of payment in effect at your death.
If you are not a living natural person, the Annuitant will be treated as
the Owner for purposes of this provision. If you are not a living natural person
and there is a change in the Annuitant, such change shall be treated as the
death of the Owner for purposes of this provision. If the Policy has two owners,
the first death of either owner is treated as the death of the owner for
purposes of this provision. For purposes of this provision, the amount of any
distribution will be determined on that date of such distribution.
Notwithstanding anything in the Policy to the contrary, the surviving joint
owner will be treated as the Successor Owner of the Policy.
Other rules apply to Qualified Policies.
DEATH OF ANNUITANT
DEATH OF ANNUITANT WHO IS NOT AN OWNER. If the Annuitant dies before
the Annuity Date and the Annuitant is not an Owner, the Death Benefit will be
paid as provided in the following provisions. If the method of payment chosen
is not available or no method of payment is chosen, payment will be in one
sum.
If the Annuitant dies on or after the Annuity Date while you are alive, any
remaining payments must be paid to you at least as fast as the method of payment
in effect on the Annuitant's date of death.
BENEFICIARY DESIGNATION. This is as shown in the application. It includes
the name of the beneficiary and the order and method of payment. If you name
"estate" as a beneficiary, it means the executors or administrators of the last
survivor of you and all beneficiaries. If you name "children" of a person as a
beneficiary, only children born to or legally adopted by that person as of the
Annuitant's date of death will be included.
-11-
<PAGE>
We may rely on an affidavit as to the ages, names, and other facts about
all beneficiaries. We will incur no liability if we act on such affidavit.
CHANGE OF BENEFICIARY DESIGNATION. You may make a change while the
Annuitant is alive by sending us a request. The change will take effect the date
the request is signed and will replace previous beneficiary designations for the
Policy, but the change will not affect any action we have taken before we
receive the request. We have the right to request your Policy to make the
change.
After the Annuitant's death, anyone who has the right to make a withdrawal
may change the method of payment or may select one of the annuity options, and
may name a successor to their interest. The successor payee may be their estate.
ORDER OF PAYMENT. When the Annuitant dies (1) before the Annuity Date and
a death benefit is payable or (2) on or after the Annuity Date, you are the
Annuitant, and payments continue to the beneficiary, we will make such
payment(s) in equal shares to the primary beneficiaries living when payment is
made. If a primary dies after the first payment is made, we will pay that
primary's unpaid share in equal shares to the other primaries living when
payment is made. If the last primary dies, we will make payment in equal shares
to the successor beneficiaries living when payment is made. If a successor dies
while receiving payments, we will pay that successor's unpaid share in equal
shares to the other successors living when payment is made. If, at any time, no
primary or successor is alive, we will make a one sum payment in equal shares to
the final beneficiaries. If, at any time, no beneficiary is living, we will make
a one sum payment to you, if living when payment is made. Otherwise, we will
make a one sum payment to the estate of the last survivor of you and all
beneficiaries. "When payment is made" means (1) the date that a periodic payment
is due or (2) the date that a request is signed for a cash withdrawal or a one
sum payment. You may change this order of payment by sending us a request while
the Annuitant is alive.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
Where permitted by applicable law, we may:
(1) create new separate accounts;
(2) combine separate accounts, including the Variable Account;
(3) add new Subaccounts to or remove existing Subaccounts from the
Variable Account or combine Subaccounts;
(4) make any Subaccount available to such classes of policies as we may
determine;
(5) add new funds or remove existing funds;
-12-
<PAGE>
(6) substitute new funds for any existing Fund if shares of the Fund are
no longer available for investment or if we determine investment in a
Fund is no longer appropriate in the light of the purposes of the
Variable Account;
(7) deregister the Variable Account under the Act if such registration is
no longer required; and
(8) operate the Variable Account as a management investment company under
the Act or in any other form permitted by law.
The investment policy of the Variable Account will only be changed with the
approval of the insurance supervisory official of the state in Illinois, our
State of domicile. The investment policy of the Variable Account is to invest in
one or more investment companies. The process for such approval is on file.
SAFEKEEPING OF ACCOUNT ASSETS
State Farm holds the title to the assets of the Subaccount. The assets are
kept physically segregated and held separate and apart from State Farm's General
Account assets and from the assets in any other separate account.
Records are maintained of all purchases and redemptions of Fund shares held
by each of the Subaccounts.
A fidelity bond in the amount of $5 million covering State Farm's
directors, officers, and employees has been issued by National Union Fire
Insurance Company.
DISTRIBUTION OF THE POLICIES
State Farm VP Management Corp., One State Farm Plaza, Bloomington, Illinois
61710, acts as the principal underwriter of the Policies. The Policies are
offered to the public on a continuous basis. We do not anticipate discontinuing
the offering of the Policies, but reserve the right to discontinue the offering.
LEGAL MATTERS
All matters relating to Illinois law pertaining to the Policies,
including the validity of the Policies and State Farm's authority to issue
the Policies, have been passed upon by Kim Brunner, Senior Vice President and
General Counsel of State Farm. Sutherland Asbill & Brennan LLP of
Washington, D.C. has provided advice on certain matters relating to the
federal securities laws.
-13-
<PAGE>
EXPERTS
The statutory basis statements of admitted assets, liabilities, capital
and surplus of State Farm Life and Accident Assurance Company as of December
31, 1998 and 1997, and the related statutory basis statements of operations
and changes in capital and surplus, and cash flows for the years then ended,
appearing in this Statement of Additional Information have been audited by
PriceWaterhouseCoopers LLP, independent accountants, whose report thereon is
set forth elsewhere herein, and are included in reliance upon the authority
of such firm as experts in accounting and auditing.
As stated in their report, these financial statements were prepared by the
Company in conformity with the accounting practices prescribed or permitted by
the Insurance Department of the State of Illinois (statutory basis), which
practices differ from generally accepted accounting principles (GAAP). The
effect on the financial statements of the variances between the statutory basis
of accounting and GAAP, although not reasonably determinable, are presumed to be
material. Therefore, their report contains an adverse opinion on the financial
statements of the Company in conformity with GAAP, but an unqualified opinion in
conformity with statutory basis accounting.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Policies discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
SEC.
RELATIONSHIPS WITH THE COMPANIES THAT MAINTAIN THE BENCHMARK INDICES
STANDARD & POOR'S. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)",
"Standard & Poor's 500", and "500" are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use by State Farm and the Trust. Neither the
State Farm Variable Deferred Annuity, the Large Cap Equity Index Fund, nor the
Stock and Bond Balanced Fund (the "Product and Funds") are sponsored, endorsed,
sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("S&P").
S&P makes no representation or warranty, express or implied, to the owners of
the Product and Funds or any member of the public regarding the advisability of
investing in securities generally or in the Product and Funds particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to State Farm and the Trust is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to State Farm, the Trust, the
Product, or the Funds. S&P has no obligation to take the needs of State Farm,
the Trust, or the owners of the Product and Funds into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Product and Funds or the timing of the issuance or sale of the Product and
Funds or in the determination or calculation of the equation by which the
Product and Funds are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the
Product and Funds.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY STATE FARM, THE TRUST, OWNERS OF THE PRODUCT AND
FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
FRANK RUSSELL COMPANY. The Russell 2000(R) Index is a trademark/service
mark of the Frank Russell Company. Russell TM is a trademark of the Frank
Russell Company.
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<PAGE>
The Small Cap Equity Index Fund is not promoted, sponsored or endorsed by, nor
in any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Small Cap Equity Index Fund nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change its Index(es). Frank Russell
Company has no obligation to take the needs of any particular fund or its
participants or any other product or person into consideration in determining,
composing or calculating the Index(es).
Frank Russell Company's publication of the Index(es) in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index(es)
are based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF)
COMPRISING THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR
IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING,
WITHOUT MEANS OF LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX(ES) OR ANY DATA OR ANY SECURITY (OR
COMBINATION THEREOF) INCLUDED THEREIN.
MORGAN STANLEY & CO. INCORPORATED. The Morgan Stanley Capital
International EAFE(R) Free Index is the exclusive property of Morgan Stanley &
Co. Incorporated ("Morgan Stanley"). Morgan Stanley Capital International is a
service mark of Morgan Stanley and has been licensed for use by the Trust.
The International Equity Index Fund is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of this fund or any member of the public regarding the
advisability of investing in funds generally or in this fund particularly or the
ability of the Morgan Stanley Capital International EAFE(R) Free Index to track
general stock market performance. Morgan Stanley is the licensor of certain
trademarks, service marks and trade names of Morgan Stanley and of the Morgan
Stanley Capital International EAFE(R) Free Index which is determined, composed
and calculated by Morgan Stanley without regard to the issuer of this fund.
Morgan Stanley has no obligation to take the needs of the issuer of this fund or
the owners of this fund into consideration in determining, composing or
calculating the Morgan Stanley Capital International EAFE(R) Free Index. Morgan
Stanley is not responsible for and has not participated in the determination of
the timing of, prices at, or quantities of this fund to be issued or in the
determination or calculation of the equation by which this fund is redeemable
for cash. Morgan Stanley has no obligation or liability to owners of this fund
in connection with the administration, marketing or trading of this fund.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE ACCURACY
AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER
MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE TRUST, THE TRUST'S CUSTOMERS AND COUNTERPARTIES,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEXES OR
ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR
FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY EXPRESS
OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT
TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY OTHER PARTY HAVE ANY
LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY
OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES.
FINANCIAL STATEMENTS
State Farm's financial statements that follow should be considered only
as bearing on State Farm's ability to meet its obligations under the
Policies. They should not be considered as bearing on the investment
performance of the assets held in the Variable Account. The Variable
Account's financial statements as of December 31, 1998 also are included.
-15-
<PAGE>
STATE FARM LIFE AND ACCIDENT
ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL
AUTOMOBILE INSURANCE COMPANY)
REPORT ON AUDITS OF FINANCIAL STATEMENTS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
REPORT ON AUDITS OF FINANCIAL STATEMENTS -- GAAP BASIS
FOR PERIOD SEPTEMBER 1, 1998 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS................................ 1
FINANCIAL STATEMENTS:
Statements of Admitted Assets, Liabilities, Capital and Surplus
-- Statutory Basis as of December 31, 1998 and 1997........... 2
Statements of Operations -- Statutory Basis for the years ended
December 31, 1998 and 1997.................................... 3
Statements of Changes in Capital and Surplus -- Statutory Basis
for the years ended December 31, 1998 and 1997................ 4
Statements of Cash Flows -- Statutory Basis for the years ended
December 31, 1998 and 1997.................................... 5
NOTES TO FINANCIAL STATEMENTS -- Statutory Basis................. 6-12
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL FINANCIAL
INFORMATION..................................................... 14
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES.................. 15
SEPARATE ACCOUNT FINANCIAL STATEMENTS............................ 16-20
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company
Bloomington, Illinois
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of State Farm Life and Accident Assurance
Company as of December 31, 1998 and 1997, and the related statutory statements
of operations, of changes in capital and surplus, and of cash flows, for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 2, these financial statements were prepared by
the Company in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Illinois (statutory-basis), which
practices differ from generally accepted accounting principles. When
statutory-basis financial statements are presented for purposes other than for
filing with a regulatory agency, generally accepted auditing standards require
that an auditor's report on them state whether they are presented fairly in
conformity with generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter referred to in the
preceding paragraph, the financial statements audited by us do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of State Farm Life and Accident Assurance Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended.
Also, in our opinion, the financial statements audited by us present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
State Farm Life and Accident Assurance Company as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended,
on the basis of accounting described in Note 2.
[PRICEWATERHOUSECOOPERS LLP]
February 16, 1999
1 -------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS -- STATUTORY
BASIS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
ADMITTED ASSETS
Bonds:
United States government $ 244,471,277 $ 255,888,160
Other governmental units 57,164,370 53,772,072
Public utility 128,026,646 123,669,069
Industrial and other 306,202,747 229,795,080
--------------- ---------------
735,865,040 663,124,381
--------------- ---------------
Mortgage loans -- 434,956
--------------- ---------------
Policy loans 60,525,969 55,227,567
Cash 861,505 (225,037)
Short-term investments 12,055,757 32,123,095
Accounts receivable -- investment sales 1,600 --
--------------- ---------------
73,444,831 87,125,625
--------------- ---------------
Total cash and invested assets 809,309,871 750,684,962
Federal income taxes recoverable 7,861 6,401
Premiums deferred and uncollected 2,649,754 2,800,161
Investment income due and accrued 14,716,046 13,378,335
Other assets 453,895 523,555
Assets held in separate accounts 1,343,832 --
--------------- ---------------
Total admitted assets $ 828,481,259 $ 767,393,414
--------------- ---------------
--------------- ---------------
LIABILITIES
Aggregate reserves for life polices and contracts $ 557,185,493 $ 522,598,055
Supplementary contracts without life contingencies 18,433,678 15,886,447
Policy and contract claims 4,408,668 3,192,384
Policyholders' dividend accumulations 50,208,442 44,984,808
Dividends to policyholders payable in the following year 19,418,940 18,337,390
Advance premiums, deposits and other policy and contract liabilities 11,586,303 11,547,853
Interest maintenance reserve 2,757,104 2,971,290
Commissions payable 224,998 307,194
Other liabilities 14,673,907 6,131,527
Liabilities related to separate accounts 1,324,003 --
Federal income taxes due or accrued 28,502 28,502
Federal income taxes (payable to affiliates) 5,394,936 2,005,289
Asset valuation reserve 1,644,174 1,499,234
--------------- ---------------
Total liabilities 687,289,148 629,489,973
--------------- ---------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 10,000 shares authorized, issued and outstanding 1,000,000 1,000,000
Paid-in surplus 2,000,000 2,000,000
Group contingency life reserve 94,076 115,796
Unassigned surplus 138,098,035 134,787,645
--------------- ---------------
Total capital and surplus 141,192,111 137,903,441
--------------- ---------------
Total liabilities, capital and surplus $ 828,481,259 $ 767,393,414
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
2
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENT OF OPERATIONS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Income:
Premiums and annuity considerations $ 92,257,039 $ 87,937,701
Net investment income 55,110,410 52,128,562
Considerations for supplementary contracts and dividend accumulations 13,582,991 12,926,962
Other 229,795 244,648
--------------- ---------------
161,180,235 153,237,873
--------------- ---------------
Benefits and other expenses:
Death benefits 14,386,654 11,774,735
Surrender benefits and other fund withdrawals 24,877,721 23,964,018
Other benefits and claims 4,935,106 4,384,724
Payments on supplementary contracts and dividend accumulations 11,194,520 11,472,593
Net transfers to (from) separate accounts 1,222,986 --
Increase in policy and contract reserves 41,809,279 41,087,000
Commissions 6,146,782 6,412,280
General insurance expenses 16,670,096 14,020,365
Taxes, licenses and fees 1,398,500 2,259,658
--------------- ---------------
122,641,644 115,375,373
--------------- ---------------
Net gain from operations before dividends to policyholders and federal income taxes 38,538,591 37,862,500
Dividends to policyholders 18,992,099 17,978,550
--------------- ---------------
Net gain from operations before federal income taxes 19,546,492 19,883,950
Federal income taxes incurred (excluding capital gains) 8,597,590 9,074,127
--------------- ---------------
Net gain from operations before net realized capital gains 10,948,902 10,809,823
Net realized capital gains or (losses) less capital gains tax of $76,138 and $20,934
(excluding $44,687 and ($10,323) transferred to the IMR) (52,078) (26,493)
--------------- ---------------
Net income $ 10,896,824 $ 10,783,330
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3 -------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Common stock:
Balance at beginning and end of year $ 1,000,000 $ 1,000,000
--------------- ---------------
Paid in surplus:
Balance at beginning and end of year 2,000,000 2,000,000
--------------- ---------------
Group contingency life reserve:
Balance at beginning of year 115,796 112,574
Transfer from unassigned surplus (21,720) 3,222
--------------- ---------------
Balance at end of year 94,076 115,796
--------------- ---------------
Unassigned surplus:
Balance at beginning of year 134,787,645 122,841,516
Net income 10,896,824 10,783,330
Net unrealized capital gains (losses) 656 (682)
Surplus (contributed to) withdrawn from separate accounts (20,000) --
Other changes in surplus in separate accounts statement 64,936 --
Change in nonadmitted assets 66,110 (130,312)
Change in asset valuation reserve (144,939) 1,913,974
Change in group contingency life reserve 21,720 (3,222)
Increase in reserves on account of change in valuation basis (574,917) (616,959)
Establishment of provision for class action settlement amounts (7,000,000) --
--------------- ---------------
Balance at end of year 138,098,035 134,787,645
--------------- ---------------
Total capital and surplus $ 141,192,111 $ 137,903,441
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
4
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $ 92,693,765 $ 88,923,871
Other premiums, considerations and deposits, allowances and reserve adjustments and other
income 13,592,046 12,928,398
Investment income received (excluding realized gains/losses and net of investment
expenses) 55,020,894 52,713,874
Life and accident and health benefits paid (13,991,124) (12,615,700)
Surrender benefits and other fund withdrawals paid (24,877,721) (23,964,018)
Other benefits to policyholders paid (15,396,683) (15,554,952)
Commissions, other expenses and taxes paid (excluding federal income taxes) (24,172,667) (21,432,911)
Dividends to policyholders paid (17,910,549) (16,796,472)
Federal income taxes paid (excluding tax on capital gains) (5,264,609) (8,818,190)
Net transfers from separate accounts (1,290,766) --
--------------- ---------------
Net cash from operations 58,402,586 55,383,900
--------------- ---------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 36,841,736 43,467,042
Stocks and mortgage loans 439,289 453,109
Net loss on cash and short-term investments -- --
--------------- ---------------
Total investment proceeds 37,281,025 43,920,151
Tax on capital gains 20,932 41,271
--------------- ---------------
Total cash from investments 37,260,093 43,878,880
--------------- ---------------
Cost of investments acquired (long term only):
Bonds 110,764,003 86,260,215
Miscellaneous applications 1,600 --
--------------- ---------------
Total investments acquired 110,765,603 86,260,215
--------------- ---------------
Increase in policy loans and premium notes 5,297,748 4,608,746
--------------- ---------------
Net cash from investments (78,803,258) (46,990,081)
--------------- ---------------
Cash from financing and miscellaneous sources:
Other cash provided 1,867,183 640,478
Other applications (net) (447,307) (842,530)
--------------- ---------------
Net cash from financing and miscellaneous sources 1,419,876 (202,052)
--------------- ---------------
Net change in cash and short-term investments (18,980,796) 8,191,767
Cash and short-term investments, beginning of year 31,898,058 23,706,291
--------------- ---------------
Cash and short-term investments, end of year $ 12,917,262 $ 31,898,058
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5 -------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1. NATURE OF BUSINESS OPERATIONS
State Farm Life and Accident Assurance Company (the Company) is a wholly-owned
subsidiary of State Farm Mutual Automobile Insurance Company (SFMAIC). The
Company is licensed in four states and primarily markets individual life and
annuity products through an independent contractor agency force. The Company's
individual life insurance products include traditional whole life, universal
life, term insurance and variable universal life contracts, which together
account for approximately 88% of premium revenue. Individual annuity products
including variable annuity contracts account for an additional 12%. The Company
also writes small amounts of group credit life and employee group life.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The accompanying financial statements have been prepared on a statutory basis in
accordance, in all material respects, with accounting practices prescribed in
the National Association of Insurance Commissioners (NAIC) Annual Statement
Instructions and Accounting Practices and Procedures manuals, as well as state
laws, regulations, and general administrative rules. Statutory basis accounting
also permits the use of accounting practices which differ from those prescribed
in the sources referred to above, when such practices are approved by the
insurance department of the insurer's state of domicile. State Farm Life and
Accident Assurance Company has used no such permitted accounting practices in
the preparation of these financial statements that would be deemed to have a
material effect on the determination of its financial position as of December
31, 1998 and 1997, or the results of its operations for the years then ended.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant accounting practices include:
A. INVESTMENTS
Bonds are stated at values prescribed by the NAIC. In general, bonds are stated
at amortized cost. Under GAAP, debt securities would be classified into three
categories: held-to-maturity, trading and available-for-sale. Held-to-maturity
securities would be reported at amortized cost. Trading securities would be
reported at fair value, with unrealized gains and losses included in earnings.
Available-for-sale securities would be reported at fair value, with unrealized
gains and losses, net of applicable taxes, reported in a separate component of
surplus.
Prepayment assumptions for loan-backed bonds are internal estimates based on
historical prepayment patterns. Prepayment assumptions for structured securities
are based on estimates from various data reporting services. These assumptions
are consistent with the current interest rate and economic environment. The
retrospective adjustment method is used to value all securities.
Mortgage loans on real estate, all of which are first liens, are carried at the
aggregate unpaid principal balances.
Policy loans are stated at the aggregate of unpaid loan balances which are not
in excess of cash surrender values of related policies.
Short-term investments are stated at cost which approximates market.
Investment income is recorded when earned. Realized gains and losses on sale or
maturity of investments are determined on the basis of specific identification.
Aggregate unrealized capital gains and losses are credited or charged directly
to unassigned surplus.
B. PREMIUMS DEFERRED AND UNCOLLECTED
Premiums deferred and uncollected represent modal premiums, either due and
uncollected or not yet due, where policy reserves have been provided on the
assumption that the full premium for the current policy year has been collected.
Also, where policy reserves have been provided on a continuous premium
assumption, premiums uncollected are similarly defined.
C. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS
Policy reserves on life insurance are based on statutory mortality and interest
requirements and are computed using principally net level and modified
preliminary term methods with interest rates ranging from 3% to 5.5%. The use of
a modified reserve basis partially offsets the effect of immediately expensing
policy acquisition costs. Policy reserves on annuities are based on statutory
mortality and interest requirements with interest rates ranging from 3% to 7%.
GAAP reserves are based on mortality, lapse, withdrawal and interest rates that
are based on Company experience.
- ---------
6
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
D. POLICYHOLDERS' DIVIDENDS
All of the Company's life insurance business is written on the participating
basis. Policyholders' dividends are determined annually by the Board of
Directors. Amounts declared and estimated to be payable to policyholders in the
forthcoming year have been included in the accompanying financial statements as
a liability based on approved dividend scales. Under GAAP, dividends are
anticipated and may be considered as a planned contractual benefit when
computing the value of future policy benefits.
E. FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with SFMAIC and its
affiliates.
The consolidated federal income tax liability is apportioned to each entity in
accordance with a written agreement. The allocation is based upon separate
return calculations with current credit for net losses and tax credits.
Intercompany federal income tax balances are settled as follows: 1) intercompany
federal income tax receivables and payables which relate to the current tax year
will be settled within ninety (90) days; 2) any refunds of federal income tax
will be settled within sixty (60) days of receipt of the refund; and 3) any
payments of federal income tax due will be settled within sixty (60) days of
payment of the tax due.
The Company's provision for federal income taxes is computed in accordance with
those sections of the Internal Revenue Code applicable to life insurance
companies and is based on income which is currently taxable. Under GAAP,
deferred federal income taxes would be provided for temporary differences
between the tax basis and financial statement basis of assets and liabilities.
F. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
Pension Plan
The Company and affiliated insurers sponsor a defined benefit plan covering
substantially all of its employees.
The Company's funding policy is to contribute (1) at least the current service
cost on a current basis and to fund any unfunded liabilities over the
appropriate period and (2) not more than the maximum amount that may be deducted
for federal income tax purposes.
Contributions are allocated among participating companies based on ratios of
annual compensation rates.
Under GAAP, periodic net pension expense would be based on the cost of
incremental benefits for employee service during the period, interest on the
projected benefit obligation, actual return on plan assets and amortization of
actuarial gains and losses rather than the funding policy.
Other Postretirement Benefits
The Company and its affiliated insurers currently provide certain health care
and life insurance benefits pursuant to plans sponsored by its parent, SFMAIC.
Eligible former employees, eligible former agents, and their eligible dependents
currently may participate in these plans.
As a result of the policy promulgated by the NAIC concerning the treatment of
certain postretirement benefits, beginning in 1993, the Company changed its
method of accounting for the costs of the potential health care and life
insurance benefits provided to those already eligible or retired post-career
associates to the accrual method, and elected to amortize its transition
obligation attributable to these potential benefits over twenty years.
GAAP accounting for postretirement benefits requires an additional accrual for
the estimated cost of the potential benefit obligation under the plans for
active, but not yet eligible, employees and their dependents.
G. INTEREST MAINTENANCE RESERVE AND ASSET VALUATION RESERVE
Interest Maintenance Reserve (IMR) -- Realized capital gains and losses, due to
interest rate fluctuations, net of tax on short-term and long-term fixed income
investments are applied in this calculation. These gains and losses are
amortized into income over the approximate remaining life of the investment
sold. The IMR is not calculated under GAAP.
Asset Valuation Reserve (AVR) -- Realized gains and losses due to credit risk
fluctuations and unrealized gains and losses on applicable invested assets are
reflected in the calculation of this reserve. Changes in the AVR are charged or
credited directly to unassigned surplus and include no voluntary contributions
in 1998 or 1997. The AVR is not calculated under GAAP.
H. SEPARATE ACCOUNTS
The Company issues individual variable universal life and annuity contracts.
Deposits received in connection with these contracts are placed in the Company's
separate accounts and general accounts within certain limits.
A separate account is an accounting entity segregated as a discrete operation
within an insurance company. Assets held in
7 -------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
separate accounts under variable life and variable annuity contracts are
invested as designated by the contract holder in shares of mutual funds which
are managed either by the Company or by an outside manager.
Separate account assets are reported at market value and liabilities are
recorded at amounts equal to assets. Except for rights of the Company as a
result of surplus contributions made to the separate accounts, contract holders
are the only persons having rights to any assets in the separate accounts or to
income arising from such assets.
I. RECOGNITION OF PREMIUMS AND ANNUITY CONSIDERATIONS AND RELATED EXPENSES
Premiums and annuity considerations are recognized over the premium paying
period of the policies, whereas acquisition costs such as commissions and other
costs related to new business are expensed as incurred. For investment contracts
(those without mortality risk, such as immediate annuities with benefits paid
for a period certain) and contracts that permit the insured to change the amount
and timing of premium payments (such as universal life products), deposits are
recorded as revenue when received. Under GAAP, the deposits are recorded as
increases to liabilities and revenue is recognized as mortality and other
assessments are made to policyholders. Additionally, acquisition costs under
GAAP are capitalized and amortized over the policy period.
J. NONADMITTED ASSETS
Certain assets designated as "nonadmitted" assets aggregating $241,007 and
$307,116 at December 31, 1998 and 1997, respectively, are not recognized by
statutory accounting practices. These assets are excluded from the balance
sheet, and the net change in such assets is charged or credited directly to
unassigned surplus. GAAP would recognize such assets at the lower of cost or net
realizable value.
The discussion above highlights the significant variances between the statutory
accounting practices followed by the Company and GAAP. The effect of these
differences has not been determined but is presumed to be material.
3. BONDS AND OTHER DEBT SECURITIES
The amortized cost and estimated market values of investments in debt securities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
government corporations and agencies $ 302,292 $ 31,174 $ (2) $ 333,464
Obligations of states and political subdivisions 2,799 100 2,899
Corporate securities 442,830 22,436 (311) 464,955
------------ ----------- ----- ------------
Total $ 747,921 $ 53,710 $ (313) $ 801,318
------------ ----------- ----- ------------
------------ ----------- ----- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. treasury securities and obligations of U.S.
government corporations and agencies $ 309,843 $ 25,904 $ (136) $ 335,611
Obligations of states and political subdivisions 2,799 96 -- 2,895
Corporate securities 382,605 11,423 (739) 393,289
------------ ----------- ----- ------------
Total $ 695,247 $ 37,423 $ (875) $ 731,795
------------ ----------- ----- ------------
------------ ----------- ----- ------------
</TABLE>
- ---------
8
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
The amortized cost and estimated market value of debt securities, by contractual
maturity, are shown below (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 52,383 $ 55,997
Due after one year through five years 365,591 393,530
Due after five years through ten years 277,287 296,031
Due after ten years 52,660 55,760
------------ ------------
Total $ 747,921 $ 801,318
------------ ------------
------------ ------------
</TABLE>
Gross proceeds and realized gains and losses on bonds sold at the discretion of
the Company for the year ended December 31, were (in thousands):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Proceeds $ -- $ 4,819
Gross gains -- --
Gross losses -- (162)
</TABLE>
At December 31, 1998, bonds carried at amortized cost of $1,597,026 were on
deposit with regulatory authorities.
4. NET INVESTMENT INCOME
The components of net investment income earned by type of investment for the
years ended December 31, 1998 and 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Bonds $ 50,351 $ 47,316
Short-term investments 1,349 1,576
Policy loans 3,706 3,449
Mortgage loans 3 50
Other -- 3
----------- -----------
Gross investment income 55,409 52,394
Investment (expenses) (299) (265)
----------- -----------
Net investment income $ 55,110 $ 52,129
----------- -----------
----------- -----------
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each significant class of financial instruments for which it is practicable to
estimate that value:
Bonds and Short-Term Investments
Fair values for issues traded on public exchanges are based on the market price
in such exchanges at year end. For issues that are not traded on public
exchanges, fair values were estimated based on market comparables or internal
analysis.
Mortgage Loans
Fair values were estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Separate Accounts
The fair value of the assets held in separate accounts and corresponding
liabilities are estimated based on the fair value of the underlying assets.
Cash
The carrying amount is a reasonable estimate of fair value.
Deferred Annuities
Fair values were approximated by the amount due to the annuity holder as if the
annuity contract was surrendered at year end.
Advance Premiums
Fair values were approximated by the amount due to the policyholder as if the
policy was surrendered at year end.
Settlement Options Without Life Contingencies
Settlement options without life contingencies are similar to demand deposits.
The fair value is the amount payable on demand at year end.
9 -------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
The estimated fair values and statement values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
FAIR STATEMENT STATEMENT
VALUE VALUE FAIR VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Bonds $ 789,262 $ 735,865 $ 699,684 $ 663,124
Bond reserves -- 1,618 -- 1,407
------------ ------------ ------------ ------------
$ 789,262 $ 734,247 $ 699,684 $ 661,717
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Mortgage loans $ -- $ -- $ 450 $ 435
Mortgage loan reserves -- -- -- 5
------------ ------------ ------------ ------------
$ -- $ -- $ 450 $ 430
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash $ 862 $ 862 $ (225) $ (225)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Short-term investments: $ 12,056 $ 12,056 $ 32,111 $ 32,123
Short-term reserves -- 25 -- 87
------------ ------------ ------------ ------------
$ 12,056 $ 12,031 $ 32,111 $ 32,036
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Separate Accounts $ 1,344 $ 1,344 $ -- $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Financial liabilities:
Deferred annuity reserves $ 123,768 $ 125,022 $ 127,986 $ 127,654
Advance premiums 1,932 1,949 2,294 2,315
Settlement options without life contingencies 18,434 18,434 15,886 15,886
Separate Accounts 1,324 1,324 -- --
</TABLE>
- ---------
10
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
6. FEDERAL INCOME TAXES
The difference between the Company's effective income tax rate and the statutory
rate for both 1998 and 1997 is primarily due to non-deductible policyholder
dividends, unamortized deferred acquisition costs and tax reserves.
The examinations of the Company's federal income tax returns through 1986 have
been closed by the Internal Revenue Service. Returns for 1987, 1988, 1989 and
1990 have been examined. Although a few issues remain open, no open issue would
have a material effect on surplus. Returns for 1991, 1992 and 1993 are currently
under examination. Although the audit is still in progress at this time, there
have been no individual issues or issues in the aggregate raised that would
require adjustments which would have a material effect on surplus.
7. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
A. PENSION PLANS
The pension cost allocated to the Company amounted to $0 in both 1998 and 1997.
A comparison of accumulated plan benefits, determined in accordance with
Statement of Financial Accounting Standards No. 35, and plan net assets for the
non-contributory defined benefit pension plan of the Company and its parent and
other affiliates as of August 31, (the most recent actuarial valuation date) is
presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of accumulated plan
benefits:
Vested $ 3,214,144 $ 2,857,267
Nonvested 62,938 59,984
----------- -----------
$ 3,277,082 $ 2,917,251
----------- -----------
----------- -----------
Net assets available for benefits $ 6,862,052 $ 6,611,785
----------- -----------
----------- -----------
</TABLE>
Benefits paid amounted to $141,934,614 and $116,085,398 in 1998 and 1997,
respectively. The assumed rate of return on plan assets used in determining the
actuarial present value of vested and nonvested accumulated plan benefits was 7%
for both 1998 and 1997. In addition, the discount rate was 7% for both 1998 and
1997. The rate of compensation increases ranged from 5.5% to 12.8% in 1998 and
1997 and varies by the attained age of the employee.
The Company elected to change its plan year to a calendar year beginning January
1, 1999.
The Company participates with its affiliates in a qualified defined contribution
plan. Contributions recorded for the years ended December 31, 1998 and 1997,
were $162,710 and $71,088, respectively. Benefits, generally available upon
retirement, are paid from net assets available for plan benefits.
B. OTHER POSTRETIREMENT BENEFITS
The Company's share of the net post-career benefit cost for the year ended
December 31, 1998, was $352,911 and included paid benefits, the expected cost of
the potential health care and life insurance benefits for newly eligible
post-career associates, interest cost and amortization of the transition
obligation.
At December 31, 1998 and 1997 respectively, the Company's share of the recorded
unfunded post-career benefit obligation attributable to the potential health
care and life insurance benefits for post-career associates was $1,260,752 and
$985,543. The Company's share of the remaining transition obligation for these
potential benefits was $792,161 and $807,171 at December 31, 1998 and 1997,
respectively, which is being amortized over 20 years, beginning in 1993. The
Company's share of unrecognized net (gains) or losses, resulting from experience
different from that assumed and/or changes in actuarial assumptions, was
$(60,967) at December 31, 1998. The Company's share of the estimated cost of the
potential benefit obligation under the plans for active, but not yet eligible
employees, agents, and their qualifying dependents at January 1, 1998, was
$2,864,477, which is not accrued in these financial statements. At January 1,
1998 and 1997, the discount rate used in determining the accumulated post-career
benefit obligation attributable to these potential benefits was 6.5% and 7%,
respectively, and the 1998 health care cost trend rate is 10% for the first
year, graded to 6% over the following five years.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the Company's share of
the post-career benefit obligation attributable to the potential health care
insurance benefits for post-career associates by $153,061 as of January 1, 1998,
and the estimated eligibility and interest cost components of the net periodic
post-career benefit cost for 1998 by $26,433.
The Company participates with its affiliates in an unfunded deferred
compensation plan for highly compensated employees
11-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
and independent contractor agents. As the Company currently has no participants
in this plan, there was no liability established for 1998 or 1997.
8. OTHER RELATED PARTY TRANSACTIONS
The Company, its parent, and its affiliates share certain administrative,
occupancy and marketing expenses. Such expenses are allocated to the Company
based on time and usage studies and totaled approximately $11,738,367 and
$8,762,970 in 1998 and 1997, respectively.
At December 31, 1998 and 1997, total amounts owed to the parent company,
exclusive of federal income taxes, were approximately $2,571,904 and $1,800,341,
respectively. Total amounts owed to affiliates were approximately $5,551 and
$5,397 at December 31, 1998 and 1997, respectively.
9. CONTINGENT LIABILITIES
On August 28, 1998, the Company entered into a Stipulation of Settlement with
attorneys for the plaintiffs in a class action lawsuit involving alleged
misleading life insurance sales practices in connection with the Company's sale
of traditional and universal life insurance policies in the United States from
1982 through 1997. The Company denies the allegations in this lawsuit but has
entered into a settlement in order to limit additional expense and burden upon
operations. The proposed settlement received court approval in a fairness
hearing concluded on February 11, 1999.
Pursuant to the terms of this proposed settlement, the Company has agreed to
provide policyowners in the class with options that include policy enhancement,
the right to purchase an enhanced value policy or enhanced value annuity and a
claim review process. While it is not possible to predict with certainty the
ultimate dollar amount that would be paid or credited to current and former
policyholders under the term of this proposed settlement, the Company has
elected to record, on an estimated basis, a liability for such amount in the
December 31, 1998 financial statements. Also included in this liability is an
amount for estimated legal and administrative costs which will be incurred in
connection with the settlement. An amount of $7,000,000 has been included in the
liabilities of the Company as of December 31, 1998 for such provision with a
corresponding credit recorded in the Statement of Changes in Capital and
Surplus.
The Company is subject to liabilities of a contingent nature which may from time
to time arise. Such liabilities could result from sales practices, income tax
matters, guaranty fund assessments or other occurrences that take place in the
normal course of doing business. In addition, the life insurance industry has
not been exempt from the impact of an increasingly litigious environment which
is being experienced in the United States. Liabilities arising as a result of
these factors, or other such contingencies, that are not provided for elsewhere
in these financial statements are not reasonably estimable and are not
considered by management to be material in relation to the financial position of
the Company.
10. DIVIDEND RESTRICTIONS
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in Illinois without the prior approval of the commissioner
is subject to restrictions related to statutory surplus and net income. For
companies doing business in New York, such payments are subject to similar
restrictions related to statutory surplus.
- ---------
12
<PAGE>
SUPPLEMENTAL SCHEDULE
13-------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION
To the Board of Directors
State Farm Life and Accident Assurance Company
Bloomington, Illinois
In our opinion, the accompanying supplemental schedule of assets and liabilities
as of and for the year ended December 31, 1998 is fairly stated in all material
respects in relation to the basic financial statements, taken as a whole, of
State Farm Life and Accident Assurance Company for the year ended December 31,
1998, which is covered by our report dated February 16, 1999 presented in the
first section of this document. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. This information is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements.
[PRICEWATERHOUSECOOPERS LLP]
February 16, 1999
- ---------
14
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA
DECEMBER 31, 1998
The following is a summary of certain financial data (in thousands) included in
other exhibits and schedules subjected to audit procedures by independent
auditors and utilized by actuaries in the determination of reserves.
<TABLE>
<S> <C>
Investment income earned:
U.S. government bonds $ 19,850
Other bonds (unaffiliated) 30,501
Mortgage loans 3
Premiums notes, policy loans and liens 3,706
Short-term investments 1,349
---------------
Gross investment income $ 55,409
---------------
---------------
Bonds and short-term investments by class and maturity:
Bonds by maturity -- statement value
Due within one year or less $ 52,383
Over 1 year through 5 years 365,591
Over 5 years through 10 years 277,287
Over 10 years through 20 years 47,103
Over 20 years 5,557
---------------
Total by maturity $ 747,921
---------------
---------------
Bond by class -- statement value
Class 1 $ 706,099
Class 2 41,617
Class 3 38
Class 4 167
Class 5 --
Class 6 --
---------------
Total by class $ 747,921
---------------
---------------
Total bonds publicly traded $ 705,894
---------------
---------------
Total bonds privately placed $ 42,027
---------------
---------------
Short term investments -- book value $ 12,056
---------------
---------------
Cash on deposit $ 862
---------------
---------------
Life insurance in force:
Ordinary $ 13,323,447
---------------
---------------
Credit life $ 11,938
---------------
---------------
Group life $ 18,666
---------------
---------------
Amount of accidental death insurance in force under ordinary policies $ 308,903
---------------
---------------
Life Insurance policies with disability provisions in force:
Ordinary $ 204
---------------
---------------
Group life (certificates) $ 1
---------------
---------------
Supplementary contracts in force:
Ordinary -- not involving life contingencies:
Amount on deposit $ 10,256
---------------
---------------
Income payable $ 152
---------------
---------------
Ordinary -- involving life contingencies:
Income payable $ 156
---------------
---------------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 2,766
---------------
---------------
Deferred -- fully paid account balance $ 123,122
---------------
---------------
Deferred -- not fully paid -- account balance $ 389
---------------
---------------
Deposit funds and dividend accumulations:
Deposit funds -- account balance $ 3,471
---------------
---------------
Dividend accumulations -- account balance $ 50,208
---------------
---------------
</TABLE>
15-------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of State Farm Life and Accident Assurance Company and
Contract Owners of State Farm Life and Accident Assurance Company Variable
Annuity Separate Account
In our opinion, the accompanying statement of assets and liabilities and owners'
equity and the related statement of operations and changes in owners' equity
present fairly, in all material respects, the financial position of State Farm
Life and Accident Assurance Company Variable Annuity Separate Account, (which
includes Large Cap Equity Index Fund, Small Cap Equity Index Fund, Bond Fund,
Money Market Fund, International Equity Index Fund, and the Stock and Bond Fund
thereof) at December 31, 1998, the results of their operations, and the changes
in their equity for the period September 1, 1998 (commencement of operations) to
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of State Farm Life and
Accident Assurance Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included direct confirmation of the number of shares owned at
December 31, 1998 with State Farm Variable Product Trust, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 12, 1999
- ---------
16
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES AND OWNERS' EQUITY
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Investments at market value:
State Farm Variable Product Trust Funds
Large Cap Equity Index Fund
40,435 shares (cost $489,967) $ 517,564
Small Cap Equity Index Fund
18,295 shares (cost $167,192) 174,536
Bond Fund
24,979 shares (cost $254,123) 253,539
Money Market Fund
126,424 shares (cost $126,424) 126,424
International Equity Index Fund
16,412 shares (cost $182,757) 190,869
Stock and Bond Fund
6,221 shares (cost $68,380) 70,986
---------------
Total investments $ 1,333,918
Total Assets $ 1,333,918
---------------
---------------
LIABILITIES AND OWNERS' EQUITY
Owners' Equity $ 1,333,918
---------------
Total Liabilities and Owners' Equity $ 1,333,918
---------------
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN OWNERS' EQUITY
FOR THE PERIOD SEPTEMBER 1, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1998
<TABLE>
<CAPTION>
INVESTORS FUND SERIES
---------------------------------------------------------------------
LARGE CAP SMALL CAP
EQUITY INDEX EQUITY INDEX BOND MONEY
OPERATIONS: FUND FUND FUND MARKET FUND
- ------------------------------------------------------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income:
Dividend Income $ 2,683 $ 3,875 $ 1,612 $ 713
------- ------- ------- -------
Expenses:
Mortality and expense risk charges 487 156 366 169
------- ------- ------- -------
Net investment income (loss) 2,196 3,719 1,246 544
------- ------- ------- -------
Realized net investment gain (loss) (5) (18) (311) 0
Unrealized appreciation (depreciation), net 27,597 7,344 (584) 0
------- ------- ------- -------
Realized and unrealized gain (loss) on investments and
capital gain distributions, net 27,592 7,326 (895) 0
------- ------- ------- -------
Net increase (decrease) in owners' equity from operations 29,788 11,045 351 544
------- ------- ------- -------
EQUITY TRANSACTIONS:
- ------------------------------------------------------------
Proceeds from units purchased 466,824 158,477 284,852 128,661
Transfers (net) including transfers to or from fixed account 14,298 6,215 (29,026) (1,902)
Payments for surrenders and other redemptions (3,346) (1,201) (2,638) (879)
Net increase (decrease) in equity derived from contract
holder transactions 477,776 163,491 253,188 125,880
Increase in equity from surplus contributed 10,000 0 0 0
------- ------- ------- -------
Total increase (decrease) in owners' equity 517,564 174,536 253,539 126,424
Owners' equity at beginning of period 0 0 0 0
------- ------- ------- -------
Owners' equity at end of period $ 517,564 $ 174,536 $ 253,539 $ 126,424
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
INTERNATIONAL STOCK AND
EQUITY INDEX BOND
OPERATIONS: FUND FUND
- ------------------------------------------------------------ --------------- ---------------
<S> <C> <C>
Income:
Dividend Income $ 950 $ 0
------- ------
Expenses:
Mortality and expense risk charges 180 63
------- ------
Net investment income (loss) 770 (63)
------- ------
Realized net investment gain (loss) (4) 2
Unrealized appreciation (depreciation), net 8,112 2,606
------- ------
Realized and unrealized gain (loss) on investments and
capital gain distributions, net 8,108 2,608
------- ------
Net increase (decrease) in owners' equity from operations 8,878 2,545
------- ------
EQUITY TRANSACTIONS:
- ------------------------------------------------------------
Proceeds from units purchased 174,610 67,474
Transfers (net) including transfers to or from fixed account 9,642 967
Payments for surrenders and other redemptions (2,261) 0
Net increase (decrease) in equity derived from contract
holder transactions 181,991 68,441
Increase in equity from surplus contributed 0 0
------- ------
Total increase (decrease) in owners' equity 190,869 70,986
Owners' equity at beginning of period 0 0
------- ------
Owners' equity at end of period $ 190,869 $ 70,986
------- ------
------- ------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
18
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. GENERAL INFORMATION
Organization:
The State Farm Life and Accident Assurance Company Variable Annuity Separate
Account (the "Separate Account") is a segregated investment account of the State
Farm Life and Accident Assurance Company (the "Company") and is registered with
the Securities and Exchange Commission as a unit investment trust pursuant to
the provisions of the Investment Company Act of 1940. The Separate Account was
established by the Company on December 9, 1996 and commenced operations on
September 1, 1998. Accordingly, it is an accounting entity wherein all
segregated account transactions are reflected. The assets of the Separate
Account are invested in one or more of the funds of the State Farm Variable
Product Trust (the "Trust") at the fund's net asset value in accordance with the
selection made by the contract owners.
Transactions with Sponsor:
A surplus contribution of $10,000 was made to the Separate Account by the
Company in 1998. As an investor in the Separate Account, the Company shares in
the investment performance of the Separate Account in relation to the portion of
its ownership of fund shares, which shares are subject to the same valuation
procedures as policy holders' shares. The market value of the Company's
investment in the separate account as surplus contributed was $9,915 at December
31, 1998.
2. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent assets and liabilities at the date of the financial
statements. As a result, actual results reported as income and expenses could
differ from the estimates reported in the accompanying financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments:
Investments in the Separate Account are valued by using net asset values which
are based on the daily closing prices of the underlying securities in the
Separate Account's portfolios.
Securities Transactions and Investment Income:
Securities transactions are recorded on the trade date (the date the order to
buy or sell is executed). Dividend income is recorded on the ex-dividend date.
The cost of investments sold and the corresponding capital gains and losses are
determined on a specific identification basis. Net investment income and net
realized gains (losses) and unrealized appreciation (depreciation) on
investments are allocated to the contracts on each valuation date based on each
contract's pro rata share of the assets of the fund as of the beginning of the
valuation date.
Accumulation Unit Valuation:
On each day the New York Stock Exchange (the "Exchange") is open for trading
(except for certain designated office-closed days), the accumulation unit value
is determined as of the earlier of 3:00 PM Central Time or the close of the
Exchange by dividing the contract holders' share of the value of each fund's
investments and other assets, less liabilities, by the number of contract owner
accumulation units outstanding in the respective fund.
Federal Income Tax:
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Separate Account are part of the
total operations of the Company and are not taxed as a separate entity.
Under Federal income tax law, net investment income and realized gains (losses)
are retained in the Separate Account and are not taxable until received by the
contract owner or beneficiary in the form of annuity payments or other
distributions.
4. EXPENSES AND DEDUCTIONS
A mortality and expense risk charge is deducted by the Company from the Separate
Account on a daily basis which is equal, on an annual basis, to 1.15% of the
daily net asset value of the contract holders' portion of assets in the Separate
Account. The charge may be adjusted after policy issue, but is guaranteed not to
exceed 1.25% of net assets. Although periodic retirement payments to contract
owners vary according to the investment performance of the fund, such payments
are not affected by expense or mortality experience because the Company assumes
the mortality risk and the expense risk under the contracts. The mortality risk
assumed by the Company
19-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
results from the life annuity payment option in the contracts in which the
Company agrees to make annuity payments regardless of how long a particular
annuitant or other payee lives. The annuity payments are determined in
accordance with annuity purchase rate provisions established at the time the
contracts are issued. Based on the actuarial determination of expected
mortality, the Company is required to fund any deficiency in the annuity payment
reserves from its general account assets. The disbursements for mortality and
expense risk and premium and death benefit guarantee risk charges amounted to
$1,422 during the period.
A $30 administrative fee is deducted from the policy accumulation value upon:
each policy anniversary, full surrender of the policy if not surrendered on the
anniversary, or the Annuity Date, as defined, if that date is not on the policy
anniversary. The administrative fee reimburses the Company for administrative
expenses relating to the issuance and maintenance of the contract. The
administrative fees earned by the Company during the period were $59.
A surrender charge may be deducted in the event of a surrender to reimburse the
Company for expenses incurred in connection with issuing a policy. The full
surrender charge will be reduced during the first seven contract years until it
reaches zero in the eighth contract year. There were no surrender charges
deducted during the period.
The Company reserves the right to deduct a $25 transfer processing fee for each
transfer in excess of 12 during a policy year.
5. OWNERS' EQUITY
Owners' equity is represented by accumulation units in the related Separate
Account, as well as the value of the fund shares owned by the Company. At
December 31, 1998 ownership of the Separate Account was represented by the
following accumulation units and accumulation unit values and surplus
contributed: (Multiplication of amounts shown may not equal contract owners'
equity because of rounding.)
<TABLE>
<CAPTION>
CONTRACT OWNERS' EQUITY
<S> <C> <C> <C>
UNIT UNITS CONTRACT
FUND VALUE OUTSTANDING OWNERS' EQUITY
- --------------- ------ ----------- ---------------
Large Cap $12.29 41,309 $ 507,649
Small Cap 9.66 18,069 174,536
Bond 10.56 24,013 253,539
Money Market 10.36 12,203 126,424
International 11.20 17,048 190,869
Stock and Bond 11.35 6,256 70,986
---------------
Total $1,324,003
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACT
OWNERS' SURPLUS TOTAL
FUND EQUITY CONTRIBUTED EQUITY
- -------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Large Cap $ 507,649 $ 9,915 $ 517,564
Small Cap 174,536 0 174,536
Bond 253,539 0 253,539
Money Market 126,424 0 126,424
International 190,869 0 190,869
Stock and Bond 70,986 0 70,986
--------------- ----- -----------
Total $1,324,003 $ 9,915 $ 1,333,918
--------------- ----- -----------
--------------- ----- -----------
</TABLE>
- ---------
20
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B.
(b) Exhibits
(1) Resolutions of the Board of Directors of State Farm Life and
Accident Assurance Company ("State Farm") establishing the State Farm
Life and Accident Assurance Company Variable Annuity Separate Account
(the "Variable Account").*
(2) Not Applicable.
(3) Distribution Agreement.*
(4) (a) Form of Policy.*
(b) Riders to Form of Policy*
(5) Application.***
(6) (a) Articles of Incorporation of State Farm.*
(b) By-Laws of State Farm.*
(7) Not Applicable.
(8) Participation Agreement.*
(9) Opinion and Consent of Counsel.*
(10) (a) Consent of Sutherland Asbill & Brennan LLP.
(b) Consent of PricewaterhouseCoopers LLP
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Powers of Attorney**
________________
* Incorporated by reference to the Registrant's initial registration
statement filed with the Securities and Exchange Commission on June
24, 1998 (File No. 333-57579).
** Incorporated by reference to Exhibit 12 of the Registration Statement
on Form S-6 (File No. 333-64345) filed with the Securities and Exchange
Commission on September 25, 1998.
*** Incorporated by reference to the Registrant's Post-Effective
Amendment No. 1 filed with the Securities and Exchange Commission on
December 22, 1998.
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
NAME AND PRINCIPAL
BUSINESS ADDRESS/*/ Position with State Farm
---------------- ------------------------
<S> <C>
Edward B. Rust, Jr. Director; President
Roger B. Tompkins Director: Executive Vice President
Darrell W. Beernink Vice President and Actuary
Charles R. Wright Director; Agency Vice President
Roger S. Joslin Director
Kurt G. Moser Director; Senior Vice President - Investments
Vincent J. Trosino Director
James G. Fisher Vice President - Operations
Kim M. Brunner Senior Vice President and General Counsel
Danny L. Scott, M.D. Vice President and Medical Director
Laura P. Sullivan Director; Vice President - Counsel; and Secretary
Dale R. Egeberg Vice President and Controller - Life
Terry L. Huff Vice President - Advanced Products
Max E. McPeek Vice President - Compliance
Roger J. Lehman Director
</TABLE>
* The principal business address of all the persons listed above is One State
Farm Plaza, Bloomington, Illinois 61710-0001.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
State Farm Mutual Automobile Insurance Company
State Farm County Mutual Insurance Company of Texas (Common
Management)
State Farm Florida Insurance Company (100% Ownership)
State Farm Financial Services, FSB (100% Ownership)
State Farm General Insurance Company (100% Ownership)
State Farm Fire and Casualty Company (100% Ownership)
State Farm Life Insurance Company (100% Ownership)
State Farm Annuity and Life Insurance Company (100% Ownership)
State Farm Life and Accident Assurance Company (100% Ownership)
State Farm Indemnity Company (100% Ownership)
Amberjack, Ltd. (100% Ownership)
Fiesta Jack, Ltd. (100% Ownership)
State Farm Lloyds, Inc. (100% Ownership)
State Farm Investment Management Corp. (100% Ownership)
State Farm International Services, Inc. (100% Ownership)
State Farm VP Management Corp. (100% Ownership)
Insurance Placement Services, Inc. (100% Ownership)
Top Layer Reinsurance Ltd. (50% Ownership)
ITEM 27. NUMBER OF POLICY OWNERS
As of April 1, 1999, there were 918 policy owners.
ITEM 28. INDEMNIFICATION
Illinois Business Corporation Act Chapter 805 Section 5/8.75 is a
comprehensive provision that defines the power of Illinois corporations to
provide for the indemnification of its officers, directors, employees and
agents. This Section also authorizes Illinois corporations to purchase and
maintain insurance on behalf of directors, officers, employees or agents of the
corporation.
The Articles of Incorporation, as amended, and the Bylaws of State
Farm Life and Accident Assurance Company do not provide for the indemnification
of officers, directors, employees or agents of the Company.
ITEM 29. PRINCIPAL UNDERWRITER
(a) State Farm VP Management Corp. ("State Farm VP") is the
registrant's principal underwriter.
<PAGE>
(b) Officers and Directors of State Farm VP.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* With the Underwriter
- ------------------ ---------------------
<S> <C>
Edward B. Rust, Jr. Director; President, CEO
Roger S. Joslin Director; Vice President and
Treasurer; CFO
Kurt G. Moser Director
Charles R. Wright Director; Vice President,
Sales and Marketing
Roger B. Tompkins Director; Vice President,
Administration; COO
Ralph O. Bolt Assistant Vice President,
Sales and Marketing
David R. Grimes Assistant Vice President,
Financial; Secretary
Terry L. Huff Assistant Vice President,
Administration; Manager, OSJ
Max E. McPeek Assistant Vice President, Compliance;
Chief Compliance Officer
Stephen L. Horton Assistant Secretary; Counsel
</TABLE>
* The principal business address of all of the persons listed above is One
State Farm Plaza, Bloomington, Illinois 61710-0001.
ITEM 30. LOCATION OF BOOKS AND RECORDS
All of the accounts, books, records or other documents required to be
kept by Section 31(a) of the Investment Company Act of 1940 and rules
thereunder, are maintained by State Farm at One State Farm Plaza,
Bloomington, Illinois 61710-0001.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B of this
registration statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
(a) The registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as is
necessary to ensure that the audited financial statements in the
registration statement are never more than 16 months old for as
long as purchase payments under the Policies offered herein are
being accepted.
(b) The registrant undertakes that it will include either (1) as part
of any application to purchase a Policy offered by the
prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or
similar written communication affixed to or included in the
prospectus that the applicant can remove and send to State Farm
for a Statement of Additional Information.
(c) The registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made
available under this Form N-4 promptly upon written or oral
request to State Farm at the address or phone number listed in
the prospectus.
(d) State Farm represents that in connection with its offering of the
Policies as funding vehicles for retirement plans meeting the
requirements of Section 403(b) of the Internal Revenue Code of
1986, it is relying on a no-action letter dated November 28,
1988, to the American Council of Life Insurance (Ref. No.
IP-6-88) regarding Sections 22(e), 27(c)(1), and 27(d) of the
Investment Company Act of 1940, and that paragraphs numbered (1)
through (4) of that letter will be complied with.
(e) State Farm represents that the fees and charges under the
Policies, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the
risks assumed by State Farm.
<PAGE>
SIGNATURES
As required by the requirements of the Securities Act of 1933, the
registrant, State Farm Life and Accident Assurance Company Variable Annuity
Separate Account, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this registration statement and has duly
caused this registration statement to be signed on its behalf, by the in the
City of Bloomington and the State of Illinois, on this 27th day of April,
1999.
State Farm Life and Accident Assurance Company
Variable Annuity Separate Account
(Registrant)
(SEAL)
By: State Farm Life and Accident Assurance Company
(Depositor)
Attest: /s/ Terry L. Huff By: *
----------------- ---------------
Terry L. Huff Edward B. Rust, Jr.
President
State Farm Life and Accident
Assurance Company
<PAGE>
As required by the Securities Act of 1933, this registration statement has
been signed below by the following persons in the capacities indicated on the
date(s) set forth below.
Signature Title Date
- --------- ----- ----
* President and Director --------------
- -------------------- (Principal Executive Officer)
Edward B. Rust, Jr.
* Executive Vice President and --------------
- -------------------- Director
Roger B. Tompkins
* Vice President and Controller --------------
- -------------------- (Principal Accounting Officer)
Dale R. Egeberg
* Vice President and Actuary --------------
- -------------------- (Principal Financial Officer)
Darrell W. Beernink
* Director --------------
- --------------------
Roger J. Lehman
* Director --------------
- --------------------
Roger S. Joslin
Director, Vice President - Counsel --------------
- -------------------- and Secretary
Laura P. Sullivan
* Director and Senior Vice President - --------------
- -------------------- Investments
Kurt G. Moser
* Director --------------
- --------------------
Vincent J. Trosino
* Director, Agency Vice President --------------
- --------------------
Charles R. Wright
* By /s/ Terry L. Huff April 27, 1999
--------------------------- --------------
Terry L. Huff Date
Pursuant to Power of Attorney
<PAGE>
Exhibit 10.(a)
[Letterhead of Sutherland Asbill & Brennan LLP]
April 26, 1999
State Farm Life and Accident Assurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the statement of additional information filed as part of the Form
N-4 registration statement for State Farm Life and Accident Assurance Company
Variable Annuity Separate Account. In giving this consent, we do not admit
that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
---------------------------
Stephen E. Roth, Esq.
<PAGE>
Exhibit 10(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company
We consent to the inclusion in Post-Effective Amendment No. 2 of the
Registration Statement of State Farm Life and Accident Assurance Company
Variable Annuity Separate Account on Form N-4 (No. 333-57579) of our report
dated February 16, 1999, on our audits of the statutory financial statements
of State Farm Life and Accident Assurance Company. We also consent to the
reference to our Firm under the caption "Experts" in the Statement of
Additional Information.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 23, 1999
