<PAGE>
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON
FORMS 66-3A AND 66-4A
The variable annuity Contracts issued by Horace Mann Life Insurance Company
on Forms 66-3A and 66-4A are no longer offered or sold by Horace Mann Life
Insurance Company. These earlier Contracts remain in effect but differ from
the Contracts described in the Prospectus in the following material respects.
Please refer to the Contracts on Forms 66-3A and 66-4A for a complete
description of their provisions.
1. In lieu of the Surrender Charge, 6% of each Purchase Payment (gross
stipulated payment) plus $.50, without any yearly limitation, is deducted for
sales and administrative expenses and death benefit charges. It is estimated
that of the 6% deduction, 4% is for sales expenses and 2% for the death
benefit risk. The additional $.50 deduction is for administrative expenses.
All Purchase Payments, net of applicable deductions, including premium taxes
if applicable, are invested by the Account in shares of Horace Mann Growth
Fund. There is no annual maintenance fee or transfer charge.
2. In lieu of the Mortality and Expense Risk Fee ("M&E Fee") described in
the Prospectus, a fee is deducted from all distributions paid by the Growth
Fund to the Account or, if the fee is accrued and unpaid, from the value of a
Participant's individual account upon withdrawal or transfer from the Account.
This fee is computed weekly at the rate of .0075% of the net assets of the
Account (.39% on an annual basis). It is estimated that .31% is for mortality
risk and .08% is for expense risk.
3. The "present value factor" used in calculating the actuarial liability of
the Variable Retirement Annuity Account is computed using the Progressive
Annuity Mortality Table with interest at 4%.
4. With respect to the group Contract issued on Form 66-4A, if the Annuitant
is no longer in the class of eligible Participants or elects not to continue
to participate in the group Contract, the Annuitant may elect, within 31 days
after the date of termination, to purchase from Horace Mann Life Insurance
Company its individual annuity Contract most nearly similar in benefits and
provisions to the group Contract. The individual annuity Contract will be
issued at the then attained age of the Annuitant and at the same annual
Purchase Payment as the group Contract Certificate, unless otherwise agreed to
by Horace Mann Life Insurance Company.
FORM 66-3A AND 66-4A CONTRACTS
<TABLE>
<S> <C> <C>
Contract Owner Transaction Expenses,(/1/) as a percentage of
Purchase Payments:
Sales Expense Charge............................................... 4.00%
Death Benefit Risk Charge.......................................... 2.00%
Administration Expense Charge............................. $.50 per payment
plus $10.00
issuance fee
Separate Account Annual M&E Fee, as a percentage of average
account value:
Mortality Risk ........................................... 0.31%
Expense Risk ............................................. 0.08%
Total Separate Account Annual M&E Fee.............................. 0.39%
Annual Operating Expenses of Growth Fund,(/2/) as a
percentage of average net assets for the December 31, 1997
fiscal year:
Management Fees.................................................... 0.50%
Other Expenses..................................................... 0.02%
Total Growth Fund Operating Expenses............................... 0.52%
</TABLE>
<PAGE>
EXAMPLE(/3/)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of
the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:.................................. $79 $97 $117 $175
If you do not surrender your Contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:.................................. $79 $97 $117 $175
</TABLE>
(/1/)Premium taxes, currently ranging between 0 and 3.5%, are not included.
The rate varies depending upon state of residence, and not all states impose
premium taxes. Also, depending on the state, taxes are taken from Purchase
Payments or are levied at annuitization.
(/2/)The Operating Expenses of the Growth Fund are borne indirectly by
Contract Owners.
(/3/)The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1997 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
--------------
The date of this Supplement is May 1, 1998.
<PAGE>
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON
FORM 66-2A
The variable annuity Contract issued by Horace Mann Life Insurance Company
on Form 66-2A is no longer offered or sold by Horace Mann Life Insurance
Company. This earlier Contract remains in effect but differs from the
Contracts described in the Prospectus in the following material respects.
Please refer to the Contract on Form 66-2A for a complete description of its
provisions.
1. In lieu of the Surrender Charge, 6% of each Purchase Payment (gross
stipulated payment) plus $.50, without any yearly limitation, is deducted for
sales and administrative expenses and death benefit charges.
It is estimated that of the 6% deduction, 4% is for sales expenses and 2%
for the death benefit risk. The additional $.50 deduction is for
administrative expenses.
All Purchase Payments, net of applicable deductions including premium taxes
if applicable, are invested by the Account in shares of Horace Mann Growth
Fund. There is no annual maintenance fee or transfer charge.
2. In lieu of the Mortality and Expense Risk Fee ("M&E Fee") described in
the Prospectus, a fee is deducted from distributions paid by the Growth Fund
to the Account or, if the fee is accrued and unpaid, from the value of a
Contract Owner's individual account upon withdrawal or transfer from the
Account. This fee is computed weekly at the rate of .0075% of the net assets
of the Account (.39% on an annual basis). It is estimated that .31% is for
mortality risk and .08% is for expense risk.
FORM 66-2A CONTRACTS
<TABLE>
<S> <C> <C>
Contract Owner Transaction Expenses,(/1/) as a percentage of
Purchase Payments:
Sales Expense Charge............................................... 4.00%
Death Benefit Risk Charge.......................................... 2.00%
Administration Expense Charge............................. $.50 per payment
plus $10.00
issuance fee
Separate Account Annual M&E Fee, as a percentage of average
account value:
Mortality Risk............................................ 0.31%
Expense Risk ............................................. 0.08%
Total Separate Account Annual M&E Fee.............................. 0.39%
Annual Operating Expenses of Growth Fund,(/2/) as a
percentage of average net assets for the December 31, 1997
fiscal year:
Management Fees.................................................... 0.50%
Other Expenses..................................................... 0.02%
Total Growth Fund Operating Expenses............................... 0.52%
</TABLE>
<PAGE>
EXAMPLE(/3/)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of
the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:................................... $79 $97 $117 $175
If you do not surrender your Contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:................................... $79 $97 $117 $175
</TABLE>
(/1/)Premium taxes, currently ranging between 0 and 3.5%, are not included.
The rate varies depending upon state of residence, and not all states impose
premium taxes. Also, depending on the state, taxes are taken from Purchase
Payments or are levied at annuitization.
(/2/)The Operating Expenses of the Growth Fund are borne indirectly by
Contract Owners.
(/3/)The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1997 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
--------------
The date of this Supplement is May 1, 1998.
<PAGE>
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON
FORM 527-GC
The group variable annuity Contract issued by Horace Mann Life Insurance
Company on Form 527-GC is no longer offered or sold by Horace Mann Life
Insurance Company. This earlier Contract remains in effect but differs from
the Contracts described in the Prospectus in the following material respects.
Please refer to the Contract on Form 527-GC for a complete description of its
provisions.
1. The Contract may be terminated or discontinued by the Group Contract
Owner upon written notice to Horace Mann Life Insurance Company. The written
notice must specify the date for termination which may not be earlier than 30
days following the date such notice is received by Horace Mann Life Insurance
Company. The Contract may be discontinued by Horace Mann Life Insurance
Company upon 90 days' written notice to the Group Contract Owner.
2. If the Contract is terminated or the Annuitant ceases to be in the class
of eligible Annuitants, the Annuitant may elect within 90 days thereafter to
purchase from Horace Mann Life Insurance Company the individual annuity
Contract most similar in benefits and provisions to those of the Annuitant's
Certificate.
3. At the end of each fiscal year, Horace Mann Life Insurance Company may,
in its discretion, determine an experience credit to be equitably applied
based on the mortality experience and administration costs of the Contract.
4. The Contract's minimum Purchase Payment is $10. Minimum annual Purchase
Payments that may be allocated to the Account are $200. In lieu of the
Surrender Charge, 5% of each Purchase Payment plus $.50 is deducted for sales
and administrative expenses and death benefit charges. The $.50 charge may not
exceed $6.00 in any Contract Year. If Purchase Payments are allocated to both
the Fixed Accumulation Account and the Separate Account, the per payment fee
is $.75, not to exceed $9.00 in any Contract Year. It is estimated that of the
5% deduction, 3.2% is for sales expenses, 0.2% is for the death benefit risk
and 1.6% is for administrative expenses. Premium taxes payable, if applicable,
are deducted from each payment. All Purchase Payments net of applicable
deductions, are invested by the Account in shares of the Growth Fund. There is
no annual maintenance charge or transfer charge.
5. In lieu of the Mortality and Expense Risk Fee ("M&E Fee") described in
the Prospectus, a fee for mortality and expense risk, computed weekly at the
rate of .005575% of the net assets of the Account (approximately .29% on an
annual basis), will be deducted from dividends and other distributions paid by
the Growth Fund to the Account or to the extent such distributions are accrued
and unpaid, from the value of a Participant's account upon withdrawal or
transfer of the Participant's interest out of the Account. It is estimated
that .24% is for mortality risk and .05% is for expense risk.
6. The "present value factor" used in calculating the actuarial liability of
the Variable Retirement Annuity Account is computed using the Progressive
Annuity Mortality Table with interest at 3.5%. Consequently, the interest rate
used to compute the value of a Variable Retirement Annuity Unit is 3.79% (of
which .29% represents the charge for mortality and expense risks).
FORM 527-GC CONTRACTS
<TABLE>
<S> <C> <C>
Contract Owner Transaction Expenses,(/1/) as a percentage
of Purchase Payments:
Sales Expense Charge.............................................. 3.20%
Death Benefit Risk Charge......................................... 0.20%
Administration Expense Charge........................... 1.60% and $.50
per payment plus
$20.00 issuance fee
Separate Account Annual M&E Fee, as a percentage of total
net assets:
Mortality Risk.......................................... 0.24%
Expense Risk............................................ 0.05%
Total Separate Account Annual M&E Fee............................. 0.29%
Annual Operating Expenses of Growth Fund,(/2/) as a
percentage of average net assets for the December 31,
1996 fiscal year:
Management Fees................................................... 0.50%
Other Expenses.................................................... 0.02%
Total Growth Fund Operating Expenses.............................. 0.52%
</TABLE>
<PAGE>
EXAMPLE(/3/)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of
the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:.................................. $78 $95 $112 $164
If you do not surrender your Contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets:.................................. $78 $95 $112 $164
</TABLE>
(/1/)Premium taxes, currently ranging between 0 and 3.5%, are not included.
The rate varies depending upon state of residence, and not all states impose
premium taxes. Also, depending on the state, taxes are taken from Purchase
Payments or are levied at annuitization.
(/2/)The Operating Expenses of the Growth Fund are borne indirectly by
Contract Owners.
(/3/)The EXAMPLE, should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1997 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
--------------
The date of this Supplement is May 1, 1998.
<PAGE>
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1998
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
FOR CONTRACTS ISSUED ON
FORM 529
The individual variable annuity Contract issued by Horace Mann Life
Insurance Company on Form 529 is no longer offered or sold by Horace Mann Life
Insurance Company. These earlier Contracts remain in effect but differ from
the Contracts described in the Prospectus in the following material respects.
Please refer to the Contract on Form 529 for a complete description of its
provisions.
1. The Contract's minimum Purchase Payment (gross stipulated payment) is
$10. Minimum annual Purchase Payments that may be allocated to the Account are
$200. In lieu of the Surrender Charge, 5% of each Purchase Payment plus $.50
is deducted for sales and administrative expenses and death benefit charges.
The $.50 charge may not exceed $6.00 in any Contract Year. If Purchase
Payments are allocated to both the Fixed Accumulation Account and the Separate
Account, the per payment fee is $.75, not to exceed $9.00 per Contract Year.
It is estimated that of the 5% deduction, 3.2% is for sales expenses, 0.2% is
for the death benefit risk and 1.6% is for administrative expenses. Premium
taxes payable, if applicable, are deducted from each Purchase Payment. All
Purchase Payments, net of applicable deductions, are invested by the Account
in shares of the Growth Fund. There is no annual maintenance charge or
transfer charge.
2. In lieu of the Mortality and Expense Risk Fee ("M&E Fee") described in
the Prospectus, a fee for mortality and expense risk, computed weekly at the
rate of .005575% of the net assets of the Account (approximately .29% on an
annual basis), will be deducted from dividends and other distributions paid by
the Growth Fund to the Account, or to the extent such distributions are
accrued and unpaid, from the value of a Contract Owner's account upon
withdrawal or transfer of the Contract Owner's interest out of the Account. It
is estimated that .24% of such charge is for mortality risk and .05% is for
expense risk.
3. The "present value factor" used in calculating the actuarial liability of
the Variable Retirement Annuity Account is computed using the Progressive
Annuity Mortality Table with interest at 3.5%. Consequently, the interest rate
used to compute the value of a Variable Retirement Annuity Unit is 3.79% (of
which .29% represents the charge for mortality and expense risks).
FORM 529 CONTRACTS
<TABLE>
<S> <C> <C>
Contract Owner Transaction Expenses,(/1/) as a percentage of
Purchase Payments:
Sales Expense Charge................................................ 3.20%
Death Benefit Risk Charge........................................... 0.20%
Administration Expense Charge............................... 1.60% and $.50
per payment
plus $20.00
issuance fee
Separate Account Annual M&E Fee, as a percentage of total net
assets:
Mortality Risk.............................................. 0.24%
Expense Risk................................................ 0.05%
Total Separate Account Annual M&E Fee............................... 0.29%
Annual Operating Expenses of Growth Fund,(/2/) as a percentage
of average net assets for the December 31, 1997 fiscal year:
Management Fees..................................................... 0.50%
Other Expenses...................................................... 0.02%
Total Growth Fund Operating Expenses................................ 0.52%
</TABLE>
<PAGE>
EXAMPLE(/3/)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your Contract at the end of
the applicable time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual re-
turn on assets:............................ $78 $95 $112 $164
If you do not surrender your Contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual re-
turn on assets:............................ $78 $95 $112 $164
</TABLE>
(/1/)Premium taxes, currently ranging between 0 and 3.5%, are not included.
The rate varies depending upon state of residence, and not all states impose
premium taxes. Also, depending on the state, taxes are taken from Purchase
Payments or are levied at annuitization.
(/2/)The Operating Expenses of the Growth Fund are borne indirectly by
Contract Owners.
(/3/)The EXAMPLE, should not be considered a representation of past or future
expenses. Amounts shown are based on the average cash value of the average
number of annuity Contracts in the accumulation phase during the 1997 calendar
year. Actual expenses may be greater or less than those shown.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE GROWTH FUND.
--------------
The date of this Supplement is May 1, 1998.
<PAGE>
[PICTURE]
Horace Mann Life Insurance Company
Separate Account Prospectus
Horace Mann Mutual Funds Prospectus
May 1, 1998
<PAGE>
[PICTURE]
Prospectus
Variable tax deferred annuity contracts
Qualified and non-qualified plans
Horace Mann Life Insurance Company
Separate account
May 1, 1998
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
INDIVIDUAL SINGLE PAYMENT AND INDIVIDUAL AND GROUP FLEXIBLE PAYMENT
VARIABLE DEFERRED ANNUITY CONTRACTS ISSUED BY
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
This Prospectus offers combination fixed and variable annuity contracts to
individuals, as single payment contracts, and to individuals and groups, as
flexible payment contracts, issued by Horace Mann Life Insurance Company
("HMLIC") in connection with retirement plans or arrangements, some of which
may qualify for special tax treatment under the Internal Revenue Code as
amended. Amounts transferred to Horace Mann Life Insurance Company Separate
Account as directed by a Participant or Contract Owner are invested in one or
more of seven Subaccounts. Each Subaccount in turn purchases shares in a
corresponding portfolio of the Horace Mann Mutual Funds, an open-end
diversified management investment company. The Horace Mann Mutual Funds
consist of:
Growth Fund--a fund investing primarily in common stocks.
Balanced Fund--a fund investing in common stocks, debt securities and money
market instruments.
Income Fund--a fund investing primarily in debt securities.
Short-Term Investment Fund--a fund investing in short-term debt instruments.
Small Cap Growth Fund--a fund investing primarily in small cap equity
securities with earnings growth potential.
International Equity Fund--a fund investing in marketable foreign equity
securities.
Socially Responsible Fund--a fund investing in equity securities of United
States-based companies which are determined to be socially responsible
pursuant to criteria set forth in the Fund's Prospectus.
The portfolios listed above collectively are referred to as the "Funds."
This Prospectus sets forth concisely the information a prospective investor
should know before investing. Additional information about the Horace Mann
Life Insurance Company Separate Account has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated May 1,
1998, and is incorporated herein by reference. The Statement of Additional
Information is available upon request, without charge, by writing to Horace
Mann Life Insurance Company, P.O. Box 4657, Springfield, Illinois 62708-4657,
by sending a telefacsimile (FAX) transmission to (217) 535-7123, or by
telephoning (217) 789-2500 or (800) 999-1030 (toll-free). The Table of
Contents of the Statement of Additional Information appears on page 19 of this
Prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE
FUNDS.*
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE INVESTING
AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
*The Funds' Prospectus follows page 19 of the Horace Mann Life Insurance
Company Separate Account Prospectus.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
DEFINITIONS............................................................... 3
SUMMARY................................................................... 4
CONDENSED FINANCIAL INFORMATION........................................... 8
HORACE MANN LIFE INSURANCE COMPANY, THE ACCOUNT AND THE HORACE MANN MUTUAL
FUNDS.................................................................... 10
Horace Mann Life Insurance Company...................................... 10
The Account............................................................. 10
The Horace Mann Mutual Funds............................................ 10
THE CONTRACT.............................................................. 11
Contract Owners' Rights................................................. 11
Purchasing the Contract................................................. 11
Purchase Payments....................................................... 11
Amount and Frequency of Purchase Payments............................. 11
Allocation of Purchase Payments....................................... 11
Accumulation Units and Accumulation Unit Value........................ 11
Transactions............................................................ 12
Transfers............................................................. 12
Changes in Allocation Instructions.................................... 12
Surrender Before Commencement of Annuity Period....................... 12
Reinvestment Priviledge............................................... 13
Deferment............................................................. 13
Confirmations......................................................... 13
Deductions and Expenses................................................. 13
Annual Maintenance Charge............................................. 13
Mortality and Expense Risk Fee........................................ 13
Operating Expenses of the Horace Mann Mutual Funds.................... 14
Premium Taxes......................................................... 14
Death Benefit Proceeds.................................................. 14
Mandatory Minimum Distribution.......................................... 14
Income Payments......................................................... 14
Income Payment Options................................................ 15
Amount of Fixed and Variable Income Payments.......................... 16
Misstatement of Age..................................................... 16
Modification of the Contract............................................ 16
TAX CONSEQUENCES.......................................................... 17
Separate Account........................................................ 17
Contract Owners......................................................... 17
Contributions......................................................... 17
Distributions Under Qualified Contracts............................... 17
Distributions Under Non-Qualified Contracts........................... 18
Penalty Tax........................................................... 18
VOTING RIGHTS............................................................. 19
OTHER INFORMATION......................................................... 19
ADDITIONAL INFORMATION.................................................... 19
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER
TO ACQUIRE, ANY INTEREST OR PARTICIPATION IN THE CONTRACTS OFFERED BY THIS
PROSPECTUS IN ANY STATE TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
OR SOLICITATION IN SUCH STATE.
2
<PAGE>
DEFINITIONS
- -------------------------------------------------------------------------------
ACCOUNT: Horace Mann Life Insurance Company Separate Account, a segregated
variable investment account consisting of seven Subaccounts each of which
invests in the corresponding Horace Mann Mutual Fund. The Account was
established by Horace Mann Life Insurance Company under Illinois law and
registered as a unit investment trust under the Investment Company Act of
1940.
ACCUMULATION UNIT: A unit of measurement used to determine the value of a
Contract Owner's interest in a Subaccount before Income Payments begin.
ANNUITANT: The recipient of Income Payments.
ANNUITY PERIOD: The period during which income payments are made to the
Annuitant or the last surviving Joint Annuitant, if any.
ANNUITY UNIT: A unit of measurement used in determining the amount of
variable Income Payment during the Annuity Period.
CERTIFICATE: Each Participant under a group Contract is issued a Certificate
summarizing the provisions of the Contract and showing participation in the
retirement plan adopted by the Contract Owner.
CONTRACT: This Prospectus offers combination fixed and variable annuity
Contracts to individuals as single payment Contracts and to both individuals
and groups as flexible payment Contracts. The term "Contract" in this
Prospectus generally will be used to describe Contracts issued to individuals
and Certificates issued to Participants in a group plan.
CONTRACT OWNER: The individual or entity to whom the Contract is issued.
Under a group contract, all references to the Contract Owner refer to the
Participant in a group plan.
CONTRACT YEAR: A year measured from the date a Contract (or a Certificate)
was issued to an individual Contract Owner (or a Participant) and each
anniversary of this date.
FUNDS: The Horace Mann Mutual Funds ("Trust") consist of seven portfolios:
Growth Fund, Balanced Fund, Income Fund, Short-Term Investment Fund ("Short-
Term Fund"), Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund. The Trust is an open-end, diversified, management investment
company registered under the Investment Company Act of 1940.
INCOME PAYMENTS: A series of payments that may be for life; for life with a
guaranteed number of payments; for the joint lifetimes of the Annuitant and
another person, and thereafter, during the lifetime of the survivor; or for
some fixed period. A fixed annuity provides a series of payments that will be
substantially equal in amount throughout the annuity payout period. A fixed
annuity does not participate in the investment experience of any subaccount. A
variable annuity provides a series of payments that vary in amount depending
upon the investment experience of the Subaccount(s) selected by the Contract
Owner.
MATURITY DATE: The date Income Payments begin. The individual Contracts
offered by this Prospectus describe the criteria for determining Maturity
Dates.
In addition, tax qualified plans often place certain limitations upon
election of a Maturity Date. Generally, distributions under tax qualified
plans must begin by April 1 following the calendar year in which the Contract
Owner or Participant reaches age 70 1/2. See "The Contract--Mandatory Minimum
Distribution."
NET PURCHASE PAYMENT: The balance of each Purchase Payment received by
Horace Mann Life Insurance Company after deducting any applicable premium
taxes, or the balance of any transfer amount from other Subaccounts after
applicable charges, or dividends reinvested after applicable charges.
PARTICIPANT: A person to whom a Certificate showing participation under a
group Contract has been issued.
PURCHASE PAYMENT: An amount paid to Horace Mann Life Insurance Company as
consideration for the Contract, the amount transferred from other Subaccounts,
and any dividends reinvested.
QUALIFIED PLAN: A tax-sheltered annuity as defined in Section 403(b) or a
simplified employee pension plan as defined in Section 408(k) of the Internal
Revenue Code ("IRC"). IRAs as defined in Section 408 could be qualified in
some situations.
SUBACCOUNT: A division of the Separate Account of Horace Mann Life Insurance
Company which invests in shares of the corresponding portfolio of the Horace
Mann Mutual Funds.
SURRENDER CHARGE: (a contingent deferred sales charge) An amount kept by
Horace Mann Life Insurance Company if a withdrawal is made or if the Contract
is surrendered. The charge is intended to compensate Horace Mann Life
Insurance Company for the cost of selling the product.
VALUATION DATE: The Valuation Date ends at the earlier of 3:00 p.m. central
time or at the closing of the New York Stock Exchange. No valuations are made
for any day that the New York Stock Exchange is closed. For 1998 no valuations
are made for the day after Thanksgiving.
VALUATION PERIOD: The period from the end of a Valuation Date to the end of
the next Valuation Date, excluding the day the period begins and including the
day it ends.
3
<PAGE>
SUMMARY
- -------------------------------------------------------------------------------
This summary is intended to provide a brief overview of the more significant
aspects of the Contract. Further information can be found in this Prospectus,
the HMLIC Separate Account Statement of Additional Information, and the
Contract. This Prospectus is intended to serve as a disclosure document for
the variable portion of the Contracts only. As used in this Prospectus,
"variable" means that the value depends on the investment performance of the
portfolio selected from the Horace Mann Mutual Funds. For information
regarding the fixed account, refer to the Contract.
Detailed information about the Horace Mann Mutual Funds is contained in the
Funds' Prospectus which immediately follows this Prospectus for Horace Mann
Life Insurance Company Separate Account, and in the Funds' Statement of
Additional Information. Each Fund's expenses, including advisory and
management fees, are found in the Table of Annual Operating Expenses shown on
page 6 of this Summary.
WHAT IS "THE SEPARATE ACCOUNT"?
HMLIC established the Horace Mann Life Insurance Company Separate Account
(the "Account") to segregate assets dedicated to the variable portion of the
combination fixed and variable Contracts offered herein. The Account is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940 as a unit investment trust. The Account consists of seven
Subaccounts, each investing solely in shares of the corresponding portfolio of
the Horace Mann Mutual Funds: Growth Fund, Balanced Fund, Income Fund, Short-
Term Fund, Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund.
WHO MAY PURCHASE A HORACE MANN ANNUITY OFFERED BY THIS PROSPECTUS?
Individuals, as well as groups, may purchase the combination fixed and
variable flexible payment annuity. Individuals may also purchase the single
payment plan. The Contracts offered by this Prospectus are designed to provide
retirement benefits in connection with Section 403(b) Annuities, Individual
Retirement Annuities ("IRAs"), Roth IRAs, Simplified Employee Pension Plans
("SEPs"), Savings Incentive Match Plan for Employees ("SIMPLE") and non-
qualified Retirement Annuities.
The Contract is offered and sold by HMLIC through its licensed life
insurance sales personnel, who are registered representatives of Horace Mann
Investors, Inc. ("Investors"). HMLIC has entered into a distribution agreement
with Investors an affiliated broker-dealer registered under the Securities and
Exchange Act of 1934. Investors is a member of the National Association of
Securities Dealers, Inc. (NASD).
IS THERE A MINIMUM PURCHASE PAYMENT?
The minimum annual Purchase Payment under a flexible payment Contract during
any Contract Year is $225. The minimum Purchase Payment under a single payment
Contract is $2,000. No Purchase Payments are required after the first Contract
Year. Contract Owners may elect to allocate all or part of the Purchase
Payments to one or more Subaccount(s). The minimum Purchase Payment allocated
to any Subaccount within any given Contract Year must equal or exceed $100.
Under certain group plans the minimum may be reduced or eliminated.
WHAT ARE MY INVESTMENT CHOICES?
(a) SEPARATE ACCOUNT
Includes seven Subaccounts:
GROWTH FUND--a fund investing primarily in common stocks.
BALANCED FUND--a fund investing in common stocks, debt securities and money
market instruments.
INCOME FUND--a fund investing primarily in debt securities.
SHORT-TERM FUND--a fund investing in short-term debt instruments.
SMALL CAP GROWTH FUND--a fund investing primarily in small cap equity
securities with earnings growth potential.
INTERNATIONAL EQUITY FUND--a fund investing in marketable foreign equity
securities.
SOCIALLY RESPONSIBLE FUND--a fund investing in equity securities of United
States-based companies which are determined to be socially responsible
pursuant to criteria set forth in the funds' prospectus.
(b) FIXED ACCOUNT (See the Contract)
At any time before the Contract's Maturity Date, amounts may be transferred
from one Subaccount to another, and to and from the fixed account of the
Contract. (Transfers from the fixed account of the Contract into a Subaccount
are treated like any other partial withdrawal from the fixed account of the
Contract, except that no surrender charge is imposed and the early withdrawal
penalty is waived. If an amount transferred from the fixed account is
surrendered within 365 days, the amount transferred will be subject to the
applicable surrender and withdrawal penalties as if the money had been
withdrawn
from the fixed account.) The minimum amount that
can be transferred is $100 or the entire dollar value of the Subaccount,
whichever is less. See "The Contract--Transactions--Transfers."
MAY I WITHDRAW ALL OR PART OF THE CONTRACT VALUE BEFORE THE MATURITY DATE?
Unless restricted by his or her retirement plan or by the Internal Revenue
Code (IRC), a Contract Owner may at any time before the Maturity Date
surrender his or her Contract in whole or withdraw in part for cash. Partial
withdrawals are subject to a $100 minimum. Each surrender or partial
4
<PAGE>
withdrawal is processed on the basis of the net asset value(s) of an
accumulation unit of the Subaccount(s) from which the value is being
surrendered or withdrawn. Surrenders and withdrawals may be subject to
Surrender Charges as described on page 12 in this Prospectus.
WHAT ARE THE CHARGES OR DEDUCTIONS?
Contracts are subject to deductions for applicable state or local government
premium taxes. Premium taxes presently range from 0 to 3.5%.
A Mortality and Expense Risk Fee (M&E Fee), computed and accrued weekly, is
deducted from the account value. This fee will not exceed 1.35% of the
Contract Owner's average value in a Subaccount on an annual basis, but may be
lower on certain group plans.
A fixed annual maintenance charge of $25 is assessed against the Contract on
each anniversary, unless the Contract value equals or exceeds $10,000, in
which case such charge is waived. This charge may be waived or lowered on
certain group plans.
No deduction for sales expense is charged on Purchase Payments, but a
decreasing surrender charge is assessed against certain withdrawals and
surrenders during the first five contract years. In the first Contract Year
the charge is 8% of the amount withdrawn for the Flexible Payment Contract and
5% for the Single Premium Contract. The charge is taken from the Contract
Owner's value in the Subaccount(s) from which the withdrawal is made. In no
event will the charges exceed 8.5% of the Net Purchase Payments to the
Subaccount(s). See "The Contract--Transactions--Surrender Before Commencement
of Annuity Period." Under certain group plans these charges may be reduced or
eliminated.
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF INVESTING IN THIS CONTRACT?
The IRC provides penalties for premature distributions under various
retirement plans. Values may not be withdrawn from Section 403(b) Contracts
except under certain circumstances. See "Tax Consequences." This Contract
might not be suitable for a short-term investment. See "The Contract--
Transactions--Surrender Before Commencement of Annuity Period."
IF I RECEIVE MY CONTRACT AND AM DISSATISFIED, MAY I RETURN IT?
Subject to various state insurance laws, generally the Contract Owner may
return the Contract to HMLIC within 30 days of receipt of the Contract. The
market value of the assets purchased by payments paid to the Account, less any
taxes will be refunded.
WHEN CAN I BEGIN RECEIVING INCOME PAYMENTS, AND WHAT OPTIONS ARE AVAILABLE?
Payments will begin on the Maturity Date selected by the Contract Owner.
Variable Income Payments are made in monthly installments. A lump sum payment
will be made if the total Contract value is less than $2,000 or if monthly
Income Payments at the Maturity Date would be less than $20. An optional
Maturity Date and various income payment options are available under the
Contract.
Income Payments may be fixed or variable or a combination of fixed and
variable payments. The following options are available for receiving Income
Payments: Life Annuity with or without Period Certain, Joint and Survivor Life
Annuity, Income for Fixed Period, Income for Fixed Amount, and Interest Income
Payments.
5
<PAGE>
TABLE OF ANNUAL OPERATING EXPENSES
- -------------------------------------------------------------------------------
The following is a summary of costs and expenses borne by the Contract Owner
in connection with an investment in the Account.
HORACE MANN LIFE INSURANCE COMPANY SEPARATE ACCOUNT
<TABLE>
<S> <C>
Contract Owner Transaction Expenses:(/1/)
Maximum Surrender Charge as a percentage of redemption proceeds(/2/)
--for Single Payment Contracts........................................ 5.00%
--for Flexible Payment Contracts...................................... 8.00%
Annual Maintenance Charge(/3/)............................................ $25
Separate Account M&E Fee, as a percentage of average account value:
Mortality Risk.......................................................... 0.45%
Expense Risk............................................................ 0.90%
Total Separate Account M&E Fee............................................ 1.35%
</TABLE>
HORACE MANN MUTUAL FUNDS
Annual Operating Expenses of the Horace Mann Mutual Funds, as a percentage
of average daily net assets (net of reimbursements and fee waivers):
<TABLE>
<CAPTION>
SHORT- SMALL CAP INTERNATIONAL SOCIALLY
GROWTH(/4/) BALANCED(/4/) INCOME(/4/) TERM(/5/) GROWTH(/6/) EQUITY(/6/) RESPONSIBLE(/6/)
FUND FUND FUND FUND FUND FUND FUND
----------- ------------- ----------- --------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees (after
waiver)................ 0.50% 0.48% 0.46% 0.13% 1.00% 0.70% 0.55%
Other Expenses (after
waiver)................ 0.02% 0.02% 0.46% 0.37% 0.16% 0.45% 0.27%
----- ----- ----- ----- ----- ----- -----
Total Fund Operating
Expense (after waiver
and commission
credit(/7/)) .......... 0.52% 0.50% 0.92% 0.50% 1.16% 1.15% 0.82%
</TABLE>
(/1/)Premium taxes, currently ranging between 0 and 3.5%, are not included.
The rate of the premium tax varies depending upon the state of residence, and
not all states impose premium taxes. Also, depending on the state, taxes are
taken from Purchase Payments or are levied at annuitization.
(/2/)In some cases, the Surrender Charge does not apply. See "The Contract--
Transactions--Surrender Before Commencement of Annuity Period."
(/3/)The annual maintenance charge equals $25 per year, unless the Contract
value equals or exceeds $10,000 at each anniversary. The annual maintenance
charge is not deducted after the Maturity Date. This charge may be reduced or
eliminated on certain group plans.
(/4/)The expenses are shown for the fiscal year ending December 31, 1997.
(/5/)Total Fund Operating Expenses for the Short-Term Fund for the year ended
December 31, 1997, without any waivers or expense reimbursements, were 2.52%.
Without fee waivers management fees and other expenses would be 0.53% and
2.19%.
(/6/)The expenses are shown based on actual amounts for the fiscal year ended
December 31, 1997 with the voluntary waiver of fees and expenses undertaken by
Horace Mann Investors, Inc. for the current fiscal year. The Small Cap Growth
Fund, International Equity Fund and Socially Responsible Fund commenced
operations on March 10, 1997. Horace Mann Investors, Inc. had voluntarily
agreed to waive a portion of its management fee and reimburse certain expenses
during the first year of the Funds' operations. Without such waiver, the
management fee, other expenses and total fund operating expenses,
respectively, would have been: 1.05%, 0.39% and 1.44% for the Small Cap Growth
Fund; 0.67%, 1.15% and 1.82% for the International Equity Fund; and 0.71%,
0.45% and 1.16% for the Socially Responsible Fund. See the "Management"
section of the Horace Mann Mutual Funds Prospectus for a description of the
contractual fee rates.
(/7/)Commission Credits--Wellington Management Company, LLP, subadvisor for
the Growth and Balanced Funds, seeks the best price and execution on each
transaction and negotiates commission rates solely on the execution
requirements of each trade. Occasionally, they place, under a directed
brokerage arrangement, common stock trades with a broker/dealer who credits to
the Funds part of the commissions paid. Without such commission credits the
other expenses and total fund operating expenses, respectively, would have
been: 0.03% and 0.53% for the Growth Fund and 0.03% and 0.51% for the Balanced
Fund.
6
<PAGE>
EXAMPLE(/1/)
<TABLE>
<CAPTION>
SHORT- SMALL CAP SOCIALLY
GROWTH BALANCED INCOME TERM GROWTH INTERNATIONAL RESPONSIBLE
FUND FUND FUND FUND FUND EQUITY FUND FUND
------ -------- ------ ------ --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR FLEXIBLE PAYMENT
CONTRACTS
If you surrender your
Contract at the end of
the applicable time
period:
You would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets:
1 year $102 $102 $106 $102 $108 $108 $105
3 years $126 $126 $138 $126 $144 $144 $135
5 years $104 $103 $125 $103 $137 $136 $119
10 years $225 $223 $267 $223 $290 $290 $256
If you do not surrender
your Contract:
You would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets:
1 year $ 20 $ 20 $ 24 $ 20 $ 26 $ 26 $ 23
3 years $ 61 $ 60 $ 73 $ 63 $ 80 $ 80 $ 70
5 years $104 $103 $125 $103 $137 $136 $119
10 years $225 $223 $267 $223 $290 $290 $256
FOR SINGLE PAYMENT
CONTRACTS
If you surrender your
Contract at the end of
the applicable time
period:
You would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets:
1 year $ 71 $ 71 $ 75 $ 71 $ 77 $ 77 $ 74
3 years $ 93 $ 93 $105 $ 93 $112 $112 $102
5 years $104 $103 $125 $103 $137 $136 $119
10 years $225 $223 $267 $223 $290 $290 $256
If you do not surrender
your Contract:
You would pay the
following expenses on a
$1,000 investment,
assuming 5% annual
return on assets:
1 year $ 20 $ 20 $ 24 $ 20 $ 26 $ 26 $ 23
3 years $ 61 $ 60 $ 73 $ 60 $ 80 $ 80 $ 70
5 years $104 $103 $125 $103 $137 $136 $119
10 years $225 $223 $267 $223 $290 $290 $256
</TABLE>
(/1/)The EXAMPLE should not be considered a representation of past or future
expenses. Amounts shown are based on the "Other Expenses" shown on the fee
table and average cash value of the average number of annuity Contracts in the
accumulation phase during the 1997 calendar year. The Small Cap Growth Fund,
International Equity Fund and Socially Responsible Fund commenced operations
on March 10, 1997. Actual expenses may by greater or less than those shown.
There is no assumption for premium taxes, applicable in certain states, in
these examples.
THE PURPOSE OF THE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS
COSTS AND EXPENSES THAT THEY BEAR DIRECTLY OR INDIRECTLY. THE TABLE REFLECTS
EXPENSES OF THE SEPARATE ACCOUNT AS WELL AS THOSE OF THE UNDERLYING
FUNDS. SEE "THE CONTRACT-DEDUCTIONS AND EXPENSES."
7
<PAGE>
CONDENSED FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
The following information is taken from the Separate Account financial
statements and is covered by the report of the Separate Account Independent
Auditors. A copy of the financial statements and report are contained in the
Annual Report for the Separate Account and are incorporated herein by
reference and may be obtained by calling or writing Horace Mann Life Insurance
Company. The Small Cap Growth Fund, International Equity Fund and Socially
Responsible Fund each commenced operations on March 10, 1997.
<TABLE>
<CAPTION>
ACCUMULATION ACCUMULATION # UNITS
UNIT VALUE UNIT VALUE OUTSTANDING
BEGINNING OF END OF END OF
YEAR ENDED PERIOD PERIOD PERIOD
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
GROWTH FUND 12/31/97 $23.76 $25.66 18,317,985
12/31/96 21.66 23.76 13,503,527
12/31/95 17.64 21.66 9,499,642
12/31/94 19.85 17.64 7,444,937
12/31/93 19.49 19.85 5,271,528
12/31/92 19.15 19.49 3,847,269
12/31/91 16.64 19.15 3,244,626
12/31/90 18.88 16.64 2,748,244
12/31/89 17.30 18.88 2,349,405
12/31/88 16.00 17.30 2,110,447
BALANCED FUND 12/31/97 $18.94 $19.82 18,709,483
12/31/96 18.00 18.94 15,151,785
12/31/95 15.26 18.00 12,085,917
12/31/94 16.72 15.26 10,010,131
12/31/93 16.22 16.72 7,470,133
12/31/92 15.91 16.22 5,352,185
12/31/91 14.19 15.91 4,274,088
12/31/90 15.10 14.19 3,528,857
12/31/89 13.48 15.10 2,697,026
12/31/88 12.71 13.48 2,142,638
INCOME FUND 12/31/97 $12.69 $13.00 718,041
12/31/96 13.03 12.69 817,803
12/31/95 12.02 13.03 776,272
12/31/94 13.06 12.02 746,535
12/31/93 12.95 13.06 694,843
12/31/92 12.92 12.95 566,223
12/31/91 12.26 12.92 473,423
12/31/90 12.35 12.26 415,716
12/31/89 11.64 12.35 346,639
12/31/88 11.59 11.64 279,341
SHORT-TERM FUND 12/31/97 $10.03 $ 9.99 114,103
12/31/96 10.00 10.03 112,004
12/31/95 10.08 10.00 95,982
12/31/94 10.07 10.08 103,526
12/31/93 10.09 10.07 106,595
12/31/92 10.10 10.09 99,345
12/31/91 10.37 10.10 94,194
12/31/90 10.73 10.37 106,548
12/31/89 10.49 10.73 96,997
12/31/88 10.25 10.49 98,300
SMALL CAP FUND 12/31/97 $10.00 $11.70 1,219,124
INTERNATIONAL EQUITY
FUND 12/31/97 $10.00 $10.27 451,401
SOCIALLY RESPONSIBLE
FUND 12/31/97 $10.00 $12.10 692,571
</TABLE>
8
<PAGE>
Accumulation Unit Values shown above are reduced annually for dividend
distributions from each underlying mutual fund. Dividend distributions are
used to purchase additional Accumulation Units.
Financial statements of the Account and of HMLIC are available with the
Statement of Additional Information. A copy of the Statement of Additional
Information and of the financial statements may be obtained without charge by
mailing a written request to Horace Mann Life Insurance Company, P.O. Box
4657, Springfield, Illinois 62708-4657, by sending a telefacsimile (FAX)
transmission request to (217) 535-7123, or by telephoning (217) 789-2500 or
(800) 999-1030 (toll-free).
From time to time the Account may advertise total return for the subaccount.
Total return may be used for all seven subaccounts. Total return performance
figures represent past performance and are not intended to indicate future
performance. Investment return and the principal value of an investment may
fluctuate. A Contract Owner's shares, when redeemed, may be worth more or less
than their original cost. Total return is computed by finding the average
annual compounded rate of return that would equate the initial amount invested
to the ending redeemable value.
To the extent required, all charges shown in the Table of Annual Operating
Expenses are reflected in the calculations of the performance figures. Because
the median contract value exceeds $10,000, the annual maintenance charge of
$25 has not been deducted. However, contracts with a value of less than
$10,000 would be subject to the annual maintenance fee, which would reduce
performance. Total return may be calculated to reflect the fact that certain
expenses have been reimbursed or waived. In addition, total return
calculations assume redemption at the end of the stated period and, therefore,
reflect the applicable Surrender Charge. However, comparative figures may be
presented that do not assume redemption.
9
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY,
THE ACCOUNT AND
THE HORACE MANN MUTUAL FUNDS
HORACE MANN LIFE INSURANCE COMPANY
Horace Mann Life Insurance Company ("HMLIC") located at One Horace Mann
Plaza, Springfield, Illinois 62715-0001, is an Illinois stock life insurance
company organized in 1949. HMLIC is licensed to do business in 48 states and
in the District of Columbia. HMLIC writes individual and group life insurance
and annuity contracts on a nonparticipating basis.
HMLIC is an indirect wholly-owned subsidiary of Horace Mann Educators
Corporation ("HMEC"), a publicly-held insurance holding company traded on the
New York Stock Exchange.
THE ACCOUNT
On October 9, 1965, HMLIC established the Account under Illinois law. The
Account is registered with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940. The Account and
each subaccount are administered and accounted for as a part of the business
of HMLIC. However, the income gains and losses, whether or not realized, of
each subaccount are credited to or charged against the amounts allocated to
that subaccount in accordance with the terms of the Contracts without regard
to other income, gains or losses of the remaining subaccounts or of HMLIC. The
assets of the Account may not be charged with liabilities arising out of any
other business of HMLIC. All obligations arising under the Contracts,
including the promise to make Income Payments, are general corporate
obligations of HMLIC. Accordingly, all of HMLIC's assets are available to meet
its obligations and expenses under the Contracts. While HMLIC is obligated to
make payments under the Contracts, the amount of variable Income Payments are
not guaranteed since the payment amounts fluctuate in accordance with the
performance of the subaccounts.
THE HORACE MANN MUTUAL FUNDS
The Horace Mann Mutual Funds ("Trust") is an open-end, diversified,
management investment company registered under the Investment Company Act of
1940. The Trust is made up of a series of portfolios ("Funds"). The Trust
issues shares of common stock that are continually offered for sale. The
Funds, advised by Horace Mann Investors, Inc. ("Investors"), invest in
securities of different issuers and industry classifications in an attempt to
spread and reduce the risks inherent in all investing. Investors has entered
into an agreement with an investment subadviser for each of the Funds whereby
the subadviser manages the investment and reinvestment of the assets of a
Fund.
The primary investment objective of the Growth Fund is long-term capital
growth; conservation of principal and production of income are secondary
objectives. The Growth Fund invests primarily in common stocks. Wellington
Management, LLP serves as the investment subadviser to the Growth Fund.
The primary investment objective of the Balanced Fund is to realize high
long-term total rate of return consistent with prudent investment risks. The
Balanced Fund's assets are invested in a mix of common stocks, debt securities
and money market instruments. Wellington Management, LLP serves as the
investment subadviser to the Balanced Fund.
The primary investment objective of the Income Fund is to achieve a long-
term total rate of return in excess of the U.S. bond market over a full market
cycle. The Income Fund invests primarily in debt securities. Wellington
Management Company, LLP serves as the investment subadviser to the Income
Fund.
The primary investment objective of the Short-Term Fund is to realize
maximum current income to the extent consistent with liquidity. Preservation
of principal is a secondary objective. The Short-Term Fund attempts to realize
its objectives through investments in short-term debt instruments; it is not a
money market fund and does not maintain a stable net asset value per share.
Wellington Management, LLP serves as the investment subadviser to the Short-
Term Fund.
The investment objective of the Small Cap Growth Fund is long-term capital
appreciation through small cap stocks with earnings growth potential. The
Small Cap Growth Fund invests primarily in small cap stocks, which the
subadviser considers to have favorable and above-average earnings growth
prospects. BlackRock Financial Management, Inc. serves as investment
subadviser to the Small Cap Growth Fund.
The primary investment objective of the International Equity Fund is long
term capital growth primarily through diversified holding of marketable
foreign equity investments. The International Equity Fund invests primarily in
equity securities of established companies, listed on foreign exchanges, which
the subadviser believes have favorable characteristics. It may also invest in
fixed income securities of foreign governments and companies. Scudder Kemper
Investments, Inc. serves as the investment subadviser to the International
Equity Fund.
The investment objective of the Socially Responsible Fund is long term
capital growth, above average current income and growth of income. The
Socially Responsible Fund invests primarily in marketable equity securities,
including common stocks, preferred stocks, and debt securities convertible
into common stocks of seasoned financially strong U.S.-based companies.
Investments in equity securities are limited to issuers which the subadviser
determines:
1. Do not produce tobacco products;
2. Do not produce alcoholic beverages;
3. Do not own and/or operate casinos or manufacture gaming devices;
10
<PAGE>
4. Do not produce nuclear weapons or guidance and/or delivery systems,
specifically for nuclear weapons;
5. By popular standards, maintain non-discriminatory employment practices
throughout a company's facilities; and
6. By popular standards, maintain environmental policies, practices and
procedures which are currently acceptable, or which are exhibiting
improvement.
Scudder Kemper Investments, Inc. serves as the investment subadviser to the
Socially Responsible Fund.
Detailed information on the Funds is contained in the Funds' Prospectus
which accompanies this Prospectus.
THE CONTRACT
CONTRACT OWNERS' RIGHTS
A Contract may be issued under a retirement plan on a qualified basis as
defined in the IRC or on a non-qualified basis. Qualified and non-qualified
contracts receive different tax treatment. See "Tax Consequences."
To participate in a qualified plan, the Contract Owner may be required to
forego certain rights granted by the Contract and should refer to the
provisions of his or her Contract, the provisions of the plan or trust
instrument, and/or applicable provisions of the IRC.
Unless otherwise provided by law, and subject to the terms of any governing
plan or trust, the Contract Owner may exercise all privileges of ownership, as
defined in the Contract, without the consent of any other person. These
privileges include the right during the period specified in the Contract to
change the beneficiary designated in the Contract, to designate a payee and to
agree to a modification of the Contract terms.
This Prospectus describes only the variable portions of the Contract. On the
Maturity Date, the Contract Owner has limited rights to acquire fixed annuity
payout options. See the Contract for details regarding fixed Income Payments.
PURCHASING THE CONTRACT
The Contract is offered and sold by HMLIC through its licensed life
insurance sales personnel who are also registered representatives of
Investors. HMLIC has entered into a distribution agreement with Investors.
Investors, located at One Horace Mann Plaza, Springfield, Illinois 62715-0001,
is a broker-dealer registered under the Securities Exchange Act of 1934.
Investors is a member of the NASD and is a wholly-owned subsidiary of Horace
Mann Educators Corporation.
In order to purchase a Contract offered by this Prospectus, an applicant
must complete an application bearing all requested signatures and in some
states a properly completed suitability questionnaire. For a Contract issued
pursuant to Section 403(b) of the IRC, the applicant must also submit a signed
acknowledgment of the IRC restrictions on withdrawals applicable to such
contracts. For an Individual Retirement Annuity ("IRA"), Roth IRA, SIMPLE or a
Contract issued under a SEP plan, the applicant must also acknowledge receipt
of the IRA disclosure form.
Applications for Contracts are to be sent to HMLIC's Home Office. If an
incomplete application is received, HMLIC will promptly request that the
applicant furnish additional information needed to process the application.
The initial Purchase Payment will be held in a suspense account, without
interest, for a period not exceeding five business days. If the necessary
information is not received within these five business days HMLIC will return
the initial Purchase Payment, unless otherwise directed by the applicant.
Sales commissions are paid by HMLIC. Sales commissions typically range from
2% to 6% of Purchase Payments received.
PURCHASE PAYMENTS
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS--The minimum acceptable annual
Purchase Payment under a flexible payment Contract is $225. No Purchase
Payments are required after the first Contract Year. Payments may be made in
lump sum or installments. The minimum acceptable monthly Purchase Payment is
$25. The minimum acceptable Purchase Payment under a single payment Contract
is $2,000. Under certain group plans the minimum may be reduced or eliminated.
The IRC limits the amounts which may be contributed to qualified plans. See
"Tax Consequences--Contract Owners-- Contributions."
ALLOCATION OF PURCHASE PAYMENTS--All or part of the Purchase Payments made
may be allocated to one or more subaccounts. The minimum Purchase Payment
amount allocated to any subaccount in any given Contract Year must equal or
exceed $100.
ACCUMULATION UNITS AND ACCUMULATION UNIT VALUE--The number of Accumulation
Units purchased by Purchase Payments is determined by dividing the dollar
amount credited to each subaccount by the applicable accumulation unit value
next determined following receipt of the payment by HMLIC.
Accumulation Units are valued on each Valuation Date. The accumulation unit
value of each subaccount is equal to the net asset value of the underlying
Fund (computed by dividing the net assets of a mutual fund by the outstanding
number of mutual fund shares on each Valuation Date). Dividends declared by
the underlying Fund of each subaccount, net of applicable deductions and
charges, are used to purchase additional Accumulation Units. To the extent
that deductions and charges exceed dividends, Accumulation Units will be
surrendered. The accumulation unit value of the Growth Fund was established at
$16.87 on October 9, 1965. The accumulation unit value of the Balanced Fund,
Income Fund and Short-Term Investment Fund was established at $10.00 on
February 1, 1983. The accumulation unit value of the Small Cap Growth Fund,
International Equity Fund and Socially Responsible Fund was established at
$10.00 on March 10, 1997.
11
<PAGE>
TRANSACTIONS
TRANSFERS--Amounts may be transferred from one subaccount to another, and to
and from the fixed account of the Contract, prior to the Maturity Date.
(Transfers from the fixed account of the Contract into a subaccount are
treated like any other partial withdrawal from the fixed account, except that
the early withdrawal penalty is being waived. If an amount transferred from
the fixed account is surrendered or withdrawn within 365 days, the amount
transferred will be subject to the applicable surrender charge and early
withdrawal penalty as if the money had been withdrawn from the fixed account).
The minimum amount that can be transferred is $100 or the entire dollar value
of the subaccount(s), whichever is less.
A Contract Owner may elect to transfer funds between subaccounts and fixed
account by submitting a written request to Horace Mann Life Insurance Company
at P.O. Box 4657, Springfield, Illinois 62708-4657 or by calling (800) 999-
1030. Telefacsimile (FAX) transmissions of the request also will be accepted
if sent to (217) 527-2307. The request must: (1) be signed by the Contract
Owner or, for telephone transactions, be made by the Contract Owner, (2)
include the name of the Contract Owner and the Contract number, and (3)
specifically state either the dollar amount or the number of accumulation
units to be transferred. The request also must specify the subaccounts from
which and to which the transfer is to be made. Transfers are effective either
on a date specified in the request, provided that date falls on or after
receipt of the request at the Home Office, or on the first Valuation Date
following receipt of the request by the Home Office.
Up to twelve transfers may be pre-scheduled at any point in time. The twelve
transfers cannot extend beyond a twelve month period. A signed written request
or form may be completed or by calling (800) 999-1030. Telefacsimile (FAX)
transmissions of the request also will be accepted if sent to (217) 527-2307.
See "Other Information-Forms Availability." If a Contract Owner decides to
cancel a pre-scheduled transfer arrangement, he or she should notify the Home
Office either in writing or by calling (800) 999-1030 or Telefacsimile (FAX)
(217) 527-2307 prior to the next designated transfer date.
CHANGES IN ALLOCATION INSTRUCTIONS--A Contract Owner may elect to change the
allocation of future Purchase Payments at any time by mailing a written
request to Horace Mann Life Insurance Company at P.O. Box 4657, Springfield,
Illinois 62708-4657 or by calling (800) 999-1030. Telefacsimile (FAX)
transmissions of the request also will be accepted if sent to (217) 527-2307.
The request must: (1) be signed by the Contract Owner, (2) include the
Contract Owner's name and Contract number, and (3) specify the new allocation
percentage for each subaccount. If allocations are made to the fixed portion
of the Contract or to one or more subaccounts, the percentages must total
100%. Changes in allocation instructions are effective either on a date
specified in the request, provided that date falls on or after receipt of the
request in the Home Office, or on the first Valuation Date following receipt
of the request by the Home Office. See "Other Information-Forms Availability."
SURRENDER BEFORE COMMENCEMENT OF ANNUITY PERIOD--Values may not be withdrawn
from Section 403(b) Contracts except under certain circumstances. (See "Tax
Consequences.") However, if not restricted by the IRC or applicable retirement
plan under which the Contract is issued, a Contract Owner may surrender the
Contract in whole or withdraw in part for cash before Income Payments begin.
The surrender or partial withdrawal value is determined on the basis of the
accumulation unit value next computed following the receipt of the request for
surrender or partial withdrawal. A surrender or partial withdrawal may result
in adverse federal income tax consequences to the Contract Owner. These
consequences include current taxation of payments received, and may include
penalties resulting from premature distribution. See "Tax Consequences."
A Contract Owner eligible to surrender or request a partial withdrawal may
elect to do so by submitting a signed, written request to Horace Mann Life
Insurance Company at its Home Office at P.O. Box 4657, Springfield, Illinois
62708-4657. A partial withdrawal request must be in a form acceptable by
HMLIC; telefacsimile (FAX) transmissions of the request will be accepted if
the proceeds are sent to the Contract Owner. A surrender request must be in a
form acceptable to HMLIC; telefacsimile (FAX) transmissions of the request
will not be accepted. See "Tax Consequences and Other Information-Forms
Availability."
Partial withdrawals and surrenders will be processed either on a date
specified by you in a request, provided the date specified occurs on or after
receipt of the request at the Home Office, or on the first Valuation Date
following receipt of the request at the Home Office.
Any partial withdrawal is subject to a $100 minimum and may not reduce the
Contract Owner's interest in a subaccount to less than $100. A complete
surrender may be made at any time, unless otherwise restricted by the
retirement plan or the IRC.
Surrenders and partial withdrawals from any variable subaccount are subject
to the following Surrender Charges:
<TABLE>
<CAPTION>
DURING FLEXIBLE SINGLE
CONTRACT PAYMENT PAYMENT
YEAR CONTRACTS CONTRACTS
<S> <C> <C>
1 8% 5%
2 8% 4%
3 6% 3%
4 4% 2%
5 2% 1%
Thereafter 0% 0%
</TABLE>
Surrender Charges are applied to withdrawals based on the date the account is
opened and not on the date the premium is paid.
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<PAGE>
Under certain group plans the surrender charges may be reduced.
Partial withdrawals may be made without charge if (1) the withdrawal does
not exceed 15% of the variable portion of the Contract value; and (2) the
Contract has been in force for two or more Contract Years; and (3) more than
twelve months have passed since the date of the last partial withdrawal.
Contract value is computed on the first Valuation Date following receipt of
the request in good form by the Home Office. If all three conditions are not
met, partial withdrawals are subject to Surrender Charges.
Any request for partial withdrawal, where the withdrawal is subject to a
Surrender Charge, will be increased by the amount of the Surrender Charge. For
example, a request to withdraw $3,000 at a 4% Surrender Charge will require a
withdrawal of $3,125. This withdrawal represents a cash distribution of $3,000
and a Surrender Charge of $125. Any taxes withheld will reduce the dollar
amount of the distribution.
The Surrender Charge is assessed on the basis of the amount surrendered or
withdrawn from the subaccount(s), but will never exceed 8.5% of Net Purchase
Payment(s) to a subaccount during the lifetime of the Contract. For example,
if a Contract Owner's subaccount value is $12,000 and Purchase Payments to
date equal $10,000 and the Contract Owner withdraws $2,000 (i.e., one sixth of
the subaccount value), then the Surrender Charge may not exceed 8.5% of
$1,666.66 (one sixth of the Purchase Payment(s) to which the withdrawal
relates).
If premium taxes are deducted prior to surrender or partial withdrawal, any
reduction of HMLIC's premium tax liability due to the surrender or partial
withdrawal will be to HMLIC's benefit.
REINVESTMENT PRIVILEGE--You may elect to reinvest all of the proceeds
received from a surrender or partial withdrawal within 30 days after such
withdrawal has been made by returning the uncashed check and a written
request. Upon receipt of your uncashed check we will credit your contract with
Accumulation Units based on the amount reinvested and the Accumulation Unit
Value next computed following receipt. Reinvested amounts will be allocated to
the applicable investment options in the same proportion as they were
allocated at the time of withdrawal. The reinvestment privilege may be used
only once.
DEFERMENT--HMLIC ordinarily completes a transaction within seven calendar
days after receipt of a proper request to transfer, surrender, partially
withdraw or commence Income Payments at the Maturity Date. The value of the
Contract is determined as of the Valuation Date on which the request is
received or on the Maturity Date for Income Payments. However, determination
of Contract value and processing the transaction may be deferred for (1) any
period during which the New York Stock Exchange is closed for other than
customary weekend or holiday closings or during which trading is restricted by
the Securities and Exchange Commission; (2) any emergency period when it is
not reasonably practicable to sell securities or fairly determine accumulation
unit values or annuity unit values; or (3) any other period designated by the
Securities and Exchange Commission to protect persons with interests in the
Account.
CONFIRMATIONS--HMLIC mails written confirmations of Purchase Payments to
Contract Owners within five business days following the end of each calendar
quarter. Written confirmations of transfers, changes in allocations, partial
withdrawals, and surrenders, are mailed to Contract Owners within seven
calendar days of the date the transaction occurred.
If a Contract Owner believes that the confirmation statement contains an
error, the Contract Owner should notify HMLIC as soon as possible after
receipt of the confirmation statement. Notice may be provided by writing to
HMLIC, P.O. Box 4657, Springfield, Illinois 62708-4657, by sending a
telefacsimile (FAX) transmission to (217) 527-2307, or by telephoning (217)
789-2500 or (800) 999-1030 (toll free).
DEDUCTIONS AND EXPENSES
ANNUAL MAINTENANCE CHARGE--An annual maintenance charge of $25 is deducted
from each Contract on the Contract anniversary date unless the contract value
equals or exceeds $10,000. This charge may be reduced or eliminated on certain
group plans. The annual maintenance charge is deducted from the subaccount
containing the greatest dollar amount or from the fixed account of the
Contract when none of the variable subaccounts have any value.
Charges for annual maintenance cease once Income Payments begin. No annual
maintenance charge is taken, in whole or in part, in the event of a complete
surrender unless the surrender occurs on the Contract anniversary date.
The annual maintenance charge is intended to reimburse HMLIC for actual
expenses incurred in administering the Contract. HMLIC does not expect to
profit from such annual maintenance charge and assumes the risk that this
annual maintenance charge may be insufficient to cover the actual costs of
administering the Contract.
MORTALITY AND EXPENSE RISK FEE--For assuming mortality and expense risk,
HMLIC applies a fee to the subaccount value of each Contract. The fee for
mortality and expense risk may not exceed the annual rate of 1.35% of the
average net variable account value based on the date of calculation (0.45% for
mortality risk, and 0.90% for expense risk); however, HMLIC reserves the right
to change the fee (subject to the 1.35% ceiling) in the future. The fee
accumulates on a weekly basis at a rate of .0257205% of the net variable
account value as of the date of the calculation. The accumulated value of the
fee is deducted annually (usually at the time the Trust declares dividends)
from each subaccount or upon any surrender, partial withdrawal or transfer of
value accruing before such annual deduction with the necessary number of
units, at the then current accumulation unit value, being redeemed to
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<PAGE>
equal the dollar amount of the charges owed. Under certain group plans this
fee may be reduced.
OPERATING EXPENSES OF THE HORACE MANN MUTUAL FUNDS--There are deductions
from and expenses paid out of the assets of the Funds that are described in
the Funds' Prospectus which accompanies this Prospectus.
PREMIUM TAXES--Certain state and local governments levy a premium tax,
presently ranging from 0 to 3.5%, on the amount of Purchase Payments made
under this Contract. The premium tax, if any, is deducted either when payments
are received or when an amount is applied to provide an annuity at the
Maturity Date, depending upon the applicable law.
DEATH BENEFIT PROCEEDS
If a Contract Owner dies before the Maturity Date, the Contract value, or
the amount of Purchase Payments less any withdrawals, whichever is greater,
will be applied toward the purchase of an income payment option payable to the
beneficiary designated by the Contract Owner. The Contract value is determined
as of the date proof of death is received by HMLIC from the beneficiary. Under
certain group plans the death benefit may include an annual increase in value.
Proof of death includes a certified death certificate and a completed
claimant's statement. The option purchased will be one elected by the Contract
Owner. If no option was elected, the beneficiary may elect an income payment
option.
All or part of the death benefit proceeds may be paid to the beneficiary in
a lump sum or under one of the income payment options described under "Income
Payments-Income Payment Options." If the form of Income Payment selected
requires that payment be made by HMLIC after the death of the beneficiary,
payments will be made to a payee designated by the beneficiary or, if no
subsequent payee has been designated, to the beneficiary's estate.
For all Contracts issued in connection with this Prospectus, except Roth
IRAs, if the Contract Owner dies before Income Payments begin and the
designated beneficiary is not a surviving spouse, the IRC requires the
complete distribution of proceeds by December 31 of the calendar year of the
fifth anniversary of the owner's death; i.e., "the five-year rule." This
requirement can be satisfied by an annuity for life or a period certain not
exceeding the life expectancy of a designated beneficiary, provided the Income
Payments begin no later than December 31 of the calendar year following the
Contract Owner's death. Any part of a Contract Owner's interest payable to a
minor child will be paid to the child's legal guardian for the benefit of the
child.
If the designated beneficiary is the Contract Owner's surviving spouse,
Income Payments may be deferred until April 1 following the calendar year in
which the Annuitant would have reached age 70 1/2. For non-qualified
annuities, a designated beneficiary which is a surviving spouse may defer
distributions until he or she reaches age 70 1/2. However, if the surviving
spouse dies before distributions begin under any non-qualified Contract issued
in connection with this Prospectus, the five-year rule and its exceptions,
explained in the preceding paragraph, will apply to his or her beneficiary.
If the Contract Owner dies on or after the Maturity Date, the remaining
portion of the interest in the Contract undistributed at the time of the
Contract Owner's death must be distributed at least as rapidly as under the
method of distribution in force at the time of the Contract Owner's death.
MANDATORY MINIMUM DISTRIBUTION
Qualified plans are subject to distribution requirements of the IRC. A
distribution must occur each calendar year once a Contract Owner reaches age
70 1/2. The Contract Owner may elect to defer the first distribution until
April 1 of the year following his or her attainment of age 70 1/2. Should the
first payment be deferred, the Contract Owner must take two distributions in
the calendar year following attainment of age 70 1/2.
Generally, the amount of the mandatory minimum distribution depends on the
Contract value and the life expectancy of the Contract Owner. Under Mandatory
Minimum Distribution requirements, distributions must be made for the life (or
lives) or a period not exceeding the life expectancy (or joint life
expectancy) of the Contract Owner (or the Contract Owner and a designated
beneficiary). To begin mandatory distributions the Contract Owner must contact
the Home Office at P. O. Box 4657, Springfield, Illinois 62708-4657.
The Internal Revenue Service has indicated that a Contract Owner who can
verify the December 31, 1986 balance in his or her Section 403(b) annuity, can
delay distribution of that amount until the end of the calendar year in which
he or she turns age 75. At that time, the December 31, 1986 balance is subject
to the minimum distribution requirements. The December 31, 1986 balance
includes deposits received and any interest earned as of December 31, 1986.
Deposits received after that date, interest on those deposits, and interest
earned on the December 31, 1986 balance are subject to the age 70 1/2
distribution requirements.
Failure to take the required distributions results in the imposition of a
penalty tax equal to one-half (50%) of the difference between what was and
what should have been distributed. In addition, income tax is due on the full
amount that should have been distributed. Further, any distribution from a
403(b) contract in excess of the mandatory minimum distribution is subject to
a 20% federal income tax withholding. Roth IRAs are not subject to Mandatory
Distribution. See "Tax Consequences."
INCOME PAYMENTS
The Contract provides for fixed or variable income payment options or a
combination of both. The Contract Owner may elect to have Income Payments made
under any one or more of the options described below or may elect a lump sum
payment. To begin receiving Income Payments a properly completed request form
must be received in the Home Office. The request will be processed so that the
Income Payments begin on the first
14
<PAGE>
of the month following the month of receipt unless a later date is requested
and approved by the Company. If a fixed payment option is elected, the
variable account value will be transferred to the fixed account on the date
the request is received in the Home Office. In addition, if a variable payment
is elected, any money in the fixed account will be transferred to the variable
account on the date we received the request in the Home Office. Generally, at
the time an income payment option is selected, a Contract Owner must elect
whether to withhold for federal and state income taxes. See "Other
Information--Forms Availability" and "Tax Consequences."
In general, the longer Income Payments are guaranteed, the lower the amount
of each payment. Fixed Income Payments are paid in monthly, quarterly, semi-
annual & annual installments. Variable Income Payments are paid only on a
monthly basis. If the Contract value to be applied under any one fixed or
variable income payment option is less than $2,000 or if the option chosen
would provide Income Payments less than $20 per month at the Maturity Date,
then the Contract value will be paid in a lump sum.
INCOME PAYMENT OPTIONS
The following income payment options are available on a variable basis
unless otherwise stated.
LIFE ANNUITY WITH OR WITHOUT PERIOD CERTAIN--The life option guarantees
Income Payments for the lifetime of the Annuitant. If a period certain is
selected (10, 15 or 20 years) and the Annuitant dies before the end of the
period, Income Payments are guaranteed to the beneficiary until the end of the
period selected or the beneficiary may request the commuted value, if any, of
the remaining period certain payments. If no beneficiary is living at the time
of the Annuitant's death, the commuted value, if any, of the remaining period
certain payments will be paid in a single sum to the estate of the Annuitant.
Under the life without period certain option, it is possible that only one
Income Payment may be made if the Annuitant's death occurred before the due
date of the second Income Payment. This option usually provides the largest
Income Payments. The Annuitant cannot make unscheduled withdrawals or change
to another option after the first Income Payment has been made.
JOINT AND SURVIVOR LIFE ANNUITY--This life only option provides lifetime
Income Payments during the lifetimes of two Annuitants. After one annuitant
dies, the Income Payments will continue during the lifetime of the survivor in
an amount reduced to two-thirds of the monthly payments that would have been
paid had the joint lifetime of the two Annuitants continued. The Income
Payments cease after the last payment paid prior to the survivor's death. It
could be possible for only one payment to be made under this option if both
Annuitants die before the due date of the second payment. The Annuitants
cannot make unscheduled withdrawals or change to another income option after
the first Income Payment has been made.
INCOME FOR FIXED PERIOD--This option provides Income Payments for a fixed
period not less than one year nor exceeding 30 years; however, payments may
not extend beyond the life expectancy of the Annuitant. Upon the Annuitant's
death, the beneficiary will be paid the remaining Income Payments due, if any,
or the beneficiary may request the commuted value, if any, of the remaining
period certain payments. If no beneficiary is living at the time of the
Annuitant's death, the commuted value, if any, of the remaining Income
Payments will be paid in a lump sum to the estate of the Annuitant. The
Annuitant has the right to change to another income option or make unscheduled
withdrawals from the remaining commuted value subject to IRC requirements.
This option is available on a fixed payment basis only.
INCOME FOR FIXED AMOUNT--This option provides payments of a fixed amount
until the account value, with interest, has been paid; however, payments may
not extend beyond the life expectancy of the Annuitant. Upon the Annuitant's
death, the beneficiary will be paid the remaining Income Payments due, if any,
or the beneficiary may request the commuted value, if any, of the remaining
Income Payments. If no beneficiary is living at the time of the Annuitant's
death, the commuted value, if any, of the remaining Income Payments will be
paid in a lump sum to the estate of the Annuitant. The Annuitant has the right
to change to another income option or make unscheduled withdrawals from the
remaining commuted value subject to IRC requirements. This option is available
on a fixed payment basis only.
INTEREST INCOME PAYMENTS--This option provides Income Payments based on
interest earned from the proceeds of the Contract, at a rate determined by
HMLIC, but never less than the annual guaranteed interest rate. Interest will
be credited at the end of each payment period. Once the Annuitant reaches age
70 1/2, mandatory minimum distribution requirements will not allow Interest
Income Payments to continue. The Annuitant may elect another income option at
the end of any payment period, or subject to IRC requirements, may withdraw
the Contract value in whole or in part upon written request. The request must
be made prior to the end of the period that the Annuitant agreed to receive
Income Payments. See "Mandatory Minimum Distribution." This option is
available on a fixed payment basis only.
OTHER INCOME OPTIONS--If the Annuitant does not wish to elect one or more
income payment options, the Annuitant may:
a) receive the proceeds in a lump sum, or
b) leave the Contract with HMLIC and receive the value under the
mandatory minimum distribution requirements of IRC Section 401(a)(9), see
"Mandatory Minimum Distribution," or
c) elect any other option that HMLIC makes available.
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<PAGE>
AMOUNT OF FIXED AND VARIABLE INCOME PAYMENTS
In general, the dollar amount of Income Payments under the Contract depends
on Contract value. Contract value equals the value of the fixed account of the
Contract plus the value of each subaccount. The value of each subaccount is
determined by multiplying the number of Accumulation Units credited to each
subaccount by its respective accumulation unit value, less any accumulated
asset charge. Contract value may be more or less than the amount of Net
Purchase Payments allocated to the Contract.
FIXED INCOME PAYMENTS--The amount of each payment under a fixed income
payment option is determined from the income option tables in the Contract.
These tables show the monthly payment for each $1,000 of Contract value
allocated to provide a fixed Income Payment. Guaranteed fixed Income Payments
will not change regardless of investment, mortality or expense experience.
Higher Income Payments may be made at the sole discretion of HMLIC.
VARIABLE INCOME PAYMENTS--The amount of the first monthly variable Income
Payment is determined from the income option tables in the Contract. The
tables show the amount of the Income Payment for each $1,000 of value
allocated to provide Income Payments. The income option tables vary with the
form of income option payment selected and adjusted age of the Annuitant(s).
The first monthly variable Income Payment is used to calculate the number of
variable annuity units for each subsequent monthly Income Payment. The number
of variable annuity units remains constant over the payment period except when
a joint and survivor option is chosen. The number of variable annuity units
will be reduced upon the death of either Annuitant by one-third.
The amount of monthly Income Payments following the first variable Income
Payment varies from month to month to reflect the investment experience of
each subaccount funding those payments. Income Payments are determined each
month by multiplying the variable annuity units by the applicable variable
annuity unit value at the date of payment. The variable annuity unit value
will change between Valuation Dates to reflect the investment experience of
each subaccount.
ASSUMED INTEREST RATE--The selection of an assumed interest rate affects
both the first monthly variable Income Payment and the pattern of subsequent
payments. One divided by the sum of the assumed interest rate and the
mortality and expense risk fee, adjusted to a monthly rate, is the investment
multiplier. If the investment performance of a subaccount funding variable
Income Payments is the same as the investment multiplier, the monthly payments
will remain level. If its investment performance exceeds the investment
multiplier, the monthly payments will increase. Conversely, if investment
performance is less than the investment multiplier, the payments will
decrease. Unless otherwise provided, the assumed interest rate is 4.0% per
annum.
ANNUITY UNIT VALUE--The variable annuity unit value for the Growth,
Balanced, and Income Funds was set at $10.00 as of the date amounts first were
allocated to provide Income Payments. The variable annuity unit value for the
Small Cap Growth Fund, International Equity Fund, Socially Responsible Fund
and Short-Term Fund also has been set at $10.00, however, no Income Payments
have been paid from these subaccounts. The current variable annuity unit value
is equal to the prior variable annuity unit value on the Valuation Date when
payments were last determined, multiplied by the applicable net investment
factor. The net investment factor reflects the investment performance of the
subaccount during the current month plus the value of any dividends and
distributions during the current month. This factor is computed by dividing
the net asset value of a share of the underlying Fund on the last business day
of the current month, plus any dividends or other distributions, by the net
asset value of a share on the last business day of the preceding month, and
multiplying this result by the investment multiplier.
MISSTATEMENT OF AGE
If the age of the Annuitant has been misstated, any Income Payment amount
shall be adjusted to reflect the correct age. If the Income Payments were too
large because of a misstatement of age, HMLIC will deduct the difference with
interest, at an effective annual interest rate of 6%, from future payments
until totally repaid. If the Income Payments were too small, HMLIC will add
the difference with interest, at an effective annual interest rate of 6%, to
the next payment.
MODIFICATION OF THE CONTRACT
The Contract provides that it may be modified by HMLIC to maintain continued
compliance with applicable state and federal laws. Contract Owners will be
notified of any modification. Only officers designated by HMLIC may modify the
terms of the Contract.
HMLIC reserves the right to offer Contract Owners, at some future date and
in accordance with the requirements of the Investment Company Act of 1940, the
option to direct that their Purchase Payments be allocated to a portfolio
within the Trust other than one or more of the seven currently offered Horace
Mann Mutual Funds. If any shares of the Trust's seven portfolios are not
available for purchase by the Account, or if in the judgment of HMLIC further
investment in these shares is no longer appropriate in view of the purposes of
the Account or subaccount, then (i) shares of another portfolio may be
substituted for existing Fund shares held in the affected subaccount and/or
(ii) payments received after a date specified by HMLIC may be applied to the
purchase of shares of another portfolio. No substitution will be made without
prior approval of the Securities and Exchange Commission. Any substitution
would be for shares of a portfolio with investment objectives similar to those
of the Fund it replaces.
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<PAGE>
TAX CONSEQUENCES
SEPARATE ACCOUNT
The operations of the Account form part of the operations of HMLIC; however,
the IRC provides that no federal income tax will be payable by HMLIC on the
investment income and capital gains of the Account if certain conditions are
met. Provided the investments of the underlying Funds continue to meet the
diversification requirements of IRC Section 817(h), the Contract Owner will
not pay federal income tax on the investment income and capital gains under a
Contract until Income Payments begin or a full or partial withdrawal is made.
CONTRACT OWNERS
CONTRIBUTIONS--Under IRC Section 403(b), Purchase Payments made by public
school systems, churches, or certain tax-exempt organizations to purchase
annuities for their employees are excludable from the gross income of the
employee to the extent that aggregate Purchase Payments for the employee do
not exceed certain limitations imposed by the IRC. Further, any amounts
credited to the Contract Owner's account are not taxable until such amounts
are distributed. If the Contract is used for a tax-sheltered annuity described
in IRC Section 403(b) or a simplified employee pension plan described in IRC
Section 408(k) or ("qualified plans"), contributions made by an employer
through a salary reduction plan are permitted up to prescribed limits.
Generally, IRC Section 403(b) imposes a limitation on the amount of tax-
deferred Purchase Payments that may be made in a calendar year equal to 20% of
an employee's compensation includable in gross income for that year.
Adjustments to this limitation are made based upon the Contract Owner's years
of service with his or her employer and take into account the Contract Owner's
prior and current contributions to qualified plans. The Section 403(b)
limitation also is adjusted for any amounts deferred in prior taxable years
under an eligible deferred compensation plan as defined by IRC Section 457. In
addition, IRC Section 415 imposes a 25% limitation on total pre-tax
contributions to all tax-qualified plans. No limitations are imposed on the
amount of contributions made to a non-qualified contract.
If the Contract is used as a traditional IRA, subject to certain
limitations, all or a portion of the contribution up to $2,000 ($4,000 if
combined with a spousal IRA) may be deductable from gross income. The same
contribution limits apply to the Roth IRA, however, it is funded with after
tax dollars. The maximum contributions for all IRAs is $2,000. Contributions
to a simplified employee pension plan Contract generally may not exceed 15% of
compensation or $30,000, whichever is less. Until a taxable distribution
occurs, no federal income tax is payable by the Contract Owner on Purchase
Payments and investment earnings of a Contract purchased for a qualified plan
or a deductable IRA. The earnings distributed from a Roth IRA are tax-free if
certain conditions have been met.
Effective January 1, 1989, the IRC imposes restrictions on distributions
(i.e., partial withdrawals or surrenders) from annuity contracts qualified
under IRC Section 403(b). IRC Section 403(b)(11) requires that for these
annuity contracts to receive tax-deferred treatment, the following
distribution restrictions must be applied to contributions and all earnings
credited after December 31, 1988.
Distributions may be paid only:
(1) When the employee attains age 59 1/2, separates from service, dies,
or becomes disabled (within the meaning of IRC Section 72(m)(7)), or
(2) In hardship cases and cannot exceed contributions made through a
salary reduction agreement. Distribution of any income attributable to
these contributions is prohibited.
DISTRIBUTIONS UNDER QUALIFIED CONTRACTS--The IRC subjects qualified plans to
certain mandatory minimum distribution requirements. See "The Contract--
Mandatory Minimum Distribution."
If certain requirements are met, full or partial distributions other than
mandatory minimum distributions, either may be rolled over or exchanged on a
tax-free basis from one plan to another in accordance with IRC Section 1035 or
Revenue Ruling 90-24. Distributions from an IRC Section 403(b) Contract may be
rolled over to another IRC Section 403(b) Contract or to an IRA. Distributions
from an IRA may be rolled over to another IRA or to an IRC Section 403(b)
Contract if the IRA contains only amounts rolled over from a 403(b) plan. Roth
IRAs can only accept rollover money from a traditional IRA or another Roth
IRA.
Effective January 1, 1993, federal tax law requires HMLIC to withhold for
ordinary income tax purposes, 20% of any distributions from annuity Contracts
or plans qualified under IRC Section 403 with the exception of the following:
(1) eligible rollover distributions made directly to another trustee,
(2) periodic payments received over the Contract Owner's lifetime,
(3) periodic payments received under the minimum required distribution
rules, or
(4) periodic payments received over a period of ten years or more.
The Contract Owner, after receiving a distribution that is subject to the
20% withholding tax, may elect to rollover the distribution within 60 days of
receiving it. However, in order to qualify the entire distribution as a
rollover, the Contract Owner must replace the 20% withheld when making the
rollover payment. If the 20% is not replaced, the amount withheld will be
subject to ordinary income taxes and a possible 10% tax penalty if the
distribution occurred before age 59 1/2.
17
<PAGE>
All distributions, with the exception of a return of nondeductible employee
contributions and certain Roth distributions, received from a qualified plan
or an IRA are includable in gross income in the year paid. Once Income
Payments begin, any nondeductible contributions are recovered tax-free as a
portion of each Income Payment. Under certain limited circumstances, an
individual may elect forward averaging with respect to a lump sum
distribution.
For any distribution not subject to the 20% withholding, HMLIC is required
to withhold federal income tax unless the Contract Owner elects not to have
federal income tax withheld. After an election is made with respect to Income
Payments, a Contract Owner may revoke the election at any time. HMLIC will
notify the Contract Owner at least annually of his or her right to revoke the
election. Contract Owners are required by law to provide their correct
taxpayer identification numbers ("TIN") to HMLIC. If the Contract Owner is an
individual, the TIN is his or her Social Security number.
If the designated beneficiary is not the Contract Owner's spouse, then at
least 50% of the present value of the amount available for distribution must
be paid within the life expectancy of the Contract Owner of an IRA or a
qualified plan. Each payment to the beneficiary must be no less than each
payment to the Contract Owner.
DISTRIBUTIONS UNDER NON-QUALIFIED CONTRACTS--Contract Owners of non-
qualified Contracts are not subject to federal income tax on earnings until
Income Payments are received under the Contract.
A distribution by surrender or partial withdrawal during the accumulation
period may subject the Contract Owner to federal income tax. For this purpose,
an assignment or pledge (or agreement to assign or pledge) is considered a
distribution.
If the distribution is a full surrender, the Contract Owner is taxed on the
amount distributed, less Purchase Payments reduced by any prior partial
withdrawals which were not subject to income tax.
A distribution by partial withdrawal is deemed to come first from any
previously untaxed accumulation and then from principal. The Contract Owner is
subject to income tax on any previously untaxed accumulation which is
distributed.
Purchase Payments may be made by means of a full or partial tax free
exchange of annuity contracts under IRC Section 1035. Contracts exchanged
under IRC Section 1035 after January 18, 1985 will be subject to the annuity
income tax rules of IRC Section 72 in effect after that date, with exceptions
set forth below regarding the first-in first-out treatment of contracts issued
prior to August 14, 1982. See below "Penalty Tax."
If distributions are made pursuant to an income payment option, that portion
of each Income Payment which represents the Contract Owner's investment in the
Contract is excluded from gross income for federal income tax purposes. The
"investment in the Contract" is equal to total Purchase Payments to the
Contract less the portion of any periodic distributions that were excluded
from the individual's gross income. Once the Contract Owner's investment is
returned in full, the entire amount of each Income Payment is taxable as
ordinary income.
PENALTY TAX--Distributions to a Contract Owner under a qualified plan or IRA
are subject to an IRS 10% penalty unless the distributions are received:
(1) on or after age 59 1/2,
(2) on account of death,
(3) on account of disability, as defined in IRC Section 72(m)(7),
(4) pursuant to a qualified domestic relations order, as defined in IRC
414(p),
(5) for deductible medical expenses in excess of 7 1/2% of adjusted gross
income,
(6) on account of separation from service after age 55, or
(7) as a series of substantially equal payments for the life or a period
not exceeding life expectancy of the Contract Owner, or the lives or a
period not exceeding the joint life expectancy of the Contract Owner and a
designated beneficiary.
Taxable distributions from non-qualified Contracts received prior to age 59
1/2 are also subject to an IRS 10% penalty unless the distribution is made
after the Contract Owner's death or disability, received as part of
substantially equal periodic payments for the Contract Owner's lifetime, or
attributable to Purchase Payments made prior to August 14, 1982. In addition,
for non-qualified Contracts issued during the period August 14, 1982 through
January 18, 1985 and for additional Purchase Payments to non-qualified
Contracts issued prior to August 14, 1982, the penalty will not apply to
distributions attributable to Purchase Payments paid ten years or more prior
to the distribution. For this purpose, distributions will be attributed to
Purchase Payments on a "first-in first-out" basis (i.e. to the earliest
Purchase Payment which has not been fully allocated to prior distributions.)
Roth IRAs are not subject to the 10% penalty if;
The contract has been inforce for five years, and;
The annuitant has attained age 59 1/2; or when used to purchase a first
home not to exceed $10,000 (as adjusted by the IRC); or
The annuitant becomes disabled as defined in IRC Section 72(m)(7); or
The distribution is made after the death of the Annuitant.
The preceding discussion is informational only and is not to be considered
tax advice. Contract Owners are urged to
18
<PAGE>
- ------------------------------------------------------------------------------
- ------
- ------------------------------------------------------------------------
consult a competent tax adviser before taking any action that could have tax
consequences.
VOTING RIGHTS
Unless otherwise restricted by the plan under which a Contract is issued,
each Contract Owner has the right to instruct HMLIC with respect to voting his
or her interest in the shares of the Funds held by the Separate Account at all
shareholder meetings.
The number of votes that may be cast by a Contract Owner is based on the
number of units owned as of the record date of the meeting. Shares for which
no instructions are received are voted in the same proportion as the shares
for which instructions have been received. Any Fund shares attributable to
investment by HMLIC will be voted in proportion to the vote by Contract Owners
who have Separate Account units. Contract Owners receive various materials,
such as proxy materials and voting instruction forms, that relate to voting
Fund shares.
OTHER INFORMATION
LEGAL PROCEEDINGS--There are no legal proceedings to which the Separate
Account is a party or to which the assets of the Separate Account are subject.
HMLIC is engaged in various kinds of routine litigation that, in HMLIC's
judgment, are not material to its financial condition. None of this litigation
relates to the Separate Account.
REGISTRATION STATEMENT--A registration statement has been filed with the
Securities and Exchange Commission under the Securities Act of 1933 with
respect to the Contract. This Prospectus does not contain all information set
forth in the registration statement, its amendments and exhibits. Statements
contained in this Prospectus as to the content of the Contract and other legal
instruments are summaries. For a complete statement of the terms thereof,
reference is made to these instruments as filed.
CONTRACT OWNER COMMUNICATIONS--To ensure receipt of communications, Contract
Owners must notify HMLIC of address changes. Notice of a change in address may
be sent to Horace Mann Life Insurance Company, Annuity Customer Service, P.O.
Box 4657, Springfield, Illinois 62708-4657. Contract Owners may also provide
notice of an address change by sending a telefacsimile (FAX) transmission to
(217) 527-2307 or by calling (217) 789-2500 or (800) 999-1030 (toll free).
HMLIC will attempt to locate Contract Owners for whom no current address is
on file. In the event HMLIC is unable to locate a Contract Owner, HMLIC may be
forced to surrender the value of the Contract to the Contract Owner's last
known state of residence in accordance with the state's abandoned property
laws.
CONTRACT OWNER INQUIRIES--A toll free number, (800) 999-1030, is available
to telephone HMLIC's Annuity Customer Service Department. Written questions
should be sent to Horace Mann Life Insurance Company, Annuity Customer
Service, P.O. Box 4657, Springfield, Illinois 62708-4657.
FORMS AVAILABILITY--Specific forms are available from HMLIC to aid the
Contract Owner in effecting many transactions allowed under the Contract.
These forms may be obtained by calling the Annuity Customer Service Department
toll free at (800) 999-1030.
NASD REGULATION'S PUBLIC DISCLOSURE PROGRAM--Information about Horace Mann
Investors, Inc. and your agent is available from the National Association of
Securities Dealers (NASD) at www.nasdr.com or by calling (800) 289-9999.
YEAR 2000 READINESS--HMLIC relies on computer systems to maintain customer
accounts and records and process customer account transactions. Because of the
way that computers have historically stored dates, some of these systems
currently may not be able to correctly process activity occurring in the year
2000. By early 1995, HMLIC had a comprehensive plan developed to update these
systems. HMLIC expects, but there can be no absolute assurance that, the
necessary work will be completed on a timely basis.
ADDITIONAL INFORMATION
A copy of the Statement of Additional Information providing more detailed
information about the Account is available, without charge, upon request. The
Table of Contents of this Statement follows:
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
General Information and History........................................... 2
Investment Experience..................................................... 2
Underwriter............................................................... 3
Financial Statements...................................................... 3
</TABLE>
To receive, without charge, a copy of the 1997 Annual Report of the Horace
Mann Family of Funds and the Horace Mann Life Insurance Company Separate
Account and/or a copy of the Statement of Additional Information for Horace
Mann Life Insurance Company Separate Account and/or the Horace Mann Mutual
Funds, please complete the following request form and mail it to the address
indicated below, or send it by telefacsimile (FAX) transmission to (217) 535-
7123 or telephone (217) 789-2500 or (800) 999-1030 (toll-free).
HORACE MANN LIFE INSURANCE COMPANY
P.O. BOX 4657
SPRINGFIELD, ILLINOIS 62708-4657
Please provide free of charge the following information:
1997 Annual Report of the Horace Mann Family of Funds and the Horace Mann
Life Insurance Company Separate Account.
Statement of Additional Information dated May 1, 1998 for the Horace Mann
Mutual Funds.
Statement of Additional Information dated May 1, 1998 for the Horace Mann
Life Insurance Company Separate Account.
Please mail the above documents to:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
(City/State/Zip)
19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Horace Mann Life Insurance Company -----------------
P.O. Box 4657 BULK RATE
Springfield, IL 62708-4657 U.S. POSTAGE PAID
(800) 999-1030 (Toll-Free) CHICAGO, IL
PERMIT NO. 5974
-----------------
Horace Mann(R)
- ----------------------------------------
Insuring America's Educational Community
Underwritten by
Horace Mann Life Insurance Company
IA-004354(5/98)
<PAGE>
Statement of Additional Information
Variable tax deferred annuity contracts
Qualified and non-qualified plans
Horace Mann Life Insurance Company
Separate Account
May 1, 1998
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
___________________________
HORACE MANN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT
___________________________
Individual and Group
Flexible Payment and Individual Single Payment Variable Tax
Deferred Annuity Contracts
___________________________
Horace Mann Life Insurance Company
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the Prospectus, dated May 1, 1998, for Horace Mann Life
Insurance Company Separate Account. A copy of the Prospectus may be obtained by
writing to Horace Mann Life Insurance Company, P.O. Box 4657, Springfield,
Illinois 62708-4657, by sending a telefacsimile (FAX) transmission to (217) 535-
7123, or by telephoning toll-free (800) 999-1030.
May 1, 1998
TABLE OF CONTENTS
Topic Page
- ----- ----
General Information and History................................ 2
Investment Experience.......................................... 2
Underwriter.................................................... 3
Financial Statements........................................... 4
1
<PAGE>
GENERAL INFORMATION AND HISTORY
Horace Mann Life Insurance Company ("HMLIC") sponsors the Horace Mann Life
Insurance Company Separate Account (the "Account"). HMLIC is an indirect
wholly-owned subsidiary of Horace Mann Educators Corporation ("HMEC"), a
publicly-held insurance holding company traded on the New York Stock Exchange.
INVESTMENT EXPERIENCE
(Applies to Annuity Alternative Contracts Only)
December 31, 1997
<TABLE>
<CAPTION>
TOTAL RETURN DATA
AVERAGE ANNUAL TOTAL RETURN/1/
(Based on a $1,000 ---------------------------
investment)/2/ 1 YR 5 YRS 10 YRS
---------------------------
<S> <C> <C> <C>
Growth Fund Account Division
With Redemption/3/ 12.15% 16.57% 13.62%
Without Redemption 21.90% 16.57% 13.62%
Balanced Fund Account Division
With Redemption/3/ 8.14% 12.09% 11.09%
Without Redemption 17.54% 12.09% 11.09%
Income Fund Account Division
With Redemption/3/ (0.60)% 3.24% 5.34%
Without Redemption 8.04% 3.24% 5.34%
Short-Term Fund Account Division
With Redemption/3/ (4.58)% 0.96% 1.96%
Without Redemption 3.72% 0.96% 1.96%
Small Cap Growth Fund Account Division/4/
With Redemption/3/ 6.56%
Without Redemption 15.83%
International Equity Fund Account Division/4/
With Redemption/3/ (5.79)%
Without Redemption 2.40%
Socially Responsible Fund Account Division/4/
With Redemption/3/ 12.11%
Without Redemption 21.86%
</TABLE>
- -----------
/1/In some cases, actual performance reflects subsidization where total return
has been enhanced due to expenses of each Fund being waived or paid by
affiliates of the Funds.
/2/To the extent required, all charges shown in the Table of Annual Operating
Expenses are reflected in the calculations of the performance figures. Because
the median contract value exceeds $10,000, the annual maintenance charge of $25
has not been deducted. However, contracts with a value of less than $10,000
would be subject to the annual maintenance charge, which would reduce
performance. Total return may be calculated to reflect the fact that certain
expenses have been reimbursed or waived. In addition, total return calculations
assume redemption at the end of the stated period and, therefore, reflect the
applicable Surrender Charge. However, comparative figures may be presented that
do not assume redemption.
/3/With redemption reflects performance of a surrendered contract. Redemption
has no effect on return after the initial five-year contract period.
/4/Small Cap Growth Fund, International Equity Fund and Socially Responsible
Fund each commenced operations on March 10, 1997.
This performance data represents past performance. Investment return and the
principal value of an investment may fluctuate. An investor's shares, when
redeemed, may be worth more or less than their original cost. All charges as
shown in the Prospectus fee tables are reflected in this data, with the
exception of the annual maintenance charge and premium taxes.
The total return quotations are based on the average annual compounded rates of
return over one, five, and ten year periods ended December 31, 1997. Small Cap
Growth, International Equity and Socially Responsible Funds commenced operations
on March 10, 1997, and, therefore, their returns are not annualized. Total
return is computed by finding the average annual compounded rates of return that
would equate the initial amount invested to the ending redeemable value.
The performance data contained in this Statement of Additional Information is
based on the fees and charges for the flexible payment Contracts currently
offered by the Company. Prior Contracts, single premium contracts, and certain
group plans have different fees and charges; therefore these performance
calculations are not valid for those contracts.
2
<PAGE>
UNDERWRITER
HMLIC offers and sells the Contract on a continuous basis through its licensed
life insurance sales personnel who are also registered representatives of Horace
Mann Investors, Inc. ("Investors"), a broker/dealer registered with the
Securities and Exchange Commission and a member of the National Association of
Securities Dealers, Inc. (NASD). HMLIC contracts with Investors, principal
underwriter of the Account, to distribute the variable contracts of HMLIC.
Investors, located at One Horace Mann Plaza, Springfield, Illinois 62715-0001,
is an affiliate of HMLIC and a wholly-owned subsidiary of HMEC.
Commissions paid to Investors were $2,657,025, $3,879,547 and $5,781,260, for
the years ended 1995, 1996 and 1997, respectively. Investors does not retain any
of these commissions. Commissions received by Investors are paid to registered
representatives who sell contracts offered by this Prospectus.
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP, independent auditors for the Account and HMLIC, has
offices at 303 East Wacker Drive, Chicago, Illinois 60601. KPMG Peat Marwick LLP
representatives perform an audit of the financial statements of the Account
annually and provide accounting advice and services related to Securities and
Exchange Commission filings throughout the year and perform an annual audit of
the statutory financial statements of HMLIC.
The financial statements of the Account, including the auditors' reports
thereon, are incorporated herein by reference from the Annual Report for the
Account for the year ended December 31, 1997. A copy of this Annual Report
accompanies the Statement of Additional Information. Additional copies may
be obtained, upon request and without charge, by contacting Horace Mann Life
Insurance Company, P.O. Box 4657, Springfield, Illinois 62708-4657, or by
telephoning (217) 789-2500 or (800) 999-1030 (toll-free). The statutory
financial statements for HMLIC, including the auditors' reports thereon, which
are included herein, should be considered only as bearing upon the ability of
HMLIC to meet its obligations under the Contracts.
3
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
4
<PAGE>
Independent Auditors' Report
The Board of Directors
Horace Mann Life Insurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital and surplus of Horace Mann Life Insurance Company as of
December 31, 1997 and 1996 and the related statutory statements of operations,
capital and surplus, and cash flow for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in notes 1 and 7 to the statutory financial statements,
the Company prepared these statutory financial statements using accounting
practices prescribed or permitted by the Department of Insurance of the State of
Illinois, which practices differ from generally accepted accounting principles.
The effects on the statutory financial statements of the variances between the
statutory basis of accounting and generally accepted accounting principles,
although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the statutory financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of Horace Mann Life Insurance Company as of December 31, 1997
and 1996, or the results of its operations or its cash flows for each of the
years in the three year period ended December 31, 1997.
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the admitted assets, liabilities and capital and
surplus of Horace Mann Life Insurance Company as of December 31, 1997 and 1996,
and results of its operations and its cash flow for each of the years in the
three year period ended December 31, 1997, on the basis of accounting described
in note 1.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying Schedules, is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
Chicago, Illinois KPMG Peat Marwick
April 3, 1998
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets,
Liabilities and Capital and Surplus
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------
Admitted Assets 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Cash and investments:
Bonds $1,958,250 $1,978,005
Common stocks 806 54
Mortgage loans on real estate 45,136 48,840
Real estate 5,530 6,754
Policy loans 48,640 43,721
Cash 1,157 2,218
Short-term investments 88,144 10,759
Receivable for securities 1,016 -
Other invested assets 71 147
- -----------------------------------------------------------
Total cash and investments 2,148,750 2,090,498
Life insurance premiums deferred
and uncollected 41,238 39,444
Accident and health premiums due
and unpaid 1,103 3,560
Investment income due and accrued 32,227 31,509
Other assets 3,368 9,993
Variable annuity assets 959,760 684,836
- -----------------------------------------------------------
Total admitted assets $3,186,446 $2,859,840
- -----------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
6
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Admitted Assets,
Liabilities and Capital and Surplus
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands, except share data)
- -------------------------------------------------------------------------
Liabilities and Capital and Surplus 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Policy liabilities:
Aggregate reserves:
Life and annuity $1,822,379 $1,818,824
Accident and health 17,497 21,606
Unpaid benefits:
Life 6,163 8,021
Accident and health 4,521 7,453
Policyholder funds on deposit 111,977 107,289
Policyholder dividends payable
in the following year 100 1,248
Provision for accident and health
experience rating refunds - 103
Remittances not allocated 1,742 4,052
- -------------------------------------------------------------------------
Total policy liabilities 1,964,379 1,968,596
Accrued expenses 6,432 5,782
Asset valuation reserve 16,484 26,924
Interest maintenance reserve 15,331 15,882
Federal income tax payable 1,105 2,576
Payable for investment purchases - 5,849
Funds held for loaned securities 56,438 -
Payable to parent, subsidiaries and affiliates 5,810 -
Transfer from separate accounts (8,033) (6,303)
Other liabilities 7,282 7,072
Variable annuity liabilities 956,253 684,836
- -------------------------------------------------------------------------
Total liabilities 3,021,481 2,711,214
- -------------------------------------------------------------------------
Capital and surplus:
Capital stock, $1 par value.
Authorized 5,000,000 shares,
2,500,000 shares outstanding 2,500 2,500
Additional paid-in and contributed surplus 22,704 22,704
Special surplus fund - contingent
variable annuity reserve 625 625
Unassigned surplus 139,136 122,797
- -------------------------------------------------------------------------
Total capital and surplus 164,965 148,626
- -------------------------------------------------------------------------
Total liabilities and capital and surplus $3,186,446 $2,859,840
- -------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
7
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums, annuity and supplementary
contract considerations:
Life $104,684 $101,618 $ 97,837
Annuity 199,189 166,870 142,870
Accident and health 32,395 50,258 49,718
Supplementary contracts 30,455 26,655 26,329
- -------------------------------------------------------------------------
Total premiums, annuity and supplementary
contract considerations 366,723 345,401 316,754
Net investment income 156,570 152,786 149,997
Amortization of interest maintenance
reserve 2,581 2,898 2,903
Other 916 468 429
- -------------------------------------------------------------------------
Total revenue 526,790 501,553 470,083
- -------------------------------------------------------------------------
Benefits and expenses:
Provisions for claims and benefits:
Life 86,110 85,758 79,787
Annuity 251,455 220,833 199,982
Accident and health 32,228 45,998 41,394
Supplementary contracts 42,098 37,687 36,842
- -------------------------------------------------------------------------
Total claims and benefits 411,891 390,276 358,005
Commissions 26,864 24,436 23,263
General and other expenses 55,742 50,861 48,289
- -------------------------------------------------------------------------
Total benefits and expenses 494,497 465,573 429,557
- -------------------------------------------------------------------------
Net gain before dividends to policyholders
and federal income tax 32,293 35,980 40,526
Dividends to policyholders (540) 1,335 1,385
- -------------------------------------------------------------------------
Net gain before federal income tax 32,833 34,645 39,141
Federal income tax expense 10,549 17,140 12,581
- -------------------------------------------------------------------------
Net gain from operations 22,284 17,505 26,560
Realized investment losses
net of tax and transfers to IMR (1,241) (1,193) (3,331)
- -------------------------------------------------------------------------
Net income $ 21,043 $ 16,312 $ 23,229
- -------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
8
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Capital and Surplus
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Capital stock $ 2,500 $ 2,500 $ 2,500
- --------------------------------------------------------------------------
Additional paid-in capital and
contributed surplus 22,704 22,704 22,704
- --------------------------------------------------------------------------
Special surplus fund-
contingent variable annuity reserve 625 625 625
- --------------------------------------------------------------------------
Unassigned surplus:
Balance at beginning of year 122,797 108,009 96,922
Net income 21,043 16,312 23,229
Change in net unrealized
capital gains 2,706 1,150 4,564
Change in non-admitted assets (237) (79) 477
Change in reserve valuation
basis (note 1) (2,020) 11,361 -
Change in asset valuation reserves 10,440 845 (1,183)
Surplus contributed to Separate
Accounts during the period (3,100) - -
Other changes in surplus in Separate
Account Statement 3,507 - -
Dividends to parent (16,000) (16,000) (16 000)
Change in separate account
reserve valuation basis (note 1) - 4,799 -
Exhibit 8A tax impact (note 1) - (3,600) -
- --------------------------------------------------------------------------
Balance at end of year 139,136 122,797 108,009
- --------------------------------------------------------------------------
Total capital and surplus $164,965 $148,626 $133,838
- --------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
9
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from operations:
Revenue received:
Premiums, considerations
and deposits $367,166 $341,994 $315,197
Investment income received 152,195 151,862 146,996
Other income received 916 468 428
- ---------------------------------------------------------------------------
Total revenue received 520,277 494,324 462,621
- ---------------------------------------------------------------------------
Benefits and expenses paid:
Claims, benefits and
net transfers paid 416,022 341,546 275,256
Expenses paid 82,078 75,160 72,952
Dividends to policyholders paid 622 1,381 1,436
Federal income taxes paid 11,541 15,398 16,713
- ---------------------------------------------------------------------------
Total benefits and expenses paid 510,263 433,485 366,357
- ---------------------------------------------------------------------------
Net cash from operations 10,014 60,839 96,264
- ---------------------------------------------------------------------------
Cash from investments:
From investments sold or matured:
Bonds 1,291,350 1,042,070 1,099,397
Common and preferred stock - 1,554 566
Mortgage loans 4,799 32,981 32,724
Real estate and other 1,628 4,325 9,552
- ---------------------------------------------------------------------------
Total investment proceeds 1,297,777 1,080,930 1,142,239
Tax on capital gains (losses) 903 (176) (5,788)
- ---------------------------------------------------------------------------
Total from investment proceeds 1,296,874 1,081,106 1,148,027
- ---------------------------------------------------------------------------
Cost of investments acquired:
Bonds 1,265,726 1,145,362 1,195,111
Mortgage loans 186 641 495
Real estate and other 1,301 562 572
- ---------------------------------------------------------------------------
Total investments acquired 1,267,213 1,146,565 1,196,178
Net increase in policy loans 4,918 3,824 3,288
- ---------------------------------------------------------------------------
Total from investments acquired 1,272,131 1,150,389 1,199,466
- ---------------------------------------------------------------------------
Net cash from investments 24,743 (69,283) (51,439)
- ---------------------------------------------------------------------------
</TABLE>
(Continued)
10
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Statutory Statements of Cash Flow
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cash from financing and miscellaneous:
Cash provided:
Securities lending 56,438 - -
Other cash 8,743 10,261 1,233
- ---------------------------------------------------------------------------
Total cash provided 65,181 10,261 1,233
- ---------------------------------------------------------------------------
Cash applied:
Dividends to parent 16,000 16,000 16,000
Other applications 7,614 978 9,895
- ---------------------------------------------------------------------------
Total cash applied 23,614 16,978 25,895
- ---------------------------------------------------------------------------
Net cash from financing
and miscellaneous 41,567 (6,717) (24,662)
- ---------------------------------------------------------------------------
Net change in cash and
short-term investments 76,324 (15,161) 20,163
Cash and short-term investments
at beginning of year 12,977 28,138 7,975
- ---------------------------------------------------------------------------
Cash and short-term investments
at end of year $89,301 $12,977 $ 28,138
- ---------------------------------------------------------------------------
</TABLE>
See accompanying notes to statutory financial statements.
11
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
December 31, 1997, 1996 and 1995
(In thousands)
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
Organization
Horace Mann Life Insurance Company (the Company) is a wholly owned
subsidiary of Allegiance Life Insurance Company (ALIC). The Company's
ultimate parent is Horace Mann Educators Corporation (HMEC).
The Company sells and underwrites tax-qualified retirement annuities,
individual life, group medical, group disability income, and group life
insurance products primarily to educators and other employees of public
schools and their families. The Company stopped writing new group medical
insurance policies in January 1997, terminated 95% of that business by
December 1997, and will terminate the remaining group medical insurance
policies in 1998.
Basis of Presentation
The accompanying statutory financial statements have been prepared in
conformity with the accounting practices prescribed or permitted by the
Department of Insurance of the State of Illinois and the National
Association of Insurance Commissioners (NAIC), which differ materially in
some respects from generally accepted accounting principles as more fully
discussed in note 7. The significant statutory accounting practices follow.
Prescribed and Permitted Statutory Accounting Practices
Prescribed statutory accounting practices include state laws, regulations,
and general administrative rules, as well as a variety of publications of
the NAIC. Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ from state to
state, may differ from company to company within a state, and may change in
the future. The Company has no permitted statutory accounting practices.
In March 1998 the NAIC adopted the codification of Statutory Accounting
Principles (Codification) as the NAIC supported basis of accounting.
Codification will likely change the definitions of what comprises
prescribed versus permitted statutory accounting practices, and may result
in changes to the accounting policies that insurance enterprises use to
prepare their statutory financial statements. The implementation date is
ultimately dependent on an insurers state of domicile and has not yet been
announced. The Company is currently evaluating the impact of the
Codification on their statutory financial statements.
(Continued)
12
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Investments
Investments are valued in accordance with the requirements of the NAIC.
Bonds are generally carried at amortized cost. Common stocks are carried at
market. Mortgage loans are carried at the unpaid principal balance less
unamortized discount and were issued at the value of no more than 75% of
the appraised value of the mortgaged property. No significant new
commercial mortgage loans have been issued since 1988. Real estate is
carried at the lower of fair market value or cost. Policy loans are carried
at the unpaid principal balance.
The Company does not have any investments in derivative financial
instruments.
Asset Valuation Reserve
The Asset Valuation Reserve (AVR) was calculated as prescribed and required
by the NAIC. This reserve is maintained for the purpose of stabilizing
surplus against the effects of fluctuations in the value of certain bond,
stock, mortgage loan and real estate investments. Changes in the AVR
reserve are charged or credited to surplus.
The balance of the AVR by component as of December 31, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Bonds, preferred stock and
short-term investments $15,141 $25,517
Mortgage loans 485 855
Common stock 242 16
Real estate and other investments 616 536
- ------------------------------------------------------------------------
Total AVR $16,484 $26,924
- ------------------------------------------------------------------------
</TABLE>
The AVR is held at a level equal to 100% of the maximum reserve level allowed
by the NAIC.
Interest Maintenance Reserve
The Interest Maintenance Reserve (IMR) was calculated as prescribed by the
NAIC. This reserve is designed to capture the realized capital gains and
losses which result from changes in the overall level of interest rates and
amortize them into income over the approximate remaining life of the
investment sold.
Cash and Short-Term Investments
Amounts represent cash and short-term securities having a maturity of 30 days
or less. Short-term investments are carried at cost which approximates market
value.
(Continued)
13
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Variable Annuities Assets and Liabilities
Assets held in trust for purchasers of variable annuity contracts and the
related liabilities are included in the statutory statements of admitted
assets, liabilities and capital and surplus. Variable annuity assets, carried
at market value, and liabilities represent tax-qualified variable annuity
funds invested in the Horace Mann mutual funds.
During 1997 the Company introduced three new mutual funds - a small cap growth
fund, an international equity fund, and a "socially responsible" fund.
Variable annuity assets were invested in the Horace Mann mutual funds as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Horace Mann Growth Fund $532,086 $372,824
Horace Mann Balanced Fund 386,247 299,977
Horace Mann Income Fund 9,651 10,857
Horace Mann Short-Term Fund 1,201 1,178
Horace Mann Small Cap Fund 16,321 -
Horace Mann International Equity Fund 5,137 -
Horace Mann Socially Responsible Fund 9,117 -
- -------------------------------------------------------------------------
Total $959,760 $684,836
- -------------------------------------------------------------------------
</TABLE>
The investment income, gains and losses of these accounts accrue directly to
the policyholders and are not included in the operations of the Company.
Aggregate Reserves
Applicable state insurance laws require that the Company set up reserves in
accordance with statutory regulations, carried as liabilities to meet future
obligations under outstanding policies. These reserves are the amount that,
with the additional premiums to be received and interest thereon compounded
annually at certain rates, is calculated to be sufficient to meet the various
policy and contract obligations as they occur.
In 1997, the Company changed the basis of valuation for supplementary
contracts with life contingencies from guarantee of payments at issue to
guarantee of current payment. The change in valuation basis increased
supplementary contracts with life contingencies reserves and decreased surplus
by $2,020.
In 1996, with the approval of the Department of Insurance of the State of
Illinois, the Company changed its reserve methodology for deferred annuities
from full account value to Commissioners Annuity Reserve Valuation Method
(CARVM). The change in method of valuation decreased fixed reserves by
$11,361; decreased variable reserves by $4,799; and increased surplus $12,560,
net of $3,600 tax.
(Continued)
14
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Aggregate reserves for life policies, annuity contracts, and supplementary
contracts with life contingencies are based on statutory mortality tables and
interest assumptions using either the net level, or commissioners' reserve
valuation method or CARVM. The annuity reserves include the current declared
interest rates through the valuation date. The composition of these
liabilities at December 31 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregate reserves
------------------ Mortality Interest
1997 1996 table rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Life $ 370,049 $ 329,938 1980 CSO 4.0-7.0 %
6,785 6,374 1958 CET 2.5-5.5
169,898 171,113 1958 CSO 2.5-4.5
28,556 26,987 Various 2.5-5.5
10,170 10,601 1941 CSO 2.5-3.0
Annuity 1,032,030 1,062,135 1971 IAM 3.0-7.5
118,586 132,099 1949 PAT 3.0-5.5
1,488 1,655 1937 SAT 3.0
607 590 Various 3.0
Supplementary
contracts with
life contingencies 75,662 68,551 1983a 6.5-11.0
5,832 5,818 1971 IAM 4.5-11.25
2,716 2,963 1937 SAT 3.5
- --------------------------------------------------------------------------------
Total $1,822,379 $1,818,824
- --------------------------------------------------------------------------------
</TABLE>
Aggregate reserves for accident and health policies include the present value
of amounts not yet due on existing claims and unearned premiums at December 31
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregate reserves
------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Present value of amounts not yet
due on claims (3% interest rate) $16,042 $16,036
Reserve for rate credits - 3,776
Additional contract reserves 1,163 1,262
Unearned premiums and other 292 532
- --------------------------------------------------------------------------------
Aggregate accident and health reserves $17,497 $21,606
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
15
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Unpaid Benefits
Unpaid benefits consists of case basis reserves and estimates of losses
incurred but not reported. Estimates for losses incurred but not reported
are based on prior experience modified for current trends.
Accident and health claim reserves and liabilities include the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate reserves for accident
and health $17,497 $21,606 $22,088
Unpaid benefits accident and health 4,521 7,453 7,864
Less: Reserve for rate credits 29 (3,776) (3,670)
Additional contract reserves (1,163) (1,262) (1,353)
Unearned premiums and other (321) (532) (522)
- --------------------------------------------------------------------------------
Accident and health claim reserves
and liabilities $20,563 $23,489 $24,407
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth an analysis of accident and health claim
reserves and liabilities and provides a reconciliation of beginning and
ending reserves for the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net balance at January 1 $23,489 $24,407 $24,852
Incurred related to:
Current year 34,827 45,638 41,367
Prior years 1,516 335 (725)
- --------------------------------------------------------------------------------
Total incurred 36,343 45,973 40,642
- --------------------------------------------------------------------------------
Paid related to:
Current year 27,591 34,556 30,025
Prior years 11,678 12,335 11,062
- --------------------------------------------------------------------------------
Total paid 39,269 46,891 41,087
- --------------------------------------------------------------------------------
Net balance at December 31 $20,563 $23,489 $24,407
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
16
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Reserves for Supplementary Contracts
Without Life Contingencies
This reserve represents the present value of future payments discounted with
interest only. At December 31, 1997 and 1996 this liability was $107,606
and $102,681, respectively, based on average credited interest rates of 5.7%
and 5.6% in 1997 and 1996, respectively and is included in "policyholder
funds on deposit."
Policyholder Dividends Payable in the
Following Year
Dividends expected to be paid on anniversary dates in the following year are
estimated and accrued based on current dividend scales approved by the Board
of Directors.
Premiums
Life premiums are reflected as earned on the policy anniversary date.
Annuity and supplementary contract premiums are reflected as earned when
collected. Accident and health premiums are reported as revenue when due
and earned on a pro rata basis over the period covered by the policy.
Deferred life premiums represent modal premiums (other than annual) to be
billed in the year subsequent to the commencement of the policy year.
Uncollected premiums represent premiums due less accident and health
premiums over 90 days past due. Both deferred and uncollected premiums have
been reduced by the estimated cost of collection.
Income Taxes
Income taxes were provided based upon the calculation of income taxes
currently payable or benefits recoverable. The Company is included in the
consolidated federal income tax return of its ultimate parent, HMEC.
Acquisition Expenses
The cost of acquiring new business, principally commissions, underwriting
salaries, and related expenses, is charged to expense as incurred.
Non-admitted Assets
Assets prescribed by the Illinois Insurance Code as "non-admitted"
(principally over 90-day accident and health due and unpaid premiums) are
charged to unassigned surplus.
(Continued)
17
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Use of Estimates
The preparation of statutory financial statements requires management to
make estimates and assumptions that affect the reported financial statements
balances as well as the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
Year 2000
In 1990 the Company established programing standards to address the year
2000 for new computer systems. By early 1995, the Company had developed a
comprehensive plan to address the issue and began converting its existing
computers systems to be year 2000 compliant. At December 31, 1997 over 60%
of all business applications, representing more than 40% of all Company's
program code, were year 2000 compliant. Management anticipates completing
conversions of the remaining internal business applications by the end of
1998. Vendors that have not already completed conversions have indicated
their plans to become year 2000 compliant by the end of 1998. During 1999,
additional testing of all systems and final reviews of individual computer
applications will be completed.
(2) Investments
Net Investment Income
The components of net investment income are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on bonds $148,451 $144,770 $136,186
Interest on mortgage loans 5,601 6,359 10,782
Interest on short-term investments 1,591 1,502 1,620
Interest on policy loans 2,945 2,729 2,418
Real estate income 602 449 1,071
Miscellaneous investment income 11 52 287
- --------------------------------------------------------------------------------
Gross investment income 159,201 155,861 152,364
Investment expenses 2,631 3,075 2,367
- --------------------------------------------------------------------------------
Net investment income $156,570 $152,786 $149,997
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
18
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Realized Investment Gains (Losses) Net of Tax and Transfers to IMR
Realized investment gains and losses are determined on the basis of specific
identification. Realized investment gains on most fixed income securities
are transferred on an after tax basis to IMR and amortized into income over
the average remaining lives of the assets sold. Only realized investment
gains (losses) which result from changes in the overall level of interest
rates are transferred to IMR. These gains (losses) are not included in net
income in the year they occurred.
The IMR at December 31 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve balance, beginning of year $15,882 $17,622 $17,633
Current year capital gains (losses),
net of tax 2,030 1,158 2,892
Amortization of interest maintenance
reserve (2,581) (2,898) (2,903)
- --------------------------------------------------------------------------------
Reserve balance, end of year $15,331 $15,882 $17,622
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
19
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Realized investment gains (losses) reported in the statutory statement of
operations net of tax and transfers to IMR are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 3,092 $ 758 $ 4,450
Real estate (1,904) (1,804) (5,387)
Common stock (6) 992 262
Short-term investments 31 - -
- --------------------------------------------------------------------------------
1,213 (54) (675)
Less federal income tax 424 (19) (236)
Transferred to interest maintenance
reserve (2,030) (1,158) (2,892)
- --------------------------------------------------------------------------------
Realized investment losses
net of tax and transfers to IMR $(1,241) $(1,193) $(3,331)
- --------------------------------------------------------------------------------
</TABLE>
Change in Net Unrealized Capital Losses
Certain investments are required to be carried at market. The resulting
unrealized gains or losses are reflected as credits or charges to unassigned
surplus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized capital losses
Beginning of period $(4,707) $(5,857) $(10,421)
End of period (2,001) (4,707) (5,857)
- --------------------------------------------------------------------------------
Decrease for the period $ 2,706 $ 1,150 $ 4,564
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
20
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Bonds
At December 31, 1997 and 1996, 5.5% and 4.3%, respectively, of the total
bond portfolio (at amortized cost) consisted of private placement bonds.
The market value of private placement bonds is estimated based upon factors
including credit quality, interest rates and maturity dates.
The carrying value and estimated market value of investments in bonds as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carrying Unrealized Unrealized Market
December 31, 1997 value gains losses value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Mortgage-backed
securities $ 426,533 $14,027 $ (215) $ 440,345
Other 200,223 4,849 (34) 205,038
Municipal bonds 27,118 2,137 - 29,255
Foreign government bonds 26,397 1,714 (442) 27,669
Corporate bonds 1,027,178 48,396 (2,113) 1,073,461
Other mortgage-backed
securities 250,801 5,455 (176) 256,080
- --------------------------------------------------------------------------------
Total $1,958,250 $76,578 $(2,980) $2,031,848
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carrying Unrealized Unrealized Market
December 31, 1996 value gains losses value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Mortgage-backed
securities $496,719 $ 9,843 $ (2,674) $ 503,888
Other 207,861 1,867 (333) 209,395
Municipal bonds 19,690 890 (158) 20,422
Foreign government bonds 34,684 1,340 (2) 36,022
Corporate bonds 985,127 26,752 (10,399) 1,001,480
Other mortgage-backed
securities 233,924 3,770 (1,651) 236,043
- --------------------------------------------------------------------------------
Total $1,978,005 $44,462 $(15,217) $2,007,250
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
21
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
At December 31, 1997, 1.9% of the Company's investment portfolio was
invested in collateralized mortgage obligations ("CMOs") excluding mortgage
obligations of United States governmental agencies. The average credit
quality rating of the Company's investment in CMOs was AAA and NAIC 1 -the
highest ratings. The market value of CMOs at December 31, 1997 was $122,384
compared to a $118,078 carrying value. The average duration of the
Company's investment in CMOs was 2.8 years at December 31, 1997.
The carrying value and estimated market value of bonds by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Estimated
Carrying market
December 31, 1997 value value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 124,894 $ 125,431
Due after one year through five years 483,738 491,707
Due after five years through ten years 617,841 640,439
Due after ten years 731,777 774,271
- --------------------------------------------------------------------------------
Total bonds $1,958,250 $2,031,848
- --------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of investments in bonds during 1997, 1996 and 1995 were
$1,102,340, $887,663 and $965,703, respectively. Gross gains of $9,115,
$9,343 and $11,646 and gross losses of $7,412, $9,024 and $7,869 were
realized on those sales for 1997, 1996 and 1994, respectively.
Mortgage Loans and Real Estate
The Company's investment in commercial mortgage loans has been declining
since 1989 as a result of the Company's strategy to reduce its holdings in
such investments. The Company has made no new significant investments in
commercial mortgage loans since 1988. At December 31, 1997 mortgage loans
were 1.4% of total cash and invested assets. All outstanding commercial
mortgages are secured by completed, income-producing properties.
(Continued)
22
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Deposits
The carrying value of securities on deposit with governmental authorities,
as required by law, as of December 31 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Held for all policyholders $1,685 $1,671 $1,679
Held for policyholders in certain states 611 612 590
- --------------------------------------------------------------------------------
$2,296 $2,283 $2,269
- --------------------------------------------------------------------------------
</TABLE>
Securities Lending
Beginning in 1997, the Company entered into a securities lending program
whereby fixed income securities are loaned to third parties, primarily major
brokerage firms. As of December 31, 1997, fixed maturities with a fair value
of $56,438 were loaned. Proceeds from securities lending program are held in
short term investments. At December 31, 1997 the Company was in compliance
with agreements with custodian banks facilitating the lending program that
require a minimum of 100% of the value of the loaned securities to be
separately maintained as collateral for each loan.
Investments in Entities Exceeding 10% of Capital and Surplus
The names of entities (other than the U.S. Government and government
agencies and authorities) in which the total amount invested exceeds 10% of
total capital and surplus at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Standard & Poors Carrying
Bonds: rating: value
- --------------------------------------------------------------------------------
<S> <C> <C>
General Motors Corporation AAA/A-/BBB+ $40,185
Green Tree Financial Corporation AAA/A 31,901
First Union Corporation A/A- 21,270
Ford Motor Credit/Capital A/A+ 19,107
Lehman Brothers Holdings A 18,969
Mellon Financial A/BBB+ 18,788
RJR Nabisco BBB/BBB- 18,768
Salomon Brothers A 18,523
Merrill Lynch Mortgage Investors AAA/AA- 17,805
Chemical Bank A/A- 17,276
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
23
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
(3) Related Party Transactions
The Company has common management and shares office facilities with HMEC
and other affiliates and is a party to several intercompany service
agreements. Under these agreements, the Company paid $76,826, $71,098, and
$66,620 for management, administrative, data processing, commissions and
agency services, utilization of personnel, and investment advisory
services in 1997, 1996 and 1995, respectively.
The Company had balances payable to affiliates of $1,693 and $1,546 at
December 31, 1997 and 1996, respectively included in "accrued expenses"
and "other liabilities" in the statutory statements of admitted assets,
liabilities and capital and surplus. Also, the Company had balances
payable of $5,810 at December 31, 1997 and balances receivable from
affiliates of $109 at December 31, 1996, which were included in "other
assets" in 1996.
ALIC reinsures all of the Company's life insurance business in the state
of Arizona (See Note 8).
(4) Federal Income Taxes
The Company is included in the consolidated federal income tax return of
its parent, ALIC and its ultimate parent, HMEC and its subsidiaries. Tax
sharing agreements between the Company and HMEC, as approved by the Board
of Directors of the Company, provides that tax on operating income is
charged to the Company as if it were filing a separate federal income tax
return. The Company receives the benefits of any losses or tax credits to
the extent utilized in the consolidated return. Intercompany tax balances
are settled quarterly with a subsequent final annual settlement.
Deferred income taxes are not provided on temporary differences between
financial statement and tax bases of assets and liabilities.
The following is a reconciliation of federal income tax expense on income
from operations with income tax computed by applying the federal corporate
rate of 35% for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
"Expected" federal income tax expense
on reported income from operations $11,491 $12,126 $13,699
Add (deduct) tax effects of:
Reserve adjustments (1,853) 3,920 (1,442)
Policy acquisition costs 707 677 910
Other, net 204 417 (586)
- --------------------------------------------------------------------------------
Federal income tax expense $10,549 $17,140 $12,581
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
24
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
(5) Restrictions of Surplus
The amount of dividends which can be paid by Illinois insurance companies
without prior approval of the State Insurance Commissioner is subject to
restrictions relating to profitability and statutory surplus. Dividends
which may be paid by the Company during 1998 without prior approval are
approximately $21,000. Dividend payments were $16,000, $16,000 and $16,000
in 1997, 1996 and 1995, respectively.
The Company is required by the Maryland Insurance Department to provide a
minimum reserve of $625 for guaranteed minimum death benefits under
variable annuity contracts issued by the Company.
Under applicable Illinois insurance laws and regulations, the Company is
required to maintain a minimum capital and surplus of $1,500.
(6) Fair Value of Financial Instruments
Generally accepted accounting principles require that the Company disclose
estimated fair values for certain financial instruments. The following
methods and assumptions were used to estimate the fair value of financial
instruments.
Investments - For fixed maturities and short-term investments, fair value
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities, adjusted for differences between the quoted securities and the
securities being valued. The fair value of mortgage loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and the same
remaining maturities. The fair value of policy loans is based on estimates
using discounted cash flow analysis and current interest rates being
offered for new loans. The carrying value of real estate is an estimate of
fair value based on discounted cash flow from operations.
(Continued)
25
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Annuity Contract Liabilities and Policyholder Account Balances on Interest-
sensitive Life Contracts - The fair values of annuity contract liabilities
and policyholder account balances on interest-sensitive life contracts are
equal to the discounted estimated future cash flows (using the Company's
current interest rates earned on its investments) including an adjustment
for risk that the timing or amount of cash flows will vary from
management's estimate.
Other Policyholder Funds - Other policyholder funds are supplementary
contract reserves and dividend accumulations which represent deposits that
do not have defined maturities. The carrying value of these funds is used
as a reasonable estimate of fair value.
The carrying amounts and fair values of financial instruments at December
31, 1997 consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Carrying Fair
amount value
- --------------------------------------------------------------------------------
<S> <C> <C>
Financial Assets
Bonds $1,958,250 $2,031,848
Mortgage loans 45,136 46,092
Real estate 5,530 5,530
Short-term investments 88,144 88,144
Policy loans and other 49,517 46,779
- --------------------------------------------------------------------------------
Total investments $2,146,577 $2,218,393
Asset valuation reserve 16,484 -
- --------------------------------------------------------------------------------
Total investments less asset
valuation reserve 2,130,093 2,218,393
Cash 1,157 1,157
- --------------------------------------------------------------------------------
Financial Liabilities
Policyholder account
balances on interest-sensitive
life contracts 91,322 84,034
Annuity contract liabilities 1,236,920 1,112,479
Other policyholder funds 112,077 112,077
- --------------------------------------------------------------------------------
</TABLE>
Fair value estimates shown above are dependent upon subjective assumptions
and involve significant uncertainties resulting in variability in estimates
with changes in assumptions. Fair value assumptions are based upon
subjective estimates of market conditions and perceived risks of financial
instruments at a certain point in time. The disclosed fair values do not
reflect any premium or discount that could result from offering for sale at
one time an entire holding of a particular financial instrument. In
addition, potential taxes and other expenses that would be incurred in an
actual sale or settlement are not reflected in amounts disclosed.
(Continued)
26
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
(7) Differences Between Generally Accepted Accounting
Principles and Statutory Accounting Practices
Statutory accounting practices differ in some respects from generally
accepted accounting principles. Under generally accepted accounting
principles, the following applies:
(a) Aggregate reserves for future life benefits are computed on the net
level premium method using estimates of future investment yield,
mortality, and withdrawal.
(b) Aggregate reserve for annuity contracts are carried at accumulated
policyholder values without reduction for potential surrender or
withdrawal charges.
(c) Policyholder dividends, based on dividend scales in effect at the time
the policies were issued, are accrued ratably over the premium paying
period of the policies.
(d) Life premiums are reflected as earned when due. Annuity considerations
and other fund deposits are reflected as deposits rather than revenue.
(e) Acquisition costs are deferred and amortized generally over the premium
paying period for individual life contracts and the estimated contract
life for interest-sensitive life and investment contracts.
(f) Deferred income taxes are provided on all significant temporary
differences between values of assets and liabilities for book and tax
reporting purposes.
(g) Non-admitted assets less applicable allowance accounts are restored to
the balance sheet.
(h) Asset valuation and interest maintenance reserves are not provided.
(i) The assets and liabilities are revalued as of the date of acquisition
of HMEC and its subsidiaries in August, 1989.
(j) Realized investment gains (losses) resulting from changes in interest
rates are recognized in income when the related security is sold.
(k) Reinsurance ceded credits are recognized as assets in GAAP basis
financial statements.
(l) Fixed maturity investments (bonds) are categorized as available for
sale. Such investments are carried at market with changes in market
value charged or credited to unassigned surplus, net of deferred income
taxes.
The aggregate effect of the foregoing differences has not been determined
separately for the Company.
(Continued)
27
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
(8) Reinsurance
Information with respect to reinsurance ceded and assumed by the Company is
set forth below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance premiums ceded:
To ALIC $1,147 $1,057 $1,019
To other companies 1,066 924 807
Life insurance reserves ceded:
To ALIC 6,933 6,375 5,986
To other companies 1,983 1,436 1,366
Life insurance premiums assumed:
From other companies - 1 -
Group accident and health premiums ceded:
To other companies 1,228 1,587 943
Amounts recoverable from reinsurers
on paid losses 197 482 201
- --------------------------------------------------------------------------------
</TABLE>
The maximum amount of direct ordinary insurance retained on any standard
life is $200. Amounts in excess of $200 are ceded on a yearly renewable
term basis of reinsurance. The Company reinsures on a treaty basis for each
accident and health claim up to $1 million over a prescribed retention
amount. Although reinsurance agreements transfer risk for amounts over a
certain retention limit, the Company has not relieved its primary obligation
to the policyholders. For the years ended December 31, 1997, 1996 and 1995,
the accident and health retention amount was $300 each year.
(9) Pension Plans and Other Postretirement Benefits
The Company is a member of the Horace Mann group of insurance companies. All
the Company's personnel are employees of Horace Mann Service Corporation, an
affiliated company. Salaries, pension and related benefits are allocated to
the Company for these services.
Pension Plans
Employees are covered under a defined benefit plan and a defined
contribution plan, and certain employees participate in supplemental
retirement plans.
Benefits under the defined benefit and supplemental retirement plans are
based on employees' years of service and compensation for the highest 36
consecutive months of earnings under the plan. Under the defined
contribution plan, contributions are made to employees' accounts based on a
percentage of compensation that is determined by employees' years of
service. Retirement benefits to employees are paid first from their
accumulated accounts under the defined contribution plan with the balance
funded by the defined benefit and supplemental retirement plans.
(Continued)
28
<PAGE>
HORACE MANN LIFE INSURANCE COMPANY
Notes to Statutory Financial Statements
(In thousands)
- --------------------------------------------------------------------------------
Employees are also eligible to participate in the Supplemental Retirement
and Savings Plan, a 401(k) plan, and may generally contribute up to 10% of
eligible compensation on a before tax basis. The employer contributes an
amount equal to 50% of the first 6% of eligible compensation contributed
each month by participating employees.
Total allocated pension expense was $3,934, $3,642 and $3,306 for 1997,
1996 and 1995, respectively.
Postemployment Benefits
In addition to providing pension benefits, the Company also provides
certain health care and life insurance benefits to retired employees and
eligible dependents. Employees with ten years of service are eligible to
receive these benefits upon retirement. The allocated cost of these
benefits totaled $803, $647, and $683 for the years ended December 31,
1997, 1996, and 1995, respectively.
(10) Risk-Based Capital
The insurance departments of various states, including the Company's
domiciliary state of Illinois impose risk-based capital (RBC) requirements
on insurance enterprises. The RBC calculation serves as a benchmark for the
regulation of life insurance companies by state insurance regulators. The
requirements apply various weighted factors to financial balances or
activity levels based on their perceived degree of risk.
The RBC guidelines define specific capital levels where regulatory
intervention is required based on the ratio of the Company's actual total
adjusted capital (sum of capital and surplus and AVR) to control levels
determined by the RBC formula. At December 31, 1997, the Company's actual
total adjusted capital was $181,499 and the authorized control level risk-
based capital was $27,548.
29
<PAGE>
Schedule I
HORACE MANN LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Amount
shown in
Balance
Type of investments Cost(1) Market Value Sheet
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Bonds:
U.S. Government and government
agencies and authorities $ 332,176 $ 341,949 $ 332,176
State, municipalities and
political subdivisions 322,391 333,386 322,391
Foreign government bonds 26,397 27,669 26,397
Public utilities 17,958 18,513 17,958
Other corporate bonds 1,259,328 1,310,330 1,259,328
Preferred stocks:
Public utilities - - -
---------- ---------- ----------
Total debt securities $1,958,250 $2,031,847 $1,958,250
---------- ========== ----------
Equity securities:
Common stocks:
Industrial and miscellaneous - 806 806
---------- ---------- ----------
Total equity securities - $ 806 806
---------- ========== ----------
Mortgage loans on real estate 45,136 XXX 45,136
Real estate 8,338 XXX 8,338
Policy loans 48,640 XXX 48,640
Short-term investments 88,144 XXX 88,144
Other investments 72 XXX 72
---------- ----------
Total investments $2,148,580 XXX $2,149,386
========== ==========
</TABLE>
(1) Debt securities are carried at amortized cost or investment values
prescribed by the National Association of Insurance Commissioners.
(2) Real estate acquired in satisfaction of indebtedness is $5,334.
(3) Differences between cost and amounts shown in the balance sheet for
investments, other than equity securities, represent non-admitted
investments.
See accompanying independent auditors' report
30
<PAGE>
Schedule III
HORACE MANN LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
As of December 31, For the years ended December 31,
--------------------------------------------- ----------------------------------------------------------
Future policy
benefits Other Premium revenue Amortization
Deferred losses, policy and annuity, Benefits, of deferred
policy claims claims and pension and Net claims, losses policy Other
acquisition and loss Unearned benefits other contract investment and settlement acquisition operating Premiums
Segment cost(1) expenses(3) premiums(3) payable considerations income expenses costs(1) expenses written(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Life $ 590,132 $ 4,338 $104,684 $ 41,237 $ 86,110 $48,476
Annuity 1,153,739 100 199,189 100,663 251,455 22,556
Supplementary
Contracts 84,670 107,606 30,455 12,464 42,098 725
Accident and
Health 22,018 33 32,395 2,206 32,228 10,849
-------- ---------- -------- -------- -------- -------- -------- -------- ------- -------
Total $1,850,559 $112,077 $366,723 $156,570 $411,891 $82,606
======== ========== ======== ======== ======== ======== ======== ======== ======= =======
1996:
Life $ 551,328 $ 5,656 $101,618 $ 38,695 $ 85,758 $44,202
Annuity 1,197,563 103 166,870 99,235 220,833 18,062
Supplementary
Contracts 77,954 102,681 26,655 12,256 37,687 620
Accident and
Health 29,059 97 50,258 2,600 45,998 12,413
-------- ---------- -------- -------- -------- -------- -------- -------- ------- -------
Total $1,855,904 $108,537 $345,401 $152,786 $390,276 $75,297
======== ========== ======== ======== ======== ======== ======== ======== ======= =======
1995:
Life $ 511,145 $ 5,727 $ 97,837 $ 36,159 $ 79,787 $42,638
Annuity 1,205,426 106 142,870 98,086 199,982 16,010
Supplementary
Contracts 70,956 101,942 26,329 12,196 36,842 593
Accident and
Health 29,952 75 49,719 3,556 41,394 12,311
-------- ---------- -------- -------- -------- -------- -------- -------- ------- -------
Total $1,817,479 $107,850 $316,755 $149,997 $358,005 $71,552
======== ========== ======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
(1) Does not apply to financial statements of life insurance companies which
are prepared on a statutory basis.
(2) Does not apply to life insurance.
(3) Unearned premiums and other deposit funds are included in future policy
benefits, losses, claims and loss expenses.
See accompanying independent auditors' report
31
<PAGE>
Schedule IV
HORACE MANN LIFE INSURANCE COMPANY
REINSURANCE
For the years ended December 31, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies assumed amount To net
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997: Life insurance in force $11,287,605 $528,096 $ - $10,759,509 0.0%
=========== ======== ========== =========== ===
Premiums and annuity,
pension and other
contract considerations:
Life insurance $ 106,897 $ 2,213 $ - $ 104,684 0.0%
Annuity 199,189 - - 199,189 0.0%
Supplementary contracts 30,455 - - 30,455
Accident and health 33,623 1,228 - 32,395 0.0%
----------- -------- ---------- ----------- ---
Total premiums $ 370,164 $ 3,441 $ - $ 366,723 0.0%
=========== ======== ========== =========== ===
1996: Life insurance in force $10,736,338 $418,521 $ - $10,317,817 0.0%
=========== ======== ========== =========== ===
Premiums and annuity,
pension and other
contract considerations:
Life insurance $ 103,598 $ 1,980 $ - $ 101,618 0.0%
Annuity 166,870 - - 166,870 0.0%
Supplementary contracts 26,655 - - 26,655
Accident and health 51,845 1,587 - 50,258 0.0%
----------- -------- ---------- ----------- ---
Total premiums $ 348,968 $ 3,567 $ - $ 345,401 0.0%
=========== ======== ========== =========== ===
1995: Life insurance in force $10,316,420 $355,596 $ - $ 9,960,824 0.0%
=========== ======== ========== =========== ===
Premiums and annuity,
pension and other
contract considerations:
Life insurance $ 99,663 $ 1,826 $ - $ 97,837 0.0%
Annuity 142,870 - - 142,870 0.0%
Supplementary contracts 26,329 - - 26,329
Accident and health 50,662 943 - 49,719 0.0%
----------- -------- ---------- ----------- ---
Total premiums $ 319,524 $ 2,769 $ - $ 316,755 0.0%
=========== ======== ========== =========== ===
</TABLE>
See accompanying independent auditors' report
32
