<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1998
REGISTRATION NO. 333-64345
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF
UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
------------------------
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
(Exact name of trust)
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(Name of Depositor)
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710-0001
(Complete address of depositor's principal executive offices)
LAURA P. SULLIVAN, ESQ.
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
ONE STATE FARM PLAZA
BLOOMINGTON, ILLINOIS 61710-0001
(Name and complete address of agent for service)
------------------------
COPY TO:
STEPHEN E. ROTH, ESQUIRE
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
SECURITIES BEING OFFERED:
VARIABLE UNIVERSAL LIFE INSURANCE POLICIES
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1 Cover Page
2 Cover Page
3 Not applicable
4 Sale of the Policies
5 The Variable Account
6 The Variable Account
7 Not applicable
8 The Variable Account
9 Litigation
10 Summary and Diagram of the Policy; Premiums; Allocation Options; Death Benefits; Other Policy
Benefits and Provisions; Surrender Benefits; Loan Benefits; The Variable Account and State Farm
Fund; Voting of Fund Shares
11 The Variable Account and State Farm Fund; Allocation Options
12 The Variable Account and State Farm Fund; Allocation Options
13 Charges and Deductions
14 Premiums
15 Premiums; Allocation Options
16 Allocation Options
17 Premiums; Surrender Benefits; Loan Benefits; Requesting Payments and Telephone Transactions
18 The Variable Account and State Farm Fund; Other Policy Benefits and Provisions
19 Reports to Policy Owners
20 The Variable Account
21 Loan Benefits
22 Not applicable
23 State Farm and the Fixed Account
24 Not applicable
25 State Farm and the Fixed Account
26 Charges and Deductions
27 State Farm and the Fixed Account
28 State Farm and the Fixed Account
29 State Farm and the Fixed Account
30 Not applicable
31 Not applicable
32 Not applicable
33 Not applicable
34 Not applicable
35 State Farm and the Fixed Account
36 Not applicable
37 Not applicable
38 Sale of the Policies
39 Sale of the Policies
40 Not Applicable
41 Sale of the Policies
42 Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2 ITEM CAPTION IN PROSPECTUS
- ----------------- -----------------------------------------------------------------------------------------------------
<C> <S>
43 Not applicable
44 How Your Policy Account Values Vary
45 Not applicable
46 How Your Policy Account Values Vary
47 Allocation Options
48 State Farm and the Fixed Account; The Variable Account and State Farm Fund
49 Not applicable
50 The Variable Account and State Farm Fund
51 Premiums; Allocation Options; Charges and Deductions; Surrender Benefits
52 The Variable Account and State Farm Fund; Other Policy Benefits and Provisions
53 Tax Considerations
54 Not applicable
55 Hypothetical Illustrations
56 Not applicable
57 Not applicable
58 Not applicable
59 Financial Statements
</TABLE>
<PAGE>
XXX, 1998
VARIABLE
UNIVERSAL LIFE
State Farm Life and Accident Assurance Company
Variable Universal Life Prospectus
[LOGO]
<PAGE>
PROSPECTUS DATED , 1998
VARIABLE UNIVERSAL LIFE INSURANCE POLICY
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY VARIABLE LIFE SEPARATE ACCOUNT
OF STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
P.O. BOX 2307
BLOOMINGTON, ILLINOIS 61702-2307
TELEPHONE (888) 702-2307
This prospectus describes a variable universal life insurance policy (the
"Policy") offered by State Farm Life and Accident Assurance Company ("State
Farm," "we," "us," or "our"). The Policy is designed to provide lifetime
insurance protection on the insured named in the Policy (the "Insured") and at
the same time provide flexibility to vary the amount and timing of premiums and
to change the amount of death benefits payable under the Policy. This
flexibility allows the purchaser of a Policy (the "Owner," "you," or "your") to
provide for changing insurance needs under a single insurance policy.
The Owner may allocate net premiums and Policy Account Value to the State Farm
Life and Accident Assurance Company Variable Life Separate Account (the
"Variable Account") and also to State Farm's general account (the "Fixed
Account"), within certain limits. The Variable Account is divided into
subaccounts (each, a "Subaccount"). Each Subaccount invests in a corresponding
investment portfolio (each, a "Fund") of State Farm Variable Product Trust (the
"Trust"). The Funds currently available are the Large Cap Equity Index Fund,
Small Cap Equity Index Fund, International Equity Index Fund, Stock and Bond
Balanced Fund, Bond Fund, and Money Market Fund. The accompanying prospectus for
the Trust describes each of the Funds, including the risks of investing in each
Fund, and provides other information about the Trust.
An Owner can select from two death benefit options available under the Policy: a
level insurance amount or "Basic Amount" ("Option 1"), and a level insurance
amount (or Basic Amount) plus Policy Account Value ("Option 2"). State Farm
guarantees that the death benefit will never be less than the Basic Amount (less
any unrepaid Policy loans and past due charges) so long as the Policy is in
force. For Policies issued in New York, if the Insured is alive on the Maturity
Date, the Cash Surrender Value on the Maturity Date will be paid to the Owner
and the Policy will terminate.
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. If the Cash Surrender Value is insufficient to
cover the charges due under the Policy, the Policy will lapse without value.
However, the Policy will not lapse during the Death Benefit Guarantee Period,
regardless of the sufficiency of the Cash Surrender Value, so long as the
minimum premiums for the Death Benefit Guarantee have been paid. The Policy also
provides for Policy loans and permits withdrawals within limits. In addition,
Owners can elect dollar-cost averaging or portfolio rebalancing programs.
This prospectus should be read carefully and retained for future reference. A
prospectus or prospectus profile for State Farm Variable Product Trust must
accompany this prospectus and should be read in conjunction with this
prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY,
ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE POLICIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY AND DIAGRAM OF THE POLICY 2
INDEX OF TERMS 5
PREMIUMS 6
Applying for a Policy 6
Exchanges from State Farm Universal Life and State Farm
Traditional Ordinary Whole Life 6
Free Look Right to Cancel Policy 6
Premiums 6
Planned Premiums 7
Premiums to Prevent Lapse 7
Death Benefit Guarantee 7
Crediting Premiums to the Policy 7
ALLOCATION OPTIONS 7
Net Premium Allocations 7
Subaccount Options 8
Fixed Account Option 8
Transfers 8
Dollar-Cost Averaging 9
Portfolio Rebalancing Program 9
CHARGES AND DEDUCTIONS 10
HOW YOUR POLICY ACCOUNT VALUES VARY 11
Policy Account Value 11
Cash Value 11
Cash Surrender Value 11
Subaccount Policy Value 11
Fixed Policy Account Value 12
DEATH BENEFITS 13
Amount of Death Benefit Payable 13
Death Benefit Options 13
Changing the Death Benefit Option 13
Changing the Basic Amount 13
Effect of Withdrawals on the Death Benefit 14
Changing the Beneficiary 14
LOAN BENEFITS 14
Loan Account 14
Interest 14
Loan Repayment 14
Effect of Policy Loan 14
SURRENDER BENEFITS 15
Full Surrender 15
Withdrawals 15
HYPOTHETICAL ILLUSTRATIONS OF
ACCUMULATED PREMIUMS, POLICY ACCOUNT VALUES, CASH SURRENDER
VALUES AND DEATH BENEFITS 16
REQUESTING PAYMENTS AND
TELEPHONE TRANSACTIONS 25
Requesting Payments 25
Telephone Transactions 25
OTHER POLICY BENEFITS AND PROVISIONS 25
Exchange Provision 25
Other Policy Provisions 26
Beneficiary 26
Reinstatement 26
Other Changes 26
Reports to Policy Owners 26
Assignment and Change of Owner 26
Supplemental Benefits 26
STATE FARM AND THE FIXED ACCOUNT 27
THE VARIABLE ACCOUNT AND THE TRUST 30
TAX CONSIDERATIONS 31
ADDITIONAL INFORMATION 32
APPENDIX A A-1
APPENDIX B B-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT BE LAWFULLY MADE.
1 -------
<PAGE>
SUMMARY AND DIAGRAM OF THE POLICY
The following summary of prospectus information and diagram of the important
features of the Policy should be read in conjunction with the more detailed
information appearing elsewhere in this prospectus. Unless otherwise indicated,
the description of the Policy in this prospectus assumes that the Policy is in
force and there is no outstanding Loan Amount. Definitions of certain terms used
in this prospectus may be found by referring to the Index of Terms immediately
following the diagram.
Purpose of the Policy. The Policy is designed to provide insurance benefits with
a long-term investment element. The Policy should be considered in conjunction
with other insurance owned by the Owner. It may not be advantageous to replace
existing insurance with the Policy.
Comparison with Universal Life Insurance. The Policy is similar in many ways to
universal life insurance. As with universal life insurance: the Owner pays
premiums for insurance coverage on the Insured; the Policy provides for the
accumulation of a Cash Surrender Value that is payable if the Policy is
surrendered during the Insured's lifetime; and the Cash Surrender Value may be
substantially lower than the premiums paid. However, the Policy differs
significantly from universal life insurance in that the Policy Account Value may
decrease if the investment performance of the Subaccounts to which Policy
Account Value is allocated is sufficiently adverse. If the Cash Surrender Value
becomes insufficient to cover charges when due and the Death Benefit Guarantee
is not in effect, the Policy will lapse without value after a grace period. See
"Premiums to Prevent Lapse," page 7.
Tax Considerations. State Farm intends for the Policy to satisfy the definition
of a life insurance contract under section 7702 of the Internal Revenue Code of
1986, as amended (the "Code"). Under certain circumstances, a Policy could be
treated as a "modified endowment contract." State Farm will monitor Policies and
will attempt to notify an Owner on a timely basis if his or her Policy is in
jeopardy of becoming a modified endowment contract. For further discussion of
the tax status of a Policy and the tax consequences of being treated as a life
insurance contract or a modified endowment contract, see "Tax Considerations,"
page 31.
Free Look Right to Cancel Policy. For a limited time after the Policy is issued,
you have the right to cancel your Policy and receive a full refund of all
premiums paid. See "Free Look Right to Cancel Policy," page 6. During this
limited period, Net Premiums paid will be allocated to the Fixed Account. See
"Net Premium Allocations," page 7.
Owner Inquiries. If you have any questions, you may write or call our Home
Office at P.O. Box 2307, Bloomington, IL 61702-2307, (888) 702-2307.
- ---------
2
<PAGE>
DIAGRAM OF POLICY
PREMIUMS
- - You select a payment plan but are not required to pay premiums according to
the plan. You can vary the frequency and amount, within limits, and can skip
planned premiums. See "Planned Premiums," page 7.
- - Minimum initial premium and planned premium depend on the Insured's Age, sex,
rate class, Basic Amount selected, and any supplemental riders. See
"Premiums," page 6.
- - Unplanned premiums may be made, within limits. See "Premiums," page 6.
- - Under certain circumstances, extra premiums may be required to prevent lapse.
See "Premiums to Prevent Lapse," page 7.
ALLOCATION OF NET PREMIUMS
- - A 5% premium charge is deducted from each premium before allocation resulting
in a net premium.
- - You direct the allocation of Net Premiums among six Subaccounts and the Fixed
Account. See "Net Premium Allocations," page 7, for rules and limits.
- - Interest is credited on amounts allocated to the Fixed Account at a rate
determined by State Farm, but not less than an annual effective rate of 4%.
See "Transfers," page 8, for rules and limits on Fixed Account allocations.
FUNDS AVAILABLE THROUGH SUBACCOUNTS
- - The Subaccounts invest in corresponding portfolios of State Farm Variable
Product Trust. See "The Trust," page 30.
- - The current Funds available and their investment advisory fees and other
expenses are as follows:
<TABLE>
<CAPTION>
LARGE CAP SMALL CAP INTERNATIONAL STOCK AND MONEY
EQUITY INDEX EQUITY INDEX EQUITY INDEX BOND BALANCED BOND MARKET
<S> <C> <C> <C> <C> <C> <C>
Advisory Fees(1) .26% .40% .55% .36% .50% .40%
Other Expenses (after expense
limitation)(2) .10% .10% .20% .10% .10% .10%
--- --- --- --- ---- ------
Total Annual Expenses (after expense
limitation) .36% .50% .75% .46% .60% .50%
--- --- --- --- ---- ------
--- --- --- --- ---- ------
</TABLE>
(1) For each of the Funds other than the Stock and Bond Balanced Fund, the
investment advisory fees shown above are the actual amounts expected to be
incurred in the current fiscal year for such Funds. The Stock and Bond
Balanced Fund, which invests in the Large Cap Equity Index Fund and the Bond
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 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.
(2) For each of the Funds other than the Stock and Bond Balanced Fund, "other
expenses" are based on estimated amounts for the current fiscal year. The
amounts shown for such Funds' "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. 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. By
investing in the Large Cap Equity Index Fund and the Bond Fund, the Stock and
Bond Balanced Fund will indirectly bear its share of those underlying Funds'
"other expenses" and will incur its own "other expenses." The amount shown
for the Stock and Bond Balanced Fund's "other expenses" reflects the fact
that the investment adviser to the Funds has agreed to bear the expenses
incurred by each underlying Fund, other than the investment advisory fee,
that exceed 0.10% of each such Fund's average daily net assets, and that the
investment adviser to the Funds has agreed to bear all of the Stock and Bond
Balanced Fund's own "other expenses." These expense limitation arrangements
are voluntary and can be eliminated by the investment adviser at any time.
Absent these expense limitations, estimated "other expenses" for the Large
Cap Equity Index Fund, Small Cap Equity Index Fund, International Equity
Index Fund, Stock and Bond Balanced Fund, Bond Fund, and Money Market Fund
would have been 0.11%, 0.13%, 0.28%, 0.43%, 0.25%, and 0.35%, respectively.
3 -------
<PAGE>
DEDUCTIONS FROM ASSETS
- - A monthly deduction is made for cost of insurance, $6 current monthly expense
charge (maximum of $8 per month), and supplemental benefit charges. See
"Charges and Deductions -- Monthly Deduction," page 10.
- - A daily charge at a current annual rate of 0.80% (maximum annual rate of
0.90%) is deducted from assets in the Subaccounts. See "Charges and Deductions
-- Mortality and Expense Risk Charge," page 10. This charge is not deducted
from assets in the Fixed Account.
POLICY ACCOUNT VALUE
- - Policy Account Value is the amount in the Subaccounts and in the Fixed Account
credited to your Policy plus the value held in the general account to secure
the Loan Amount. See "Policy Account Value," page 11, "Fixed Policy Account
Value," page 12, and "Subaccount Policy Value," page 11.
- - Policy Account Value varies from day to day to reflect Subaccount investment
experience, interest credited on any Fixed Account allocations, charges
deducted and other Policy transactions (such as Policy loans, transfers and
withdrawals).
- - Policy Account Value can be transferred among the Subaccounts and the Fixed
Account. A $25 transfer processing fee may apply to transfers made after the
12th transfer in a Policy Year. See "Transfers" for rules and limits. Policy
loans reduce the amount available for allocations and transfers.
- - Policy Account Value serves as the starting point for calculating certain
values under a Policy, such as the Cash Surrender Value and the Death Benefit.
- - There is no minimum guaranteed Policy Account Value. The Policy may lapse on a
Deduction Date if the Cash Surrender Value is insufficient to cover the
Monthly Deduction then due and the Death Benefit Guarantee is not in effect.
CASH BENEFITS
- - Loans may be taken for amounts up to 90% of Cash Value, at a net interest rate
of 2%. See "Loan Benefits," page 14, and "Tax Treatment of Policy Benefits,"
page 31.
- - Withdrawals generally can be made up to 4 times each Policy Year provided
there is sufficient remaining Cash Surrender Value. A withdrawal processing
fee equal to the lesser of $25 or 2% of the amount requested for withdrawal
will apply to each withdrawal. See "Withdrawals," page 15, for rules and
limits.
- - The Policy can be surrendered at any time for its Cash Surrender Value (Policy
Account Value minus Loan Amount and minus any applicable surrender charge).
See "Full Surrender," page 15.
- - A surrender charge will be deducted from the Policy Account Value upon a full
surrender of the Policy during the first 10 Policy Years or the first 10 years
after an increase in Basic Amount. See "Surrender Charge," page 10 and
Appendix A, page A-1.
- - A variety of payment options are available.
DEATH BENEFITS
- - Death Benefits are available as a lump sum or under a variety of payment
options.
- - The minimum Basic Amount available is $50,000.
- - Death Benefits are available in two death benefit options: Option 1 (greater
of Basic Amount plus any Net Premium payment received since the last Deduction
Date, or a specified percentage of Policy Account Value); or Option 2 (greater
of Basic Amount plus the Policy Account Value, or a specified percentage of
Policy Account Value). See "Death Benefits," page 13.
- - There is flexibility to change the Basic Amount and to change the Death
Benefit option. See "Changing the Basic Amount" and "Changing the Death
Benefit Option," page 13, for rules and limits.
- - The Death Benefit Guarantee keeps the Policy in force regardless of
sufficiency of Cash Surrender Value so long as cumulative premiums paid on the
Policy, less any withdrawals and less the Loan Policy Account Value, are at
least equal to the Minimum Premium. See "Death Benefit Guarantee," page 7.
- - The Death Benefit should be excludible from the gross income of the
Beneficiary. See "Tax Treatment of Policy Benefits," page 31.
- ---------
4
<PAGE>
INDEX OF TERMS
AGE -- Age means the age on the Insured's last birthday as of the Policy Date
and each Policy Anniversary. If the Policy Date falls on the birthday of the
Insured, the Age will be the age attained by the Insured on the Policy Date.
CASH VALUE -- Policy Account Value less any applicable surrender charge.
CASH SURRENDER VALUE -- Cash Value less any Loan Amount.
DEATH BENEFIT -- The amount of insurance provided under the Policy determined by
the Death Benefit Option and any insurance amounts provided by riders. The
amount payable on the death of the Insured will be reduced by any Loan Amount
and any unpaid Monthly Deductions.
DEDUCTION DATE -- The Policy Date and each monthly anniversary of the Policy
Date.
HOME OFFICE -- P.O. Box 2307, Bloomington, IL 61702-2307, 1-888-702-2307.
ISSUE DATE -- The date the Policy is issued.
LOAN ACCOUNT -- A part of our general account to which Policy Account Value in
the Variable Account and the Fixed Account is transferred to provide collateral
for any loan taken under the Policy.
LOAN POLICY ACCOUNT VALUE -- The value of the Loan Account for this Policy.
LOAN AMOUNT -- The sum of all outstanding Policy loans including both principal
plus accrued interest.
MATURITY DATE -- For policies issued in New York, the Policy Anniversary when
the Insured is Age 100.
MINIMUM PREMIUM -- For any Policy Month during the first 10 Policy Years (first
5 Policy Years for Policies issued in New York) the cumulative minimum monthly
premium required to keep the Death Benefit Guarantee in effect.
POLICY -- The Policy contains the Basic Plan, any amendments, endorsements, and
riders, and a copy of the application. The Policy is the entire contract.
POLICY ANNIVERSARY -- The same day and month as the Policy Date each year that
the Policy remains in force.
POLICY DATE -- If the Policy is issued as applied for and we receive the premium
before the Issue Date, the Policy Date is the later of the application date or
the date we receive the premium. Otherwise, the Policy Date is the Issue Date.
Policy Months, Years and Anniversaries are measured from the Policy Date. The
Policy Date cannot be the 29th, 30th, or 31st day of any month.
POLICY ACCOUNT VALUE -- The combined value of your Policy in all of the
Subaccounts of the Variable Account, the Fixed Account, and the values held in
our general account to secure Policy loans.
POLICY YEAR -- Any period of twelve months starting with the Policy Date or a
Policy Anniversary.
VALUATION DAY -- Each day on which both the New York Stock Exchange and the Home
Office are open for business except for a day that a Subaccount's corresponding
Fund does not value its shares. The New York Stock Exchange is currently closed
on weekends and on the following holidays: New Year's Day; Reverend Dr. Martin
Luther King, Jr. Holiday; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day. During 1998,
the Home Office is closed on the above-listed holidays and on the Friday after
Thanksgiving and the day before Christmas Day.
VALUATION PERIOD -- The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
5 -------
<PAGE>
PREMIUMS
Applying for a Policy. To purchase a Policy, you must complete an application
and submit it to an authorized State Farm agent. You also must pay an initial
premium of a sufficient amount. See "Premiums," below. Your initial premium can
be submitted with your application or at a later date. Coverage becomes
effective as of the date we receive the premium, but is limited to $300,000
(unless the Insured is under 15 days old in which case coverage will not exceed
$3,000) until the application is approved.
Generally, State Farm will issue a Policy covering an Insured up to age 80 (age
70 in New York) if evidence of insurability satisfies our underwriting rules and
an initial premium of sufficient amount has been received. This amount must be
at least equal to the minimum monthly premium if the mode of the Policy is
monthly, and 12 times the minimum monthly premium if the mode of the Policy is
annual. Evidence of insurability may include, among other things, a medical
examination of the Insured. We reserve the right not to accept an application
for any lawful reason.
Exchanges from State Farm Universal Life and State Farm Traditional Ordinary
Whole Life. State Farm will permit the owner of a State Farm Universal Life
policy or a State Farm Traditional Ordinary whole life policy to exchange such
policy for a Policy subject to the following conditions: (1) the initial Basic
Amount for the Policy must equal or exceed the Basic Amount less any policy loan
and accrued loan interest for the original policy; (2) State Farm will waive
evidence of insurability where the initial Basic Amount of the Policy is equal
to the Basic Amount less any policy loan and accrued loan interest for the
original policy, and where the death benefit options are the same for exchanges
from a Universal Life policy or where the death benefit option is Option 1 for
exchanges from a Traditional Ordinary whole life policy; and (3) the original
policy must be terminated. State Farm can change this program at any time.
On exchanges from a Universal Life policy to a Policy, State Farm will waive the
surrender charge on the Universal Life policy and will waive the 5% premium
charge on the Policy for the amount transferred from the Universal Life policy
to the Policy.
On exchanges from a Traditional Ordinary whole life policy to a Policy, State
Farm will waive the 5% premium charge on the Policy for the amount transferred
from the Traditional Ordinary whole life policy to the Policy.
Free Look Right to Cancel Policy. During your "free-look" period, you may cancel
your Policy and receive a refund of all premiums paid. 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 to State Farm or to an authorized State Farm agent. Immediately after
mailing or delivery, the Policy will be deemed void from the beginning.
Premiums. The premium amounts sufficient to fund a Policy depend on a number of
factors, such as the Age, sex and rate class of the proposed Insured, the
desired Basic Amount, and any supplemental benefits. We reserve the right to
require evidence of insurability prior to accepting any premium payment. After
the initial premium is paid, additional premiums may be paid in any amount (of
at least $25) and at any time. However, total premiums paid in a Policy Year may
not exceed guideline premium limitations for life insurance set forth in the
Code. We reserve the right to reject any premium that would result in the Policy
being disqualified as life insurance under the Code and will refund any rejected
premium. In addition, we will monitor Policies and will attempt to notify the
Owner on a timely basis if his or her Policy is in jeopardy of becoming a
modified endowment contract under the Code. See "Tax Considerations," page 31.
State Farm allows a credit on conversions of eligible State Farm term insurance
to the Policy. The amount of the credit is based on the premiums paid on the
term coverage during the 12 months prior to conversion. The amount of the credit
will be added to the premium, if any, submitted by the Owner converting the term
coverage, and will be treated as part of the initial premium for the Policy
(except for purposes of the free look provision). Therefore, the credit will be
included in the premiums for purposes of calculating and deducting the premium
charge. See "Charges and Deductions -- Premium Charge," page 10. If the Policy
is surrendered, the credit will not be recaptured by State Farm. The amount of
the credit will not be included for purposes of calculating agent compensation.
See "Additional Information -- Sale of the Policies," page 32.
- ---------
6
<PAGE>
Planned Premiums. When you apply for a Policy, you select a monthly or annual
premium payment plan. You may arrange for monthly premiums to be paid via
automatic deduction from your checking account. You are not required to pay
premiums in accordance with this premium plan; rather, you can pay more or less
than planned (subject to the $25 minimum) or skip a planned premium entirely.
You can change the amount of planned premiums and payment arrangements, or
switch between monthly and annual frequencies, whenever you want by providing
satisfactory written or telephone instructions to the Home Office (if we have
your telephone authorization on file), which will be effective upon our receipt
of the instructions. Depending on the Policy Account Value at the time of an
increase in the Basic Amount and the amount of the increase requested, a change
in the amount of planned premiums may be advisable. See "Changing the Basic
Amount," page 13.
Premiums to Prevent Lapse. Failure to pay planned premiums will not necessarily
cause a Policy to lapse. Rather, whether a Policy lapses depends on whether its
Cash Surrender Value is insufficient to cover the Monthly Deduction when due. If
the Cash Surrender Value on a Deduction Date is less than the Monthly Deduction
to be deducted on that date and the Death Benefit Guarantee is not in effect,
the Policy will be in default and a grace period will begin. See "Monthly
Deduction," page 10 and "Death Benefit Guarantee," below. This could happen if
the Cash Surrender Value has decreased due to insufficient investment experience
or because premiums paid have been insufficient to offset the Monthly Deduction.
You have until the end of the grace period to pay the required premium. If the
grace period ends prior to the end of the Death Benefit Guarantee (See "Death
Benefit Guarantee"), the required premium must be large enough to provide the
lesser of (1) the Minimum Premium required at the end of the grace period, or
(2) an amount large enough to provide an increase in the Cash Surrender Value
sufficient to cover the Monthly Deductions for the grace period and any increase
in the surrender charges through the end of the grace period. If the grace
period ends after the end of the Death Benefit Guarantee, the required premium
must be large enough to provide an increase in the Cash Surrender Value
sufficient to cover the Monthly Deductions for the grace period and any increase
in the surrender charges through the end of the grace period. State Farm will
send notice of the amount required to be paid during the grace period to your
last known address and to any assignee of record. The grace period will end 61
days after the notice is sent and your Policy will remain in effect during the
grace period. If the Insured should die during the grace period before the
required premium is paid, the Death Benefit will still be payable to the
Beneficiary, although the amount paid will reflect a reduction for the Monthly
Deduction(s) due on or before the date of the Insured's death. See "Amount of
Death Benefit Payable," page 13. If the required premium has not been paid
before the grace period ends, your Policy will lapse. It will have no value and
no benefits will be payable. But see "Other Policy Benefits and Provisions,"
page 25 for a discussion of your reinstatement rights.
A grace period also may begin if the Cash Surrender Value is insufficient to
cover charges due to the outstanding Loan Amount. See "Effect of Policy Loan,"
page 14.
Death Benefit Guarantee. During the first 10 Policy Years (first 5 Policy Years
in New York), so long as cumulative premiums paid, less withdrawals and the Loan
Policy Account Value, are at least equal to the Minimum Premium amount for your
Policy, the Policy will remain in force, regardless of the sufficiency of Cash
Surrender Value to cover Monthly Deductions.
Crediting Premiums to the Policy. Your initial premium will be credited to the
Policy on the Policy Date. Any additional premium received after the Policy Date
will be credited to the Policy as of the end of the Valuation Period during
which it is received at our Home Office. Premiums received on a non-Valuation
Day will be deemed received on the next succeeding Valuation Day.
ALLOCATION OPTIONS
Net Premium Allocations. When you apply for a Policy, you specify the percentage
of Net Premium to be allocated to each Subaccount and the Fixed Account. You can
change the allocation percentages at any time by sending satisfactory written or
telephone instructions to the Home Office (if we have your telephone
authorization on file). The change will apply to all premiums received with or
after we receive your instructions. Net Premium allocations must be in
percentages totaling 100%, and each allocation percentage must be a whole
number.
7 -------
<PAGE>
Until the free look period expires, all Net Premiums will be allocated to the
Fixed Account. At the end of this period, the Policy Account Value is
transferred to the Subaccounts and/or remains in the Fixed Account based on the
net premium allocation percentages in effect at the time of the transfer. See
"How Your Policy Account Values Vary," page 11. For this purpose, we assume your
free look period starts 10 days after we issue your 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 ("SEC") as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The investment objective(s) of each of the Funds in which
Subaccounts invest are summarized below. There is no assurance that these
objectives will be met.
The Large Cap Equity Index Fund seeks to match the performance of the Standard &
Poor's-Registered Trademark- Composite Index of 500 Stocks(1). This Fund will
pursue its objective by investing primarily on a capitalization-weighted basis
in the securities comprising the index.
The Small Cap Equity Index Fund seeks to match the performance of the Russell
2000-Registered Trademark- Small Stock Index(2). This Fund will pursue its
objective by investing primarily in a representative sample of stocks found in
the index.
The International Equity Index Fund seeks to match the performance of the Morgan
Stanley Capital International Europe, Australia and Far East Free
(EAFE-Registered Trademark- Free) Index(3). This Fund will pursue its objective
by investing primarily in a representative sample of stocks found in the index.
The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and capital
gains. This Fund will pursue its objective by investing primarily in high
quality debt securities.
The 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
pursue its objective by investing exclusively in high quality money market
instruments. AN INVESTMENT IN THE MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. This Fund will attempt to maintain a stable
net asset value of $1.00 per share, BUT THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO DO SO.
Further information about the Funds is contained in the accompanying prospectus
for the Trust, which you should read in conjunction with this prospectus. See
also "The Trust," page 30.
Fixed Account Option. The Fixed Account is part of our general account. It is
not a separate account. Amounts allocated to the Fixed Account are credited with
interest for the period of allocation at rates determined in our sole
discretion, but in no event will interest credited on these amounts be less than
an effective annual rate of 4%. The current interest rate is the guaranteed
interest rate plus any excess interest rate. The current interest rate is
determined periodically. You assume the risk that interest credited may not
exceed the guaranteed minimum rate of 4% per year. Except for surrender charges
allocated to and monthly deductions taken from the Fixed Account, once interest
is credited to the Fixed Account, that interest becomes part of the Fixed
Account and is nonforfeitable. See "State Farm's Fixed Account Option," page 30.
There are significant limits on your right to transfer Policy Account Value from
the Fixed Account. See "Transfers," below.
Transfers. You may transfer Policy Account Value from and among the Subaccounts
at any time after the end of the free look period. The minimum amount of Policy
Account Value that may be transferred from a Subaccount is $250, or, if less,
the Policy Account Value held in the Subaccount. Policy Account
- ------------------------------
(1) 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 Universal Life 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.)
(2) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell(-TM-) 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.)
(3) 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>
Value held in the Fixed Account may be transferred 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 do not carry over
to the next year. The maximum transfer amount is the greater of 25% of the
Policy Account Value held in the Fixed Account on the date of the transfer or
$1,000, unless waived by us. The amount transferred must be at least $250, or,
if less, the Policy Account Value held in the Fixed Account.
Transfer requests may be made by satisfactory written or telephone request (if
we have your telephone authorization on file). A transfer will take effect at
the end of the Valuation Period during which the request is received at the Home
Office. State Farm may, however, defer transfers under the same conditions that
we may delay paying proceeds. See "Requesting Payments," page 25. There is no
limit on the number of transfers from and among the Subaccounts. However, State
Farm reserves the right to impose a $25 per transfer processing fee on each
transfer in a Policy Year in excess of 12. For purposes of assessing this fee,
each transfer request is considered one transfer, regardless of the number of
Subaccounts affected by the transfer. Any unused "free" transfers do not carry
over to the next year. State Farm reserves the right to modify, restrict,
suspend or eliminate the transfer privileges, including telephone transfer
privileges, at any time, for any reason.
Dollar-Cost Averaging. The dollar-cost averaging program permits you to
systematically transfer on a monthly, quarterly, semi-annual or annual basis a
set dollar amount from either the Subaccount investing in the Money Market Fund
(the "Money Market Subaccount") or the Subaccount investing in the Bond Fund
(the "Bond Subaccount") to any combination of Subaccounts and/or the Fixed
Account. If the Money Market Subaccount or the Bond Subaccount is the Subaccount
from which the transfer is made, it cannot also be used as one of the
Subaccounts in this combination. The dollar-cost averaging method of investment
is designed to reduce the risk of making purchases only when the price of 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 by
sending us a written request. To use the dollar-cost averaging program, you must
transfer at least $100 from the Money Market Subaccount or Bond Subaccount, as
applicable. Once elected, dollar-cost averaging remains in effect from the date
we receive your request 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. There is no
additional charge for dollar-cost averaging. A transfer under this program is
not considered a transfer for purposes of assessing a transfer processing fee.
We reserve the right to discontinue offering the dollar-cost averaging program
at any time and for any reason. Dollar-cost averaging is not available while you
are participating in the portfolio rebalancing program.
Portfolio Rebalancing Program. Once your money has been allocated among the
Subaccounts, the performance of each Subaccount may cause your allocation to
shift. You may instruct us to automatically rebalance (on a monthly, quarterly,
semi-annual or annual basis) the value of your Policy in the Subaccounts to
return to the percentages specified in your allocation instructions. You may
elect to participate in the portfolio rebalancing program at any time by sending
us a written request at the Home Office. Your percentage allocations must be in
whole percentages. Subsequent changes to your percentage allocations may be made
at any time by written or telephone instructions to the Home Office (if we have
your telephone authorization on file). Once elected, portfolio rebalancing
remains in effect from the date we receive your written request until you
instruct us to discontinue portfolio rebalancing. There is no additional charge
for using portfolio rebalancing, and a portfolio rebalancing transfer is not
considered a transfer for purposes of assessing a transfer processing fee. We
reserve the right to discontinue offering the portfolio rebalancing program at
any time and for any reason. Portfolio rebalancing does not guarantee a profit
or protect against loss. Amounts in the Fixed Account may not be used in
connection with the portfolio rebalancing program. Portfolio
9 -------
<PAGE>
rebalancing is not available while you are participating in the dollar-cost
averaging program.
CHARGES AND DEDUCTIONS
State Farm deducts the charges described below. Certain of the charges depend on
a number of variables, and are illustrated in the hypothetical illustrations
beginning on page 17. The charges are for the services and benefits provided,
costs and expenses incurred and risks assumed by State Farm under or in
connection with the Policies. Services and benefits provided by State Farm
include: the death, cash and loan benefits provided by the Policy; investment
options, including Net Premium allocations, dollar-cost averaging and portfolio
rebalancing programs; administration of various elective options under the
Policy; and the distribution of various reports to Owners. Costs and expenses
incurred by State Farm include those associated with underwriting applications,
increases in Basic Amount, and riders, 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, such as
federal, state and local premium and other taxes and fees. Risks assumed by
State Farm include the risks that Insureds may live for a shorter period of time
than estimated, therefore resulting in the payment of greater death benefits
than expected, and that the costs of providing the services and benefits under
the Policies will exceed the charges deducted.
- PREMIUM CHARGE. State Farm deducts a 5% charge from each premium before
allocating the resulting Net Premium to the Policy Account Value.
- MORTALITY AND EXPENSE RISK CHARGE. State Farm currently deducts a daily
charge from assets in the Subaccounts attributable to the Policies at an
annual rate of 0.80% of net assets. This charge is guaranteed not to
exceed an annual rate of 0.90% of net assets. This charge does not apply
to Fixed Account assets attributable to the Policies. This charge is
factored into the net investment factor (see page 11). State Farm may
profit from this charge.
- MONTHLY DEDUCTION. State Farm deducts the Monthly Deduction on each
Deduction Date from Policy Account Value in the Variable Account and the
Fixed Account on a pro rata basis. The Monthly Deduction for each Policy
consists of (1) the cost of insurance charge discussed below, (2) a
current monthly expense charge of $6 (it cannot exceed $8 per month), and
(3) any charges for additional benefits added by riders to the Policy (see
"Supplemental Benefits").
- SURRENDER CHARGE. If the Policy is surrendered during the first 10 Policy
Years or the first 10 years after an increase in Basic Amount, State Farm
will deduct a surrender charge based on the Basic Amount at issue, or
increase, as applicable. The surrender charge will be deducted before any
surrender proceeds are paid. The surrender charge depends on the Insured's
Age at issue, or on the Policy Anniversary preceding an increase. It is
calculated based on an amount per $1,000 of the Basic Amount at issue (or
increase). During the 10-year period a surrender charge is in effect, it
increases monthly in the first two years, remains level for the next four
years, then decreases by 1/5 each year for the next five years to zero.
See table below and Appendix A for sample surrender charges. The surrender
charge for your Policy will be stated in your Policy.
MAXIMUM SURRENDER CHARGE
$100,000 INITIAL BASIC AMOUNT
<TABLE>
<CAPTION>
INDIVIDUAL INDIVIDUAL
POLICY YEAR AGE 35 AGE 50
------ ------------ ------------
<S> <C> <C>
3-6 $ 516.00 $ 1,272.00
</TABLE>
- OTHER CHARGES. State Farm reserves the right to impose a $25 transfer
processing fee on each transfer in a Policy Year in excess of 12. See
"Transfers," page 8, for a discussion of the transfer processing fee. On
each withdrawal, State Farm will assess a withdrawal processing fee equal
to the lesser of $25 or 2% of the amount withdrawn. See "Withdrawals,"
page 15, for a discussion of the withdrawal processing fee. There are Fund
expenses that range on an annual basis from 0.36% to 0.75% of the average
daily value of your money invested in the Funds. See "Diagram of Policy,"
page 3, and the prospectus for the Trust for a description of the
investment advisory fees and other expenses incurred by the Funds.
Comment on Cost of Insurance. The cost of insurance is a significant charge
under your Policy because it is the primary charge for the death benefit
provided by your Policy. The cost of insurance charge depends on a number of
variables that cause the charge to vary from Policy to Policy and from Deduction
Date to Deduction Date. It is calculated for the Basic Amount at issue and for
any increase in the Basic Amount. The cost of insurance charge is equal to the
Company's current monthly cost of insurance rate for the Insured multiplied by
the net amount at risk under the Policy for the Basic Amount at issue or as
increased. The net amount at risk is equal to the difference
- ---------
10
<PAGE>
between (1) the amount of insurance attributable to the Basic Amount at issue or
as increased, as applicable, on the Deduction Date at the start of the month
divided by 1.0032737, and (2) the Policy Account Value attributable to the Basic
Amount at issue or as increased, as applicable, on the Deduction Date at the
start of the month after the deduction of the part of the Monthly Deduction that
does not include the cost of insurance and the monthly charge for any Waiver of
Monthly Deduction rider. Your Policy describes more specifically how this amount
is calculated.
The cost of insurance rate for the Insured is based on his or her Age, sex and
applicable rate class. We currently place Insureds in the following rate classes
when we issue the Policy, based on our underwriting: a male or female or unisex
rate class where appropriate under applicable law (currently including the state
of Montana); and a tobacco or non-tobacco rate class. Juveniles are placed in a
male or female or unisex rate class. The original rate class applies to the
initial Basic Amount. If an increase in Basic Amount is approved, a different
rate class may apply to the increase, based on the Insured's circumstances at
the time of the increase. We guarantee that the cost of insurance rates used to
calculate the monthly cost of insurance charge will not exceed the maximum cost
of insurance rates set forth in the Policy. The maximum cost of insurance rates
are based on the Insured's age last birthday at the start of the Policy Year,
sex, and, for issue ages 20 and over, tobacco use. If the Insured is age 20 and
over on the Policy Date or the effective date of any increase in Basic Amount,
the Commissioners 1980 Standard Ordinary Non-Smoker Table applies if the Insured
is classified as non-tobacco; otherwise, the Commissioners 1980 Standard
Ordinary Smoker Mortality Table applies. If the Insured is under age 20 on the
Policy Date or the effective date of any increase in Basic Amount, the
Commissioners 1980 Standard Ordinary Mortality Table applies. Modifications are
made for rate classes other than standard. See "Hypothetical Illustrations of
Accumulated Premiums, Policy Account Values, Cash Surrender Values, and Death
Benefits" page 16 for examples showing the effects of the cost of insurance
charge.
HOW YOUR POLICY ACCOUNT VALUES VARY
Policy Account Value. The Policy Account Value serves as a starting point for
calculating certain values under a Policy. It is the aggregate of the value of
your Policy in all of the Subaccounts of the Variable Account, the Fixed
Account, and values held in our general account to secure Policy loans. See
"Loan Benefits," page 14. The Policy Account Value is determined first on the
Policy Date and thereafter on each Valuation Day. The Policy Account Value will
vary to reflect the performance of the Subaccounts to which amounts have been
allocated, interest credited on amounts allocated to the Fixed Account and Loan
Account, charges, transfers, withdrawals, Policy loans, Policy loan interest,
and Policy loan repayments. It may be more or less than premiums paid.
Cash Value. The Cash Value on a Valuation Day is the Policy Account Value
reduced by any surrender charge that would be deducted if the Policy were
surrendered that day.
Cash Surrender Value. The Cash Surrender Value on a Valuation Day is the Cash
Value reduced by any Loan Amount. For Policies issued in New York, if the
Insured is alive on the Maturity Date, we will pay the Cash Surrender Value to
the Owner and the Policy will terminate.
Subaccount Policy Value. On any Valuation Day, for each Subaccount the
Subaccount Policy Value is equal to the number of Subaccount units credited to
the Policy multiplied by their unit value for that Valuation Day. When you
allocate an amount to a Subaccount, either by Net Premium allocation, transfer
of Policy Account Value or repayment of a Policy loan, your Policy is credited
with units in that Subaccount. The number of units is determined by dividing the
dollar amount allocated, transferred or repaid to the Subaccount by the
Subaccount's unit value for the Valuation Day when the allocation, transfer or
repayment is effected. The number of Subaccount units credited to a Policy will
decrease when the allocated portion of the Monthly Deduction is taken from the
Subaccount, a Policy loan is taken from the Subaccount, an amount is transferred
from the Subaccount, a withdrawal is taken from the Subaccount, or the Policy is
surrendered.
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<PAGE>
UNIT VALUES. A Subaccount's unit value varies to reflect the investment
experience of the underlying Fund, and may increase or decrease from one
Valuation Day to the next. The unit value for each Subaccount was
arbitrarily set at $10 when the Subaccount was established. For each
Valuation Period after the date of establishment, the unit value is
determined by multiplying the value of a unit 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 Account Value. The Fixed Policy Account Value on any date on or
after the Issue Date is equal to: (1) the sum of the following amounts in the
Fixed Account: Net Premium allocations, Policy Account Value transfers, and
interest accruals (if the date is a Policy Anniversary it also includes any
dividend payments); minus (2) the sum of any Monthly Deductions attributed to
the Fixed Account, any withdrawals or transfers (including any transfer
processing fee or withdrawal processing fee) from the Fixed Account, and Policy
loans taken from the Fixed Account.
- ---------
12
<PAGE>
DEATH BENEFITS
As long as the Policy remains in force, we will pay the Death Benefit upon
receipt at our Home Office of due proof of the Insured's death. See "Requesting
Payments," page 25. The Death Benefit will be paid to the Beneficiary.
Amount of Death Benefit Payable. The amount of Death Benefit payable is the
amount of insurance determined under the Death Benefit Option in effect on the
date of the Insured's death, plus any supplemental Death Benefit provided by
riders, minus any Loan Amount on that date and, if the date of death occurred
during a grace period, minus the past due Monthly Deductions. Under certain
circumstances, the amount of the Death Benefit may be further adjusted. See
"Incontestability," "Limited Death Benefit" and "Misstatement of Age or Sex,"
page 26. If the Insured dies before a Policy is issued, the Death Benefit
payable is limited to $300,000, unless the insured is under 15 days old in which
case the Death Benefit payable will not exceed $3,000.
Death Benefit Options. The Policy Account Value on the date of death of the
Insured is used in determining the amount of insurance. Under Option 1, the
Death Benefit is the greater of (1) the Basic Amount plus any Net Premiums
received since the last Deduction Date, or (2) the applicable percentage amount
of the Policy Account Value based on the Insured's Age at the start of the
current Policy Year, as determined using the table of percentages prescribed by
federal income tax law. Under Option 2, the Death Benefit is the greater of (1)
the Basic Amount plus the Policy Account Value, or (2) the applicable percentage
amount of the Policy Account Value based on the Insured's Age at the start of
the current Policy Year, as determined using the table of percentages prescribed
by federal income tax law. The percentage is 250% to Age 40 and declines
thereafter as the Insured's Age increases. The table of percentages is shown
below. If the table of percentages currently in effect becomes inconsistent with
any federal income tax laws and/or regulations, we reserve the right to change
the table.
Under Option 1, the Death Benefit ordinarily will not change. Under Option 2,
the Death Benefit will vary directly with the investment performance of the
Policy Account Value. To see how and when investment performance may begin to
affect the Death Benefit, please see the hypothetical illustrations beginning on
page 16.
Changing the Death Benefit Option. You select the Death Benefit Option when you
apply for the Policy. You may change the Death Benefit Option on your Policy
subject to the following rules. Each change must be submitted by written request
received by our Home Office and no more than one change in the Death Benefit
Option may be made in any Policy Year. The effective date of the change will be
the date at the end of the Valuation Period during which we receive the request
for the change. We will send you revised Policy schedule pages reflecting the
new Death Benefit Option and the effective date of the change. If you request a
change from Option 1 to Option 2, the Basic Amount will be decreased by the
Policy Account Value on the effective date of the change. When a change from
Option 2 to Option 1 is made, the Basic Amount after the change will be
increased by the Policy Account Value on the effective date of the change. The
minimum monthly premium for the Death Benefit Guarantee will also change when a
Death Benefit Option change is made.
Changing the Basic Amount. You select the Basic Amount when you apply for the
Policy. You may change the Basic Amount, subject to the following conditions. No
change will be permitted that may result in your Policy being disqualified as a
life insurance contract under Section 7702 of the Code. Only one change
(increase or decrease) may be made during a Policy Year. To increase the Basic
Amount, contact an authorized State Farm agent. To decrease the Basic Amount,
submit a written
<TABLE>
<CAPTION>
TABLE OF PERCENTAGES OF POLICY ACCOUNT VALUE
- ------------------------------------------------------------------------------------
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
<S> <C> <C> <C> <C> <C>
0 - 40 250% 54 157% 68 117%
41 243% 55 150% 69 116%
42 236% 56 146% 70 115%
43 229% 57 142% 71 113%
44 222% 58 138% 72 111%
45 215% 59 134% 73 109%
46 209% 60 130% 74 107%
47 203% 61 128% 75 - 90 105%
48 197% 62 126% 91 104%
49 191% 63 124% 92 103%
50 185% 64 122% 93 102%
51 178% 65 120% 94 101%
52 171% 66 119% 95+ 100%
53 164% 67 118%
</TABLE>
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<PAGE>
request to our Home Office. Any increase in the Basic Amount must be at least
$25,000 and an application must be submitted, along with evidence of
insurability satisfactory to State Farm. There must be enough Cash Surrender
Value to make a Monthly Deduction that includes the cost of insurance for the
increase.
A change in planned premiums may be advisable based on the increase in Basic
Amount. See "Planned Premiums," page 7. Also, the minimum monthly premium for
the Death Benefit Guarantee will increase. The increase in Basic Amount, if
approved by us, will become effective on the date the increase is applied for
and the Policy Account Value will be adjusted to the extent necessary to reflect
a portion of the Monthly Deduction attributable to the increase as of the
effective date and any intervening Deduction Date based on the increase in Basic
Amount. The surrender charge will increase upon an increase in Basic Amount. No
increases will be allowed after the Policy Anniversary when the Insured is age
80 (age 70 in New York).
Any decrease in the Basic Amount must be at least $10,000, and the Basic Amount
after the decrease must be at least $50,000. A decrease in Basic Amount will
become effective on the date at the end of the Valuation Period during which we
receive a written request at our Home Office. Also, the minimum monthly premium
for the Death Benefit Guarantee will decrease. Any decrease will first be used
to reduce the most recent increase, then the next most recent increases, then
the initial Basic Amount. No surrender charge will be deducted upon a decrease
in Basic Amount. The surrender charge will not be reduced upon a decrease in
Basic Amount.
Effect of Withdrawals on the Death Benefit. A withdrawal will affect your Death
Benefit in the following respects. If Death Benefit Option 1 is in effect, the
Basic Amount will also be reduced by the withdrawal amount dollar-for-dollar. If
the Basic Amount reflects increases in the Initial Basic Amount, the withdrawal
will reduce first the most recent increase, and then the next most recent
increase, if any, in reverse order, and finally the Initial Basic Amount. If
Death Benefit Option 2 is in effect, the Basic Amount is unaffected by the
withdrawal.
Changing the Beneficiary. You designate the Beneficiary(ies) when you apply for
the Policy. You may change the designated Beneficiary by submitting a
satisfactory written request received by us. If the Insured dies and there is no
surviving Beneficiary, the Insured's estate will be the Beneficiary.
LOAN BENEFITS
You may borrow an amount(s) up to 90% of your Cash Value at any time but you
should consider the possible tax consequences of doing this. See "Requesting
Payments," page 25. Requests for Policy loans may be made in writing or by
telephone (if we have your telephone authorization on file). See "Requesting
Payments," page 25. Outstanding Policy loans, including accrued interest, reduce
the amount available for new loans.
Loan Account. The Policy Account Value is not affected when a loan is made.
However, an amount equal to the loan proceeds is transferred from the Policy
Account Value in the Variable Account and Fixed Account to the Loan Account, and
is held as "collateral" for the loan. If you do not direct an allocation for
this transfer when requesting the loan we will take it on a pro rata basis. When
a loan is repaid, an amount equal to the repayment is transferred from the Loan
Account to the Variable Account and Fixed Account and allocated as you direct
when submitting the repayment. If you provide no direction, the amount will be
allocated in accordance with your standing instructions for Net Premium
allocations.
Interest. We will charge interest daily on any outstanding Policy loan at an
effective annual rate of 8.0%. Interest is due and payable at the end of each
Policy Year while a Policy loan is outstanding. On each Policy Anniversary, any
unpaid amount of loan interest accrued since the last Policy Anniversary becomes
part of the outstanding loan. An amount equal to the unpaid amount of interest
is transferred to the Loan Account from each Subaccount and the Fixed Account on
a pro-rata basis according to the respective values in each Subaccount and the
Fixed Account. On each Deduction Date, the amount in the Loan Account will be
credited with interest at a minimum guaranteed annual effective rate of 6.0%. On
each Deduction Date, the interest so earned is transferred to the Subaccounts
and the Fixed Account in accordance with the instructions for Net Premium
allocations then in effect.
Loan Repayment. You may repay all or part of your Loan Amount at any time while
the Insured is living and the Policy is in force. Loan repayments must be sent
to our Home Office and will be credited at the end of the Valuation Period
during which they are received. A Policy loan repayment is not treated as a
premium payment and is not subject to the 5% premium charge.
Effect of Policy Loan. A Policy loan, whether or not repaid, will affect Policy
values over time because the investment results of the Subaccounts and current
interest rates credited on Policy Account Value in the Fixed Account will apply
only to the non-loaned portion of the Policy Account Value. The longer the loan
is outstanding, the greater the effect is likely to be. Depending on the
investment results of the Subaccounts or credited interest rates for the Fixed
Account while the Policy loan is outstanding, the effect could be favorable or
unfavorable. Policy loans, particularly if not repaid, could make it more likely
than otherwise for a Policy to terminate. See "Tax Considerations,"
- ---------
14
<PAGE>
page 31, for a discussion of adverse tax consequences if a Policy lapses with
Policy loans outstanding. If the Death Benefit becomes payable while a Policy
loan is outstanding, the Loan Amount will be deducted in calculating the Death
Benefit. If the Loan Amount exceeds the Cash Value on any Deduction Date and the
Death Benefit Guarantee is not in effect, the Policy will be in default. We will
send you, and any assignee of record, notice of the default. You will have a
61-day grace period to submit a sufficient payment to avoid lapse.
SURRENDER BENEFITS
Full Surrender. You may surrender your Policy at any time for its Cash Surrender
Value. See "Requesting Payments," page 25. A surrender charge may apply. See
"Surrender Charge," page 10. Your Policy will terminate and cease to be in force
if it is surrendered for a lump sum. It cannot later be reinstated.
Withdrawals. You may make withdrawals under your Policy. See "Requesting
Payments," page 25. Requests for withdrawals may be made in writing or by
telephone (if we have your telephone authorization on file). See "Requesting
Payments and Telephone Transactions," page 25. The minimum withdrawal amount is
$500. A withdrawal must be less than the Cash Surrender Value on the day the
request for withdrawal is effective. No more than four withdrawals may be made
during a Policy Year. A withdrawal processing fee equal to the lesser of $25 or
2% of the amount withdrawn will be assessed on a withdrawal. This charge will be
deducted from your Policy Account Value along with the amount requested to be
withdrawn. When you request a withdrawal, you can direct how the withdrawal will
be deducted from your Policy Account Value. If you provide no directions, the
withdrawal will be deducted from your Policy Account Value in the Subaccounts
and Fixed Account on a pro-rata basis.
15-------
<PAGE>
HYPOTHETICAL ILLUSTRATIONS OF ACCUMULATED PREMIUMS, POLICY ACCOUNT VALUES, CASH
SURRENDER VALUES, AND DEATH BENEFITS
The following illustrations show how certain values under a sample Policy change
with assumed investment performance over an extended period of time. In
particular, they illustrate how Policy Account Values, Cash Surrender Values and
Death Benefits under a Policy covering an Insured of a given Age on the Policy
Date would vary over time if planned premiums were paid annually at the
beginning of each Policy Year and the return on the assets in the Subaccounts
was a uniform gross annual rate of 0%, 6% or 12%, before deduction of any fees
and charges, including Fund fees and charges. The tables also show planned
premiums accumulated at 5% interest. The values under a Policy would be
different from those shown if the returns averaged 0%, 6% or 12% but fluctuated
over and under those averages throughout the years shown. The hypothetical
investment rates of return are illustrative only and should not be deemed a
representation of past or future investment rates of return. Actual rates of
return for a particular Policy may be more or less than the hypothetical
investment rates of return used in the illustrations.
The illustrations assume an average annual expense ratio of .53% of the average
daily net assets of the Funds available under the Policies, based on the
estimated expense ratios for the Fund expenses and fees for the first year of
operations, as shown in the table appearing above under "Summary and Diagram of
the Policy." For information on Fund expenses and fees, see the prospectus for
the Funds accompanying this prospectus. The current charge illustrations also
reflect the 0.80% mortality and expense risk charge to the Variable Account. The
maximum charge illustrations reflect the maximum 0.90% mortality and expense
risk charge to the Variable Account. After deduction of Fund expenses and fees
and the mortality and expense risk charge, the illustrated gross annual
investment rates of return of 0%, 6% and 12% would correspond to approximate net
annual rates of return for the Subaccounts of -1.32%, 4.60% and 10.52%,
respectively, for the current charge illustrations, and -1.42%, 4.49%, and
10.41% respectively, for the maximum charge illustrations.
The illustrations also reflect the Monthly Deduction for the hypothetical
Insured. Our current charges and the higher maximum charges we have the
contractual right to charge are reflected in separate illustrations on each of
the following pages. All the illustrations reflect the fact that no charges for
Federal or state income taxes are currently made against the Variable Account
and assume no Loan Amount or charges for supplemental benefits.
The illustrations are based on our sex distinct rates for non-tobacco users.
Upon request, we will furnish a comparable illustration based upon the proposed
Insured's individual circumstances. Such illustrations may assume different
hypothetical rates of return than those illustrated in the following tables.
- ---------
16
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS (AND NET) GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
ACCUMULATED --------------------------------------------- ---------------------------------------------
END OF AT 5% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.32% NET) (4.60% NET) (10.52% NET) (-1.32%) (4.60% NET) (10.52% NET)
- --------- --------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1,313 961 1,024 1,088 703 766 830
2 2,691 1,904 2,091 2,286 1,388 1,575 1,770
3 4,138 2,829 3,201 3,604 2,313 2,685 3,088
4 5,657 3,734 4,355 5,053 3,218 3,839 4,537
5 7,252 4,619 5,553 6,648 4,103 5,037 6,132
6 8,928 5,483 6,798 8,401 4,967 6,282 7,885
7 10,686 6,325 8,090 10,331 5,912 7,677 9,918
8 12,533 7,143 9,430 12,453 6,834 9,120 12,144
9 14,472 7,939 10,821 14,790 7,732 10,614 14,584
10 16,508 8,709 12,262 17,363 8,606 12,159 17,260
15 28,322 12,161 20,307 34,765 12,161 20,307 34,765
20 43,399 14,844 29,941 63,434 14,844 29,941 63,434
25 62,642 16,437 41,433 110,673 16,437 41,433 110,673
30 87,201 16,238 55,107 187,484 16,238 55,107 187,484
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 100,000 100,000 100,000
2 100,000 100,000 100,000
3 100,000 100,000 100,000
4 100,000 100,000 100,000
5 100,000 100,000 100,000
6 100,000 100,000 100,000
7 100,000 100,000 100,000
8 100,000 100,000 100,000
9 100,000 100,000 100,000
10 100,000 100,000 100,000
15 100,000 100,000 100,000
20 100,000 100,000 100,000
25 100,000 100,000 148,302
30 100,000 100,000 228,730
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
17-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS (AND NET) GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
ACCUMULATED --------------------------------------------- ---------------------------------------------
END OF AT 5% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.42% NET) (4.49% NET) (10.41% NET) (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- --------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1,313 906 968 1,030 648 710 772
2 2,691 1,792 1,971 2,159 1,276 1,455 1,643
3 4,138 2,655 3,010 3,396 2,139 2,494 2,880
4 5,657 3,495 4,085 4,752 2,979 3,569 4,236
5 7,252 4,312 5,197 6,238 3,796 4,681 5,722
6 8,928 5,103 6,345 7,865 4,587 5,829 7,349
7 10,686 5,868 7,531 9,649 5,455 7,118 9,236
8 12,533 6,606 8,755 11,606 6,297 8,445 11,297
9 14,472 7,317 10,018 13,754 7,111 9,812 13,547
10 16,508 7,999 11,321 16,111 7,895 11,218 16,008
15 28,322 10,915 18,445 31,905 10,915 18,445 31,905
20 43,399 12,763 26,573 57,582 12,763 26,573 57,582
25 62,642 12,907 35,536 99,781 12,907 35,536 99,781
30 87,201 10,227 45,105 167,671 10,227 45,105 167,671
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 100,000 100,000 100,000
2 100,000 100,000 100,000
3 100,000 100,000 100,000
4 100,000 100,000 100,000
5 100,000 100,000 100,000
6 100,000 100,000 100,000
7 100,000 100,000 100,000
8 100,000 100,000 100,000
9 100,000 100,000 100,000
10 100,000 100,000 100,000
15 100,000 100,000 100,000
20 100,000 100,000 100,000
25 100,000 100,000 133,707
30 100,000 100,000 204,559
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
18
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS (AND NET) GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
ACCUMULATED --------------------------------------------- ---------------------------------------------
END OF AT 5% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.32% NET) (4.60% NET) (10.52% NET) (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- --------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1,313 959 1,023 1,086 701 765 828
2 2,691 1,899 2,086 2,280 1,383 1,570 1,764
3 4,138 2,820 3,191 3,592 2,304 2,675 3,076
4 5,657 3,719 4,336 5,032 3,203 3,820 4,516
5 7,252 4,596 5,524 6,612 4,080 5,008 6,096
6 8,928 5,450 6,755 8,346 4,934 6,239 7,830
7 10,686 6,279 8,028 10,248 5,866 7,615 9,835
8 12,533 7,082 9,344 12,335 6,772 9,035 12,026
9 14,472 7,859 10,706 14,625 7,653 10,499 14,419
10 16,508 8,609 12,111 17,137 8,505 12,008 17,034
15 28,322 11,897 19,824 33,876 11,897 19,824 33,876
20 43,399 14,281 28,683 60,564 14,281 28,683 60,564
25 62,642 15,357 38,454 103,059 15,357 38,454 103,059
30 87,201 14,294 48,323 170,442 14,294 48,323 170,442
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 100,959 101,023 101,086
2 101,899 102,086 102,280
3 102,820 103,191 103,592
4 103,719 104,336 105,032
5 104,596 105,524 106,612
6 105,450 106,755 108,346
7 106,279 108,028 110,248
8 107,082 109,344 112,335
9 107,859 110,706 114,625
10 108,609 112,111 117,137
15 111,897 119,824 133,876
20 114,281 128,683 160,564
25 115,357 138,454 203,059
30 114,294 148,323 270,442
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
19-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS (AND NET) GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
ACCUMULATED --------------------------------------------- ---------------------------------------------
END OF AT 5% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.42% NET) (4.49% NET) (10.41% NET) (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- --------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1,313 904 966 1,028 646 708 770
2 2,691 1,787 1,966 2,153 1,271 1,450 1,637
3 4,138 2,644 2,998 3,382 2,128 2,482 2,866
4 5,657 3,477 4,064 4,726 2,961 3,548 4,210
5 7,252 4,285 5,163 6,195 3,769 4,647 5,679
6 8,928 5,063 6,294 7,799 4,547 5,778 7,283
7 10,686 5,813 7,457 9,551 5,401 7,045 9,139
8 12,533 6,534 8,654 11,466 6,224 8,344 11,156
9 14,472 7,223 9,882 13,557 7,017 9,676 13,351
10 16,508 7,880 11,142 15,842 7,777 11,039 15,739
15 28,322 10,604 17,874 30,849 10,604 17,874 30,849
20 43,399 12,093 25,061 54,102 12,093 25,061 54,102
25 62,642 11,619 31,877 89,811 11,619 31,877 89,811
30 87,201 8,034 36,770 144,300 8,034 36,770 144,300
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 100,904 100,966 101,028
2 101,787 101,966 102,153
3 102,644 102,998 103,382
4 103,477 104,064 104,726
5 104,285 105,163 106,195
6 105,063 106,294 107,799
7 105,813 107,457 109,551
8 106,534 108,654 111,466
9 107,223 109,882 113,557
10 107,880 111,142 115,842
15 110,604 117,874 130,849
20 112,093 125,061 154,102
25 111,619 131,877 189,811
30 108,034 136,770 244,300
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
20
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
----------------------------------------- -----------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
GROSS (AND NET) GROSS (AND NET)
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
ACCUMULATED ----------------------------------------- -----------------------------------------
END OF AT 5% INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.32% NET) (4.60% NET) (10.52% NET) (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,893 2,020 2,146 1,257 1,384 1,510
2 5,381 3,742 4,112 4,499 2,470 2,840 3,227
3 8,275 5,542 6,279 7,077 4,270 5,007 5,805
4 11,314 7,292 8,519 9,903 6,020 7,247 8,631
5 14,505 8,990 10,836 13,003 7,718 9,564 11,731
6 17,855 10,633 13,232 16,406 9,361 11,960 15,134
7 21,373 12,217 15,705 20,144 11,199 14,687 19,126
8 25,066 13,742 18,261 24,255 12,979 17,498 23,492
9 28,945 15,204 20,902 28,781 14,695 20,393 28,272
10 33,017 16,599 23,628 33,770 16,344 23,374 33,515
15 56,644 22,313 38,590 67,871 22,313 38,590 67,871
20 86,798 25,187 56,200 125,325 25,187 56,200 125,325
25 125,284 23,604 78,177 218,977 23,604 78,177 218,977
30 174,402 15,037 108,719 372,707 15,037 108,719 372,707
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- ------------ ----------- ------------
<S> <C> <C> <C>
1 100,000 100,000 100,000
2 100,000 100,000 100,000
3 100,000 100,000 100,000
4 100,000 100,000 100,000
5 100,000 100,000 100,000
6 100,000 100,000 100,000
7 100,000 100,000 100,000
8 100,000 100,000 100,000
9 100,000 100,000 100,000
10 100,000 100,000 100,000
15 100,000 100,000 100,000
20 100,000 100,000 145,377
25 100,000 100,000 234,306
30 100,000 114,155 391,342
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
21-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
PREMIUMS GROSS (AND NET) GROSS (AND NET)
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
AT 5% --------------------------------------------- ---------------------------------------------
END OF INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.42% NET) (4.49% NET) (10.41% NET) (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,748 1,869 1,992 1,112 1,233 1,356
2 5,381 3,435 3,786 4,154 2,163 2,514 2,882
3 8,275 5,056 5,749 6,502 3,784 4,477 5,230
4 11,314 6,606 7,753 9,050 5,334 6,481 7,778
5 14,505 8,082 9,797 11,817 6,810 8,525 10,545
6 17,855 9,479 11,879 14,825 8,207 10,607 13,553
7 21,373 10,792 13,998 18,101 9,775 12,980 17,083
8 25,066 12,021 16,155 21,675 11,258 15,392 20,912
9 28,945 13,159 18,348 25,582 12,650 17,839 25,073
10 33,017 14,198 20,574 29,858 13,943 20,319 29,604
15 56,644 17,532 32,025 58,633 17,532 32,025 58,633
20 86,798 16,338 43,595 107,663 16,338 43,595 107,663
25 125,284 6,620 54,641 187,779 6,620 54,641 187,779
30 174,402 0 64,183 317,834 0 64,183 317,834
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 100,000 100,000 100,000
2 100,000 100,000 100,000
3 100,000 100,000 100,000
4 100,000 100,000 100,000
5 100,000 100,000 100,000
6 100,000 100,000 100,000
7 100,000 100,000 100,000
8 100,000 100,000 100,000
9 100,000 100,000 100,000
10 100,000 100,000 100,000
15 100,000 100,000 100,000
20 100,000 100,000 124,889
25 100,000 100,000 200,923
30 0 100,000 333,726
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
22
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON CURRENT CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
PREMIUMS GROSS (AND NET) GROSS (AND NET)
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
AT 5% --------------------------------------------- ---------------------------------------------
END OF INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.32% NET) (4.60% NET) (10.52% NET) (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- ------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,885 2,011 2,137 1,249 1,375 1,501
2 5,381 3,717 4,085 4,469 2,445 2,813 3,197
3 8,275 5,491 6,220 7,010 4,219 4,948 5,738
4 11,314 7,204 8,415 9,779 5,932 7,143 8,507
5 14,505 8,854 10,668 12,796 7,582 9,396 11,524
6 17,855 10,436 12,978 16,081 9,164 11,706 14,809
7 21,373 11,943 15,338 19,654 10,926 14,320 18,637
8 25,066 13,375 17,749 23,545 12,612 16,986 22,782
9 28,945 14,725 20,206 27,777 14,216 19,698 27,269
10 33,017 15,986 22,704 32,380 15,731 22,449 32,126
15 56,644 20,589 35,408 61,972 20,589 35,408 61,972
20 86,798 21,271 47,149 105,993 21,271 47,149 105,993
25 125,284 16,042 55,124 170,903 16,042 55,124 170,903
30 174,402 3,105 55,851 267,371 3,105 55,851 267,371
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.32% NET) (4.60% NET) (10.52% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 101,885 102,011 102,137
2 103,717 104,085 104,469
3 105,491 106,220 107,010
4 107,204 108,415 109,779
5 108,854 110,668 112,796
6 110,436 112,978 116,081
7 111,943 115,338 119,654
8 113,375 117,749 123,545
9 114,725 120,206 127,777
10 115,986 122,704 132,380
15 120,589 135,408 161,972
20 121,271 147,149 205,993
25 116,042 155,124 270,903
30 103,105 155,851 367,371
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
23-------
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE ISSUE AGE 50 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $2,500 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
POLICY ACCOUNT VALUE CASH SURRENDER VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL ASSUMING HYPOTHETICAL
PREMIUMS GROSS (AND NET) GROSS (AND NET)
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
AT 5% --------------------------------------------- ---------------------------------------------
END OF INTEREST 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
POL YR PER YEAR (-1.42% NET) (4.49% NET) (10.41% NET) (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- --------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,737 1,858 1,980 1,101 1,222 1,344
2 5,381 3,403 3,752 4,116 2,131 2,480 2,844
3 8,275 4,992 5,675 6,417 3,720 4,403 5,145
4 11,314 6,496 7,620 8,892 5,224 6,348 7,620
5 14,505 7,910 9,582 11,552 6,638 8,310 10,280
6 17,855 9,227 11,553 14,408 7,955 10,281 13,136
7 21,373 10,442 13,526 17,471 9,425 12,509 16,453
8 25,066 11,551 15,496 20,759 10,788 14,733 19,996
9 28,945 12,545 17,453 24,284 12,036 16,944 23,775
10 33,017 13,414 19,382 28,057 13,159 19,128 27,803
15 56,644 15,395 27,990 51,022 15,395 27,990 51,022
20 86,798 11,850 32,524 81,613 11,850 32,524 81,613
25 125,284 0 27,737 119,912 0 27,737 119,912
30 174,402 0 4,095 162,555 0 4,095 162,555
<CAPTION>
DEATH BENEFIT
-----------------------------------------
ASSUMING HYPOTHETICAL
GROSS (AND NET)
ANNUAL INVESTMENT RETURN OF
-----------------------------------------
END OF 0% GROSS 6% GROSS 12% GROSS
POL YR (-1.42% NET) (4.49% NET) (10.41% NET)
- --------- ------------- ----------- -------------
<S> <C> <C> <C>
1 101,737 101,858 101,980
2 103,403 103,752 104,116
3 104,992 105,675 106,417
4 106,496 107,620 108,892
5 107,910 109,582 111,552
6 109,227 111,553 114,408
7 110,442 113,526 117,471
8 111,551 115,496 120,759
9 112,545 117,453 124,284
10 113,414 119,382 128,057
15 115,395 127,990 151,022
20 111,850 132,524 181,613
25 0 127,737 219,912
30 0 104,095 262,555
</TABLE>
(1) Assumes annual premiums are paid at the beginning of each policy year.
(2) Assumes no policy loans or withdrawals are made.
(3) Zero values indicate termination of insurance coverage in the absence of
additional premium payments.
THE HYPOTHETICAL RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS
THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND THE ACTUAL EXPERIENCE OF THE
ACCOUNTS. THE POLICY ACCOUNT VALUE, CASH SURRENDER VALUE, AND DEATH BENEFIT FOR
A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN
AVERAGED 0.00%, 6.00%, AND 12.00% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS
CAN BE MADE BY STATE FARM OR ANY OF THE FUNDS THAT THESE HYPOTHETICAL RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
VALUES ILLUSTRATED ARE NET OF ANY APPLICABLE CHARGES, SUCH AS PREMIUM CHARGES,
MORTALITY AND EXPENSE RISK CHARGES, MONTHLY EXPENSE CHARGES, COST OF INSURANCE
CHARGES, AND CHARGES FOR FUND EXPENSES AND FEES.
- ---------
24
<PAGE>
REQUESTING PAYMENTS AND
TELEPHONE TRANSACTIONS
Requesting Payments. Written requests for payment (except where telephone
requests are authorized by us) must be sent to our Home Office or given to an
authorized State Farm agent for forwarding to our Home Office. We will
ordinarily pay any Death Benefit, loan proceeds or surrender or withdrawal
proceeds in a lump sum within seven days after receipt at our Home Office of all
the documents required for such a payment or, for surrenders and withdrawals, on
a later date if you so request. Other than the Death Benefit, which is
determined as of the date of the Insured's death, the amount will be determined
as of the end of the Valuation Period during which our Home Office receives all
required documents or, for surrenders and withdrawals, on a later date if you so
request. The Death Benefit generally will be paid 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-. Interest will be
paid on the amount in the State Farm Benefit Management
Account-Registered Trademark- from the date of the Insured's death to the date
the State Farm Benefit Management Account-Registered Trademark- is closed.
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: (1) the
disposal or valuation of the Variable Account's assets is not reasonably
practicable because the New York Stock Exchange is closed for other than a
regular holiday or weekend, trading is restricted by the SEC, or the SEC
declares that an emergency exists; or (2) the SEC by order permits postponement
of payment to protect State Farm's Policy Owners. We also may defer making
payments attributable to a check that has not cleared, and we may defer payment
of proceeds from the Fixed Account for a withdrawal, surrender or Policy loan
request for up to six months from the date we receive the request. However, we
will not defer payment of a withdrawal or Policy loan requested to pay a premium
due on a State Farm policy.
The Policy offers a wide variety of optional ways of receiving proceeds payable
under the Policy other than in a lump sum. An authorized State Farm agent can
explain these options upon request. None of these options vary with the
investment performance of a Variable Account because they are all forms of
fixed-benefit annuities.
Telephone Transactions. You may make certain requests under the Policy by
telephone provided we have your written authorization on file at the Home
Office. These include requests for transfers, withdrawals, Policy loans, changes
in premium allocation designations, dollar-cost averaging changes and changes in
the portfolio rebalancing program. Our Home Office will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Such procedures may include, among others, requiring some form of personal
identification prior to acting upon instructions received by telephone,
providing written confirmation of such transactions, and/or tape recording of
telephone instructions. Your request for telephone transactions authorizes us to
record telephone calls. If reasonable procedures are not employed, we may be
liable for any losses due to unauthorized or fraudulent instructions. However,
if reasonable procedures are employed, we will not be liable for any losses due
to unauthorized or fraudulent instructions. We reserve the right to place
limits, including dollar limits, on telephone transactions.
OTHER POLICY BENEFITS AND PROVISIONS
Exchange Provision. You have the right to transfer all of your Policy Account
Value to the Fixed Account during the first two Policy Years (or the first two
years after an increase in Basic Amount), or within 60 days after the effective
date of a material change in the investment policy of the Variable Account. Such
transfers are not counted for purposes of determining whether a transfer
processing fee applies.
For Policies issued in New York, on any Policy Anniversary, you have the right
to request that we exchange the Policy for a fixed paid-up whole life insurance
policy. Such exchanges are not counted for purposes of determining whether a
transfer processing fee applies. If Death Benefit Option 2 is in effect, we will
change the death benefit option to Death Benefit Option 1. The effective date of
the whole life insurance policy will be the Policy Anniversary on or next
following the date we receive your request. We will transfer the entire
Subaccount Policy
25-------
<PAGE>
Value to the Fixed Account. The Basic Amount after the change will be determined
by applying the Cash Surrender Value on the Policy Anniversary as a single
premium at the Insured's age, sex, and rate class. We will use the mortality
table used to determine the maximum cost of insurance rates and the guaranteed
interest rate for the Fixed Account. Any riders will be terminated. No monthly
expense charge will be made. No further changes in Basic Amount, changes in
death benefit option, or withdrawals will be allowed. The Fixed Policy Account
Value will be reduced by the amount of any surrender charge and the Loan Amount.
No further surrender charge will be applied. The Basic Amount Minimum will not
apply.
Other Policy Provisions. The Policy contains provisions addressing the following
matters:
- DIVIDENDS. The Policy is participating. However, we do not anticipate that
any dividends will be paid on the Policy.
- INCONTESTABILITY. The Policy limits our right to contest the Policy as
issued or as increased, for reasons of material misstatements contained in
the application, after it has been in force during the Insured's lifetime
for a minimum period, generally for two years from the Issue Date of the
Policy or effective date of the increase.
- LIMITED DEATH BENEFIT. The Policy limits the Death Benefit if the Insured
dies by suicide generally within two years after the Issue Date of the
Policy or effective date of the increase.
- MISSTATEMENT OF AGE OR SEX. The Death Benefit will be adjusted if the
Insured's Age or sex has been misstated in the application.
Beneficiary. You may name the Beneficiary(ies) when you apply for the Policy.
The Beneficiary is entitled to the insurance benefits under the Policy. You may
change the Beneficiary or the order of payment during the Insured's lifetime by
providing a written request to the Home Office. Your change will be effective on
the date the request is signed or on any later date specified in the request,
but the change will not affect any action we have taken before we receive the
request. When the Insured dies, we will make payment in equal shares to the
primary Beneficiary(ies) living when payment is made. If no Beneficiary is
living when the Insured dies, we will make a one sum payment to you, if you are
alive when payment is made. Otherwise, we will make a one sum payment to the
estate of the last survivor of you and all Beneficiaries.
Reinstatement. If the Policy has not been surrendered, the Policy may be
reinstated within five years after lapse, subject to compliance with certain
conditions, including the payment of a necessary premium and submission of
satisfactory evidence of insurability. See your Policy for further information.
Other Changes. At any time we may make such changes in the Policy as are
necessary to assure compliance at all times with the definition of life
insurance prescribed by the Code; to make the Policy, our operations, or the
operation of the Variable Account conform with any law or regulation issued by
any government agency to which they are subject; or to reflect a change in the
operation of the Variable Account, if allowed by the Policy. Only an officer of
the Company has the right to change the Policy. No agent has the authority to
change the Policy or waive any of its terms. All endorsements, amendments, or
riders must be signed by an officer to be valid.
Reports to Policy Owners. State Farm maintains records and accounts of all
transactions involving the Policy, the Variable Account, the Fixed Account and
the Loan 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 Account Value, as
required by the 1940 Act. In addition, when you pay premiums (other than by pre-
authorized checking account deduction) or if you take out a Policy loan, make
transfers or make withdrawals, you will receive a written confirmation of these
transactions.
Assignment and Change of Owner. You may assign the Policy subject to its terms.
We will not be deemed to know of an assignment unless we receive a written copy
of it at our Home Office. We assume no responsibility for the validity or effect
of any assignment. In certain circumstances, an assignment may be a taxable
event. See "Tax Considerations", page 31. You may change the Owner of the Policy
by sending a written request to our Home Office while the Insured is alive and
the Policy is in force. The change will take effect the date you sign the
Written Request, but the change will not affect any action we have taken before
we receive the Written Request. A change of Owner does not change the
Beneficiary designation.
Supplemental Benefits. The following supplemental benefits are available and may
be added to your Policy by rider. Monthly charges for these benefits will be
deducted from your Policy Account Value as part of the Monthly Deduction (see
page 10).
GUARANTEED INSURABILITY OPTION RIDER. Allows you to increase the Basic
Amount on the specific option dates without evidence of insurability.
DISABILITY WAIVER OF MONTHLY DEDUCTION RIDER. Provides for the waiver of
the Monthly Deductions upon total disability of the Insured for as long as
the disability continues.
ADDITIONAL INSURED RIDER. Provides level term insurance coverage for the
spouse of the Insured to spouse's age 80.
ACCIDENTAL DEATH BENEFIT RIDER. Provides additional death benefit if
accidental death occurs prior to age 70.
CHILDREN'S TERM RIDER. Provides term life insurance on your eligible
children.
Additional rules and limits apply to these supplemental benefits. Please ask
your authorized State Farm agent for further information or contact our Home
Office.
- ---------
26
<PAGE>
STATE FARM AND THE FIXED 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. 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 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. The Policy described in this prospectus
has been filed with and, where required, approved by, insurance officials in
those states where it is sold.
State Farm Directors and Officers. State Farm is managed by a board of
directors. The following table sets forth the name and principal occupations
during the past five years of each of State Farm's directors. Each person's
address is One State Farm Plaza, Bloomington, Illinois 61710-0001.
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ------------------------ ---------------------------------------------------------------------------
<S> <C> <C>
Edward B. Rust, Director; President Chairman of the Board, President and CEO -- State Farm Mutual Automobile
Jr. Insurance Company; President and CEO -- State Farm Fire and Casualty
Company; President and CEO -- State Farm General Insurance Company;
President -- State Farm County Mutual Insurance Company of Texas; Director
-- State Farm Lloyds, Inc.; Chairman of the Board, President and Treasurer
-- State Farm Companies Foundation; Director -- State Farm International
Services, Inc.; President and Director -- State Farm Life Insurance
Company, State Farm Annuity and Life Insurance Company, State Farm Life and
Accident Assurance Company, State Farm Investment Management Corp., State
Farm Growth Fund, Inc., State Farm Balanced Fund, Inc., State Farm Interim
Fund, Inc., and State Farm Municipal Bond Fund, Inc.; President, CEO and
Director -- State Farm VP Management Corp.; President, CEO and Trustee --
State Farm Variable Product Trust (1997-present)
Roger B. Tompkins Director; Executive Vice Director and Executive Vice President -- State Farm Life Insurance Company,
President State Farm Annuity and Life Insurance Company, and State Farm Life and
Accident Assurance Company (1997-present); Vice President -- California --
State Farm Mutual Automobile Insurance Company, State Farm Fire and
Casualty Company, State Farm General Insurance Company; Vice President and
Director (1997-present), -- State Farm VP Management Corp.
Charles R. Wright Director; Agency Vice Director (1995-present) and Agency Vice President (1992-present) -- State
President Farm Mutual Automobile Insurance Company; -- State Farm Fire and Casualty
Company, State Farm General Insurance Company, State Farm International
Services, Inc., State Farm Life Insurance Company, State Farm Annuity and
Life Insurance Company, and State Farm Life and Accident Assurance Company;
Vice President and Director (1997-present) -- State Farm VP Management
Corp.
Bruce Callis Director Director -- State Farm Annuity and Life Insurance Company (1986-present),
State Farm Life and Accident Assurance Company (1991-present), State Farm
General Insurance Company (1992-1998), State Farm Companies Foundation
(1992-present); Senior Vice President -- State Farm Mutual Automobile
Insurance Company (1995-present); Vice President -- State Farm Mutual
Automobile Insurance Company (1983-1995)
</TABLE>
27-------
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ----------------- ------------------------ ---------------------------------------------------------------------------
<S> <C> <C>
Roger S. Joslin Director Director, Senior Vice President and Treasurer -- State Farm Mutual
Automobile Insurance Company; Director, Chairman of the Board and Treasurer
-- State Farm Fire and Casualty Company; Director, Vice President and
Treasurer -- State Farm General Insurance Company; Treasurer -- State Farm
County Mutual Insurance Company of Texas; Director, Vice President and
Treasurer -- State Farm Lloyds, Inc.; Assistant Treasurer -- State Farm
Companies Foundation; Director, Vice President and Treasurer -- State Farm
International Services, Inc., State Farm Investment Management Corp., State
Farm Growth Fund, Inc., State Farm Balanced Fund, Inc., State Farm Interim
Fund, Inc., and State Farm Municipal Bond Fund, Inc.; Director -- State
Farm Life Insurance Company, State Farm Annuity and Life Insurance Company,
and State Farm Life and Accident Assurance Company; Vice President,
Treasurer and Director (1997-present) -- State Farm VP Management Corp.;
Vice President, Treasurer and Trustee (1997-present) -- State Farm Variable
Product Trust
Roger J. Lehman Director Director -- State Farm General Insurance Company (1990-1997), State Farm
Fire and Casualty Company (1992-1995), State Farm Life and Accident
Assurance Company (1992-present); Vice President -- State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty Company, and
State Farm General Insurance Company (1987-1994)
Kurt G. Moser Director; Vice President Vice President -- Investments -- State Farm Mutual Automobile Insurance
-- Investments Company; Director and Vice President -- Investments -- State Farm Fire and
Casualty Company, State Farm General Insurance Company, State Farm Life
Insurance Company, State Farm Annuity and Life Insurance Company, and State
Farm Life and Accident Assurance Company; Vice President -- Investments --
State Farm County Mutual Insurance Company of Texas, State Farm Lloyds,
Inc., and State Farm International Services, Inc.; Investment Officer --
State Farm Indemnity Company; Underwriter -- State Farm Lloyds; Director
and Senior Vice President -- State Farm Investment Management Corp.; Vice
President -- State Farm Growth Fund, Inc., State Farm Balanced Fund, Inc.,
State Farm Interim Fund, Inc., and State Farm Municipal Bond Fund, Inc.;
Director -- State Farm VP Management Corp.; Vice President -- State Farm
Variable Product Trust (1997-present)
Laura P. Sullivan Director; Vice President Vice President -- Counsel and Secretary of the Board -- State Farm Mutual
-- Counsel; and Automobile Insurance Company, State Farm Fire and Casualty Company;
Secretary Director -- Vice President -- Counsel and Secretary of the Board -- State
Farm General Insurance Company; Assistant Secretary -- Treasurer -- State
Farm County Mutual Insurance Company of Texas; Director and Assistant
Secretary -- State Farm Indemnity Company; Director, Vice President --
Secretary -- State Farm Companies Foundation; Assistant Secretary -- State
Farm International Services, Inc.; Vice President -- Counsel and Secretary
of the Board -- State Farm Life Insurance Company, State Farm Annuity and
Life Insurance Company, State Farm Life and Accident Insurance Company
Vincent J. Director Director, Vice Chairman of the Board, Executive Vice President and Chief
Trosino Operating Officer -- State Farm Mutual Automobile Insurance Company;
Director and Vice President -- State Farm Fire and Casualty Company, State
Farm General Insurance Company; Director -- State Farm Lloyds, Inc.;
Assistant Secretary -- State Farm Companies Foundation; Director -- State
Farm International Services, Inc., State Farm Life Insurance Company, State
Farm Annuity and Life Insurance Company, State Farm Life and Accident
Assurance Company, State Farm Investment Management Corp.
</TABLE>
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<PAGE>
The following table sets forth the names and principal occupations during the
past five years of the senior officers of State Farm (other than officers listed
above who are members of State Farm's Board of Directors). Each person's address
is One State Farm Plaza, Bloomington, Illinois 61710-0001.
SENIOR OFFICERS
<TABLE>
<CAPTION>
POSITION WITH STATE
NAME AND ADDRESS FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------- ---------------------- -------------------------------------------------------------------------
<S> <C> <C>
James G. Fisher Vice President -- Vice President -- Operations (1995 - present) -- State Farm Life
Operations Insurance Company, State Farm Life and Accident Assurance Company;
Executive Assistant (1994 - 1995), and Agency Director (1988 - 1994) --
State Farm Insurance Companies
William A. Montgomery Senior Vice President Senior Vice President and General Counsel -- State Farm Mutual Automobile
and General Counsel Insurance Company, State Farm Fire and Casualty Company, State Farm
General Insurance Company, State Farm Life Insurance Company, State Farm
Annuity and Life Insurance Company, and State Farm Life and Accident
Assurance Company since 1997 (Vice President and General Counsel from
1993 - 1997); Law Firm Partner (through 1993) -- Schiff, Hardin & Waite
Danny L. Scott, M.D. Vice President and Vice President and Medical Director -- State Farm Life Insurance Company,
Medical Director State Farm Annuity and Life Insurance Company, and State Farm Life and
Accident Assurance Company
Darrell W. Beernink Vice President and Vice President and Actuary -- Health -- State Farm Mutual Automobile
Actuary Insurance Company; Director, Vice President and Actuary -- State Farm
Life Insurance Company; Vice President and Actuary -- State Farm Annuity
and Life Insurance Company, and State Farm Life and Accident Assurance
Company
Dale R. Egeberg Vice President and Vice President and Controller -- Life -- State Farm Life Insurance
Controller -- Life Company, State Farm Annuity and Life Insurance Company, and State Farm
Life and Accident Assurance Company (1997 - present); Controller -- State
Farm Life Insurance Company, State Farm Annuity and Life Insurance
Company, and State Farm Life and Accident Assurance Company (through
1997)
Terry L. Huff Vice President -- Vice President -- Advanced Products (1998 - present), Assistant Vice
Advanced Products President (1997-1998), and Actuary (prior to 1997) -- State Farm Life
Insurance Company, State Farm Annuity and Life Insurance Company, and
State Farm Life and Accident Assurance Company
Max E. McPeek Vice President -- Vice President--Compliance (1998 - present), Assistant Vice President--
Compliance Compliance (1997-1998), Assistant Vice President (prior to 1997) -- State
Farm Life Insurance Company, State Farm Annuity and Life Insurance
Company, and State Farm Life and Accident Assurance Company
</TABLE>
29-------
<PAGE>
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.
State Farm's Fixed Account Option. The Fixed Account is part of State Farm's
general account assets. State Farm's general account assets are used to support
our insurance and annuity obligations other than those funded by separate
accounts. Subject to applicable law, State Farm has sole discretion over the
investment of the assets of the Fixed Account.
Because of exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 nor has the Fixed
Account been registered as an investment company under the 1940 Act.
Accordingly, neither the Fixed Account nor any interests therein are subject to
the provisions of these Acts and, as a result, the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this prospectus relating
to the Fixed Account. The disclosure regarding the Fixed Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in a
prospectus.
THE VARIABLE ACCOUNT AND THE TRUST
The Variable Account. State Farm established the Variable Account as a separate
investment account under Illinois law on December 9, 1996. State Farm owns the
assets in the Variable Account and is obligated to pay all benefits under the
Policies. The Variable Account is used to support the Policies as well as for
other purposes permitted by law. The Variable Account is registered with the SEC
as a unit investment trust under the 1940 Act and qualifies as a "separate
account" within the meaning of the federal securities laws. Such registration
does not involve any supervision by the SEC of the management of the Variable
Account or State Farm. State Farm has established other separate investment
accounts, of which State Farm Life and Accident Assurance Company Variable
Annuity 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 State Farm Variable Product 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
Policy if, in State Farm's judgment, investment in a Subaccount should no longer
be possible or becomes inappropriate to the purposes of the Policies, or if
investment in another subaccount or insurance company separate account is in the
best interest of Owners. No substitution may take place without notice to Owners
and prior approval of the SEC and insurance regulatory authorities, to the
extent required by the 1940 Act and applicable law.
The Trust. State Farm Investment Management Corp. ("SFIM"), a wholly owned
subsidiary of State Farm Mutual Automobile Insurance Company, serves as
investment adviser to the Trust. SFIM has engaged Barclays Global Fund Advisors
as the investment sub-adviser to provide day-to-day portfolio management for the
Large Cap Equity Index Fund, the Small Cap Equity Index Fund, and the
International Equity Index Fund. For more information concerning the investment
adviser and investment sub-adviser, please see the accompanying prospectus for
the Trust.
Voting of Fund Shares. State Farm is the legal owner of shares held by the
Subaccounts and as such has the right to vote on all matters submitted to
shareholders of the Funds. However, as required by law, State Farm will vote
shares held in the Subaccounts at regular and special meetings of shareholders
of the Funds in accordance with instructions received from Owners with Policy
Account 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 material, 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. State Farm
may, if required by state insurance officials, disregard Owner voting
instructions if such instructions would require shares to be voted so as to
cause a change in sub-classification or investment objectives of one or more of
the Funds, or to approve or disapprove an investment advisory agreement. In
addition, State Farm may under certain circumstances disregard voting
instructions that would require changes in the investment policy or investment
adviser of one
- ---------
30
<PAGE>
or more of the Funds, provided that State Farm reasonably disapproves of such
changes in accordance with applicable federal regulations. If State Farm ever
disregards voting instructions, Owners will be advised of that action and of the
reasons for such action in the next report to Owners.
TAX CONSIDERATIONS
Introduction. The following summary provides a general description of the
Federal income tax considerations associated with the Policy and does not
purport to be complete or to cover all tax situations. This discussion is not
intended as tax advice. Counsel or other competent tax advisors should be
consulted for more complete information. This discussion is based upon State
Farm's understanding of the present Federal income tax laws. No representation
is made as to the likelihood of continuation of the present Federal income tax
laws or as to how they may be interpreted by the Internal Revenue Service (the
"IRS").
Tax Status of the Policy. In order to qualify as a life insurance contract for
Federal income tax purposes and to receive the tax treatment normally accorded
life insurance contracts under Federal tax law, a Policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, State Farm
believes that a Policy issued on the basis of a standard risk class should
satisfy the applicable requirements. There is less guidance with respect to
Policies issued on a substandard basis (i.e., a premium class involving higher
than standard mortality risk), and it is not clear whether such a Policy would
satisfy the applicable requirements, particularly if the Owner pays the full
amount of premiums permitted under the Policy. If it is subsequently determined
that a Policy does not satisfy the applicable requirements, State Farm may take
appropriate steps to bring the Policy into compliance with such requirements and
reserves the right to restrict Policy transactions in order to do so.
In certain circumstances, owners of variable life insurance 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. Where 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 Policy Account 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.
In addition, the Code requires that the investments of the Variable Account be
"adequately diversified" in order for the Policies to be treated as life
insurance contracts for Federal income tax purposes. It is intended that the
Variable Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
Tax Treatment of Policy Benefits
In General. State Farm believes that the Death Benefit under a Policy should be
excludible from the gross income of the Beneficiary. Federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Owner or Beneficiary. A tax advisor should
be consulted on these consequences.
In recent years, Congress has adopted new rules relating to life insurance owned
by businesses. Any business contemplating the purchase of a new Policy or a
change in an existing Policy should consult a tax advisor.
Generally, the Owner will not be deemed to be in constructive receipt of the
Policy Account Value until there is a distribution. When distributions from a
Policy occur, or when loans are taken out from or secured by (e.g., by
assignment), a Policy, the tax consequences depend on whether the Policy is
classified as a "Modified Endowment Contract."
Modified Endowment Contracts. Under the Internal Revenue Code, certain life
insurance contracts are classified as "Modified Endowment Contracts," with less
favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policies as to premiums and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
Modified Endowment Contract. The rules are too complex to be summarized here,
but generally depend on the amount of premiums paid during the first seven
Policy Years. Certain changes in a Policy after it is issued could also cause it
to be classified as a Modified Endowment Contract. A current or prospective
Owner should consult with a competent advisor to determine whether a Policy
transaction will cause the Policy to be classified as a Modified Endowment
Contract. State Farm will monitor the Policies, however, and will attempt to
notify an Owner on a timely basis if it believes that such Owner's Policy is in
jeopardy of becoming a Modified Endowment Contract.
Distributions from Modified Endowment Contracts. Policies classified as Modified
Endowment Contracts are subject to the following tax rules:
31-------
<PAGE>
(1) All distributions, including distributions upon surren-
der and withdrawals, will be treated as ordinary income subject to tax up
to an amount equal to the excess (if any) of the unloaned Policy Account
Value (Cash Surrender Value for surrenders) immediately before the
distribution plus prior distributions over the Owner's total investment
in the Policy at that time. "Total investment in the Policy" means the
aggregate amount of any premiums or other considerations paid for a
Policy, plus any previously taxed distributions, minus any credited
dividends.
(2) Loans taken from or secured by (e.g., by assignment), such a Policy are
treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount included in
income except where the distribution or loan is made when the Owner has
attained age 59 1/2 or is disabled, or where the distribution is part of
a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies)
of the Owner and the Owner's Beneficiary or designated Beneficiary.
Distributions from Policies that are not Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment Contract
are generally treated first as a recovery of an Owner's investment in the Policy
and only after the recovery of all investment in the Policy as taxable income.
However, certain distributions which must be made in order to enable the Policy
to continue to qualify as a life insurance contract for Federal income tax
purposes if Policy benefits are reduced during the first 15 Policy Years may be
treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a Policy that is not a Modified Endowment Contract are
generally not treated as distributions.
Finally, neither distributions from nor loans from or secured by a Policy that
is not a Modified Endowment Contract are subject to the 10 percent additional
tax.
Policy Loans. In general, interest on a loan from a Policy will not be
deductible. Before taking out a Policy loan, an Owner should consult a tax
advisor as to the tax consequences.
Multiple Policies. All Modified Endowment Contracts that are issued by State
Farm (or its affiliates) to the same Owner during any calendar year are treated
as one Modified Endowment Contract for purposes of determining the amount
includible in the Owner's income when a taxable distribution occurs.
Possible Tax Law Changes. Although the likelihood of legislative changes is
uncertain, there is always the possibility that the tax treatment of the Policy
could change by legislation or otherwise. For instance, the President's 1999
Budget Proposal recommended legislation that, if enacted, would adversely modify
the federal taxation of this Policy. It is possible that any legislative change
could be retroactive (that is, effective prior to the date of the change).
Consult a tax advisor with respect to legislative developments and their effect
on the Policy.
ADDITIONAL INFORMATION
Sale 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. also acts as principal underwriter for
State Farm Life and Accident Assurance Company Variable Annuity Separate
Account, a separate account also established by State Farm, and may act as
principal underwriter for other separate accounts established by affiliates of
State Farm. 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. The Policies are sold by certain registered representatives of State
Farm VP Management Corp. who are also appointed and licensed as State Farm
insurance agents. Commissions are payable to the broker-dealer under two
alternative commission schedules, depending on which schedule is elected by the
registered representatives. Under the first schedule, commissions will not
exceed 40% of the premiums received up to the Primary Compensation Premium (as
defined in agreements between State Farm VP Management Corp. and its registered
representatives) and 3 1/2% of all other premiums received. Under the second
schedule, commissions will not exceed 30% of the premiums received up to the
first Primary Compensation Premium, 15% of the premiums received up to the next
two Primary Compensation Premiums, and 4% of all other premiums received. In
addition, State Farm may pay incentive bonuses or expense reimbursements.
Other Information. A registration statement under the Securities Act of 1933 has
been filed with the SEC relating to the offering described in this prospectus.
This prospectus does not include all the information set forth in the
registration statement. The omitted information may be obtained at the SEC's
principal office in Washington, D.C. by paying the SEC's prescribed fees. The
omitted information is also available at the SEC's Internet site
(http://www.sec.gov).
Preparing for Year 2000. Like all financial services providers, State Farm, in
administering the Policies, utilizes systems that may be affected by Year 2000
transition issues and relies on service providers that also may be affected.
State Farm has developed, and is in the process of implementing, a Year 2000
- ---------
32
<PAGE>
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. We
are unable to predict the outcome of these efforts; however, as of the date of
this prospectus, it is not anticipated that Owners will experience negative
effects with respect to their Policies as a result of Year 2000 transition
implementation. Business application systems and external interfaces will be
tested, prioritized and remediated as necessary to provide continuous,
uninterrupted service. Our target date for completion is June, 1999 or earlier
for most activities, but there can be no assurance that State Farm will be
successful, or that interaction with other service providers will not impact
State Farm's services at that time.
Litigation. 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. Since the outcome of any
litigation cannot be predicted with certainty, State Farm believes that it is
possible that such litigation could have a material impact on State Farm,
although State Farm does not believe it would have any impact on the Variable
Account.
Legal Matters. The legal matters in connection with the Policy described in this
prospectus have been passed on by William A. Montgomery, the Senior Vice
President and General Counsel of State Farm. Sutherland, Asbill & Brennan LLP of
Washington, D.C. has provided advice on matters relating to the federal
securities laws.
Relationships with the Companies that Maintain the Benchmark Indices.
Standard & Poor's
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 Universal Life 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, 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 the 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 or the 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 or the Funds or the timing of the issuance or sale of the Product or
the Funds or in the determination or calculation of the equation by which the
Product or the 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 or the 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
1) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell-TM- is a trademark of the Frank Russell
Company. 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 prospectus
for 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.
2) Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change its Index. 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.
3) Frank Russell Company's publication of the Index in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in
33-------
<PAGE>
any or all securities upon which the Index is based. FRANK RUSSELL COMPANY
MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE AS TO THE ACCURACY,
COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE INDEX OR ANY DATA INCLUDED IN
THE INDEX. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION OR WARRANTY
REGARDING THE USE, OR THE RESULTS OF USE, OF THE INDEX OR ANY DATA INCLUDED
THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX. 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 OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF)
INCLUDED THEREIN.
Morgan Stanley & Co. Incorporated
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. 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 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 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 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 INDEX FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND /OR THE COMPLETENESS OF THE INDEX 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 INDEX 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 INDEX 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.
Experts. The statutory basis statements of admitted assets, liabilities and
surplus of State Farm Life and Accident Assurance Company as of December 31,
1997 and 1996, and the related statutory basis statements of income and changes
in surplus, and cash flows for the years then ended, appearing in this
prospectus have been audited by Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), independent accountants, with offices in Chicago,
Illinois, 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
State Farm in conformity with the accounting practices prescribed or permitted
by the Insurance Department of the State of Illinois (statutory basis), which
practices differ from generally accepted accounting principles (GAAP). The
effect on the financial statements of the variances between the statutory basis
of accounting and GAAP, although not reasonably determinable, are presumed to be
material. Therefore, their report contains a qualified opinion on the financial
statements of State Farm in conformity with GAAP, but an unqualified opinion in
conformity with statutory basis accounting. Actuarial matters included in this
prospectus have been examined by Gerry Brogla, F.S.A., Actuary of State Farm,
whose opinion is filed as an exhibit to the registration statement.
Financial Statements. The audited statutory basis statements of admitted assets,
liabilities and surplus of State Farm Life and Accident Assurance Company as of
December 31, 1997 and 1996, and the related statutory basis statements of income
and changes in surplus, and cash flows for the years then ended, as well as the
Report of the Independent Accountants, appear in Appendix B. The unaudited
interim statutory basis statements of admitted assets, liabilities and surplus
of State Farm Life and Accident Assurance Company as of June 30, 1998, also
appear in Appendix B. The financial statements of State Farm should be
considered only as bearing on our ability to meet our obligations under the
Policies. THEY SHOULD NOT BE CONSIDERED AS BEARING ON THE INVESTMENT PERFORMANCE
OF THE ASSETS HELD IN THE VARIABLE ACCOUNT. No financial statements are
presented in this prospectus for the Variable Account because it had not yet
commenced operations, had no assets or liabilities, and had received no income
nor incurred any expenses as of the date of this prospectus.
- ---------
34
<PAGE>
APPENDIX A
EXAMPLE OF SURRENDER CHARGES
<TABLE>
<CAPTION>
POLICY ISSUED TO MALE AGE 35 POLICY ISSUED TO MALE AGE 50
------------------------------ ------------------------------
$50,000
INCREASE $50,000
IN BASIC INCREASE
AMOUNT, IN BASIC
BEGINNING POLICY AMOUNT,
- ------------------------ $100,000 BEGINNING OF $100,000 BEGINNING OF
POLICY POLICY INITIAL YEAR 16 (AGE INITIAL YEAR 16 (AGE
YEAR MONTH BASIC AMOUNT 50) BASIC AMOUNT 65)
- ----------- ----------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1 1 $ 21.50* $ 0.00 $ 53.00* $ 0.00
1 6 129.00 0.00 318.00 0.00
1 12 258.00 0.00 636.00 0.00
2 6 387.00 0.00 954.00 0.00
2 12 516.00 0.00 1,272.00 0.00
3 1 516.00 0.00 1,272.00 0.00
4 1 516.00 0.00 1,272.00 0.00
5 1 516.00 0.00 1,272.00 0.00
6 1 516.00 0.00 1,272.00 0.00
7 1 412.80 0.00 1,017.60 0.00
8 1 309.60 0.00 763.20 0.00
9 1 206.40 0.00 508.80 0.00
10 1 103.20 0.00 254.40 0.00
11 1 0.00 0.00 0.00 0.00
12 1 0.00 0.00 0.00 0.00
13 1 0.00 0.00 0.00 0.00
14 1 0.00 0.00 0.00 0.00
15 1 0.00 0.00 0.00 0.00
16 1 0.00 26.50* 0.00 40.42*
16 6 0.00 159.00 0.00 242.50
16 12 0.00 318.00 0.00 485.00
17 6 0.00 477.00 0.00 727.50
17 12 0.00 636.00 0.00 970.00
18 1 0.00 636.00 0.00 970.00
19 1 0.00 636.00 0.00 970.00
20 1 0.00 636.00 0.00 970.00
21 1 0.00 636.00 0.00 970.00
22 1 0.00 508.80 0.00 776.00
23 1 0.00 381.60 0.00 582.00
24 1 0.00 254.40 0.00 388.00
25 1 0.00 127.20 0.00 194.00
26 1 0.00 0.00 0.00 0.00
</TABLE>
- ------------------------------
* In this example, the Surrender Charge increases by approximately this amount
each month through the first 2 years after issue or increase. The Surrender
Charge then remains level through the end of the 6th year. Starting at the
beginning of the 7th year after issue or increase, the surrender charge
decreases by 1/5 at the beginning of each year, until it is zero in the 11th
year.
A-1-------
<PAGE>
APPENDIX B
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, 1997 AND 1996
B-1-------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Report of Independent Accountants B-3
Financial Statements:
Statements of Admitted Assets, Liabilities, Capital and
Surplus -- Statutory Basis, December 31, 1997 and 1996 B-4
Statements of Operations -- Statutory Basis for the years
ended December 31, 1997 and 1996 B-5
Statements of Changes in Capital and Surplus -- Statutory
Basis for the years ended December 31, 1997 and 1996 B-6
Statements of Cash Flows -- Statutory Basis for the years
ended December 31, 1997 and 1996 B-7
Notes to Financial Statements -- Statutory Basis B-8 - B-13
Supplemental Schedule of Assets and Liabilities B-15 - B-17
Statements of Admitted Assets, Liabilities, Capital and
Surplus -- Statutory Basis (Unaudited) As of June 30, 1998 B-18
Statements of Operations -- Statutory Basis (Unaudited) for
the six months ended June 30, 1998 B-19
Statements of Changes in Capital and Surplus -- Statutory
Basis (Unaudited) for the six months ended June 30, 1998 B-20
Statements of Cash Flows -- Statutory Basis (Unaudited) for
the six months ended June 30, 1998 B-21
Note to Financial Statements B-22
</TABLE>
- ---------
B-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company
Bloomington, Illinois
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of State Farm Life and Accident Assurance
Company as of December 31, 1997 and 1996, and the related statutory statements
of operations, changes in capital and surplus, and cash flows, for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 2, these financial statements were prepared by
the Company in conformity with accounting practices prescribed or permitted by
the Insurance Department of the State of Illinois (statutory-basis), which
practices differ from generally accepted accounting principles. When
statutory-basis financial statements are presented for purposes other than for
filing with a regulatory agency, generally accepted auditing standards require
that an auditor's report on them state whether they are presented fairly in
conformity with generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of State Farm Life and Accident Assurance Company as of December 31, 1997 and
1996, or the results of its operations or its cash flows for the years then
ended.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
State Farm Life and Accident Assurance Company as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended,
on the basis of accounting described in Note 2.
Our audit was conducted for the purpose of expressing an opinion on the
statutory financial statements taken as a whole. The Supplemental Schedule of
Assets and Liabilities is presented to comply with the NAIC's Annual Statement
Instructions and is not a required part of the basic statutory financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic statutory financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
statutory financial statements taken as a whole.
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
February 17, 1998
B-3-------
<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
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
ADMITTED ASSETS
Bonds:
United States Government $ 255,888,160 $ 261,169,872
Other governmental units 53,772,072 41,081,626
Public utility 123,669,069 119,036,061
Industrial and other 229,795,080 200,352,271
--------------- ---------------
663,124,381 621,639,830
--------------- ---------------
Mortgage loans 434,956 881,687
--------------- ---------------
Policy loans 55,227,567 50,619,504
Cash (225,037) 793,829
Short-term investments 32,123,095 22,912,462
--------------- ---------------
87,125,625 74,325,795
--------------- ---------------
Total cash and invested assets 750,684,962 696,847,312
Federal income taxes recoverable 6,401 4,995
Premiums deferred and uncollected 2,800,161 2,955,909
Investment income due and accrued 13,378,335 12,696,611
Other assets 523,555 508,880
--------------- ---------------
Total admitted assets $ 767,393,414 $ 713,013,707
--------------- ---------------
--------------- ---------------
LIABILITIES
Aggregate reserves for life polices and contracts $ 522,598,055 $ 487,454,812
Supplementary contracts without life contingencies 15,886,447 13,984,522
Policy and contract claims 3,192,384 3,743,996
Policyholders' dividend accumulations 44,984,808 40,397,525
Dividends to policyholders payable in the following year 18,337,390 17,155,313
Advance premiums, deposits and other policy and contract liabilities 11,547,853 10,820,786
Interest maintenance reserve 2,971,290 3,224,825
Commissions payable 307,194 256,625
Other liabilities 6,131,527 4,811,220
Federal income taxes due or accrued 28,502 28,502
Federal income taxes (payable to affiliates) 2,005,289 1,768,283
Asset valuation reserve 1,499,234 3,413,208
--------------- ---------------
Total liabilities 629,489,973 587,059,617
--------------- ---------------
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 115,796 112,574
Unassigned surplus 134,787,645 122,841,516
--------------- ---------------
Total capital and surplus 137,903,441 125,954,090
--------------- ---------------
Total liabilities, capital and surplus $ 767,393,414 $ 713,013,707
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
B-4
<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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Income:
Premiums and annuity considerations $ 87,937,701 $ 83,530,695
Net investment income 52,128,562 48,639,789
Considerations for supplementary contracts and dividend accumulations 12,926,962 12,439,159
Other 244,648 238,722
------------- -------------
$ 153,237,873 $ 144,848,365
------------- -------------
Benefits and other expenses:
Death benefits 11,774,735 10,652,837
Surrender benefits and other fund withdrawals 23,964,018 22,498,422
Other benefits and claims 4,384,724 5,607,763
Payments on supplementary contracts and dividend accumulations 11,472,593 11,098,199
Increase in policy and contract reserves 41,087,000 39,317,611
Commissions 6,412,280 6,069,105
General insurance expenses 14,020,365 12,841,898
Taxes, licenses and fees 2,259,658 2,225,026
------------- -------------
$ 115,375,373 $ 110,310,861
------------- -------------
Net gain from operations before dividends to policyholders and federal income taxes 37,862,500 34,537,504
Dividends to policyholders 17,978,550 16,870,893
------------- -------------
Net gain from operations after dividends to policyholders and before federal income taxes 19,883,950 17,666,611
Federal income taxes incurred (excluding capital gains) 9,074,127 7,643,806
------------- -------------
Net gain from operations after dividends to policyholders and federal income taxes and
before realized gains 10,809,823 10,022,805
Net realized capital gains less capital gains tax of $20,934 and $41,017 (excluding
($10,323) and ($84,120) transferred to the IMR) (26,493) (84,352)
------------- -------------
Net income $ 10,783,330 $ 9,938,453
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-5-------
<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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<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 112,574 107,411
Transfer from unassigned surplus 3,222 5,163
------------- -------------
Balance at end of year 115,796 112,574
------------- -------------
Unassigned surplus:
Balance at beginning of year 122,841,516 114,436,603
Net income 10,783,330 9,938,453
Net unrealized capital (losses) gains (682) 130
Change in nonadmitted assets (130,312) (69,928)
Change in asset valuation reserve 1,913,974 (170,943)
Change in group contingency life reserve (3,222) (5,163)
Increase in reserves on account of change in valuation basis (616,959) (1,287,636)
------------- -------------
Balance at end of year 134,787,645 122,841,516
------------- -------------
Total capital and surplus $ 137,903,441 $ 125,954,090
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
B-6
<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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $ 88,923,871 $ 84,238,057
Other premiums, considerations and deposits, allowances and reserve adjustments and other
income 12,928,398 12,441,484
Investment income received (excluding realized gains/losses and net of investment
expenses) 52,713,874 49,069,364
Life and accident and health benefits paid (12,615,700) (11,745,944)
Surrender benefits and other fund withdrawals paid (23,964,018) (22,498,422)
Other benefits to policyholders paid (15,554,952) (15,112,660)
Commissions, other expenses and taxes paid (excluding federal income taxes) (21,432,911) (20,830,652)
Dividends to policyholders paid (16,796,472) (15,929,693)
Federal income taxes paid (excluding tax on capital gains) (8,818,190) (8,616,731)
--------------- ---------------
Net cash from operations 55,383,900 51,014,803
--------------- ---------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 43,467,042 35,084,672
Stocks and mortgage loans 453,109 386,564
Net loss on cash and short-term investments -- (658)
--------------- ---------------
Total investment proceeds 43,920,151 35,470,578
Tax on capital gains 41,271 133,963
--------------- ---------------
Total cash from investments 43,878,880 35,336,615
--------------- ---------------
Cost of investments acquired (long term only):
Bonds 86,260,215 79,477,197
--------------- ---------------
Total investments acquired 86,260,215 79,477,197
--------------- ---------------
Increase in policy loans and premium notes 4,608,746 5,026,094
--------------- ---------------
Net cash from investments (46,990,081) (49,166,676)
--------------- ---------------
Cash from financing and miscellaneous sources:
Other cash provided 640,478 689,616
Other applications (net) (842,530) (718,727)
--------------- ---------------
Net cash from financing and miscellaneous sources (202,052) (29,111)
--------------- ---------------
Net change in cash and short-term investments 8,191,767 1,819,016
Cash and short-term investments, beginning of year 23,706,291 21,887,275
--------------- ---------------
Cash and short-term investments, end of year $ 31,898,058 $ 23,706,291
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-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
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 and term insurance which together account for approximately 88% of premium
revenue. Individual annuity products account for an additional 12%. The Company
also writes small amounts of group credit life and employee group life.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The accompanying financial statements have been prepared on a statutory basis in
accordance, in all material respects, with accounting practices prescribed in
the National Association of Insurance Commissioners (NAIC) Annual Statement
Instructions and Accounting Practices and Procedures manuals, as well as state
laws, regulations, and general administrative rules. Statutory basis accounting
also permits the use of accounting practices which differ from those prescribed
in the sources referred to above, when such practices are approved by the
insurance department of the insurer's state of domicile. State Farm Life and
Accident Assurance Company has used no such permitted accounting practices in
the preparation of these financial statements that would be deemed to have a
material effect on the determination of its financial position as of December
31, 1997 and 1996, or the results of its operations for the years then ended.
Statutory basis accounting is a comprehensive basis of accounting other than
generally accepted accounting principles (GAAP).
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant accounting practices include:
A. INVESTMENTS
Bonds are stated at values prescribed by the NAIC. In general, bonds are stated
at amortized cost. Under GAAP, debt securities would be classified into three
categories: held-to-maturity, trading and available-for-sale. Held-to-maturity
securities would be reported at amortized cost. Trading securities would be
reported at fair value, with unrealized gains and losses included in earnings.
Available-for-sale securities would be reported at fair value, with unrealized
gains and losses, net of applicable taxes, reported in a separate component of
surplus.
Prepayment assumptions for loan-backed bonds are internal estimates based on
historical prepayment patterns. Prepayment assumptions for structured securities
are based on estimates from various data reporting services. These assumptions
are consistent with the current interest rate and economic environment. The
retrospective adjustment method is used to value all securities.
Mortgage loans on real estate, all of which are first liens, are carried at the
aggregate unpaid principal balances.
Policy loans are stated at the aggregate of unpaid loan balances which are not
in excess of cash surrender values of related policies.
Short-term investments are stated at cost which approximates market.
Investment income is recorded when earned. Realized gains and losses on sale or
maturity of investments are determined on the basis of specific identification.
Aggregate unrealized capital gains and losses are credited or charged directly
to unassigned surplus.
B. PREMIUMS DEFERRED AND UNCOLLECTED
Premiums deferred and uncollected represent modal premiums, either due and
uncollected or not yet due, where policy reserves have been provided on the
assumption that the full premium for the current policy year has been collected.
Also, where policy reserves have been provided on a continuous premium
assumption, premiums uncollected are similarly defined.
C. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS
Policy reserves on life insurance are based on statutory mortality and interest
requirements and are computed using principally net level and modified
preliminary term methods with interest rates ranging from 3% to 5.5%. The use of
a modified reserve basis partially offsets the effect of immediately expensing
policy acquisition costs. Policy reserves on annuities are based on statutory
mortality and interest requirements with interest rates ranging from 3% to 7%.
GAAP reserves are based on mortality, lapse, withdrawal and interest rates that
are based on company experience.
- ---------
B-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
D. POLICYHOLDERS' DIVIDENDS
All of the Company's life insurance business is written on the participating
basis. Policyholders' dividends are determined annually by the Board of
Directors. Amounts declared and estimated to be payable to policyholders in the
forthcoming year have been included in the accompanying financial statements as
a liability based on approved dividend scales. Under GAAP, dividends are
anticipated and may be considered as a planned contractual benefit when
computing the value of future policy benefits.
E. FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with SFMAIC and its
affiliates.
The consolidated federal income tax liability is apportioned to each entity in
accordance with a written agreement. The allocation is based upon separate
return calculations with current credit for net losses and tax credits.
Intercompany federal income tax balances are settled as follows: 1) intercompany
federal income tax receivables and payables which relate to the current tax year
will be settled within ninety (90) days; 2) any refunds of federal income tax
will be settled within sixty (60) days of receipt of the refund; and 3) any
payments of federal income tax due will be settled within sixty (60) days of
payment of the tax due.
The Company's provision for federal income taxes is computed in accordance with
those sections of the Internal Revenue Code applicable to life insurance
companies and is based on income which is currently taxable. Under GAAP,
deferred federal income taxes would be provided for temporary differences
between the tax basis and financial statement basis of assets and liabilities.
F. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
Pension Plan
The Company and affiliated insurers sponsor a defined benefit plan covering
substantially all of its employees.
The Company's funding policy is to contribute (1) at least the current service
cost on a current basis and to fund any unfunded liabilities over the
appropriate period and (2) not more than the maximum amount that may be deducted
for federal income tax purposes.
Contributions are allocated among participating companies based on ratios of
annual compensation rates.
Under GAAP, periodic net pension expense would be based on the cost of
incremental benefits for employee service during the period, interest on the
projected benefit obligation, actual return on plan assets and amortization of
actuarial gains and losses rather than the funding policy.
Other Postretirement Benefits
The Company and its affiliated insurers currently provide certain health care
and life insurance benefits pursuant to plans sponsored by its parent, SFMAIC.
Eligible former employees, eligible former agents, and their eligible dependents
currently may participate in these plans.
As a result of the policy promulgated by the NAIC concerning the treatment of
certain postretirement benefits, beginning in 1993, the Company changed its
method of accounting for the costs of the potential health care and life
insurance benefits provided to post-career associates to the accrual method, and
elected to amortize its transition obligation attributable to these potential
benefits over twenty years.
GAAP accounting for postretirement benefits requires an additional accrual for
the estimated cost of the potential benefit obligation under the plans for
active, but not yet eligible, employees and their dependents.
G. INTEREST MAINTENANCE RESERVE AND ASSET VALUATION RESERVE
Interest Maintenance Reserve (IMR) -- Realized capital gains and losses, due to
interest rate fluctuations, net of tax on short-term and long-term fixed income
investments are applied in this calculation. These gains and losses are
amortized into income over the approximate remaining life of the investment
sold. The IMR is not calculated under GAAP.
Asset Valuation Reserve (AVR) -- Realized gains and losses due to credit risk
fluctuations and unrealized gains and losses on applicable invested assets are
reflected in the calculation of this reserve. Changes in the AVR are charged or
credited directly to unassigned surplus and include no voluntary contributions
in 1997 or 1996. The AVR is not calculated under GAAP.
H. RECOGNITION OF PREMIUMS AND ANNUITY CONSIDERATIONS AND RELATED EXPENSES
Premiums and annuity considerations are recognized over the premium paying
period of the policies, whereas acquisition costs such as commissions and other
costs related to new business are expensed as incurred. Under GAAP, certain of
the Company's premium and annuity considerations and initial reserves (e.g. on
universal life policies) would be excluded from
B-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
income and the change in reserves. Additionally, acquisition costs under GAAP
are capitalized and amortized over the policy period.
I. NONADMITTED ASSETS
Certain assets designated as "nonadmitted" assets aggregating $307,116 and
$176,804 at December 31, 1997 and 1996, respectively, are not recognized by
statutory accounting practices. These assets are excluded from the balance
sheet, and the net change in such assets is charged or credited directly to
unassigned surplus. GAAP would recognize such assets at the lower of cost or net
realizable value.
The discussion above highlights the significant variances between the statutory
accounting practices followed by the Company and GAAP. The effect of these
differences has not been determined but is presumed to be material.
3. BONDS AND OTHER DEBT SECURITIES
The amortized cost and estimated market values of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
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 $309,842,748 $25,903,661 $ (135,590) $335,610,819
Obligations of states and political subdivisions 2,799,255 96,007 -- 2,895,262
Corporate securities 382,605,473 11,423,289 (739,261) 393,289,501
------------ ----------- ----------- ------------
Total $695,247,476 $37,422,957 $ (874,851) $731,795,582
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
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 $299,847,642 $ 22,178,903 $(1,327,849) $320,698,696
Obligations of states and political subdivisions 3,099,190 85,095 -- 3,184,285
Corporate securities 341,605,460 6,819,931 (4,090,937) 344,334,454
------------ ------------ ------------ ------------
Total $644,552,292 $ 29,083,929 $(5,418,786) $668,217,435
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The amortized cost and estimated market value of debt securities, by contractual
maturity, are shown below. 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, 1997
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Due in one year or less $ 62,873,481 $ 63,019,585
Due after one year through five years 214,104,126 223,861,793
Due after five years through ten years 367,635,499 390,249,558
Due after ten years 50,634,370 54,664,646
------------ ------------
Total $695,247,476 $731,795,582
</TABLE>
Gross proceeds and realized gains and losses on bonds sold at the discretion of
the Company for the year ended December 31, were:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Proceeds $ 4,819,158 $ 8,272,109
Gross gains -- 277
Gross losses (161,609) (222,005)
</TABLE>
At December 31, 1997, bonds carried at amortized cost of $1,627,655 were on
deposit with regulatory authorities.
- ---------
B-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
4. NET INVESTMENT INCOME
The components of net investment income earned by type of investment for the
years ended December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Bonds $47,315,582 $44,754,214
Short-term investments 1,575,944 1,019,916
Policy loans 3,449,552 3,062,129
Mortgage loans 50,169 99,510
Other 2,777 880
----------- -----------
Gross investment income 52,394,024 48,936,649
Investment expenses (265,462) (296,860)
----------- -----------
Net investment income $52,128,562 $48,639,789
----------- -----------
----------- -----------
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each significant class of financial instruments for which it is practicable to
estimate that value:
Bonds and Short-Term Investments
Fair values for issues traded on public exchanges are based on the market price
in such exchanges at year end. For issues that are not traded on public
exchanges, fair values were estimated based on market comparables or internal
analysis.
Mortgage Loans
Fair values were estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Cash
The carrying amount is a reasonable estimate of fair value.
Deferred Annuities
Fair values were approximated by the amount due to the annuity holder as if the
annuity contract was surrendered at year end.
Advance Premiums
Fair values were approximated by the amount due to the policyholder as if the
policy was surrendered at year end.
Settlement Options Without Life Contingencies
Settlement options without life contingencies are similar to demand deposits.
The fair value is the amount payable on demand at year end.
The estimated fair values and statement values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Bonds $699,684,257 $663,124,381 $645,305,556 $621,639,830
Bond reserves 0 1,406,917 0 3,212,828
------------ ------------ ------------ ------------
$699,684,257 $661,717,464 $645,305,556 $618,427,002
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Mortgage loans $ 450,040 $ 434,956 $ 905,156 $ 881,687
Mortgage loan reserves 0 4,893 0 15,430
------------ ------------ ------------ ------------
$ 450,040 $ 430,063 $ 905,156 $ 866,257
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash $ (225,037) $ (225,037) $ 793,829 $ 793,829
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Short-term investments: $ 32,111,325 $ 32,123,095 $ 22,911,879 $ 22,912,462
Short-term reserves 0 87,424 0 184,951
------------ ------------ ------------ ------------
$ 32,111,325 $ 32,035,671 $ 22,911,879 $ 22,727,511
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Financial liabilities:
Deferred annuity reserves $127,986,114 $127,653,829 $128,520,058 $128,382,016
Advance premiums 2,294,493 2,315,423 2,495,614 2,538,370
Settlement options without life contingencies 15,886,447 15,886,447 13,984,522 13,984,522
</TABLE>
-------
B-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
6. FEDERAL INCOME TAXES
The difference between the Company's effective income tax rate and the statutory
rate for both 1997 and 1996 is primarily due to non-deductible policyholder
dividends, unamortized deferred acquisition costs and tax reserves.
The examinations of the Company's federal income tax returns through 1986 have
been closed by the Internal Revenue Service. Returns for 1987, 1988, 1989 and
1990 have been examined. Although a few issues remain open, no open issue would
have a material effect on surplus. Returns for 1991, 1992 and 1993 are currently
under examination. At this time, there have been no issues raised that would
require adjustments which would have a material effect on surplus.
7. PENSION PLAN AND OTHER
POSTRETIREMENT BENEFITS
A. Pension Plan
Plan benefits are based on years of credited service up to 35 years and the
employee's rate of annual compensation during the 5 consecutive years of highest
compensation.
The pension cost allocated to the Company for its employees amounted to $0 and
$100,785 in 1997 and 1996, respectively. A comparison of accumulated plan
benefits, determined in accordance with Statement of Financial Accounting
Standards No. 35, and plan net assets for the non-contributory defined benefit
pension plan of the Company and its parent and other affiliates as of August 31,
1997 (the most recent actuarial valuation date) and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Actuarial present value of accumulated plan
benefits:
Vested $2,857,266,646 $2,620,702,754
Nonvested 59,983,879 56,123,860
-------------- --------------
$2,917,250,525 $2,676,826,614
-------------- --------------
-------------- --------------
Net assets available for benefits $6,611,785,481 $5,235,032,043
-------------- --------------
-------------- --------------
</TABLE>
The assumed rate of return used in determining the actuarial present value of
vested and nonvested accumulated plan benefits was 7% as of August 31, 1997 and
1996.
The Company participates with its affiliates in a qualified defined contribution
plan for which substantially all employees are eligible. Contributions are based
on the performance of the Company and its affiliates as well as matching a
percentage of employee contributions (up to specified limits). Such
contributions for the years ended December 31, 1997 and 1996, were $71,088 and
$61,340, 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, 1997, was $328,983 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, 1997 and 1996 respectively, the Company's share of the unfunded
recorded post-career benefit obligation attributable to the potential health
care and life insurance benefits for post-career associates was $985,543 and
$723,089. The transition obligation for these potential benefits is being
amortized over twenty years. The Company's share of the remaining transition
obligation was $807,171 and $1,181,880 at December 31, 1997 and 1996
respectively. The Company's share of unrecognized net (gains) or losses,
resulting from experience different from that assumed and/or changes in
actuarial assumptions was $(35,161) at December 31, 1997. 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, 1997, was $2,353,787 which is not accrued in these financial
statements. The discount rate used in determining the accumulated post-career
benefit obligation attributable to these potential benefits is 7%, and the
health care cost trend rate is 11%, graded to 6% over the following 5 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 $131,251 as of January 1, 1997,
and the estimated eligibility and interest cost components of the net periodic
post-career benefit cost for 1997 by $24,196.
The Company participates with its affiliates in an unfunded deferred
compensation plan for highly compensated employees
- ---------
B-12
<PAGE>
and independent contractor agents. As the Company currently has no participants
in this plan, there was no liability established for 1997 or 1996.
8. OTHER RELATED PARTY TRANSACTIONS
The Company, its parent, and its affiliates share certain administrative,
occupancy and marketing expenses. Such expenses are allocated to the Company
based on time and usage studies and totaled approximately $8,762,970 and
$7,959,707, in 1997 and 1996, respectively.
At December 31, 1997 and 1996, total amounts owed to the parent company,
exclusive of federal income taxes, were approximately $1,800,341 and $1,539,134,
respectively. Total amounts owed to affiliates were approximately $5,397 and
$3,465 at December 31, 1997 and 1996, respectively.
9. CONTINGENT LIABILITIES
The Company is a defendant in several lawsuits challenging sales practices with
respect to life insurance products, some of which allege class action status.
The ultimate outcome of these lawsuits is uncertain, and an amount or estimate
of a range of amounts relative to the outcome of these cases cannot be
determined at this time. Therefore, no liability has been recorded in these
financial statements. Management believes it is possible that the resolution of
these matters could be material to these statements.
In addition, the Company is subject to liabilities of a contingent nature which
may from time to time arise. Such liabilities could result from income tax
matters, guaranty fund assessments or other occurrences that take place in the
normal course of doing business. In addition, the life insurance industry has
not been exempt from the impact of an increasingly litigious environment which
is being experienced in the United States. Liabilities arising as a result of
these factors, or other such contingencies, that are not provided for elsewhere
in these financial statements are not reasonably estimable and are not
considered by management to be material in relation to the financial position of
the Company.
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.
-------
B-13
<PAGE>
SUPPLEMENTAL SCHEDULE
- ---------
B-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, 1997 AND 1996
The following is a summary of certain financial data included in other exhibits
and schedules subjected to audit procedures by independent auditors and utilized
by actuaries in the determination of reserves.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Investment income earned:
U.S. government bonds $ 20,487,860 $ 20,118,942
Other bonds (unaffiliated) 26,827,722 24,635,272
Mortgage loans 50,169 99,510
Premiums notes, policy loans and liens 3,449,552 3,062,129
Short-term investments 1,575,944 1,019,916
Cash on hand 2,777 880
------------ ------------
Gross investment income $ 52,394,024 $ 48,936,649
------------ ------------
------------ ------------
Mortgage loans -- book value
Commercial mortgages $ 434,956 $ 881,687
------------ ------------
Total mortgage loans $ 434,956 $ 881,687
------------ ------------
------------ ------------
Mortgage loans by standing -- book value
Good standing $ 434,956 $ 881,687
------------ ------------
------------ ------------
</TABLE>
-------
B-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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Bonds and short-term investments by class and maturity:
Bonds by maturity -- statement value
Due within one year or less $ 62,873,481 $ 57,726,725
Over 1 year through 5 years 214,104,126 156,503,907
Over 5 years through 10 years 367,635,499 384,092,202
Over 10 years through 20 years 47,644,606 44,238,838
Over 20 years 2,989,764 1,990,620
------------- -------------
Total by maturity $ 695,247,476 $ 644,552,292
------------- -------------
------------- -------------
Bond by class -- statement value
Class 1 $ 671,755,663 $ 627,967,895
Class 2 22,886,243 14,942,661
Class 3 553,599 850,027
Class 4 51,971 791,709
Class 5
Class 6
------------- -------------
Total by class $ 695,247,476 $ 644,552,292
------------- -------------
------------- -------------
Total bonds publicly traded $ 666,183,274 $ 619,390,464
------------- -------------
------------- -------------
Total bonds privately placed $ 29,064,202 $ 25,161,828
------------- -------------
------------- -------------
Short term investments -- book value $ 32,123,095 $ 22,912,462
------------- -------------
------------- -------------
Cash on deposit $ (225,037) $ 793,829
------------- -------------
------------- -------------
</TABLE>
- ---------
B-16
<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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Life insurance in force
Ordinary $12,406,768,000 $11,416,229,000
--------------- ---------------
--------------- ---------------
Credit life $ 14,124,000 $ 17,231,000
--------------- ---------------
--------------- ---------------
Group life $ 19,777,000 $ 31,484,000
--------------- ---------------
--------------- ---------------
Amount of accidental death insurance in force under ordinary policies $ 315,065,000 $ 318,935,000
--------------- ---------------
--------------- ---------------
Life Insurance policies with disability provisions in force:
Ordinary $ 197,527 $ 190,671
--------------- ---------------
--------------- ---------------
Group life (certificates) $ 603 $ 802
--------------- ---------------
--------------- ---------------
Supplementary contracts in force:
Ordinary -- not involving life contingencies
Amount on deposit $ 8,588,989 $ 8,316,380
--------------- ---------------
--------------- ---------------
Income payable $ 123,053 $ 116,160
--------------- ---------------
--------------- ---------------
Ordinary -- involving life contingencies
Income payable $ 154,207 $ 129,213
--------------- ---------------
--------------- ---------------
Annuities:
Ordinary
Immediate -- amount of income payable $ 2,431,809 $ 2,214,101
--------------- ---------------
--------------- ---------------
Deferred -- fully paid account balance $ 125,241,738 $ 125,694,658
--------------- ---------------
--------------- ---------------
Deferred -- not fully paid -- account balance $ 1,057,844 $ 1,466,957
--------------- ---------------
--------------- ---------------
Deposit funds and dividend accumulations:
Deposit funds -- account balance $ 3,679,461 $ 3,767,979
--------------- ---------------
--------------- ---------------
Dividend accumulations -- account balance $ 44,984,808 $ 40,397,525
--------------- ---------------
--------------- ---------------
</TABLE>
-------
B-17
<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
(UNAUDITED)
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
1998
---------------
<S> <C>
ADMITTED ASSETS
Bonds:
United States Government $ 252,616,762
Other governmental units 55,446,644
Public utilities 129,315,004
Industrial and other 260,701,689
---------------
698,080,099
---------------
Mortgage Loans 0
---------------
Policy loans 57,770,139
Cash (1,561,157)
Short-term investments 19,660,872
---------------
Total cash and invested assets 773,949,953
---------------
Premiums deferred and uncollected 2,900,203
Investment income due and accrued 14,014,234
Federal income tax recoverable (including from affiliates) 7,156
Other assets 560,717
---------------
Total admitted assets $ 791,432,263
---------------
---------------
LIABILITIES
Aggregate reserves for life policies and contracts $ 540,727,159
Reserve for contracts without life contingencies 17,334,650
Policy and contract claims 4,484,184
Policyholders' dividend accumulations 47,725,087
Dividends to policyholders payable in the following year 18,910,628
Advance premiums, deposits and other policy and contract liabilities 11,556,280
Interest maintenance reserve 2,860,332
Commissions payable 189,098
Federal income taxes due or accrued 246,512
Other liabilities 5,211,555
Asset valuation reserve 1,660,184
---------------
Total Liabilities 650,905,668
---------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 10,000 shares authorized, issued and outstanding 1,000,000
---------------
Special surplus -- group 94,076
Paid-in surplus 2,000,000
Unassigned surplus 137,432,520
---------------
Total capital and surplus 140,526,596
---------------
Total liabilities, capital and surplus $ 791,432,263
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these statements.
- ---------
B-18
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------
<S> <C>
Income:
Premiums and annuity considerations $ 46,001,981
Net investment income 27,119,887
Considerations for supplementary contracts and dividend accumulations 7,126,271
Other 126,705
---------------
$ 80,374,844
---------------
Benefits and other expenses:
Death benefits 7,912,379
Surrender benefits and other fund withdrawals 13,524,551
Other benefits and claims 2,541,267
Payments on supplementary contracts and dividend accumulations 5,165,711
Increase in policy and contract reserves 21,899,846
Commissions 3,152,921
General insurance expenses 8,386,471
Taxes, licenses and fees 1,127,173
Other Fees 12,337
---------------
$ 63,722,656
---------------
Net gain from operations before dividends to policyholders and federal income taxes 16,652,188
Dividends to policyholders 10,122,119
---------------
Net gain from operations after dividends to policyholders and before federal income taxes 6,530,069
Federal and foreign income taxes incurred (excluding capital gains) 3,465,451
---------------
Net gain from operations after dividends to policyholders and federal income taxes and before realized
gains 3,064,619
Net realized capital gains or (losses) less capital gains tax of $15,168 (excluding $15,097) transferred to
the IMR) (5,677)
---------------
Net income $ 3,058,941
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these statements.
-------
B-19
<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
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------
<S> <C>
Common stock:
Balance at beginning and end of period $ 1,000,000
---------------
Paid-in surplus:
Balance at beginning and end of period 2,000,000
Group contingency life reserve 94,076
---------------
2,094,076
---------------
Unassigned surplus:
Balance at beginning of year 134,787,645
Net income 3,058,941
Change in nonadmitted assets 31,794
Change in asset valuation reserve (160,949)
Increase in reserves on account of change in valuation basis (306,631)
Change in group contingency life reserve 21,720
---------------
Balance at end of period 137,432,520
---------------
Total capital and surplus $ 140,526,596
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these statements.
- ---------
B-20
<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
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------
<S> <C>
Income:
Premiums and annuity considerations $ 46,170,678
Other premiums, considerations and deposits, allowances and reserve adjustment, and other income 7,126,921
Investment income received (excluding realized gains/losses and net of investment expenses) 27,190,557
Surrender benefits and other fund withdrawals paid (13,524,551)
Other benefits to policyholders paid (14,345,147)
Commissions, other expenses and taxes paid (excluding federal income taxes) (13,521,295)
Dividends to policyholders paid (9,548,882)
Federal income taxes paid (excluding tax on capital gains) (5,268,653)
---------------
Net cash from operations 24,279,627
---------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 12,315,837
Mortgage loans 439,289
---------------
Total investment proceeds 12,755,126
Net tax on capital gains 0
---------------
Total cash from investments 12,755,126
---------------
Cost of investments acquired (long-term only):
Bonds 47,879,127
---------------
Total investments acquired 47,879,127
---------------
Increase (decrease) in policy loans and premium notes 2,542,572
---------------
Net cash from investments (37,666,573)
---------------
Cash from financing and miscellaneous sources:
Other cash provided 265,755
Other applications (net) (677,153)
---------------
Net cash from financing and miscellaneous sources (411,398)
---------------
Net change in cash and short-term investments (13,798,343)
Cash and short-term investments, beginning of year 31,898,058
---------------
Cash and short-term investments, end of period $ 18,099,715
---------------
---------------
</TABLE>
The accompanying notes are an integral part of these statements.
-------
B-21
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTE TO FINANCIAL STATEMENTS
The statement of financial position as of June 30, 1998, the statement of
changes in capital and surplus, operations, and cash flows for the six-month
period ended June 30, 1998 are unaudited. The interim financial statements
reflect all adjustments (consisting only of normal recurring accruals) which
are, in the opinion of management, necessary for the fair presentation of the
financial position, changes in capital and surplus, results of operations and
cash flows for the interim periods. The results of operations for the interim
period should not be considered indicative of results to be expected for the
full year.
- ---------
B-22
<PAGE>
[LOGO]
Issued By:
State Farm Life and Accident Assurance Company
(Licensed in New York and Wisconsin)
Home Offices: Bloomington, Illinois
State Farm VP Management Corp.
(Underwriter & Distributor of Variable Products)
One State Farm Plaza
Bloomington, Illinois 61710-0001
Printed in U.S.A.
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
State Farm Life and Accident Assurance Company hereby represents that the
fees and charges deducted under the Policy, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by State Farm Life and Accident Assurance Company.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of pages.
Undertaking to file reports.
Rule 484 undertaking.
Representation pursuant to Section 26(e)(2)(A).
The signatures.
<PAGE>
The following exhibits, corresponding to those required by paragraph A of
the instructions as to exhibits in Form N-8B-2:
1 A. (1) Resolution of the Board of Directors of State Farm Life and
Accident Assurance Company establishing State Farm Life and
Accident Assurance Company Variable Life Separate Account(4)
(2) Not Applicable
(3) (a) Not Applicable
(b) Form of Distribution Agreement (1)
(c) Not Applicable
(4) Not applicable
(5) (a) Specimen Flexible Premium Variable Universal Life Insurance
Policy(4)
(b) Policy Riders and Endorsements(4)
(6) (a) Articles of Incorporation of State Farm Life and Accident
Assurance Company (2)
(b) By-laws of State Farm Life and Accident Assurance
Company (2)
(7) Not applicable
(8) Form of participation agreement (3)
(9) Not applicable
(10) Application form
(11) Description of issuance, transfer and redemption procedures(4)
(12) Powers of Attorney(4)
B. Not applicable
C. Not applicable
2. Opinion and consent of William A. Montgomery, Esq. as to the legality of
the securities being registered(4)
3. Not applicable
4. Not applicable
5. Not applicable
6. Opinion and consent of Gerry Brogla, F.S.A. as to actuarial matters
pertaining to the securities being registered(4)
7. (a) Consent of Independent Accountants(4)
(b) Consent of Sutherland, Asbill & Brennan LLP(4)
- ------------------------
1. Incorporated herein by reference to Exhibit 3 of the registration statement
on Form N-4 (File No. 333-57579) filed with the Securities and Exchange
Commission on June 24, 1998.
2. Incorporated herein by reference to Exhibit 6 of the registration statement
on Form N-4 (File No. 333-57579) filed with the Securities and Exchange
Commission on June 24, 1998.
3. Incorporated herein by reference to Exhibit 8 of the registration statement
on Form N-4 (File No. 333-57579) filed with the Securities and Exchange
Commission on June 24, 1998.
4. Incorporated herein by reference to the similarly designated exhibit
included in the initial registration statement on Form S-6 (File No.
333-64345) filed with the Securities and Exchange Commission on September
25, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
State Farm Life and Accident Assurance Company Variable Life Separate Account,
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, and its seal to be hereunto affixed and
attested, all in the City of Bloomington and the State of Illinois, on this 18th
day of November, 1998.
STATE FARM LIFE AND ACCIDENT
ASSURANCE COMPANY
VARIABLE LIFE SEPARATE ACCOUNT
(SEAL) (Registrant)
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
Pursuant to the requirements of the Securities Act of 1933, State Farm Life
and Accident Assurance Company has duly caused this registration statement to be
signed on its behalf by the undersigned thereunto duly authorized, and its seal
to be hereunto affixed and attested, all in the City of Bloomington and the
State of Illinois, on the 18th day of November, 1998.
STATE FARM LIFE AND ACCIDENT
ASSURANCE COMPANY
(SEAL)
Attest: /s/ STEPHEN L. HORTON By: *
-------------------------------- --------------------------------
Stephen L. Horton Edward B. Rust, Jr.
PRESIDENT
STATE FARM LIFE AND ACCIDENT
ASSURANCE COMPANY
<PAGE>
Pursuant to the requirements of 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- -------------------------------------------- ----------------------
<C> <S> <C>
* President and Director
---------------------------------- (Principal Executive Officer)
Edward B. Rust, Jr.
* Vice President and Actuary;
---------------------------------- (Principal Financial Officer)
Darrell W. Beernink
* Vice President and Controller -- Life
---------------------------------- (Principal Accounting Officer)
Dale R. Egeberg
*
---------------------------------- Director; Executive Vice President
Roger B. Tompkins
*
---------------------------------- Director
Bruce Callis
*
---------------------------------- Director
Roger S. Joslin
*
---------------------------------- Director
Kurt G. Moser
*
---------------------------------- Director
Roger J. Lehman
* Director; Vice President, Counsel and
---------------------------------- Secretary
Laura P. Sullivan
*
---------------------------------- Director
Vincent J. Trosino
*
---------------------------------- Director
Charles R. Wright
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ TERRY HUFF November 18, 1998
--------------------------------- -----------------
Terry Huff (Date)
PURSUANT TO POWER OF ATTORNEY
</TABLE>
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY, BLOOMINGTON, ILLINOIS
VARIABLE UNIVERSAL LIFE INSURANCE APPLICATION PAGE 1
<TABLE>
<CAPTION>
<S><C>
- -----------------------------------------------------------------------------------------------------------------------------------
1 IF THE APPLICATION IS FOR A CHANGE IN A STATE FARM POLICY, GIVE THE POLICY NUMBER:
----------------------
- -----------------------------------------------------------------------------------------------------------------------------------
2 PROPOSED INSURED 1 (PRINT NAME IN FULL)
- -----------------------------------------------------------------------------------------------------------------------------------
MR / / LAST NAME FIRST NAME MIDDLE INITIAL MAILING ADDRESS
a MS / /
- -----------------------------------------------------------------------------------------------------------------------------------
CITY STATE ZIP CODE IN YES NO SOCIAL SECURITY DRIVER'S STATE
CITY? / / / / OR TAX ID NUMBER LICENSE NUMBER
b
- -----------------------------------------------------------------------------------------------------------------------------------
SEX BIRTH DATE AGE MARITAL STATUS HEIGHT WEIGHT STATE UNITED STATES OR YES NO
MO-DAY-YR OF BIRTH CANADIAN CITIZEN? / / / /
c
- -----------------------------------------------------------------------------------------------------------------------------------
OCCUPATION EMPLOYERS NAME Do job duties fall into one of the following YES NO
(GIVE EXACT DUTIES) AND ADDRESS hazardous categories? (amusements/sports; construction/ / / / /
d explosive/divers; liquor; logging/mining; gas/oil)
- -----------------------------------------------------------------------------------------------------------------------------------
3 PROPOSED INSURED 2 (PRINT NAME IN FULL)
- -----------------------------------------------------------------------------------------------------------------------------------
MR / / LAST NAME FIRST NAME MIDDLE INITIAL SOCIAL SECURITY OR DRIVER'S STATE
a MS / / TAX IDENTIFICATION LICENSE NUMBER
NUMBER
- -----------------------------------------------------------------------------------------------------------------------------------
SEX BIRTH DATE AGE MARITAL STATUS HEIGHT WEIGHT STATE UNITED STATES OR YES NO
MO-DAY-YR OF BIRTH CANADIAN CITIZEN? / / / /
b
- -----------------------------------------------------------------------------------------------------------------------------------
OCCUPATION EMPLOYERS NAME Do job duties fall into one of the following YES NO
(GIVE EXACT DUTIES) AND ADDRESS hazardous categories? (amusements/sports; construction/ / / / /
c explosive/divers; liquor; logging/mining; gas/oil)
- -----------------------------------------------------------------------------------------------------------------------------------
4 APPLICANT/OWNER (IF NOT PROPOSED INSURED 1, PRINT NAME IN FULL)
- -----------------------------------------------------------------------------------------------------------------------------------
LAST NAME FIRST NAME MIDDLE INITIAL SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER
a
- -----------------------------------------------------------------------------------------------------------------------------------
MAILING ADDRESS CITY STATE ZIP CODE IN YES NO
b CITY? / / / /
- -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR OWNER (REQUIRED UNLESS APPLICANT/OWNER IS A TRUST OR CORPORATION)
- -----------------------------------------------------------------------------------------------------------------------------------
LAST NAME FIRST NAME MIDDLE INITIAL
c
- -----------------------------------------------------------------------------------------------------------------------------------
COMPLETE: IF PROPOSED a Is Proposed Insured 1 to be YES NO b Give amount of (IF NONE, SO INDICATE)
INSURED IS UNDER AGE 16 Owner at and after age 21? / / / / insurance in force on:
Father $ Mother $
- -----------------------------------------------------------------------------------------------------------------------------------
5 VARIABLE UNIVERSAL LIFE
- -----------------------------------------------------------------------------------------------------------------------------------
a Initial Basic Amount: $
- -----------------------------------------------------------------------------------------------------------------------------------
b Death Benefit: / / Option 1- / / Option 2-Basic Amount
(COMPLETE FOR NEW POLICY ONLY) Basic Amount plus Account Value
If option not chosen, policy provisions determine option.
- -----------------------------------------------------------------------------------------------------------------------------------
Riders/Benefits applied for: Waiver of Monthly YES NO
c (CHECK RATEBOOK FOR AVAILABILITY OF RIDERS.) Deduction (For Disability) / / / /
- -----------------------------------------------------------------------------------------------------------------------------------
/ / AMOUNT / / AMOUNT
AD GIO 1-COMPLETE 8 & 9
- -----------------------------------------------------------------------------------------------------------------------------------
/ / / / A1 2 AMOUNT 2-COMPLETE QUESTIONS
CTR(1) UNITS TERM FOR PROPOSED INSURED 2
- -----------------------------------------------------------------------------------------------------------------------------------
d Dividend Option: / / Increase in Basic Amount / / Cash Payment
If option not chosen, policy provisions determine option.
- -----------------------------------------------------------------------------------------------------------------------------------
e Planned Premium: ------------------------
AGENTS EMPLOYEES EXISTING SPECIAL MONTHLY
EXISTING PAYROLL PAYROLL SALARY ACCOUNT NUMBER:
ANNUAL SFPP LIFE PAC DEDUCTION DEDUCTION ALLOTMENT
Mode: / / / / / / / / / / / / ------------------------
(Check one)
Amount to be billed each payment date $
-------------------
- -----------------------------------------------------------------------------------------------------------------------------------
f Increase in Basic Amount:
(DO NOT COMPLETE FOR NEW POLICY) $
- -----------------------------------------------------------------------------------------------------------------------------------
g Initial Account and Payment Allocation: COMPLETE FOR NEW POLICY ONLY
(During the free look period, all net premiums %
will be allocated to the Fixed Account.) (MUST BE WHOLE %
WITH 1% MINIMUM)
/ / Large Cap Equity Index Subaccount
----------------
/ / Small Cap Equity Index Subaccount
----------------
/ / International Equity Index Subaccount
----------------
/ / Stock and Bond Balanced Subaccount
----------------
/ / Bond Subaccount
----------------
/ / Money Market Subaccount
----------------
/ / Fixed Account
----------------
TOTAL = 100 %
- -----------------------------------------------------------------------------------------------------------------------------------
h Check the appropriate box if you wish to have:
ONLY ONE MAY BE IN EFFECT AT ONE TIME.
/ / Dollar Cost Averaging -OR- / / Portfolio Rebalancing
COMPLETE SEPARATE FORM IF EITHER IS CHECKED.
- -----------------------------------------------------------------------------------------------------------------------------------
i Premium submitted with the application $
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
6 BENEFICIARY DESIGNATION - PROPOSED INSURED 1
- -----------------------------------------------------------------------------------------------------------------------------------
Completion of this section will replace all previous rider and policy designations for this policy. If a Change of Plan,
this will replace previous designations.
- -----------------------------------------------------------------------------------------------------------------------------------
PRIMARY BENEFICIARY - FULL NAME AGE RELATIONSHIP
/ / Interest Option or / / One Sum or / / Other-Explain*
- -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR BENEFICIARY - FULL NAME AGE RELATIONSHIP
/ / Interest Option or / / One Sum or / / Other-Explain*
- -----------------------------------------------------------------------------------------------------------------------------------
FINAL BENEFICIARY - FULL NAME AGE RELATIONSHIP
One Sum Settlement Only
- -----------------------------------------------------------------------------------------------------------------------------------
* IF ADDITIONAL SPACE IS NEEDED, USE THE EXPLANATION SECTION ON PAGE 2.
If a beneficiary survives the Insured, any payment to successor will be one sum, unless changed.
- -----------------------------------------------------------------------------------------------------------------------------------
7 BENEFICIARY DESIGNATION - PROPOSED INSURED 2
- -----------------------------------------------------------------------------------------------------------------------------------
(Complete for Additional Insured's rider only if Beneficiary provision in the rider is NOT desired.) If a Change of Plan this will
replace previous designations. If this section is completed, the Payment of Benefit Provisions of the policy will control rather
than the Beneficiary provision of such rider. "Additional Insured" would be used in place of "Insured."
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
PRIMARY BENEFICIARY - FULL NAME AGE RELATIONSHIP
/ / Interest Option or / / One Sum or / / Other-Explain*
- -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR BENEFICIARY - FULL NAME AGE RELATIONSHIP
/ / Interest Option or / / One Sum or / / Other-Explain*
- -----------------------------------------------------------------------------------------------------------------------------------
FINAL BENEFICIARY - FULL NAME AGE RELATIONSHIP
One Sum Settlement Only
- -----------------------------------------------------------------------------------------------------------------------------------
* IF ADDITIONAL SPACE IS NEEDED, USE THE EXPLANATION SECTION ON PAGE 2.
If a beneficiary survives the Additional Insured, any payment to successor will be one sum, unless changed.
- -----------------------------------------------------------------------------------------------------------------------------------
54-615 NY (1997) Printed in U.S.A.
</TABLE>
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE APPLICATION PAGE 2
- --------------------------------------------------------------------------------
CHILDREN'S TERM RIDER OR JUVENILE APPLICATIONS (AGES 0 -15)
COMPLETE 8 & 9 COMPLETE 9 & 10
<TABLE>
<CAPTION>
<S><C>
8 List children under age 18: (ONLY IF CTR APPLIED FOR) (IF NONE, SO STATE)
------------------------------------------------------------------------------------
LAST NAME, FIRST NAME, MI RELATIONSHIP TO BIRTH DATE AMOUNT NOW
(IF LAST NAME DIFFERENT EXPLAIN) PROPOSED INSURED (1) ------------ INSURED FOR
MO. DAY YR.
------------
$
</TABLE>
9 Has juvenile or have any children named in question 12:
(IF YES, EXPLAIN) YES NO
a had a birth defect, mental disorder, or
impairment of sight, hearing, or speech? / / / /
b had asthma, seizure, diabetes, or kidney disease? / / / /
c had heart murmur, anemia, leukemia, or cancer? / / / /
d in the last 3 years, for any reason not
previously explained, been a patient in a
hospital, clinic, or emergency room? / / / /
e in the last 10 years, had or been
treated for Acquired Immune Deficiency
Syndrome (AIDS)? / / / /
- --------------------------------------------------------------------------------
ALL APPLICATIONS COMPLETE 10
- --------------------------------------------------------------------------------
PROPOSED INSURED
1 2
YES NO YES NO
10a Do you have personal and business life
insurance of more than $200,000 (IF YES,
GIVE AMOUNTS AND DETAILS) / / / / / / / /
b Do you have any accidental death insurance
excluding group? (IF YES, AND AD APPLIED FOR,
GIVE AMOUNT ____________) / / / / / / / /
c Will this policy replace or change
insurance or annuities you now have? (IF
YES, EXPLAIN) / / / / / / / /
d Are you now applying for life or heath
insurance with any other company? (IF YES,
STATE COMPANIES AND AMOUNT) / / / / / / / /
e Do you plan to leave or travel from the
United States or Canada in the next 6
months? (IF YES, EXPLAIN) / / / / / / / /
- ----------------------------------------------------
APPLICATIONS (AGES 16 & UP):
- - IF NO MEDICAL EXAM REQUIRED
COMPLETE 10-16
- - IF MEDICAL EXAM REQUIRED
COMPLETE 11, 12, 14a, & 14e.
- ----------------------------------------------------
11 Have you used tobacco in any form in the
last 12 months? / / / / / / / /
- ----------------------------------------------------
12 Have you, in the last 3 years:
(IF YES, EXPLAIN)
a flown as a pilot, crew member, or a
student pilot in aircraft such as an
airplane, helicopter, glider, or
ultralight? Or, is any such activity
planned in the next 6 months? / / / / / / / /
b engaged in avocations such as mountain
or rock climbing, auto, motorcycle, or
powerboat racing, scuba or sky diving,
hang gliding, or ballooning? Or, is any
such activity planned in the next 6 months? / / / / / / / /
c had your driver's license suspended or
revoked, had any moving violations, had
2 or more accidents, or been charged with
driving under the influence of alcohol
or drugs? / / / / / / / /
- ----------------------------------------------------
13 Have you ever: (IF YES, EXPLAIN)
a applied for or received disability
benefits? / / / / / / / /
b had an impairment or loss of sight
or hearing, or an impairment of neck,
back, or limb? / / / / / / / /
- ----------------------------------------------------
14 Have you in the last 10 years, had or
been treated for: (IF YES, CIRCLE AND EXPLAIN)
*a high blood pressure, stroke, heart murmur,
chest pain, heart attack, tumor, cancer,
or lymph gland disorder? / / / / / / / /
b mental, nervous, or convulsive disorder;
or epilepsy? / / / / / / / /
c pneumonia, emphysema, asthma; ulcer,
colitis, liver, or intestinal disorder;
anemia or blood disorder? / / / / / / / /
d diabetes, arthritis, sexually transmitted
disease, or kidney disease? / / / / / / / /
*e Acquired Immune Deficiency Syndrome (AIDS)? / / / / / / / /
f chronic diarrhea, unexplained weight loss,
recurrent fever, fatigue, or night sweats? / / / / / / / /
- ----------------------------------------------------
15 Have you, in the last 5 years: (IF YES, EXPLAIN)
a used cocaine, marijuana, hallucinogenic
drugs, or narcotics not prescribed by a
physician? / / / / / / / /
b been treated or counseled, or advised
to seek treatment or counsel, for alcohol
or drug use? / / / / / / / /
- ----------------------------------------------------
16 Have you, in the last 5 years, for any
reason not previously explained: (IF YES,
EXPLAIN)
a had treatment or a test (except for HIV)
in any medical facility such as a lab,
clinic, emergency room, or hospital? / / / / / / / /
b had treatment or advice from any
physician or psychologist? / / / / / / / /
c taken prescribed medication? (IF YES, LIST &
EXPLAIN) / / / / / / / /
d had surgery or been told surgery was necessary? / / / / / / / /
- --------------------------------------------------------------------------------
* AGENT - IF YES, IT MAY BE ADVISABLE NOT TO COLLECT MONEY OR GIVE A
BINDING RECEIPT - CONSULT AGENTS SERVICE FOR SPECIFIC INSTRUCTIONS.
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE APPLICATION PAGE 3
- --------------------------------------------------------------------------------
17 SUITABILITY INFORMATION (COMPLETE FOR NEW POLICY ONLY)
- --------------------------------------------------------------------------------
Applicants are urged to supply information in order that the agent may make an
informed judgment as to the suitability of a particular purchase of a Variable
Universal Life Policy. If the Applicant chooses not to, the agent must complete
the following items to the best of his/her knowledge.
YES NO
Did the applicant provide the suitability information? / / / / (IF NO, EXPLAIN)
- --------------------------------------------------------------------------------
a. Annual Income from Occupation $
b. Annual Income from other sources $
Indicate other sources:
c. Projected Income for next 12 months $
d. Estimated Net Worth (excluding home) $_____________________
Liquid Assets included in Net Worth $_____________________
e. No. and Age of Dependent Children:
(IF NONE, SO STATE)
f. Tax Bracket:
g. Score from Risk Profiler:
h. Purpose for Purchasing this Policy:
/ / Death Benefit
/ / Personal Retirement Planning
Years to Retirement: _________
/ / Other (specify) ____________________________
j. Which best approximates your experience with the following types of
investments:
NONE UP TO 5 YRS 5 YRS OR MORE
Mutual Funds / / / / / /
Individual Common Stocks / / / / / /
Annuities / / / / / /
- --------------------------------------------------------------------------------
18 TELEPHONE AUTHORIZATION
- --------------------------------------------------------------------------------
The owner 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, and changes in portfolio rebalancing program. Our Home Office will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Such procedures may include, among others, requiring some
other form of personal identification prior to acting upon instructions received
by telephone, providing written confirmation of such transactions and/or tape
recording of telephone instructions. Your request for telephone transactions
authorizes us to record telephone calls. If reasonable procedures are not
employed, we may be liable for any losses due to unauthorized or fraudulent
instructions. If reasonable procedures are employed, we will not be liable for
any losses due to unauthorized or fraudulent instructions.
This authorization will continue in force until the earlier of a) the date we
receive a revocation request from the Owner, b) the date we restrict or
discontinue all Telephone Authorizations, or c) the date we receive an ownership
change.
YES NO
Do you elect to have telephone authorization? / / / /
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
19 EXPLANATIONS IF SPACE IS INSUFFICIENT, USE ADDITIONAL SHEETS, WHICH WILL BE PART OF THIS APPLICATION. SHEETS MUST BE
SIGNED & DATED BY PROPOSED INSURED(S), AND/OR APPLICANT, AND WITNESSED BY AGENT.
- ----------------------------------------------------------------------------------------------------------------------------------
QUESTION NAME OF PERSON NATURE AND SEVERITY OF CONDITION DATES NAMES & ADDRESSES OF
NUMBER FREQUENCY OF ATTACKS - TREATMENT RECEIVED ONSET RECOVERY MEDICAL ATTENDANTS AND HOSPITALS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MO. YR MO. YR.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
VARIABLE UNIVERSAL LIFE INSURANCE APPLICATION PAGE 4
- -----------------------------------------------------------------------------------------------------------------------------
20 AGREEMENTS AND ACKNOWLEDGMENTS
- -----------------------------------------------------------------------------------------------------------------------------
YES NO
a. DO YOU BELIEVE THAT THIS POLICY WILL MEET YOUR NEEDS AND FINANCIAL OBJECTIVES? / / / /
b. DO YOU UNDERSTAND THAT THE AMOUNT AND DURATION OF THE DEATH BENEFIT MAY VARY,
DEPENDING ON THE INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNTS IN THE SEPARATE
ACCOUNT? / / / /
c. DO YOU UNDERSTAND THAT THE POLICY VALUES MAY INCREASE OR DECREASE, DEPENDING ON
THE INVESTMENT EXPERIENCE OF THE SEPARATE ACCOUNT? / / / /
d. DID YOU RECEIVE THE SEPARATE ACCOUNT PROSPECTUS AND THE FUND PROSPECTUS FOR THE
POLICY APPLIED FOR? IF YES, GIVE DATE SHOWN ON THE PROSPECTUS:____________________________ / / / /
e. ARE YOU ASSOCIATED WITH AN NASD MEMBER BROKER DEALER? / / / /
Coverage will be effective as of the policy date if the following conditions are met: the first premium is paid when the
policy is delivered; the Proposed Insureds are living on the delivery date; and, on that delivery date, the information given
to the Company is true and complete without material changes.
For changes in Basic Amount, the change will be effective on the deduction date on or next following acceptance of the
change by the Company if on such deduction date the following conditions are met: there is enough cash surrender value to
make the required deduction; the Proposed Insureds are all living; and the information given to the Company is true and
complete without material changes.
However, if a binding receipt has been given and is in effect, its terms apply.
All Proposed Insureds and the Applicant state that the information in this application and any medical history is true and
complete. It is agreed that the Company can investigate the truth and completeness of such information while the policy is
contestable.
By accepting the policy, the Owner agrees to the beneficiaries named, method of payment, and corrections made. No change
in plan, amount, benefits, or age at issue may be made on the application unless the Owner agrees in writing. Only
an authorized company officer may change the policy provisions. Neither the agent nor a medical examiner may pass on
insurability.
- -----------------------------------------------------------------------------------------------------------------------------
Social Security or Tax Identification Number (TIN) Certification - By signing this application, I certify under penalties
of perjury that (1) the TIN shown above is correct, and (2) that I am not subject to backup withholding either because I
have not been notified that I am subject to backup withholding as a result of a failure to report all interest or dividends,
or the Internal Revenue Service has notified me that I am no longer subject to backup withholding. (IF YOU ARE SUBJECT TO
BACKUP WITHHOLDING, CROSS OUT ITEM 2.) The Internal Revenue Service does not require your consent to any provision of this
document other than the certifications required to avoid backup withholding.
- -----------------------------------------------------------------------------------------------------------------------------
Any policy issued on this application will be owned by Proposed Insured 1 or the Applicant, if other than Proposed
Insured 1.
DATED ON SIGNATURE OF PROPOSED INSURED 1 X
----------- MONTH ---------- DAY --------- YEAR --------- --------------------------
NOT REQUIRED IF PROPOSED
INSURED IS UNDER AGE 16
AT
--------------- CITY -------------------- STATE --------------- SIGNATURE OF PROPOSED INSURED 2 X
--------------------------
SIGNATURE OF AGENT AS
WITNESS TO ALL SIGNATURES X SIGNATURE OF APPLICANT X
--------------------------------------- ------------------------------------
NOT REQUIRED UNLESS APPLICANT IS
OTHER THAN PROPOSED INSURED 1. IF
A FIRM OR CORPORATION IS TO BE THE
OWNER, GIVE ITS NAME AND SIGNATURE
OF AUTHORIZED OFFICER.
- -----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------
[LOGO] STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
----------------------------------------------
PRE-NOTICE OF INVESTIGATIVE CONSUMER REPORT
In accordance with the provisions of the federal Fair Credit Reporting Act, this is to inform you that as a part of our
procedure for processing your application for life insurance, an investigative consumer report may be prepared whereby
information is obtained through personal interviews with your neighbors, friends, or others with whom you are acquainted.
This inquiry includes information as to your character, general reputation, personal characteristics, and mode of living,
except as may be related directly or indirectly to your sexual orientation. You have the right to make a written request
within a reasonable period of time to receive additional detailed information about the nature and scope of this
investigation. You may also request to be interviewed during the preparation of such a report and if an investigative
consumer report is prepared, you are entitled to request and receive a copy of the report.
ACKNOWLEDGMENT
I have received the Notices and the Acknowledgment and Authorization.
AUTHORIZATION
I authorize any source having information about me or my children to give to the Company, its reinsurers, or its
representatives all such information as to health history, diagnosis, treatment, or prognosis with respect to any physical
or mental condition, and as to other non-medical information. "Source" includes any doctor, hospital, clinic, U.S. Veterans
Administration Hospital, mental health facility, or any other medically related facility, MIB, Inc., insurance company, or
consumer reporting agency. Any information obtained will be used to determine eligibility for insurance. This information
may be released to another insurance company or MIB, Inc.; however, no MIB, Inc. information will be released to a consumer
reporting agency. This authorization is valid for 2 years. A photocopy is as valid as the original.
I authorize the Company to obtain an investigative consumer report on me (and any others proposed for insurance).
I elect to be interviewed if an investigative consumer report is prepared and indicate this preference by a "checkmark"
in the following box. / /
SIGNATURE OF SIGNATURE OF
DATE SIGNED PROPOSED INSURED 1 X PROPOSED INSURED 2 X
------------------- ----------------------------- -------------------------
(PARENT'S OR GUARDIAN'S
SIGNATURE IF JUVENILE
APPLICATION)
MAIDEN OR FORMER NAME MAIDEN OR FORMER NAME
--------------------------- ------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
AGENT'S STATEMENT
- ----------------------------------------------------------------------------------------------------------------------------------
YES NO 5 Is this policy a replacement or YES NO 8 Personal History Interview
1 Do you know the Proposed Insureds? / / / / change of existing insurance or Telephone Information
annuities? (IF YES, EXPLAIN) / / / / DAYTIME
PHONE NO. ( )
-------------
- ------------------------------------------------ --------------------------------
2 Who is to pay premiums? (FULL NAME AND
RELATIONSHIP IF OTHER THAN PROPOSED INSUREDS) 9 If applicable, has YES NO
an oral specimen
test been completed / / / /
or an exam been
scheduled? (SHOW DATE
AND PHYSICIAN OR
PARAMEDICAL FACILITY)
- ----------------------------------------------------------------------------------------------------------------------------------
YES NO 6 Is State Farm Health YES NO Agent's Code Stamp
3 Was a Binding Receipt issued? / / / / Insurance being applied for? / / / /
- -----------------------------------------------------------------------------------------------
4 Indicate other State Farm insurance in family. 7 Did you give Proposed Insureds YES NO
the Notices and the Acknowledgment
/ / Auto / / Life / / Fire / / Health and Authorization? / / / /
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -------------------------------------------------------
[LOGO] STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY BINDING RECEIPT
- -------------------------------------------------------
The Company has received $_________. This money is part of the application
for life insurance on _________________ (Proposed Insured 1) and any others
named in the application. Any check received must be honored for payment when
presented. Otherwise this Receipt is void.
As of the application date, life insurance and any additional benefits
will be payable according to the terms of the application and the policy
applied for, subject to the terms of this Receipt. No benefits are provided
by this Receipt unless Death or Total Disability results from an accident
that occurs or an illness that first manifests itself after the application
date. THE TOTAL INSURANCE BENEFIT FOR A PROPOSED INSURED UNDER THIS OR ANY
OTHER RECEIPTS AND APPLICATIONS WILL NOT EXCEED $300,000. IF THAT PROPOSED
INSURED IS UNDER THE AGE OF 15 DAYS AT DEATH, THE TOTAL INSURANCE BENEFIT
WILL NOT EXCEED $3,000. If the Waiver of Monthly Deduction Benefit is applied
for and if a death benefit becomes payable under the terms of this receipt,
the Company will return any premiums paid.
Coverage under this Receipt will end when the first of the following
occurs: (a) The application is approved; (b) Notice of disapproval of the
application is given; (c) 60 days have expired starting with the application
date.
The Company reserves the right to disapprove the application by (a)
offering to issue a policy other than as applied for, or (b) declining to
issue a policy. If the application is disapproved, the notice of disapproval
will be given to Proposed Insured 1 or to the Applicant, if other than
Proposed Insured 1. The notice will be given either (a) in person to, or (b)
by mailing it to the last known address of Proposed Insured 1 or the
Applicant. If mailed, coverage will end the earlier of the date that notice
is received or 5 days after mailing of that notice.
The money received will be refunded if (a) the policy is not accepted, or
(b) the Company declines to issue a policy, or (c) the 60-day period has
expired.
There is no coverage under this Receipt if the application contains any
material misrepresentation.
NO AGENT OR COMPANY REPRESENTATIVE MAY WAIVE OR CHANGE THE ANSWER TO ANY
QUESTION IN THE APPLICATION OR CHANGE THE TERMS OF THIS RECEIPT.
DATE OF APPLICATION
---------------------------------
SIGNATURE OF AGENT X
---------------------------------------------------
Note: Do NOT use this Receipt for a change on a Variable Universal Life
policy. See reverse side.
- -------------------------------------------------------------------------------
- ---------------------------------------------------
Detach and leave with Proposed Insured
when Application is written:
- -------------------------------------------------------
[LOGO] STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
- -------------------------------------------------------
NOTICES
NOTICE OF INFORMATION PRACTICES
The life insurance application requests personal information about the
persons proposed for coverage. Occasionally, we may need to collect
additional personal information from other sources. All such personal
information is treated as confidential. In certain cases, however, that
information might be disclosed to others without authorization. A right of
access and correction exists as to the personal information we may collect. A
more detailed notice, including a description of our information practices
and your rights, is available upon request.
MIB, INC. (MEDICAL INFORMATION BUREAU) NOTICE
Information regarding your insurability will be treated as confidential. The
Company or its reinsurers may, however, make a brief report to MIB, Inc. This
is a non-profit membership organization of life insurance companies which
operates an information exchange on behalf of its members. If you apply to
another MIB, Inc., member company for life or health insurance coverage, or a
claim for benefits is submitted to such a company, MIB, Inc., upon request,
will supply such a company with the information it may have in its file.
Upon receipt of a request from you, MIB, Inc. will arrange disclosure of any
information it may have in your file. If you question the accuracy of
information in the MIB, Inc. file, you may contact MIB, Inc. and seek a
correction in accordance with the procedures set forth in the federal Fair
Credit Reporting Act. The address of the MIB, Inc. information office is Post
Office Box 105, Essex Station, Boston, Massachusetts 02112, telephone number
(617) 426-3660.
The Company or its reinsurers, may also release information in its file to
other life insurance companies to whom you may apply for life or health
insurance, or to whom a claim for benefits may be submitted.
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
100 State Farm Place, P.O. Box 8000, Ballston Spa, New York 12020-8000
Phone (518)884-5000
INSURANCE DEPARTMENT OF THE STATE OF NEW YORK
DEFINITION OF REPLACEMENT
In order to determine whether you are replacing or otherwise changing the
status of existing life insurance policies or annuity contracts, and in order
to receive the valuable information necessary to make a careful comparison if
you are contemplating replacement, the agent is required to ask you the
following questions and explain any items that you do not understand.
As part of your purchase of a new life insurance policy or a new annuity
contract, has existing coverage been, or is it likely to be:
<TABLE>
<CAPTION>
Yes No
<S> <C> <C>
(1) Lapsed, surrendered, partially surrendered, forfeited, assigned to the
insurer replacing the life insurance policy or annuity contract, or
otherwise terminated? / / / /
(2) Changed or modified into paid-up insurance; continued as extended term
insurance or under another form of nonforfeiture benefit; or otherwise
reduced in value by the use of nonforfeiture benefits, dividend
accumulations, dividend cash values or other values? / / / /
(3) Changed or modified so as to effect a reduction either in the amount of
the existing life insurance or annuity benefit or in the period of
time the existing life insurance or annuity benefit will continue in
force? / / / /
(4) Reissued with a reduction in amount such that any cash values are
released, including all transactions wherein an amount of dividend
accumulations or paid-up additions is to be released on one or more
of the existing policies? / / / /
(5) Assigned as collateral for a loan or made subject to borrowing or
withdrawal of any portion of the loan value, including all
transactions wherein any amount of dividend accumulations or paid-up
additions is to be borrowed or withdrawn on one or more existing
policies? / / / /
(6) Continued with a stoppage of premium payments or reduction in the
amount of premium paid? / / / /
</TABLE>
If you have answered yes to any of the above questions, a replacement as defined
by New York Insurance Department Regulation No. 60 has occurred or is likely to
occur and your agent is required to provide you with a completed Disclosure
Statement and the IMPORTANT Notice Regarding Replacement or Change of Life
Insurance Policies or Annuity Contracts.
DATE SIGNATURE OF APPLICANT
------------------------- ------------------------
DATE SIGNATURE OF APPLICANT
------------------------- -------------------------
To the best of my knowledge, a replacement is involved in this
transaction / / Yes / / No
DATE SIGNATURE OF AGENT
-------------------------- -----------------------------
454-626 d-26 09-1998 PRINTED IN U.S.A.
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
100 State Farm Place, P.O. Box 8000, Ballston Spa, New York 12020-8000
Phone (518)884-5000
INSURANCE DEPARTMENT OF THE STATE OF NEW YORK
IMPORTANT NOTICE REGARDING REPLACEMENT OR CHANGE OF LIFE INSURANCE POLICIES
OR ANNUITY CONTRACTS
THIS NOTICE IS FOR YOUR BENEFIT AND REQUIRED BY REGULATION NO. 60
You are contemplating the purchase of a life insurance policy or annuity
contract in connection with the surrender, lapse or change of existing life
insurance policies or annuity contracts. The agent is required to give you
this notice together with a signed disclosure statement containing the
summary result comparison for the new life insurance policy or annuity
contract and any life insurance policies or annuity contracts to be changed
that sets forth the facts of the transaction and its advantages and
disadvantages to you. Your decision could be a good one - or a mistake - so
make sure you understand the facts. You should:
1. Carefully study the Disclosure Statement, which includes a Summary
Result Comparison, until you are sure you understand fully the effect
of the transaction.
2. Ask the company or agent from whom you bought your existing life
insurance policies or annuity contracts to review with you the
transaction and the Disclosure Statement. You may be able to effect
the changes you desire more advantageously with them. Their customer
service telephone number is contained in the Disclosure Statement.
3. Consult your tax advisor. There may be unfavorable tax implications
associated with the contemplated changes to your existing life
insurance policies or annuity contracts.
As a general rule, it is often not advantageous to drop or change existing
coverage in favor of new coverage, whether issued by the same or a different
insurance company. Some of the reasons it may disadvantageous are:
1. The amount of the annual premium under an existing life insurance
policy may be lower than that called for by a new life insurance
policy having the same or similar benefits. Any replacement of the
same type of policy will normally be at a higher premium rate based
upon the insured's then attained age.
2. Since the initial costs of a life insurance policy are charged against
the cash value increases in the earlier life insurance policy years,
the replacement of an old life insurance policy by a new one results
in the policyholder sustaining the burden of these costs twice.
Annuity contracts usually contain provision for surrender charges,
therefore a replacement involving annuity contracts may result in the
imposition of surrender charges.
3. The incontestable and suicide clauses begin anew in a new life
insurance policy. This could result in a claim being denied under the
new life insurance policy that would have been paid under the life
insurance policy that was replaced.
4. An existing life insurance policy or annuity contract often has more
favorable provisions than a new life insurance policy or annuity
contract in areas such as loan interest rate, settlement options,
disability benefits and tax treatment.
5. There may have been changes in your health since the purchase of the
existing coverage.
6. The insurance company with which you have existing coverage can often
make a desired change on terms that would be more favorable than if
you replaced existing coverage with new coverage.
You have the right, within 60 days from the date of delivery of a new life
insurance policy or annuity contract, to return it to the insurer and receive
an unconditional full refund of all premiums or considerations paid on it, or
in the case of a variable or market value adjustment policy or contract, a
payment of the cash surrender benefits provided under the policy or contract,
plus the amount of all fees and other charges deducted from gross
considerations or imposed under the life insurance policy or annuity
contract, except that during the first 10 days from the date of delivery of
the new policy or contract return of premium or consideration, if greater,
and MAY have the right to reinstate or restore any life insurance policies
and annuity contracts that were surrendered, lapsed or changed in the
transaction to their former status to the extent possible and in accordance
with the insurer's published reinstatement rules to the extent such rules are
not inconsistent with the provisions of this part.
454-626 d-26 09-1998 PRINTED IN U.S.A.
<PAGE>
IMPORTANT: THIS RIGHT SHOULD NOT BE VIEWED AS REINSTATING OR RESTORING YOUR LIFE
INSURANCE POLICY OR ANNUITY CONTRACT TO THE SAME CONDITION AS IF IT HAD NEVER
BEEN REPLACED. THERE MAY BE CONSEQUENCES IN REINSTATING OR RESTORING YOUR LIFE
INSURANCE POLICY OR ANNUITY CONTRACT, INCLUDING BUT NOT LIMITED TO:
- The right to reinstate or restore your life insurance policy or annuity
contract applies only to companies subject to New York insurance laws;
- Your life insurance policy or annuity contract is subject to your
specific company's reinstatement rules, which may vary from company
to company. These rules may require payment of both premium and
interest; however, you will not be subject to evidence of
insurability, or a new contestable or suicide period;
- You may not receive the interest or investment performance during the
period the life insurance policy or annuity contract was replaced; and
- There may be unfavorable Federal Income Tax consequences as a result of the
reinstatement of your Life Insurance policy or annuity contract.
IMPORTANT: IN THE CASE OF A VARIABLE OR MARKET VALUE ADJUSTMENT POLICY OR
CONTRACT, THE VALUE OF THE POLICY OR CONTRACT MAY INCREASE OR DECREASE DURING
THE 60 DAY PERIOD DEPENDING ON THE PERFORMANCE OF THE UNDERLYING INVESTMENTS,
WHICH MAY AFFECT THE VALUE OF THE REFUND YOU RECEIVE.
I hereby acknowledge that I read the above "IMPORTANT NOTICE" and have received
a copy of same.
DATE SIGNATURE OF APPLICANT
------------------------- ------------------------
DATE SIGNATURE OF APPLICANT
------------------------- ------------------------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
100 State Farm Place, P.O. Box 8000, Ballston Spa, New York 12020-8000
Phone (518)884-5000
INSURANCE DEPARTMENT OF THE STATE OF NEW YORK
DISCLOSURE STATEMENT
IMPORTANT - IT MAY NOT BE IN YOUR BEST INTEREST TO SURRENDER, LAPSE, CHANGE OR
BORROW FROM EXISTING LIFE INSURANCE POLICIES OR ANNUITY CONTRACTS IN CONNECTION
WITH THE PURCHASE OF A NEW LIFE INSURANCE POLICY OR ANNUITY CONTRACT WHETHER
ISSUED BY THE SAME OR A DIFFERENT INSURANCE COMPANY. YOU ARE URGED TO CONTACT
YOUR EXISTING AGENT OR INSURANCE COMPANY PRIOR TO COMPLETING THE TRANSACTION.
THEY CAN HELP YOU DECIDE WHETHER THE REPLACEMENT IS IN YOUR BEST INTEREST.
FOR YOUR PROTECTION, the Insurance Department of the State of New York requires
that you be given this Disclosure Statement, the IMPORTANT Notice Regarding
Replacement or Change of Life Insurance Policies or Annuity Contracts and the
Definition of Replacement, together with policy information on all proposed and
existing coverage affected.
Name of Applicant(s) Telephone Number
----------------------- ------------------
Address
------------------------------------------------------------------------
Name of Agent Telephone Number
------------------------------ ------------------
Agent's Address
----------------------------------------------------------------
The Information On Existing Coverage On This Form Was Obtained From:
/ / The following replaced company(ies)
-----------------------------------------
/ / Approximations if replaced company(ies) failed to provide information in the
prescribed time
-----------------------------------------------------------------
454-626 b-28 10-1998 PRINTED IN U.S.A.
<PAGE>
2.
DISCLOSURE STATEMENT CONTINUED
1. DESCRIPTION OF TRANSACTION
Proposed Policy / Contract
<TABLE>
<CAPTION>
Existing Policies / Contracts Affected
(1) (2) (3)
<S> <C> <C> <C>
As of As of As of
------------- -------------- -------------
Company Name
----------------- ------------------ ------------------- ------------------
Customer Service
(800)688-0895 Phone Number
----------------- ------------------ ------------------- ------------------
Contract Number # # #
----------------- ----------------- ------------------ -----------------
Issue Date
----------------- ------------------ ------------------- ------------------
Type of Insurance
----------------- ------------------ ------------------- ------------------
Base Policy
$ Face Amount $ $ $
----------------- ----------------- ------------------ -----------------
Rider
----------------- ------------------- ----------------- ------------------- ------------------
Rider
----------------- ------------------- ----------------- ------------------- ------------------
Rider
----------------- ------------------- ----------------- ------------------- ------------------
Rider
----------------- ------------------- ----------------- ------------------- ------------------
Rider
----------------- ------------------- ----------------- ------------------- ------------------
Total Annualized
$ Premium $ $ $
----------------- ----------------- ------------------ -----------------
Current
N/A Surrender Charge $ $ $
----------------- ----------------- ------------------- ------------------
Guaranteed
% Interest Rate % % %
---------------- ----------------- ------------------ -----------------
Current Loan
% Interest Rate % % %
---------------- ----------------- ------------------ -----------------
Current Loan Balance
----------------- ------------------ ------------------- ------------------
Contestable Expiry Date
----------------- ------------------ ------------------- ------------------
Suicide Expiry Date
----------------- ------------------ ------------------- ------------------
</TABLE>
<PAGE>
3.
DISCLOSURE STATEMENT CONTINUED
Existing coverage to be changed by:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(1) (2) (3)
Lapse or Surrender / / / / / /
Amendment or Reissue / / / / / /
Loan or Withdrawal / / / / / /
Death Benefit
Reduction To $ $ $
-------------- -------------- ---------------
Reduced Paid-Up For $ $ $
-------------- -------------- ---------------
Extended Term to
-------------- -------------- ---------------
Other
-------------- -------------- ---------------
Cash released by change $ $ $
-------------- -------------- ---------------
Use of cash released
------------------------------------------------------------------------------------
</TABLE>
2. SUMMARY RESULT COMPARISON
<TABLE>
<CAPTION>
Proposed With Existing Coverage Changed Existing Coverage Unchanged
Guaranteed Non-Guaranteed Guaranteed Non-Guaranteed
<S> <C> <C> <C> <C>
Annualized Premium
$ $ Current Year $ $
---------------- --------------- -------------- -------------
$ $ 5 Years Hence $ $
---------------- --------------- -------------- -------------
$ $ 10 Years Hence $ $
---------------- --------------- -------------- -------------
Surrender Value
$ $ End of 1st Year $ $
---------------- --------------- -------------- -------------
$ $ 5 Years Hence $ $
---------------- --------------- -------------- -------------
$ $ 10 Years Hence $ $
---------------- --------------- -------------- -------------
</TABLE>
<PAGE>
4.
DISCLOSURE STATEMENT CONTINUED
<TABLE>
<CAPTION>
Proposed With Existing Coverage Changed Existing Coverage Unchanged
Guaranteed Non-Guaranteed Guaranteed Non-Guaranteed
<S> <C> <C> <C> <C>
Death Benefit
$ $ End of 1st Year $ $
---------------- ----------------- ---------------- -------------
$ $ 5 Years Hence $ $
---------------- ----------------- ---------------- -------------
$ $ 10 Years Hence $ $
---------------- ----------------- ---------------- -------------
Dividends
$ End of 1st Year $
----------------- -------------
$ 5 Years Hence $
----------------- -------------
$ 10 Years Hence $
----------------- -------------
</TABLE>
AGENT'S STATEMENT
1. The primary reasons(s) for recommending the new life insurance policy or
annuity contract is(are):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. The existing life insurance policy or annuity contract cannot meet the
applicant's objectives because:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. The advantages of continuing the existing life insurance policy or annuity
contract without changes are:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
5.
DISCLOSURE STATEMENT CONTINUED
REMARKS
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
/ / The attached proposal, including sales material, was used in this sale.
/ / No proposal or sales material was used in this sale.
If more than three existing life insurance policies or annuity contracts are
to be affected by this transaction or if more than one new life or annuity
contract is proposed, Section 1 of this Disclosure Statement must be
completed for such additional life insurance policies and annuity contracts.
In addition, a composite comparison shall be completed of all existing life
insurance policies or annuity contracts to all proposed life insurance
policies or annuity contracts. The proposal, including sales material used
in the sale of the proposed life insurance policy or annuity contract, must
accompany the submission of this form to the insurer. Copies must be given
to the applicant.
I have personally completed this form and certify that it is correct to the best
of my knowledge and ability.
Date: Signature of Agent:
------------------------ --------------------------------
I hereby acknowledge that I received and read the above Disclosure Statement
before I signed the application for the new coverage.
Date: Signature of Applicant:
------------------------ ---------------------------
Date: Signature of Applicant:
------------------------ ---------------------------
