Prospectus
Individual Flexible Premium Deferred Variable Annuity
(No Surrender Charge Contract)
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
Offered By: American United Life Insurance Company(R); One American Square
Indianapolis, Indiana 46282; (317) 263-1877
Variable Products Service Office:
P.O. Box 7127, Indianapolis, Indiana 46209-7127; (800) 863-9354
This Prospectus describes individual variable annuity contracts (the
"Contracts") offered by American United Life Insurance Company(R) ("AUL" or the
"Company"). AUL designed the Contracts for use in connection with retirement
plans and deferred compensation plans for individuals. Contract Owners may use
the Contracts in connection with retirement plans that meet the requirements of
Sections 401(a), 403(b), 408, 408A or 457 of the Internal Revenue Code.
This Prospectus describes a flexible premium contract: Contracts for which
premiums may vary in amount and frequency, subject to certain limitations. The
Contract provides for the accumulation of values on either a variable basis, a
fixed basis, or both. The Contract also provides several options for fixed and
variable annuity payments to begin on a future date.
A Contract Owner may allocate premiums designated to accumulate on a
variable basis to one or more of the Investment Accounts of a separate account
of AUL. The separate account is named the AUL American Individual Variable
Annuity Unit Trust (the "Variable Account"). Each Investment Account invests
exclusively in shares of one of the following Mutual Fund Portfolios:
<TABLE>
<CAPTION>
<S> <C>
AUL American Series Fund Inc. Portfolios Fidelity Variable Insurance Products Fund II
Equity Portfolio Fidelity Asset Manager
Bond Portfolio Fidelity Contrafund
Managed Portfolio Fidelity Index 500
Money Market Portfolio Janus Aspen Series
Alger American Fund, Inc. Janus Flexible Income
Alger American Growth Janus Worldwide Growth
American Century Variable Portfolios, Inc. PBHG Insurance Series Fund, Inc.
American Century VP Income & Growth PBHG Growth II
American Century VP International PBHG Technology & Communications
Calvert Variable Series SAFECO Resource Series Trust
Calvert Social Mid Cap Growth SAFECO RST Equity
Fidelity Variable Insurance Products Fund SAFECO RST Growth
Fidelity Equity-Income T. Rowe Price Equity Series, Inc.
Fidelity Growth T. Rowe Price Equity Income
Fidelity High Income
Fidelity Overseas
</TABLE>
Premiums allocated to an Investment Account of the Variable Account will
increase or decrease in dollar value depending on the investment performance of
the corresponding mutual fund portfolio in which the Investment Account invests.
These amounts are not guaranteed. In the alternative, a Contract Owner may
allocate premiums to AUL's Fixed Account. Such allocations will earn interest at
rates that are paid by AUL as described in "The Fixed Account."
This Prospectus concisely sets forth information about the Contracts and
the Variable Account that a prospective investor should know before investing.
Certain additional information is contained in a "Statement of Additional
Information," dated May 4, 1999, which has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional Information is
incorporated by reference into this Prospectus. A prospective investor may
obtain a copy of the Statement of Additional Information without charge by
calling or writing to AUL at the telephone number or address indicated above. A
postage pre-paid envelope is included for this purpose. The table of contents of
the Statement of Additional Information is located at the end of this
Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any represention to the contrary is a
criminal offense.
This prospectus should be accompanied by the current prospectuses for the
fund or funds being considered. Each of these prospectuses should be read
carefully and retained for future reference.
The date of this Prospectus is May 4, 1999.
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TABLE OF CONTENTS
Description Page
- ----------- ----
DEFINITIONS............................................. 3-4
SUMMARY................................................. 5-6
Purpose of the Contracts.............................. 5
Types of Contracts.................................... 5
The Variable Account and the Funds.................... 5
Summary of the Fixed Account.......................... 5
Market Value Adjusted Fixed Acount...................
Non-Market Value Adjusted Fixed Account..............
Enhanced Averaging Fixed Account.....................
Premiums.............................................. 5
Right to Examine......................................
Transfers............................................. 5
Charges...............................................
Distributions.........................................
Withdrawals.......................................... 6
Loan Privileges......................................
The Death Benefit.................................... 6
Initial Dollar Cost Averaging Program.................
Ongoing Dollar Cost Averaging Program.................
Portfolio Rebalancing.................................
Contacting AUL........................................ 6
EXPENSE TABLE........................................... 6-9
PERFORMANCE OF THE INVESTMENT
ACCOUNTS................................................ 11-12
INFORMATION ABOUT AUL, THE VARIABLE
ACCOUNT, AND THE FUNDS.................................. 12-15
American United Life Insurance Company(R)............. 12
Variable Account...................................... 12
The Funds............................................. 13
AUL American Series Fund, Inc......................... 13
AUL American Equity Portfolio........................ 13
AUL American Bond Portfolio.......................... 13
AUL American Money Market Portfolio.................. 13
AUL American Managed Portfolio....................... 13
Alger American Fund................................... 14
Alger American Growth Portfolio...................... 14
American Century Variable Portfolios, Inc............. 14
VP Income & Growth................................... 14
VP International Portfolio........................... 14
Calvert Variable Series............................... 14
Calvert Social Mid Cap Growth Fund .................. 14
Fidelity Variable Insurance Products Fund............. 14
Equity-Income Portfolio.............................. 14
Growth Portfolio..................................... 14
High Income Portfolio................................ 14
Overseas Portfolio................................... 14
Fidelity Variable Insurance Products Fund II.......... 14
Asset Manager Portfolio.............................. 14
Contrafund Portfolio................................. 14
Index 500 Portfolio.................................. 14
Janus Aspen Series....................................
Flexible Income......................................
Worldwide Growth.....................................
PBHG Insurance Series Fund, Inc....................... 15
Growth II Portfolio.................................. 15
Technology & Communications Portfolio................ 15
SAFECO Resource Series Trust..........................
RST Equity...........................................
RST Growth...........................................
T. Rowe Price Equity Series, Inc...................... 15
T. Rowe Price Equity Income.......................... 15
THE CONTRACTS........................................... 15
General............................................... 15
PREMIUMS AND CONTRACT VALUES
DURING THE ACCUMULATION PERIOD.......................... 15-17
Application for a Contract............................ 15
Premiums under the Contracts.......................... 15
Right to Examine...................................... 16
Allocation of Premiums................................ 16
Transfers of Account Value............................ 16
Dollar Cost Averaging Program......................... 16
Initial Dollar Cost Averaging Program................
Ongoing Dollar Cost Averaging Program................
Portfolio Rebalancing.................................
Contract Owner's Variable Account Value............... 17
Accumulation Units................................... 17
Accumulation Unit Value.............................. 17
Net Investment Factor................................ 17
CHARGES AND DEDUCTIONS.................................. 18-19
Premium Tax Charge....................................
Withdrawal Charge.....................................
Mortality and Expense Risk Charge.....................
Administrative Fee....................................
Rider Charges.........................................
Other Charges.........................................
Variations in Charges.................................
Guarantee of Certain Charges..........................
Expenses of the Funds.................................
DISTRIBUTIONS...........................................
Cash Withdrawals...................................... 18
Loan Privileges.......................................
Death Proceeds Payment Provisions..................... 18
Death of the Owner...................................
Death of the Annuitant...............................
Payments from the Variable Account.................... 19
Annuity Period........................................
General..............................................
Fixed Payment Annuity................................
Variable Payment Annuity.............................
Payment Options......................................
Selection of an Option...............................
THE FIXED ACCOUNT....................................... 21-22
Summary of the Fixed Account..........................
Non-Market Value Adjusted Fixed Account..............
Market Value Adjusted Fixed Account..................
Enhanced Averaging Fixed Account.....................
Withdrawals........................................... 22
Transfers............................................. 22
Contract Charges...................................... 22
Payments from the Fixed Account(s).................... 22
MORE ABOUT THE CONTRACTS................................ 22-23
Designation and Change of Beneficiary................. 22
Assignability......................................... 23
Proof of Age and Survival............................. 23
Misstatements......................................... 23
Acceptance of New Premiums............................ 23
Optional Benefits.....................................
FEDERAL TAX MATTERS..................................... 23-26
Introduction.......................................... 23
Diversification Standards............................. 23
Taxation of Annuities in General-
Non-Qualified Plans.................................. 23
Additional Considerations............................. 24
Qualified Plans....................................... 25
Qualified Plan Federal Taxation Summary...............
403(b) Programs-Constraints on Withdrawals............ 26
403(b) Programs-Loan Privileges.......................
OTHER INFORMATION....................................... 26-27
Voting of Shares of the Funds......................... 26
Substitution of Investments........................... 27
Changes to Comply with Law and Amendments............. 27
Reservation of Rights................................. 27
Periodic Reports...................................... 27
Legal Proceedings..................................... 27
Legal Matters......................................... 27
Financial Statements.................................. 27
YEAR 2000 ISSUES AND READINESS.......................... 28
PERFORMANCE INFORMATION ................................ 28
STATEMENT OF ADDITIONAL
INFORMATION TABLE OF CONTENTS........................... 29
2
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DEFINITIONS
Various terms commonly used in this Prospectus are defined as follows:
403(b) PLAN - An arrangement by a public school organization or an organization
that is described in Section 501(c)(3) of the Internal Revenue Code, including
certain charitable, educational and scientific organizations, under which
employees are permitted to take advantage of the Federal income tax deferral
benefits provided for in Section 403(b) of the Internal Revenue Code.
408 or 408A PLAN - A plan of individual retirement accounts or annuities,
including a simplified employee pension plan, SIMPLE IRA or Roth IRA plan
established by an employer, that meets the requirements of Section 408 or 408A
of the Internal Revenue Code.
457 PLAN - A plan established by a unit of a state or local government or a
tax-exempt organization under Section 457 of the Internal Revenue Code.
ACCOUNT VALUE - The total of a Contract Owner's interest in the Variable
Account, the Fixed Account(s) and the Loan Account. Initially, it is equal to
the initial premium less any applicable premium tax and thereafter will reflect
the net result of premiums, investment experience, charges deducted, and any
partial withdrawals taken.
ACCUMULATION PERIOD - The period starting on the Contract Date and ending when
the Contract is terminated, either through surrender, withdrawal(s),
annuitization, payment of charges, payment of the death benefit, or a
combination thereof.
ACCUMULATION UNIT - A unit of measure used to record amounts of increases to,
decreases from, and accumulations in the Investment Accounts of the Variable
Account during the Accumulation Period.
ANNUITANT - The person or persons on whose life annuity payments depend.
ANNUITY - A series of payments made by AUL to an Annuitant or Beneficiary during
the period specified in the Annuity Option.
ANNUITY DATE - The first day of any month in which an annuity begins under a
Contract, which shall not be later than the required beginning date under
applicable federal requirements.
ANNUITY OPTIONS - Options under a Contract that prescribe the provisions under
which a series of annuity payments are made to an Annuitant, contingent
Annuitant, or Beneficiary.
ANNUITY PERIOD - The period during which annuity payments are made.
ASSUMED INTEREST RATE (AIR) - The investment rate built into the Variable
Payment Annuity table used to determine the first annuity payment.
AUL - American United Life Insurance Company(R).
BENEFICIARY - The person having the right to receive the death proceeds, if any,
payable upon the death of the Contract Owner during the Accumulation Period, and
the person having the right to benefits, if any, payable upon the death of an
Annuitant during the Annuity Period under any Annuity Option other than a
survivorship option (i.e., Option 3-under which the contingent Annuitant has the
right to benefits payable upon the death of an Annuitant).
BUSINESS DAY - A day on which AUL's Home Office is customarily open for
business. Traditionally, in addition to federal holidays, AUL is not open for
business on the day after Thanksgiving and either the day before or after
Christmas or Independence Day.
CASH VALUE - The Cash Value is the Account Value plus or minus any applicable
Market Value Adjustment.
CONTRACT ANNIVERSARY - The yearly anniversary of the Contract Date.
CONTRACT DATE - The date shown as the Contract Date in a Contract. It will not
be later than the date the initial premium is accepted under a Contract, and it
is the date used to determine Contract Months, Contract Years, and Contract
Anniversaries.
CONTRACT OWNER OR OWNER - The person entitled to the ownership rights under the
Contract and in whose name the Contract is issued. A trustee or custodian may be
designated to exercise an Owner's rights and responsibilities under a Contract
in connection with a retirement plan that meets the requirements of Section 401
or 408 of the Internal Revenue Code. An administrator, custodian, or other
person performing similar functions may be designated to exercise an Owner's
responsibilities under a Contract in connection with a 403(b) or 457 Program.
The term "Owner," as used in this Prospectus, shall include, where appropriate,
such a trustee, custodian, or administrator.
CONTRACT YEAR - A period beginning with one Contract Anniversary, or, in the
case of the first Contract Year, beginning on the Contract Date, and ending the
day before the next Contract Anniversary.
DEATH PROCEEDS - The amount payable to the Beneficiary by reason of the death of
the Annuitant or Owner during the Accumulation Period in accordance with the
terms of the Contract.
EMPLOYEE BENEFIT PLAN - A pension or profit sharing plan established by an
Employer for the benefit of its employees and which is qualified under Section
401 of the Internal Revenue Code.
FIXED ACCOUNT - An account that is part of our General Account, and is not part
of or dependent on the investment performance of the Variable Account.
FIXED ACCOUNT VALUE - The total value under a Contract allocated to any of the
Fixed Account(s).
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<PAGE>
FUNDS - AUL American Series Fund, Inc., which offers the Equity, Bond, Money
Market, Managed, and Tactical Asset Allocation Portfolios; Calvert Variable
Series, which offers the Calvert Social Mid Cap Growth Fund; Alger American
Fund, which offers the Alger American Growth Portfolio; American Century
Variable Portfolios, Inc. which offers the VP Income & Growth and VP
International Portfolios; Fidelity Variable Insurance Products Fund ("VIP"),
which offers the Equity-Income, Growth, High Income and Overseas Portfolios;
Fidelity Variable Insurance Products Fund II ("VIP II"), which offers the Asset
Manager, Contrafund, and Index 500 Portfolios; Janus Aspen Series which offers
the Flexible Income and Worldwide Growth Portfolios; PBHG Insurance Series Fund,
Inc., which offers the Growth II and the Technology & Communications Portfolios;
SAFECO Resource Series Trust which offers the RST Equity and RST Growth
Portfolios; and T. Rowe Price Equity Series, Inc., which offers the T. Rowe
Price Equity Income Portfolio. Each of the Funds is a diversified, open-end
management investment company commonly referred to as a mutual fund, or a
portfolio thereof.
GENERAL ACCOUNT - All assets of AUL other than those allocated to the Variable
Account or to any other separate account of AUL.
GUARANTEED PERIOD - The period of time in years that the interest rate on an MVA
Fixed Account is guaranteed. Guaranteed Periods may be 1, 3, 5, 7, or 10 years
in length or other duration offered from time to time by AUL.
HOME OFFICE - The Variable Products Service Office at AUL's principal business
office, One American Square, Indianapolis, Indiana 46282.
HR-10 PLAN - An Employee Benefit Plan established by a self-employed person in
accordance with Section 401 of the Internal Revenue Code. Investment Account - A
sub-account of the Variable Account that invests in shares of one of the Funds.
INVESTMENT ACCOUNTS - One or more of the subdivisions of the Separate Account.
Each Investment Account is invested in a corresponding Portfolio of a particular
mutual fund.
LOAN ACCOUNT - A portion of the Account Value which is collateral for loan
amounts.
MARKET VALUE ADJUSTMENT - An upward or downward adjustment in the value of an
MVA Fixed Account if withdrawals or transfers are made prior to the expiration
of the Guaranteed Period.
MVA FIXED ACCOUNT - A subaccount of the Fixed Account, having a particular
Guaranteed Period, and subject to a Market Value Adjustment.
NET CASH VALUE - Cash Value less outstanding loan and loan interest.
NET PURCHASE PAYMENTS - The premiums paid less any applicable premium tax.
PREMIUMS - The amounts paid to AUL as consideration for the Contract. In those
states that require the payment of premium tax upon receipt of a premium by AUL,
the term "premium" shall refer to the amount received by AUL net of the amount
deducted for premium tax.
PROPER NOTICE - Notice that is received at our Home Office in a form that is
acceptable to Us.
SEPARATE ACCOUNT - AUL American Individual Variable Annuity Unit Trust. The
Separate Account is segregated into several Investment Accounts each of which
invests in a corresponding mutual fund portfolio.
VALUATION DATE - Valuation Dates are the dates on which the Investment Accounts
are valued. A Valuation Date is any date on which the New York Stock Exchange is
open for trading and we are open for business. Traditionally, in addition to
federal holidays, AUL is not open for business on the day after Thanksgiving and
either the day before or after Christmas or Independence Day.
VALUATION PERIOD - The Valuation Period begins at the close of one Valuation
Date and ends at the close of the next succeeding Valuation Date. Generally, the
Valuation Date is "closed" at or about 4:00 P.M. eastern standard time, on each
day the NYSE is open for trading. The Valuation Date may close earlier than 4:00
P.M. EST if the NYSE closes earlier than 4:00 P.M. and it is possible to
determine the net asset value at that time.
VARIABLE ACCOUNT - The Separate Account.
VARIABLE ACCOUNT VALUE - The Account Value of this Contract which is invested in
one or more Investment Accounts.
4
<PAGE>
SUMMARY
This summary is intended to provide a brief overview of the more
significant aspects of the Contract. Later sections of this Prospectus, the
Statement of Additional Information, and the Contract provide further detail.
Unless the context indicates otherwise, the discussion in this summary and the
remainder of the Prospectus relates to the portion of the Contract involving the
Variable Account. The pertinent Contract and "The Fixed Account" section of this
Prospectus briefly describe the Fixed Account.
PURPOSE OF THE CONTRACTS
AUL offers the individual variable annuity contracts ("Contracts")
described in this Prospectus for use in connection with taxable contribution
retirement plans and deferred compensation plans for individuals (collectively
"non-Qualified Plans"). AUL also offers the Contracts for use by individuals in
connection with retirement plans that meet the requirements of Sections 401,
403(b), 457, 408 or 408A of the Internal Revenue Code, using pre-tax
conributions (collectively "Qualified Plans"). A Contract presents a dynamic
concept in retirement planning designed to give Contract Owners flexibility in
attaining investment goals. A Contract provides for the accumulation of values
on a variable basis, a fixed basis, or both, and provides several options for
fixed and variable annuity payments. During the Accumulation Period, a Contract
Owner can allocate premiums to the various Investment Accounts of the Variable
Account or to the Fixed Account. See "The Contracts."
Investors should carefully consider the tax benefits and disadvantages of a
Contract, and should consult a tax advisor. The tax benefits can be important
for investors seeking retirement income. The Contract may be disadvantageous for
those who do not plan to use the Contract as a source of retirement income. The
tax treatment may not be important for investors using the Contract in
connection with certain Qualified Plans. Investors should also consider the
investment and annuity benefits offered by the Contracts.
THE VARIABLE ACCOUNT AND THE FUNDS
AUL will allocate premiums designated to accumulate on a variable basis to
the Variable Account. See "Variable Account." The Variable Account is currently
divided into subaccounts referred to as Investment Accounts. Each Investment
Account invests exclusively in shares of one of the portfolios of the following
mutual funds:
<TABLE>
<S> <C> <C>
Investment Account and Mutual Fund Investment Adviser
Corresponding Mutual Fund Portfolio
AUL American Equity AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Bond AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Managed AUL American Series Fund, Inc. American United Life Insurance Company(R)
AUL American Money Market AUL American Series Fund, Inc. American United Life Insurance Company(R)
Alger American Growth Alger American Fund Fred Alger & Company
American Century VP Income & Growth American Century Variable Portfolios, Inc. American Century Investment Management, Inc.
American Century VP International American Century Variable Portfolios, Inc. American Century Investment Management, Inc.
Fidelity Asset Manager Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Contrafund Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Equity-Income Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity Growth Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity High Income Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Fidelity Index 500 Fidelity Variable Insurance Products Fund II Fidelity Management & Research Company
Fidelity Overseas Fidelity Variable Insurance Products Fund Fidelity Management & Research Company
Janus Aspen Series Flexible Income Janus Aspen Series Fund, Inc. Janus Capital Corporation
Janus Aspen Series Worldwide Growth Janus Aspen Series Fund, Inc. Janus Capital Corporation
PBHG Growth II PBHG Insurance Series Fund, Inc. Pilgrim Baxter & Associates, Ltd.
PBHG Technology & Growth PBHG Insurance Series Fund, Inc. Pilgrim Baxter & Associates, Ltd.
SAFECO RST Equity SAFECO Resource Series Trust SAFECO Asset Management Company
SAFECO RST Growth SAFECO Resource Series Trust SAFECO Asset Management Company
T. Rowe Price Equity Income T. Rowe Price Equity Series, Inc. T. Rowe Price Associates, Inc.
</TABLE>
Each of the Funds has a different investment objective. A Contract Owner
may allocate premiums to one or more of the Investment Accounts available under
a Contract. Premiums allocated to a particular Investment Account will increase
or decrease in dollar value depending upon the investment performance of the
corresponding mutual fund portfolio in which the Investment Account invests.
These amounts are not guaranteed. The Contract Owner bears the investment risk
for amounts allocated to an Investment Account of the Variable Account.
SUMMARY OF FIXED ACCOUNT
A Contract Owner may allocate premiums to one of several fixed accounts
which are part of AUL's general account. The Contracts will offer either Market
Value Adjusted (MVA) fixed accounts or a non-MVA fixed account. The MVA Fixed
Account(s) may not be available in all states. The Contracts will also offer an
Enhanced Averaging Fixed Account in all states as a part of the dollar cost
averaging program.
Market Value Adjusted Fixed Account
Market Value Adjusted Fixed Accounts provide a guaranteed rate of interest
over five different maturity durations: one (1), three (3), five (5), seven (7)
or ten (10) years. AUL will credit the Fixed Account the declared interest rate
for the duration selected unless a distribution from the Market Value Adjusted
Fixed Account occurs for any reason. If such a distribution occurs, AUL will
subject the proceeds to a market value adjustment, resulting in either an
increase or decrease in the value of the distributed proceeds, depending on
interest rate fluctuations. No market value adjustment will be applied to a
Market Value Adjusted Fixed Account if the allocations are held until maturity.
In that case, the Market Value Adjusted Fixed Account will be credited the
declared rate for the duration selected. A Contract Owner must allocate a
minimum amount of $1,000 to a Market Value Adjusted Fixed Account. MARKET VALUE
ADJUSTED FIXED ACCOUNTS ARE NOT AVAILABLE IN ALL STATES.
Non-Market Value Adjusted Fixed Accounts
A Contract Owner may allocate premiums to the Non-Market Value Adjusted
(non-MVA) Fixed Account only where MVA Fixed Accounts are not available. The
non-MVA Fixed Account is part of AUL's General Account. Amounts allocated to the
non-MVA Fixed Account earn interest at rates periodically determined by AUL.
Generally, any current rate that exceeds the guaranteed rate will be effective
for the Contract for a period of at least one year. These rates are guaranteed
to be at least an effective annual rate of 3%.
Enhanced Averaging Fixed Account
A Contract Owner may allocate premiums in the first Contract Year to the
Enhanced Averaging Fixed Account. Within one year after deposit, a Contract
Owner must transfer these allocations to other Investment Accounts. AUL will
recalculate, each month, the amounts it will transfer out of the Enhanced
Averaging Fixed Account. This procedure ensures that the entire balance of the
Enhanced Averaging Fixed Account will be transferred within the one year
timeframe. Amounts allocated to the Enhanced Averaging Fixed Account earn
interest at rates periodically determined by AUL. AUL guarantees these rates to
be at least an effective annual rate of 3%. The Enhanced Averaging Fixed Account
is only available in the first contract year and requires an initial deposit of
$10,000 therein.
PREMIUMS
The Contract Owner may vary premiums in amount and frequency. However, the
minimum premium payment is $50.
Right to Examine
The Contract Owner has the right to return the Contract for any reason
within ten days of receipt (or a longer period if required by state law). If the
Contract Owner exercises this right, AUL will treat the Contract as void from
its inception. AUL will refund to the Contract Owner the Account Value plus any
amounts deducted for premium taxes and other expenses. The Contract Owner bears
all of the investment risk prior to the Company's receipt of request for
cancellation. AUL will refund the premium paid in those states where required by
law and for all individual retirement annuities.
TRANSFERS
A Contract Owner may transfer his or her Variable Account Value among the
available Investment Accounts or to any of the available Fixed Accounts at any
time during the Accumulation Period. The Contract Owner may transfer part of his
or her Fixed Account Value to one or more of the available Investment Accounts
during the Accumulation Period, subject to certain restrictions. The minimum
transfer amount from any one Investment Account or from the Fixed Account is
$500. If the Contract
5
<PAGE>
Value in an Investment Account or the Fixed Account prior to a transfer is less
than $500, then the minimum transfer amount is the Contract Owner's remaining
Account Value in that account. If, after any transfer, the remaining Account
Value in an Investment Account or in the Fixed Account would be less than $500,
then AUL will treat that request as a request for a transfer of the entire
Contract Value.
Amounts transferred from the non-MVA Fixed Account to an Investment Account
cannot exceed 20% of the Owner's non-MVA Fixed Account Value as of the beginning
of that Contract Year. See "Transfers of Account Value."
CHARGES
AUL will deduct certain charges in connection with the operation of the
Contracts and the Variable Account. These charges include a mortality and
expense risk charge, a premium tax charge, and an annual contract fee. In
addition, the Funds pay investment advisory fees and other expenses. For further
information on these charges and expenses, see "Charges and Deductions."
DISTRIBUTIONS
Withdrawals
The Contract Owner may surrender or take a partial withdrawal from the
Account Value at any time before the Annuity Date. Withdrawals and surrender are
subject to the limitations under any applicable Qualified Plan and applicable
law. The minimum withdrawal amount is $200.
Certain retirement programs, such as 403(b) Programs, are subject to
constraints on withdrawals and full surrenders. See "403(b) Programs-Constraints
on Withdrawals." See "Cash Withdrawals" for more information, including the
possible charges and tax consequences of full and partial withdrawals.
Loan Privileges
Prior to the annuity date, the owner of a contract qualified under Section
403(b) may take a loan from the Account Value subject to the terms of the
Contract. The Plan and the Internal Revenue Code may impose restrictions on
loans.
The Death Benefit
If a Contract Owner dies during the Accumulation Period, AUL will pay a
death benefit to the Beneficiary. The amount of the death benefit is equal to
the Death Proceeds. A death benefit will not be payable if the Contract Owner
dies on or after the Annuity Date, except as may be provided under the Annuity
Option elected. See "The Death Proceeds" and "Annuity Options."
INITIAL DOLLAR COST AVERAGING PROGRAM
Beginning within the first contract year, owners who wish to purchase units
of an Investment Account over a one year period may do so through the Initial
Dollar Cost Averaging ("Initial DCA") Program. Under the Initial DCA Program,
the Contract Owner authorizes AUL to transfer an amount from the Enhanced
Averaging Fixed Account into one or more other Investment Accounts. AUL
recalculates the transfer amount each month to ensure that the entire balance of
the Enhanced Averaging Fixed Account is transferred within the one year
timeframe. The unit values are determined on the dates of the transfers. These
transfers will continue automatically over a 12 month period. To participate in
the Program, AUL requires a minimum deposit of $10,000 into the Enhanced
Averaging Fixed Account. For further information, see the explanation under
"Dollar Cost Averaging Program."
ONGOING DOLLAR COST AVERAGING PROGRAM
At any time, the Contract Owner may purchase units of an Investment Account
over a period of time through the Ongoing Dollar Cost Averaging (Ongoing DCA)
Program. Under the Ongoing DCA Program, the Contract Owner authorizes AUL to
transfer a specific dollar amount from the AUL American Money Market Investment
Account into one or more other Investment Accounts at the unit values determined
on the dates of the transfers. These transfers will continue automatically until
AUL receives notice to discontinue the Program, or until there is not enough
money in the AUL Money Market Investment Account to continue the Program. To
participate in the Program, AUL requires a minimum deposit of $10,000 into the
AUL Money Market Investment Account. For further information, see the
explanation under "Dollar Cost Averaging Program."
PORTFOLIO REBALANCING PROGRAM
The Contract Owner may elect to automatically adjust his or her investment
account balances consistent with the allocation most recently requested. AUL can
do this on a quarterly or annual basis from the date on which the Portfolio
Rebalancing Program commences.
CONTACTING AUL
Individuals should direct all written requests, notices, and forms required
under the Contracts, and any questions or inquiries to AUL's Variable Products
Office at the address and phone number shown in the front of this Prospectus.
EXPENSE TABLE
The purpose of the following table is to assist investors in understanding
the various costs and expenses that Contract Owners bear directly and
indirectly. The table reflects expenses of the Variable Account as well as the
Funds. Expenses of the Variable Account shown under "Contract Owner Transaction
Expenses" and "Variable Account Annual Expenses" are fixed and specified under
the terms of the Contract. Expenses of the Funds as shown under "Fund Annual
Expenses" are not fixed or specified under the terms of the Contract, and may
vary from year to year. The fees in this expense table have been provided by the
Funds and have not been independently verified by AUL. The table does not
reflect AUL's charges for premium taxes that may be imposed by various
jurisdictions. See "Premium Tax Charge." The information contained in the table
is not generally applicable to amounts allocated to the Fixed Account(s) or to
annuity payments under an Annuity Option.
6
<PAGE>
EXPENSE TABLE (continued)
For a complete description of a Contract's costs and expenses, see "Charges
and Deductions." For a more complete description of the Funds' costs and
expenses, see the Funds' Prospectuses.
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
DEFERRED SALES LOAD (as a percentage of amount surrendered)
This contract does not assess any sales charges (also referred to as
"Withdrawal Charges.")
ANNUAL CONTRACT FEE
Maximum administrative fee (per year)(1) .....................................................................$30
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of annual account value)(2)
Standard Individual Deferred Variable Annuity
Mortality and expense risk fee..........................................................1.45% yrs 1 - 10
..........................................................1.35% yrs 11+
Optional Rider Expenses (as an equivalent annual percentage of average account value)(3)
Enhanced Death Benefit Rider Option....................................................................0.15%
Enhanced Death Benefit and Guaranteed Minimum Annuitization Benefit Rider Option.......................0.35%
FUND ANNUAL EXPENSES (as a percentage of net assets of each Fund)
<S> <C> <C> <C>
Management/ Other Total Fund
Portfolio Advisory Fee Expenses Annual Expenses
- --------- ------------ -------- ---------------
AUL American Series Fund, Inc.
Equity Portfolio 0.50%(4) 0.12% 0.62%
Bond Portfolio 0.50%(4) 0.12% 0.62%
Managed Portfolio 0.50%(4) 0.12% 0.62%
Money Market Portfolio 0.40%(4) 0.11% 0.51%
Alger American Fund
Alger American Growth Portfolio 0.75% 0.04% 0.79%
American Century Variable Portfolios, Inc.
American Century VP Income & Growth 0.70% 0.00% 0.70%
American Century VP International 1.50%(5) 0.00% 1.50%
Calvert Variable Series:
Calvert Social Mid Cap Growth Portfolio 0.90%(6) 0.16% 1.06%
Fidelity Variable Insurance Products Fund
Equity-Income Portfolio 0.49% 0.09% 0.58%(7)
Growth Portfolio 0.59% 0.09% 0.68%(7)
High Income Portfolio 0.58% 0.12% 0.70%
Overseas Portfolio 0.74% 0.17% 0.91%(7)
Fidelity Variable Insurance Products Fund II
Asset Manager Portfolio 0.54% 0.10% 0.64%(7)
Contrafund Portfolio 0.59% 0.11% 0.70%(7)
Index 500 Portfolio 0.24% 0.11% 0.35%(7)
Janus Aspen Series
Flexible Income Portfolio 0.65% 0.08% 0.73%
Worldwide Growth Portfolio 0.65% 0.07% 0.72%(8)
PBHG Insurance Series Fund, Inc.
Growth II Portfolio 0.51% 0.69% 1.20%(9)
Technology & Communications Portfolio 0.49% 0.71% 1.20%(9)
SAFECO Resource Series Trust
RST Equity 0.74% 0.04% 0.78%
RST Growth 0.74% 0.06% 0.80%
T. Rowe Price Equity Series, Inc.
T. Rowe Price Equity Income 0.85% 0.00% 0.85%(10)
<FN>
(1)The Annual Contract Fee may be less than $30.00 per year, based on the
Owner's Account Value. The maximum charge imposed will be the lesser of 2% of
the Owner's Account Value or $30.00 per year. The Annual Contract Fee is waived
if the Account Value equals or exceeds $50,000 on a Contract Anniversary.
(2)The Variable Account expenses set forth apply exclusively to allocations
made to the Investment Account(s) of the Variable Account. Such charges do not
apply to, and will not be assessed against, allocations made to the Fixed
Account(s). The total Variable Account expenses shown include the Standard
Contractual Death Benefit (See Death Proceeds Payment Provisions). The Variable
Account expenses are deducted from the Account Value on a monthly basis.
(3)At the time of application, the applicant may choose any of the Enhanced
Benefit riders in lieu of receiving the Standard Contractual Death Benefit
option and no Enhanced Living Benefits. Should the applicant choose a Rider
Option, the Company will deduct the appropriate rider charge from the Account
Value on a monthly bais.
(4)AUL has currently agreed to waive its advisory fee if the ordinary
expenses of a Portfolio exceed 1% and, to the extent necessary, assume any
expenses in excess of its advisory fee so that the expenses of each Portfolio,
including the advisory fee but excluding extraordinary expenses, will not exceed
1% of the Portfolio's average daily net asset value per year. The Adviser may
terminate the policy of reducing its fee and/or assuming Fund expenses upon 30
days written notice to the Fund and such policy will be terminated automatically
by the termination of the Investment Advisory Agreement.
(5)American Century VP International fees are 1.50% on the first
$250,000,000 of average net assets; 1.20% on the next $250,000,000 of average
net assets; and, 1.10% thereafter.
(6) The figures above are based on expenses for fiscal year 1998, and have
been restated to reflect the elimination of the performance adjustment in CVS
Mid Cap Portfolios. The restatement includes the addition of 0.01%.
(7) A portion of the brokerage commissions that certain funds pay was used
to reduce fund expenses. In addition, certain funds, or FMR on behalf of certain
funds, have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash balances were used to reduce custodian
expenses. Including these reductions, the total operating expenses, after
reimbursement for Index 500 Portfolio, presented in the table would have been:
Equity-Income Portfolio .57%; Growth Portfolio .66%; Overseas Portfolio .89%;
Asset Manager Portfolio .63%; Index 500 Portfolio .28%; and, Contrafund
Portfolio .66%.
(8) All expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for the Worldwide Growth reduce the Management Fee
to the level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the Management Fee and then against Other
Expenses. Janus Capital has agreed to continue the other waivers and fee
reductions until at least the next annual renewal of the advisory agreement.
Without the contractual waivers and fee reductions, the total expenses would
have been 0.74% for the Janus Worldwide Growth Portfolio.
(9) The Investment Adviser agreed to reimburse a portion of the funds'
expenses during the period. Without this reimbursement, the funds' management
fee, other expenses and total expenses would have been 0.85%, 0.69% and 1.54%
respectively, for the PBHG Growth II Portfolio and 0.85%, 0.71% and 1.56%
respectively, for the PBHG Technology and Communications Portfolio.
(10) This is an annual all-inclusive fee paid to the advisor.
</FN>
</TABLE>
7
<PAGE>
EXAMPLES (for any Investment Account)
The following examples show expenses that a Contract Owner would pay at the
end of one or three years if at the end of those time periods, the Contract is
surrendered, annuitized, or not surrendered or annuitized. The information below
represents expenses on a $1,000 premium and assumes a 5% return per year. The
example shows expenses for Flexible Premium Contracts. These examples should not
be considered a representation of past or future expenses. Because Fund expenses
may vary, actual expenses may be greater or less than those shown. The assumed
5% return is hypothetical and should not be considered a representation of past
or future returns, which may be greater or less than the assumed amount. The
Annual Contract Fee charge used in these examples is based on an estimated
average Contract Owner Account Value of $10,000. A pro-rata portion of the
Annual Contract Fee has, therefore, been used in the calculation.
<TABLE>
<CAPTION>
<S> <C>
Flexible
Premium Contracts
-----------------
Investment Account
- ------------------
AUL American Equity
1 year $ 23.99
3 years 73.59
AUL American Bond
1 year 23.99
3 years 73.59
AUL American Managed
1 year 23.99
3 years 73.59
AUL American Money Market
1 year 22.89
3 years 70.27
Alger American Growth
1 year 25.71
3 years 78.76
American Century VP Income & Growth
1 year 24.79
3 years 76.01
American Century VP International
1 year 32.78
3 years 99.82
Calvert Social Mid Cap Growth
1 year 28.41
3 years 86.84
8
<PAGE>
Examples (for any Investment Account) (continued)
<CAPTION>
<S> <C>
Flexible
Premium Contracts
-----------------
Investment Account
- ------------------
Fidelity VIP Equity-Income
1 year $ 23.59
3 years 72.37
Fidelity VIP Growth
1 year 24.61
3 years 75.46
Fidelity VIP High Income
1 year 24.79
3 years 76.01
Fidelity VIP Overseas
1 year 26.91
3 years 82.37
Fidelity VIP II Asset Manager
1 year 24.21
3 years 74.25
Fidelity VIP II Contrafund
1 year 24.79
3 years 76.01
Fidelity VIP II Index 500
1 year 21.27
3 years 65.39
Janus Flexible Income
1 year 25.09
3 years 76.89
Janus Worldwide Growth
1 year 25.01
3 years 76.67
PBHG Growth II
1 year 29.80
3 years 90.97
PBHG Technology & Communications
1 year 29.80
3 years 90.97
SAFECO RST Equity
1 year 25.60
3 years 78.43
SAFECO RST Growth
1 year 25.78
3 years 78.98
T. Rowe Price Equity Income
1 year 26.29
3 years 80.51
</TABLE>
9
<PAGE>
PERFORMANCE OF THE INVESTMENT ACCOUNTS
The following table presents the return on investment for each of the
Investment Accounts. Though the Contracts were not offered prior to the date of
this prospectus, the tables present hypothetical information of the results,
based on the performance of the Funds, that would have been achieved if the
Contracts had been held for the periods presented. The return on investment
represents a change in a hypothetical Accumulation Unit allocated to an
Investment Account and takes into account Variable Account charges such as the
mortality and expense risk charges and a pro rata portion of the Annual Contract
Fee.
<TABLE>
<CAPTION>
Performance for Flexible Premium Contracts
Average Average Average Average
Annual Annual Annual Annual Cumulative
Return on Return on Return on Return on Return on
Inception Inception Investment Investment Investment Investment Investment for
Date of Date of for Year for 3 Years for 5 Years for lesser of lesser of 10
Mutual Investment ending ending ending 10 Years or Years or Since
Investment Account Fund Account 12/31/98 12/31/98 12/31/98 Since Inception Inception
- ------------------ ---- ------- -------- -------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AUL American Equity 4/10/90 04/30/99 5.46% 16.29% 13.23% 12.25% 174.19%
AUL American Bond 4/10/90 04/30/99 6.86% 4.39% 4.52% 6.76% 76.98%
AUL American Managed 4/10/90 04/30/99 6.48% 11.61% 9.64% 9.74% 125.14%
AUL American Money Market 4/10/90 04/30/99 5.28% 5.25% 5.06% 5.06% 53.88%
Alger American Growth 1/09/89 04/30/99 45.50% 26.05% 21.76% 19.70% 501.81%
American Century VP Income &
Growth 10/30/97 04/30/99 24.70% n.a. n.a. 28.43% 34.01%
American Century VP
International 5/01/94 04/30/99 16.70% 15.21% n.a. 10.33% 58.28%
Calvert Social Mid Cap Growth 7/16/91 04/30/99 27.53% 17.80% 14.69% 13.19% 152.24%
Fidelity VIP Equity-Income 10/09/86 04/30/99 9.69% 15.75% 16.72% 13.62% 258.88%
Fidelity VIP Growth 10/09/86 04/30/99 37.07% 23.30% 19.68% 17.35% 395.49%
Fidelity VIP High Income 9/19/85 04/30/99 (5.99%) 6.80% 6.93% 9.16% 140.38%
Fidelity VIP Overseas 1/28/87 04/30/99 10.79% 10.55% 7.82% 8.17% 119.48%
Fidelity VIP II Asset Manager 9/06/89 04/30/99 13.05% 14.71% 9.85% 11.12% 167.21%
Fidelity VIP II Contrafund 1/03/95 04/30/99 27.72% 22.92% n.a. 27.44% 163.38%
Fidelity VIP II Index 500 8/27/92 04/30/99 26.10% 25.67% 21.47% 19.14% 203.98%
Janus Flexible Income 9/13/93 04/30/99 7.48% 8.11% 8.41% 7.92% 49.77%
Janus Worldwide Growth 9/13/93 04/30/99 26.53% 24.47% 19.22% 21.86% 185.18%
PBHG Growth II 5/01/97 04/30/99 6.31% n.a. n.a. 7.51% 12.85%
PBHG Technology
& Communications 5/01/97 04/30/99 29.91% n.a. n.a. 18.94% 33.57%
SAFECO RST Equity 11/06/86 04/30/99 22.72% 22.68% 20.11% 17.08% 384.31%
SAFECO RST Growth 1/07/93 04/30/99 (0.19%) 22.54% 24.67% 24.72% 275.04%
T. Rowe Price Equity Income 3/31/94 04/30/99 7.18% 16.83% n.a. 18.40% 123.32%
</TABLE>
11
<PAGE>
INFORMATION ABOUT AUL, THE VARIABLE ACCOUNT, AND THE FUNDS
AMERICAN UNITED LIFE INSURANCE COMPANY(R)
AUL is a legal reserve mutual life insurance company existing under the
laws of the State of Indiana. It was originally incorporated as a fraternal
society on November 7, 1877, under the laws of the Federal government, and
reincorporated under the laws of the State of Indiana in 1933. It is qualified
to do business in 48 states and the District of Columbia. AUL has its principal
business office located at One American Square, Indianapolis, Indiana 46282.
AUL conducts a conventional life insurance, reinsurance, and annuity
business. At December 31, 1998, AUL had total assets of $9,336,325,097 and a
policy owners' surplus of $734,099,854.
The principal underwriter for the Contracts is AUL, which is registered
with the SEC as a broker-dealer.
VARIABLE ACCOUNT
AUL American Individual Variable Annuity Unit Trust was established by AUL
on November 11, 1998, under procedures established under Indiana law. The
income, gains, or losses of the Variable Account are credited to or charged
against the assets of the Variable Account without regard to other income,
gains, or losses of
12
<PAGE>
AUL. Assets in the Variable Account attributable to the reserves and other
liabilities under the Contracts are not chargeable with liabilities arising from
any other business that AUL conducts. AUL owns the assets in the Variable
Account and is required to maintain sufficient assets in the Variable Account to
meet all Variable Account obligations under the Contracts. AUL may transfer to
its General Account assets that exceed anticipated obligations of the Variable
Account. All obligations arising under the Contracts are general corporate
obligations of AUL. AUL may invest its own assets in the Variable Account, and
may accumulate in the Variable Account proceeds from Contract charges and
investment results applicable to those assets.
The Variable Account is currently divided into sub-accounts referred to as
Investment Accounts. Each Investment Account invests exclusively in shares of
one of the Funds. Premiums may be allocated to one or more Investment Accounts
available under a Contract. AUL may in the future establish additional
Investment Accounts of the Variable Account, which may invest in other
securities, mutual funds, or investment vehicles.
The Variable Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with the
SEC does not involve supervision by the SEC of the administration or investment
practices of the Variable Account or of AUL.
THE FUNDS
Each of the Funds is a diversified, open-end management investment company
commonly referred to as a mutual fund, or a portfolio thereof. Each of the Funds
is registered with the SEC under the 1940 Act. Such registration does not
involve supervision by the SEC of the investments or investment policies or
practices of the Fund. Each Fund has its own investment objective or objectives
and policies. The shares of a Fund are purchased by AUL for the corresponding
Investment Account at the Fund's net asset value per share, i.e., without any
sales load. All dividends and capital gain distributions received from a Fund
are automatically reinvested in such Fund at net asset value, unless otherwise
instructed by AUL. AUL has entered into agreements with the
Distributors/Advisers of American Century Variable Portfolios, Inc., Calvert
Variable Series, Fidelity Investments, Janus Capital Corporation, Pilgrim Baxter
& Associates, SAFECO Asset Management Company and T. Rowe Price Equity Series,
Inc. under which AUL has agreed to render certain services and to provide
information about these funds to its Contract Owners and/or Participants who
invest in these funds. Under these agreements and for providing these services,
AUL receives compensation from the Distributor/Advisor of these funds, ranging
from zero basis points until a certain level of Fund assets have been purchased
to 25 basis points on the net average aggregate deposits made.
The investment advisers of the Funds are identified on page 5. All of the
investment advisers are registered with the SEC as investment advisers. The
Funds offer their shares as investment vehicles to support variable annuity
contracts. The advisers or distributors to certain of the Funds may advise and
distribute other investment companies that offer their shares directly to the
public, some of which have names similar to the names of the Funds in which the
Investment Accounts invest. These investment companies offered to the public
should not be confused with the Funds in which the Investment Accounts invest.
The Funds are described in their prospectuses, which accompany this prospectus.
A summary of the investment objective or objectives of each Fund is
provided below. There can be no assurance that any Fund will achieve its
objective or objectives. More detailed information is contained in the
Prospectus for the Funds, including information on the risks associated with the
investments and investment techniques of each Fund.
AUL AMERICAN SERIES FUND, INC.
AUL AMERICAN EQUITY PORTFOLIO
The primary investment objective of the AUL American Equity Portfolio is
long-term capital appreciation. The Fund seeks current investment income as a
secondary objective. The Fund attempts to achieve these objectives by investing
primarily in equity securities selected on the basis of fundamental investment
research for their long-term growth prospects.
AUL AMERICAN BOND PORTFOLIO
The primary investment objective of the AUL American Bond Portfolio is to
provide a high level of income consistent with prudent investment risk. As a
secondary objective, the Fund seeks to provide capital appreciation to the
extent consistent with the primary objective. The Fund attempts to achieve these
objectives by investing primarily in corporate bonds and other debt securities.
AUL AMERICAN MANAGED PORTFOLIO
The investment objective of the AUL American Managed Portfolio is to
provide a high total return consistent with prudent investment risk. The Fund
attempts to achieve this objective through a fully managed investment policy
utilizing publicly traded common stock, debt securities (including convertible
debentures), and money market securities.
AUL AMERICAN MONEY MARKET PORTFOLIO
The investment objective of the AUL American Money Market Portfolio is to
provide a high level of current income while preserving assets and maintaining
liquidity and investment quality. The Fund attempts to achieve this objective by
investing in short-term money market instruments that are of the highest
quality.
FOR ADDITIONAL INFORMATION CONCERNING AUL AMERICAN SERIES FUND, INC. AND ITS
PORTFOLIOS, PLEASE SEE THE AUL AMERICAN SERIES FUND, INC. PROSPECTUS, WHICH
SHOULD BE READ CAREFULLY BEFORE INVESTING.
13
<PAGE>
ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO
The Alger American Growth Portfolio is a growth portfolio that seeks to
obtain long-term capital appreciation by investing in a diversified, actively
managed portfolio of equity securities. Except during temporary defensive
periods, the Portfolio invests at least 65% of its total assets in equity
securities of companies that, at the time of purchase, have a total market
capitalization of one billion dollars or greater.
FOR ADDITIONAL INFORMATION CONCERNING THE ALGER AMERICAN FUND AND ITS PORTFOLIO,
PLEASE SEE THE ALGER AMERICAN FUND PROSPECTUS, WHICH SHOULD BE READ CAREFULLY
BEFORE INVESTING.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AMERICAN CENTURY VP INCOME & GROWTH
The American Century VP Income & Growth Portfolio seeks dividend growth,
current income and capital appreciation by investing in a diversified portfolio
of U.S. stocks. The fund employs a quantitative management approach with the
goal of producing a total return that exceeds its benchmark, the S&P 500. The
fund's management team also targets a dividend yield that is 30% higher than the
yield of the S&P 500. The fund invests mainly in large-company stocks, such as
those in the S&P 500, but it also may invest in the stocks of small- and
medium-sized companies. The management team strives to outperform the S&P 500
over time while matching the risk characteristics of the index.
AMERICAN CENTURY VP INTERNATIONAL
The American Century VP International Portfolio seeks to achieve its
investment objective of capital growth by investing primarily in securities of
foreign companies that meet certain fundamental and technical standards of
selection and have, in the opinion of the investment manager, potential for
appreciation. The Fund will invest primarily in common stocks (defined to
include depository receipts for common stocks and other equity equivalents) of
companies located in developed markets. Investment in securities of foreign
issuers typically involves greater risks than investment in domestic securities,
including currency fluctuations and political instability.
FOR ADDITIONAL INFORMATION CONCERNING AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
AND ITS PORTFOLIOS, PLEASE SEE THE AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING.
CALVERT VARIABLE SERIES
CALVERT SOCIAL MID CAP GROWTH
The Calvert Social Mid Cap Growth Portfolio is a socially responsible
growth Portfolio that seeks long-term capital appreciation by investing
primarily in the stock of medium sized companies. To the extent possible,
investments are made in enterprises that make a significant contribution to
society through their products and services and through the way they do
business.
FOR ADDITIONAL INFORMATION CONCERNING CALVERT VARIABLE SERIES AND THE CALVERT
SOCIAL MID CAP GROWTH PORTFOLIO, PLEASE SEE THE CALVERT VARIABLE SERIES
PROSPECTUS, WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
VIP EQUITY-INCOME PORTFOLIO
The VIP Equity-Income Portfolio seeks reasonable income. The fund will also
consider the potential for capital appreciation. The fund seeks a yield which
exceeds the composite yield on the securities comprising the S&P 500. The
Adviser normally invests at least 65% of the fund's total assets in
income-producing equity securities. The Adviser may also invest the fund's
assets in other types of equity securities and debt securities, including
lower-quality debt securities. The Adviser may also invest in securities of
foreign issuers in addition to securities of domestic issuers.
VIP GROWTH PORTFOLIO
The VIP Growth Portfolio seeks capital appreciation. The Adviser normally
invests the fund's assets primarily in common stocks. The Adviser invests the
fund's assets in companies that it believes have above-average growth potential.
Growth may be measured by factors such as earnings or revenue. The Adviser may
invest the fund's assets in securities of foreign issuers in addition to
securities of domestic issuers.
VIP HIGH INCOME PORTFOLIO
The VIP High Income Portfolio seeks to obtain a high level of current
income while also considering growth of capital. The Adviser normally invests at
least 65% of the fund's total assets in income-producing debt securities,
preferred stocks and convertible securities, with an emphasis on lower-quality
debt securities. Many lower-quality debt securities are subject to legal or
contractual restrictions limiting the Adviser's ability to resell the securities
to the general public. The Adviser may also invest the fund's assets in
non-income producing securities, including defaulted securities and common
stocks. The Adviser intends to limit common stocks to 10% of the fund's total
assets. The Adviser may invest in companies whose financial condition is
troubled or uncertain and that may be involved in bankruptcy proceedings,
reorganization or financial restructurings.
VIP OVERSEAS PORTFOLIO
The VIP Overseas Portfolio seeks long-term growth of capital. The Adviser
normally invests at least 65% of the fund's total assets in foreign securities.
The Adviser normally invests the fund's assets primarily in stocks. The adviser
normally diversifies the fund's investments across different countries and
regions. In allocating the fund's investments across countries and regions, the
Adviser will consider the size of the market in each country and region relative
to the size of the international market as a whole.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
VIP II ASSET MANAGER PORTFOLIO
The VIP II Asset Manager Portfolio seeks high total return with reduced
risk over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term instruments. The Adviser allocates the fund's
assets among the following classes, or types, of investments. The stock class
includes equity securities of all types. The bond class includes all varieties
of fixed-income securities, including lower-quality debt securities, maturing in
more than one year. The short-term/money market class includes all types of
short-term and money market instruments.
VIP II CONTRAFUND
The VIP II Contrafund Portfolio seeks long-term capital appreciation. The
Adviser normally invests the fund's assets primarily in common stocks. The
Adviser invests the fund's assets in securities of companies whose value the
Adviser believes is not fully recognized by the public. The types of companies
in which the fund may invest include companies experiencing positive fundamental
change such as a new management team or product launch, a significant
cost-cutting intiative, a merger or acquisition, or a reduction in industry
capacity that should lead to improved pricing; companies whose earnings
potential has increased or is expected to increase more than generally
perceived; companies that have enjoyed recent market popularity but which appear
to have temporarily fallen out of favor for reasons that are considered
non-recurring or short-term; and companies that are undervalued in relation to
securities of other companies in the same industry.
VIP II INDEX 500 PORTFOLIO
The VIP II Index 500 Portfolio seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by the S&P 500. The Adviser's principal investment strategies
include investing at least 80% of assets in common stocks included in the S&P
500 and lending securities to earn income for the fund. 14
<PAGE>
FOR ADDITIONAL INFORMATION CONCERNING FIDELITY'S VARIABLE INSURANCE PRODUCTS
FUND ("VIP") AND VARIABLE INSURANCE PRODUCTS FUND II ("VIP II") AND THEIR
PORTFOLIOS, PLEASE SEE THE VIP AND VIP II PROSPECTUS, WHICH SHOULD BE READ
CAREFULLY BEFORE INVESTING.
JANUS ASPEN SERIES
FLEXIBLE INCOME PORTFOLIO
The Flexible Income Portfolio is a diversified portfolio that seeks to
maximize total return from a combination of income and capital appreciation by
investing primarily in income-producing securities. This Portfolio may have
substantial holdings of lower rated debt securities or "junk" bonds.
WORLDWIDE GROWTH PORTFOLIO
The Worldwide Growth Portfolio is a diversified portfolio that seeks
long-term growth of capital by investing primarily in common stocks of foreign
and domestic issuers.
FOR ADDITIONAL INFORMATION CONCERNING JANUS ASPEN SERIES FUND AND ITS
PORTFOLIOS, PLEASE SEE THE JANUS ASPEN SERIES FUND PROSPECTUS, WHICH SHOULD BE
READ CAREFULLY BEFORE INVESTING
PBHG INSURANCE SERIES FUNDS, INC.
PBHG GROWTH II PORTFOLIO
The investment objective of the PBHG Growth II Portfolio is capital
appreciation. The Portfolio will normally invest in growth securities of small
and medium-sized companies with market capitalizations or annual revenues
between $500 million and $10 billion. The growth securities in the Portfolio are
primarily common stocks that the Adviser believes have strong earnings growth
and capital appreciation potential. The PBHG Growth II Portfolio is managed by
Jeffrey A. Wrona, CFA, who is responsible for managing other mid-cap
institutional accounts and co-manages the PBHG Technology & Communications
Fund of the PBHG Funds, Inc.
PBHG TECHNOLOGY & COMMUNICATIONS PORTFOLIO
The primary objective of the PBHG Technology & Communications Portfolio is
long-term growth of capital. Current income is incidental to the Portfolio's
objective. The Portfolio will normally invest in common stocks of companies
which (1) rely extensively on technology or communications in their product
development or operations; (2) are experiencing exceptional growth in sales and
earnings driven by technology or communications-related products and services;
and (3) are expected to benefit from technological advances and improvement. The
Portfolio is co-managed by Jeffrey A. Wrona, CFA, and Michael Hahn, CFA, who
co-manage the PBHG Technology & Communications Fund of the PBHG Funds, Inc.
FOR ADDITIONAL INFORMATION CONCERNING THE PBHG INSURANCE SERIES FUND, INC. AND
ITS PORTFOLIOS, PLEASE SEE THE PBHG INSURANCE SERIES FUND, INC. PROSPECTUS,
WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING.
SAFECO RESOURCE SERIES TRUST
RST EQUITY PORTFOLIO
The Equity Portfolio has as its investment objective to seek long-term
capital and reasonable current income. The Equity Portfolio ordinarily invests
principally in common stocks selected for long-term appreciation and/or dividend
potential.
RST GROWTH PORTFOLIO
The Growth Portfolio has as its investment objective to seek growth of
capital and the increased income that ordinarily follows from such growth. The
Growth Portfolio ordinarily invests a preponderance of its assets in common
stocks selected for potential appreciation.
FOR ADDITIONAL INFORMATION CONCERNING SAFECO RESOURCE SERIES TRUST AND ITS
PORTFOLIOS, PLEASE SEE THE SAFECO RESOURCE SERIES TRUST PROSPECTUS, WHICH SHOULD
BE READ CAREFULLY BEFORE INVESTING.
T. ROWE PRICE EQUITY SERIES, INC.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The T. Rowe Price Equity Income Portfolio seeks to provide substantial
dividend income as well as long-term capital appreciation through investments in
common stocks of established companies.
FOR ADDITIONAL INFORMATION CONCERNING T. ROWE PRICE EQUITY SERIES, INC. AND ITS
PORTFOLIO, PLEASE SEE THE T. ROWE PRICE EQUITY SERIES, INC. PROSPECTUS, WHICH
SHOULD BE READ CAREFULLY BEFORE INVESTING.
THE CONTRACTS
GENERAL
The Contracts are offered for use in connection with non-tax qualified
retirement plans by an individual. The Contracts are also eligible for use in
connection with certain tax qualified retirement plans that meet the
requirements of Sections 401, 403(b), 408 or 408A of the Internal Revenue Code.
Certain Federal tax advantages are currently available to retirement plans that
qualify as (1) self-employed individuals' retirement plans under Section 401,
such as HR-10 Plans, (2) pension or profit-sharing plans established by an
employer for the benefit of its employees under Section 401, (3) Section 403(b)
annuity purchase plans for employees of public schools or a charitable,
educational, or scientific organization described under Section 501(c)(3), and
(4) individual retirement accounts or annuities, including those established by
an employer as a simplified employee pension plan or SIMPLE IRA plan under
Section 408, Roth IRA plan under Section 408A or (5) deferred compensation plans
for employees established by a unit of a state or local government or by a
tax-exempt organization under Section 457
PREMIUMS AND ACCOUNT VALUES DURING THE ACCUMULATION PERIOD
APPLICATION FOR A CONTRACT
Any person or, in the case of Qualified Plans, any qualified organization,
wishing to purchase a Contract must submit an application and an initial premium
to AUL, and provide any other form or information that AUL may require. AUL
reserves the right to reject an application or premium for any reason, subject
to AUL's underwriting standards and guidelines.
PREMIUMS UNDER THE CONTRACTS
Premiums under Flexible Premium Contracts may vary at any time during the
Contract Owner's life and before the Contract's Annuity Date. Premiums for
Flexible Premium Contracts may vary in amount and frequency, but each premium
payment must be at least $50. Premiums may not total more than $1 million in
each of the first two Contract Years and $15,000 in any subsequent Contract Year
unless otherwise agreed to by AUL.
If the minimum premium amounts under One Year Flexible Premium Contracts
are not met, AUL may, after 60 days notice, terminate the Contract and pay an
amount equal to the Account Value as of the close of business on the effective
date of termination. AUL may change the
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minimum premiums permitted under a Contract, and may waive any minimum required
premium at its discretion.
Annual premiums under any Contract purchased in connection with a Qualified
Plan will be subject to maximum limits imposed by the Internal Revenue Code and
possibly by the terms of the Qualified Plan. See the Statement of Additional
Information for a discussion of these limits or consult the pertinent Qualified
Plan document. Such limits may change without notice.
Initial premiums must be credited to a Contract no later than the end of
the second Business Day after it is received by AUL at its Home Office if it is
preceded or accompanied by a completed application that contains all the
information necessary for issuing the Contract and properly crediting the
premium. If AUL does not receive a complete application, AUL will notify the
applicant that AUL does not have the necessary information to issue a Contract.
If the necessary information is not provided to AUL within five Business Days
after the Business Day on which AUL first receives an initial premium or if AUL
determines it cannot otherwise issue a Contract, AUL will return the initial
premium to the applicant, unless consent is received to retain the initial
premium until the application is made complete.
Subsequent premiums (other than initial premiums) are credited as of the
end of the Valuation Period in which they are received by AUL at its Home
Office.
RIGHT TO EXAMINE PERIOD
The Owner has the right to return the Contract for any reason within the
Right to Examine Period which is a ten day period beginning when the Owner
receives the Contract. If a particular state requires a longer Right to Examine
Period, then eligible Owners in that state will be allowed the longer statutory
period in which to return the Contract. The returned Contract will be deemed
void and AUL will refund the Account Value as of the end of the Valuation Period
in which AUL receives the Contract plus any amounts deducted for premium taxes
and contract expenses. The Contract Owner bears the investment risk during the
period prior to the Company's receipt of request for cancellation. AUL will
refund the premium paid in those states where required by law and for individual
retirement annuities (if returned within seven days of receipt).
ALLOCATION OF PREMIUMS
In the Policy application, you specify the percentage of a Premium to be
allocated to the investment accounts and to the Fixed Account(s). The sum of
your allocations must equal 100%, with at least 1% of each Premium payment
allocated to each account selected by you. All Premium allocations must be in
whole percentages. AUL reserves the right to limit the number of Investment
Accounts to which premiums may be allocated. You can change the allocation
percentages at any time, subject to these rules, by sending Proper Notice to the
Home Office, or by telephone if written authorization is on file with us. The
change will apply to the premium payments received with or after receipt of your
notice.
The initial Premium generally is allocated to the available Fixed
Account(s) and the Investment Accounts in accordance with your allocation
instructions on the date we receive the premium at our Home Office. Subsequent
premiums are allocated as of the end of the Valuation Period during which we
receive the premium at our Home Office.
In those states that require the refund of the greater of premiums paid or
account value, we generally allocate all premiums received to our general
account prior to the end of the "right to examine" period. We will credit
interest daily on Premiums so allocated. However, we reserve the right to
allocate premiums to the available fixed account(s) and the investment accounts
of the separate account in accordance with your allocation instructions prior to
the expiration of the "right to examine" period. At the end of the Right to
Examine period, we transfer the Net Premium and interest to the Fixed Account(s)
and the Investment Accounts based on the percentages you have selected in the
application. For purposes of determining the end of the Right to Examine period,
solely as it applies to this transfer, we assume that receipt of this Policy
occurs 5 days after the Contract Date.
TRANSFERS OF ACCOUNT VALUE
All or part of an Owner's Account Value may be transferred among the
Investment Accounts of the Variable Account or to the Fixed Account at any time
during the Accumulation Period upon receipt of a proper written request by AUL
at its Home Office. Transfers may be made by telephone if a Telephone
Authorization Form has been properly completed and received by AUL at its Home
Office. The minimum amount that may be transferred from any one Investment
Account is $500 or, if less than $500, the Owner's remaining Account Value in
the Investment Account, provided however, that amounts transferred from the
Fixed Account to an Investment Account during any given Contract Year cannot
exceed 20% of the Owner's Fixed Account Value as of the beginning of that
Contract Year. If, after any transfer, the Owner's remaining Account Value in
an Investment Account or in the Fixed Account would be less than $500, then such
request will be treated as a request for a transfer of the entire Account
Value. Currently, there are no limitations on the number of transfers between
Investment Accounts available under a Contract or the Fixed Account. In
addition, no charges are currently imposed upon transfers. AUL reserves the
right, however, at a future date, to change the limitation on the minimum
transfer, to assess transfer charges, to change the limit on remaining balances,
to limit the number and frequency of transfers, and to suspend the transfer
privilege or the telephone transfer authorization. Any transfer from an
Investment Account of the Variable Account shall be effected as of the end of
the Valuation Date in which AUL receives the request in proper form. AUL has
established procedures to confirm that instructions communicated by telephone
are genuine, which include the use of personal identification numbers and
recorded telephone calls. Neither AUL nor its agents, will be liable for acting
upon instructions believed by AUL or its agents to be genuine, provided AUL has
complied with its procedures.
Part of a Contract Owner's Fixed Account Value may be transferred to one or
more Investment Accounts of the Variable Account during the Accumulation Period
subject to certain limitations as described in "The Fixed Account."
DOLLAR COST AVERAGING PROGRAM
Owners who wish to purchase units of an Investment Account over a period of
time may do so through the Dollar Cost Averaging ("DCA") Program. The theory of
dollar cost averaging is that greater numbers of Accumulation Units are
purchased at times when the unit prices are relatively low than are purchased
when the prices are higher. This has the effect, when purchases are made at
different prices, of reducing the aggregate average cost per Accumulation Unit
to less than the average of the Accumulation Unit prices on the same purchase
dates. However, participation in the Dollar Cost Averaging Program does not
assure a Contract Owner of greater profits from the purchases under the Program,
nor will it prevent or necessarily alleviate losses in a declining market.
For example, assume that a Contract Owner requests that $1,000 per month be
transferred from the Money Market Investment Account to the AUL American Equity
Investment
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Account. The following table illustrates the effect of dollar cost averaging
over a six month period.
<TABLE>
<CAPTION>
Transfer Unit Units
Month Amount Value Purchased
----- ------ ----- ---------
<S> <C> <C> <C>
1 $1,000 $20 50
2 $1,000 $25 40
3 $1,000 $30 33.333
4 $1,000 $40 25
5 $1,000 $35 28.571
6 $1,000 $30 33.333
</TABLE>
The average price per unit for these purchases is the sum of the prices ($180)
divided by the number of monthly transfers (6) or $30. The average cost per
Accumulation Unit for these purchases is the total amount transferred ($6,000)
divided by the total number of Accumulation Units purchased (210.237) or $28.54.
THIS TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY AND IS NOT REPRESENTATIVE OF FUTURE
RESULTS.
Initial Dollar Cost Averaging Program
Under the Initial DCA Program, the owner deposits premiums into the
Enhanced Averaging Fixed Account and authorizes AUL to transfer an amount that
is recalculated on a monthly basis from the Enhanced Averaging Fixed Account
into one or more Investment Accounts. These transfers will continue
automatically over a 12 month period. To participate in the Program, a minimum
deposit of $10,000 into the Enhanced Averaging Fixed Account is required.
Transfers to any of the Fixed Account(s) are not permitted under the
Initial Dollar Cost Averaging Program. AUL offers the Initial Dollar Cost
Averaging Program to Contract Owners at no charge, and the Company reserves the
right to temporarily discontinue, terminate, or change the Program at any time.
Contract Owners may discontinue participation in the Program at any time by
providing Proper Notice to AUL. AUL must receive Proper Notice of such a change
at least five days before a previously scheduled transfer is to occur.
Contract Owners may only elect to participate in the Initial DCA Program
within the first contract year. The Program will take effect on the first
monthly transfer date following the premium receipt by AUL at its Home Office.
The Contract Owner may select the particular day of the month that the transfers
are to be made. Transfers will be performed on such day, provided that such day
is a Valuation Date. If the date selected is not a Valuation Date, then the
transfer will be made on the next Valuation Date.
Ongoing Dollar Cost Averaging (DCA) Program
Under the Ongoing DCA Program, the owner deposits premiums into the AUL
American Money Market Investment Account and then authorizes AUL to transfer a
specific dollar amount from the Money Market Investment Account into one or more
other Investment Accounts at the unit values determined on the dates of the
transfers. This may be done monthly, quarterly, semi-annually, or annually.
These transfers will continue automatically until AUL receives notice to
discontinue the Program, or until there is not enough money in the Money Market
Investment Account to continue the Program, whichever occurs first.
Currently, the minimum required amount of each transfer is $500, although
AUL reserves the right to change this minimum transfer amount in the future.
Transfers to or from any of the Fixed Accounts are not permitted under the
Ongoing DCA Program. At least ten days advance written notice to AUL is required
before the date of the first proposed transfer under the Ongoing DCA Program.
AUL offers the Ongoing Dollar Cost Averaging Program to Contract Owners at no
charge and the Company reserves the right to temporarily discontinue, terminate,
or change the Program at any time. Contract Owners may change the frequency of
scheduled transfers, or may increase or decrease the amount of scheduled
transfers, or may discontinue participation in the Program at any time by
providing written notice to AUL, provided that AUL must receive written notice
of such a change at least five days before a previously scheduled transfer is to
occur.
Contract Owners may initially elect to participate in the Ongoing DCA
Program, and if this election is made at the time the Contract is applied for,
the Program will take effect on the first monthly, quarterly, semi-annual, or
annual transfer date following the premium receipt by AUL at its Home Office.
The Contract Owner may select the particular date of the month, quarter, or year
that the transfers are to be made and such transfers will automatically be
performed on such date, provided that such date selected is a day that AUL is
open for business and provided further that such date is a Valuation Date. If
the date selected is not a Business Day or is not a Valuation Date, then the
transfer will be made on the next succeeding Valuation Date. To participate in
the Program, a minimum deposit of $10,000 is required.
PORTFOLIO REBALANCING PROGRAM
You may elect to automatically adjust your investment account balances to
be consistent with the allocation most recently requested.. This will be done on
a quarterly or annual basis from the date on which the Portfolio Rebalancing
Program commences. If the Dollar Cost Averaging program has been elected, the
Portfolio Rebalancing Program will not commence until the date following the
termination of the Dollar Cost Averaging Program.
You may elect this plan at any time. Portfolio rebalancing will terminate
when you request any transfer or the day we receive Proper Notice instructing us
to cancel the Portfolio Rebalancing Program. We do not currently charge for this
program. We reserve the right to alter the terms or suspend or eliminate the
availability of portfolio rebalancing at any time.
CONTRACT OWNER'S VARIABLE ACCOUNT VALUE
ACCUMULATION UNITS
Premiums allocated to the Investment Accounts available under a Contract
are credited to the Contract in the form of Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Investment Account by the Accumulation Unit value
for the particular Investment Account as of the end of the Valuation Period in
which the premium is credited. The number of Accumulation Units so credited to
the Contract shall not be changed by a subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
Valuation Date to Valuation Date depending upon the investment experience of the
Investment Account and charges against the Investment Account.
Accumulation Unit Value
AUL determines the Accumulation Unit value for each Investment Account of
the Variable Account on each Valuation Date. The Accumulation Unit value for
each Investment Account was initially set at one dollar $1 for the Money Market
Investment Account and $5 for all other Investment Accounts. Subsequently, on
each Valuation Date, the Accumulation Unit value for each Investment Account is
determined by multiplying the Net Investment Factor determined as of the end of
the Valuation Date for the particular Investment Account by the Accumulation
Unit value for the Investment Account as of the immediately preceding Valuation
Period. The Accumulation Unit value for each Investment Account may increase,
decrease, or remain the same from Valuation Period to Valuation Period in
accordance with the Net Investment Factor.
Net Investment Factor
The Net Investment Factor is used to measure the investment performance of
an Investment Account from one Valuation Period to the next. For any Investment
Account for a Valuation Period, the Net Investment Factor is determined by
dividing (a) by (b) where:
(a) is equal to:
(1) the net asset value per share of the Fund in which the Investment
Account invests, determined as of the end of the Valuation Period, plus
(2) the per share amount of any dividend or other distribution, if any,
paid by the Fund during the Valuation Period, plus or minus
(3) a credit or charge with respect to taxes if any, paid or reserved for
AUL during the Valuation Period that are determined by AUL to be
attributable to the operation of the Investment Account (although no
Federal income taxes are applicable under present law and no such charge is
currently assessed);
(b) is the net asset value per share of the Fund determined as of the end
of the preceding Valuation Period.
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CHARGES AND DEDUCTIONS
Premium Tax Charge
Various states and municipalities impose a tax on premiums received by
insurance companies. Whether or not a premium tax is imposed will depend upon,
among other things, the Owner's state of residence, the Annuitant's state of
residence, the insurance tax laws, and AUL's status in a particular state. AUL
assesses a premium tax charge to reimburse itself for premium taxes that it
incurs. This charge will be deducted as premium taxes are incurred by AUL, which
is usually when an annuity is effected. Premium tax rates currently range from
0% to 3.5%, but are subject to change.
Withdrawal Charge
No deduction for sales charges is made from premiums for a Contract. If a
cash withdrawal is made or the Contract is surrendered by the Owner, no
withdrawal charge (which may also be referred to as a contingent deferred sales
charge) will be assessed by AUL on the amount withdrawn.
A withdrawal may result in taxable income to the Contract Owner.
Mortality and Expense Risk Charge
AUL deducts a monthly charge from the Investment Accounts pro rata based on
your amounts in each account. Refer to the Expense Table for current charges.
This amount is intended to compensate AUL for certain mortality and expense
risks AUL assumes in offering and administering the Contracts and in operating
the Variable Account.
The expense risk is the risk that AUL's actual expenses in issuing and
administering the Contracts and operating the Variable Account will be more than
the charges assessed for such expenses. The mortality risk borne by AUL is the
risk that the Annuitants, as a group, will live longer than the AUL's actuarial
tables predict. AUL may ultimately realize a profit from this charge to the
extent it is not needed to address mortality and administrative expenses, but
AUL may realize a loss to the extent the charge is not sufficient. AUL may use
any profit derived from this charge for any lawful purpose.
Annual Contract Fee
AUL deducts an annual contract fee from each Owner's Contract Value equal
to the lesser of 2.0% of the Account Value or $30 a year. The fee is assessed
every year on a Contract if the Contract is in effect on the Contract
Anniversary, and is assessed only during the Accumulation Period. The
annual contract fee is waived on each Contract Anniversary when the Account
Value, at the time the charge would otherwise have been imposed, exceeds
$50,000. When a Contract Owner annuitizes or surrenders on any day other than a
Contract Anniversary, a pro rata portion of the charge for that portion of the
year will not be assessed. The charge is deducted proportionately from the
Account Value allocated among the Investment Accounts and the Fixed Account(s).
The purpose of this fee is to reimburse AUL for the expenses associated with
administration of the Contracts and operation of the Variable Account. AUL does
not expect to profit from this fee.
Rider Charges
The addition of any riders will result in additional charges which will be
deducted proportionately from the Account Value allocated among the Investment
Accounts and the Fixed Account(s).
Other Charges
AUL may charge the Investment Accounts of the Variable Account for the
federal, state, or local income taxes incurred by AUL that are attributable to
the Variable Account and its Investment Accounts. No such charge is currently
assessed.
Variations in Charges
AUL may reduce or waive the amount of the annual contract fee for a
Contract where the expenses associated with the sale of the Contract or the
administrative costs associated with the Contract are reduced. For example, the
annual contract fee may be reduced in connection with acquisition of the
Contract in exchange for another annuity contract issued by AUL. AUL may also
reduce or waive the annual contract fee on Contracts sold to the directors or
employees of AUL or any of its affiliates or to directors or any employees of
any of the Funds.
Guarantee of Certain Charges
AUL guarantees that the mortality and expense risk charge shall not
increase.
Expenses of the Funds
Each Investment Account of the Variable Account purchases shares at the net
asset value of the corresponding Fund. The net asset value reflects the
investment advisory fee and other expenses that are deducted from the assets of
the Fund. The advisory fees and other expenses are not fixed or specified under
the terms of the Contract and are described in the Funds' Prospectuses.
DISTRIBUTIONS
Cash Withdrawals
During the lifetime of the Annuitant, at any time before the Annuity Date
and subject to the limitations under any applicable Qualified Plan and
applicable law, a Contract may be surrendered or a partial withdrawal may be
taken from a Contract. A surrender or withdrawal request will be effective as of
the end of the Valuation Date that a Proper Notice is received by AUL at its
Home Office.
If we receive a full surrender request, we will pay the Owner's Account
Value as of the end of the Valuation Period, plus any positive or negative
market value adjustment on the amounts allocated to the MVA Fixed Accounts.
A partial withdrawal may be requested for a specified percentage or dollar
amount of an Owner's Account Value. Upon payment, the Owner's Account Value will
be reduced by an amount equal to the payment, plus any positive or negative
market value adjustment on the amounts withdrawn from the MVA Fixed Accounts. We
reserve the right to treat requests for a partial withdrawal that would leave an
Account Value of less than $5,000 as a request for a full surrender. AUL may
change or waive this provision at its discretion. The minimum amount that may be
withdrawn from a Contract Owner's Account Value is $500. In addition, Contracts
issued in connection with certain retirement programs may be subject to
constraints on withdrawals and full surrenders.
The amount of a partial withdrawal will be taken from the Investment
Accounts and the Fixed Account(s) as instructed. If the Owner does not specify,
withdrawals will be made in proportion to the Owner's Account Value in the
various Investment Accounts and the Fixed Account(s). A partial withdrawal will
not be effected until Proper Notice is received by AUL at its Home Office.
In addition to any applicable market value adjustments, a surrender or a
partial withdrawal may be subject to a premium tax charge for any tax on
premiums that may be imposed by various states and municipalities. See "Premium
Tax Charge." A surrender or withdrawal may result in taxable income and in some
cases a tax penalty. See "Tax Penalty." Owners of Contracts used in connection
with a Qualified Plan should refer to the terms of the applicable Qualified Plan
for any limitations or restrictions on cash withdrawals. The tax consequences of
a surrender or withdrawal under the Contracts should be carefully considered.
See "Federal Tax Matters."
Loan Privileges
Loan privileges are only available on Contracts qualified under 403(b).
Prior to the Annuitization Date, the Owner of a Contract qualified under 403(b)
may receive a loan from the Account Value subject to the terms of the Contract,
the specific 403(b) plan, and the Internal Revenue Code, which may impose
restrictions on loans.
Loans from a 403(b) qualified Contract are available beginning 30 days
after the Issue Date. The Contract Owner may borrow a minimum of $1,000. Loans
may only be secured by the Account Value. In non-ERISA plans, for Account Values
up to $20,000, the maximum loan balance which may be outstanding at any time is
80% of the Account Value, but not more than $10,000. If the Account Value is
$20,000 or more, the maximum loan balance which may be outstanding at any time
is 40% of the Account Value, but not more than $50,000. For ERISA plans, the
maximum loan balance which may be outstanding at any time is 50% of the Account
Value, but not more than $50,000. The $50,000 limit will be reduced by the
highest loan balances owed during the prior one-year period. Additional loans
are subject to the contract minimum amount. The aggregate of all loans may not
exceed the Account Value limitations stated above.
All loans are made from the Loan Account. An amount equal to the principal
amount of the loan will be transferred to the Loan Account. The Owner can
specify the Investment Accounts from which collateral will be transferred. If no
allocation is specified, collateral will be transferred from each Investment
Account and from the Fixed Account(s) (subject to any applicable market value
adjustment) in the same proportion that the Account Value in each Investment
Account and the Fixed Account(s) bears to the total Account Value in those
accounts on the date the loan is made.
AUL will charge interest on any outstanding loan at an annual rate of 5%.
Interest is due and payable on each Contract Anniversary while a loan is
outstanding. If interest is not paid when due, the amount of the interest is
added to the loan and becomes part of the loan. Due and unpaid interest will be
transferred each Contract Anniversary from each Investment Account and the Fixed
Account(s) to the Loan Account in the same proportion that each Investment
Account value and the Fixed Account(s) bears to the total unloaned Account
Value. The amount we transfer will be the amount by which the interest due
exceeds the interest which has been credited on the Loan Account.
The Loan Account will be credited with interest daily at an effective
annual rate of not less than 3.0%. Thus the maximum net cost of a loan is 2.0%
per year (the net cost of a loan is the difference between the rate of interest
charged on indebtedness and the amount credited to the Loan Account). Beginning
in the eleventh Policy Year, the amount in the Loan Account securing the loan
will be credited with interest at an effective annual rate in excess of the
minimum guaranteed rate of 3.0% (currently 4.0%). Thus, the current net cost of
the loan would be 1.0% per year. Any interest credited in excess of the minimum
guaranteed rate is not guaranteed.
Loans must be repaid in substantially level payments, not less frequently
than quarterly, within five years. Loans used to purchase the principal
residence of the Contract Owner may be repaid within 15 years. Loan repayments
will be processed in the same manner as a Premium Payment. A loan repayment must
be clearly marked as "loan repayment" or it will be credited as a premium.
If the Contract is surrendered while the loan is outstanding, the Account
Value will be reduced by the amount of the loan outstanding plus accrued
interest. If the Contract Owner/Annuitant dies while the loan is outstanding,
the Death Benefit will be reduced by the amount of the outstanding loan plus
accrued interest. If annuity payments start while the loan is outstanding, the
Account Value will be reduced by the amount of the outstanding loan plus accrued
interest. Until the loan is repaid, the Company reserves the right to restrict
any transfer of the Contract which would otherwise qualify as a transfer as
permitted in the Internal Revenue Code.
If a loan payment is not made when due, interest will continue to accrue.
If a loan payment is not made when due, the entire loan will be treated as a
deemed Distribution, may be taxable to the borrower, and may be subject to a tax
penalty. Interest which subsequently accrues on defaulted amounts may also be
treated as additional deemed Distributions each year. Any defaulted amounts,
plus accrued interest, will be deducted from the Contract when the participant
becomes eligible for a Distribution of at least that amount, and this amount may
again be treated as a Distribution where required by law. Additional loans may
not be available while a previous loan remains in default.
The Company reserves the right to modify the term or procedures if there is
a change in applicable law. The Company also reserves the right to assess a loan
processing fee.
Loans may also be subject to additional limitations or restrictions under
the terms of the employer's plan. Loans permitted under this Contract may still
be taxable in whole or part if the participant has additional loans from other
plans or contracts.
Death Proceeds Payment Provisions
The value of the Death Proceeds will be determined as of the end of the
Valuation Period in which due proof of death and instructions regarding payment
are received by AUL at its Home Office.
At the time of application, Contract Owners may select one of two death
benefits available under the Contract as listed below (not all death benefit
option riders may be available in all states at the time of application)
If no selection is made at the time of application, the Death Benefit will
be the Standard Contractual Death Benefit.
Standard Contractual Death Benefit
The Death Proceeds under the Standard Contractual Death Benefit are equal
to the greater of:
1) the Account Value less any outstanding loan and accrued interest
2) the total of all Premiums paid less an adjustment for amounts previously
surrendered and less any outstanding loan and accrued interest.
Enhanced One Year Step Up Death Benefit Rider
The Death Proceeds under the Enhanced One Year Step Up Death Benefit Rider
are equal to the greatest of:
1) the Account Value less any outstanding loan and accrued interest
2) the total of all Premiums paid less an adjustment for amounts previously
surrendered and less any outstanding loan and accrued interest.
3) the highest Account Value on any Contract Anniversary before the
Annuitant's 86th birthday, less an adjustment for amounts previously
surrendered, plus Premiums paid less any outstanding loan and accrued interest
after the last Contract Anniversary.
Death of the Owner
If the Contract Owner dies before the Annuity Date and the Beneficiary is
not the Contract Owner's surviving spouse, the Death Proceeds will be paid to
the Beneficiary. Such Death Proceeds will be paid in a lump-sum, unless the
Beneficiary elects to have this value applied under a settlement option. If a
settlement option is elected, the Beneficiary must be named the Annuitant and
payments must begin within one year of the Contract Owner's death. The option
also must have payments which are payable over the life of the Beneficiary or
over a period which does not extend beyond the life expectancy of the
Beneficiary.
<PAGE>
19
If the Contract Owner dies before the Annuity Date and the Beneficiary is
the Contract Owner's surviving spouse, the surviving spouse will become the new
Contract Owner. The Contract will continue with its terms unchanged and the
Contract Owner's spouse will assume all rights as Contract Owner. Within 120
days of the original Contract Owner's death, the Contract Owner's spouse may
elect to receive the Death Proceeds or withdraw any of the Account Value.
However, depending upon the circumstances, a tax penalty may be imposed upon
such a withdrawal.
Any amount payable under a Contract will not be less than the minimum
required by the law of the state where the Contract is delivered.
Death of the Annuitant
If the Annuitant dies before the Annuity Date and the Annuitant is not also
the Contract Owner, then: (1) if the Contract Owner is not an individual, the
Death Proceeds will be paid to the Contract Owner in a lump-sum; or (2) if the
Contract Owner is an individual, a new Annuitant may be named and the Contract
will continue. If a new Annuitant is not named within 120 days of the
Annuitant's death, the Account Value charges, will be paid to the Contract Owner
in a lump-sum. The death benefit will be paid to the Beneficiary or Contract
Owner, as appropriate, in a single sum or under one of the Annuity Options, as
directed by the Contract Owner or as elected by the Beneficiary. If the
Beneficiary is to receive annuity payments under an Annuity Option, there may be
limits under applicable law on the amount and duration of payments that the
Beneficiary may receive, and requirements respecting timing of payments. A tax
adviser should be consulted in considering payout options.
Payments from the Variable Account
Payment of an amount from the Variable Account resulting from a surrender,
partial withdrawal, transfer from an Owner's Account Value allocated to the
Variable Account, or payment of the Death Proceeds, normally will be made within
seven days from the date Proper Notice is received at AUL's Home Office.
However, AUL can postpone the calculation or payment of such an amount to the
extent permitted under applicable law, which is currently permissible for any
period: (a) during which the New York Stock Exchange is closed other than
customary weekend and holiday closings; (b) during which trading on the New York
Stock Exchange is restricted, as determined by the SEC; (c) during which an
emergency, as determined by the SEC, exists as a result of which (1) disposal of
securities held by the Variable Account is not reasonably practicable, or (2) it
is not reasonably practicable to determine the value of the assets of the
Variable Account; or (d) for such other periods as the SEC may by order permit
for the protection of investors. For information concerning payment of an amount
from the Fixed Account(s), see "The Fixed Account(s)."
Annuity Period
General
On the Annuity Date, the adjusted value of the Owner's Account Value may be
applied to provide an annuity option on a fixed or variable basis, or a
combination thereof.
The Annuity Date is the date chosen for annuity payments to begin. Such
date will be the first day of a calendar month unless otherwise agreed upon by
us. During the Accumulation Period, you may change the Annuity Date subject to
approval by us.
Annuitization is irrevocable once payments have begun, unless a variable
payment annuity with no life contingency is selected.
When you annuitize, you must choose:
1. An annuity payout option, and
2. Either a fixed payment annuity, variable payment annuity, or any
available combination.
A Contract Owner may designate an Annuity Date, Annuity Option, contingent
Annuitant, and Beneficiary on an Annuity Election Form that must be received by
AUL at its Home Office prior to the Annuity Date. AUL may also require
additional information before annuity payments commence. If the Contract Owner
is an individual, the Annuitant may be changed at any time prior to the Annuity
Date. The Annuitant must also be an individual and must be the Contract Owner,
or someone chosen from among the Contract Owner's spouse, parents, brothers,
sisters, and children. Any other choice requires AUL's consent. If the Contract
Owner is not an individual, a change in the Annuitant will not be permitted
without AUL's consent. The Beneficiary, if any, may be changed at any time and
the Annuity Date and the Annuity Option may also be changed at any time prior to
the Annuity Date. For Contracts used in connection with a Qualified Plan,
reference should be made to the terms of the Qualified Plan for pertinent
limitations regarding annuity dates and options.
Fixed Payment Annuity
The payment amount under a Fixed Payment Annuity option will be determined
by applying the selected portion of the Contract Proceeds to the Fixed Payment
Annuity table then in effect, after deducting applicable premium taxes. The
annuity payments are based upon annuity rates that vary with the Annuity Option
selected and the age of the Annuitant, except that in the case of Option 1,
Income for a Fixed Period, age is not a consideration. Payments under the Fixed
Payment Annuity are guaranteed as to dollar amount for the duration of the
Annuity Period.
Variable Payment Annuity
The first payment amount under a Variable Payment Annuity option is set at
the first valuation date after the Annuity Date by applying the selected portion
of the Contract Proceeds to the Variable Payment Annuity table you select, after
deducting applicable premium taxes. Payments under the Variable Payment Annuity
option will vary depending on the performance of the underlying Investment
Accounts. The dollar amount of each variable payment may be higher or lower than
the previous payment.
1. Annuity Units and Payment Amount - The dollar amount of the first
payment is divided by the value of an Annuity Unit as of the Annuity Date
to establish the number of Annuity Units representing each annuity payment.
The number of Annuity Units established remains fixed during the annuity
payment period. The dollar amount of subsequent annuity payments is
determined by multiplying the fixed number of Annuity Units by the Annuity
Unit Value for the Valuation Period in which the payment is due.
2. Assumed Investment Rate - The Assumed Investment Rate (AIR) is the
investment rate built into the Variable Payment Annuity table used to
determine your first annuity payment. You may select an AIR from 3%, 4% or
5% when you annuitize. A higher AIR means you would receive a higher
initial payment, but subsequent payments would rise more slowly or fall
more rapidly. A lower AIR has the opposite effect. If actual investment
experience equals the AIR you choose, annuity payments will remain level.
3. Value of an Annuity Unit - The value of an Annuity Unit for an
Investment Account for any subsequent Valuation Period is determined by
multiplying the Annuity Unit Value for the immediately preceding Valuation
Period by the Net Investment Factor for the Valuation Period for which the
Annuity Unit Value is being calculated, and multiplying the result by an
interest factor to neutralize the AIR built into the Variable Payment
Annuity table which you selected.
4. Transfers - During the Annuity Period, transfers between Investment
Accounts must be made in writing. We reserve the right to restrict
transfers to no more frequently than once a year. Currently, there are no
restrictions. Transfers will take place on the anniversary of the Annuity
Date unless otherwise agreed to by us.
Payment Options
All or any part of the proceeds paid at death or upon full surrender of
this Contract may be paid in one sum or according to one of the following
options:
1. Income for a Fixed Period. Proceeds are payable in monthly installments
for a specified number of years, not to exceed 20.
2. Life Annuity. Proceeds are payable in monthly installments for as long
as the payee lives. A number of payments can be guaranteed, such as 120, or
the number of payments required to refund the proceeds applied.
3. Survivorship Annuity. Proceeds are payable in monthly installments for
as long as either the first payee or surviving payee lives.
The Contract Proceeds may be paid in any other method or frequency of
payment acceptable by us.
Contract Proceeds payable in one sum will accumulate at interest from the
date of death or surrender to the payment date at the rate of interest then paid
by us or at the rate specified by statute, whichever is greater.
Selection of an Option
Contract Owners should carefully review the Annuity Options with their
financial or tax advisers. For Contracts used in connection with a Qualified
Plan, the terms of the applicable Qualified Plan should be referenced for
pertinent limitations respecting the form of annuity payments, the commencement
of distributions, and other matters. For instance, annuity payments under a
Qualified Plan generally must begin no later than April 1 of the calendar year
following the calendar year in which the Contract Owner reaches age 70 1/2 if
the Par-
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ticipant is no longer employed. For Option 1, Income for a Fixed Period,
the period elected for receipt of annuity payments under the terms of the
Annuity Option generally may be no longer than the joint life expectancy of the
Annuitant and Beneficiary in the year that the Annuitant reaches age 70 1/2 and
must be shorter than such joint life expectancy if the Beneficiary is not the
Annuitant's spouse and is more than 10 years younger than the Annuitant. Under
Option 3, Survivorship Annuity, if the contingent Annuitant is not the
Annuitant's spouse and is more than 10 years younger than the Annuitant, the
100% election specified above may not be available.
THE FIXED ACCOUNT(S)
Summary of Fixed Accounts
Premiums designated to accumulate on a fixed basis may be allocated to one
of several Fixed Accounts which are part of AUL's general account. Either Market
Value Adjusted (MVA) Fixed Account(s) or a non-MVA fixed account will be
available under the contract. The MVA Fixed Account(s) may not be available in
all states. An Enhanced Averaging Fixed Account will be available in all states
in conjunction with the Dollar Cost Averaging program.
Contributions or transfers to the Fixed Account(s) become part of AUL's
General Account. The General Account is subject to regulation and supervision by
the Indiana Insurance Department as well as the insurance laws and regulations
of other jurisdictions in which the Contracts are distributed. In reliance on
certain exemptive and exclusionary provisions, interests in the Fixed Account(s)
have not been registered as securities under the Securities Act of 1933 (the
"1933 Act") and the Fixed Account(s) has not been registered as an investment
company under the 1940 Act. Accordingly, neither the Fixed Account(s) nor any
interests therein are generally subject to the provisions of the 1933 Act or the
1940 Act. AUL has been advised that the staff of the SEC has not reviewed the
disclosure in this Prospectus relating to the Fixed Account(s). This disclosure,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in the Prospectus. This Prospectus is generally intended to serve as a
disclosure document only for aspects of a Contract involving the Variable
Account and contains only selected information regarding the Fixed Account(s).
For more information regarding the Fixed Account(s), see the Contract itself.
Non-Market Value Adjusted Fixed Account
The Account Value in the Fixed Account earns interest at one or more
interest rates determined by AUL at its discretion and declared in advance
("Current Rate"), which are guaranteed by AUL to be at least an annual effective
rate of 3% ("Guaranteed Rate"). AUL will determine a Current Rate from time to
time and, generally, any Current Rate that exceeds the Guaranteed Rate will be
effective for the Contract for a period of at least one year. We reserve the
right to change the method of crediting from time to time, provided that such
changes do not have the effect of reducing the guaranteed rate of interest. AUL
bears the investment risk for Owner's non-MVA Fixed Account(s) values and for
paying interest at the Current Rate on amounts allocated to the non-MVA Fixed
Account(s).
Market Value Adjusted Fixed Account
Market Value Adjusted Fixed Accounts provide a guaranteed rate of interest
over five different Guaranteed Periods: one (1), three (3), five (5), seven (7)
or ten (10) years. A guaranteed interest rate, determined and declared by the
Company for any Guaranteed Period selected, will be credited unless a
distribution from the Market Value Adjusted Fixed Account occurs for any reason.
The minimum amount of any allocation made to a Market Value Adjusted Fixed
Account must be $1,000. MARKET VALUE ADJUSTED FIXED ACCOUNTS MAY NOT BE
AVAILABLE IN EVERY STATE JURISDICTION.
Generally, the market value adjustment will increase or decrease the value
of distributed proceeds depending on how prevailing interest rates compare to
the market value adjusted option rates in effect. When prevailing rates are
lower than the market value adjusted option rate in effect for the Guaranteed
Period elected, distribution proceeds will increase in value. Conversely, when
prevailing rates are higher than the Market Value Adjusted option rate in effect
for the Guaranteed Period elected, distribution proceeds will decrease in value.
In no event will the adjustment reduce the Cash Value attributable to that MVA
Fixed Account below that necessary to satisfy statutory nonforfeiture
requirements. The effect of a market value adjustment should be carefully
considered before electing to surrender allocations in a Market Value Adjusted
Fixed Account.
During the MVA Free Window, you may transfer or withdraw amounts from MVA
Fixed Accounts with expiring Guaranteed Periods without Market Value Adjustment.
The MVA Free Window is currently set at 30 days prior to the end of the maturity
duration selected. We reserve the right to change the MVA Free Window. Such
amounts may be transferred to the Investment Accounts or reinvested in different
MVA Fixed Accounts for different Guaranteed Periods. If you take no such action,
the amount available at the end of the Guaranteed Period will be remain in the
MVA Fixed Account and a new Guaranteed Period will apply. We will notify you of
the interest rate declared on any such reinvestment.
Market Value Adjusted Fixed Accounts are available during the accumulation
phase of a Contract only and are not available as fixed accounts during the
annuitization phase of a Contract. In addition, Market Value Adjusted Fixed
Accounts are not available for use in conjunction with Contract Owner services
such as dollar cost averaging and portfolio rebalancing.
Enhanced Averaging Fixed Account
Initial and subsequent premiums in the first year may be allocated to the
Enhanced Averaging Fixed Account. Premiums deposited into this account must be
transferred to other Investment Accounts within one year after the deposit.
Amounts transferred out of the Enhanced Averaging Fixed Account will be
recalculated each month to assure account depletion within one year. Amounts
allocated to the Enhanced Averaging Fixed Account earn interest at rates
periodically determined by AUL that are guaranteed to be at least an effective
annual rate of 3%. Any current rate that exceeds the guaranteed rate will be
effective for the contract for a period of at least one year. The Enhanced
Averaging Fixed Account is only available at issue and requires an initial
deposit of $10,000 therein.
Withdrawals
A Contract Owner may make a full surrender or a partial withdrawal from his
or her Fixed Account Value subject to the provisions of the Contract. A full
surrender of a Contract Owner's Fixed Account Value will result in a withdrawal
payment equal to the value of the Contract Owner's Fixed Account Value as of the
day the surrender is effected, minus any applicable market value adjustment. A
partial withdrawal may be requested for a specified percentage or dollar amount
of the Contract Owner's Fixed Account Value. For a further discussion of
surrenders and partial withdrawals as generally applicable to a Contract Owner's
Variable Account Value and Fixed Account Value, see "Cash Withdrawals."
Transfers
The Contract Owner's Fixed Account Values may be transferred from the Fixed
Account(s) to the Variable Account subject to certain limitations. The minimum
amount that may be transferred from a Fixed Account is $500 or, if that Fixed
Account Value is less than $500 after the transfer, the Contract Owner's
remaining Account Value in that Fixed Account. If the amount remaining in a
Fixed Account after a transfer would be less than $500, the remaining amount
will be transferred with the amount that has been requested.
The maximum amount that may be transferred in any one Contract Year from a
non-MVA Fixed Account is the lesser of 20% of that non-MVA Fixed Account Value
as of the last Contract Anniversary or the entire non-MVA Fixed Account Value if
it would be less than $500 after the transfer. Transfers and withdrawals of a
Contract Owner's non-MVA Fixed Account Value will be effected on a last-in
first-out basis.
Transfers from MVA Fixed Accounts may be subject to market value
adjustment. Transfers from MVA Fixed Accounts to the Variable Account are not
subject to the 20% Fixed Account transfer limitation. Transfers and withdrawals
of a Contract Owner's MVA Fixed Account Value will be made from the Guaranteed
Periods you have indicated.
For a discussion of transfers as generally applicable to a Contract Owner's
Variable Account Value and Fixed Account Value, see "Transfers of Account
Value."
Contract Charges
The annual contract fee will be the same whether or not a Owner's Contract
Value is allocated to the Variable Account or the Fixed Account(s). The charge
for mortality and expense risks will not
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be assessed against the Fixed Account(s), and any amounts that AUL pays for
income taxes allocable to the Variable Account will not be charged against the
Fixed Account(s). In addition, the investment advisory fees and operating
expenses paid by the Funds will not be paid directly or indirectly by Contract
Owners to the extent the Account Value is allocated to the Fixed Account(s);
however, such Contract Owners will not participate in the investment experience
of the Variable Account. See "Charges and Deductions."
Payments from the Fixed Account(s)
Surrenders, cash withdrawals, and transfers from the Fixed Account(s) and
payment of Death Proceeds based upon a Contract Owner's Fixed Account Values may
be delayed for up to six months after a written request in proper form is
received by AUL at its Home Office. During the period of deferral, interest at
the applicable interest rate or rates will continue to be credited to the
Contract Owner's Fixed Account Values.
MORE ABOUT THE CONTRACTS
Designation and Change of Beneficiary
The Beneficiary designation contained in an application for the Contracts
will remain in effect until changed. The interests of a Beneficiary who dies
before the Contract Owner will pass to any surviving Beneficiary, unless the
Contract Owner specifies otherwise. Unless otherwise provided, if no designated
Beneficiary is living upon the death of the Contract Owner prior to the Annuity
Date, the Contract Owner's estate is the Beneficiary. Unless otherwise provided,
if no designated Beneficiary under an Annuity Option is living after the Annuity
Date, upon the death of the Annuitant, the Owner is the Beneficiary. If the
Contract Owner is not an individual, the Contract Owner will be the Beneficiary.
Subject to the rights of an irrevocably designated Beneficiary, the
designation of a Beneficiary may be changed or revoked at any time while the
Contract Owner is living by filing with AUL a written beneficiary designation or
revocation in such form as AUL may require. The change or revocation will not be
binding upon AUL until it is received by AUL at its Home Office. When it is so
received, the change or revocation will be effective as of the date on which the
beneficiary designation or revocation was signed, but the change or revocation
will be without prejudice to AUL if any payment has been made or any action has
been taken by AUL prior to receiving the change or revocation.
For Contracts issued in connection with Qualified Plans, reference should
be made to the terms of the particular Qualified Plan, if any, and any
applicable law for any restrictions on the beneficiary designation. For
instance, under an Employee Benefit Plan, the Beneficiary (or contingent
Annuitant) must be the Contract Owner's spouse if the Contract Owner is married,
unless the spouse properly consents to the designation of a Beneficiary (or
contingent Annuitant) other than the spouse.
Assignability
A Contract Owner may assign a Contract, but the rights of the Contract
Owner and any Beneficiary will be secondary to the interests of the assignee.
AUL assumes no responsibility for the validity of an assignment. Any assignment
will not be binding upon AUL until received in writing at its Home Office.
Because an assignment may be a taxable event, Contract Owners should consult a
tax advisor as to the tax consequences resulting from such an assignment.
Proof of Age and Survival
AUL may require proof of age, sex, or survival of any person on whose life
annuity payments depend.
Misstatements
If the age or sex of an Annuitant or contingent Annuitant has been
misstated, the correct amount paid or payable by AUL shall be such as the
Contract would have provided for the correct age and sex.
Acceptance of New Premiums
AUL reserves the right to refuse to accept new premiums for a Contract at
any time.
Optional Benefits
There are several riders available at time of application which are
described below. These riders carry their own charges which are described in the
Expense Table in this Prospectus.
Guaranteed Minimum Annuitization Benefit Rider
For those contracts which have elected the Guaranteed Minimum Annuitization
Benefit Rider at the time of application, the following provisions apply. If
your Contract is annuitized at any time after the tenth Contract Anniversary,
the amount applied to the annuity table then current will be the greater of:
1. The Contract Proceeds at that time, or
2. The total of all Premiums paid with interest credited at the rate shown on
the Policy Data Page, less an adjustment for amounts previously withdrawn.
Any transfer of Account Value to any Investment Account not listed on the
Policy Data Page as approved for use with this benefit will terminate the rider.
Long Term Care Facility and Terminal Illness Benefit Rider
For those Contracts which have elected a Long Term Care Facility and
Terminal Illness rider at the time of application, the following provisions
apply. Surrender charges on withdrawals will not apply if a Contract Owner is
confined for a continuous 90 day period to a Long Term Care Facility or a 30 day
period to a hospital, as defined by the rider provisions. In addition, upon
receipt of a physician's letter at the Company's Home Office, no surrender
charges will be deducted upon withdrawals if the Contract Owner has been
diagnosed by that physician to have a terminal illness as defined by the rider
provisions.
The Contract Owner may be subject to income tax on all or a portion of any
such withdrawals and to a tax penalty if the Contract Owner takes withdrawals
prior to age 59 1/2 (see "Federal Tax Matters, Additional Considerations,
Contracts Owned by Non-Natural Persons")
FEDERAL TAX MATTERS
INTRODUCTION
The Contracts described in this Prospectus are designed for use in
connection with non-tax qualified retirement plans for individuals and for use
by individuals in connection with retirement plans under the provisions of
Sections 401(a), 403(b), 457, 408 or 408A of the Internal Revenue Code ("Code").
The ultimate effect of Federal income taxes on values under a Contract, on
annuity payments, and on the economic benefits to the Owner, the Annuitant, and
the Beneficiary or other payee, may depend upon the type of plan for which the
Contract is purchased and a number of different factors. The discussion
contained herein and in the Statement of Additional Information is general in
nature. It is based upon AUL's understanding of the present Federal income tax
laws as currently interpreted by the Internal Revenue Service ("IRS"), and is
not intended as tax advice. No representation is made regarding the likelihood
of continuation of the present Federal income tax laws or of the current
interpretations by the IRS. Future legislation may affect annuity contracts
adversely. Moreover, no attempt is made to consider any applicable state or
other laws. Because of the inherent complexity of such laws and the fact that
tax results will vary according to the terms of the plan and the particular
circumstances of the individual involved, any person contemplating the purchase
of a Contract, or receiving annuity payments under a Contract, should consult a
qualified tax adviser.
AUL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY CONTRACT OR ANY
TRANSACTION INVOLVING THE CONTRACTS. CONSULT YOUR TAX ADVISOR.
DIVERSIFICATION STANDARDS
Treasury Department regulations under Section 817(h) of the Code prescribe
asset diversification requirements which are expected to be met by the
investment companies whose shares are sold to the Investment Accounts. Failure
to meet these requirements would jeopardize the tax status of the Contracts. See
the Statement of Additional Information for additional details.
In connection with the issuance of the regulations governing
diversification under Section 817(h) of the Code, the Treasury Department
announced that it would issue future regulations or rulings addressing the
circumstances in which a variable contract owner's control of the investments of
a separate account may cause the contract owner, rather than the insurance
company, to be treated as the owner of the assets held by the separate account.
If the variable contract owner is considered the owner of the securities
underlying the separate account, income and gains produced by those securities
would be included currently in a contract owner's gross income. It is not clear,
at present, what these regulations or rulings may provide. It is possible that
when the regulations or rulings are issued, the Contracts may need to be
modified in order to remain in compliance. AUL intends to make reasonable
efforts to comply with any such regulations or rulings so that the Contracts
will be treated as annuity contracts for Federal income tax purposes and
reserves the right to make such changes as it deems appropriate for that
purpose.
TAXATION OF ANNUITIES IN GENERAL - NON-QUALIFIED PLANS
Section 72 of the Code governs taxation of annuities. In general, a
Contract Owner is not taxed on increases in value under an annuity contract
until some form of distribution is made under the contract. However, the
increase in value may be subject to tax currently under certain circumstances.
See "Contracts Owned by Non-Natural Persons" below and "Diversification
Standards" above.
1. Surrenders or Withdrawals Prior to the Annuity Date
Code Section 72 provides that amounts received upon a total or partial
surrender or withdrawal from a contract prior to the annuity date generally will
be treated as gross income to the extent that the cash value of the contract
(determined without regard to any surrender charge in the case of a partial
withdrawal) exceeds the "investment in the contract." In general, the
"investment in the contract" is that portion, if any, of premiums paid under a
contract less any distributions received previously under the contract that are
excluded from the recipient's gross income. The taxable portion is taxed at
ordinary income tax rates. For purposes of this rule, a pledge or assignment of
a contract is treated as a payment received on account of a partial withdrawal
of a contract. Similarly, loans under a
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contract generally are treated as distributions under the contract.
2. Surrenders or Withdrawals on or after the Annuity Date
Upon receipt of a lump-sum payment or an annuity payment under an annuity
contract, the recipient is taxed if the cash value of the contract exceeds the
investment in the contract. For fixed annuity payments, the taxable portion of
each payment is determined by using a formula known as the "exclusion ratio,"
which establishes the ratio that the investment in the contract bears to the
total expected amount of annuity payments for the term of the contract. That
ratio is then applied to each payment to determine the non-taxable portion of
the payment. That remaining portion of each payment is taxed at ordinary income
rates. Once the excludable portion of annuity payments to date equals the
investment in the contract, the balance of the annuity payments will be fully
taxable.
Withholding of Federal income taxes on all distributions may be required
unless a recipient who is eligible elects not to have any amounts withheld and
properly notifies AUL of that election. Special rules apply to withholding on
distributions from Employee Benefit Plans that are qualified under Section
401(a) of the Internal Revenue Code.
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the recipient
reaches age 59 1/2, a penalty tax is imposed equal to 10% of the portion of such
amount which is includable in gross income. However, the penalty tax is not
applicable to withdrawals: (1) made on or after the death of the owner (or where
the owner is not an individual, the death of the "primary annuitant," who is
defined as the individual the events in whose life are of primary importance in
affecting the timing and amount of the payout under the contract); (2)
attributable to the recipient's becoming totally disabled within the meaning of
Code Section 72(m)(7); or (3) which are part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the recipient, or the joint lives (or joint life expectancies) of
the recipient and his beneficiary. The 10% penalty also does not apply in
certain other circumstances described in Code Section 72.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax for
the first year in which the modification occurs will be increased by an amount
(determined in accordance with IRS regulations) equal to the tax that would have
been imposed but for item (iii) above, plus interest for the deferral period, if
the modification takes place (a) before the close of the period which is five
years from the date of the first payment and after the recipient attains age 59
1/2, or (b) before the recipient reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must provide the
following two distribution rules: (a) if the owner dies on or after the Annuity
Commencement Date, and before the entire interest in the contract has been
distributed, the remaining interest must be distributed at least as quickly as
the method in effect on the owner's death; and (b) if the owner dies before the
Annuity Date, the entire interest in the contract must generally be distributed
within five years after the date of death, or, if payable to a designated
beneficiary, must be annuitized over the life of that designated beneficiary or
over a period not extending beyond the life expectancy of that beneficiary,
commencing within one year after the date of death of the owner. If the
designated beneficiary is the spouse of the owner, the contract may be continued
in the name of the spouse as owner.
For purposes of determining the timing of distributions under the foregoing
rules, where the owner is not an individual, the primary annuitant is considered
the owner. In that case, a change in the primary annuitant will be treated as
the death of the owner. Finally, in the case of joint owners, the
distribution-at-death rules will be applied by treating the death of the first
owner as the one to be taken into account in determining how generally
distributions must commence, unless the sole surviving owner is the deceased
owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of contracts (not purchased in connection with a Qualified
Plan) before the Annuity Commencement Date will trigger income tax on the gain
on the contract, with the donee getting a stepped-up basis for the amount
included in the donor's income. This provision does not apply to certain
transfers incident to a divorce. The 10% penalty tax on pre-age 59 1/2
withdrawals and distributions and gift tax also may be applicable.
3. Contracts Owned by Non-Natural Persons
If the contract is held by a non-natural person (for example, a corporation
in connection with its non-tax qualified deferred compensation plan) the income
on that contract (generally the net surrender value less the premium payments
and amounts includable in gross income for prior taxable years with respect to
the contract) is includable in taxable income each year. Other taxes (such as
the alternative minimum tax and the environmental tax imposed under Code Section
59A) may also apply. The rule does not apply where the contract is acquired by
the estate of a decedent, where the contract is held by certain types of
retirement plans, where the contract is a qualified funding asset for structured
settlements, where the contract is purchased on behalf of an employee upon
termination of an Employee Benefit Plan, and in the case of a so-called
immediate annuity. Code Section 457 (deferred compensation) plans for employees
of state and local governments and tax-exempt organizations are not within the
purview of the exceptions. However, the income of state and local governments
and tax-exempt organizations generally is exempt from federal income tax.
4. Multiple Contract Rule
For purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in gross
income, all annuity contracts issued by the same insurer to the same contract
owner during any cal-
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endar year must be aggregated and treated as one contract. Thus, any amount
received under any such contract prior to the contract's Annuity Commencement
Date, such as a partial surrender, dividend, or loan, will be taxable (and
possibly subject to the 10% penalty tax) to the extent of the combined income in
all such contracts. In addition, the Treasury Department has broad regulatory
authority in applying this provision to prevent avoidance of the purposes of
this rule.
QUALIFIED PLANS
The Contract may be used with certain types of Qualified Plans as described
under "The Contracts." The tax rules applicable to participants in such
Qualified Plans vary according to the type of plan and the terms and conditions
of the plan itself. No attempt is made herein to provide more than general
information about the use of the Contract with the various types of Qualified
Plans. Contract Owners, Annuitants, and Beneficiaries, are cautioned that the
rights of any person to any benefits under such Qualified Plans will be subject
to the terms and conditions of the plans themselves and may be limited by
applicable law, regardless of the terms and conditions of the Contract issued in
connection therewith. For example, AUL may accept beneficiary designations and
payment instructions under the terms of the Contract without regard to any
spousal consents that may be required under the Code or the Employee Retirement
Income Security Act of 1974 ("ERISA"). Consequently, a Contract Owner's
Beneficiary designation or elected payment option may not be enforceable.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Individual Retirement Annuities
Code Section 408 permits an eligible individual to contribute to an
individual retirement program through the purchase of Individual Retirement
Annuities ("IRAs"). The Contract may be purchased as an IRA. IRAs are subject to
limitations on the amount that may be contributed, the persons who may be
eligible, and the time when distributions must commence. Depending upon the
circumstances of the individual, contributions to an IRA may be made on a
deductible or non-deductible basis. IRAs may not be transferred, sold, assigned,
discounted, or pledged as collateral for a loan or other obligation. The annual
premium for an IRA may not exceed $2,000, reduced by any contribution to that
individual's Roth IRA. In addition, distributions from certain other types of
Qualified Plans may be placed on a tax-deferred basis into an IRA.
2. Roth IRA
Effective January 1, 1998, a Roth IRA under Code Section 408A is available
for retirement savings for individuals with earned income. The Contract may be
purchased as a Roth IRA. Roth IRA allows an individual to contribute
non-deductible contributions for retirement purposes, with the earnings income
tax-deferred, and the potential ability to withdraw the money income tax-free
under certain circumstances. Roth IRAs are subject to limitations on the amount
that may be contributed, the persons who may be eligible, and the time when
distributions must commence. Roth IRAs may not be transferred, sold, assigned,
discounted, or pledged as collateral for a loan or other obligation. The annual
premium for a Roth IRA may not exceed $2,000, reduced by any contribution to
that individual's IRA. In addition, a taxpayer may elect to convert an IRA to a
Roth IRA, accelerating deferred income taxes on previous earnings in the IRA to
a current year.
3. Corporate Pension and Profit Sharing Plans
Code Section 401(a) permits employers to establish various types of
retirement plans for their employees. For this purpose, self-employed
individuals (proprietors or partners operating a trade or business) are treated
as employees eligible to participate in such plans. Such retirement plans may
permit the purchase of Contracts to provide benefits thereunder.
In order for a retirement plan to be "qualified" under Code Section 401(a),
it must: (1) meet certain minimum standards with respect to participation,
coverage and vesting; (2) not discriminate in favor of "highly compensated"
employees; (3) provide contributions or benefits that do not exceed certain
limitations; (4) prohibit the use of plan assets for purposes other than the
exclusive benefit of the employees and their beneficiaries covered by the plan;
(5) provide for distributions that comply with certain minimum distribution
requirements; (6) provide for certain spousal survivor benefits; and (7) comply
with numerous other qualification requirements.
A retirement plan qualified under Code Section 401(a) may be funded by
employer contributions, employee contributions or a combination of both. Plan
participants are not subject to tax on employer contributions until such amounts
are actually distributed from the plan. Depending upon the terms of the
particular plan, employee contributions may be made on a pre-tax or after-tax
basis. In addition, plan participants are not taxed on plan earnings derived
from either employer or employee contributions until such earnings are
distributed.
4. Tax-Deferred Annuities
Section 403(b) of the Code permits the purchase of "tax-deferred annuities"
by public schools and organizations described in Section 501(c)(3) of the Code,
including certain charitable, educational and scientific organizations. These
qualifying employers may pay premiums under the Contracts for the benefit of
their employees. Such premiums are not includable in the gross income of the
employee until the employee receives distributions from the Contract. The amount
of premiums to the tax-deferred annuity is limited to certain maximums imposed
by the Code. Furthermore, the Code sets forth additional restrictions governing
such items as transferability, distributions, nondiscrimination and withdrawals.
Any employee should obtain competent tax advice as to the tax treatment and
suitability of such an investment.
5. Deferred Compensation Plans
Section 457 of the Code permits employees of state and local governments
and units and agencies of state and local governments as well as tax-exempt
organizations described in Section 501(c)(3) of the Code to defer a portion of
their compensation without paying current taxes. Distributions received
by an employee from a 457 Plan will be taxed as ordinary income.
Qualified Plan Federal Taxation Summary
The above description of the Federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contract Owner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan (other than a 457 program) that will last for a period of ten or
more years are generally subject to voluntary income tax withholding. The amount
withheld on such periodic distributions is determined at the rate applicable to
wages. The recipient of a periodic distribution may generally elect not to have
withholding apply.
Nonperiodic distributions (e.g., lump-sums and annuities or installment
payments of less than 10 years) from a Qualified
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Plan (other than a 457 program or an IRAs are generally subject to mandatory 20%
income tax withholding. However, no withholding is imposed if the distribution
is transferred directly to another eligible Qualified Plan or IRA. Nonperiodic
distributions from an IRA are subject to income tax withholding at a flat 10%
rate. The recipient of such a distribution may elect not to have withholding
apply.
Distributions from a 457 program are subject to the normal wage withholding
rules.
403(b) PROGRAMS - CONSTRAINTS ON WITHDRAWALS
Section 403(b) of the Internal Revenue Code permits public school employees
and employees of organizations specified in Section 501(c)(3) of the Internal
Revenue Code, such as certain types of charitable, educational, and scientific
organizations, to purchase annuity contracts, and subject to certain
limitations, to exclude the amount of purchase payments from gross income for
federal tax purposes. Section 403(b) imposes restrictions on certain
distributions from tax-sheltered annuity contracts meeting the requirements of
Section 403(b) that apply to tax years beginning on or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b)
tax-sheltered annuities that are attributable to employee contributions made
after December 31, 1988 under a salary reduction agreement not begin before the
employee reaches age 59 1/2, separates from service, dies, becomes disabled, or
incurs a hardship. Furthermore, distributions of income or gains attributable to
such contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
principal residence, or paying certain tuition expenses.
An Owner of a Contract purchased as a tax-deferred Section 403(b) annuity
contract will not, therefore, be entitled to exercise the right of surrender or
withdrawal, as described in this Prospectus, in order to receive his or her
Contract Value attributable to premiums paid under a salary reduction agreement
or any income or gains credited to such Contract Owner under the Contract unless
one of the above-described conditions has been satisfied, or unless the
withdrawal is otherwise permitted under applicable federal tax law. In the case
of transfers of amounts accumulated in a different Section 403(b) contract to
this Contract under a Section 403(b) Program, the withdrawal constraints
described above would not apply to the amount transferred to the Contract
attributable to a Contract Owner's December 31, 1988 account balance under the
old contract, provided that the amounts transferred between contracts meets
certain conditions. An Owner's Contract may be able to be transferred to certain
other investment or funding alternatives meeting the requirements of Section
403(b) that are available under an employer's Section 403(b) arrangement.
OTHER INFORMATION
VOTING OF SHARES OF THE FUNDS
AUL is the legal owner of the shares of the Portfolios of the Funds held by
the Investment Accounts of the Variable Account. In accordance with its view of
present applicable law, AUL will exercise voting rights attributable to the
shares of the Funds held in the Investment Accounts at any regular and special
meetings of the shareholders of the Funds on matters requiring shareholder
voting under the 1940 Act. AUL will exercise these voting rights based on
instructions received from persons having the voting interest in corresponding
Investment Accounts of the Variable Account and consistent with any requirements
imposed on AUL under contracts with any of the Funds, or under applicable law.
However, if the 1940 Act or any regulations thereunder should be amended, or if
the present interpretation thereof should change, and as a result AUL determines
that it is permitted to vote the shares of the Funds in its own right, it may
elect to do so.
The person having the voting interest under a Contract is the Contract
Owner. AUL or the pertinent Fund shall send to each Contract Owner a Fund's
proxy materials and forms of instruction by means of which instructions may be
given to AUL on how to exercise voting rights attributable to the Fund's shares.
Unless otherwise required by applicable law or under a contract with any of
the Funds, with respect to each of the Funds, the number of Fund shares as to
which voting instructions may be given to AUL is determined by dividing the
value of all of the Accumulation Units of the corresponding Investment Account
attributable to a Contract on a particular date by the net asset value per share
of that Fund as of the same date. After the Annuity Date, the number of Fund
shares as to which voting instructions may be given to AUL is determined by
dividing the value of all of the Annuity Units by the net asset value per share
of that Fund as of the same date. Fractional votes will be counted. The number
of votes as to which voting instructions may be given will be determined as of
the date coincident with the date established by a Fund for determining
shareholders eligible to vote at the meeting of the Fund. If required by the SEC
or under a contract with any of the Funds, AUL reserves the right to determine
in a different fashion the voting rights attributable to the shares of the Fund.
Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Contracts for which no timely voting
instructions are received will be voted by AUL in the same proportion as the
voting instructions which are received in a timely manner for all Contracts
participating in that Investment Account. AUL will vote shares of any Investment
Account, if any, that it owns beneficially in its own discretion, except that if
a Fund offers it shares to any insurance company separate account that funds
variable life insurance contracts or if otherwise required by applicable law or
contract, AUL will vote its own shares in the same proportion as the voting
instructions that are received in a timely manner for Contracts participating in
the Investment Account.
Neither the Variable Account nor AUL is under any duty to inquire as to the
instructions received or the authority of Owners or others to instruct the
voting of shares of any of the Funds.
SUBSTITUTION OF INVESTMENTS
AUL reserves the right, subject to compliance with the law as then in
effect, to make additions to, deletions from, substitutions for, or combinations
of the securities that are held by
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the Variable Account or any Investment Account or that the Variable Account or
any Investment Account may purchase. If shares of any or all of the Funds should
no longer be available for investment, or if, in the judgment of AUL's
management, further investment in shares of any or all of the Funds should
become inappropriate in view of the purposes of the Contracts, AUL may
substitute shares of another fund for shares already purchased, or to be
purchased in the future under the Contracts. AUL may also purchase, through the
Variable Account, other securities for other classes of contracts, or permit a
conversion between classes of contracts on the basis of requests made by
Contract Owners or as permitted by Federal law.
Where required under applicable law, AUL will not substitute any shares
attributable to a Contract Owner's interest in an Investment Account or the
Variable Account without notice, Contract Owner approval, or prior approval of
the SEC or a state insurance commissioner, and without following the filing or
other procedures established by applicable state insurance regulators.
AUL also reserves the right to establish additional Investment Accounts of
the Variable Account that would invest in another investment company, a series
thereof, or other suitable investment vehicle. New Investment Accounts may be
established in the sole discretion of AUL, and any new Investment Account will
be made available to existing Contract Owners on a basis to be determined by
AUL. AUL may also eliminate or combine one or more Investment Accounts or cease
permitting new allocations to an Investment Account if, in its sole discretion,
marketing, tax, or investment conditions so warrant.
Subject to any required regulatory approvals, AUL reserves the right to
transfer assets of any Investment Account of the Variable Account to another
separate account or Investment Account.
In the event of any such substitution or change, AUL may, by appropriate
endorsement, make such changes in these and other Contracts as may be necessary
or appropriate to reflect such substitution or change. AUL reserves the right to
operate the Variable Account as a management investment company under the 1940
Act or any other form permitted by law, an Investment Account may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other separate accounts of AUL or an
affiliate thereof. Subject to compliance with applicable law, AUL also may
combine one or more Investment Accounts and may establish a committee, board, or
other group to manage one or more aspects of the operation of the Variable
Account.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
AUL reserves the right, without the consent of Contract Owners, to make any
change to the provisions of the Contracts to comply with, or to give Contract
Owners the benefit of, any Federal or state statute, rule, or regulation,
including, but not limited to, requirements for annuity contracts and retirement
plans under the Internal Revenue Code and regulations thereunder or any state
statute or regulation.
RESERVATION OF RIGHTS
AUL reserves the right to refuse to accept new premiums under a Contract
and to refuse to accept any application for a Contract.
PERIODIC REPORTS
AUL will send quarterly statements showing the number, type, and value of
Accumulation Units credited to the Contract. AUL will also send statements
reflecting transactions in a Contract Owner's Account as required by applicable
law. In addition, every person having voting rights will receive such reports or
Prospectuses concerning the Variable Account and the Funds as may be required by
the 1940 Act and the 1933 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Variable Account or the
Variable Account's principal underwriter or depositor (or any subsidiary) is a
party, or which would materially affect the Variable Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Contracts
described in this Prospectus and the organization of AUL, its authority to issue
the Contracts under Indiana law, and the validity of the forms of the Contracts
under Indiana law have been passed upon by the Associate General Counsel of AUL.
Legal matters relating to the Federal securities and Federal income tax
laws have been passed upon by Dechert Price & Rhoads, Washington, D.C.
FINANCIAL STATEMENTS
Financial statements of AUL as of December 31, 1998, are included in the
Statement of Additional Information.
YEAR 2000 READINESS DISCLOSURE
In recent years, the Year 2000 problem has received extensive publicity.
The problem arises because most computer systems and programs were written with
dates expressed as a 2 digit code. Unless steps are taken many systems may
interpret the year "2000" as "1900," and date-related computations either would
not be processed or would be processed incorrectly. This could have a material
and adverse effect on financial institutions such as banks and insurance
companies like AUL. To prevent this, AUL began assessing the potential impact in
early 1996 and adopted a detailed written work plan in June, 1997 to deal with
Year 2000 issues.
Due to the complexity of this issue and the ever-increasing
interrelationships of computer systems in the United States it would be
extremely difficult for any company to state that it has or will achieve
complete Year 2000 compliance or guarantee that its systems will not be affected
in any way on January 1, 2000. However, AUL currently believes that all critical
computer systems and software (those systems or software which would cause
great disruption to the Company if they were inoperable for any length of time
or if they were to generate erroneous data) are, as of April 1, 1999, Year 2000
27
<PAGE>
compliant. Although AUL has no reason to believe that these steps will not be
sufficient to avoid any material adverse impact from Year 2000 issues and is
addressing Year 2000 issues by using both internal staff and external
consultants, by replacing or upgrading hardware, operating systems and
application software, by remediating current application software and by testing
software and hardware in future dated scenarios, there can be no assurance that
the Company's efforts will be sufficient to avoid any adverse impact. The total
effort for all activities to make AUL systems ready for the year 2000 is
currently expected to amount to more than 250 person years of labor at a cost of
approximately $19,000,000 which has been or will be expensed against current
operating funds. As of December 1998, $13,000,000 of this cost was already
incurred.
As a part of its plan, the company has surveyed its primary business
partners to be sure that they have taken steps to address Year 2000 issues. AUL
will continue to monitor the status of all business partners' Year 2000 efforts.
Additionally, a contingency planning effort is underway to identify means by
which the risk associated with potential internal or external failures can be
reduced. Year 2000 contingency planning also includes development of a mechanism
to identify and respond to problems that could develop and to define steps to be
taken should problems arise.
PERFORMANCE INFORMATION
Performance information for the Investment Accounts is shown under
"Performance of the Investment Accounts." Performance information for the
Investment Accounts may also appear in promotional reports and sales literature
to current or prospective Contract Owners in the manner described in this
section. Performance information in promotional reports and literature may
include the yield and effective yield of the Investment Account investing in the
Money Market Investment Account, the yield of the remaining Investment Accounts,
the average annual total return and the total return of all Investment Accounts.
For information on the calculation of current yield and effective yield, see the
Statement of Additional Information.
Quotations of average annual total return for any Investment Account will
be expressed in terms of the average annual compounded rate of return on a
hypothetical investment in a Contract over a period of one, five and ten years
(or, if less, up to the life of the Investment Account), and will reflect the
deduction of the mortality and expense risk charge, and if applicable, the
administrative charge. Hypothetical quotations of average annual total return
may also be shown for an Investment Account for periods prior to the time that
the Investment Account commenced operations based upon the performance of the
mutual fund portfolio in which that Investment Account invests, and will reflect
the deduction of the administrative charge and the mortality and expense risk
charge as if, and to the extent, that such charges had been applicable.
Quotations of total return, actual and hypothetical, may simultaneously be shown
that do not take into account certain contractual charges such as the
administrative charge and may be shown for different periods.
Performance information for any Investment Account reflects only the
performance of a hypothetical Contract under which Contract Value is allocated
to an Investment Account during a particular time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies, characteristics, and quality of the Fund
in which the Investment Account invests, and the market conditions during the
given time period, and should not be considered as representation of what may be
achieved in the future. For a description of the methods used to determine yield
and total return in promotional reports and literature for the Investment
Accounts, information on possible uses for performance, and other information,
see the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to AUL. The Table of Contents of the Statement
of Additional Information is set forth below:
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY.................................................................. 3
DISTRIBUTION OF CONTRACTS........................................................................ 3
CUSTODY OF ASSETS................................................................................ 3
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT....................................................... 3
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PLANS................................... 3-6
403(b) Programs................................................................................ 4
408 and 408A Programs.......................................................................... 4
457 Programs...................................................................................
Employee Benefit Plans......................................................................... 5
Tax Penalty for All Annuity Contracts.......................................................... 5
Withholding for Employee Benefit Plans and Tax-Deferred Annuities.............................. 5
INDEPENDENT ACCOUNTANTS.......................................................................... 6
PERFORMANCE INFORMATION.......................................................................... 6-7
FINANCIAL STATEMENTS............................................................................. 8-19
</TABLE>
A Statement of Additional Information may be obtained without charge by calling
or writing to AUL at the telephone number and address set forth in the front of
this Prospectus. A postage pre-paid envelope is included for this purpose.
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================================================================================
No dealer, salesman or any other person is authorized by the AUL
American Individual Unit Trust or by AUL to give any information or to
make any representation other than as contained in this Prospectus in
connection with the offering described herein.
There has been filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended,
with respect to the offering herein described. For further information
with respect to the AUL American Individual Unit Trust, AUL and its
variable annuities, reference is made thereto and the exhibits filed
therewith or incorporated therein, which include all contracts or
documents referred to herein.
================================================================================
Individual Flexible Premium Deferred Variable Annuity
(No surrender Charge Contract)
Individual Variable Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
PROSPECTUS
Dated: May 4, 1999
================================================================================
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 4, 1999
Individual Flexible Premium Deferred Variable Annuity
(No Surrender Charge Contract)
Individual Variable Annuity Contracts
Offered By
American United Life Insurance Company(R)
One American Square
Indianapolis, Indiana 46282
(317) 263-4045
Individual Annuity Service Office Mail Address:
P.O. Box 7127, Indianapolis, Indiana 46206-7127
(800) 863-9354
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the current Prospectus for
Individual Flexible Premium Deferred Variable Annuity, dated May 4,
1999.
A Prospectus is available without charge by calling the number listed
above or by mailing the Business Reply Mail card included in this
Statement of Additional Information to American United Life Insurance
Company(R) ("AUL") at the address listed above.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Description Page
<S> <C>
GENERAL INFORMATION AND HISTORY................................................................. 3
DISTRIBUTION OF CONTRACTS....................................................................... 3
CUSTODY OF ASSETS............................................................................... 3
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT...................................................... 3
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PROGRAMS............................... 3-6
403(b) Programs............................................................................... 4
408 and 408A Programs......................................................................... 4
457 Programs..................................................................................
Employee Benefit Plans........................................................................ 5
Tax Penalty for All Annuity Contracts......................................................... 5
Withholding for Employee Benefit Plans and Tax-Deferred Annuities............................. 5
INDEPENDENT ACCOUNTANTS......................................................................... 6
PERFORMANCE INFORMATION......................................................................... 6-7
FINANCIAL STATEMENTS............................................................................ 8-19
</TABLE>
2
<PAGE>
GENERAL INFORMATION AND HISTORY
For a general description of AUL and AUL American Individual Variable
Annuity Unit Trust (the "Variable Account"), see the section entitled
"Information about AUL, The Variable Account, and The Funds" in the Prospectus.
Defined terms used in this Statement of Additional Information have the same
meaning as terms defined in the Prospectus.
DISTRIBUTION OF CONTRACTS
AUL is the Principal Underwriter for the variable annuity contracts (the
"Contracts") described in the Prospectus and in this Statement of Additional
Information. AUL is registered with the Securities and Exchange Commission (the
"SEC") as a broker-dealer. The Contracts are currently being sold in a
continuous offering. While AUL does not anticipate discontinuing the offering of
the Contracts, it reserves the right to do so. The Contracts are sold by
registered representatives of AUL who are also licensed insurance agents.
AUL also has sales agreements with various broker-dealers under which the
Contracts will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable annuity contracts. The broker-dealers are required
to be registered with the SEC and members of the National Association of
Securities Dealers, Inc.
AUL serves as the Principal Underwriter without compensation from the
Variable Account.
CUSTODY OF ASSETS
The assets of the Variable Account are held by AUL. The assets are
maintained separate and apart from the assets of other separate accounts of AUL
and from AUL's General Account assets. AUL maintains records of all purchases
and redemptions of shares of the Funds.
TAX STATUS OF AUL AND THE VARIABLE ACCOUNT
The operations of the Variable Account form a part of AUL, so AUL will be
responsible for any Federal income and other taxes that become payable with
respect to the income of the Variable Account. Each Investment Account will bear
its allocable share of such liabilities, but under current law, no dividend,
interest income, or realized capital gain attributable, at a minimum, to
appreciation of the Investment Accounts will be taxed to AUL to the extent it is
applied to increase reserves under the Contracts.
Each of the Funds in which the Variable Account invests has advised AUL
that it intends to qualify as a "regulated investment company" under the Code.
AUL does not guarantee that any Fund will so qualify. If the requirements of the
Code are met, a Fund will not be taxed on amounts distributed on a timely basis
to the Variable Account. Were such a Fund not to so qualify, the tax status of
the Contracts as annuities might be lost, which could result in immediate
taxation of amounts earned under the Contracts (except those held in Employee
Benefit Plans and 408 Programs).
Under regulations promulgated under Code Section 817(h), each Investment
Account must meet certain diversification standards. Generally, compliance with
these standards is determined by taking into account an Investment Account's
share of assets of the appropriate underlying Fund. To meet this test, on the
last day of each calendar quarter, no more than 55% of the total assets of a
Fund may be represented by any one investment, no more than 70% may be
represented by any two investments, no more than 80% may be represented by any
three investments, and no more than 90% may be represented by any four
investments. For the purposes of Section 817(h), securities of a single issuer
generally are treated as one investment, but obligations of the U.S. Treasury
and each U.S. Governmental agency or instrumentality generally are treated as
securities of separate issuers.
TAX TREATMENT OF AND LIMITS ON PREMIUMS UNDER RETIREMENT PROGRAMS
The Contracts may be offered for use with several types of qualified or
non-qualified retirement programs as described in the Prospectus. The tax rules
applicable to Owners of Contracts used in connection with qualified retirement
programs vary according to the type of retirement plan and its terms and
conditions. Therefore, no attempt is made herein to provide more than general
information about the use of the Contracts with the various types of qualified
retirement programs.
Owners, Annuitants, Beneficiaries and other payees are cautioned that the
rights of any person to any benefits under these programs may be subject to the
terms and conditions of the Qualified Plans themselves, regardless of the terms
and conditions of the Contracts issued in connection therewith.
Generally, no taxes are imposed on the increases in the value of a Contract
by reason of investment experience or employer contributions until a
distribution occurs, either as a lump-sum
3
<PAGE>
payment or annuity payments under an elected Annuity Option or in the form of
cash withdrawals, surrenders, or other distributions prior to the Annuity Date.
The amount of premiums that may be paid under a Contract issued in
connection with a Qualified Plan are subject to limitations that may vary
depending on the type of Qualified Plan. In addition, early distributions from
most Qualified Plans may be subject to penalty taxes, or in the case of
distributions of amounts contributed under salary reduction agreements, could
cause the Qualified Plan to be disqualified. Furthermore, distributions from
most Qualified Plans are subject to certain minimum distribution rules. Failure
to comply with these rules could result in disqualification of the Qualified
Plan or subject the Annuitant to penalty taxes. As a result, the minimum
distribution rules could limit the availability of certain Annuity Options to
Contract Owners and their Beneficiaries.
Below are brief descriptions of various types of qualified retirement
programs and the use of the Contracts in connection therewith. Unless otherwise
indicated in the context of the description, these descriptions reflect the
assumption that the Contract Owner is a participant in the retirement program.
For Employee Benefit Plans that are defined benefit plans, a Contract generally
would be purchased by a Participant, but owned by the plan itself.
403(b) PROGRAMS
Premiums paid pursuant to a 403(b) Program are excludable from a Contract
Owner's gross income if they do not exceed the smallest of the limits calculated
under Sections 402(g), 403(b)(2), and 415 of the Internal Revenue Code. Section
402(g) generally limits a Contract Owner's salary reduction premiums to a 403(b)
Program to $10,000 a year. The $10,000 limit may be reduced by salary reduction
premiums to another type of retirement plan. A Contract Owner with at least 15
years of service for a "qualified employer" (i.e., an educational organization,
hospital, home health service agency, health and welfare service agency, church
or convention or association of churches) generally may exceed the $10,000 limit
by $3,000 per year, subject to an aggregate limit of $15,000 for all years.
Section 403(b)(2) provides an overall limit on employer and Contract Owner
salary reduction premiums that may be made to a 403(b) Program. Section
403(b)(2) generally provides that the maximum amount of premiums a Contract
Owner may exclude from his gross income in any taxable year is equal to the
excess, if any, of:
(a) the amount determined by multiplying 20% of his includable compensation
by the number of his years of service with his employer, over
(b) the total amount contributed to retirement plans sponsored by his
employer, including the Section 403(b) Program, that were excludable from his
gross income in prior years.
Contract Owners employed by "qualified employers" may elect to have certain
alternative limitations apply.
Section 415(c) also provides an overall limit on the amount of employer and
Contract Owner's salary reduction premiums to a Section 403(b) Program that will
be excludable from an employee's gross income in a given year. The Section
415(c) limit is the lesser of (a) $30,000, or (b) 25% of the Contract Owner's
annual compensation (reduced by his salary reduction premiums to the 403(b)
Program and certain other employee plans). This limit will be reduced if a
Contract Owner also participates in an Employee Benefit Plan maintained by a
business that he or she controls.
The limits described above do not apply to amounts "rolled over" from
another Section 403(b) Program. A Contract Owner who receives an "eligible
rollover distribution" will be permitted either to roll over such amount to
another Section 403(b) Program or an IRA within 60 days of receipt or to make a
direct rollover to another Section 403(b) Program or an IRA without recognition
of income. An "eligible rollover distribution" means any distribution to a
Contract Owner of all or any taxable portion of the balance of his credit under
a Section 403(b) Program, other than a required minimum distribution to a
Contract Owner who has reached age 70 1/2 and excluding any distribution which
is one of a series of substantially equal payments made (1) over the life
expectancy of the Contract Owner or the joint life expectancy of the Contract
Owner and his beneficiary or (2) over a specified period of 10 years or more.
Provisions of the Internal Revenue Code require that 20% of every eligible
rollover distribution that is not directly rolled over be withheld by the payor
for federal income taxes.
408 AND 408A PROGRAMS
Code Sections 219, 408 and 408A permit eligible individuals to contribute
to an individual retirement program, including a Simplified Employee Pension
Plan, an Employer Association Established Individual Retirement Account Trust,
known as an Individual Retirement Account ("IRA") and a Roth IRA. These IRA
accounts are subject to limitations on the amount that may be contributed, the
persons who may be eligible, and on the time when distributions may commence. In
addition, certain distributions from some other types of retirement plans may be
placed on a tax-deferred basis in an IRA. Sale of the Contracts for use with
IRAs may be subject to special requirements imposed by the Internal Revenue
Service. Purchasers of the Contracts for such purposes will be provided with
such supplementary information as may be required by the Internal Revenue
Service or other appropriate agency, and will have the right to revoke the
Contract under certain circumstances.
If an Owner of a Contract issued in connection with a 408 Program
surrenders the Contract or makes a partial withdrawal, the Contract Owner will
realize income taxable at ordinary tax rates on the amount received to the
extent that amount exceeds the 408 premiums that were not excludable from the
taxable income of the employee when paid.
Premiums paid to the individual retirement account of a Contract Owner
under a 408 Program that is described in Section 408(c) of the Internal Revenue
Code are subject to the
4
<PAGE>
limits on premiums paid to individual retirement accounts under Section 219(b)
of the Internal Revenue Code. Under Section 219(b) of the Code, premiums paid to
an individual retirement account are limited to the lesser of $2,000 per year or
the Contract Owner's annual compensation. For tax years beginning after 1996, if
a married couple files a joint return, each spouse may, in the great majority of
cases, make contributions to his or her IRA up to the $2,000 limit. The extent
to which a Contract Owner may deduct premiums paid in connection with this type
of 408 Program depends on his and his spouse's gross income for the year and
whether either participate in another employer-sponsored retirement plan.
Premiums paid in connection with a 408 Program that is a simplified
employee pension plan are subject to limits under Section 402(h) of the Internal
Revenue Code. Section 402(h) currently limits premiums paid in connection with a
simplified employee pension plan to the lesser of (a) 15% of the Contract
Owner's compensation, or (b) $30,000. Premiums paid through salary reduction are
subject to additional annual limits.
Withdrawals from Roth IRAs may be made tax-free under certain
circumstances. Please consult your tax adviser for more details.
457 PROGRAMS
Deferrals by an eligible individual to a 457 Program generally are limited
under Section 457(b) of the Internal Revenue Code to the lesser of (a) $8,000 or
(b) 33 1/3% of the Contract Owner's includable compensation. If the Contract
Owner participates in more than one 457 Program, the $8,000 limit applies to
contributions to all such programs. The $8,000 limit is reduced by the amount of
any salary reduction contribution the Contract Owner makes to a 403(b) Program,
a 408 Program, or an Employee Benefit Program. The Section 457(b) limit is
increased during the last three years ending before the Contract Owner reaches
his normal retirement age under the 457 Program. Effective January 1, 1997, the
limit on deferrals is indexed in $500 increments.
EMPLOYEE BENEFIT PLANS
Code Section 401 permits business employers and certain associations to
establish various types of retirement plans for employees. Such retirement plans
may permit the purchase of Contracts to provide benefits thereunder.
If an Owner of a Contract issued in connection with an Employee Benefit
Plan who is a participant in the Plan receives a lump-sum distribution, the
portion of the distribution equal to any premiums that were taxable to the
Contract Owner in the year when paid is generally received tax free. The balance
of the distribution will generally be treated as ordinary income. Special
five-year forward averaging provisions under Code Section 402 may be utilized on
the amount subject to ordinary income tax treatment, provided that the Contract
Owner has reached age 59 1/2, has not previously elected forward averaging for a
distribution from any Employee Benefit Plan after reaching age 59 1/2, and has
not rolled over a distribution from the Employee Benefit Plan or a similar plan
into another Employee Benefit Plan or an individual retirement account or
annuity. Special ten-year averaging and a capital-gains election may be
available to a Contract Owner who reached age 50 before 1986.
Under an Employee Benefit Plan under Section 401 of the Code, when annuity
payments commence (as opposed to a lump-sum distribution), under Section 72 of
the Code, the portion of each payment attributable to premiums that were taxable
to the participant in the year made, if any, is excluded from gross income as a
return of the participant's investment. The portion so excluded is determined at
the time the payments commence by dividing the participant's investment in the
Contract by the expected return. The periodic payments in excess of this amount
are taxable as ordinary income. Once the participant's investment has been
recovered, the full annuity payment will be taxable. If the annuity should stop
before the investment has been received, the unrecovered portion is deductible
on the Annuitant's final return. If the Contract Owner paid no premiums that
were taxable to the Contract Owner in the year made, there would be no portion
excludable.
The applicable annual limits on premiums paid in connection with an
Employee Benefit Plan depend upon the type of plan. Total premiums paid on
behalf of a Contract Owner who is a participant to all defined contribution
plans maintained by an Employer are limited under Section 415(c) of the Internal
Revenue Code to the lesser of (a) $30,000, or (b) 25% of a participant's annual
compensation. Premiums paid through salary reduction to a cash-or-deferred
arrangement under a profit sharing plan are subject to additional annual limits.
Premiums paid to a defined benefit pension plan are actuarially determined based
upon the amount of benefits the participant will receive under the plan formula.
The maximum annual benefit any participant may receive under an Employer's
defined benefit plan is limited under Section 415(b) of the Internal Revenue
Code. The limits determined under Section 415(b) and (c) of the Internal Revenue
Code are further reduced for a participant who participates in a defined
contribution plan and a defined benefit plan maintained by the same employer.
TAX PENALTY FOR ALL ANNUITY CONTRACTS
Any distribution made to a Contract Owner who is a participant from an
Employee Benefit Plan or a 408 Program other than on account of one or more of
the following events will be subject to a 10% penalty tax on the amount
distributed:
(a) the Contract Owner has attained age 59 1/2;
(b) the Contract Owner has died; or
(c) the Contract Owner is disabled.
In addition, a distribution from an Employee Benefit Plan will not be
subject to a 10% excise tax on the amount distributed if the Contract Owner is
55 and has separated from service. Distributions received at least annually as
part of a series of substantially equal periodic payments made for the life of
the Participant will not be subject to an excise tax. Certain amounts paid for
medical care also may not be subject to an excise tax.
WITHHOLDING FOR EMPLOYEE BENEFIT PLANS AND
TAX-DEFERRED ANNUITIES
Distributions from an Employee Benefit Plan to an employee, surviving
spouse, or former spouse who is an alternate payee under a qualified domestic
relations order, in the form a lump-sum settlement or periodic annuity payments
for a fixed period of fewer than 10 years are subject to mandatory federal
income tax withholding of 20% of the taxable amount of the distribution, unless
the distributee directs the transfer of such amounts to another Employee Benefit
Plan or to an Individual Retirement Account under Code Section 408. The taxable
amount is the amount of the distribution, less the amount allocable to after-tax
premiums.
5
<PAGE>
All other types of distributions from Employee Benefit Plans and all
distributions from Individual Retirement Accounts, are subject to federal income
tax withholding on the taxable amount unless the distributee elects not to have
the withholding apply. The amount withheld is based on the type of distribution.
Federal tax will be withheld from annuity payments (other than those subject to
mandatory 20% withholding) pursuant to the recipient's withholding certificate.
If no withholding certificate is filed with AUL, tax will be withheld on the
basis that the payee is married with three withholding exemptions. Tax on all
surrenders and lump-sum distributions from Individual Retirement Accounts will
be withheld at a flat 10% rate.
Withholding on annuity payments and other distributions from the Contract
will be made in accordance with regulations of the Internal Revenue Service.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, independent accountants, performs certain
auditing services for AUL and performs similar services for the Variable
Account. The AUL financial statements included in this Statement of Additional
Information have been audited to the extent and for the periods indicated in
their report thereon.
PERFORMANCE INFORMATION
Performance information for the Investment Accounts is shown in the
prospectus under "Performance of the Investment Accounts." Performance
information for the Investment Accounts may also appear in promotional reports
and literature to current or prospective Contract Owners in the manner described
in this section. Performance information in promotional reports and literature
may include the yield and effective yield of the Investment Account investing in
the AUL American Money Market Portfolio ("Money Market Investment Account"), the
yield of the remaining Investment Accounts, the average annual total return and
the total return of all Investment Accounts.
Current yield for the Money Market Investment Account will be based on the
change in the value of a hypothetical investment (exclusive of capital changes)
over a particular 7-day period, less a pro rata share of the Investment
Account's expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figures carried to at least the nearest hundredth of
one percent.
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)**365/7] - 1
Quotations of yield for the remaining Investment Accounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(a-b/cd + 1)**6 - 1]
where a = net investment income earned during the period by the Portfolio
attributable to shares owned by the Investment Account
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Accumulation Units outstanding during
the period that were entitled to receive dividends, and
d = the value (maximum offering period) per Accumulation Unit on the
last day of the period.
Quotations of average annual total return for any Investment Account will
be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five, and ten years
(or, if less, up to the life of the Investment Account), calculated pursuant to
the following formula: P(1 + T)**n = ERV (where P = a hypothetical initial
payment of $1,000, T = the average annual total return, n = the number of years,
and ERV = the ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the period). Hypothetical quotations of average total return
may also be shown for an Investment Account for periods prior to the time that
the Investment Account commenced operations based upon the performance of the
mutual fund portfolio in which that Investment Account invests, as adjusted for
applicable charges. All total return figures reflect the deduction of the
applicable withdrawal charge, the administrative charge, and the mortality and
expense risk charge. Quotations of total return, actual and hypothetical, may
simultaneously be shown that do not take into account certain contractual
charges such as the withdrawal charge and the administrative charge and
quotations of total return may reflect other periods of time.
The average annual return that the Investment Accounts achieved for the one
year, three year, five year, and the lesser of ten years or since inception for
the periods ending
6
<PAGE>
December 31, 1998 under a Flexible Premium Contract and a One Year Flexible
Premium Contract and all Contracts may be found in the Prospectus.
Performance information for an Investment Account may be compared, in
promotional reports and literature, to: (1) the Standard & Poor's 500 Composite
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices that measure performance of a pertinent
group of securities so that investors may compare an Investment Account's
results with those of a group of securities widely regarded by investors as
representative of the securities markets in general; (2) other groups of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons who rank such investment companies on overall performance or other
criteria; and (3) the Consumer Price Index (measure for inflation) to assess the
real rate of return from an investment in the Contract. Unmanaged indices may
assume the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for any Investment Account reflects only the
performance of a hypothetical Contract under which an Owner's Account Value is
allocated to an Investment Account during a particular time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies, characteristics and quality of the Funds
in which the Investment Account invests, and the market conditions during the
given time period, and should not be considered as a representation of what may
be achieved in the future.
Promotional reports and literature may also contain other information
including (1) the ranking of any Investment Account derived from rankings of
variable annuity separate accounts or other investment products tracked by
Lipper Analytical Services or by other rating services, companies, publications,
or other persons who rank separate accounts or other investment products on
overall performance or other criteria; (2) the effect of tax-deferred
compounding on an Investment Account's investment returns, or returns in
general, which may include a comparison, at various points in time, of the
return from an investment in a Contract (or returns in general) on a
tax-deferred basis; (assuming one or more tax rates) with the return on a
taxable basis; and (3) AUL's rating or a rating of AUL's claim-paying ability by
firms that analyze and rate insurance companies and by nationally recognized
statistical rating organizations.
7
<PAGE>
FINANCIAL STATEMENTS
The financial statements of AUL, which are included in this Statement of
Additional Information, should be considered only as bearing on the ability of
AUL to meet its obligations under the Contracts. They should not be considered
as bearing on the investment performance of the assets held in the Variable
Account.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
American United Life Insurance Company(R)
Indianapolis, Indiana
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, policyholders' surplus, and cash flows present fairly,
in all material respects, the financial position of American United Life
Insurance Company(R) and affiliates (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for years then
ended, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Indianapolis, Indiana
February 26, 1999
<TABLE>
<CAPTION>
Combined Balance Sheet
December 31 1998 (in millions) 1997
- --------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Investments:
Fixed Maturities:
Available for sale at fair value $ 1,695.4 $ 1,653.8
Held to maturity at amortized cost 2,536.2 2,902.2
Equity securities at fair value 75.1 18.6
Mortgage loans 1,128.5 1,120.4
Real estate 46.6 52.1
Policy loans 144.4 143.1
Short term and other invested assets 64.9 102.0
Cash and cash equivalents 95.7 41.2
- --------------------------------------------------------------------------------------------------------
Total investments 5,786.8 6,033.4
- --------------------------------------------------------------------------------------------------------
Accrued investment income 73.0 79.3
Reinsurance receivables 290.6 244.3
Deferred acquisition costs 451.7 421.2
Property and equipment 56.8 55.5
Insurance premiums in course of collection 66.7 72.9
Other assets 16.1 17.2
Assets held in separate accounts 2,594.6 1,674.0
- --------------------------------------------------------------------------------------------------------
Total assets $9,336.3 $8,597.8
- --------------------------------------------------------------------------------------------------------
Liabilities and policyholders' surplus
Liabilities
Policy reserves $5,339.1 $5,642.9
Other policyholder funds 203.9 177.1
Pending policyholder claims 209.2 164.3
Surplus notes 75.0 75.0
Other liabilities and accrued expenses 180.4 199.9
Liabilities related to separate accounts 2,594.6 1,674.0
- --------------------------------------------------------------------------------------------------------
Total liabilities 8,602.2 7,933.2
- --------------------------------------------------------------------------------------------------------
Unrealized appreciation of securities,
net of deferred income tax 39.5 36.5
Policyholders' surplus 694.6 628.1
- --------------------------------------------------------------------------------------------------------
Total policyholders' surplus 734.1 664.6
- --------------------------------------------------------------------------------------------------------
Total liabilities and policyholders' surplus $9,336.3 $8,597.8
- --------------------------------------------------------------------------------------------------------
Combined Statement of Policyholders' Surplus
Policyholders' surplus at beginning of year $664.6 $572.8
Net income 66.5 74.3
Change in unrealized appreciation (depreciation)
of securities, net 3.0 17.5
- --------------------------------------------------------------------------------------------------------
Policyholders' surplus at end of year $734.1 $664.6
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Combined Statement of Operations
Year ended December 31 1998 (in millions) 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Insurance premiums and other considerations $478.5 $413.9
Policy and contract charges 87.7 69.3
Net investment income 452.1 469.5
Realized investment gains 15.8 13.7
Other income 8.9 5.9
- --------------------------------------------------------------------------------------------------------
Total revenues 1,043.0 972.3
- --------------------------------------------------------------------------------------------------------
Benefits and expenses:
Policy benefits $462.4 $386.2
Interest expense on annuities and financial products 231.9 257.3
Underwriting, acquisition and insurance expenses 157.8 131.2
Amortization of deferred acquisition costs 59.7 53.2
Dividends to policyholders 26.4 25.0
Interest expense on surplus notes 5.8 5.8
Other operating expenses 10.2 9.5
- --------------------------------------------------------------------------------------------------------
Total benefits and expenses 954.2 868.2
- --------------------------------------------------------------------------------------------------------
Income before income tax expense 88.8 104.1
Income tax expense 22.3 29.8
- --------------------------------------------------------------------------------------------------------
Net income $ 66.5 $ 74.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Combined Statement of Cash Flows
Year ended December 31 1998 (in millions) 1997
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 66.5 $ 74.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred acquisition costs 59.7 53.2
Depreciation 11.2 10.1
Deferred taxes 8.1 7.3
Realized investment gains (15.8) (13.7)
Policy acquisition costs capitalized (94.2) (90.8)
Interest credited to deposit liabilities 225.7 252.1
Fees charged to deposit liabilities (32.7) (32.9)
Amortization and accrual of investment income (10.8) (8.2)
Increase in insurance liabilities 169.6 140.2
Increase in noninvested assets (45.5) (66.3)
Increase in other liabilities (1.8) 35.1
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 340.0 360.4
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases:
Fixed maturities, Held to Maturity (18.7) (120.8)
Fixed maturities, Available for Sale (473.8) (348.3)
Equity securities (63.7) (9.4)
Mortgage loans (183.2) (155.4)
Real estate (4.9) (1.9)
Short term and other invested assets (2.7) (43.3)
Proceeds from sales, calls or maturities:
Fixed maturities, Held to Maturity 388.9 241.2
Fixed maturities, Available for Sale 461.6 335.1
Equity securities 8.1 7.2
Mortgage loans 179.2 149.7
Real estate 4.0 4.3
Short term and other invested assets 39.9 1.6
- --------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 334.7 60.0
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Deposits to insurance liabilities 846.6 713.6
Withdrawals from insurance liabilities (1,467.0) (1,112.5)
Other .2 (.5)
- --------------------------------------------------------------------------------------------------------
Net cash used by financing activities (620.2) (399.4)
- --------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 54.5 21.0
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents beginning of year 41.2 20.2
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of year $ 95.7 $ 41.2
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Notes to Financial Statements
1. Significant Accounting Policies
- ----------------------------------
Nature of Operations and Basis of Presentation
American United Life Insurance Company(R) (AUL) is an Indiana-domiciled mutual
life insurance company with headquarters in Indianapolis. AUL is licensed to do
business in 48 states and the District of Columbia and is an authorized
reinsurer in all states. AUL offers individual life and annuity products through
its career agent distribution system. AUL's qualified group retirement plans,
tax deferred annuities and other non-medical group products are marketed through
independent agents and brokers, as well as career agents who are supported by 37
regional sales offices located throughout the country. Life and pooled
reinsurance is marketed directly to other insurance companies. In 1998, AUL
International began operations to develop reinsurance partners in Central and
South America. The combined Company financial statements include the accounts of
AUL and its affiliate, The State Life Insurance Company (State Life), and its
subsidiary, Equity Sales Corporation. Significant intercompany transactions have
been excluded.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP). AUL and State Life file
separate financial statements with insurance regulatory authorities which are
prepared on the basis of statutory accounting practices which are significantly
different from financial statements prepared in accordance with GAAP. These
differences are described in detail in Note 9 - Statutory Information.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Investments
- ------------
Fixed maturity securities which may be sold to meet liquidity and other needs of
the Company are categorized as available for sale and are stated at fair value.
Fixed maturity securities which the Company has the positive intent and ability
to hold to maturity are categorized as held-to-maturity and are stated at
amortized cost. Equity securities are stated at fair value. Mortgage loans on
real estate are carried at amortized cost less an impairment allowance for
estimated uncollectible amounts. Real estate is reported at cost less allowances
for depreciation. Depreciation is provided (straight line) over the estimated
useful lives of the related assets. Investment real estate is net of accumulated
depreciation of $31.7 million at December 31, 1998 and 1997. Depreciation
expense for investment real estate amounted to $2.4 million and $2.5 million for
1998 and 1997, respectively. Policy loans are carried at their unpaid balance.
Other invested assets are reported at cost plus the Company's equity in
undistributed net equity since acquisition. Short term investments include
investments with maturities of one-year or less and are carried at cost which
approximates market. Short term certificates of deposit and savings certificates
are considered to be cash equivalents. The carrying amount for cash and cash
equivalents approximates market.
Realized gains and losses on sale or maturity of investments are based upon
specific identification of the investments sold and do not include amounts
allocable to separate accounts. At the time a decline in value of an investment
is determined to be other than temporary, a provision for loss is recorded which
is included in realized investment gains and losses. Unrealized gains and
losses, resulting from carrying available-for-sale securities at fair value, are
reported in policyholders' surplus, net of deferred taxes.
Deferred Policy Acquisition Costs
- ---------------------------------
Those costs of acquiring new business, which vary with and are primarily related
to the production of new business, have been deferred to the extent that such
costs are deemed recoverable. Such costs include commissions, certain costs of
policy underwriting and issue and certain variable agency expenses. These costs
are amortized with interest as follows:
For participating whole life insurance products, over the lesser of 30
years or the lifetime of the policy in relation to the present value of
estimated gross margins from expenses, investments and mortality,
discounted using the expected investment yield.
For universal life-type policies and investment contracts, over the lesser
of the lifetime of the policy or 30 years for life policies or 20 years for
other policies in relation to the present value of estimated gross profits
from surrender charges and investment, mortality and expense margins,
discounted using the interest rate credited to the policy.
For term life insurance products and life reinsurance policies, over the
lesser of the benefit period or 30 years for term life or 20 years for life
reinsurance policies in relation to the ratio of anticipated annual premium
revenue to the anticipated total premium revenue, using the same
assumptions used in calculating policy benefits.
For miscellaneous group life and individual and group health policies,
straight line over the expected life of the policy.
For credit insurance policies, the deferred acquisition cost balance is
primarily equal to the unearned premium reserve multiplied by the ratio of
deferrable commissions to premiums written.
Recoverability of the unamortized balance of deferred policy acquisition costs
is evaluated regularly. For universal life-type contracts, investment contracts
and participating whole life policies, the accumulated amortization is adjusted
(increased or decreased) whenever there is a material change in the estimated
gross profits or gross margins expected over the life of a block of business in
order to maintain a constant relationship between cumulative amortization and
the present value of gross profits or gross margins. For most other contracts,
the unamortized asset balance is reduced by a charge to income only when the
present value of future cash flows, net of the policy liabilities, is not
sufficient to cover such asset balance.
<PAGE>
Notes to Financial Statements
Assets Held in Separate Accounts
- --------------------------------
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policies, primarily variable annuity contracts,
equity-based pension and profit sharing plans and variable universal life
policies. The assets of these accounts are legally segregated, and are valued at
fair value. The related liabilities are recorded at amounts equal to the
underlying assets; the fair value of these liabilities is equal to their
carrying amount.
Property and Equipment
- ----------------------
Property and equipment includes real estate owned and occupied by the Company.
Property and equipment is carried at cost, net of accumulated depreciation of
$47.1 million and $41.6 million as of December 31, 1998 and 1997, respectively.
The Company provides for depreciation of property and equipment using the
straight-line method over its estimated useful life. Depreciation expense for
1998 and 1997 was $8.8 million and $7.6 million, respectively.
Premium Revenue and Benefits to Policyholders
- ---------------------------------------------
The premiums and benefits for whole life and term insurance products and certain
annuities with life contingencies (immediate annuities) are fixed and
guaranteed. Such premiums are recognized as premium revenue when due. Group
insurance premiums are recognized as premium revenue over the time period to
which the premiums relate. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the life of the
contracts. This association is accomplished by means of the provision for
liabilities for future policy benefits and the amortization of deferred policy
acquisition costs.
Universal life policies and investment contracts are policies with terms that
are not fixed and guaranteed. The terms that may be changed could include one or
more of the amounts assessed the policyholder, premiums paid by the policyholder
or interest accrued to policyholder balances. The amounts collected from
policyholders for these policies are considered deposits, and only the
deductions during the period for cost of insurance, policy administration and
surrenders are included in revenue. Policy benefits and claims that are charged
to expense include interest credited to contracts and benefit claims incurred in
the period in excess of related policy account balances.
Reserves for Future Policy and Contract Benefits
- ------------------------------------------------
Liabilities for future policy benefits for participating whole life policies are
calculated using the net level premium method and assumptions as to interest and
mortality. The interest rate is the dividend fund interest rate and the
mortality rates are those guaranteed in the calculation of cash surrender values
described in the contract. Liabilities for future policy benefits for term life
insurance and life reinsurance policies are calculated using the net level
premium method and assumptions as to investment yields, mortality and
withdrawals. The assumptions are based on projections of past experience and
include provisions for possible unfavorable deviation. These assumptions are
made at the time the contract is issued. Liabilities for future policy benefits
on universal life and investment contracts consist principally of policy account
values plus certain deferred policy fees which are amortized using the same
assumptions and factors used to amortize the deferred policy acquisition costs.
If the future benefits on investment contracts are guaranteed (immediate
annuities with benefits paid for a period certain) the liability for future
benefits is the present value of such guaranteed benefits. Claim liabilities
include provisions for reported claims and estimates based on historical
experience for claims incurred but not reported.
Income Taxes
- ------------
The provision for income taxes includes amounts currently payable and deferred
income taxes resulting from the temporary differences in the assets and
liabilities determined on a tax and financial reporting basis.
<PAGE>
Notes to Financial Statements
2. Investments:
- ---------------
<TABLE>
<CAPTION>
The book value and fair value of investments in fixed maturity securities by type of
investment were as follows:
December 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Available for sale: (in millions)
<S> <C> <C> <C> <C>
Obligations of U.S. government, states,
...political subdivisions and foreign governments. $ 42.7 $ 5.4 $0.0 $ 48.1
Corporate securities 1,119.7 65.5 4.3 1,180.9
Mortgage-backed securities 440.7 26.0 0.3 466.4
- --------------------------------------------------------------------------------------------------------------------
$ 1,603.1 $ 96.9 $4.6 $ 1,695.4
- --------------------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of U.S. government, states,
...political subdivisions and foreign governments $ 108.8 $ 7.6 $0.0 $ 116.4
Corporate securities. 1,656.4 141.0 2.9 1,794.5
Mortgage-backed securities. 771.0 50.3 0.3 821.0
- --------------------------------------------------------------------------------------------------------------------
$ 2,536.2 $ 198.9 $3.2 $ 2,731.9
- --------------------------------------------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
Available for sale: (in millions)
Available for sale:
Obligations of U.S. government, states,
...political subdivisions and foreign governments $ 47.8 $ 4.0 $0.0 $ 51.8
Corporate securities. 1,064.1 55.5 1.8 1,117.8
Mortgage-backed securities. 456.8 27.6 0.2 484.2
- --------------------------------------------------------------------------------------------------------------------
$ 1,568.7 $ 87.1 $2.0 $1,653.8
- --------------------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of U.S. government, states,
...political subdivisions and foreign governments $ 124.2 $ 6.2 $0.3 $ 130.1
Corporate securities. 1,854.4 123.4 3.6 1,974.2
Mortgage-backed securities 923.6 55.5 0.2 978.9
- --------------------------------------------------------------------------------------------------------------------
$ 2,902.2 $ 185.1 $4.1 $ 3,083.2
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements
The amortized cost and fair value of fixed maturity securities at December 31,
1998, by contractual average maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Total
Amortized Fair Amortized Fair Amortized Fair
(in millions) Cost Value Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in one year
or less $ 40.7 $ 40.9 $ 72.9 $ 73.9 $ 113.6 $ 114.8
Due after one year
through five years 392.8 404.1 753.4 790.5 1,146.2 1,194.6
Due after five years
through ten years 363.9 383.1 577.7 639.3 941.6 1,022.4
Due after ten years 365.0 400.9 361.2 407.2 726.2 808.1
- --------------------------------------------------------------------------------------------------------------------
1,162.4 1,229.0 1,765.2 1,910.9 2,927.6 3,139.9
Mortgage-backed securities 440.7 466.4 771.0 821.0 1,211.7 1,287.4
- --------------------------------------------------------------------------------------------------------------------
$1,603.1 $1,695.4 $2,536.2 $2,731.9 $4,139.3 $4,427.3
</TABLE>
Net investment income consisted of the following:
for years ended December 31 1998 (in millions) 1997
- -------------------------------------------------------------------------
Fixed maturity securities $341.0 $359.4
Equity securities 2.3 2.5
Mortgage loans 98.5 100.9
Real estate 10.7 11.2
Policy loans 8.8 8.8
Other 10.0 7.3
- -------------------------------------------------------------------------
Gross investment income 471.3 490.1
Investment expenses 19.2 20.6
- -------------------------------------------------------------------------
Net investment income $452.1 $469.5
- -------------------------------------------------------------------------
Net realized investment gains and (losses) include write downs and changes in
the reserve for losses on mortgage loans and foreclosed real estate of $(.1)
million and $(1.3) million for 1998 and 1997, respectively. Proceeds from the
sales, maturities or calls of investments in fixed maturities during 1998 and
1997 were approximately $850.5 million and $576.3 million, respectively. Gross
gains of $14.9 million and $11.6 million, and gross losses of $.6 million and
$1.3 million were realized in 1998 and 1997, respectively. The changes in
unrealized appreciation of fixed maturities amounted to approximately $7.2
million and $39.9 million in 1998 and 1997, respectively.
At December 31, 1998, the unrealized appreciation on equity securities of
approximately $2.3 million is comprised of $3.8 million in unrealized gains and
$1.5 million of unrealized losses and has been reflected directly in
policyholders' surplus. The change in the unrealized appreciation of equity
securities amounted to approximately $.1 million and $.9 million in 1998 and
1997, respectively.
<PAGE>
The Company maintains a diversified mortgage loan portfolio and exercises
internal limits on concentrations of loans by geographic area, industry, use and
individual mortgagor. At December 31, 1998, the largest geographic concentration
of commercial mortgage loans was in Indiana, California and Florida where
approximately 31% of the portfolio was invested. A total of 40% of the mortgage
loans have been issued on retail properties, primarily backed by long term
leases or guarantees from strong credits.
The Company has outstanding mortgage loan commitments at December 31, 1998, of
approximately $100.3 million. As of December 31, 1998, the carrying value of
investments that produced no income for the previous twelve month period was $.2
million.
<PAGE>
Notes to Financial Statements
3. Insurance Liabilities:
- -------------------------
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
(in millions)
- -------------------------------------------------------------------------------------------------------------------------
Withdrawal Mortality or morbidity Interest rate December 31,
assumption assumption assumption 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Future policy benefits:
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Participating whole life contracts Company Company 2.5% to 6.0% $ 632.7 $ 594.5
experience experience
Universal life-type contracts n/a n/a n/a 381.2 376.4
Other individual life contracts Company Company 2.5% to 8.0% 271.1 216.4
experience experience
Accident and health n/a n/a n/a 55.2 51.0
Annuity products n/a n/a n/a 3,803.7 4,213.6
Group life and health n/a n/a n/a 195.2 191.0
Other policyholder funds n/a n/a n/a 203.9 177.1
Pending policyholder claims n/a n/a n/a 209.2 164.3
- -------------------------------------------------------------------------------------------------------------------------
Total insurance liabilities $5,752.2 $5,984.3
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Participating life insurance policies under generally accepted accounting
principles represent approximately 7% and 9% of the total individual life
insurance in force at December 31, 1998 and 1997, respectively. Participating
policies represented approximately 34% and 39% of life premium income for 1998
and 1997, respectively. The amount of dividends to be paid is determined
annually by the Board of Directors.
4. Employees' and Agents' Benefit Plans:
- ----------------------------------------
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Company contributions to the employee plan are made
periodically in an amount between the minimum ERISA required contribution and
the maximum tax-deductible contribution. Such amounts are expensed as
contributed. Contributions made to the Plan were $2.1 million in 1998 and $2.8
million in 1997.
The following benefit information for the employees' defined benefit plan was
determined by independent actuaries as of January 1, 1998 and 1997,
respectively, the most recent actuarial valuation dates:
1998 (in millions) 1997
- --------------------------------------------------------------------------------
Actuarial present value of
accumulated benefits for the
employees' defined benefit plan $33.6 $28.1
Fair value of plan assets 49.6 39.7
- --------------------------------------------------------------------------------
Funded status $16.0 $11.6
- --------------------------------------------------------------------------------
Net periodic pension cost $ 2.1 $ 2.0
- --------------------------------------------------------------------------------
The assumed discount rate was 7.17% and 7.36% for 1998 and 1997, respectively.
For both 1998 and 1997, the expected return on plan assets was 8.0% and the rate
of compensation increase assumed was 6%. Benefits paid out of the Plan were
approximately $3.1 million in 1998 and $2.6 million in 1997.
The Company has a defined contribution plan and a 401(k) salary
reduction/savings plan for employees. Quarterly contributions covering employees
who have completed one full calendar year of service are made by the Company in
amounts based upon the Company's financial results. Company contributions to the
plan during 1998 and 1997 were $1.7 million and $1.5 million, respectively.
<PAGE>
Notes to Financial Statements
The Company has a defined contribution pension plan and a 401(k) plan covering
substantially all of the agents, except general agents. Contributions of 3% to
4 1/2% of defined commissions (plus 3% to 41/2% for commissions over the Social
Security wage base) are made to the pension plan. An additional contribution of
3% of defined commissions is made to a 401(k) plan. Company contributions
expensed for these plans for 1998 and 1997 were $257,000 and $268,000,
respectively.
The funds for all plans are held by the Company under deposit administration and
group annuity contracts.
The Company also provides certain health care and life insurance benefits
(postretirement benefits) for retired employees and certain agents (retirees).
Employees and agents with at least 10 years of plan participation may become
eligible for such benefits if they reach retirement age while working for the
Company.
Accrued postretirement benefits as of December 31: 1998 (in millions) 1997
================================================================================
Accumulated postretirement benefit obligation $9.5 $9.3
Net postretirement benefit cost 1.2 1.0
Company contributions .7 .7
- --------------------------------------------------------------------------------
There are no specific plan assets for this postretirement liablility as of
December 31, 1998 and 1997. Claims incurred for benefits were funded by company
contributions.
The assumed discount rate used in determining the accumulated postretirement
benefit was 7.00% and the assumed health care cost trend rate was 10% graded to
5% until 2004. Compensation rates were assumed to increase 6% at each year end.
The health coverage for retirees 65 and over is capped in the year 2000. The
health care cost trend rate assumption has an effect on the amounts reported. An
increase in the assumed health care cost trend rates by one percentage point
would increase the accumulated postretirement benefit obligation as of December
31, 1998, by $152,000 and increase the accumulated postretirement benefit cost
for 1998 by $16,000.
5. Federal Income Taxes:
- ------------------------
A reconciliation of the income tax attributable to continuing operations
computed at U.S. federal statutory tax rates to the income tax expense included
in the statement of operations follows:
for years ended December 31 1998 (in millions) 1997
- ------------------------------------------------------------------------------
Income tax computed at statutory tax rate $31.0 $36.3
Tax exempt income (2.0) (1.5)
Mutual company differential earnings amount 4.3 6.1
Prior year differential earnings amount (10.2) (3.7)
Other (0.8) (7.4)
- ------------------------------------------------------------------------------
Federal income tax $22.3 $29.8
- ------------------------------------------------------------------------------
The components of the provision for income taxes on earnings included current
tax provisions of $14.2 million and $22.5 million for the years ended December
31, 1998 and 1997, respectively, and deferred tax expense of $8.1 million and
$7.3 million for the years ended December 31, 1998 and 1997, respectively.
<PAGE>
Notes to Financial Statements
Deferred income tax assets (liabilities)
- --------------------------------------------------------------------------------
as of December 31: 1998 1997
- --------------------------------------------------------------------------------
Deferred policy acquisition costs $(148.8) $(137.0)
Investments (11.1) (12.0)
Insurance liabilities 158.9 154.7
Unrealized appreciation of securities (23.6) (21.9)
Other (6.1) (4.7)
- --------------------------------------------------------------------------------
Deferred income tax assets (liabilities) $ (30.7) $ (20.9)
- --------------------------------------------------------------------------------
Federal income taxes paid were $10.6 million and $28.6 million for 1998 and
1997, respectively.
6. Reinsurance:
- ---------------
The Company is a party to various reinsurance contracts under which it receives
premiums as a reinsurer and reimburses the ceding companies for portions of the
claims incurred. At December 31, 1998 and 1997, life reinsurance assumed was
approximately 74% and 71%, respectively, of life insurance in force.
For individual life policies, the Company cedes the portion of the total risk in
excess of $1,500,000. For other policies, the Company has established various
limits of coverage it will retain on any one policyholder and cedes the
remainder of such coverage.
Certain statistical data with respect to reinsurance follows:
for years ended December 31 1998 1997
- --------------------------------------------------------------------------------
Direct statutory premiums $374.1 $369.4
Reinsurance assumed 329.7 253.9
Reinsurance ceded 150.2 132.3
- --------------------------------------------------------------------------------
Net premiums 553.6 491.0
- --------------------------------------------------------------------------------
Reinsurance recoveries $146.4 $ 103.4
The Company accounts for all reinsurance agreements as transfers of risk. If
companies to which reinsurance has been ceded are unable to meet obligations
under the reinsurance agreements, the Company would remain liable. Six
reinsurers account for approximately 66% of the Company's December 31, 1998,
ceded reserves for life and accident and health insurance. The remainder of such
ceded reserves is spread among numerous reinsurers.
7. Surplus Notes and Lines of Credit:
- -------------------------------------
On February 16, 1996, the Company issued $75 million of Surplus Notes, due March
30, 2026. Interest is payable semi-annually on March 30, and September 30 at a
7.75% annual rate. Any payment of interest on or principal of the Notes may be
made only with the prior approval of the Commissioner of the Indiana Department
of Insurance. The Surplus Notes may not be redeemed at the option of AUL or any
holder of the Surplus Notes. Interest paid during 1998 was $5.8 million. The
Company has available a $125 million committed credit facility. No amounts have
been drawn as of December 31, 1998.
8. Commitments and Contingencies:
- ---------------------------------
Various lawsuits have arisen in the ordinary course of the Company's business.
In each of the matters, the Company believes the ultimate resolution of such
litigation will not result in any material adverse impact to operations or
financial condition of the Company.
In 1997, AUL signed an investment agreement with Indianapolis Life Insurance
Company (Indianapolis Life) and Indianapolis Life Group of Companies (ILGroup),
a downstream holding company of Indianapolis Life, with a purpose of creating an
affiliation under a mutual holding company structure. At December 31, 1998, AUL
has invested $49.5 million in ILGroup in exchange for a 33.2% ownership. In
1998, AUL signed an affiliation agreement with Pioneer Mutual Life Insurance
Company, who joined with AUL, Indianapolis Life and State Life contemplating
future integration of the companies in a mutual holding company structure.
<PAGE>
Notes to Financial Statements
9. Statutory Information:
- ----------------------------
AUL and State Life prepare statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Indiana
Department of Insurance. Prescribed statutory accounting practices (SAP)
currently include state laws, regulations and general administrative rules
applicable to all insurance enterprises domiciled in a particular state, as well
as practices described in National Association of Insurance Commissioners'
(NAIC) publications.
A reconciliation of SAP surplus to GAAP surplus at December 31 follows:
- --------------------------------------------------------------------------------
for years ended December 31 1998 (in millions) 1997
- --------------------------------------------------------------------------------
SAP surplus $496.5 $464.2
Deferred policy acquisition costs 481.8 447.4
Adjustments to policy reserves (306.0) (303.1)
Asset valuation and interest maintenance reserves 88.9 86.1
Unrealized gain on invested assets, net 39.5 36.5
Surplus notes (75.0) (75.0)
Deferred income taxes (6.7) 1.0
Other, net 15.1 7.5
- --------------------------------------------------------------------------------
GAAP surplus $734.1 $664.6
- --------------------------------------------------------------------------------
A reconciliation of SAP net income to GAAP net income for the years ended
December 31 follows:
- --------------------------------------------------------------------------------
for years ended December 31 1998 (in millions) 1997
- --------------------------------------------------------------------------------
SAP income $33.5 $41.8
Deferred policy acquisition costs 34.5 37.6
Adjustments to policy reserves (3.7) (9.2)
Deferred income taxes (8.1) (7.3)
Other, net 10.3 11.4
- --------------------------------------------------------------------------------
GAAP net income $66.5 $74.3
- --------------------------------------------------------------------------------
Life insurance companies are required to maintain certain amounts of assets on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $4.9 million at December 31, 1998.
10. Fair Value of Financial Instruments:
- ----------------------------------------
The disclosure of fair value information about certain financial instruments is
based primarily on quoted market prices. The fair values of short-term
investments and policy loans approximate the carrying amounts reported in the
balance sheets. Fair values for fixed maturity and equity securities, and
surplus notes are based on quoted market prices where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services, or in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of the
investments.
The fair value of the aggregate mortgage loan portfolio was estimated by
discounting the future cash flows using current rates at which similar loans
would be made to borrowers with similar credit ratings for similar maturities.
The estimated fair values of the liabilities for policyholder funds approximate
the statement values because interest rates credited to account balances
approximate current rates paid on similar funds and are not generally guaranteed
beyond one year. Fair values for other insurance reserves are not required to be
disclosed. However, the estimated fair values for all insurance liabilities are
taken into consideration in the Company's overall management of interest rate
risk, which minimizes exposure to changing interest rates through the matching
of investment maturities with amounts due under insurance contracts. The fair
values of certain financial instruments along with their corresponding carrying
values at December 31, 1998 and 1997 follow.
1998 (in millions) 1997
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
- --------------------------------------------------------------------------------
Fixed maturity securities:
Available for sale $1,695.4 $1,695.4 $1,653.8 $1,653.8
Held to Maturity 2,536.2 2,731.9 2,902.2 3,083.2
Equity securities 75.1 75.1 18.6 18.6
Mortgage loans 1,128.5 1,202.1 1,120.4 1,201.0
Policy loans 144.4 144.4 143.1 143.1
Surplus notes 75.0 80.5 75.0 79.5
- --------------------------------------------------------------------------------
<PAGE>
Board of Directors
Jerry D. Semler, CLU (1, 2)
Chairman of the Board,
President and Chief
Executive Officer,
AUL
Steven C. Beering, MD (3)
President, Purdue University
West Lafayette, Indiana
Arthur L. Bryant, FSA (2)
President, The State Life
Insurance Company
James M. Cornelius (1)
Chairman of the Board,
Guidant Corporation
Indianapolis, Indiana
James E. Dora (1)
Chairman of the Board
and Chief Executive Officer,
General Hotels Corporation
Indianapolis, Indiana
Otto N. Frenzel, III (3)
Chairman of Executive Committee,
National City Bank, Indiana
Indianapolis, Indiana
David W. Goodrich, SIOR (2)
President, Indianapolis Colliers Turley Martin Tucker Company
Indianapolis, Indiana
<PAGE>
William P. Johnson (2)
Chairman of the Board and
Chief Executive Officer,
Goshen Rubber Company, Inc.
Goshen, Indiana
James T. Morris (1)
Chairman of the Board
and Chief Executive Officer,
IWC Resources Corporation
and the Indianapolis
Water Company
Indianapolis, Indiana
R. Stephen Radcliffe,
FSA, CLU, MAAA (2)
Executive Vice President,
AUL
Thomas E. Reilly, Jr. (2)
Chairman of the Board, Reilly Industries, Inc.
Indianapolis, Indiana
William R. Riggs (1)
Partner, Ice Miller Donadio
& Ryan
Indianapolis, Indiana
John C. (Jack) Scully, CLU
President Emeritus,
LIMRAInternational
Hartford, Connecticut
Yvonne H. Shaheen (3)
Chief Executive Officer
and President,
Long Electric Company Indianapolis, Indiana
Frank D. Walker (3)
Chairman of the Board,
Walker Information
Indianapolis, Indiana
Board committees
(1) Executive
(2) Finance
(3) Audit
Management Committee
Jerry D. Semler, CLU
Chairman of the Board,
President and Chief Executive Officer
R. Stephen Radcliffe, FSA,
CLU, MAAA
Executive Vice President
John H. Barbre, CLU
Senior Vice President,
Individual Division
<PAGE>
John R. Barton, CLU, FLMI
Senior Vice President,
Group Division
William R. Brown, JD
General Counsel and Secretary
Arthur L. Bryant, FSA
President, The State Life
Insurance Company
Scott A. Kincaid
Senior Vice President and
Chief Information Officer
Charles D. Lineback, FLMI
Senior Vice President,
Reinsurance Division
James W. Murphy, FLMI
Senior Vice President,
Corporate Finance
Jerry L. Plummer
Senior Vice President,
Human Resources and
Corporate Support
G. David Sapp, CFA, FLMI
Senior Vice President, Investments
William L. Tindall
Senior Vice President,
Pension Division
(As of 2/1/99) Enterprise Profile American United Life Insurance Company(R) is a
mutual company with headquarters in Indianapolis. AUL's predecessors were
founded in 1877 and the company is currently licensed to sell in 48 states and
the District of Columbia. AULInternational's headquarters in Coral Gables,
Florida, serves a growing number of Central and South American countries.
AUL, with approximately $9.3 billion in assets, is a diversified company with
four major product lines. We offer individual life insurance and annuities,
group life and disability insurance, pension products and reinsurance services.
The company is one of the nation's top providers of tax-deferred group annuities
and pensions, with more than $5.45 billion of group annuity and pension assets
under management. In 1994, AUL entered into a strategic alliance with The State
Life Insurance Company. All the financials in this report include/ combined AUL
and State Life results, unless otherwise noted. In late 1997, the company
announced an affiliation with Indianapolis Life Insurance Company, and in 1998,
Pioneer Mutual Life Insurance Company of Fargo, North Dakota, also became an
affiliate of AUL. AUL has earned consistently high ratings. We are rated A+
(second highest of 15 rating categories) by A.M. Best, AA (third of 18) by
Standard & Poor's and Duff & Phelps, and A1 (fifth of 25) by Moody's.
AUL's agents and sales representatives are prepared to provide service to
policyholders and clients at any time. If for any reason you need additional
assistance, however, you may call the Home Office toll free. Regarding
individual products, call 1-800-537-6442, regarding group products, call
1-800-553-5318, regarding financial institution sales, call 1-800-381-3683 and
regarding pension products, call 1-800-634-1629. For additional information
about AUL, call Jim Freeman, vice president, Corporate C ommunications, at (317)
285-1609.
19
<PAGE>
================================================================================
No dealer, salesman or any other person is authorized by the AUL American
Individual Unit Trust to give any information or to make any representation
other than as contained in this Statement of Additional Information in
connection with the offering described herein.
There has been filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, with
respect to the offering herein described. For further information with
respect to the AUL American Individual Variable Annuity Unit Trust, AUL and
its variable annuities, reference is made thereto and the exhibits filed
therewith or incorporated therein, which include all contracts or documents
referred to herein.
================================================================================
Individual Flexible Premium Deferred Variable Annuity
(No Surrender Charge Contract)
Individual Variable Annuity Contracts
Sold By
AMERICAN UNITED
LIFE INSURANCE COMPANY(R)
One American Square
Indianapolis, Indiana 46282
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 4, 1999
================================================================================
20
<PAGE>
