<PAGE>
As Filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-64345
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 2 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)
(Name and complete address
of agent for service) Copy to:
Laura P. Sullivan, Esq. Stephen E. Roth, Esq.
State Farm Life and Sutherland Asbill & Brennan LLP
Accident Assurance Company 1275 Pennsylvania Avenue, N.W.
One State Farm Plaza Washington, DC 20004-2415
Bloomington, Illinois 61710-0001
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
It is proposed that this filing become effective:
/ / Immediately upon filing pursuant to paragraph (b).
/X/ On May 1, 2000 pursuant to paragraph (b).
/ / __ days after filing pursuant to paragraph (a)(1).
/ / On (date) pursuant to paragraph (a)(1) of Rule 485.
<PAGE>
May 1, 2000
VARIABLE
UNIVERSAL LIFE
State Farm Life and Accident Assurance Company
Variable Universal Life Prospectus
[LOGO]
<PAGE>
PROSPECTUS DATED MAY 1, 2000
VARIABLE UNIVERSAL LIFE INSURANCE POLICY
ISSUED BY
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
State Farm Life and Accident Assurance Company ("State Farm," "we," "us," or
"our") is offering the variable universal life insurance policy (the "Policy")
described in this prospectus. State Farm designed the Policy to provide:
(1) lifetime insurance protection on the insured person named in the policy, and
(2) flexibility regarding premiums and death benefits. Subject to certain
restrictions, the purchaser of a Policy (the "Owner," "you," or "your") may:
- - change the frequency and amounts of premium payments;
- - change the level of death benefits; and
- - allocate premiums (after State Farm deducts a premium charge) and Policy
values to:
--) State Farm's general account (the "Fixed Account"), an account that
provides a specified minimum rate of interest; and
--) subaccounts of State Farm Life and Accident Assurance Company Variable
Life Separate Account (the "Variable Account"), a separate account allowing
you to invest in the following investment portfolios ("Funds") of the State
Farm Variable Product Trust (the "Trust"):
/ / Large Cap Equity Index Fund
/ / Small Cap Equity Index Fund
/ / International Equity Index Fund
/ / Stock and Bond Balanced Fund
/ / Bond Fund
/ / Money Market Fund
The accompanying prospectus for the Trust describes each of the investment
portfolios, including the risks of investing in each portfolio, and provides
other information about the Trust.
An Owner of a Policy can select between two death benefit options: (1) a level
insurance amount (Basic Amount) or (2) a level insurance amount plus the Policy
Account Value. As long as the Policy is in force, State Farm guarantees that the
death benefit will never be less than the Basic Amount less any unrepaid Policy
loans and past due charges. For Policies issued in New York, if the Insured is
alive on the Maturity Date, State Farm will pay the Cash Surrender Value on the
Maturity Date to the Owner and the Policy will terminate.
The Policy provides for a Cash Surrender Value, which is the amount State Farm
would pay if you surrender the policy. Because this value varies with the
portfolio's performance, there is no guaranteed Cash Surrender Value or
guaranteed minimum Cash Surrender Value if you allocate premiums and Policy
values to the Trust. On any given day, the Cash Surrender Value could be more or
less than the premiums paid.
The Policy provides for a death benefit guarantee whereby the Policy will not
lapse so long as you pay certain minimum premiums. The Policy also allows you to
take loans, make withdrawals, and participate in a dollar-cost averaging program
or a portfolio rebalancing program.
Please read this prospectus carefully and keep it for future reference. A
prospectus or prospectus profile for State Farm Variable Product Trust must
accompany this prospectus and you should read it in conjunction with this
prospectus.
INTERESTS IN THE POLICIES AND SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF OR GUARANTEED BY A BANK, AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. THE
POLICIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INDEX OF TERMS................................................... 2
SUMMARY OF THE POLICY............................................ 3
PREMIUMS......................................................... 7
Applying for a Policy.......................................... 7
Exchanges from State Farm Universal Life and State Farm
Traditional Ordinary Whole Life............................... 7
Free Look Right to Cancel Policy............................... 7
Premiums....................................................... 7
Planned Premiums............................................... 8
Premiums to Prevent Lapse...................................... 8
Death Benefit Guarantee........................................ 8
Crediting Premiums to the Policy............................... 8
ALLOCATION OPTIONS............................................... 8
Net Premium Allocations........................................ 8
Subaccount Options............................................. 9
Fixed Account Option........................................... 9
Transfers...................................................... 9
Dollar-Cost Averaging.......................................... 10
Portfolio Rebalancing Program.................................. 10
CHARGES AND DEDUCTIONS........................................... 11
HOW YOUR POLICY ACCOUNT VALUES VARY.............................. 12
Policy Account Value........................................... 12
Cash Value..................................................... 12
Cash Surrender Value........................................... 12
Subaccount Policy Value........................................ 13
Fixed Policy Account Value..................................... 13
DEATH BENEFITS................................................... 13
Amount of Death Benefit Payable................................ 13
Death Benefit Options.......................................... 13
Changing the Death Benefit Option.............................. 14
Changing the Basic Amount...................................... 14
Effect of Withdrawals on the Death Benefit..................... 14
Changing the Beneficiary....................................... 15
LOAN BENEFITS.................................................... 15
Loan Account................................................... 15
Interest....................................................... 15
Loan Repayment................................................. 15
Effect of Policy Loan.......................................... 15
SURRENDER BENEFITS............................................... 16
Full Surrender................................................. 16
Withdrawals.................................................... 16
HYPOTHETICAL ILLUSTRATIONS OF ACCUMULATED PREMIUMS, POLICY
ACCOUNT VALUES, CASH SURRENDER VALUES, AND DEATH BENEFITS....... 17
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS................... 26
Requesting Payments............................................ 26
Telephone Transactions......................................... 26
OTHER POLICY BENEFITS AND PROVISIONS............................. 26
Exchange Provision............................................. 26
Other Policy Provisions........................................ 27
Beneficiary.................................................... 27
Reinstatement.................................................. 27
Other Changes.................................................. 27
Reports to Policy Owners....................................... 27
Assignment and Change of Owner................................. 27
Supplemental Benefits.......................................... 28
STATE FARM AND THE FIXED ACCOUNT................................. 28
State Farm Life and Accident Assurance Company................. 28
State Farm Directors and Officers.............................. 28
THE VARIABLE ACCOUNT AND THE TRUST............................... 31
TAX CONSIDERATIONS............................................... 32
TAX TREATMENT OF POLICY BENEFITS................................. 32
ADDITIONAL INFORMATION........................................... 33
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS.
THIS PROSPECTUS CONSTITUTES AN OFFERING ONLY IN
THOSE JURISDICTIONS WHERE SUCH OFFERING
MAY LAWFULLY BE MADE.
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<PAGE>
INDEX OF TERMS
This prospectus uses the following special 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 Insured's birthday,
the Age will be the age the Insured reaches 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. State
Farm will reduce the amount payable on the Insured's death by any Loan Amount
and any unpaid Monthly Deductions.
DEDUCTION DATE -- The Policy Date and each monthly anniversary of the Policy
Date.
FUND -- An investment portfolio of the State Farm Variable Product Trust and an
underlying investment option under the Policy.
HOME OFFICE -- P.O. Box 2307, Bloomington, IL 61702-2307, 1-888-702-2307.
INSURED -- The person upon whose life State Farm issues the Policy.
ISSUE DATE -- The date State Farm issues the Policy.
LOAN ACCOUNT -- A part of our general account to which we transfer Policy
Account Value in the Variable Account and the Fixed Account to provide
collateral for any loan you take under the Policy.
LOAN AMOUNT -- The sum of all outstanding Policy loans including both principal
plus accrued interest.
LOAN POLICY ACCOUNT VALUE -- The value of the Loan Account for this Policy.
MATURITY DATE -- For Policies issued in New York, the Maturity Date is 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 variable life insurance policy described in this prospectus. The
Policy contains the Basic Plan, any amendments, endorsements and riders, and a
copy of the application. The Policy is the entire contract.
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 ANNIVERSARY -- The same day and month as the Policy Date each year that
the Policy remains in force.
POLICY DATE -- If we issue the Policy 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.
We measure Policy Months, Years and Anniversaries from the Policy Date. The
Policy Date cannot be the 29th, 30th, or 31st day of any month.
POLICY MONTH -- The same day as the Policy Date each month that the Policy
remains in force.
POLICY YEAR -- Any 12-month period starting with the Policy Date or a Policy
Anniversary.
TRUST -- State Farm Variable Product Trust.
VALUATION DAY -- Each day on which both the New York Stock Exchange and the Home
Office are open for business except for a day that a Subaccount's corresponding
Fund does not value its shares.
VALUATION PERIOD -- The period that starts at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
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2
<PAGE>
SUMMARY OF THE POLICY
The following paragraphs summarize certain prospectus information and the
important features of the Policy. Please read this summary along 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. Please refer to the
Index of Terms for definitions of certain terms this prospectus uses.
Purpose of the Policy. State Farm designed the Policy to provide insurance
benefits with a long-term investment element. You should consider the Policy in
conjunction with other insurance you own. Please consider carefully before
replacing 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 you surrender the Policy 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 you allocated Policy Account Value declines (or is not
sufficiently favorable). 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 8.
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 32.
Free Look Right to Cancel Policy. For a limited time after State Farm issues a
Policy, 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 7. During this
limited period, State Farm will allocate Net Premiums paid to the Fixed Account.
See "Net Premium Allocations," page 8.
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 (toll free).
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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 8.
- - 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 7.
- - You may pay unplanned premiums, within limits. See "Premiums," page 7.
- - Under certain circumstances, you may need to pay extra premiums to prevent
lapse. See "Premiums to Prevent Lapse," page 8.
ALLOCATING NET PREMIUMS
- - State Farm deducts a 5% premium charge 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 8, for rules and limits.
- - State Farm credits interest on amounts allocated to the Fixed Account at a
rate we determine, but not less than an annual effective rate of 4%. See
"Transfers," page 9, 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 31.
TABLE A
FUND ANNUAL EXPENSES
(as a percentage of average daily net assets)
The investment advisory fees shown below are the actual amounts incurred in the
fiscal year ended December 31, 1999 for each of the Funds. The Stock and Bond
Balanced Fund invests primarily in the Large Cap Equity Index Fund and the Bond
Fund. The Stock and Bond Balanced Fund will not pay investment advisory fees
directly, but will indirectly bear its share of the investment advisory fees
incurred by the Large Cap Equity Index Fund and the Bond Fund. Therefore, the
investment results of the Stock and Bond Balanced Fund will be net of these
fees. The relative amounts that the Stock and Bond Balanced Fund invests in the
Large Cap Equity Index Fund and the Bond Fund at any one time will fluctuate,
but under normal circumstances, the Stock and Bond Balanced Fund will attempt to
maintain approximately 60% of its net assets in shares of the Large Cap Equity
Index Fund and approximately 40% of its net assets in shares of the Bond Fund.
Based on these percentages, an approximate investment advisory fee was derived
for the Stock and Bond Balanced Fund. This derived fee is used for the purpose
of showing the Stock and Bond Balanced Fund's annual expenses in the table below
and for purposes of the Example below.
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4
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By investing in the Large Cap Equity Index Fund and the Bond Fund, the Stock and
Bond Balanced Fund will indirectly bear its share of those underlying Funds'
Other Expenses and will incur its own Other Expenses. Other Expenses reflect the
fact that the investment adviser to the Funds has agreed to bear the expenses
incurred by each Fund (other than the International Equity Index Fund), other
than the investment advisory fee, that exceed 0.10% of such Fund's average daily
net assets, and that the investment adviser to the Funds has agreed to bear all
of the Stock and Bond Balanced Fund's own Other Expenses. The investment adviser
to the Funds has agreed to bear the expenses incurred by the International
Equity Index Fund, other than the investment advisory fee, that exceed 0.20% of
that Fund's average daily net assets. These expense limitation arrangements are
voluntary and the investment adviser can eliminate them at any time.
<TABLE>
<CAPTION>
TOTAL
OTHER EXPENSES ANNUAL EXPENSES
INVESTMENT (AFTER EXPENSE (AFTER EXPENSE
FUND ADVISORY FEES LIMITATION) (*) LIMITATION) (*)
<S> <C> <C> <C>
Large Cap Equity Index Fund 0.26% 0.08% 0.34%
Small Cap Equity Index Fund 0.40% 0.10% 0.50%
International Equity Index Fund 0.55% 0.20% 0.75%
Money Market Fund 0.40% 0.10% 0.50%
Bond Fund 0.50% 0.10% 0.60%
Stock and Bond Balanced Fund 0.36% 0.08% 0.44%
</TABLE>
(*) Absent this expense limitation, Other Expenses for the Small Cap Equity
Index Fund, International Equity Index Fund, Bond Fund, and Money Market Fund
would be 0.22%, 0.39%, 0.12%, and 0.13%, respectively.
DEDUCTIONS FROM ASSETS
- - State Farm makes a monthly deduction 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 11.
- - State Farm deducts a daily charge at a current annual rate of 0.80% (maximum
annual rate of 0.90%) from assets in the Subaccounts. See "Charges and
Deductions Mortality and Expense Risk Charge," page 11. State Farm does not
deduct this charge 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 12, "Fixed Policy Account
Value," page 13, and "Subaccount Policy Value," page 13.
- - 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).
- - You may transfer Policy Account Value 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.
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<PAGE>
CASH BENEFITS
- - You may take loans for amounts up to 90% of Cash Value, at a net interest rate
of 2%. See "Loan Benefits," page 15, and "Tax Treatment of Policy Benefits,"
page 32.
- - You may make withdrawals 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 16, for rules and limits.
- - You can surrender the Policy at any time for its Cash Surrender Value (Policy
Account Value minus Loan Amount and minus any applicable surrender charge).
See "Full Surrender," page 16.
- - State Farm will deduct a surrender charge 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 11.
- - 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.
- - We provide 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 14, 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 8.
- - The Death Benefit should be excludible from the gross income of the
Beneficiary. See "Tax Treatment of Policy Benefits," page 32.
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6
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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. You can submit your
initial premium 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 if
evidence of insurability satisfies our underwriting rules and we have received
an initial premium of sufficient amount. This amount must be at least equal to
the minimum monthly premium if the payment mode of the Policy is monthly, and
12 times the minimum monthly premium if the payment 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. We reserve the right to refuse
an exchange for any lawful reason.
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, State Farm will deem the Policy 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. After you pay the initial
premium, you may pay additional premiums in any amount 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 32.
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 11. State Farm will
not recapture the credit if you surrender the Policy. State Farm will not
include the amount of the credit for purposes of calculating agent compensation.
See "Additional Information Sale of the Policies."
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<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 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 14.
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
we are to deduct 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 11, 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. 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. 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 we send the notice and your Policy will remain in effect during the
grace period. If the Insured should die during the grace period before you pay
the required premium, 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 you do not pay the required premium 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 26, 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 15.
Death Benefit Guarantee. During the first 10 Policy Years (first 5 Policy Years
for Policies issued 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. We will credit your initial premium to the
Policy on the Policy Date. We will credit any additional premium received after
the Policy Date to the Policy as of the end of the Valuation Period when we
receive the premium at our Home Office based on the unit value next computed
after receipt. See Subaccount Policy Value. We will deem any premiums we receive
on a non-Valuation Day as being 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 you want to allocate 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 we receive 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.
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8
<PAGE>
Until the free look period expires, we will allocate all Net Premiums to the
Fixed Account. At the end of this period, we transfer the Policy Account Value
to the Subaccounts and/or retain it 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 12. 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 paragraphs below summarize the investment objective(s) of each
of the Funds in which Subaccounts invest. There is no assurance that a Fund will
meet its objective(s).
- - The Large Cap Equity Index Fund seeks to match the performance of the
Standard & Poor's Composite Index of 500 Stocks-Registered Trademark-(2). This
Fund will pursue its objective by investing primarily on a
capitalization-weighted basis in the securities that make up the S&P 500.
- - The Small Cap Equity Index Fund seeks to match the performance of the Russell
2000-Registered Trademark- Small Stock Index(3). This Fund will pursue its
objective by investing primarily in a representative sample of stocks found in
the Russell 2000.
- - The International Equity Index Fund seeks to match the performance of the
Morgan Stanley Capital International Europe, Australia and Far East Free
Index-Registered Trademark- (the "EAFE-Registered Trademark-Free")(4). This
Fund will pursue its objective by investing primarily in a representative
sample of stocks found in the EAFE Free.
- - The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and
capital gains. This Fund will pursue its objective by investing primarily in
good quality bonds issued by domestic companies.
- - The Stock and Bond Balanced Fund seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing
primarily in the Trust's Large Cap Equity Index Fund and the Bond Fund.
- - The Money Market Fund seeks to maximize current income to the extent
consistent with the preservation of capital and maintenance of liquidity. This
Fund will pursue its objective by investing exclusively in high quality money
market instruments. THE U.S. GOVERNMENT or the FEDERAL DEPOSIT INSURANCE
CORPORATION DO NOT INSURE OR GUARANTEE AN INVESTMENT IN THE MONEY MARKET FUND.
This Fund will attempt to maintain a stable net asset value of $1.00 per
share, BUT THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO.
The accompanying prospectus for the Trust contains further information about the
Funds. Please read the Trust's prospectus in conjunction with this prospectus.
See also "The Trust," page 31.
Fixed Account Option. The Fixed Account is part of our general account. It is
not a separate account. We credit amounts allocated to the Fixed Account with
interest for the period of allocation at rates we determine 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. We determine the current interest
rate 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 31. 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
- ------------------------------
(2) Standard & Poor's-Registered Trademark-, S&P-Registered Trademark-, S&P
500-Registered Trademark-, Standard & Poor's 500 and 500 are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed for use by State Farm
and the Trust. Neither the State Farm Variable 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.)
(3) The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell is a trademark of the Frank Russell
Company. The Small Cap Equity Index Fund (the "Fund") is not sponsored,
endorsed, sold or promoted by the Frank Russell Company, and the Frank
Russell Company makes no representation regarding the advisability of
investing in the Fund. (For more information regarding the Russell 2000
Index, see "Relationships with the Companies that Maintain the Benchmark
Indices" in this prospectus.)
(4) The Morgan Stanley Capital International Europe, Australia and Far East Free
(EAFE-Registered Trademark- Free) Index is the exclusive property of Morgan
Stanley & Co. Incorporated ("Morgan Stanley"). Morgan Stanley Capital
International is a service mark of Morgan Stanley and has been licensed for
use by the Trust. The International Equity Index Fund (the "Fund") is not
sponsored, endorsed, sold or promoted by Morgan Stanley and Morgan Stanley
makes no representation regarding the advisability of investing in the Fund.
(For more information regarding the Morgan Stanley Capital International EAFE
Free Index, see "Relationships with the Companies that Maintain the Benchmark
Indices" in this prospectus.)
9 -------
<PAGE>
look period. The minimum amount of Policy Account Value that you may transfer
from a Subaccount is $250, or, if less, the Policy Account Value held in the
Subaccount. You may transfer Policy Account Value held in 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.
You may make transfer requests 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 we receive the request at the Home
Office. State Farm may, however, defer transfers under the same conditions that
we may delay paying proceeds. See "Requesting Payments," page 26. 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. You may make subsequent changes to your percentage
allocations at any time by providing 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. You may not use amounts in the
Fixed Account in connection with the portfolio rebalancing program. Portfolio
rebalancing is not available while you are participating in the dollar-cost
averaging program.
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10
<PAGE>
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 State Farm
provides, costs and expenses State Farm incurs and risks State Farm assumes
under or in connection with the Policies.
Services and benefits State Farm provides 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 State Farm incurs include those associated with underwriting
applications, increases in Basic Amount, and riders, various overhead and other
expenses associated with providing the services and benefits under 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 State Farm assumes 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. State Farm guarantees that this charge
will not exceed an annual rate of 0.90% of net assets. This charge does
not apply to Fixed Account assets attributable to the Policies. We factor
this charge into the Net Investment Factor (see page 13). State Farm may
profit from this charge and may use such profit for any lawful purpose
including paying our expenses related to selling the Policies.
- 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 you surrender the Policy 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. State Farm will deduct the surrender charge
before we pay any surrender proceeds. The surrender charge depends on the
Insured's Age at issue, or on the Policy Anniversary preceding an
increase. We calculate the surrender charge based as an amount per $1,000
of the Basic Amount at issue (or increase). The maximum surrender charge
amount per $1,000 of Basic Amount is $21 which is for Insured's ages 70 to
80. 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 Appendix A for sample surrender charges. Your Policy will state the
surrender charge for your Policy.
- 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 9, 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 16, for a discussion of the withdrawal processing fee. There are Fund
expenses that, in 1999, ranged on an annual basis from 0.34% to 0.75% of
the average daily value of your money invested in the Funds. See "Summary
of the Policy," page 3, and the prospectus for the Trust for a description
of the investment advisory fees and other expenses incurred by the Funds.
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<PAGE>
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. We calculate the cost of insurance 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 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 we
calculate this amount.
We base the cost of insurance rate for the Insured 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. We place juveniles in a
male or female or unisex rate class. The original rate class applies to the
initial Basic Amount. If we approve an increase in Basic Amount, 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. We base the maximum cost of insurance rates 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
17, 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 15. We determine the Policy Account Value 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 you allocate amounts,
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 we would deduct if you surrendered the
Policy on 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.
- ---------
12
<PAGE>
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, we credit your Policy
with units in that Subaccount. We determine the number of units by dividing the
dollar amount allocated, transferred or repaid to the Subaccount by the
Subaccount's unit value for the Valuation Day when we effect the allocation,
transfer or repayment. The number of Subaccount units credited to a Policy will
decrease when we take the allocated portion of the Monthly Deduction from the
Subaccount, take a Policy loan from the Subaccount, transfer an amount from the
Subaccount, take a withdrawal from the Subaccount, or surrender the Policy.
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. We arbitrarily set the unit value for each
Subaccount at $10 when we established the Subaccount. For each Valuation
Period after the date of establishment, we determine the unit value 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 we use 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.
DEATH BENEFITS
As long as the Policy remains in force, we will pay the Death Benefit once we
receive at our Home Office due proof of the Insured's death. See "Requesting
Payments," page 26. We will pay the Death Benefit 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, State Farm may further adjust the amount of the
Death Benefit. See "Incontestability," "Limited Death Benefit," and
"Misstatement of Age or Sex," page 27. If the Insured dies before we issue a
Policy, we limit the Death Benefit payable 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. State Farm uses the Policy Account Value on the Insured's
date of death to determine 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. We reserve the right to change the table if the table of percentages
currently in effect becomes inconsistent with any federal income tax laws and/or
regulations. 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 17.
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<PAGE>
<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>
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:
You must submit each change by written request that we receive at our Home
Office, and
You may only change the Death Benefit Option once 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
you make a change from Option 2 to Option 1, 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 you change a Death Benefit Option. Changing the death benefit option
may have tax consequences and you should consult a tax advisor before doing so.
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:
(1) State Farm will not permit any change that may result in your Policy
being disqualified as a life insurance contract under Section 7702 of the
Code.
(2) You may only make one change (increase or decrease) during a Policy
Year.
To increase the Basic Amount, contact an authorized State Farm agent. To
decrease the Basic Amount, submit a written request to our Home Office. Any
increase in the Basic Amount must be at least $25,000 and you must submit an
application, 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 8. Also, the minimum monthly premium for
the Death Benefit Guarantee will increase. If we approve the increase in Basic
Amount, the increase will become effective on the date you apply for it and we
will adjust the Policy Account Value 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. We
will not allow any increases after the Policy Anniversary when the Insured is
age 80.
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. State Farm will use any decrease
first to reduce the most recent increase, then the next most recent increases,
then the initial Basic Amount. We will not deduct a surrender charge upon a
decrease in Basic Amount. We will not reduce the surrender charge upon a
decrease in Basic Amount.
Changing the Basic Amount may have tax consequences and you should consult a tax
advisor before doing so.
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 withdrawal will also reduce the
Basic Amount dollar-for-dollar. If the Basic Amount reflects increases in the
Initial Basic Amount, the
- ---------
14
<PAGE>
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 withdrawal will not affect the
Basic Amount.
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. See
"Requesting Payments," page 26. You may make requests for Policy loans in
writing or by telephone (if we have your telephone authorization on file). See
"Requesting Payments," page 26. Outstanding Policy loans, including accrued
interest, reduce the amount available for new loans.
Loan Account. Making a loan does not affect the Policy Account Value. However,
we transfer an amount equal to the loan proceeds from the Policy Account Value
in the Variable Account and Fixed Account to the Loan Account, and hold this
amount 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 you
repay a loan, we transfer an amount equal to the repayment from the Loan Account
to the Variable Account and Fixed Account and allocate this amount as you direct
when submitting the repayment. If you provide no direction, we will allocate the
amount 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. We transfer an amount equal to the unpaid amount
of interest 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, we will credit the amount in the Loan
Account with interest at a minimum guaranteed annual effective rate of 6.0%. On
each Deduction Date, we will transfer the interest so earned 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. You must send loan repayments
to our Home Office and we will credit the repayment at the end of the Valuation
Period during which we receive them. State Farm does not treat a loan repayment
as a premium payment and loan repayments are 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. If the Death Benefit becomes payable
while a Policy loan is outstanding, we will deduct the Loan Amount 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. A Policy loan may have tax consequences. See "Tax Considerations."
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<PAGE>
SURRENDER BENEFITS
Full Surrender. You may surrender your Policy at any time for its Cash Surrender
Value. See "Requesting Payments," page 26. A surrender charge may apply. See
"Surrender Charge," page 11. Your Policy will terminate and cease to be in force
if you surrender it for a lump sum. You cannot later reinstate the Policy.
Surrendering your Policy may have tax consequences and you should consult a tax
advisor before doing so.
Withdrawals. You may make withdrawals under your Policy. See "Requesting
Payments," page 26. You may make withdrawal requests in writing or by telephone
(if we have your telephone authorization on file). See "Requesting Payments and
Telephone Transactions," page 26. 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. You may not make more than four withdrawals during a
Policy Year. On each withdrawal, we will assess a withdrawal processing fee
equal to the lesser of $25 or 2% of the amount withdrawn. State Farm will deduct
this charge from your Policy Account Value along with the withdrawal amount
requested. When you request a withdrawal, you can direct us how to deduct the
withdrawal from your Policy Account Value. If you provide no directions, we will
deduct the withdrawal from your Policy Account Value in the Subaccounts and
Fixed Account on a pro-rata basis. Making a withdrawal under your Policy may
have tax consequences and you should consult a tax advisor before doing so.
- ---------
16
<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 .52% of the average
daily net assets of the Funds available under the Policies, based on the expense
ratios for the Fund expenses and fees, as shown in the table appearing above
under "Summary 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
- -1.31%, 4.61% and 10.53%, respectively, for the current charge illustrations,
and -1.41%, 4.51%, and 10.42% respectively, for the maximum charge
illustrations.
The illustrations also reflect the Monthly Deduction for the hypothetical
Insured. Separate illustrations on each of the following pages reflect our
current charges and the higher maximum charges we have the contractual right to
charge. All the illustrations reflect the fact that we currently make no charges
for Federal or state income taxes against the Variable Account and assume no
Loan Amount or charges for supplemental benefits.
We base the illustrations 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.
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 CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 961 1,024 1,088 703 766 830 100,000 100,000 100,000
2 2,691 1,904 2,091 2,286 1,388 1,575 1,770 100,000 100,000 100,000
3 4,138 2,830 3,202 3,604 2,314 2,686 3,088 100,000 100,000 100,000
4 5,657 3,735 4,356 5,054 3,219 3,840 4,538 100,000 100,000 100,000
5 7,252 4,621 5,555 6,650 4,105 5,039 6,134 100,000 100,000 100,000
6 8,928 5,485 6,800 8,404 4,969 6,284 7,888 100,000 100,000 100,000
7 10,686 6,327 8,093 10,335 5,915 7,680 9,922 100,000 100,000 100,000
8 12,533 7,147 9,434 12,459 6,837 9,125 12,150 100,000 100,000 100,000
9 14,472 7,943 10,826 14,798 7,736 10,620 14,592 100,000 100,000 100,000
10 16,508 8,714 12,269 17,373 8,611 12,166 17,270 100,000 100,000 100,000
15 28,322 12,171 20,325 34,797 12,171 20,325 34,797 100,000 100,000 100,000
20 43,399 14,861 29,978 63,517 14,861 29,978 63,517 100,000 100,000 100,000
25 62,642 16,462 41,500 110,857 16,462 41,500 110,857 100,000 100,000 148,549
30 87,201 16,271 55,223 187,867 16,271 55,223 187,867 100,000 100,000 229,197
</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 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 906 968 1,030 648 710 772 100,000 100,000 100,000
2 2,691 1,792 1,972 2,160 1,276 1,456 1,644 100,000 100,000 100,000
3 4,138 2,656 3,012 3,397 2,140 2,496 2,881 100,000 100,000 100,000
4 5,657 3,496 4,087 4,753 2,980 3,571 4,237 100,000 100,000 100,000
5 7,252 4,314 5,200 6,240 3,798 4,684 5,724 100,000 100,000 100,000
6 8,928 5,105 6,350 7,868 4,589 5,834 7,352 100,000 100,000 100,000
7 10,686 5,870 7,537 9,653 5,458 7,124 9,240 100,000 100,000 100,000
8 12,533 6,610 8,763 11,612 6,300 8,454 11,302 100,000 100,000 100,000
9 14,472 7,321 10,029 13,761 7,114 9,823 13,555 100,000 100,000 100,000
10 16,508 8,003 11,335 16,121 7,900 11,231 16,018 100,000 100,000 100,000
15 28,322 10,924 18,479 31,935 10,924 18,479 31,935 100,000 100,000 100,000
20 43,399 12,778 26,641 57,658 12,778 26,641 57,658 100,000 100,000 100,000
25 62,642 12,928 35,660 99,951 12,928 35,660 99,951 100,000 100,000 133,935
30 87,201 10,255 45,319 168,019 10,255 45,319 168,019 100,000 100,000 204,983
</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 CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 959 1,023 1,086 701 765 828 100,959 101,023 101,086
2 2,691 1,900 2,086 2,280 1,384 1,570 1,764 101,900 102,086 102,280
3 4,138 2,821 3,191 3,593 2,305 2,675 3,077 102,821 103,191 103,593
4 5,657 3,720 4,337 5,033 3,204 3,821 4,517 103,720 104,337 105,033
5 7,252 4,597 5,526 6,614 4,081 5,010 6,098 104,597 105,526 106,614
6 8,928 5,452 6,757 8,349 4,936 6,241 7,833 105,452 106,757 108,349
7 10,686 6,281 8,031 10,252 5,868 7,618 9,840 106,281 108,031 110,252
8 12,533 7,085 9,349 12,341 6,776 9,039 12,031 107,085 109,349 112,341
9 14,472 7,863 10,711 14,633 7,657 10,505 14,426 107,863 110,711 114,633
10 16,508 8,613 12,118 17,147 8,510 12,015 17,044 108,613 112,118 117,147
15 28,322 11,907 19,841 33,908 11,907 19,841 33,908 111,907 119,841 133,908
20 43,399 14,297 28,718 60,642 14,297 28,718 60,642 114,297 128,718 160,642
25 62,642 15,380 38,516 103,235 15,380 38,516 103,235 115,380 138,516 203,235
30 87,201 14,323 48,425 170,810 14,323 48,425 170,810 114,323 148,425 270,810
</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 35 STANDARD NON-TOBACCO
$100,000 INITIAL DEATH BENEFIT $1,250 ANNUAL PREMIUM
DEATH BENEFIT OPTION 2
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,313 904 966 1,028 646 708 770 100,904 100,966 101,028
2 2,691 1,787 1,966 2,153 1,271 1,450 1,637 101,787 101,966 102,153
3 4,138 2,645 2,999 3,383 2,129 2,483 2,867 102,645 102,999 103,383
4 5,657 3,478 4,066 4,727 2,962 3,550 4,211 103,478 104,066 104,727
5 7,252 4,286 5,166 6,197 3,770 4,650 5,681 104,286 105,166 106,197
6 8,928 5,065 6,299 7,802 4,549 5,783 7,286 105,065 106,299 107,802
7 10,686 5,816 7,464 9,555 5,403 7,051 9,143 105,816 107,464 109,555
8 12,533 6,537 8,662 11,471 6,227 8,352 11,162 106,537 108,662 111,471
9 14,472 7,227 9,893 13,565 7,021 9,686 13,358 107,227 109,893 113,565
10 16,508 7,885 11,156 15,852 7,781 11,052 15,749 107,885 111,156 115,852
15 28,322 10,613 17,906 30,878 10,613 17,906 30,878 110,613 117,906 130,878
20 43,399 12,108 25,124 54,173 12,108 25,124 54,173 112,108 125,124 154,173
25 62,642 11,638 31,988 89,969 11,638 31,988 89,969 111,638 131,988 189,969
30 87,201 8,057 36,946 144,627 8,057 36,946 144,627 108,057 136,946 244,627
</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 CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,893 2,020 2,146 1,257 1,384 1,510 100,000 100,000 100,000
2 5,381 3,742 4,113 4,499 2,470 2,841 3,227 100,000 100,000 100,000
3 8,275 5,543 6,280 7,078 4,271 5,008 5,806 100,000 100,000 100,000
4 11,314 7,294 8,521 9,905 6,022 7,249 8,633 100,000 100,000 100,000
5 14,505 8,993 10,840 13,007 7,721 9,568 11,735 100,000 100,000 100,000
6 17,855 10,637 13,236 16,412 9,365 11,964 15,140 100,000 100,000 100,000
7 21,373 12,222 15,711 20,152 11,204 14,694 19,134 100,000 100,000 100,000
8 25,066 13,749 18,270 24,266 12,985 17,507 23,503 100,000 100,000 100,000
9 28,945 15,212 20,913 28,796 14,703 20,404 28,288 100,000 100,000 100,000
10 33,017 16,608 23,643 33,790 16,354 23,388 33,536 100,000 100,000 100,000
15 56,644 22,333 38,627 67,936 22,333 38,627 67,936 100,000 100,000 100,000
20 86,798 25,221 56,278 125,489 25,221 56,278 125,489 100,000 100,000 145,568
25 125,284 23,655 78,329 219,341 23,655 78,329 219,341 100,000 100,000 234,695
30 174,402 15,108 108,986 373,467 15,108 108,986 373,467 100,000 114,436 392,141
</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 1
VALUES BASED ON MAXIMUM CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,748 1,870 1,992 1,112 1,234 1,356 100,000 100,000 100,000
2 5,381 3,435 3,788 4,155 2,163 2,516 2,883 100,000 100,000 100,000
3 8,275 5,057 5,751 6,503 3,785 4,479 5,231 100,000 100,000 100,000
4 11,314 6,608 7,757 9,052 5,336 6,485 7,780 100,000 100,000 100,000
5 14,505 8,085 9,803 11,821 6,813 8,531 10,549 100,000 100,000 100,000
6 17,855 9,482 11,888 14,831 8,210 10,616 13,559 100,000 100,000 100,000
7 21,373 10,797 14,010 18,109 9,779 12,992 17,091 100,000 100,000 100,000
8 25,066 12,027 16,171 21,686 11,264 15,408 20,923 100,000 100,000 100,000
9 28,945 13,166 18,369 25,596 12,657 17,860 25,087 100,000 100,000 100,000
10 33,017 14,207 20,600 29,877 13,952 20,345 29,622 100,000 100,000 100,000
15 56,644 17,550 32,090 58,693 17,550 32,090 58,693 100,000 100,000 100,000
20 86,798 16,366 43,734 107,815 16,366 43,734 107,815 100,000 100,000 125,066
25 125,284 6,662 54,920 188,105 6,662 54,920 188,105 100,000 100,000 201,272
30 174,402 0 64,777 318,501 0 64,777 318,501 100,000 100,000 334,426
</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 CURRENT CHARGES
<TABLE>
<CAPTION>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET -1.31% NET 4.61% NET 10.53% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,885 2,011 2,137 1,249 1,375 1,501 101,885 102,011 102,137
2 5,381 3,717 4,086 4,469 2,445 2,814 3,197 103,717 104,086 104,469
3 8,275 5,493 6,222 7,012 4,221 4,950 5,740 105,493 106,222 107,012
4 11,314 7,206 8,417 9,782 5,934 7,145 8,510 107,206 108,417 109,782
5 14,505 8,857 10,672 12,800 7,585 9,400 11,528 108,857 110,672 112,800
6 17,855 10,440 12,982 16,087 9,168 11,710 14,815 110,440 112,982 116,087
7 21,373 11,948 15,344 19,663 10,931 14,327 18,645 111,948 115,344 119,663
8 25,066 13,381 17,758 23,556 12,618 16,995 22,793 113,381 117,758 123,556
9 28,945 14,732 20,217 27,792 14,224 19,708 27,283 114,732 120,217 127,792
10 33,017 15,995 22,717 32,400 15,741 22,463 32,145 115,995 122,717 132,400
15 56,644 20,608 35,441 62,031 20,608 35,441 62,031 120,608 135,441 162,031
20 86,798 21,299 47,213 106,139 21,299 47,213 106,139 121,299 147,213 206,139
25 125,284 16,078 55,232 171,224 16,078 55,232 171,224 116,078 155,232 271,224
30 174,402 3,144 56,018 268,026 3,144 56,018 268,026 103,144 156,018 368,026
</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>
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>
PREMIUM POLICY ACCOUNT VALUE CASH SURRENDER VALUE DEATH BENEFIT
ACCUMULATED ---------------------------------- ---------------------------------- ----------------------------------
- -------------- 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS
YR AT 5% -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET -1.41% NET 4.51% NET 10.42% NET
- --- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,625 1,737 1,859 1,980 1,101 1,223 1,344 101,737 101,859 101,980
2 5,381 3,404 3,753 4,116 2,132 2,481 2,844 103,404 103,753 104,116
3 8,275 4,993 5,677 6,418 3,721 4,405 5,146 104,993 105,677 106,418
4 11,314 6,498 7,624 8,895 5,226 6,352 7,623 106,498 107,624 108,895
5 14,505 7,912 9,588 11,556 6,640 8,316 10,284 107,912 109,588 111,556
6 17,855 9,231 11,562 14,413 7,959 10,290 13,141 109,231 111,562 114,413
7 21,373 10,447 13,538 17,478 9,429 12,521 16,461 110,447 113,538 117,478
8 25,066 11,556 15,512 20,769 10,793 14,748 20,006 111,556 115,512 120,769
9 28,945 12,552 17,472 24,297 12,043 16,963 23,788 112,552 117,472 124,297
10 33,017 13,422 19,406 28,075 13,167 19,152 27,821 113,422 119,406 128,075
15 56,644 15,411 28,047 51,074 15,411 28,047 51,074 115,411 128,047 151,074
20 86,798 11,872 32,629 81,736 11,872 32,629 81,736 111,872 132,629 181,736
25 125,284 0 27,902 120,174 0 27,902 120,174 99,449 127,902 220,174
30 174,402 0 4,322 163,066 0 4,322 163,066 72,497 104,322 263,066
</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.
25-------
<PAGE>
REQUESTING PAYMENTS AND TELEPHONE TRANSACTIONS
Requesting Payments. You must send written requests for payment (except where we
authorize telephone requests) to our Home Office or give the requests 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 we determine
as of the date of the Insured's death, we will determine the amount 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.
We generally will pay the Death Benefit through the State Farm Benefit
Management Account-Registered Trademark-, an interest bearing checking account.
We will send the State Farm Benefit Management Account-Registered Trademark-
checkbook to you within seven days after we receive all required documents. A
Beneficiary will have immediate access to the proceeds by writing a check on the
State Farm Benefit Management Account-Registered Trademark-. We will pay
interest on the amount in the State Farm Benefit Management
Account-Registered Trademark- from the date of the Insured's death to the date
the State Farm Benefit Management Account-Registered Trademark- is closed.
Neither the Federal Deposit Insurance Corporation nor any other agency insure
amounts in the State Farm Benefit Management Account-Registered Trademark-.
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 as a result of which it
is not reasonably practicable for the Variable Account: (A) to dispose of
its securities; or (B) to determine the value of its net assets; 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 we do not employ reasonable procedures, we may be
liable for any losses due to unauthorized or fraudulent instructions. However,
if we do employ reasonable procedures, we will not be liable for any losses due
to unauthorized or fraudulent instructions. We reserve the right to place
limits, including dollar limits, on telephone transactions.
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
- ---------
26
<PAGE>
Amount), or, in New York, 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.
Value to the Fixed Account. The Basic Account 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
paying any dividends 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. State Farm will adjust the Death Benefit if
the application misstates the Insured's Age or sex.
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. We will effect your change on
the date you sign the request 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 you have not surrendered the Policy, you may reinstate the
Policy 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
Variable Account's operations 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 a State Farm
officer has the right to change the Policy. No agent has the authority to change
the Policy or waive any of its terms. A State Farm officer must sign all
endorsements, amendments, or riders in order for those documents 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, we will send you
a report showing information about your Policy for the period covered by the
report. State Farm also will send you 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 are not 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 32. When allowed by law, 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
27-------
<PAGE>
designation. A change of Owner may have adverse tax consequences. You should
consult a tax adviser before changing an Owner.
Supplemental Benefits. The following supplemental benefits are available and you
may add them to your Policy by rider. State Farm will deduct monthly charges for
these benefits from your Policy Account Value as part of the Monthly Deduction
(see page 11).
- 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
Insured's spouse 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.
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 61710-0001.
State Farm was incorporated in 1960 and has been continuously engaged in the
life insurance business since that year. State Farm is subject to regulation by
the Insurance Department of the State of Illinois as well as by the insurance
departments of all other states and jurisdictions in which it does business.
State Farm sells insurance in New York and Wisconsin and is also licensed in
Illinois and Connecticut. State Farm submits annual statements on its operations
and finances to insurance officials in such states. The Policy described in this
prospectus has been filed with and, where required, approved by, insurance
officials in those jurisdictions where it is sold.
State Farm Directors and Officers. A board of directors manages State Farm. 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, Jr. Director; President; Chairman of the Board, CEO -- State Farm Mutual Automobile
Chairman of the Board 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
President Insurance Company, 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
(1995-1997); Vice President and Director (1997-present), --
State Farm VP Management Corp.
</TABLE>
- ---------
28
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ------------------- ------------------------- ------------------------------------------------------------
<S> <C> <C>
Charles R. Wright Director; Executive Vice Director and Executive Vice President (1998-present) --
President and Chief State Farm Mutual Automobile Insurance Company, State Farm
Agency and Marketing Fire and Casualty Company, State Farm General Insurance
Officer 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.; Director
and Agency Vice President (1995-1998) -- State Farm Mutual
Automobile Insurance Company.
Roger S. Joslin Director Director, Vice Chairman of the Board and Chief Financial
Officer (1998-present) -- State Farm Mutal Automobile
Insurance Company; Director, Senior Vice President and
Treasurer (1995-1998) -- 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
Kurt G. Moser Director; Senior Vice Senior Vice President -- Investments -- State Farm Mutual
President -- Investments Automobile Insurance 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.; Senior
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.; Senior Vice President -- State Farm
Variable Product Trust (1997-present)
Vincent J. Trosino Director Director, Vice Chairman of the Board, President and Chief
Operating Officer (1998-present) -- State Farm Mutual
Automobile Insurance Company; Director, Executive Vice
President and Chief Operating Officer (1995-1998) -- State
Farm Mutual Automobile Insurance Company; Director and Vice
President -- State Farm Fire and Casualty Company, State
Farm General Insurance Company
Laura P. Sullivan Director, Vice President, Vice President, Counsel and Secretary of the Board -- State
Counsel and Secretary Farm Mutual Automobile Insurance Company, State Farm Fire
and Casualty Company; 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 Assurance Company
Roger J. Lehman Director Director -- State Farm General Insurance Company
(1990-1997), State Farm Life and Accident Assurance Company
(1992-present)
</TABLE>
29-------
<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>
NAME AND ADDRESS POSITION WITH STATE FARM PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- ---------------------- ------------------------ -----------------------------------------------------------
<S> <C> <C>
Nancy A. Behrens Vice President --Life Vice President -- Life Process Support (1999-present),
Process Support Actuary (1996-1998), -- Management Assistant (prior to
1996) State Farm Life and Accident Assurance Company, State
Farm Life Insurance Company
Kim M. Brunner Vice President and Vice President and General Counsel (1/99-present) -- and
General Counsel Vice President and Regulatory General Counsel
(1997-1998) -- State Farm General Insurance Company; Vice
President and General Counsel (9/98-present) -- State Farm
Life and Accident Assurance Company, State Farm Annuity and
Life Insurance Company; Senior Vice President and General
Counsel (9/98-present) -- Vice President and Regulatory
General Counsel (1997-9/98) -- and Vice President-Counsel
(1993-1997) -- State Farm Mutual Automobile Insurance
Company; Vice President and General Counsel
(1998-present), -- Vice President and Regulatory General
Counsel (9/98-present) -- State Farm Fire and Casualty
Company
James G. Fisher Vice President -- Vice President -- Operations (1995 - present) -- State Farm
Operations Life Insurance Company
Danny L. Scott, M.D. Vice President and Vice President and Medical Director -- State Farm Life
Medical Director Insurance Company, 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 -- State Farm Life Insurance
Controller 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);
Vice President and Controller -- State Farm Mutual
Automobile Insurance Company, State Farm Fire and Casualty
Company (1999-present)
Darrell W. Beernink Vice President and Vice President and Actuary -- Health -- State Farm Mutual
Actuary Automobile 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
Terry L. Huff Vice President -- Vice President -- Advanced Products (1998 - present), --
Advanced Products Assistant Vice 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
Compliance Vice President -- 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>
- ---------
30
<PAGE>
National Union Fire Insurance Company has issued a fidelity bond in the amount
of $5 million covering State Farm's directors, officers and employees.
State Farm's Fixed Account Option. The Fixed Account is part of State Farm's
general account assets. State Farm uses its general account assets to support
its 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 Fixed Account's assets.
Because of exemptive and exclusionary provisions, State Farm has not registered
interests in the Fixed Account under the Securities Act of 1933, nor has State
Farm registered the Fixed Account as an investment company under the 1940 Act.
Accordingly, neither the Fixed Account nor any interests therein are subject to
the provisions of these Acts and, as a result, the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this prospectus relating
to the Fixed Account. The disclosure regarding the Fixed Account may, however,
be subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in a
prospectus.
THE VARIABLE ACCOUNT 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. State Farm uses the Variable Account to support the Policies as well
as for other purposes permitted by law.
The Variable Account is registered with the SEC as a unit investment trust under
the 1940 Act and qualifies as a "separate account" within the meaning of the
federal securities laws. Such registration does not involve any supervision by
the SEC of the management of the Variable Account or State Farm. State Farm has
established other separate investment accounts, of which State Farm Life and
Accident Assurance Company Variable 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. Please see the accompanying prospectus for the
Trust for more information concerning the investment adviser and investment
sub-adviser.
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
31-------
<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, State Farm will advise Owners 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. Please consult counsel or other competent tax advisors
for more complete information. This discussion is based upon State Farm's
understanding of the present Federal income tax laws. State Farm makes no
representation as to the likelihood of continuation of the present Federal
income tax laws or as to how the Internal Revenue Service (the "IRS") may
interpret such laws.
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. State Farm intends 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
gift, estate, transfer, and other tax consequences of ownership or receipt of
Policy proceeds depend on the circumstances of each Owner or Beneficiary.
Consult a tax advisor 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.
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32
<PAGE>
Distributions other than Death Benefits from Modified Endowment
Contracts. Policies classified as Modified Endowment Contracts are subject to
the following tax rules:
(1) All distributions, including distributions upon surrender 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.
If a Policy becomes a Modified Endowment Contract, distributions that occur
during the Policy Year will be taxed as distributions from a Modified Endowment
Contract. In addition, distributions from a Policy within two years before it
becomes a Modified Endowment Contract will be taxed in this manner. This means
that a distribution made from a Policy that is not a Modified Endowment Contract
could later become taxable as a distribution from a Modified Endowment Contract.
Distributions other than Death Benefits 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. If a loan from a Policy that is not a Modified Endowment Contract is
outstanding when the Policy is canceled or lapses, then the amount of the
outstanding loan will be taxed as if it were a distribution from the Policy.
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.
Business Uses of the Policy. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax advisor. In recent years, moreover, 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.
Our Income Taxes. At the present time, we make no charge for any Federal, state
or local taxes (other than the charge for state and local premium taxes) that we
incur that may be attributable to the Variable Account or its Subaccounts. We do
have the right in the future to make additional charges for any such tax or
other economic burden resulting from the application of the tax laws that we
determine is attributable to the Variable Account or its Subaccounts.
Under current laws in several states, we may incur state and local taxes (in
addition to premium taxes). These taxes are not now significant and we are not
currently charging for them. If they increase, we may deduct charges for such
taxes.
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. 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
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<PAGE>
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% 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. State Farm has filed a registration statement under the
Securities Act of 1933 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. You may obtain the omitted information 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).
Insurance Marketplace Standards Association. State Farm Life Insurance Company
and State Farm Life and Accident Assurance Company are members of the Insurance
Marketplace Standards Association (IMSA). IMSA is an independent and voluntary
organization created by the American Council of Life Insurance (ACLI) to improve
customer confidence in the life insurance industry. Life insurers that are
members of IMSA agree to meet and maintain high standards of ethical conduct in
their dealings with consumers for individual life insurance and annuity
products.
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. Although we cannot predict
the outcome of any litigation with certainty, State Farm believes that at the
present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on the Variable Account or State Farm.
Legal Matters. The legal matters in connection with the Policy described in this
prospectus have been passed on by Kim M. Brunner, 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
- ---------
34
<PAGE>
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 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,
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<PAGE>
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, capital
and surplus of State Farm Life and Accident Assurance Company as of
December 31, 1999 and 1998, and the related statutory basis statements of
operations and changes in capital and surplus, and cash flows for the years then
ended, appearing in this prospectus have been audited by 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, State Farm prepared these financial statements in conformity with the
accounting practices prescribed or permitted by the Insurance Department of the
State of Illinois (statutory basis), which practices differ from generally
accepted accounting principles (GAAP). The effect on the financial statements of
the variances between the statutory basis of accounting and GAAP, although not
reasonably determinable, are presumed to be material. Therefore, their report
contains an adverse opinion on the financial statements of 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, capital and surplus of State Farm Life and Accident Assurance
Company as of December 31, 1999 and 1998, and the related statutory basis
statements of operations and changes in capital and surplus, and cash flows for
the years then ended, as well as the Report of the Independent Accountants,
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.
The audited GAAP basis statements of assets, liabilities and policy owners'
equity of the Variable Account as of December 31, 1999, and the related
statements of operations and changes in policy owners' equity for the year then
ended and the statement of changes in policy owners' equity for the period
December 9, 1998 (commencement of operations) to December 31, 1998, also appear
in Appendix B.
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36
<PAGE>
APPENDIX A
EXAMPLE OF SURRENDER CHARGES
<TABLE>
POLICY ISSUED TO MALE AGE POLICY ISSUED TO MALE AGE
35 50
-------------------------- --------------------------
$50,000
INCREASE $50,000
IN BASIC INCREASE
AMOUNT, IN BASIC
BEGINNING $100,000 POLICY $100,000 AMOUNT,
- -------------------------------- INITIAL BEGINNING OF INITIAL BEGINNING OF
POLICY POLICY BASIC YEAR 16 (AGE BASIC YEAR 16 (AGE
YEAR MONTH AMOUNT 50) 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.
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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, 1999 AND 1998
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY VARIABLE
LIFE SEPARATE ACCOUNT
REPORT ON AUDIT OF FINANCIAL STATEMENTS
DECEMBER 31, 1999
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38
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS........ 40
FINANCIAL STATEMENTS:
Statements of Admitted Assets,
Liabilities, Capital and Surplus --
Statutory Basis as of December 31,
1999 and 1998......................... 41
Statements of Operations -- Statutory
Basis for the years ended December 31,
1999 and 1998......................... 42
Statements of Changes in Capital and
Surplus -- Statutory Basis for the
years ended December 31, 1999 and
1998.................................. 43
Statements of Cash Flows -- Statutory
Basis for the years ended December 31,
1999 and 1998......................... 44
NOTES TO FINANCIAL STATEMENTS --
Statutory Basis......................... 45-51
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION...... 53
SUPPLEMENTAL SCHEDULE OF ASSETS AND
LIABILITIES............................. 54-55
REPORT OF INDEPENDENT ACCOUNTANTS ON
SEPARATE ACCOUNT FINANCIAL STATEMENTS... 57
SEPARATE ACCOUNT FINANCIAL STATEMENTS.... 58-64
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company
Bloomington, Illinois
We have audited the accompanying statutory statements of admitted assets,
liabilities, capital and surplus of State Farm Life and Accident Assurance
Company (the Company) as of December 31, 1999 and 1998, and the related
statutory statements of operations, of changes in capital and surplus, and of
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described more fully in Note 2, these financial statements were prepared by
the Company in conformity with accounting practices prescribed or permitted by
the Illinois Department of Insurance (statutory basis), which practices differ
from accounting principles generally accepted in the United States. When
statutory basis financial statements are presented for purposes other than for
filing with a regulatory agency, auditing standards generally accepted in the
United States require that an auditor's report on them state whether they are
presented fairly in conformity with accounting principles generally accepted in
the United States. The effects on the financial statements of the variances
between the statutory basis of accounting and accounting principles generally
accepted in the United States, although not reasonably determinable, are
presumed to be material.
In our opinion, because of the effects of the matter referred to in the
preceding paragraph, the financial statements audited by us do not present
fairly, in conformity with accounting principles generally accepted in the
United States, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended.
Also, in our opinion, the financial statements audited by us present fairly, in
all material respects, the admitted assets, liabilities, capital and surplus of
the Company as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended, on the basis of accounting
described in Note 2.
[/S/ PRICEWATERHOUSECOOPERS LLP]
Chicago, IL
February 22, 2000
- ---------
40
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, CAPITAL AND SURPLUS -- STATUTORY
BASIS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Bonds:
United States government $184,207,498 $244,471,277
Other governmental units 72,451,747 57,164,370
Public utility 94,242,246 128,026,646
Industrial and other 432,507,219 306,202,747
------------ ------------
783,408,710 735,865,040
------------ ------------
Policy loans 64,863,099 60,525,969
Cash (645,660) 861,505
Short-term investments 7,217,123 12,055,757
Accounts receivable -- investment sales -- 1,600
------------ ------------
71,434,562 73,444,831
------------ ------------
Total cash and invested assets 854,843,272 809,309,871
Federal income taxes recoverable 12,409 7,861
Premiums deferred and uncollected 2,522,280 2,649,754
Investment income due and accrued 15,679,600 14,716,046
Other assets 370,998 453,895
Assets held in separate accounts 12,808,024 1,343,832
------------ ------------
Total admitted assets $886,236,583 $828,481,259
============ ============
LIABILITIES
Aggregate reserves for life polices and contracts $586,974,317 $557,185,493
Supplementary contracts without life contingencies 20,313,291 18,433,678
Policy and contract claims 1,777,480 4,408,668
Policyholders' dividend accumulations 54,774,435 50,208,442
Dividends to policyholders payable in the following year 18,570,111 19,418,940
Advance premiums, deposits and other policy and contract
liabilities 11,790,242 11,586,303
Interest maintenance reserve 2,783,126 2,757,104
Commissions payable 251,249 224,998
Other liabilities 13,478,918 14,673,907
Liabilities related to separate accounts 12,784,159 1,324,003
Federal income taxes due or accrued 28,502 28,502
Federal income taxes (payable to affiliates) 4,313,293 5,394,936
Asset valuation reserve 1,933,148 1,644,174
------------ ------------
Total liabilities 729,772,271 687,289,148
------------ ------------
CAPITAL AND SURPLUS
Common stock, $100 par value; 10,000 shares authorized,
issued and outstanding 1,000,000 1,000,000
Paid-in surplus 2,000,000 2,000,000
Group contingency life reserve 92,659 94,076
Unassigned surplus 153,371,653 138,098,035
------------ ------------
Total capital and surplus 156,464,312 141,192,111
------------ ------------
Total liabilities, capital and surplus $886,236,583 $828,481,259
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
41-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Income:
Premiums and annuity considerations $102,978,097 $92,257,039
Net investment income 58,277,698 55,110,410
Considerations for supplementary contracts and dividend
accumulations 14,527,132 13,582,991
Other 387,704 229,795
------------ -----------
176,170,631 161,180,235
------------ -----------
Benefits and other expenses:
Death benefits 13,264,244 14,386,654
Surrender benefits and other fund withdrawals 30,584,986 24,877,721
Other benefits and claims 6,438,185 4,935,106
Payments on supplementary contracts and dividend
accumulations 13,176,141 11,194,520
Net transfers to separate accounts 9,550,126 1,222,986
Increase in policy and contract reserves 36,101,057 41,809,279
Commissions 6,106,512 6,146,782
General insurance expenses 21,436,725 16,670,096
Taxes, licenses and fees 1,908,547 1,398,500
------------ -----------
138,566,523 122,641,644
------------ -----------
Net gain from operations before dividends to policyholders
and federal income taxes incurred 37,604,108 38,538,591
Dividends to policyholders 17,204,735 18,992,099
------------ -----------
Net gain from operations before federal income taxes 20,399,373 19,546,492
Federal income taxes incurred (excluding capital gains) 8,130,821 8,597,590
------------ -----------
Net gain from operations before net realized capital gains 12,268,552 10,948,902
Net realized capital gains or (losses) less capital gains
tax of $39,672 and $76,138 (excluding $342,934 and
($44,687) transferred to the IMR) in 1999 and 1998,
respectively 144,985 (52,078)
------------ -----------
Net income $ 12,413,537 $10,896,824
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
42
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Common stock:
Balance at beginning and end of year $ 1,000,000 $ 1,000,000
------------ ------------
Paid in surplus:
Balance at beginning and end of year 2,000,000 2,000,000
------------ ------------
Group contingency life reserve:
Balance at beginning of year 94,076 115,796
Transfer from unassigned surplus (1,417) (21,720)
------------ ------------
Balance at end of year 92,659 94,076
------------ ------------
Unassigned surplus:
Balance at beginning of year 138,098,035 134,787,645
Net income 12,413,537 10,896,824
Net unrealized capital gains (1,851) 656
Surplus contributed to separate accounts - (20,000)
Other changes in surplus in separate accounts statement 3,518 64,936
Change in nonadmitted assets 42,071 66,110
Change in asset valuation reserve (288,974) (144,939)
Change in group contingency life reserve 1,417 21,720
Increase in reserves on account of change in valuation
basis -- (574,917)
Change in provision for class action settlement amounts 3,103,900 (7,000,000)
------------ ------------
Balance at end of year 153,371,653 138,098,035
------------ ------------
Total capital and surplus $156,464,312 $141,192,111
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
43-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash from operations:
Premiums and annuity considerations $103,692,805 $ 92,693,765
Other premiums, considerations and deposits, allowances
and reserve adjustments and other income 14,604,380 13,592,046
Investment income received (excluding realized
gains/losses and net of investment expenses) 58,328,980 55,020,894
Life and accident and health benefits paid (17,060,316) (13,991,124)
Surrender benefits and other fund withdrawals paid (30,584,986) (24,877,721)
Other benefits to policyholders paid (17,268,200) (15,396,683)
Commissions, other expenses and taxes paid (excluding
federal income taxes) (26,653,065) (24,172,667)
Dividends to policyholders paid (18,053,564) (17,910,549)
Federal income taxes paid (excluding tax on capital gains) (9,180,544) (5,264,609)
Net transfers from separate accounts (10,205,866) (1,290,766)
------------ ------------
Net cash from operations 47,619,624 58,402,586
------------ ------------
Cash from investments:
Proceeds from investments sold, matured or repaid:
Bonds 115,082,868 36,841,736
Stocks and mortgage loans -- 439,289
Net loss on cash and short-term investments (297) --
------------ ------------
Total investment proceeds 115,082,571 37,281,025
Tax on capital gains 76,140 20,932
------------ ------------
Total cash from investments 115,006,431 37,260,093
------------ ------------
Cost of investments acquired (long term only):
Bonds 163,097,960 110,764,003
Miscellaneous applications -- 1,600
Total investments acquired 163,097,960 110,765,603
------------ ------------
Increase in policy loans and premium notes 4,338,980 5,297,748
------------ ------------
Net cash from investments (52,430,509) (78,803,258)
------------ ------------
Cash from financing and miscellaneous sources:
Other cash provided 608,660 1,867,183
Other applications (net) (2,143,574) (447,307)
------------ ------------
Net cash from financing and miscellaneous sources (1,534,914) 1,419,876
------------ ------------
Net change in cash and short-term investments (6,345,799) (18,980,796)
Cash and short-term investments, beginning of year 12,917,262 31,898,058
------------ ------------
Cash and short-term investments, end of year $ 6,571,463 $ 12,917,262
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
44
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1. NATURE OF BUSINESS OPERATIONS
State Farm Life and Accident Assurance Company (the Company) is a wholly-owned
subsidiary of State Farm Mutual Automobile Insurance Company (SFMAIC). The
Company is licensed in four states and primarily markets individual life and
annuity products through an independent contractor agency force. The Company's
individual life insurance products include traditional whole life, universal
life, term insurance and variable universal life contracts, which together
account for approximately 83% of premium revenue. Individual annuity products
including variable annuity contracts account for an additional 17%. The Company
also writes small amounts of group credit life and employee group life.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The accompanying financial statements have been prepared on a statutory basis in
accordance, in all material respects, with accounting practices prescribed in
the National Association of Insurance Commissioners (NAIC) Annual Statement
Instructions and Accounting Practices and Procedures manuals, as well as state
laws, regulations and general administrative rules. Statutory basis accounting
also permits the use of accounting practices which differ from those prescribed
in the sources referred to above, when such practices are approved by the
Illinois Department of Insurance. The Company has used no such permitted
accounting practices in the preparation of these financial statements that would
be deemed to have a material effect on the determination of its financial
position as of December 31, 1999 and 1998, or the results of its operations for
the years then ended.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant accounting practices include:
A. INVESTMENTS
Bonds are stated at values prescribed by the NAIC. In general, bonds are stated
at amortized cost. Under GAAP, debt securities would be classified into three
categories: held-to-maturity, trading and available-for-sale. Held-to-maturity
securities would be reported at amortized cost. Trading securities would be
reported at fair value, with unrealized gains and losses included in earnings.
Available-for-sale securities would be reported at fair value, with unrealized
gains and losses, net of applicable taxes, reported in a separate component of
surplus.
Prepayment assumptions for loan-backed bonds are internal estimates based on
historical prepayment patterns. Prepayment assumptions for structured securities
are based on estimates from various data reporting services. These assumptions
are consistent with the current interest rate and economic environment. The
retrospective adjustment method is used to value all securities.
Policy loans are stated at the aggregate of unpaid loan balances which are not
in excess of cash surrender values of related policies.
Short-term investments are stated at cost which approximates market.
Investment income is recorded when earned. Realized gains and losses on sale or
maturity of investments are determined on the basis of specific identification.
Aggregate unrealized capital gains and losses are credited or charged directly
to unassigned surplus.
B. PREMIUMS DEFERRED AND UNCOLLECTED
Premiums deferred and uncollected represent modal premiums, either due and
uncollected or not yet due, where policy reserves have been provided on the
assumption that the full premium for the current policy year has been collected.
Also, where policy reserves have been provided on a continuous premium
assumption, premiums uncollected are similarly defined.
C. AGGREGATE RESERVES FOR LIFE POLICIES AND CONTRACTS
Policy reserves on life insurance are based on statutory mortality and interest
requirements and are computed using principally net level and modified
preliminary term methods with interest rates ranging from 3% to 5.5%. The use of
a modified reserve basis partially offsets the effect of immediately expensing
policy acquisition costs. Policy reserves on annuities are based on statutory
mortality and interest requirements with interest rates ranging from 3% to 7%.
Under GAAP, reserves are based on mortality, lapse, withdrawal and interest
rates that are based on Company experience.
D. POLICYHOLDERS' DIVIDENDS
All of the Company's life insurance business is written on the participating
basis. Policyholders' dividends are determined
45-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
annually by the Board of Directors. Amounts declared and estimated to be payable
to policyholders in the forthcoming year have been included in the accompanying
financial statements as a liability based on approved dividend scales. Under
GAAP, dividends are anticipated and may be considered as a planned contractual
benefit when computing the value of future policy benefits.
E. FEDERAL INCOME TAXES
The Company's federal income tax return is consolidated with SFMAIC and its
affiliates.
The consolidated federal income tax liability is apportioned to each entity in
accordance with a written agreement. The allocation is based upon separate
return calculations with current credit for net losses and tax credits.
Intercompany federal income tax balances are settled as follows:
1) intercompany federal income tax receivables and payables which relate to the
current tax year will be settled within ninety (90) days; 2) any refunds of
federal income tax will be settled within sixty (60) days of receipt of the
refund; and 3) any payments of federal income tax due will be settled within
sixty (60) days of payment of the tax due. Changes in prior year tax liability
may result in reallocation of prior year tax.
The Company's provision for federal income taxes is computed in accordance with
those sections of the Internal Revenue Code applicable to life insurance
companies and is based on income which is currently taxable. Under GAAP,
deferred federal income taxes would be provided for temporary differences
between the tax basis and financial statement basis of assets and liabilities.
F. PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
Pension Plan
The Company and affiliated insurers sponsor a defined benefit plan covering
substantially all of its employees.
The Company's funding policy is to contribute (1) at least the current service
cost on a current basis and to fund any unfunded liabilities over the
appropriate period and (2) not more than the maximum amount that may be deducted
for federal income tax purposes.
Contributions are allocated among participating companies based on ratios of
annual compensation rates.
Under GAAP, periodic net pension expense would be based on the cost of
incremental benefits for employee service during the period, interest on the
projected benefit obligation, actual return on plan assets and amortization of
actuarial gains and losses rather than the funding policy.
Other Postretirement Benefits
The Company and its affiliated insurers currently provide certain health care
and life insurance benefits pursuant to plans sponsored by its parent, SFMAIC.
Eligible former employees, eligible former agents and their eligible dependents
currently may participate in these plans.
As a result of the policy promulgated by the NAIC concerning the treatment of
certain postretirement benefits, beginning in 1993, the Company changed its
method of accounting for the costs of the potential health care and life
insurance benefits provided to those already eligible or retired post-career
associates to the accrual method, and elected to amortize its transition
obligation attributable to these potential benefits over twenty years.
Under GAAP, accounting for postretirement benefits requires an additional
accrual for the estimated cost of the potential benefit obligation under the
plans for active, but not yet eligible, employees and their dependents.
G. INTEREST MAINTENANCE RESERVE AND ASSET VALUATION RESERVE
Interest Maintenance Reserve (IMR) -- Realized capital gains and losses, due to
interest rate fluctuations, net of tax on short-term and long-term fixed income
investments are applied in this calculation. These gains and losses are
amortized into income over the approximate remaining life of the investment
sold. The IMR is not calculated under GAAP.
Asset Valuation Reserve (AVR) -- Realized gains and losses due to credit risk
fluctuations and unrealized gains and losses on applicable invested assets are
reflected in the calculation of this reserve. Changes in the AVR are charged or
credited directly to unassigned surplus and include no voluntary contributions
in 1999 or 1998. The AVR is not calculated under GAAP.
H. SEPARATE ACCOUNTS
The Company issues individual variable universal life and annuity contracts.
Deposits received in connection with these contracts are placed in the Company's
separate accounts and general accounts within certain limits.
A separate account is an accounting entity segregated as a discrete operation
within an insurance company. Assets held in
- ---------
46
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
separate accounts under variable life and variable annuity contracts are
invested as designated by the contract holder in shares of mutual funds which
are managed either by the Company or by an outside manager.
Separate account assets are reported at market value and liabilities are
recorded at amounts equal to assets. Except for rights of the Company as a
result of surplus contributions made to the separate accounts, contract holders
are the only persons having rights to any assets in the separate accounts or to
income arising from such assets.
I. RECOGNITION OF PREMIUMS AND ANNUITY CONSIDERATIONS AND RELATED EXPENSES
Premiums and annuity considerations are recognized over the premium paying
period of the policies, whereas acquisition costs such as commissions and other
costs related to new business are expensed as incurred. For investment contracts
(those without mortality risk, such as immediate annuities with benefits paid
for a period certain) and contracts that permit the insured to change the amount
and timing of premium payments (such as universal life products), deposits are
recorded as revenue when received. Under GAAP, the deposits are recorded as
increases to liabilities and revenue is recognized as mortality and other
assessments are made to policyholders. Additionally, acquisition costs under
GAAP are capitalized and amortized over the policy period.
J. NONADMITTED ASSETS
Certain assets designated as "nonadmitted" assets aggregating $198,936 and
$241,007 at December 31, 1999 and 1998, respectively, are not recognized by
statutory accounting practices. These assets are excluded from the balance
sheet, and the net change in such assets is charged or credited directly to
unassigned surplus. Under GAAP, such assets would be recognized at the lower of
cost or net realizable value.
The preceding discussion highlights the significant variances between the
statutory accounting practices followed by the Company and GAAP. The effect of
these differences has not been determined but is presumed to be material.
3. BONDS AND OTHER DEBT SECURITIES
The amortized cost and estimated market values of investments in debt securities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $255,503 $11,914 $ (2,758) $264,659
Obligations of states and political subdivisions 5,173 48 (114) 5,107
Corporate bonds 529,950 2,302 (21,040) 511,212
-------- ------- -------- --------
Total $790,626 $14,264 $(23,912) $780,978
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $302,292 $31,174 $ (2) $333,464
Obligations of states and political subdivisions 2,799 100 -- 2,899
Corporate bonds 442,830 22,436 (311) 464,955
-------- ------- ----- --------
Total $747,921 $53,710 $(313) $801,318
======== ======= ===== ========
</TABLE>
47-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
The amortized cost and estimated market value of debt securities, by contractual
maturity, are shown below (in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 41,336 $ 40,832
Due after one year through
five years 303,042 299,344
Due after five years through
ten years 373,814 369,252
Due after ten years 72,434 71,550
-------- --------
Total $790,626 $780,978
======== ========
</TABLE>
Gross proceeds and realized gains and losses on bonds sold at the discretion of
the Company for the year ended December 31, were (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Proceeds $ 75,511 $ --
Gross gains 516 --
Gross losses (47) --
</TABLE>
At December 31, 1999, bonds carried at amortized cost of $1,575,401 were on
deposit with regulatory authorities.
4. NET INVESTMENT INCOME
The components of net investment income earned by type of investment for the
years ended December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Bonds $54,190 $50,351
Short-term investments 453 1,349
Policy loans 3,987 3,706
Mortgage loans -- 3
------- -------
Gross investment income 58,630 55,409
Investment expenses (352) (299)
------- -------
Net investment income $58,278 $55,110
======= =======
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each significant class of financial instruments for which it is practicable to
estimate that value:
Bonds and Short-Term Investments
Fair values for issues traded on public exchanges are based on the market price
in such exchanges at year end. For issues that are not traded on public
exchanges, fair values were estimated based on market comparables or internal
analysis.
Separate Accounts
The fair value of the assets held in separate accounts and corresponding
liabilities are estimated based on the fair value of the underlying assets.
Cash
The carrying amount is a reasonable estimate of fair value.
Deferred Annuities
Fair values were approximated by the amount due to the annuity holder as if the
annuity contract was surrendered at year end.
Advance Premiums
Fair values were approximated by the amount due to the policyholder as if the
policy was surrendered at year end.
- ---------
48
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
Settlement Options Without Life Contingencies
Settlement options without life contingencies are similar to demand deposits.
The fair value is the amount payable on demand at year end. The estimated fair
values and statement values of the Company's financial instruments at December
31, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Bonds $773,761 $783,409 $789,262 $735,865
Bond reserves -- 1,921 -- 1,618
-------- -------- -------- --------
$773,761 $781,488 $789,262 $734,247
======== ======== ======== ========
Cash $ (646) $ (646) $ 862 $ 862
======== ======== ======== ========
Short-term investments: $ 7,217 $ 7,217 $ 12,056 $ 12,056
Short-term reserves -- 7 -- 25
-------- -------- -------- --------
$ 7,217 $ 7,210 $ 12,056 $ 12,031
======== ======== ======== ========
Separate accounts $ 12,808 $ 12,808 $ 1,344 $ 1,344
======== ======== ======== ========
Financial liabilities:
Deferred annuity reserves $117,688 $118,753 $123,768 $125,022
Advance premiums 1,752 1,770 1,932 1,949
Settlement options without life contingencies 20,313 20,313 18,434 18,434
Separate accounts 12,784 12,784 1,324 1,324
</TABLE>
6. FEDERAL INCOME TAXES
The difference between the Company's effective income tax rate and the statutory
rate for both 1999 and 1998 is primarily due to non-deductible policyholder
dividends, unamortized deferred acquisition costs and tax reserves.
The examinations of the Company's federal income tax returns through 1987 have
been closed by the Internal Revenue Service. Returns for 1988, 1989 and 1990
have been examined. Although a few issues remain open, no open issue would have
a material effect on surplus. Returns for 1991, 1992 and 1993 are currently
under examination. Although the audit is still in progress at this time, there
have been no individual issues or issues in the aggregate raised that would
require adjustments which would have a material effect on surplus.
7. PENSION PLANS AND OTHER
POSTRETIREMENT BENEFITS
A. Pension Plans
No pension cost was allocated in 1999 or 1998 as the plan was subject to the
full funding limitation of the Internal Revenue Code. A comparison of
accumulated plan benefits, determined in accordance with Statement of Financial
Accounting Standards No. 35, and plan net assets for the non-contributory
49-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
defined benefit pension plan of the Company and its parent and other affiliates
as of December 31, is presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Actuarial present value of
accumulated plan benefits:
Vested $3,579,461 $3,325,703
Nonvested 69,327 63,895
---------- ----------
$3,648,788 $3,389,598
========== ==========
Net assets available for
benefits $8,761,550 $8,285,652
========== ==========
</TABLE>
Benefits paid amounted to $163,776,000 and $145,034,703 in 1999 and 1998,
respectively. The assumed rate of return on plan assets used in determining the
actuarial present value of vested and nonvested accumulated plan benefits was
7.0% for both 1999 and 1998. In addition, the discount rate was 7.0% for both
1999 and 1998. The assumed rate of compensation increases ranged from 5.5% to
12.8% in 1999 and 1998 and varies by the attained age of the employee.
The Company elected to change its plan year to a calendar year beginning January
1, 1999.
The Company participates with its affiliates in a qualified defined contribution
plan. Contributions recorded for the years ended December 31, 1999 and 1998,
were $201,267 and $162,710, respectively. Benefits, generally available upon
retirement, are paid from net assets available for plan benefits.
B. Other Postretirement Benefits
The Company's share of the net post-career benefit cost for the year ended
December 31, 1999, was $585,098 and included paid benefits, the expected cost of
the potential health care and life insurance benefits for newly eligible
post-career associates, interest cost and amortization of the transition
obligation.
At December 31, 1999 and 1998, respectively, the Company's share of the recorded
unfunded post-career benefit obligation attributable to the potential health
care and life insurance benefits for post-career associates was $1,742,316 and
$1,260,752. The Company's share of the remaining transition obligation for these
potential benefits was $807,638 and $792,161 at December 31, 1999 and 1998,
respectively, which is being amortized over 20 years, beginning in 1993. The
Company's share of unrecognized net (gains) or losses, resulting from experience
different from that assumed and/or changes in actuarial assumptions, was
$187,350 at December 31, 1999. The Company's share of the estimated cost of the
potential benefit obligation under the plans for active, but not yet eligible
employees, agents, and their qualifying dependents at January 1, 1999, was
$4,252,064, which is not accrued in these financial statements. At January 1,
1999 and 1998, the discount rate used in determining the accumulated post-career
benefit obligation attributable to these potential benefits was 6.0% and 6.5%,
respectively, and the 1999 health care cost trend rate is 9.0% for the first
year, graded to 6.0% over the following five years.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the Company's share of
the post-career benefit obligation attributable to the potential health care
insurance benefits for post-career associates by $227,328 as of January 1, 1999,
and the estimated eligibility and interest cost components of the net periodic
post-career benefit cost for 1999 by $110,553.
The Company participates with its affiliates in an unfunded deferred
compensation plan for highly compensated employees and independent contractor
agents. As the Company currently has no participants in this plan, there was no
liability established for 1999 or 1998.
8. OTHER RELATED PARTY TRANSACTIONS
The Company, its parent, and its affiliates share certain administrative,
occupancy and marketing expenses. Such expenses are allocated to the Company
based on surveys and usage studies and totaled approximately $14,552,000 and
$11,738,000 in 1999 and 1998, respectively.
At December 31, 1999 and 1998, total amounts owed to the parent company,
exclusive of federal income taxes, were approximately $5,479,000 and $2,572,000,
respectively. Total amounts owed to affiliates were approximately $6,000 at both
December 31, 1999 and 1998, respectively.
9. CONTINGENT LIABILITIES
On August 28, 1998, the Company entered into a Stipulation of Settlement with
attorneys for the plaintiffs in a class action lawsuit involving alleged
misleading life insurance sales practices in connection with the Company's sale
of traditional and universal life insurance policies in the United States from
- ---------
50
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
1982 through 1997. The Company denies the allegations in this lawsuit but
entered into a settlement in order to limit additional expense and burden upon
operations. The proposed settlement received court approval in a fairness
hearing concluded on February 11, 1999.
Pursuant to the terms of the proposed settlement, the Company has agreed to
provide policyowners in the class with options that include policy enhancements,
the right to purchase an enhanced value policy or enhanced value annuity and a
claim review process. While it has not been possible to predict with certainty
the ultimate dollar amount that will be paid or credited to current and former
policyholders under the terms of this settlement, the Company elected to record,
on an estimated basis, a liability for such amount in the December 31, 1998
financial statements. Included in this liability was an amount for estimated
legal and administrative costs which would be incurred in connection with the
settlement. An amount of $7,000,000 was included in the liabilities of the
Company as of December 31, 1998 for such provision with a corresponding charge
recorded in the Statement of Changes in Capital and Surplus.
During 1999, in its Statement of Operations, the Company reflected charges for
legal and administrative expenses associated with the class action settlement.
In addition, the Company has reflected charges for payments to be made or
credited to current and former policyholders in accordance with the terms of the
settlement agreement. Legal and administrative expenses of $2,253,818 and
settlement contribution amounts totaling $1,149,302 have been reflected in
arriving at the amount of 1999 Net Income. Because of the uncertainty regarding
the ultimate number of claims to be settled, the policy enhancements to be made
and the ongoing administrative expenses, the Company is continuing to reflect in
its liabilities the amount of $3,896,100 as a general provision for additional
future charges in connection with this class action lawsuit.
The Company is subject to liabilities of a contingent nature which may from time
to time arise. Such liabilities could result from sales practices, income tax
matters, guaranty fund assessments or other occurrences that take place in the
normal course of doing business. In addition, the life insurance industry has
not been exempt from the impact of an increasingly litigious environment which
is being experienced in the United States. Liabilities arising as a result of
these factors, or other such contingencies, that are not provided for elsewhere
in these financial statements are not reasonably estimable and are not
considered by management to be material in relation to the financial position of
the Company
10. DIVIDEND RESTRICTIONS
The maximum amount of dividends which can be paid to shareholders of insurance
companies domiciled in Illinois without the prior approval of the commissioner
is subject to restrictions related to statutory surplus and net income. For
companies doing business in New York, such payments are subject to similar
restrictions related to statutory surplus.
51-------
<PAGE>
SUPPLEMENTAL SCHEDULE
- ---------
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
SUPPLEMENTAL FINANCIAL INFORMATION
To the Board of Directors
State Farm Life and Accident Assurance Company
Bloomington, Illinois
In our opinion, the accompanying supplemental schedule of assets and liabilities
as of and for the year ended December 31, 1999 is fairly stated in all material
respects in relation to the basic financial statements, taken as a whole, of
State Farm Life and Accident Assurance Company for the year ended December 31,
1999, which is covered by our report dated February 22, 2000 presented in the
first section of this document. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. This information is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements.
[/S/ PRICEWATERHOUSECOOPERS LLP]
Chicago, IL
February 22, 2000
53-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA
DECEMBER 31, 1999
The following is a summary of certain financial data (in thousands) included in
other exhibits and schedules subjected to audit procedures by independent
auditors and utilized by actuaries in the determination of reserves.
<TABLE>
<S> <C>
Investment income earned:
U.S. government bonds $ 17,497
Other bonds (unaffiliated) 36,693
Premiums notes, policy loans and liens 3,987
Short-term investments 453
-----------
Gross investment income $ 58,630
===========
Bonds and short-term investments by class and maturity:
Bonds by maturity - statement value
Due within one year or less $ 41,336
Over 1 year through 5 years 303,042
Over 5 years through 10 years 373,814
Over 10 years through 20 years 64,816
Over 20 years 7,618
-----------
Total by maturity $ 790,626
===========
Bond by class - statement value
Class 1 $ 712,420
Class 2 76,039
Class 3 2,000
Class 4 167
Class 5 -
Class 6 -
-----------
Total by class $ 790,626
===========
Total bonds publicly traded $ 721,580
===========
Total bonds privately placed $ 69,046
===========
Short term investments - book value $ 7,217
===========
Cash on deposit $ (646)
===========
</TABLE>
- ---------
54
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY)
SUPPLEMENTAL SCHEDULE OF ASSETS AND LIABILITIES
SCHEDULE 1 -- SELECTED FINANCIAL DATA CONTINUED
DECEMBER 31, 1999
<TABLE>
<S> <C>
Ordinary $14,538,128
===========
Credit life $ 9,346
===========
Group life $ 20,464
===========
Amount of accidental death insurance in force under ordinary
policies $ 304,551
===========
Life Insurance with disability provisions in force:
===========
Ordinary $ 10,864
===========
Group life $ 20
===========
Supplementary contracts in force:
Ordinary - not involving life contingencies:
===========
Amount on deposit $ 11,078
===========
Income payable $ 127
===========
Ordinary - involving life contingencies:
===========
Income payable $ 171
===========
Annuities:
===========
Ordinary:
===========
Immediate - amount of income payable $ 2,941
===========
Deferred - fully paid account balance $ 128,067
===========
Deferred - not fully paid - account balance $ 249
===========
Deposit funds and dividend accumulations:
===========
Deposit funds - account balance $ 3,247
===========
Dividend accumulations - account balance $ 54,774
===========
</TABLE>
55-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
REPORT ON AUDIT OF FINANCIAL STATEMENTS
DECEMBER 31, 1999
- ---------
56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of State Farm Life and Accident Assurance
Company and Policy Owners of State Farm Life
and Accident Assurance Company Variable Life Separate Account
In our opinion, the accompanying statement of assets and liabilities and policy
owners' equity and the related statement of operations and changes in policy
owners' equity present fairly, in all material respects, the financial position
of State Farm Life and Accident Assurance Variable Life Separate Account (which
includes the Large Cap Equity Index Fund, Small Cap Equity Index Fund, Bond
Fund, Money Market Fund, International Equity Index Fund, and the Stock and Bond
Balanced Fund thereof) at December 31, 1999, the results of their operations and
the changes in their policy owners' equity for each of the periods presented, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of State Farm Life and
Accident Assurance Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included direct confirmation of the number of
shares owned at December 31, 1999 with State Farm Variable Product Trust,
provides a reasonable basis for the opinion expressed above.
[/S/ PRICEWATERHOUSECOOPERS LLP]
Chicago, IL
February 16, 2000
57-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments at market value:
State Farm Variable Product Trust Funds:
Large Cap Equity Index Fund
40,258 shares (cost $564,197) $ 606,679
Small Cap Equity Index Fund
20,369 shares (cost $201,915) 222,026
Bond Fund
7,858 shares (cost $76,041) 75,200
Money Market Fund
15,691 shares (cost $15,690) 15,690
International Equity Index Fund
11,197 shares (cost $140,865) 162,806
Stock and Bond Balanced Fund
4,119 shares (cost $49,665) 52,523
----------
Total investments 1,134,924
Total assets $1,134,924
==========
LIABILITIES AND POLICY OWNERS' EQUITY
Policy owners' equity $1,134,924
----------
Total liabilities and policy owners' equity $1,134,924
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
58
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
----------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ -------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Dividend income $13,108 $10,782 $ 1,842 $ 251 $ 1,503 $ 66 $ 27,552
------- ------- ------- ----- ------- ------ --------
Expenses:
Mortality and expense risk charges 1,983 571 270 40 480 159 3,503
------- ------- ------- ----- ------- ------ --------
Net investment income (loss) 11,125 10,211 1,572 211 1,023 (93) 24,049
------- ------- ------- ----- ------- ------ --------
Realized gain (loss) on investments (3,759) (1,085) (692) (203) (288) -- (6,027)
Change in unrealized appreciation
(depreciation), net 42,483 20,111 (841) -- 21,940 2,857 86,550
------- ------- ------- ----- ------- ------ --------
Realized and unrealized gain (loss) on
investments 38,724 19,026 (1,533) (203) 21,652 2,857 80,523
------- ------- ------- ----- ------- ------ --------
Net increase in policy owners' equity
from operations $49,849 $29,237 $ 39 $ 8 $22,675 $2,764 $104,572
======= ======= ======= ===== ======= ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
59-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
------------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ -------- -------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ 11,125 $ 10,211 $ 1,572 $ 211 $ 1,023 $ (93) $ 24,049
-------- -------- ------- ------- -------- ------- ----------
Realized (loss) on investments (3,759) (1,085) (692) (203) (288) -- (6,027)
Change in unrealized appreciation
(depreciation), net 42,483 20,111 (841) -- 21,940 2,857 86,550
-------- -------- ------- ------- -------- ------- ----------
Net realized and unrealized gain
(loss) on investments 38,724 19,026 (1,533) (203) 21,652 2,857 80,523
-------- -------- ------- ------- -------- ------- ----------
Net increase in policy owners' equity
from operations 49,849 29,237 39 8 22,675 2,764 104,572
-------- -------- ------- ------- -------- ------- ----------
EQUITY TRANSACTIONS:
- -------------------------------------
Proceeds from units purchased 591,593 174,196 97,753 19,150 152,710 47,579 1,082,981
Transfers (net) including transfers
to or from fixed account (11,059) 28,201 (17,123) (2,312) (2,303) 5,021 425
Payments for surrenders and other
redemptions (33,619) (9,608) (5,469) (1,156) (10,276) (2,841) (62,969)
-------- -------- ------- ------- -------- ------- ----------
Net increase in equity derived from
contract holder transactions 546,915 192,789 75,161 15,682 140,131 49,759 1,020,437
-------- -------- ------- ------- -------- ------- ----------
Total increase in policy owners'
equity 596,764 222,026 75,200 15,690 162,806 52,523 1,125,009
POLICY OWNERS' EQUITY:
- -------------------------------------
Beginning of year 9,915 -- -- -- -- -- 9,915
-------- -------- ------- ------- -------- ------- ----------
End of year $606,679 $222,026 $75,200 $15,690 $162,806 $52,523 $1,134,924
======== ======== ======= ======= ======== ======= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
- ---------
60
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
STATEMENT OF CHANGES IN POLICY OWNERS' EQUITY
FOR THE PERIOD DECEMBER 9, 1998 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31,
1998
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
----------------------------------------------------------------------------------------
STOCK AND
LARGE CAP SMALL CAP MONEY INTERNATIONAL BOND
EQUITY INDEX EQUITY INDEX BOND MARKET EQUITY INDEX BALANCED
FUND FUND FUND FUND FUND FUND COMBINED
------------ ------------ -------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income $ 53 $ -- $ -- $ -- $ -- $ -- $ 53
Realized gain (loss) on investments -- -- -- -- -- -- --
Change in unrealized appreciation
(depreciation), net (138) -- -- -- -- -- (138)
------- ------- ------- ------- ------- ------- -------
Net realized and unrealized (loss) on
investments (138) -- -- -- -- -- (138)
------- ------- ------- ------- ------- ------- -------
Net (decrease) in policy owners' equity
from operations (85) -- -- -- -- -- (85)
------- ------- ------- ------- ------- ------- -------
EQUITY TRANSACTIONS:
- ---------------------------------------
Proceeds from units purchased -- -- -- -- -- -- --
Transfers (net) including transfers to
or from fixed account -- -- -- -- -- -- --
Payments for surrenders and other
redemptions -- -- -- -- -- -- --
Net increase (decrease) in equity
derived from contract holder
transactions -- -- -- -- -- -- --
Increase in equity from surplus
contributed 10,000 -- -- -- -- -- 10,000
------- ------- ------- ------- ------- ------- -------
Net increase in equity derived from
policy owners' equity 10,000 -- -- -- -- -- 10,000
------- ------- ------- ------- ------- ------- -------
Total increase in policy owners' equity 9,915 -- -- -- -- -- 9,915
POLICY OWNERS' EQUITY:
- ---------------------------------------
Beginning of year -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
End of year $ 9,915 $ -- $ -- $ -- $ -- $ -- $ 9,915
======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
61-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Organization
The State Farm Life and Accident Assurance Variable Life Separate Account (the
"Separate Account") is a segregated investment account of the State Farm Life
and Accident Assurance Company (the "Company") and is registered with the
Securities and Exchange Commission as a unit investment trust pursuant to the
provisions of the Investment Company Act of 1940. The Separate Account was
established by the Company on December 9, 1996. Accordingly, it is an accounting
entity wherein all segregated account transactions are reflected.
The assets of the Separate Account are invested in one or more of the portfolios
of the State Farm Variable Product Trust (the "Trust") at the portfolio's net
asset value in accordance with the selection made by the policy owners.
Transactions with Sponsor
A surplus contribution of $10,000 was made to the Separate Account by the
Company in 1998. As an investor in the Separate Account, the Company shares in
the investment performance of the funds held by the Separate Account in relation
to the portion of its ownership of fund shares, which shares are subject to the
same valuation procedures as policy owners' shares. The market value of the
Company's investment in the Separate Account as surplus contributed was $11,993
at December 31, 1999 and $9,915 at December 31, 1998.
2. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities as well as the
disclosure of contingent liabilities at the date of the financial statements. As
a result, actual results reported as income and expenses could differ from the
estimates reported in the accompanying financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments
Investments in the Separate Account are valued by using net asset values which
are based on the daily closing prices of the underlying securities in the
Separate Account funds.
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date (the date the order to
buy or sell is executed). Dividend income is recorded on the ex-dividend date.
The cost of investments sold and the corresponding capital gains and losses are
determined on a specific identification basis. Net investment income and net
realized gains (losses) and unrealized appreciation (depreciation) on
investments are allocated to the policies on each valuation date based on each
policy's pro rata share of the assets of the fund as of the beginning of the
valuation date.
Accumulation Unit Valuation
On each day the New York Stock Exchange (the "Exchange") is open for trading,
the accumulation unit value is determined as of the earlier of 3:00 PM Central
time or the close of the Exchange by dividing the policy owners' share of the
value of each fund's investments and other assets, less liabilities, by the
number of policy holder accumulation units outstanding in the respective fund.
Federal Income Taxes
The Company is taxed as a life insurance company under the provisions of the
Internal Revenue Code. The operations of the Separate Account are part of the
total operations of the Company and are not taxed as a separate entity.
Under Federal Income tax law, net investment income and realized gains (losses)
are retained in the Separate Account and are not taxable until received by the
policy owner or beneficiary in the form of annuity payments or other
distributions.
4. EXPENSES AND DEDUCTIONS
A mortality and expense risk charge is deducted by the Company from the Separate
Account on a daily basis which is equal, on an annual basis, to 0.80% of the
daily net asset value of the policy owners' portion of assets in the Separate
Account. The charge may be adjusted after policy issues, but it is guaranteed
not to exceed 0.90% of net assets. These charges compensate the Company for
assuming these risks under the variable life contract. The disbursements for
mortality and expense risk and premium and death benefit, guarantee risk charge
amounted to $3,503 and $0 during 1999 and 1998, respectively.
At the beginning of each policy month, the Company makes a deduction from the
cash value of the policy, which consists of the cost of insurance for the policy
and any additional benefits
- ---------
62
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
provided by rider, if any for the policy month. In addition, a $6 monthly
expense charge (maximum $8 per month) is deducted which reimburses the Company
for administrative expenses relating to the issuance and maintenance of the
policy. The total amount of monthly deductions during the period was $62,950 and
$0 at December 31, 1999 and 1998, respectively.
A surrender charge may be deducted in the event of a surrender to reimburse the
Company for expenses incurred in connection with issuing a policy. The full
surrender charge will be increased monthly during the first two policy years,
stay constant during the third through sixth years and is reduced each year
after the sixth year until it reaches zero in the tenth policy year. The
surrender fees were $398 and $0 during 1999 and 1998, respectively.
A withdrawal fee is assessed upon the partial withdrawal of funds which is equal
to the lesser of $25 or 2% of the amount withdrawn. There were no withdrawal
fees in 1999 or 1998.
The Company reserves the right to deduct a $25 transfer processing fee for each
transfer in excess of 12 during a policy year.
5. CONTINGENT LIABILITIES
If the assets of any fund exceed required reserves and other liabilities, the
Company may transfer such excess to its general account.
6. POLICY OWNERS' EQUITY
Policy owners' equity is represented by accumulation units in the related
Separate Account as well as the value of the fund shares owned by the Company.
At December 31, 1999 and 1998, the ownership of the Separate Account was
represented by the following accumulation units and accumulation unit values and
surplus contributed. (Multiplication of amounts shown may not equal policy
owners' equity because of rounding.)
1999 POLICY OWNERS' EQUITY
<TABLE>
<CAPTION>
UNIT UNITS POLICY OWNERS'
FUND VALUE OUTSTANDING EQUITY
- --------------------- -------- ----------- --------------
<S> <C> <C> <C>
Large Cap Equity
Index $14.72 40,419 $ 594,746
Small Cap Equity
Index 11.56 19,214 222,026
Bond 10.45 7,201 75,200
Money Market 10.85 1,450 15,690
International Equity
Index 14.06 11,581 162,806
Stock and Bond
Balanced 12.63 4,158 52,523
----------
Total $1,122,991
==========
</TABLE>
<TABLE>
<CAPTION>
SURPLUS TOTAL
CONTRIBUTED EQUITY
----------- ----------
<S> <C> <C>
Large Cap Equity Index $11,933 $ 606,679
Small Cap Equity Index -- 222,026
Bond -- 75,200
Money Market -- 15,690
International Equity Index -- 162,806
Stock and Bond Balanced -- 52,523
------- ----------
Total $11,933 $1,134,924
======= ==========
</TABLE>
1998 POLICY OWNERS' EQUITY
<TABLE>
<CAPTION>
UNIT UNITS POLICY OWNERS'
FUND VALUE OUTSTANDING EQUITY
- --------------------- -------- ----------- --------------
<S> <C> <C> <C>
Large Cap Equity
Index $0.00 $ --
Small Cap Equity
Index 0.00 --
Bond 0.00 --
Money Market 0.00 --
International Equity
Index 0.00 --
Stock and Bond
Balanced 0.00 --
----------
Total $ --
==========
</TABLE>
<TABLE>
<CAPTION>
SURPLUS TOTAL
CONTRIBUTED EQUITY
----------- --------
<S> <C> <C>
Large Cap Equity Index $9,915 $9,915
Small Cap Equity Index -- --
Bond -- --
Money Market -- --
International Equity Index -- --
Stock and Bond Balanced -- --
------ ------
Total $9,915 $9,915
====== ======
</TABLE>
63-------
<PAGE>
STATE FARM LIFE AND ACCIDENT ASSURANCE
VARIABLE LIFE SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
Purchases and sales of the Trust's shares by the Separate Account for the year
ended December 31, 1999 by each Fund are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
---------- --------
<S> <C> <C>
Large Cap Equity Index $ 633,244 $ 75,342
Small Cap Equity Index 223,135 20,135
Bond 112,370 35,636
Money Market 20,006 4,315
International Equity Index 170,485 29,331
Stock and Bond Balanced 60,309 10,442
---------- --------
Total $1,219,549 $175,201
========== ========
</TABLE>
7. NET ASSETS
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
-------------------------------------------------
LARGE CAP SMALL CAP MONEY
EQUITY INDEX EQUITY INDEX BOND MARKET
FUND FUND FUND FUND
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Proceeds from units
purchased $591,593 $174,196 $ 97,753 $19,150
Cost of units
redeemed (44,678) 18,593 (22,592) (3,468)
Surplus contributed 10,000 -- -- --
Investment income 13,161 10,782 1,842 251
Mortality and risk
expense charges (1,983) (571) (270) (40)
Realized gain (loss)
on investments (3,759) (1,085) (692) (203)
Unrealized
appreciation
(depreciation) 42,345 20,111 (841) --
-------- -------- -------- -------
$606,679 $222,026 $ 75,200 $15,690
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
STATE FARM VARIABLE PRODUCTS TRUST
--------------------------------------
INTERNATIONAL
EQUITY INDEX STOCK AND
FUND BOND FUND COMBINED
------------- --------- ----------
<S> <C> <C> <C>
Proceeds from units
purchased $152,710 $47,579 $1,082,981
Cost of units
redeemed (12,579) 2,180 (62,544)
Surplus contributed -- -- 10,000
Investment income 1,503 66 27,605
Mortality and risk
expense charges (480) (159) (3,503)
Realized gain (loss)
on investments (288) -- (6,027)
Unrealized
appreciation
(depreciation) 21,940 2,857 86,412
-------- ------- ----------
$162,806 $52,523 $1,134,924
======== ======= ==========
</TABLE>
- ---------
64
<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
Investment Company Act File No. 811-09017
454-625.2 Printed in U.S.A.
<PAGE>
Part II
1
<PAGE>
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.
2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
The prospectus consisting of 67 pages.
Undertaking to file reports.
Rule 484 undertaking.
Representation pursuant to Section 26(e)(2)(A).
The signatures.
Written consents of the following persons: William A. Montgomery, Esq.,
Gerry Brogla, F.S.A., PricewaterhouseCoopers LLP, and Sutherland Asbill &
Brennan LLP
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) Distribution Agreement 1
(b) Registered Representative Agreement
(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) Participation agreement 3
(9) Not applicable
(10) (a) Application form 5
(b) Reinstatement Application
(11) Description of issuance, transfer and redemption procedures 4
(12) Powers of Attorney 4
B. Not applicable
C. Not applicable
3
<PAGE>
2. Opinion and consent as to the legality of the securities being
registered 3
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
7. (a) Consent of PricewaterhouseCoopers LLP
(b) Consent of Sutherland, Asbill & Brennan LLP
- -----------------------------
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.
5. Incorporated herein by reference to the similarly designated exhibit
included in pre-effective amendment No. 1 to the registration statement
on Form S-6 (File No. 333-64345) filed with the Securities and Exchange
Commission on November 18, 1998.
4
<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,
certifies that it meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act of
1933 and 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 27th day of April, 2000.
State Farm Life and Accident Assurance Company
Variable Life Separate Account
(Registrant)
(SEAL)
By: State Farm Life and Accident Assurance Company
(Depositor)
Attest: /s/ Stephen L. Horton By: *
----------------- ---------------
Stephen L. Horton Edward B. Rust, Jr.
President
State Farm Life Insurance Company
5
<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.
Signature Title Date
- --------- ----- ----
* President and Director ---------
- ------------------ (Principal Executive Officer)
Edward B. Rust, Jr.
* Executive Vice President and Director ---------
- ------------------
Roger B. Tompkins
* Vice President and Controller ---------
- ------------------ (Principal Accounting Officer)
Dale R. Egeberg
* Vice President and Actuary ---------
- ----------------- (Principal Financial Officer)
Darrell W. Beernink
* Director ---------
- ----------------
Roger J. Lehman
* Director, Vice President - Counsel ---------
- ---------------- and Secretary
Laura P. Sullivan
* Director ---------
- ----------------
Roger S. Joslin
* Director and Senior Vice President - ---------
- ---------------- Investments
Kurt G. Moser
* Director ---------
- ------------------
Vincent J. Trosino
* Director, Executive Vice President ---------
- ----------------- and Chief Agency and Marketing Officer
Charles R. Wright
* By /s/ Stephen L. Horton 4/27/00
--------------------------- ----------
Stephen L. Horton Date
Pursuant to Power of Attorney
6
<PAGE>
FORM RRA98(AA97)
STATE FARM REGISTERED REPRESENTATIVE AGREEMENT
This Agreement is entered into as of the________ day of
______________________, _________ by and between State Farm VP Management Corp.
(hereinafter referred to as "Broker-Dealer") and
_______________________________________ (hereinafter referred to as "Registered
Rep").
WHEREAS, Broker-Dealer is a securities broker-dealer registered and
qualified to transact business pursuant to rules and regulations promulgated by
the Securities and Exchange Commission (the "SEC") and the National Association
of Securities Dealers, Inc. (the "NASD") and certain state securities
regulators;
WHEREAS, Registered Rep is duly qualified and licensed to sell variable
life insurance policies and variable annuity policies (together, "Variable
Products"); and
WHEREAS, the parties mutually desire to enter into this Agreement so that
Registered Rep may sell and service Variable Products on behalf of
Broker-Dealer;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions as hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
AUTHORIZATION
Broker-Dealer hereby authorizes Registered Rep to become one of its
registered representatives and to execute securities transactions, including
Variable Product sales, exclusively through it. Registered Rep hereby accepts
that authorization.
ARTICLE II
REGISTERED REP'S OBLIGATIONS
SECTION 2.1 GENERAL. Registered Rep will solicit applications for
insurance, collect premiums, fees and charges, countersign and deliver policies,
reinstate and transfer insurance, assist policyholders and cooperate in
reporting and handling claims, avoid conflicts of interest, comply with all laws
and regulations, and cooperate with and advance the interests of Broker-Dealer,
the registered representatives, and the policyholders.
SECTION 2.2 COMPLIANCE WITH LAWS, RULES, REGULATIONS, ETC. All Registered
Rep's activities in connection with the offer and sale of Variable Products
shall conform to the requirements of state and federal securities laws, rules,
regulations and interpretive guidance, the Conduct Rules of the NASD, and state
insurance laws, rules, regulations and interpretive guidance.
SECTION 2.3 LICENSING AND REGISTRATION. Registered Rep shall remain:
a. registered with the NASD and, if necessary, any applicable state
securities regulatory authority; and
b. licensed as an insurance agent with authority to sell Variable Products
in any State in which Registered Rep will sell such Variable Products.
Registered Rep shall take all steps necessary to keep all such registrations and
licenses in force during the term of this Agreement.
SECTION 2.4 COMPLIANCE MANUAL. Registered Rep will familiarize Registered
Rep with, and will comply
<PAGE>
with, all the requirements set forth in the State Farm VP Management Corp.
Variable Products Compliance Manual (the "Compliance Manual"), as it may be
amended from time to time or supplemented by compliance memoranda from
Broker-Dealer. Without limiting the generality of the preceding sentence,
Registered Rep shall comply with the customer complaint procedures and the
filing and recordkeeping requirements set forth in the Compliance Manual.
SECTION 2.5 MATERIAL STATEMENTS OR OMISSIONS. Registered Rep will not:
a. make any material statements, either oral or written, regarding
Variable Products which are untrue or misleading; or
b. omit a material fact necessary in order to make any oral or written
statements regarding Variable Products, in the light of the
circumstances under which they were made, not misleading.
SECTION 2.6 VARIABLE PRODUCTS OFFERED. Registered Rep shall offer, sell,
and service only those Variable Products offered by Broker-Dealer, and shall not
engage in any private securities transactions without prior written approval
from Broker-Dealer. A "private securities transaction" would include, among
other things, offering variable products or other securities that are not
offered by Broker-Dealer, including any privately placed securities that are not
registered with the Securities and Exchange Commission.
SECTION 2.7 OUTSIDE ACTIVITIES AND SECURITIES DISCLOSURE FORM. Registered
Rep shall complete the "Outside Activities and Securities Disclosure Form"
attached hereto as EXHIBIT A, and will update this form as requested by
Broker-Dealer promptly when any significant additions or changes to the
information disclosed on the form arise, including new employers or sources of
income, or significant changes in the amount of income from a previously
specified source. Broker-Dealer may amend the form from time to time, and
Registered Rep's obligations hereunder shall apply with equal force to any such
amended form.
SECTION 2.8 CHANGES TO FORM U-4. Registered Rep shall immediately notify
Broker-Dealer of any changes of information in Registered Rep's registration on
Form U-4 including any changes to Registered Rep's address.
SECTION 2.9 EDUCATION AND TRAINING MEETINGS. Registered Rep shall attend
all mandatory educational and/or training meetings sanctioned by Broker-Dealer,
including but not limited to the annual compliance meeting, scheduled by
Broker-Dealer.
SECTION 2.10 SUPERVISION OF EMPLOYEES. Registered Rep shall take such steps
as are necessary to ensure that none of Registered Rep's employees, whether
registered or unregistered, engage in any activities that are not authorized
under applicable law.
SECTION 2.11 NOTIFICATIONS REQUIRED. Registered Rep shall immediately
notify Broker-Dealer of:
a. any action or fact which comes to Registered Rep's knowledge which
may possibly constitute a violation of any law;
b. any investigations or inquiries by governmental agencies;
c. any judicial proceeding related to Registered Rep;
d. loss or suspension of Registered Rep's insurance license or securities
registration to sell Variable Products; and
e. any other events as required under the Compliance Manual.
SECTION 2.12 PERSONAL SERVICES REQUIRED. The fulfillment of this Agreement
requires Registered Rep's personal services, and Registered Rep will not
directly or indirectly write or service insurance for any other company, other
than Broker-Dealer's parent or affiliated companies or through any governmental
or insurance industry plan or facility, or for any agent or broker, except in
accordance with the terms of any written consent Broker-Dealer may give
Registered Rep.
SECTION 2.13 PREMIUM FUND ACCOUNT. All funds collected on behalf of the
issuing insurance company shall be held in trust by Registered Rep as the
absolute property of the issuing insurance company, and Registered Rep will be
responsible for these funds until they are safely transmitted to the issuing
insurance company. Registered Rep agrees to maintain a premium fund account for
the issuing insurance company's benefit in a bank or similar financial
<PAGE>
institution, which the issuing insurance company may audit at any time, in which
Registered Rep will promptly deposit all funds collected for the issuing
insurance company's premiums, fees, or charges. Registered Rep further agrees to
transmit all such funds and all insurance applications promptly as directed by
Broker-Dealer.
SECTION 2.14 ADVERTISING. Broker-Dealer and the issuing insurance company
will advertise, provide promotional materials, and participate in the cost of
Registered Rep's advertising, in accordance with policies determined from time
to time by Broker-Dealer and the issuing insurance company. Registered Rep will
not use advertisements or sales literature relating to Variable Products unless
the advertisements or sales literature have been provided by Broker-Dealer.
SECTION 2.15 EXPENSES. The expense of any office, including rental,
furniture, and equipment; signs; supplies not furnished by Broker-Dealer; the
salaries of Registered Rep's employees; telephone; postage; advertising; and all
other charges or expense incurred by Registered Rep in the performance of this
Agreement shall be incurred at Registered Rep's discretion and paid by
Registered Rep.
SECTION 2.16 OFFICE LOCATION. Registered Rep agrees that in the location or
relocation of Registered Rep's office Registered Rep will not unduly infringe on
the established office location of any other registered representative.
Registered Rep agrees that Registered Rep will not make any commitment to change
office location without reasonable, at least 30 days, prior written notice to
Broker-Dealer or establish any office in addition to Registered Rep's principal
office without the prior approval of Broker-Dealer.
ARTICLE III
NATURE OF THE RELATIONSHIP
SECTION 3.1 INDEPENDENT CONTRACTOR. As a registered representative,
Registered Rep is obliged to follow Broker-Dealer procedures and processes and
to provide prompt, friendly, accurate, and cost effective service. Registered
Rep is an independent contractor for all purposes. Registered Rep has full
control of Registered Rep's daily activities, subject only to Broker-Dealer's
obligation to supervise Registered Rep under the securities laws, with the right
to exercise independent judgment as to time, place, and manner of soliciting
insurance, servicing policyholders, and otherwise carrying out the provisions of
this Agreement.
ARTICLE IV
COMPENSATION
SECTION 4.1 COMPENSATION SCHEDULE. Registered Rep's sole compensation as a
registered representative from Broker-Dealer shall be in the form of
compensation earned from Variable Product sales and service. The Schedule of
Payments attached hereto as EXHIBIT B sets forth the compensation to be paid to
Registered Rep for Variable Product sales and service while this Agreement is in
force.
SECTION 4.2 WAIVER UNTIL BROKER-DEALER IN RECEIPT OF COMPENSATION.
Registered Rep waives any right to compensation until Broker-Dealer is in
receipt of such compensation from the issuing insurance company. Compensation
will be payable by Broker-Dealer or its parent or affiliated companies.
SECTION 4.3 BONUSES, AWARDS, PRIZES, AND ALLOWANCES. Broker-Dealer reserves
the right to fix and determine the amount, extent, and conditions of any
bonuses, awards, prizes and allowances.
ARTICLE V
TERMINATION PAYMENTS
SECTION 5.1 PAYMENT AFTER TERMINATION. If this Agreement is terminated and
Registered Rep is subject to "disqualification," as that term is defined in the
NASD's bylaws, then no termination payments will be paid to Registered Rep
following the termination of this Agreement. If this Agreement is terminated and
Registered Rep is not
<PAGE>
subject to "disqualification," termination payments will be paid to Registered
Rep or Registered Rep's legal representative in accordance with the provisions
of Section 5.2.
SECTION 5.2 TERMINATION PAYMENTS. If this Agreement is terminated and
Registered Rep is not subject to "disqualification," Broker-Dealer will pay
Registered Rep or Registered Rep's legal representative:
a. on business written by Registered Rep under the Schedule of Payments
attached hereto as EXHIBIT B ,
(i) any remaining writing compensation for the first through fifth
policy years as would have been due and payable to Registered Rep
if this Agreement had not been terminated; and
(ii) if on the date of termination Registered Rep had five (5) or more
years of combined service as an agent under the State Farm
Agent's Agreement or Local Agent's Appointment, any remaining
writing compensation for the sixth through fifteenth policy years
as would have been due and payable to Registered Rep if this
Agreement had not been terminated; and
b. if the date of termination of this Agreement coincides with the date
of termination of the State Farm Agent's Agreement, and if on the date
of termination Registered Rep has twenty five (25) or more years of
combined service as an agent under the State Farm Agent's Agreement or
Local Agent's Appointment, on business credited to Registered Rep's
account on which service compensation is being paid to Registered Rep,
(i) On Variable Deferred Annuity policies a monthly amount equal to
three-fourths of one percent (3/4 of 1%) of an average monthly
premium of any such policy; and
(ii) On Variable Universal Life policies a monthly amount equal to one
and one-half percent (1 1/2%) of an average monthly premium of
any such policy
beginning the last day of the month next following the month of
termination of this Agreement and until the last day of the month in
which Registered Rep's death occurs; except that no amount shall be
paid on any policy made available for assignment by the termination of
a State Farm Registered Representative Agreement or by a release of
policies pursuant to Article X of this Agreement or Article X of any
other State Farm Registered Representative Agreement, and except that
if Registered Rep is less than sixty five (65) years of age on the
date of termination of this Agreement, amounts shall be reduced
actuarially based on Registered Rep's lower age.
c. The "average monthly premium" of a policy shall be calculated by
dividing the total premium paid on the policy by the number of full
months elapsed between its Policy Date and termination of this
Agreement, except that the "average monthly premium" for a policy in
force less than sixty (60) months shall be no greater than:
(i) For a Variable Universal Life policy, one-twelfth (1/12) of the
total Primary Compensation Premium paid on the base policy and
any increases to base and added riders, and
(ii) For a Variable Deferred Annuity policy, two hundred dollars
($200).
d. After Registered Rep and any spouse (if accepted as a payee) have
died, or at any time Broker-Dealer owes, for each of three (3)
consecutive periodic payments in this Section, less than one hundred
dollars ($100), Broker-Dealer may, in its sole discretion, change the
frequency and amount of the periodic payments to payment or payments
less frequent and of greater amount or amounts, but of equal present
value. Any new amount or amounts shall reasonably consider the time
value of money and any influence of policy persistency, agent
mortality, and other factors relevant to the payment frequency and
amounts otherwise provided herein.
<PAGE>
ARTICLE VI
CONFIDENTIALITY; PROPRIETARY MATERIALS
SECTION 6.1 CONFIDENTIALITY. Information regarding names, addresses, and
ages of issuing insurance company policyholders; and the expiration or renewal
dates of policies acquired or coming into Registered Rep's possession during the
effective period of this Agreement, or any prior Agreement, except information
and records of policyholders insured by the issuing insurance company pursuant
to any governmental or insurance industry plan or facility, are trade secrets
and confidential business information wholly owned by Broker-Dealer or its
parent or affiliated companies. All forms, computer-related and electronic
files, and other materials, whether furnished by Broker-Dealer or its parent or
affiliated companies or purchased by Registered Rep, upon which this information
is recorded shall be the sole and exclusive property of Broker-Dealer or its
parent or affiliated companies. Registered Rep's possession of this information
is only for use in carrying out Registered Rep's duties and responsibilities
under this Agreement. Registered Rep shall take all reasonable steps to maintain
the value and confidentiality of such information, including informing
Registered Rep's employees of this responsibility, and assuring their
compliance.
SECTION 6.2 MANUALS, ETC. Broker-Dealer will furnish Registered Rep,
without charge, manuals, forms, records, computer-related and electronic files,
equipment, and such other materials, supplies and services as Broker-Dealer may
specify from time to time. All such property furnished by Broker-Dealer shall
remain the property of Broker-Dealer. In addition, Broker-Dealer will offer at
Registered Rep's expense additional equipment, materials, supplies and services.
ARTICLE VII
TERM, TERMINATION AND SURVIVABILITY
SECTION 7.1 EFFECTIVE DATE AND TERM. This Agreement shall be effective on
the date set out above on Page 1 hereof and shall continue until terminated as
herein provided.
SECTION 7.2 TERMINATION. This Agreement will terminate upon the death of
Registered Rep. Either Registered Rep or Broker-Dealer has the right to
terminate this Agreement by written notice delivered to the other or mailed to
the other's last known address. The date of termination shall be the date
specified in the notice, but in the event no date is specified, the date of
termination shall be the date of delivery if the notice is delivered, or the
date of the postmark, if the notice is mailed. Either Registered Rep or
Broker-Dealer can accelerate the date of termination specified by the other by
giving written notice of termination in accordance with this paragraph. This
Agreement shall also terminate effective immediately upon the termination of the
State Farm Agent's Agreement to which Registered Rep is a party.
SECTION 7.3 RESTRICTIONS ON POST TERMINATION ACTIVITY. For a period of one
year following termination of this Agreement, Registered Rep will not either
personally or through any other person, agency, or organization:
a. induce or advise any issuing insurance company policyholder credited
to Registered Rep's account at the date of termination to lapse,
surrender, or cancel any issuing insurance company coverage; or
b. solicit any such policyholder to purchase any insurance coverage
competitive with the insurance coverages sold by Broker-Dealer. In the
event the "period of one year" conflicts with any statutory provision,
such period shall be the period permitted by statute.
After termination of this Agreement Registered Rep agrees not to act or
represent himself or herself in any way as an agent or representative of
Broker-Dealer.
SECTION 7.4 RETURN OF MATERIALS. Within ten days after the termination of
this Agreement, all property belonging to Broker-Dealer shall be returned or
made available for return to Broker-Dealer or its authorized
<PAGE>
representative. Without limiting the foregoing, Registered Rep shall promptly
deliver to Broker-Dealer, without retaining any copies or excerpts thereof, the
Compliance Manual, any other manuals, compliance memoranda, prospectuses,
statements of additional information, advertising, sales materials, business
cards and letterhead.
SECTION 7.5 SURVIVABILITY. The agreements in Sections 5.1, 5.2, 6.1, 6.2,
7.3, 7.4, 9.11 and Article VIII shall survive the termination of this Agreement.
ARTICLE VIII
DISPUTE RESOLUTION
Any controversy between Broker-Dealer and Registered Rep arising out of, or
relating to, this Agreement or the breach thereof may be settled by arbitration
in accordance with the rules then pertaining of the NASD at Chicago, Illinois.
Any arbitration hereunder and award of the arbitrators, or of a majority of
them, shall be final, and judgment may be entered in any court, state or
federal, having jurisdiction.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 ASSIGNMENT. Since Broker-Dealer is relying on Registered Rep to
carry out the provisions of this Agreement, neither the Agreement nor any
interest thereunder can be sold, assigned or pledged by Registered Rep; and no
right in any sum due or to become due to Registered Rep hereunder can be sold,
assigned, or pledged without prior written consent of Broker-Dealer.
SECTION 9.2 ENTIRE AGREEMENT. This Agreement constitutes the sole and
entire Agreement between the parties hereto, and no change, alteration, or
modification of the terms of this Agreement may be made except by agreement in
writing signed by an authorized representative of the Broker-Dealer and accepted
by Registered Rep. This Agreement supersedes all prior commitments, inducements,
promises, negotiations, representations, obligations, conditions, or agreements,
oral or written, between Broker-Dealer, its representatives, and Registered Rep,
except with respect to compensation owing to Registered Rep under Schedules of
Payment under Registered Rep's immediately preceding State Farm Registered
Representative Agreement, if any, and with respect to compensation overpayments
or any other amounts owed Broker-Dealer or its parent or affiliated companies by
Registered Rep. All payments for termination by death or for termination other
than by death which otherwise might have become payable to Registered Rep under
the terms of prior agreements with Broker-Dealer are hereby waived by Registered
Rep.
SECTION 9.3 WAIVER. Failure of any party to enforce any provision of this
Agreement will not constitute a course of conduct or waiver in the future of the
right to enforce the same or any other provision.
SECTION 9.4 SEVERABILITY. The parties to this Agreement desire and intend
that the terms and conditions of this Agreement be enforced to the fullest
extent permissible under the laws and public policies applied in each state or
jurisdiction in which enforcement is sought. The parties agree specifically
that, if any particular term or condition of this Agreement is adjudicated, or
becomes by operation of law, invalid or unenforceable, this Agreement will be
deemed amended to delete the portion that is adjudicated, or that becomes by
operation of law, invalid or unenforceable. The deletion or reduction will apply
only with respect to the operation of the term or condition, and the remainder
of the Agreement will remain in full force and effect. A deletion or reduction
resulting from any adjudication will apply only with respect to the operation of
that term in the particular jurisdiction in which the adjudication is made.
SECTION 9.5 NOTICE. All notices to a party will be sent to the following
addresses or to such other address or person as such party may designate by
notice to each other party hereunder:
a. TO BROKER-DEALER:
State Farm VP Management Corp.
c/o Variable Products Administration Department
P.O. Box 2307
Bloomington, Illinois 61702-2307
Phone: 888-495-2351
<PAGE>
Fax: 309-763-5930
with a copy to Registered Rep's Regional Agency Resources Department.
b. TO REGISTERED REP:
Registered Rep's Office Address.
SECTION 9.6 GOVERNING LAW. The validity, enforceability, and interpretation
of this Agreement shall be construed according to the laws of the State of
Illinois.
SECTION 9.7 HEADINGS. The headings in this Agreement are inserted for
convenience only and will not constitute a part hereof.
SECTION 9.8 SET OFF. Any amount (exclusive of premiums due on Registered
Rep's personal policies with the issuing insurance company) at any time owing by
Registered Rep to Broker-Dealer or its parent or affiliated companies shall be a
first lien on any payment due or thereafter becoming due Registered Rep under
any of the provisions of this Agreement, and Broker-Dealer is authorized to
deduct such indebtedness from any such payment due or thereafter becoming due to
Registered Rep from Broker-Dealer.
SECTION 9.9 CHARGE BACKS. If any application is rejected or any policy is
surrendered or canceled, in whole or in part, for any reason, before the
expiration of the policy period, or if any premium is reduced or an overpayment
made to Registered Rep, the compensation paid to Registered Rep on the amount
returned or credited to the policyholder or the amount overpaid to Registered
Rep shall be charged to Registered Rep and shall constitute an indebtedness of
Registered Rep to Broker-Dealer.
SECTION 9.10 RIGHT TO PRESCRIBE. Broker-Dealer and the issuing insurance
company retain the right to prescribe: all policy forms and provisions;
premiums, fees, and charges for insurance and services; rules governing the
binding, acceptance, renewal, rejection, or cancellation of risks, and
adjustments and payment of losses; and limitations on the submission of
applications by individual registered representatives, by market area, by line
of coverage, by policy type, by company, or by other means.
SECTION 9.11 REPRESENTATION. Registered Rep will not represent Registered
Rep as having any powers except those authorized by this Agreement and subject
to any applicable law. Without limiting the foregoing, Registered Rep shall not
have the authority to extend the time of payment of any premium, or to alter,
waive, or forfeit any of the issuing insurance company's rights, requirements,
or conditions in any policy of insurance, or otherwise obligate Broker-Dealer or
issuing insurance company in any way except as stated in this Agreement or
expressly authorized under the rules and regulations of Broker-Dealer or as
otherwise authorized in writing by Broker-Dealer.
SECTION 9.12 TRANSFER OF POLICIES. Broker-Dealer will leave in Registered
Rep's account all policies credited to Registered Rep's account so long as the
policyholder resides within a 75-mile radius of Registered Rep's principal place
of business and within a State in which Registered Rep is duly licensed, except
that Broker-Dealer may:
a. if service compensation is suspended, reduced or eliminated pursuant
to Section IV. G, Section IV. H, and/or Section IV. I of the Schedule
of Payments attached hereto as EXHIBIT B, transfer the Variable Products
credited to Registered Rep's account to the accounts of other registered
representatives or to Broker-Dealer for servicing; and
b. after prior written notice to Registered Rep, transfer any policy to
the account of another registered representative when the policyholder makes a
bona fide request in writing.
Registered Rep will respect the rights and interests of Registered Rep's fellow
registered representatives in policies credited to their accounts by refraining
from raiding or otherwise diverting policies from their accounts to Registered
<PAGE>
Rep's account. Registered Rep shall neither directly nor indirectly attempt to
divert policies to Registered Rep's own account from unassigned accounts or from
those of other registered representatives, or from Registered Rep's own account
to the accounts of other registered representatives.
ARTICLE X
RELEASE OF POLICIES
In the event of a release of policies pursuant to Section VI of the State
Farm Agent's Agreement (AA97) or Section IV of another State Farm Agent's
Agreement, the Variable Products held by policyholders and members of the
household of such policyholders whose automobile insurance policies are released
shall likewise be released, and Broker-Dealer will pay with respect to the
Variable Products released by Registered Rep the termination payments in
accordance with Section 5.2 of this Agreement, as those provisions may be
applicable.
IN WITNESS WHEREOF, Broker-Dealer has caused this Agreement to be executed
on its behalf by its authorized representative, to be effective on the date
above set out on Page 1 hereof, upon its acceptance in writing by Registered Rep
on Form RRAA98(AA97), Registered Rep's Acceptance of Agreement, transmitted to
Broker-Dealer.
STATE FARM VP MANAGEMENT CORP.
By:_________________________________________________
Authorized Representative
REPLACES - NONE PRINTED IN U.S.A.
EFFECTIVE 2-1-98
<PAGE>
<TABLE>
<S><C>
PAGE 1
VARIABLE UNIVERSAL LIFE REINSTATEMENT APPLICATION
Doc / /
STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY Type: 01 Check Digit
BLOOMINGTON, ILLINOIS
For Policy Number:
-------------------------
- ---------------------------------- -------------------------------------------
- COMPLETION STEPS -
1. ANSWER ALL QUESTIONS FOR ALL 2. OBTAIN SIGNATURES FOR:
PROPOSED INSUREDS UNDER THIS POLICY. - INSURED (EXCEPT JUVENILES AGE 15
(INSURED, ADDITIONAL INSURED, OR INSURED OR LESS.)
CHILD) - ADDITIONAL INSURED
- OWNER, IF OTHER THAN PROPOSED
INSURED 1.
NOTE: The term "PROPOSED INSURED" REFERS TO ANY PERSON(S) (INSURED, ADDITIONAL
INSURED, OR INSURED CHILD) who would be insured under this policy, if
reinstated. The Term also includes any Payor or Purchaser, if the policy has
a Payor or Purchaser rider.
- -------------------------------------------------------------------------------------------------
1 Has ANY PROPOSED INSURED, in the last 12 YES NO
months, used tobacco in any form? / / / /
IF YES, SPECIFY
---------------------------------------------------------
- -------------------------------------------------------------------------------------------------
2 Since originally applying for this policy, or within
the last 5 years if less, has ANY PROPOSED
INSURED: (IF YES, EXPLAIN)
a applied for or received disability benefits? / / / /
b been unable to obtain insurance at the plan,
amount, or rate applied for? / / / /
c changed job or job duties? / / / /
- -------------------------------------------------------------------------------------------------
3 Since originally applying for this policy, or within
the last 5 years if less, has ANY PROPOSED
INSURED had or been treated for: (IF YES, EXPLAIN)
a high blood presure, stroke, heart murmur,
chest pain, or heart attack? / / / /
b anemia or blood disorder; tumor, cancer, or
lymph gland disorder? / / / /
c mental, nervous, or convulsive disorder? / / / /
d emphysema or asthma? / / / /
e colitis, liver, or intestinal disorder? / / / /
f diabetes, arthritis, sexually transmitted disease,
or kidney disease? / / / /
- -------------------------------------------------------------------------------------------------
4 Since originally applying for this policy, or within
the last 5 years if less, has ANY PROPOSED
INSURED for any reason not previously explained:
(IF YES, EXPLAIN)
a had treatment or a test (except for HIV) in any YES NO
medical facility such as a lab, clinic, or hospital? / / / /
b had treatment or advice from any physician or
psychologist, taken prescription drugs, or been
told surgery was necessary? / / / /
c used drugs or narcotics not prescribed by an
authorized member of the medical profession,
or been advised to seek treatment or counsel
for alcohol or drug abuse? / / / /
- -------------------------------------------------------------------------------------------------
5 In the last 3 years, has ANY PROPOSED INSURED:
(IF YES, EXPLAIN)
a engaged in avocations such as flying aircraft,
mountain or rock climbing, vehicle racing, scuba
or sky diving? / / / /
b had a driver's license suspended or revoked,
been convicted of any moving violations, had
2 or more accidents, or been convicted of
driving under the influence of alcohol or drugs? / / / /
- -------------------------------------------------------------------------------------------------
6 Give current address and home phone number if
changed within the last 6 months.
- -------------------------------------------------------------------------------------------------
7 Explanations: Show question number as a reference, name of persons for whom information is
given, pertinent dates, names and addresses of medical attendants and hospitals, and full
explanation of the condition.
(IF SPACE IS INSUFFICIENT, USE ADDITIONAL SHEETS, WHICH WILL BE A PART OF THIS APPLICATION.)
- -------------------------------------------------------------------------------------------------
454-634 NY 07-1999 Printed in U.S.A.
</TABLE>
<PAGE>
<TABLE>
<S><C>
PAGE 2
- -------------------------------------------------------------------------------------------------
8. SUITABILITY INFORMATION
- -------------------------------------------------------------------------------------------------
Applicants are urged to supply information in order that the agent may make an
informed judgment as to the suitability of a reinstatement 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 / / Death Benefit
Purchasing / / Personal Retirement Planning
this Policy: Years to Retirement:__________________
/ / Other (specify)________________________________
- -------------------------------------------------------------------------------------------------
i. 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 / / / / / /
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
9. 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? / / / /
All Proposed Insureds and the Owner state that the information in this application is true and
complete to the best of their knowledge and belief. Reinstatement will take effect ONLY on the
date the company approves the Proposed Insured's insurability. Neither the agent nor a medical
examiner may pass on insurability. The Reinstated policy will be subject to ALL its original
provisions including incontestability. However, (1) for any statements in this application, the
incontestability provision will start the same date reinstatement takes effect, and (2) if the
policy is reinstated more than two years from its original date, the incontestability provision
will apply only to statements in this application.
- -------------------------------------------------------------------------------------------------
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
understand that I may request a copy of this authorization from the Company.
Dated on__________________________________________________
at________________________________________________________
CITY STATE
Signature of Witness
to all signatures_________________________________________
Signature of
Proposed Insured 1________________________________________
NOT REQUIRED FOR JUVENILE APPLICATION
Signature of
Proposed Insured 2________________________________________
Signature of
Owner_____________________________________________________
NOT REQUIRED UNLESS APPLICANT IS OTHER THAN PROPOSED
INSURED. IF A FIRM OR CORPORATION IS THE OWNER, GIVE ITS
NAME AND SIGNATURE OF AUTHORIZED OFFICER.
</TABLE>
<PAGE>
GERRY BROGLA, F.S.A.
ACTUARY
PHONE (309) 766-7957
FAX (309) 766-1827
January 25, 2000
Gentlemen:
This opinion is furnished in connection with the registration by State Farm
Life and Accident Assurance Company of its Variable Universal Life Insurance
Policy ("the Policy"), under the Securities Act of 1933 (the "Registration
Statement"). The prospectus included in the Registration Statement on Form
S-6 describes the Policy. I have reviewed the Policy form and I have
participated in the preparation and review of the Registration Statement and
Exhibits thereto. In my opinion:
(1) The illustrations of policy account values, cash surrender values,
and death benefits included in the section of the prospectus
entitled, "Hypothetical Illustrations of Accumulated Premiums,
Policy Account Values, Cash Surrender Values, and Death Benefits",
based on the assumptions stated in this section, are consistent
with the provisions of the Policy. The rate structure of the
Policy has not been designed so as to make the relationship between
premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for males ages 35
and 50 than to prospective purchasers of Policies on males of
other ages or on females.
(2) The Example of Surrender Charges shown in Appendix A is consistent
with the provisions of the Policy.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Experts" in the
prospectus.
Sincerely,
/s/ Gerry Brogla
Gerry Brogla, F.S.A.
Actuary
VGB:ls
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
State Farm Life and Accident Assurance Company
We hereby consent to the incorporation by reference in the Post-Effective
Amendment No. 2 Registration Statement of State Farm Life and Accident Assurance
Company Variable Life Separate Account on Form S-6 (No. 333-64345) of our report
dated February 22, 2000 relating to the statutory financial statements of State
Farm Life and Accident Assurance Company. We also consent to the incorporation
by reference to our Firm under the caption "Experts" in the Prospectus.
PricewaterhouseCoopers LLP
Chicago, IL
April 25, 2000
<PAGE>
[SUTHERLAND ASBILL & BRENNAN LLP]
April 20, 2000
State Farm Life and Accident Assurance Company
One State Farm Plaza
Bloomington, Illinois 61710-0001
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the Form S-6 registration statement
for State Farm Life and Accident Assurance Company Variable Life Separate
Account (File No. 333-64345). In giving this consent, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
Sincerely,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Stephen E. Roth
----------------------------
Stephen E. Roth, Esq.
