<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
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. 3 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 3 [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 May 1, 2000 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.
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May 1, 2000
VARIABLE DEFERRED ANNUITY
State Farm Life and Accident Assurance Company
Variable Deferred Annuity Prospectus
[LOGO]
<PAGE>
PROFILE DATED MAY 1, 2000
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," "our," and "State Farm" 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 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.
In a tax-qualified retirement plan, federal income tax deferral is provided by
the tax-qualified retirement plan. No additional tax deferral is provided by an
annuity. You should contact your attorney or tax advisor for more complete
information.
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.
To purchase a tax-qualified Policy, generally you must be 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
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"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 1999, ranged on an annual
basis from 0.34% 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 0.54% of
the value of an average Policy which is assumed to be $5,600) 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 $5,600 and assume that the
Annual Administrative Fee is 0.54% 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
your Policy at the All charges
Total end of 1 year you excluding
Annual would pay the surrender charges,
Insurance Total Annual Total following assessed over
Fund(1) Charges Fund Charges Annual Charges expenses a 10 year period
<S> <C> <C> <C> <C> <C>
Large Cap Equity Index Fund 1.69% 0.34% 2.03% $93 $241
Small Cap Equity Index Fund 1.69% 0.50% 2.19% $95 $257
International Equity Index
Fund 1.69% 0.75% 2.44% $97 $283
Money Market Fund 1.69% 0.50% 2.19% $95 $257
Bond Fund 1.69% 0.60% 2.29% $96 $268
Stock and Bond Balanced Fund 1.69% 0.44%(1) 2.13% $94 $251
</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.
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 DONOT
INDICATE OR PROJECT FUTURE PERFORMANCE. We may also advertise or include in
sales literature a Subaccount's performance compared to certain performance
rankings and indexes compiled by independent organizations, and we may present
performance rankings and indexes without such a comparison. More detailed
information about performance data appears in the Statement of Additional
Information.
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 on those withdrawals, or (2) the Policy Accumulation Value. 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, 2000
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.
To purchase a tax-qualified Policy, generally you must be 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 19 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 5
1. What is the Policy? 6
2. What are my Annuity Options? 6
3. How Do I Purchase A Policy? 7
Applying for a Policy 7
Initial Premium 7
Issuance of a Policy 7
Exchange Privilege: Variable Deferred Annuity 7
Free-Look Right to Cancel Policy 7
Making Additional Premium Payments 8
4. What Are My Allocation Options? 8
Premium Allocations 8
Subaccount Options 8
Fixed Account Option 9
Transfers 9
Dollar-Cost Averaging 9
Portfolio Rebalancing Program 9
Policy Accumulation Value 10
Cash Surrender Value 10
Subaccount Policy Accumulation Value 10
Accumulation Unit Value 10
Net Investment Factor 10
Fixed Policy Accumulation Value 10
5. What are the Expenses Under the Policy? 10
Surrender Charge 11
Annual Administrative Fee 11
Transfer Processing Fee 11
Mortality and Expense Risk Charge 11
Fund Expenses 11
6. How Will My Investment in the Policy
be Taxed? 11
Introduction 11
Tax Status of the Policies 12
Tax Treatment of Annuities 12
Taxation of Non-Qualified Policies 12
Taxation of Qualified Policies 13
Other Tax Consequences 14
7. How Do I Access My Money? 14
Withdrawals 14
Surrenders 15
Systematic Withdrawal Program 15
Requesting Payments and Telephone
Transactions 15
8. How Is the Performance of the Policy
Presented? 16
9. Does the Policy Have A Death Benefit? 16
10. What Other Information Should I Know? 17
State Farm and the Variable Account 17
Modification 18
Distribution of the Policies 18
Legal Proceedings 18
Reports to Policy Owners 18
Insurance Marketplace Standards Association 18
Financial Statements 18
11. How Can I Make Inquiries? 18
Table of Contents of the Statement of Additional Information 19
</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.
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<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.
FUND -- An investment Portfolio of the State Farm Variable Product Trust and an
underlying investment option under the Policy.
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.
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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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 11.
(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 11.
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, 1999 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>
Investment Other Expenses Total Annual Expenses
Fund Advisory Fees (after expense limitation) (3) (after expense limitation) (3)
<S> <C> <C> <C>
Large Cap Equity Index
Fund 0.26% 0.08% 0.34%
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% 0.10% 0.50%
Bond Fund 0.50% 0.10% 0.60%
Stock and Bond Balanced
Fund 0.36% 0.08% 0.44%
</TABLE>
(3) Absent this expense limitation, Other Expenses for the Small Cap Equity
Index Fund, International Equity Index Fund, Bond Fund, and Money Market Fund
would be 0.22%, 0.39%, 0.12% and 0.13%, respectively.
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 10 of this prospectus, and see the prospectus for the
Trust. The Example uses the average Policy Accumulation Value of $5,600, so that
the Annual Administration Fee is 0.54%. 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 11. The Example assumes you have invested all your money in the
Variable Account.
<TABLE>
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 2. If you do not surrender or annuitize
and expenses listed in the Fee Table Policy at the end of the stated time your Policy at the end of the stated time
above: period: period:
Subaccount 1 Yr 3 Yrs 5 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 10 Yrs
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Large Cap Equity Index $93 $114 $143 $241 $21 $65 $112 $241
Small Cap Equity Index $95 $119 $151 $257 $23 $70 $120 $257
International Equity Index $97 $126 $164 $283 $25 $78 $133 $283
Bond $96 $122 $156 $268 $24 $73 $125 $268
Money Market $95 $119 $151 $257 $23 $70 $120 $257
Stock and Bond Balanced $94 $117 $148 $251 $22 $68 $117 $251
</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.
- ---------
4
<PAGE>
Condensed Financial Information
The following table shows the value of an Accumulation Unit for each Sub-Account
and the number of outstanding accumulation units since the Variable Account
began operations through the fiscal year ending December 31, 1999. Please read
the information in conjunction with the financial statements, related notes and
other financial information in the Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
<S> <C> <C>
LARGE CAP EQUITY INDEX
Accumulation unit value at Beginning of period $12.29 $10.00
Accumulation unit value at end of period $14.62 $12.29
Number of Accumulation units Outstanding at end of period 332,663 41,309
SMALL CAP EQUITY INDEX
Accumulation unit value at Beginning of period $9.66 $10.00
Accumulation unit value at end of period $11.48 $9.66
Number of Accumulation units Outstanding at end of period 139,569 18,069
BOND
Accumulation unit value at Beginning of period $10.56 $10.00
Accumulation unit value at end of period $10.38 $10.56
Number of Accumulation units Outstanding at end of period 128,390 24,013
MONEY MARKET
Accumulation unit value at Beginning of period $10.36 $10.00
Accumulation unit value at end of period $10.77 $10.36
Number of Accumulation units Outstanding at end of period 59,777 12,203
INTERNATIONAL EQUITY
Accumulation unit value at Beginning of period $11.20 $10.00
Accumulation unit value at end of period $13.97 $11.20
Number of Accumulation units Outstanding at end of period 134,966 17,048
STOCK AND BOND BALANCED
Accumulation unit value at Beginning of period $11.35 $10.00
Accumulation unit value at end of period $12.55 $11.35
Number of Accumulation units Outstanding at end of period 107,265 6,265
</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.
5 -------
<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 11. 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 9.
You can request that we transfer Policy Accumulation Value from one account to
another, subject to certain conditions. See "Transfers," page 9.
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.
- ---------
6
<PAGE>
The available annuity options are:
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.
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 SPECIAL MONTHLY FOR ROTH
PAYMENT PLAN) IRA)
</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
7 -------
<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.)
- ---------
8
<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 17.
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 17. 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 15. 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
9 -------
<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 6. 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 16.
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 10.
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.
In a tax-qualified retirement plan, federal income tax deferral is provided by
the tax-qualified retirement plan. No additional tax deferral is provided by an
annuity. You should contact your attorney or tax advisor for more complete
information.
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.
Investor Control. In certain circumstances, owners of variable annuity contracts
have been considered for Federal income tax purposes to be the owners of the
assets of the 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
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- made as part of a series of substantially equal periodic payments for the
life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above.
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.
In a tax-qualified retirement plan, federal income tax deferral is provided by
the tax-qualified retirement plan. No additional tax deferral is provided by an
annuity. You should contact your attorney or tax advisor for more complete
information.
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
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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 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 for Employees (SIMPLE) IRA program, 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 16. 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 6.
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 6.) You may make requests
for withdrawals in writing or by telephone, if we have
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your telephone authorization on file. See "Requesting Payments and Telephone
Transactions," below. 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," below.
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.
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 6.) 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 11. 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
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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 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 on those withdrawals, 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 6. 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 15. 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.
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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 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
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Subaccounts at regular and special meetings of shareholders of the Funds in
accordance with instructions received from Owners with Policy Accumulation Value
in the Subaccounts. To obtain voting instructions from Owners, before a meeting
of shareholders of the Funds, State Farm will send Owners voting instruction
materials, a voting instruction form and any other related material. Shares held
by a Subaccount for which no timely instructions are received will be voted by
State Farm in the same proportion as those shares for which voting instructions
are received. Should the applicable federal securities laws, regulations or
interpretations thereof change so as to permit State Farm to vote shares of the
Funds in its own right, State Farm may elect to do so.
MODIFICATION
We may modify the Policy as follows:
- 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, 1999 and 1998, 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 Generally
Accepted Accounting Principles ("GAAP") basis statements of assets, liabilities
and owners' equity for the Variable Account as of December 31, 1999, and the
related statement of operations and changes in owners' equity for the year ended
December 31, 1999, 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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[LOGO]
Issued By:
State Farm Life and Accident Assurance Company
(Licensed in New York or Wisconsin)
Home Offices: Bloomington, Illinois
State Farm VP Management Corp.
(Underwriter & Distributor of Variable Products)
One State Farm Plaza
Bloomington, Illinois 61710-0001
Investment Company Act File No. 811-08831
454-622.1 Printed in U.S.A.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED May 1, 2000
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
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<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 $5,600
is used so that the Annual Administrative Fee is 0.54%.
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, 1999 and 1998, 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, 1999 also are included.
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<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, 1999 AND 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,
1999 and 1998......................... 2
Statements of Operations -- Statutory
Basis for the years ended December 31,
1999 and 1998......................... 3
Statements of Changes in Capital and
Surplus -- Statutory Basis for the
years ended December 31, 1999 and
1998.................................. 4
Statements of Cash Flows -- Statutory
Basis for the years ended December 31,
1999 and 1998......................... 5
NOTES TO FINANCIAL STATEMENTS --
Statutory Basis......................... 6-18
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION...... 19
SUPPLEMENTAL SCHEDULE OF ASSETS AND
LIABILITIES............................. 20-21
</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 (the Company) as of December 31, 1999 and 1998, 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 auditing standards generally accepted
in the United States. 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 Illinois Department of Insurance (statutory basis), which practices differ
from accounting principles generally accepted in the United States. When
statutory basis financial statements are presented for purposes other than for
filing with a regulatory agency, auditing standards generally accepted in the
United States require that an auditor's report on them state whether they are
presented fairly in conformity with accounting principles generally accepted in
the United States. The effects on the financial statements of the variances
between the statutory basis of accounting and accounting principles generally
accepted in the United States, 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 accounting principles generally accepted in the
United States, the financial position of the Company as of December 31, 1999 and
1998, 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
the Company as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended, on the basis of accounting
described in Note 2.
Chicago, Illinois /s/PricewaterhouseCoopers LLP
February 22, 2000
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<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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Bonds:
United States government $184,207,498 $244,471,277
Other governmental units 72,451,747 57,164,370
Public utility 94,242,246 128,026,646
Industrial and other 432,507,219 306,202,747
------------ ------------
783,408,710 735,865,040
------------ ------------
Policy loans 64,863,099 60,525,969
Cash (645,660) 861,505
Short-term investments 7,217,123 12,055,757
Accounts receivable -- investment sales -- 1,600
------------ ------------
71,434,562 73,444,831
------------ ------------
Total cash and invested assets 854,843,272 809,309,871
Federal income taxes recoverable 12,409 7,861
Premiums deferred and uncollected 2,522,280 2,649,754
Investment income due and accrued 15,679,600 14,716,046
Other assets 370,998 453,895
Assets held in separate accounts 12,808,024 1,343,832
------------ ------------
Total admitted assets $886,236,583 $828,481,259
============ ============
LIABILITIES
Aggregate reserves for life polices and contracts $586,974,317 $557,185,493
Supplementary contracts without life contingencies 20,313,291 18,433,678
Policy and contract claims 1,777,480 4,408,668
Policyholders' dividend accumulations 54,774,435 50,208,442
Dividends to policyholders payable in the following year 18,570,111 19,418,940
Advance premiums, deposits and other policy and contract
liabilities 11,790,242 11,586,303
Interest maintenance reserve 2,783,126 2,757,104
Commissions payable 251,249 224,998
Other liabilities 13,478,918 14,673,907
Liabilities related to separate accounts 12,784,159 1,324,003
Federal income taxes due or accrued 28,502 28,502
Federal income taxes (payable to affiliates) 4,313,293 5,394,936
Asset valuation reserve 1,933,148 1,644,174
------------ ------------
Total liabilities 729,772,271 687,289,148
------------ ------------
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 92,659 94,076
Unassigned surplus 153,371,653 138,098,035
------------ ------------
Total capital and surplus 156,464,312 141,192,111
------------ ------------
Total liabilities, capital and surplus $886,236,583 $828,481,259
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Income:
Premiums and annuity considerations $102,978,097 $92,257,039
Net investment income 58,277,698 55,110,410
Considerations for supplementary contracts and dividend
accumulations 14,527,132 13,582,991
Other 387,704 229,795
------------ -----------
176,170,631 161,180,235
------------ -----------
Benefits and other expenses:
Death benefits 13,264,244 14,386,654
Surrender benefits and other fund withdrawals 30,584,986 24,877,721
Other benefits and claims 6,438,185 4,935,106
Payments on supplementary contracts and dividend
accumulations 13,176,141 11,194,520
Net transfers to separate accounts 9,550,126 1,222,986
Increase in policy and contract reserves 36,101,057 41,809,279
Commissions 6,106,512 6,146,782
General insurance expenses 21,436,725 16,670,096
Taxes, licenses and fees 1,908,547 1,398,500
------------ -----------
138,566,523 122,641,644
------------ -----------
Net gain from operations before dividends to policyholders
and federal income taxes incurred 37,604,108 38,538,591
Dividends to policyholders 17,204,735 18,992,099
------------ -----------
Net gain from operations before federal income taxes 20,399,373 19,546,492
Federal income taxes incurred (excluding capital gains) 8,130,821 8,597,590
------------ -----------
Net gain from operations before net realized capital gains 12,268,552 10,948,902
Net realized capital gains or (losses) less capital gains
tax of $39,672 and $76,138 (excluding $342,934 and
($44,687) transferred to the IMR) in 1999 and 1998,
respectively 144,985 (52,078)
------------ -----------
Net income $ 12,413,537 $10,896,824
============ ===========
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<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 94,076 115,796
Transfer from unassigned surplus (1,417) (21,720)
------------ ------------
Balance at end of year 92,659 94,076
------------ ------------
Unassigned surplus:
Balance at beginning of year 138,098,035 134,787,645
Net income 12,413,537 10,896,824
Net unrealized capital gains (1,851) 656
Surplus contributed to separate accounts - (20,000)
Other changes in surplus in separate accounts statement 3,518 64,936
Change in nonadmitted assets 42,071 66,110
Change in asset valuation reserve (288,974) (144,939)
Change in group contingency life reserve 1,417 21,720
Increase in reserves on account of change in valuation
basis -- (574,917)
Change in provision for class action settlement amounts 3,103,900 (7,000,000)
------------ ------------
Balance at end of year 153,371,653 138,098,035
------------ ------------
Total capital and surplus $156,464,312 $141,192,111
============ ============
</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, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $103,692,805 $ 92,693,765
Other premiums, considerations and deposits, allowances
and reserve adjustments and other income 14,604,380 13,592,046
Investment income received (excluding realized
gains/losses and net of investment expenses) 58,328,980 55,020,894
Life and accident and health benefits paid (17,060,316) (13,991,124)
Surrender benefits and other fund withdrawals paid (30,584,986) (24,877,721)
Other benefits to policyholders paid (17,268,200) (15,396,683)
Commissions, other expenses and taxes paid (excluding
federal income taxes) (26,653,065) (24,172,667)
Dividends to policyholders paid (18,053,564) (17,910,549)
Federal income taxes paid (excluding tax on capital gains) (9,180,544) (5,264,609)
Net transfers from separate accounts (10,205,866) (1,290,766)
------------ ------------
Net cash from operations 47,619,624 58,402,586
------------ ------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 115,082,868 36,841,736
Stocks and mortgage loans -- 439,289
Net loss on cash and short-term investments (297) --
------------ ------------
Total investment proceeds 115,082,571 37,281,025
Tax on capital gains 76,140 20,932
------------ ------------
Total cash from investments 115,006,431 37,260,093
------------ ------------
Cost of investments acquired (long term only):
Bonds 163,097,960 110,764,003
Miscellaneous applications -- 1,600
Total investments acquired 163,097,960 110,765,603
------------ ------------
Increase in policy loans and premium notes 4,338,980 5,297,748
------------ ------------
Net cash from investments (52,430,509) (78,803,258)
------------ ------------
Cash from financing and miscellaneous sources:
Other cash provided 608,660 1,867,183
Other applications (net) (2,143,574) (447,307)
------------ ------------
Net cash from financing and miscellaneous sources (1,534,914) 1,419,876
------------ ------------
Net change in cash and short-term investments (6,345,799) (18,980,796)
Cash and short-term investments, beginning of year 12,917,262 31,898,058
------------ ------------
Cash and short-term investments, end of year $ 6,571,463 $ 12,917,262
============ ============
</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 83% of premium revenue. Individual annuity products
including variable annuity contracts account for an additional 17%. 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
Illinois Department of Insurance. The 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, 1999 and 1998, 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.
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%.
Under GAAP, reserves are based on mortality, lapse, withdrawal and interest
rates that are based on Company experience.
D. POLICYHOLDERS' DIVIDENDS
All of the Company's life insurance business is written on the participating
basis. Policyholders' dividends are determined
-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
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. Changes in prior year tax liability
may result in reallocation of prior year tax.
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.
Under 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 1999 or 1998. 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 $198,936 and
$241,007 at December 31, 1999 and 1998, 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. Under GAAP, such assets would be recognized at the lower of
cost or net realizable value.
The preceding discussion highlights the significant variances between the
statutory accounting practices followed by the Company and GAAP. The effect of
these differences has not been determined but is presumed to be material.
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, 1999
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $255,503 $11,914 $ (2,758) $264,659
Obligations of states and political subdivisions 5,173 48 (114) 5,107
Corporate bonds 529,950 2,302 (21,040) 511,212
-------- ------- -------- --------
Total $790,626 $14,264 $(23,912) $780,978
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES 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 bonds 442,830 22,436 (311) 464,955
-------- ------- ----- --------
Total $747,921 $53,710 $(313) $801,318
======== ======= ===== ========
</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, 1999
---------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 41,336 $ 40,832
Due after one year through
five years 303,042 299,344
Due after five years through
ten years 373,814 369,252
Due after ten years 72,434 71,550
-------- --------
Total $790,626 $780,978
======== ========
</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>
1999 1998
-------- --------
<S> <C> <C>
Proceeds $ 75,511 $ --
Gross gains 516 --
Gross losses (47) --
</TABLE>
At December 31, 1999, bonds carried at amortized cost of $1,575,401 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, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Bonds $54,190 $50,351
Short-term investments 453 1,349
Policy loans 3,987 3,706
Mortgage loans -- 3
------- -------
Gross investment income 58,630 55,409
Investment expenses (352) (299)
------- -------
Net investment income $58,278 $55,110
======= =======
</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.
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.
-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
Settlement Options Without Life Contingencies
Settlement options without life contingencies are similar to demand deposits.
The fair value is the amount payable on demand at year end. The estimated fair
values and statement values of the Company's financial instruments at December
31, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Bonds $773,761 $783,409 $789,262 $735,865
Bond reserves -- 1,921 -- 1,618
-------- -------- -------- --------
$773,761 $781,488 $789,262 $734,247
======== ======== ======== ========
Cash $ (646) $ (646) $ 862 $ 862
======== ======== ======== ========
Short-term investments: $ 7,217 $ 7,217 $ 12,056 $ 12,056
Short-term reserves -- 7 -- 25
-------- -------- -------- --------
$ 7,217 $ 7,210 $ 12,056 $ 12,031
======== ======== ======== ========
Separate accounts $ 12,808 $ 12,808 $ 1,344 $ 1,344
======== ======== ======== ========
Financial liabilities:
Deferred annuity reserves $117,688 $118,753 $123,768 $125,022
Advance premiums 1,752 1,770 1,932 1,949
Settlement options without life contingencies 20,313 20,313 18,434 18,434
Separate accounts 12,784 12,784 1,324 1,324
</TABLE>
6. FEDERAL INCOME TAXES
The difference between the Company's effective income tax rate and the statutory
rate for both 1999 and 1998 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 1987 have
been closed by the Internal Revenue Service. Returns for 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 PLANS AND OTHER
POSTRETIREMENT BENEFITS
A. Pension Plans
No pension cost was allocated in 1999 or 1998 as the plan was subject to the
full funding limitation of the Internal Revenue Code. 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
-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
defined benefit pension plan of the Company and its parent and other affiliates
as of December 31, is presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Actuarial present value of
accumulated plan benefits:
Vested $3,579,461 $3,325,703
Nonvested 69,327 63,895
---------- ----------
$3,648,788 $3,389,598
========== ==========
Net assets available for
benefits $8,761,550 $8,285,652
========== ==========
</TABLE>
Benefits paid amounted to $163,776,000 and $145,034,703 in 1999 and 1998,
respectively. The assumed rate of return on plan assets used in determining the
actuarial present value of vested and nonvested accumulated plan benefits was
7.0% for both 1999 and 1998. In addition, the discount rate was 7.0% for both
1999 and 1998. The assumed rate of compensation increases ranged from 5.5% to
12.8% in 1999 and 1998 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, 1999 and 1998,
were $201,267 and $162,710, 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, 1999, was $585,098 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, 1999 and 1998, 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 $1,742,316 and
$1,260,752. The Company's share of the remaining transition obligation for these
potential benefits was $807,638 and $792,161 at December 31, 1999 and 1998,
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
$187,350 at December 31, 1999. 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, 1999, was
$4,252,064, which is not accrued in these financial statements. At January 1,
1999 and 1998, the discount rate used in determining the accumulated post-career
benefit obligation attributable to these potential benefits was 6.0% and 6.5%,
respectively, and the 1999 health care cost trend rate is 9.0% for the first
year, graded to 6.0% 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 $227,328 as of January 1, 1999,
and the estimated eligibility and interest cost components of the net periodic
post-career benefit cost for 1999 by $110,553.
The Company participates with its affiliates in an unfunded deferred
compensation plan for highly compensated employees and independent contractor
agents. As the Company currently has no participants in this plan, there was no
liability established for 1999 or 1998.
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 surveys and usage studies and totaled approximately $14,552,000 and
$11,738,000 in 1999 and 1998, respectively.
At December 31, 1999 and 1998, total amounts owed to the parent company,
exclusive of federal income taxes, were approximately $5,479,000 and $2,572,000,
respectively. Total amounts owed to affiliates were approximately $6,000 at both
December 31, 1999 and 1998, 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
-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
1982 through 1997. The Company denies the allegations in this lawsuit but
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 the proposed settlement, the Company has agreed to
provide policyowners in the class with options that include policy enhancements,
the right to purchase an enhanced value policy or enhanced value annuity and a
claim review process. While it has not been possible to predict with certainty
the ultimate dollar amount that will be paid or credited to current and former
policyholders under the terms of this settlement, the Company elected to record,
on an estimated basis, a liability for such amount in the December 31, 1998
financial statements. Included in this liability was an amount for estimated
legal and administrative costs which would be incurred in connection with the
settlement. An amount of $7,000,000 was included in the liabilities of the
Company as of December 31, 1998 for such provision with a corresponding charge
recorded in the Statement of Changes in Capital and Surplus.
During 1999, in its Statement of Operations, the Company reflected charges for
legal and administrative expenses associated with the class action settlement.
In addition, the Company has reflected charges for payments to be made or
credited to current and former policyholders in accordance with the terms of the
settlement agreement. Legal and administrative expenses of $2,253,818 and
settlement contribution amounts totaling $1,149,302 have been reflected in
arriving at the amount of 1999 Net Income. Because of the uncertainty regarding
the ultimate number of claims to be settled, the policy enhancements to be made
and the ongoing administrative expenses, the Company is continuing to reflect in
its liabilities the amount of $3,896,100 as a general provision for additional
future charges in connection with this class action lawsuit.
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, 1999 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,
1999, which is covered by our report dated February 22, 2000 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.
Chicago, Illinois /s/PricewaterhouseCoopers LLP
February 22, 2000
-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, 1999
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 $ 17,497
Other bonds (unaffiliated) 36,693
Premiums notes, policy loans and liens 3,987
Short-term investments 453
-----------
Gross investment income $ 58,630
===========
Bonds and short-term investments by class and maturity:
Bonds by maturity - statement value
Due within one year or less $ 41,336
Over 1 year through 5 years 303,042
Over 5 years through 10 years 373,814
Over 10 years through 20 years 64,816
Over 20 years 7,618
-----------
Total by maturity $ 790,626
===========
Bond by class - statement value
Class 1 $ 712,420
Class 2 76,039
Class 3 2,000
Class 4 167
Class 5 -
Class 6 -
-----------
Total by class $ 790,626
===========
Total bonds publicly traded $ 721,580
===========
Total bonds privately placed $ 69,046
===========
Short term investments - book value $ 7,217
===========
Cash on deposit $ (646)
===========
</TABLE>
-15-
<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 CONTINUED
DECEMBER 31, 1999
<TABLE>
<S> <C>
Ordinary $14,538,128
===========
Credit life $ 9,346
===========
Group life $ 20,464
===========
Amount of accidental death insurance in force under ordinary
policies $ 304,551
===========
Life Insurance with disability provisions in force:
===========
Ordinary $ 10,864
===========
Group life $ 20
===========
Supplementary contracts in force:
Ordinary - not involving life contingencies:
===========
Amount on deposit $ 11,078
===========
Income payable $ 127
===========
Ordinary - involving life contingencies:
===========
Income payable $ 171
===========
Annuities:
===========
Ordinary:
===========
Immediate - amount of income payable $ 2,941
===========
Deferred - fully paid account balance $ 128,067
===========
Deferred - not fully paid - account balance $ 249
===========
Deposit funds and dividend accumulations:
===========
Deposit funds - account balance $ 3,247
===========
Dividend accumulations - account balance $ 54,774
===========
</TABLE>
-16-
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
REPORT ON AUDIT OF FINANCIAL STATEMENTS
DECEMBER 31, 1999
<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
contract owners' equity and the related statements of operations and changes in
contract owners' equity present fairly, in all material respects, the financial
position of State Farm Life and Accident Assurance Company Variable Annuity
Separate Account and Large Cap Equity Index Fund, Small Cap Equity Index Fund,
Bond Fund, Money Market Fund, International Equity Index Fund, and the Stock and
Bond Balanced Fund thereof at December 31, 1999, the results of their operations
and the changes in their contract owners' equity for each of the periods
presented, in the conformity with accounting principles generally accepted in
the United States. 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 audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States 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 audits, which included direct confirmation of the number of
shares owned at December 31, 1999 with State Farm Variable Product Trust,
provides a reasonable basis for the opinion expressed above.
Chicago, Illinois /s/PricewaterhouseCoopers LLP
February 16, 2000
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES AND CONTRACT OWNERS' EQUITY
DECEMBER 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Investments at value:
State Farm Variable Product Trust Funds:
Large Cap Equity Index Fund, 323,127 shares (cost $4,412,148) $4,869,514
Small Cap Equity Index fund,146,780 shares (cost $1,417,592) 1,599,898
Bond Fund, 139,108 shares (cost $1,368,566) 1,331,261
Money Market Fund, 645,070 shares (cost $645,070) 645,070
International Equity Index Fund, 129,483 shares (cost $1,563,038) 1,882,685
Stock and Bond Balanced Fund, 105,464 shares (cost $1,251,469) 1,344,673
-------------
Total investments 11,673,101
-------------
Total assets $11,673,101
-------------
-------------
LIABILITIES AND CONTRACT OWNERS' EQUITY
Contract owners' equity $11,673,101
-------------
Total liabilities and contract owners' equity $11,673,101
-------------
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCT TRUST
---------------------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
-------------- ------------ ------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $ 104,350 $ 77,946 $ 49,180 $ 20,666 $ 17,411 $ 1,683 $ 271,236
Expenses:
Mortality and expense
risk charges 29,185 10,091 10,560 5,009 11,482 7,499 73,826
-------------- ------------ ------------ ------------ -------------- ----------- ------------
Net investment income (loss) 75,165 67,855 38,620 15,657 5,929 (5,816) 197,410
Realized gain (loss) on 3,691 (2,486) (12,983) - (615) (1,542) (13,935)
investments
Change in unrealized
appreciation
(depreciation), net 429,769 174,961 (36,721) - 311,535 90,598 970,142
-------------- ------------ ------------ ------------ -------------- ----------- ------------
Realized and unrealized
gain (loss) on
investments 433,460 172,475 (49,704) - 310,920 89,056 956,207
-------------- ------------ ------------ ------------ -------------- ----------- ------------
Net increase (decrease) in
contract owners' equity
from operations
$ 508,625 $ 240,330 $ (11,084) $ 15,657 $ 316,849 $ 83,240 $1,153,617
-------------- ------------ ------------ ------------ -------------- ----------- ------------
-------------- ------------ ------------ ------------ -------------- ----------- ------------
</TABLE>
THE NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCT TRUST
----------------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ ---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 75,165 $ 67,855 $ 38,620 $ 15,657 $ 5,929 $ (5,816) $ 197,410
------------ ------------ ---------- ----------- ------------- ------------ ------------
Realized gain (loss) on investments 3,691 (2,486) (12,983) - (615) (1,542) (13,935)
Change in unrealized appreciation
(depreciation), net 429,769 174,961 (36,721) - 311,535 90,598 970,142
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net realized and unrealized
gain(loss) on investments 433,460 172,475 (49,704) - 310,920 89,056 956,207
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net increase (decrease) in
contract owners' equity from
operations 508,625 240,330 (11,084) 15,657 316,849 83,240 1,153,617
------------ ------------ ---------- ----------- ------------- ------------ ------------
Equity transactions:
Proceeds from units
purchased 3,639,847 1,131,664 1,414,330 911,948 1,381,379 1,052,978 9,532,146
Transfers (net) including
transfers to or from
fixed account 319,408 90,617 (273,966 (398,564) 50,670 199,683 (12,152)
Payments for surrenders and
other redemptions (115,929) (37,248) (51,558) (10,394) (57,082) (62,215) (334,428)
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net increase in equity from
contract holder transactions 3,843,325 1,185,032 1,088,806 502,990 1,374,966 1,190,446 9,185,566
------------ ------------ ---------- ----------- ------------- ------------ ------------
Total increase in contract
owners' equity 4,351,950 1,425,362 1,077,722 518,647 1,691,816 1,273,687 10,339,184
Contract owners' equity:
Beginning of year 517,564 174,536 253,539 126,424 190,869 70,986 1,333,918
------------ ------------ ---------- ----------- ------------- ------------ ------------
End of year $4,869,514 $1,599,898 $1,331,261 $ 645,070 $ 1,882,685 $1,344,673 $11,673,101
------------ ------------ ---------- ----------- ------------- ------------ ------------
------------ ------------ ---------- ----------- ------------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN CONTRACT OWNERS' EQUITY, CONTINUED
FOR THE PERIOD SEPTEMBER 1, 1998 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCT TRUST
----------------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ ---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 2,196 $ 3,719 $ 1,246 $ 544 $ 770 $ (63) $ 8,412
------------ ------------ ---------- ----------- ------------- ------------ ------------
Realized gain (loss) on investments (5) (18) (311) - (4) 2 (336)
Change in unrealized appreciation
(depreciation), net 27,597 7,344 (584) - 8,112 2,606 45,075
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net realized and unrealized
gain (loss) on investments 27,592 7,326 (895) - 8,108 2,608 44,739
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net increase in contract
owners' equity from
operations 29,788 11,045 351 544 8,878 2,545 53,151
------------ ------------ ---------- ----------- ------------- ------------ ------------
Equity transactions:
Proceeds from units
purchased 466,824 158,477 284,852 128,661 174,610 67,474 1,280,898
Transfers (net) including
transfers to or from
fixed account 14,298 6,215 (29,026) (1,902) 9,642 967 194
Payments for surrenders and
other redemptions (3,346) (1,201) (2,638) (879) (2,261) - (10,325)
------------ ------------ ---------- ----------- ------------- ------------ ------------
Net increase in equity derived
from contract holder
transactions 477,776 163,491 253,188 125,880 181,991 68,441 1,270,767
------------ ------------ ---------- ----------- ------------- ------------ ------------
Increase in equity from surplus
contributed 10,000 - - - - - 10,000
Total increase contract owner's
equity 517,564 174,536 253,539 126,424 190,869 70,986 1,333,918
Contract owners' equity:
Beginning of year - - - - - - -
------------ ------------ ---------- ----------- ------------- ------------ ------------
End of year $ 517,564 $ 174,536 $253,539 $ 126,424 $ 190,869 $ 70,986 $1,333,918
------------ ------------ ---------- ----------- ------------- ------------ ------------
------------ ------------ ---------- ----------- ------------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
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 funds held by the Separate
Account in relation to the portion of its ownership of fund shares, which
shares are subject to the same valuation procedures as contract owners'
shares. The market value of the Company's investment in the separate
account as surplus contributed was $11,933 at December 31, 1999 and
$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.
6
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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 Accounts 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, 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 owners' share of the value of each fund's investments and other
assets, less liabilities, by the number of contract holder accumulation
units outstanding in the respective fund.
FEDERAL INCOME TAX
The Company is taxed as a life insurance company under the provisions of
the Internal Revenue Code. The operations of the Separate Account are
part of the total operations of the Company and are not taxed as a
separate entity.
Under Federal Income tax law, net investment income and realized gains
(losses) are retained in the Separate Account and are not taxable until
received by the policy owner or beneficiary in the form of 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 owners' portion of
assets in the Separate Account. The charge may be adjusted after contract
issue, but it 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 results from the life annuity payment option in the
contracts in which the
7
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. EXPENSES AND DEDUCTIONS, CONTINUED
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 $73,826 and $1,422
during 1999 and 1998, respectively.
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 were $14,483 and $59 during 1999 and 1998, respectively.
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. Total
surrender charges were $10,306 and $0 during 1999 and 1998, respectively.
The Company reserves the right to deduct a $25 transfer processing fee
for each transfer in excess of 12 during a policy year.
8
<PAGE>
5. CONTRACT OWNERS' EQUITY
Contract 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, 1999 and 1998, the 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>
1999 CONTRACT OWNERS' EQUITY
------ ------------------------- CONTRACT
UNIT UNITS OWNERS' SURPLUS TOTAL
FUND VALUE OUTSTANDING EQUITY CONTRIBUTED EQUITY
<S> <C> <C> <C> <C> <C>
Large Cap Equity Index $14.62 332,663 $ 4,857,581 $ 11,933 $ 4,869,514
Small Cap Equity Index 11.48 139,569 1,599,898 - 1,599,898
Bond 10.38 128,390 1,331,261 - 1,331,261
Money Market 10.77 59,777 645,070 - 645,070
International Equity Index 13.97 134,966 1,882,685 - 1,882,685
Stock and Bond Balanced 12.55 107,265 1,344,673 - 1,344,673
------------ ---------- -------------
Total $11,661,168 $ 11,933 $ 11,673,101
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
1999 CONTRACT OWNERS' EQUITY
------ ------------------------- CONTRACT
UNIT UNITS OWNERS' SURPLUS TOTAL
FUND VALUE OUTSTANDING EQUITY CONTRIBUTED EQUITY
<S> <C> <C> <C> <C> <C>
Large Cap Equity Index $12.29 41,309 $ 507,649 $ 9,915 $ 517,564
Small Cap Equity Index 9.66 18,069 174,536 - 174,536
Bond 10.56 24,013 253,539 - 253,539
Money Market 10.36 12,203 126,424 - 126,424
International Equity Index 11.20 17,048 190,869 - 190,869
Stock and Bond Balanced 11.35 6,256 70,986 - 70,986
------------ ---------- -------------
Total $ 1,324,003 $ 9,915 $ 1,333,918
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
9
<PAGE>
5. CONTRACT OWNERS' EQUITY, CONTINUED
Purchases and sales of Trust's shares by the Separate Account for the
year ended December 31, 1999 by each Fund are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Large Cap Equity Index $ 4,065,166 $146,677
Small Cap Equity Index 1,295,434 42,547
Bond 1,437,048 309,622
Money Market 848,561 329,915
International Equity Index 1,462,605 81,709
Stock and Bond Balanced 1,272,676 88,044
----------------- --------------
Total $10,381,490 $998,514
----------------- --------------
----------------- --------------
</TABLE>
6. NET ASSETS
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
---------------------------------------------------------------------------------------------------
LARGE SMALL
CAP CAP INTERNATIONAL STOCK
EQUITY EQUITY MONEY EQUITY AND
INDEX INDEX BOND MARKET INDEX BOND
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Proceeds from units
purchased $4,106,671 $1,290,141 $1,699,182 $1,040,609 $ 1,555,989 $ 1,120,452 $10,813,044
Cost of units
redeemed 214,431 58,383 (357,088) (411,739) 969 138,436 (356,608)
Surplus contributed 10,000 - - - - - 10,000
Investment income 107,033 81,821 50,792 21,379 18,361 1,683 281,069
Mortality and expense
risk charges (29,672) (10,248) (10,926) (5,179) (11,662) (7,562) (75,249)
Realized gain (loss)
on investments 3,685 (2,504) (13,294) - (619) (1,540) (14,272)
Unrealized appreciation
(depreciation) 457,366 182,305 (37,305) - 319,647 93,204 1,015,217
------------ ------------ ------------ ------------ ------------- ------------- -------------
$4,869,514 $1,599,898 $1,331,361 $ 645,070 $ 1,882,685 $ 1,344,673 $11,673,201
------------ ------------ ------------ ------------ ------------- ------------- -------------
------------ ------------ ------------ ------------ ------------- ------------- -------------
</TABLE>
10
<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) (a) Distribution Agreement.*
(b) Registered Representative 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; Executive Vice President and Chief Marketing Officer
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 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)
State Farm Lloyds, Inc. (100% Ownership)
State Farm Lloyds (Attorney-in-Fact)
ITEM 27. NUMBER OF POLICY OWNERS
As of April 1, 2000, there were 2,398 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 Securities Act of 1933 and the Investment Company Act of
1940, 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,
in the City of Bloomington and the State of Illinois, on this 27th day of
April, 2000.
State Farm Life and Accident Assurance Company
Variable Annuity Separate Account
(Registrant)
(SEAL)
By: State Farm Life and Accident Assurance Company
(Depositor)
Attest: /s/ Stephen L. Horton By: *
----------------- ---------------
Stephen L. Horton 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/ Stephen L. Horton April 27, 2000
--------------------------- --------------
Stephen L. Horton Date
Pursuant to Power of Attorney
<PAGE>
FORM RRA98(AA97)
STATE FARM REGISTERED REPRESENTATIVE AGREEMENT
This Agreement is entered into as of the________ day of
______________________, _________ by and between State Farm VP Management Corp.
(hereinafter referred to as "Broker-Dealer") and
_______________________________________ (hereinafter referred to as "Registered
Rep").
WHEREAS, Broker-Dealer is a securities broker-dealer registered and
qualified to transact business pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "SEC") and the National Association
of Securities Dealers, Inc. (the "NASD") and certain state securities
regulators;
WHEREAS, Registered Rep is duly qualified and licensed to sell variable
life insurance policies and variable annuity policies (together, "Variable
Products"); and
WHEREAS, the parties mutually desire to enter into this Agreement so that
Registered Rep may sell and service Variable Products on behalf of
Broker-Dealer;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions as hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
AUTHORIZATION
Broker-Dealer hereby authorizes Registered Rep to become one of its
registered representatives and to execute securities transactions, including
Variable Product sales, exclusively through it. Registered Rep hereby accepts
that authorization.
ARTICLE II
REGISTERED REP'S OBLIGATIONS
SECTION 2.1 GENERAL. Registered Rep will solicit applications for
insurance, collect premiums, fees and charges, countersign and deliver policies,
reinstate and transfer insurance, assist policyholders and cooperate in
reporting and handling claims, avoid conflicts of interest, comply with all laws
and regulations, and cooperate with and advance the interests of Broker-Dealer,
the registered representatives, and the policyholders.
SECTION 2.2 COMPLIANCE WITH LAWS, RULES, REGULATIONS, ETC. All Registered
Rep's activities in connection with the offer and sale of Variable Products
shall conform to the requirements of state and federal securities laws, rules,
regulations and interpretive guidance, the Conduct Rules of the NASD, and state
insurance laws, rules, regulations and interpretive guidance.
SECTION 2.3 LICENSING AND REGISTRATION. Registered Rep shall remain:
a. registered with the NASD and, if necessary, any applicable state
securities regulatory authority; and
b. licensed as an insurance agent with authority to sell Variable Products
in any State in which Registered Rep will sell such Variable Products.
Registered Rep shall take all steps necessary to keep all such registrations and
licenses in force during the term of this Agreement.
SECTION 2.4 COMPLIANCE MANUAL. Registered Rep will familiarize Registered
Rep with, and will comply
<PAGE>
with, all the requirements set forth in the State Farm VP Management Corp.
Variable Products Compliance Manual (the "Compliance Manual"), as it may be
amended from time to time or supplemented by compliance memoranda from
Broker-Dealer. Without limiting the generality of the preceding sentence,
Registered Rep shall comply with the customer complaint procedures and the
filing and recordkeeping requirements set forth in the Compliance Manual.
SECTION 2.5 MATERIAL STATEMENTS OR OMISSIONS. Registered Rep will not:
a. make any material statements, either oral or written, regarding
Variable Products which are untrue or misleading; or
b. omit a material fact necessary in order to make any oral or written
statements regarding Variable Products, in the light of the
circumstances under which they were made, not misleading.
SECTION 2.6 VARIABLE PRODUCTS OFFERED. Registered Rep shall offer, sell,
and service only those Variable Products offered by Broker-Dealer, and shall not
engage in any private securities transactions without prior written approval
from Broker-Dealer. A "private securities transaction" would include, among
other things, offering variable products or other securities that are not
offered by Broker-Dealer, including any privately placed securities that are not
registered with the Securities and Exchange Commission.
SECTION 2.7 OUTSIDE ACTIVITIES AND SECURITIES DISCLOSURE FORM. Registered
Rep shall complete the "Outside Activities and Securities Disclosure Form"
attached hereto as EXHIBIT A, and will update this form as requested by
Broker-Dealer promptly when any significant additions or changes to the
information disclosed on the form arise, including new employers or sources of
income, or significant changes in the amount of income from a previously
specified source. Broker-Dealer may amend the form from time to time, and
Registered Rep's obligations hereunder shall apply with equal force to any such
amended form.
SECTION 2.8 CHANGES TO FORM U-4. Registered Rep shall immediately notify
Broker-Dealer of any changes of information in Registered Rep's registration on
Form U-4 including any changes to Registered Rep's address.
SECTION 2.9 EDUCATION AND TRAINING MEETINGS. Registered Rep shall attend
all mandatory educational and/or training meetings sanctioned by Broker-Dealer,
including but not limited to the annual compliance meeting, scheduled by
Broker-Dealer.
SECTION 2.10 SUPERVISION OF EMPLOYEES. Registered Rep shall take such steps
as are necessary to ensure that none of Registered Rep's employees, whether
registered or unregistered, engage in any activities that are not authorized
under applicable law.
SECTION 2.11 NOTIFICATIONS REQUIRED. Registered Rep shall immediately
notify Broker-Dealer of:
a. any action or fact which comes to Registered Rep's knowledge which
may possibly constitute a violation of any law;
b. any investigations or inquiries by governmental agencies;
c. any judicial proceeding related to Registered Rep;
d. loss or suspension of Registered Rep's insurance license or securities
registration to sell Variable Products; and
e. any other events as required under the Compliance Manual.
SECTION 2.12 PERSONAL SERVICES REQUIRED. The fulfillment of this Agreement
requires Registered Rep's personal services, and Registered Rep will not
directly or indirectly write or service insurance for any other company, other
than Broker-Dealer's parent or affiliated companies or through any governmental
or insurance industry plan or facility, or for any agent or broker, except in
accordance with the terms of any written consent Broker-Dealer may give
Registered Rep.
SECTION 2.13 PREMIUM FUND ACCOUNT. All funds collected on behalf of the
issuing insurance company shall be held in trust by Registered Rep as the
absolute property of the issuing insurance company, and Registered Rep will be
responsible for these funds until they are safely transmitted to the issuing
insurance company. Registered Rep agrees to maintain a premium fund account for
the issuing insurance company's benefit in a bank or similar financial
<PAGE>
institution, which the issuing insurance company may audit at any time, in which
Registered Rep will promptly deposit all funds collected for the issuing
insurance company's premiums, fees, or charges. Registered Rep further agrees to
transmit all such funds and all insurance applications promptly as directed by
Broker-Dealer.
SECTION 2.14 ADVERTISING. Broker-Dealer and the issuing insurance company
will advertise, provide promotional materials, and participate in the cost of
Registered Rep's advertising, in accordance with policies determined from time
to time by Broker-Dealer and the issuing insurance company. Registered Rep will
not use advertisements or sales literature relating to Variable Products unless
the advertisements or sales literature have been provided by Broker-Dealer.
SECTION 2.15 EXPENSES. The expense of any office, including rental,
furniture, and equipment; signs; supplies not furnished by Broker-Dealer; the
salaries of Registered Rep's employees; telephone; postage; advertising; and all
other charges or expense incurred by Registered Rep in the performance of this
Agreement shall be incurred at Registered Rep's discretion and paid by
Registered Rep.
SECTION 2.16 OFFICE LOCATION. Registered Rep agrees that in the location or
relocation of Registered Rep's office Registered Rep will not unduly infringe on
the established office location of any other registered representative.
Registered Rep agrees that Registered Rep will not make any commitment to change
office location without reasonable, at least 30 days, prior written notice to
Broker-Dealer or establish any office in addition to Registered Rep's principal
office without the prior approval of Broker-Dealer.
ARTICLE III
NATURE OF THE RELATIONSHIP
SECTION 3.1 INDEPENDENT CONTRACTOR. As a registered representative,
Registered Rep is obliged to follow Broker-Dealer procedures and processes and
to provide prompt, friendly, accurate, and cost effective service. Registered
Rep is an independent contractor for all purposes. Registered Rep has full
control of Registered Rep's daily activities, subject only to Broker-Dealer's
obligation to supervise Registered Rep under the securities laws, with the right
to exercise independent judgment as to time, place, and manner of soliciting
insurance, servicing policyholders, and otherwise carrying out the provisions of
this Agreement.
ARTICLE IV
COMPENSATION
SECTION 4.1 COMPENSATION SCHEDULE. Registered Rep's sole compensation as a
registered representative from Broker-Dealer shall be in the form of
compensation earned from Variable Product sales and service. The Schedule of
Payments attached hereto as EXHIBIT B sets forth the compensation to be paid to
Registered Rep for Variable Product sales and service while this Agreement is in
force.
SECTION 4.2 WAIVER UNTIL BROKER-DEALER IN RECEIPT OF COMPENSATION.
Registered Rep waives any right to compensation until Broker-Dealer is in
receipt of such compensation from the issuing insurance company. Compensation
will be payable by Broker-Dealer or its parent or affiliated companies.
SECTION 4.3 BONUSES, AWARDS, PRIZES, AND ALLOWANCES. Broker-Dealer reserves
the right to fix and determine the amount, extent, and conditions of any
bonuses, awards, prizes and allowances.
ARTICLE V
TERMINATION PAYMENTS
SECTION 5.1 PAYMENT AFTER TERMINATION. If this Agreement is terminated and
Registered Rep is subject to "disqualification," as that term is defined in the
NASD's bylaws, then no termination payments will be paid to Registered Rep
following the termination of this Agreement. If this Agreement is terminated and
Registered Rep is not
<PAGE>
subject to "disqualification," termination payments will be paid to Registered
Rep or Registered Rep's legal representative in accordance with the provisions
of Section 5.2.
SECTION 5.2 TERMINATION PAYMENTS. If this Agreement is terminated and
Registered Rep is not subject to "disqualification," Broker-Dealer will pay
Registered Rep or Registered Rep's legal representative:
a. on business written by Registered Rep under the Schedule of Payments
attached hereto as EXHIBIT B ,
(i) any remaining writing compensation for the first through fifth
policy years as would have been due and payable to Registered Rep
if this Agreement had not been terminated; and
(ii) if on the date of termination Registered Rep had five (5) or more
years of combined service as an agent under the State Farm
Agent's Agreement or Local Agent's Appointment, any remaining
writing compensation for the sixth through fifteenth policy years
as would have been due and payable to Registered Rep if this
Agreement had not been terminated; and
b. if the date of termination of this Agreement coincides with the date
of termination of the State Farm Agent's Agreement, and if on the date
of termination Registered Rep has twenty five (25) or more years of
combined service as an agent under the State Farm Agent's Agreement or
Local Agent's Appointment, on business credited to Registered Rep's
account on which service compensation is being paid to Registered Rep,
(i) On Variable Deferred Annuity policies a monthly amount equal to
three-fourths of one percent (3/4 of 1%) of an average monthly
premium of any such policy; and
(ii) On Variable Universal Life policies a monthly amount equal to one
and one-half percent (1 1/2%) of an average monthly premium of
any such policy
beginning the last day of the month next following the month of
termination of this Agreement and until the last day of the month in
which Registered Rep's death occurs; except that no amount shall be
paid on any policy made available for assignment by the termination of
a State Farm Registered Representative Agreement or by a release of
policies pursuant to Article X of this Agreement or Article X of any
other State Farm Registered Representative Agreement, and except that
if Registered Rep is less than sixty five (65) years of age on the
date of termination of this Agreement, amounts shall be reduced
actuarially based on Registered Rep's lower age.
c. The "average monthly premium" of a policy shall be calculated by
dividing the total premium paid on the policy by the number of full
months elapsed between its Policy Date and termination of this
Agreement, except that the "average monthly premium" for a policy in
force less than sixty (60) months shall be no greater than:
(i) For a Variable Universal Life policy, one-twelfth (1/12) of the
total Primary Compensation Premium paid on the base policy and
any increases to base and added riders, and
(ii) For a Variable Deferred Annuity policy, two hundred dollars
($200).
d. After Registered Rep and any spouse (if accepted as a payee) have
died, or at any time Broker-Dealer owes, for each of three (3)
consecutive periodic payments in this Section, less than one hundred
dollars ($100), Broker-Dealer may, in its sole discretion, change the
frequency and amount of the periodic payments to payment or payments
less frequent and of greater amount or amounts, but of equal present
value. Any new amount or amounts shall reasonably consider the time
value of money and any influence of policy persistency, agent
mortality, and other factors relevant to the payment frequency and
amounts otherwise provided herein.
<PAGE>
ARTICLE VI
CONFIDENTIALITY; PROPRIETARY MATERIALS
SECTION 6.1 CONFIDENTIALITY. Information regarding names, addresses, and
ages of issuing insurance company policyholders; and the expiration or renewal
dates of policies acquired or coming into Registered Rep's possession during the
effective period of this Agreement, or any prior Agreement, except information
and records of policyholders insured by the issuing insurance company pursuant
to any governmental or insurance industry plan or facility, are trade secrets
and confidential business information wholly owned by Broker-Dealer or its
parent or affiliated companies. All forms, computer-related and electronic
files, and other materials, whether furnished by Broker-Dealer or its parent or
affiliated companies or purchased by Registered Rep, upon which this information
is recorded shall be the sole and exclusive property of Broker-Dealer or its
parent or affiliated companies. Registered Rep's possession of this information
is only for use in carrying out Registered Rep's duties and responsibilities
under this Agreement. Registered Rep shall take all reasonable steps to maintain
the value and confidentiality of such information, including informing
Registered Rep's employees of this responsibility, and assuring their
compliance.
SECTION 6.2 MANUALS, ETC. Broker-Dealer will furnish Registered Rep,
without charge, manuals, forms, records, computer-related and electronic files,
equipment, and such other materials, supplies and services as Broker-Dealer may
specify from time to time. All such property furnished by Broker-Dealer shall
remain the property of Broker-Dealer. In addition, Broker-Dealer will offer at
Registered Rep's expense additional equipment, materials, supplies and services.
ARTICLE VII
TERM, TERMINATION AND SURVIVABILITY
SECTION 7.1 EFFECTIVE DATE AND TERM. This Agreement shall be effective on
the date set out above on Page 1 hereof and shall continue until terminated as
herein provided.
SECTION 7.2 TERMINATION. This Agreement will terminate upon the death of
Registered Rep. Either Registered Rep or Broker-Dealer has the right to
terminate this Agreement by written notice delivered to the other or mailed to
the other's last known address. The date of termination shall be the date
specified in the notice, but in the event no date is specified, the date of
termination shall be the date of delivery if the notice is delivered, or the
date of the postmark, if the notice is mailed. Either Registered Rep or
Broker-Dealer can accelerate the date of termination specified by the other by
giving written notice of termination in accordance with this paragraph. This
Agreement shall also terminate effective immediately upon the termination of the
State Farm Agent's Agreement to which Registered Rep is a party.
SECTION 7.3 RESTRICTIONS ON POST TERMINATION ACTIVITY. For a period of one
year following termination of this Agreement, Registered Rep will not either
personally or through any other person, agency, or organization:
a. induce or advise any issuing insurance company policyholder credited
to Registered Rep's account at the date of termination to lapse,
surrender, or cancel any issuing insurance company coverage; or
b. solicit any such policyholder to purchase any insurance coverage
competitive with the insurance coverages sold by Broker-Dealer. In the
event the "period of one year" conflicts with any statutory provision,
such period shall be the period permitted by statute.
After termination of this Agreement Registered Rep agrees not to act or
represent himself or herself in any way as an agent or representative of
Broker-Dealer.
SECTION 7.4 RETURN OF MATERIALS. Within ten days after the termination of
this Agreement, all property belonging to Broker-Dealer shall be returned or
made available for return to Broker-Dealer or its authorized
<PAGE>
representative. Without limiting the foregoing, Registered Rep shall promptly
deliver to Broker-Dealer, without retaining any copies or excerpts thereof, the
Compliance Manual, any other manuals, compliance memoranda, prospectuses,
statements of additional information, advertising, sales materials, business
cards and letterhead.
SECTION 7.5 SURVIVABILITY. The agreements in Sections 5.1, 5.2, 6.1, 6.2,
7.3, 7.4, 9.11 and Article VIII shall survive the termination of this Agreement.
ARTICLE VIII
DISPUTE RESOLUTION
Any controversy between Broker-Dealer and Registered Rep arising out of, or
relating to, this Agreement or the breach thereof may be settled by arbitration
in accordance with the rules then pertaining of the NASD at Chicago, Illinois.
Any arbitration hereunder and award of the arbitrators, or of a majority of
them, shall be final, and judgment may be entered in any court, state or
federal, having jurisdiction.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 ASSIGNMENT. Since Broker-Dealer is relying on Registered Rep to
carry out the provisions of this Agreement, neither the Agreement nor any
interest thereunder can be sold, assigned or pledged by Registered Rep; and no
right in any sum due or to become due to Registered Rep hereunder can be sold,
assigned, or pledged without prior written consent of Broker-Dealer.
SECTION 9.2 ENTIRE AGREEMENT. This Agreement constitutes the sole and
entire Agreement between the parties hereto, and no change, alteration, or
modification of the terms of this Agreement may be made except by agreement in
writing signed by an authorized representative of the Broker-Dealer and accepted
by Registered Rep. This Agreement supersedes all prior commitments, inducements,
promises, negotiations, representations, obligations, conditions, or agreements,
oral or written, between Broker-Dealer, its representatives, and Registered Rep,
except with respect to compensation owing to Registered Rep under Schedules of
Payment under Registered Rep's immediately preceding State Farm Registered
Representative Agreement, if any, and with respect to compensation overpayments
or any other amounts owed Broker-Dealer or its parent or affiliated companies by
Registered Rep. All payments for termination by death or for termination other
than by death which otherwise might have become payable to Registered Rep under
the terms of prior agreements with Broker-Dealer are hereby waived by Registered
Rep.
SECTION 9.3 WAIVER. Failure of any party to enforce any provision of this
Agreement will not constitute a course of conduct or waiver in the future of the
right to enforce the same or any other provision.
SECTION 9.4 SEVERABILITY. The parties to this Agreement desire and intend
that the terms and conditions of this Agreement be enforced to the fullest
extent permissible under the laws and public policies applied in each state or
jurisdiction in which enforcement is sought. The parties agree specifically
that, if any particular term or condition of this Agreement is adjudicated, or
becomes by operation of law, invalid or unenforceable, this Agreement will be
deemed amended to delete the portion that is adjudicated, or that becomes by
operation of law, invalid or unenforceable. The deletion or reduction will apply
only with respect to the operation of the term or condition, and the remainder
of the Agreement will remain in full force and effect. A deletion or reduction
resulting from any adjudication will apply only with respect to the operation of
that term in the particular jurisdiction in which the adjudication is made.
SECTION 9.5 NOTICE. All notices to a party will be sent to the following
addresses or to such other address or person as such party may designate by
notice to each other party hereunder:
a. TO BROKER-DEALER:
State Farm VP Management Corp.
c/o Variable Products Administration Department
P.O. Box 2307
Bloomington, Illinois 61702-2307
Phone: 888-495-2351
<PAGE>
Fax: 309-763-5930
with a copy to Registered Rep's Regional Agency Resources Department.
b. TO REGISTERED REP:
Registered Rep's Office Address.
SECTION 9.6 GOVERNING LAW. The validity, enforceability, and interpretation
of this Agreement shall be construed according to the laws of the State of
Illinois.
SECTION 9.7 HEADINGS. The headings in this Agreement are inserted for
convenience only and will not constitute a part hereof.
SECTION 9.8 SET OFF. Any amount (exclusive of premiums due on Registered
Rep's personal policies with the issuing insurance company) at any time owing by
Registered Rep to Broker-Dealer or its parent or affiliated companies shall be a
first lien on any payment due or thereafter becoming due Registered Rep under
any of the provisions of this Agreement, and Broker-Dealer is authorized to
deduct such indebtedness from any such payment due or thereafter becoming due to
Registered Rep from Broker-Dealer.
SECTION 9.9 CHARGE BACKS. If any application is rejected or any policy is
surrendered or canceled, in whole or in part, for any reason, before the
expiration of the policy period, or if any premium is reduced or an overpayment
made to Registered Rep, the compensation paid to Registered Rep on the amount
returned or credited to the policyholder or the amount overpaid to Registered
Rep shall be charged to Registered Rep and shall constitute an indebtedness of
Registered Rep to Broker-Dealer.
SECTION 9.10 RIGHT TO PRESCRIBE. Broker-Dealer and the issuing insurance
company retain the right to prescribe: all policy forms and provisions;
premiums, fees, and charges for insurance and services; rules governing the
binding, acceptance, renewal, rejection, or cancellation of risks, and
adjustments and payment of losses; and limitations on the submission of
applications by individual registered representatives, by market area, by line
of coverage, by policy type, by company, or by other means.
SECTION 9.11 REPRESENTATION. Registered Rep will not represent Registered
Rep as having any powers except those authorized by this Agreement and subject
to any applicable law. Without limiting the foregoing, Registered Rep shall not
have the authority to extend the time of payment of any premium, or to alter,
waive, or forfeit any of the issuing insurance company's rights, requirements,
or conditions in any policy of insurance, or otherwise obligate Broker-Dealer or
issuing insurance company in any way except as stated in this Agreement or
expressly authorized under the rules and regulations of Broker-Dealer or as
otherwise authorized in writing by Broker-Dealer.
SECTION 9.12 TRANSFER OF POLICIES. Broker-Dealer will leave in Registered
Rep's account all policies credited to Registered Rep's account so long as the
policyholder resides within a 75-mile radius of Registered Rep's principal place
of business and within a State in which Registered Rep is duly licensed, except
that Broker-Dealer may:
a. if service compensation is suspended, reduced or eliminated pursuant
to Section IV. G, Section IV. H, and/or Section IV. I of the Schedule
of Payments attached hereto as EXHIBIT B, transfer the Variable Products
credited to Registered Rep's account to the accounts of other registered
representatives or to Broker-Dealer for servicing; and
b. after prior written notice to Registered Rep, transfer any policy to
the account of another registered representative when the policyholder makes a
bona fide request in writing.
Registered Rep will respect the rights and interests of Registered Rep's fellow
registered representatives in policies credited to their accounts by refraining
from raiding or otherwise diverting policies from their accounts to Registered
<PAGE>
Rep's account. Registered Rep shall neither directly nor indirectly attempt to
divert policies to Registered Rep's own account from unassigned accounts or from
those of other registered representatives, or from Registered Rep's own account
to the accounts of other registered representatives.
ARTICLE X
RELEASE OF POLICIES
In the event of a release of policies pursuant to Section VI of the State
Farm Agent's Agreement (AA97) or Section IV of another State Farm Agent's
Agreement, the Variable Products held by policyholders and members of the
household of such policyholders whose automobile insurance policies are released
shall likewise be released, and Broker-Dealer will pay with respect to the
Variable Products released by Registered Rep the termination payments in
accordance with Section 5.2 of this Agreement, as those provisions may be
applicable.
IN WITNESS WHEREOF, Broker-Dealer has caused this Agreement to be executed
on its behalf by its authorized representative, to be effective on the date
above set out on Page 1 hereof, upon its acceptance in writing by Registered Rep
on Form RRAA98(AA97), Registered Rep's Acceptance of Agreement, transmitted to
Broker-Dealer.
STATE FARM VP MANAGEMENT CORP.
By:_________________________________________________
Authorized Representative
REPLACES - NONE PRINTED IN U.S.A.
EFFECTIVE 2-1-98
<PAGE>
Exhibit 10.(a)
[Letterhead of Sutherland Asbill & Brennan LLP]
April 20, 2000
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 (File No. 333-57579). 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 hereby consent to the incorporation by reference in the Post-Effective
Amendment No. 3 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 22, 2000, relating to the statutory
financial statements of State Farm Life and Accident Assurance Company. We
also consent to the incorporation by reference to our Firm under the caption
"Experts" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 25, 2000
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company and
Contract Owners of State Farm Life and Accident Assurance Company Variable
Annuity Separate Account
We hereby consent to the incorporation by reference in the Post-Effective
Amendment No. 3 Registration Statement on Form N-4 (No. 333-57579) of our report
dated February 16, 2000, on our audit of the financial statements of State Farm
Life and Accident Assurance Company Variable Annuity Separate Account and to the
reference of our Firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 25, 2000
