SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 1
TO REGISTRATION STATEMENT NO. 333-42793
Under
The Securities Act of 1933
IDS Life Insurance Company
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(Exact name of registrant as specified in its charter)
Minnesota
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(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
41-0823832
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(I.R.S. Employer Identification No.)
IDS Tower 10, Minneapolis, MN 55440-0010, (612) 671-3131
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(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Bruce Kohn, Counsel IDS Life Insurance Company, IDS Tower 10,
Minneapolis, Minnesota 55440-0010, (612) 671-2221
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(Name, address, including zip code, and telephone number, including area
code, of agent for service)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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<TABLE>
<CAPTION>
Calculation of Registration Fee
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<S> <C> <C> <C> <C>
Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered offering price per aggregate offering registration fee
registered unit price
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Interests in a group N/A
market value annuity
contract and
individual market
value annuity
contracts for non-tax
qualified purchases.
</TABLE>
<PAGE>
PART I.
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus.
<PAGE>
Portfolio Guaranteed Term Annuity
Prospectus, April 30, 1999
IDS Life Insurance Company (IDS Life) offers this annuity in two ways to members
of a wrap fee program sponsored by American Express Financial Advisors Inc.
(AEFA):
o a group market value annuity contract, and
o individual market value annuity contracts.
To buy this annuity, you must send IDS Life a purchase payment of at least
$5,000 with an application for a contract.
IDS Life Account MGA
Group and Individual Market
Value Annuity Contracts
Sold by:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: 800-437-0602
If you choose not to hold these securities until the end of a guarantee period,
they may be subject to a substantial market value adjustment. As a result, you
could get less than your purchase payment back.
You cannot purchase this product unless you pay an annual wrap fee. If you stop
participating in the wrap fee program, IDS Life will terminate your contract and
you may lose money through the market value adjustment.
Depending on your circumstances, you may be better off purchasing a similar
product available from IDS Life outside the wrap fee program.
Interest rates for renewal guarantee periods may be higher or lower than the
previous guaranteed interest rate. The minimum guaranteed renewal interest rate
is 3%. IDS Life guarantees this rate.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
IDS Life is not a bank or financial institution, and the securities it offers
are not deposits or obligations of, backed or guaranteed or endorsed by any bank
or financial institution nor are they insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency. Investments in this
annuity involve investment risk including the possible loss of principal.
<PAGE>
Table of contents Page
The Portfolio Guaranteed Term Annuity in brief..................................
Key terms.......................................................................
Description of contracts........................................................
General.........................................................................
Application and purchase payment................................................
Right to cancel.................................................................
Guarantee periods...............................................................
Surrenders......................................................................
Market value adjustment.........................................................
Premium taxes...................................................................
Death benefit prior to settlement...............................................
Statement.......................................................................
Electing the settlement date and form of annuity................................
Amendment, distribution, assignment and termination of contracts................
Amendment of contracts..........................................................
Distribution of contracts.......................................................
Assignment of contracts.........................................................
Termination of contracts........................................................
Federal tax considerations......................................................
The Company.....................................................................
Business........................................................................
Investments by IDS Life.........................................................
Selected financial data.........................................................
Management's discussion and analysis of consolidated
financial condition and results of operations...................................
Directors and executive officers................................................
Executive compensation..........................................................
Security ownership of management................................................
Legal proceedings and opinion...................................................
Experts.........................................................................
Appendix A - Partial surrender illustration.....................................
Appendix B - Market value adjustment illustration...............................
IDS Life financial information..................................................
<PAGE>
The Portfolio Guaranteed Term Annuity in brief
In this prospectus, "we", "us" and "IDS Life" refer to IDS Life Insurance
Company and "you" and "yours" refer to an owner who has been issued a contract.
This summary is incomplete. Do not rely on it as a description of your contract.
For more complete information, you must read the entire prospectus. You can find
more information about a topic in the summary by turning to the discussion
beginning at the page listed after that topic in the summary.
Contracts: We are offering group and individual market value annuities to
members of a wrap-fee program sponsored by AEFA for non-tax qualified and tax
qualified purchases. These market value annuity contracts have a guaranteed
interest rate that we credit to the purchase payment when it is held to the end
of the guarantee period (the renewal date). Surrenders before the renewal date
are subject to a market value adjustment.
Guarantee periods: When you make a payment under an application, you select a
guarantee period from among those that we offer when we receive your application
and payment. During this guarantee period, the purchase payment earns interest
at the interest rate that we have guaranteed for your contract. We credit
interest daily. Credited interest earns interest at the applicable guaranteed
interest rate we establish. (p. )
Renewal guarantee periods: At the end of each guarantee period, a renewal
guarantee period of one year will begin, unless you choose a different period.
You must choose the length of a renewal guarantee period during the 30 days
before the end of the previous guarantee period. Beginning on the first day of
each renewal guarantee period the renewal value will earn interest at the
renewal interest rate that we have guaranteed for your contract and the interest
credited will earn interest at the interest rate. (p.)
Surrenders: With some restrictions we permit partial or total surrenders without
a surrender charge. We may delay payment of any surrender for up to six months
from the date we receive notice of surrender or the period permitted by state
law, if less. A delay of payment will not be for more than seven days except
under extraordinary circumstances. If we choose to exercise this right then
during this delay, we will pay annual interest of at least 3% of any amounts
delayed for more than thirty days. (p. )
Market value adjustment: A market value adjustment applies when the surrender
occurs before the renewal date. No market value adjustment applies to any
surrender at the end of a guarantee period. We find the market adjusted value
using the rate we then are paying on purchase payments for new contracts for
about the same time as the time remaining in your guarantee period. Generally,
the amount of the market value adjustment depends a lot on interest rates on
investments like those we could make with new contract purchase payments at the
time you surrender and on your time remaining to the end of the guarantee
period. The market value adjustment may increase or decrease the value of your
investment before the renewal date. The amount you receive on surrender could be
less than your original purchase payment if interest rates increase. If interest
rates decrease, the amount you receive on surrender may be more than your
original purchase payment and accrued interest. The market adjusted value also
affects settlements under an annuity payment plan. (p. )
Premium taxes: We may deduct premium taxes from the accumulation value of your
contract. State premium taxes range from 0 to 3.5% of your gross purchase
payments. (p. )
Death benefit prior to settlement: The contract provides for a guaranteed death
benefit. If the annuitant or owner dies before the settlement date, we will pay
to the owner or beneficiary the death benefit in place of any other payment
under the contract. The amount of the death benefit will equal the accumulation
value. (p. )
<PAGE>
Choosing the settlement date and form of annuity: On the settlement date picked
by the owner, we will pay the owner a lump sum payment or start to pay a series
of payments. You may choose a series of payments under some annuity plans. (p. )
Key terms
In this prospectus, "we", "us" and "IDS Life" refer to IDS Life Insurance
Company and "you" and "yours" refer to an owner who has been issued a contract.
These terms can help you understand details about your annuity:
Accumulation value - The value of the purchase payment plus interest credited,
adjusted for any surrenders.
Annuitant - The person on whose life monthly annuity payments depend.
Annuity - A contract purchased from an insurance company that offers
tax-deferred growth of the purchase payment until earnings are withdrawn.
Cash surrender value - The market adjusted value is the cash surrender value. On
the last day of a guarantee period, the cash surrender value is the accumulation
value.
Contract - The certificate or individual contract described under Description of
contracts-General.
Contract anniversary - The same day and month as the contract date each year
that the contract remains in force.
Contract date - The effective date of the contract as designated in the
contract.
Current interest rate - The applicable interest rate contained in a schedule of
rates established by us at our discretion from time to time for various
guarantee periods.
Initial guarantee period - The period during which the initial guarantee rate
will be credited.
Initial guarantee rate - The rate of interest credited to the purchase payment
during the initial guarantee period.
Market adjusted value - The accumulation value increased or decreased by the
market adjusted value formula, on any date before the end of the guarantee
period.
Market value adjustment - The market adjusted value minus the accumulation
value.
Owner - The person or entity to whom the annuity contract is issued.
Purchase payment - Payment made to IDS Life for an annuity.
Renewal date - The first day of a renewal guarantee period. It will always be on
a contract anniversary.
Renewal guarantee period - A renewal guarantee period will begin at the end of
each guarantee period.
<PAGE>
Renewal guarantee rate - The rate of interest credited to the renewal value
during the renewal guarantee period as set at our discretion.
Renewal value - The accumulation value at the end of the current guarantee
period.
Settlement - The application of contract value to provide annuity payments. If
the settlement date is not the last day of a guarantee period, we apply the
market adjusted value of the contract. On the last day of a guarantee period, we
apply the accumulation value of the contract.
Settlement date - The date on which annuity payments are to begin.
Written request - A request in writing signed by you and delivered to us at our
corporate office.
Description of contracts
General
This prospectus describes interests in a group market value annuity contract and
individual market value annuity contracts offered by IDS Life to members of a
wrap-fee program sponsored by AEFA under which this contract is made available
for non-tax qualified and tax qualified purchases. Participation in a group
contract will be accounted for separately by the issuance of a certificate
showing your interest under the group contract. Participation in an individual
contract is shown by the issuance of an individual annuity contract. The
certificate and the individual contract are both referred to as the "contract."
Further details about the wrap-fee program are outlined in the client service
agreement for the program and in AEFA's Part II to Form ADV, including the
Schedule H that is filed with the Part II materials. You may obtain these
materials by calling 1-800-967-4377 (option 3). Please remember:
o you cannot purchase this product unless you pay an annual wrap fee,
o if you stop participating in the wrap-fee program, then you will no
longer qualify for this contract, IDS Life will terminate your contrac
and you may lose money through a market value adjustment, and
o if IDS Life terminates your contract, IDS Life will give you the option
of exchanging into another annuity product, which may contain higher
fees, a lower guaranteed interest rate and a surrender charge.
A similar product is available outside of the wrap-fee program under which this
contract is available. Depending on your individual circumstances, you may be
better off purchasing the similar product that is available outside of the
wrap-fee program. Please consult your financial advisor or call 1-800-437-0602
for more information.
IDS Life may offer this contract in the following tax qualified programs: (1)
plans qualified under Section 401(a), 401(k) or 403(a) of the Internal Revenue
Code of 1986, as amended (the Code); (2) annuity purchase plans adopted by
public school systems and certain tax-exempt organizations pursuant to Section
403(b) of the Code; (3) individual retirement annuities (IRAs), SIMPLE IRAs and
Simplified Employee Pension (SEP) Plans eligible under Section 408 of the Code;
and (4) deferred compensation plans under Section 457 of the Code.
<PAGE>
As described in this prospectus, the contracts have an interest rate guaranteed
by IDS Life that we credit to a purchase payment in the contract when the
purchase payment stays in the contract to its renewal date. We credit interest
daily to achieve a stated annual effective rate, based on a 365 day year. We do
not pay interest on leap days (Feb. 29th). Surrenders prior to the renewal date
are subject to a market value adjustment, income taxes, and a 10% IRS tax
penalty if withdrawn prior to age 59 1/2.
Application and purchase payment
To apply for a contract, you must complete an application and make a minimum
purchase payment of $5,000. For individuals age 90 and younger, the maximum
purchase payment is $1,000,000 without prior approval. This limit applies in
total to all IDS Life annuities you own. If you purchase the contract to fund a
tax qualified plan, that plan's limit on contributions also will apply. Once we
apply a purchase payment to a contract, we do not permit any additional purchase
payment under the contract.
We will return an improperly completed application, along with the corresponding
purchase payment, five business days after we receive it.
A payment is credited to a contract on the date we receive a properly completed
application at our corporate office along with the purchase payment. Interest is
earned the next day. IDS Life then issues a contract and confirms the purchase
payment in writing.
Right to cancel
State or federal law may give you the right to cancel the contract within a
specific period of time after receipt of the contract and receive a refund of
the entire purchase payment. For revocation to be effective, mailing or delivery
of notice of cancellation must be made in writing to our corporate office at the
following address: IDS Life Insurance Company, Attn: Transactions, P.O. Box 534,
Minneapolis, MN 55440-0534.
Guarantee periods
You select the duration of the guarantee period from among those durations we
offer when we receive your application and payment. As of the date of this
prospectus, we are offering guarantee periods with annual durations from one to
10 years; however, the guarantee periods we offer in the future could be
different. The duration selected will determine the guaranteed interest rate and
the purchase payment (less surrenders made and less applicable premium taxes, if
any) will earn interest at this guaranteed interest rate during the entire
guarantee period. Interest is credited to your annuity daily. All interest rates
we quote are effective annual interest rates. This refers to the rate that
results after interest has compounded daily for a full year.
<PAGE>
The example below shows how we will credit interest during the guarantee period.
For the purpose of this example, we have made the assumptions as indicated.
Example of guaranteed rate of accumulation
Beginning account value: $50,000
Guaranteed period: 10 years
Guaranteed rate: 6% annual effective rate
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest credited to the Cumulative interest
Year account during year credited to the account Accumulation value
1 $3,000.00 $3,000.00 $53,000.00
2 3,180.00 6,180.00 56,180.00
3 3,370.80 9,550.80 59,550.80
4 3,573.05 13,123.85 63,123.85
5 3,787.43 16,911.28 66,911.28
6 4,014.68 20,925.96 70,925.96
7 4,255.56 25,181.51 75,181.51
8 4,510.89 29,692.40 79,692.40
9 4,781.54 34,473.95 84,473.95
10 5,068.44 39,542.38 89,542.38
Guaranteed accumulation value at the end of 10 years is:
$50,000 + $39,542.38 = $89,542.38
</TABLE>
Note: This example assumes no surrenders of any amount during the entire
ten-year period. A market value adjustment applies to any interim surrender (see
Surrenders). The hypothetical interest rates are only illustrations. They do not
predict future interest rates to be declared under the contract. Actual interest
rates declared for any given time may be more or less than those shown.
Renewal guarantee periods: At the end of any guarantee period, a renewal
guarantee period will begin. We will notify you in writing about the renewal
guarantee periods available before the renewal date. This written notification
will not specify the interest rate for the renewal value. You may elect in
writing, during the 30-day period before the end of the guarantee period, a
renewal guarantee period of a different duration from among those we offer at
that time. If you do not make an election, we will automatically apply the
renewal value to a guarantee period of one year. In no event may renewal
guarantee periods extend beyond the settlement date then in effect for the
contract. For example, if the annuitant is age 82 at the end of a guarantee
period and the settlement date for the annuitant is age 85, a three-year
guarantee period is the maximum guarantee period that you may choose under the
contract. The renewal value will then earn interest at a guaranteed interest
rate that we have declared for this duration. We may declare new schedules of
guaranteed interest rates as often as daily.
At the beginning of any renewal guarantee period, the renewal value will be the
accumulation value at the end of the guarantee period just ending. We guarantee
the renewal value with our general assets. This amount will earn interest for
the renewal guarantee period at the then applicable guaranteed interest rate for
the period selected. This rate may be higher or lower than the previous
guaranteed interest rate.
At your written request, we will notify you of the renewal guarantee rates for
the periods then available. You also may call us to ask about renewal guarantee
rates.
<PAGE>
Establishment of guaranteed interest rates: We will know the guaranteed interest
rate for a chosen guarantee period at the time we receive a purchase payment or
you renew an accumulation value. We will send a confirmation that will show the
amount and the applicable guaranteed interest rate. The minimum guaranteed
interest rate for renewal values is 3% per year. The rate on renewal values will
be equal to or greater than the rate credited on new comparable purchase
payments at that time.
IDS Life has no specific formula for determining the rate of interest that it
will declare as guaranteed interest rates in the future. We will declare the
guaranteed interest rates from time to time based on our analysis of current
market conditions. (See Investments by IDS Life.) In addition, IDS Life also may
consider various other factors in determining guaranteed interest rates for a
given period, including regulatory and tax requirements; sales commission and
administrative expenses we bear; general economic trends; and competitive
factors. IDS Life in its sole discretion will make the final determination as to
the guaranteed interest rates to be declared. We cannot predict nor can we
guarantee future guaranteed interest rates above the 3% rate.
Surrenders
General: Subject to certain tax law and retirement plan restrictions noted
below, you may make total and partial surrenders under a contract at any time.
For all surrenders, we will reduce the accumulation value by the amount
surrendered on the surrender date and that amount will be payable to the owner.
We will also either reduce or increase the accumulation value by any market
value adjustment applicable to the surrender. IDS Life will, on request, inform
you of the amount payable in a total or partial surrender.
Any total or partial surrender may be subject to tax and tax penalties.
Surrenders from certain tax qualified contracts also may be subject to 20%
income tax withholding. (See Federal tax considerations.)
Tax-sheltered annuities: The Code imposes certain restrictions on an owner's
right to receive early distributions attributable to salary reduction
contributions from a contract purchased for a retirement plan qualified under
Section 403(b) of the Code as a tax-sheltered annuity (TSA).
Distributions attributable to salary reduction contributions made after Dec. 31,
1988, plus all earnings since Dec. 31, 1998 or to transfers or rollovers of such
amounts from other contracts, may come from the TSA contract only if you have
attained age 59-1/2, have become disabled as defined in the Code, have separated
from the service of your employer that purchased the contract or have died.
Additionally, if you should encounter a financial hardship (within the meaning
of the Code), you may receive a distribution of all contract values attributable
to salary reduction contributions made after Dec. 31, 1988, but not of the
earnings on them.
Even though these rules may permit a distribution (e.g., for hardship or after
separation from service), it may nonetheless be subject to a 10% IRS penalty tax
(in addition to income tax) as a premature distribution and to 20% income tax
withholding. (See Federal tax considerations.)
These restrictions do not apply to transfers of contract value to another TSA
investment vehicle available through the employer.
<PAGE>
Partial surrenders: Unless we agree otherwise, the minimum amount you may
surrender is $250. You cannot make a partial surrender if it would reduce the
accumulation value of your annuity to less than $2,000.
You may request the net check amount you wish to receive. We will determine how
much accumulation value needs to be surrendered to yield the net check amount
after any applicable market value adjustment.
You may make a partial surrender request not exceeding $50,000 by telephone. We
have the authority to honor any telephone partial surrender request believed to
be authentic and will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. As long as
reasonable procedures are followed, neither IDS Life nor its affiliates will be
liable for any loss resulting from fraudulent requests. At times when the volume
of telephone requests is unusually high, we will take special measures to ensure
that your call is answered as promptly as possible. We will not allow a
telephone surrender request within 30 days of a phoned-in address change.
Total surrenders: We will compute the value of your contract at the next close
of business after we receive your request for a complete surrender. We may ask
you to return the contract.
Payment on surrender: We may defer payment of any partial or total surrender for
a period not exceeding 6 months from the date we receive your notice of
surrender or the period permitted by state insurance law, if less. Only under
extraordinary circumstances will we defer a surrender payment more than 7 days,
and if we defer payment for more than 30 days, we will pay annual interest of at
least 3% on the amount deferred. While all circumstances under which we could
defer payment upon surrender may not be foreseeable at this time, such
circumstances could include, for example, our inability to liquidate assets due
to a general financial crisis. If we intend to withhold payment more than 30
days, we will notify you in writing.
NOTE: We will charge you a fee if you request express mail delivery of your
surrender check.
Market value adjustment
We guarantee the accumulation value, including the interest credited, if the
contract is held until the end of the guarantee period. However, we will apply a
market value adjustment if a surrender occurs prior to the end of the guarantee
period. The market adjusted value also affects settlements under an annuity
payment plan occurring at any time other than the last day of a guarantee
period.
The market adjusted value is your accumulation value (purchase payment plus
interest credited minus surrenders) adjusted by a formula. The market adjusted
value reflects the relationship between the guaranteed interest rate on your
contract and the interest rate we are crediting on new Portfolio Guaranteed Term
Annuity contracts with guarantee periods that are the same as the time remaining
in your guarantee period.
The market adjusted value is sensitive to changes in current interest rates. The
difference between your accumulation value and market adjusted value on any day
will depend on our current schedule of guaranteed interest rates on that day,
the time remaining in your guarantee period and your guaranteed interest rate.
Upon surrender your market adjusted value may be greater than your contract's
accumulation value, equal to it or less than it depending on how the guaranteed
interest rate on your contract compares to the interest rate of a new Portfolio
Guaranteed Term Annuity for the same number of years as the guarantee period
remaining on your contract.
<PAGE>
Before we look at the market adjusted value formula, it may help to look in a
general way at how comparing your contract's guaranteed rate and the rate for a
new contract affects your market adjusted value.
Relationship between your contract's guaranteed rate and new contract for the
same number of years as the guaranteed period remaining on your contract:
<TABLE>
<CAPTION>
<S> <C>
If your annuity rate is: Your market adjusted value will be:
greater than the new annuity rate + .25% greater than your accumulation value
equal to the new annuity rate + .25% equal to your accumulation value
less than the new annuity rate + .25% less than your accumulation value
</TABLE>
Let's look at two examples. In order to do so, let's make these assumptions:
o You bought a contract and chose a guarantee period of 10 years.
o We guarantee an interest rate of 4.5% annually for your 10-year guarantee
period.
o After 3 years you decide to surrender your contract. In other words, you
decide to surrender your contract when you have 7 years left in your
guarantee period.
Remember that your market adjusted value depends partly on the interest rate of
a new Portfolio Guaranteed Term Annuity for the same number of years as the
guarantee period remaining on your contract. In this case, that is 7 years.
Now let's look at our examples. For our first example, remember that your
contract is earning 4.5%. Let's assume that new contracts that we offer with a
7-year guarantee period are earning 5.0%. We add 0.25% to the 5.0% rate to get
5.25%. Your contract's 4.5% rate is less than the 5.25% rate and, as reflected
in the table above, your market adjusted value will be less than your
accumulation value.
For our second example, remember again that your contract is earning 4.5%. Let's
assume that new contracts that we offer with a 7-year guarantee period are
earning 4.0%. We add 0.25% to the 4.0% rate to get 4.25%. Your contract's 4.5%
rate is greater than the 4.25% rate and, as reflected in the table above, your
market adjusted value will be greater than your accumulation value.
<PAGE>
Market adjusted value formula:
Market adjusted value = (Renewal value)
------------------------
(1 + ic + .0025)(N + t)
Renewal value -- The accumulation value at the end of the current
guarantee period
ic -- The current interest rate offered for new Portfolio
Guaranteed Term Annuity contract sales and renewals for
the number of years remaining in the guarantee period
N -- The number of complete contract years to the end of the
current guarantee period
t -- The fraction of the contract year remaining to the end
of the contract year (for example, if 180 days remain in a
365 day contract year, it would be .493)
We periodically declare at our discretion the current guaranteed interest rate
(ic). It is the rate we are then paying on purchase payments and renewals paid
under this class of contracts for guarantee period durations equaling the
remaining guarantee period duration of the contract to which the formula is
being applied. If the remaining guarantee period is a number of complete years,
we will use the specific complete year guarantee rate. If the remaining
guarantee period is less than 1 year, we will use the one year guarantee rate.
If the remaining guarantee period is a number of complete years plus fractional
years, we will determine the rate by straight line interpolation between the two
years' rates. For example, if the remaining guarantee period duration is 8.5
years, and the current guaranteed interest rate for 8 years is 4% and for 9
years is 5%, IDS Life will use a guaranteed interest rate of 4.5%.
Market value adjustment formula:
Market value adjustment = Market adjusted value less accumulation value
For an illustration showing an upward and downward adjustment, see Appendix B.
Premium taxes
We reserve the right to deduct an amount from the accumulation value of the
contract at the time that any applicable premium taxes not previously deducted
are payable. If a tax is payable at the time of the purchase payment and we
choose to not deduct it at that time, we further reserve the right to deduct it
at a later date. Current premium taxes range in an amount up to 3.5% depending
on jurisdiction.
Death benefit prior to settlement
If the annuitant or owner dies before the settlement date, the death benefit
payable to the beneficiary will equal the accumulation value.
If your spouse is sole beneficiary or joint owner: Unless you have given us
other written instructions, if you, as owner or joint owner, die before the
settlement date and your spouse is the only beneficiary or joint owner with a
right of survivorship, your spouse may keep the annuity as owner. To do this,
your spouse must, within 60 days after we receive proof of death, give us
written instructions to keep the contract in force.
<PAGE>
Section 401(k) plans, Section 403(b) plans (TSAs), Section 457 plans, custodial
and trusteed plans, and IRAs, SIMPLE IRAs and SEPs: If the contract is purchased
under a Section 401(k) plan, Section 403(b) plan, Section 457 plan, custodial or
trusteed plan or for an IRA, SIMPLE IRA or SEP, and we receive proof of the
annuitant's death before the settlement date, we will pay the beneficiary the
death benefit described above. If the annuitant dies before reaching the
settlement date and the spouse is the only beneficiary, the spouse may keep the
contract in force until the date on which the annuitant would have reached
70-1/2 or any other date permitted by the Code. To do this, the spouse must,
within 60 days after we receive proof of death, give us written instructions to
keep the contract in force.
Paying the beneficiary: Unless you have given us other written instructions, we
will pay the beneficiary in a single payment. The beneficiary may choose to
receive this payment at any time within 5 years after the date of death. Payment
from a tax qualified contract (except an IRA, SIMPLE IRA, SEP or Section 457
plan) made to a surviving spouse instead of being directly rolled over to an IRA
may be subject to 20% income tax withholding. We may make payments under any
payment plan available under this contract if:
o the beneficiary asks us in writing within 60 days after we receive proof of
death;
o payments begin no later than one year after death or any other date
permitted by the Code; and
o the payment period does not extend beyond the beneficiary's life or life
expectancy.
We will determine the accumulation value at the next close of business after our
death claim requirements are fulfilled. We will mail payment to the beneficiary
within seven days after our death claim requirements are fulfilled.
Statement
Prior to the settlement date, at least annually, we will send a statement
showing a summary of the contract.
Choosing the settlement date and form of annuity
When we process your application, we will establish the settlement date to the
maximum age or date as specified below. You can also select a date within the
maximum limits. This date can be aligned with your actual retirement from a job,
or it can be a different future date, depending on your needs and goals and on
certain restrictions. You can also change the date, provided you send us written
instructions at least 30 days before annuity payouts begin.
For non-tax qualified contracts, the settlement date cannot be later than the
latest of:
o the contract anniversary nearest the annuitant's 85th birthday; or
o the 10th contract anniversary.
For tax qualified contracts, to avoid IRS penalty taxes, the settlement date
generally must be:
o on or after the date the annuitant reaches age 59-1/2;
o for IRAs, SIMPLE IRAs and SEPs, by April 1 of the year following the
calendar year when the annuitant reaches age 70-1/2; or
<PAGE>
o for all other tax qualified contracts, by April 1 of the year following
the calendar year when the annuitant reaches age 70-1/2 or, if later,
retires; except that 5% business owners may not select a settlement
date that is later than April 1 of the year following the calendar year
when they reach age 70-1/2.
If you are taking the minimum IRA or TSA distributions as required by the Code
from another tax qualified investment, or in the form of partial surrenders from
this contract, annuity payouts can start as late as the annuitant's 85th
birthday or the 10th contract anniversary.
Annuity payments: The first payment will be made as of the settlement date. Once
annuity payments have started for an annuitant, no surrender of the annuity
benefit can be made for the purpose of receiving a lump sum in lieu of payments.
Death after settlement date: If you or the annuitant dies after the settlement
date, the amount payable to the beneficiary, if any, will continue as provided
in the annuity payment plan then in effect.
Annuity plans: There are different ways to receive annuity payments. We call
these plans. You may select one of these plans, or another payment arrangement
to which we agree, by giving us written notice at least 30 days before the
settlement date.
You may ask us to apply the market adjusted value (less applicable premium
taxes, if any) on the settlement date under any of the annuity plans described
below, but in the absence of an election, we will apply the market adjusted
value on the settlement date under Plan B to provide a life annuity with 120
monthly payments certain.
If the amount to be applied to an annuity plan is not at least $2,000 or if
payments are to be made to other than a natural person, we have the right to
make a lump sum payment of the cash surrender value. If a lump sum payment is
from a tax qualified contract (except an IRA, SIMPLE IRA, SEP or Section 457
plan), 20% income tax withholding may apply.
o Plan A - This provides monthly annuity payments for the lifetime of the
annuitant. We will not make payments after the annuitant dies.
o Plan B - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a
period of at least 5, 10 or 15 years.
You must select the period.
o Plan C - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a
certain number of months. We determine the number of months by dividing
the market adjusted value applied under this plan by the amount of the
monthly annuity payment.
o Plan D - We call this a joint and survivor life annuity. Monthly
payments will be paid while both the annuitant and a joint annuitant
are living. When either the annuitant or joint annuitant dies, we will
continue to make monthly payments until the death of the surviving
annuitant. We will not make payments after the death of the second
annuitant.
o Plan E - This provides monthly fixed dollar annuity payments for a
period of years that you elect. The period of years may be no less than
10 nor more than 30.
<PAGE>
The contract provides for annuity payment plans on a fixed basis only. The
amount of each annuity payment will not change during the annuity payment
period. The amount of the annuity payment will depend on:
- -- the market adjusted value (less any applicable premium tax not
previously deducted) on the date;
- -- the annuity table we are then using for annuity settlements (never les
than the table guaranteed in the contract);
- -- the annuitant's age; and
- -- the annuity payment plan selected.
Other income plan options may be available.
The tables for Plans A, B, C and D are based on the "1983 Individual Annuitant
Mortality Table A" and an assumed rate of 3% per year. The table for Plan E is
based on an interest rate of 3%. IDS Life may, at our discretion, if mortality
appears more favorable and interest rates justify, apply other tables that will
result in higher monthly payments.
Restrictions for some tax qualified plans: If you purchased a tax qualified
annuity, you must select a payment plan that provides for payments:
o during the life of the annuitant;
o during the joint lives of the annuitant and beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o for a period not exceeding the joint life expectancies of the annuitant
and beneficiary.
You also must refer to the terms of the tax qualified plan and applicable law
for any limitations or restrictions on the settlement date or annuity payment
plan that you may select.
Amendment, distribution, assignment and termination of contracts
Amendment of contracts
We reserve the right to amend the contracts to meet the requirements of
applicable federal or state laws or regulations. We will notify you in writing
of any such amendments.
Distribution of contracts
IDS Life is the principal underwriter for the contracts. IDS Life is registered
with the Securities and Exchange Commission under the Securities Exchange Act of
1934 (1934 Act) as a broker-dealer and is a member of the National Association
of Securities Dealers, Inc. IDS Life may enter into selling agent agreements
with certain broker-dealers registered under the 1934 Act. IDS Life will pay a
maximum commission of 5% of the purchase payment for the sale of a contract. In
the future, we may pay a commission on an election of a subsequent guarantee
period by an owner. American Express Financial Advisors Inc., an affiliate of
IDS Life, is the sponsor of the wrap-fee program under which this contract is
made available.
<PAGE>
Assignment of contracts
You may change ownership of your annuity at any time by filing a change of
ownership form with us at our corporate office. No change of ownership will be
binding upon us until we receive and record it. If you have a tax qualified
plan, the contract may not be sold, assigned, transferred, discounted or pledged
as collateral for a loan or as security for the performance of an obligation or
for any other purpose to any person other than IDS Life; provided, however, that
if the owner is a trust or custodian, or an employer acting in a similar
capacity, ownership of a contract may be transferred to the annuitant.
The value of any part of a non-tax qualified annuity contract assigned or
pledged is taxed like a cash withdrawal to the extent allocable to investment in
annuity contracts after Aug. 13, 1982.
Transfer of a non-tax qualified annuity contract to another person without
adequate consideration is considered a gift and the transfer will be considered
a surrender of the contract for federal income tax purposes. The income in the
contract will be taxed to the transferor who may be subject to the 10% IRS
penalty tax for early withdrawal. The transferee's investment in the annuity
will be the value of the annuity at the time of the transfer. Consult with your
tax advisor before taking any action.
Termination of contracts
If your participation in the wrap-fee program is terminated, you will no longer
qualify for this contract and your contract will be terminated. Your contract
will be subject to a market value adjustment unless the termination occurs at
the end of a guarantee period. Upon termination, you will be given the option of
exchanging into another annuity product, which may contain higher fees, a lower
guaranteed interest rate and a surrender charge.
Federal tax considerations
Under current law, there is no liability for federal income tax on any increase
in the annuity's value until payments are made (except for change of ownership
discussed above in "Assignment of contracts"). However, since federal tax
consequences cannot always be anticipated, you should consult a tax advisor if
you have any questions about the taxation of your annuity contract.
You are not taxed on your purchase payment. Your purchase payment generally
includes purchase payments made with after-tax dollars. If the purchase payment
was made by you or on your behalf with pre-tax dollars as part of a tax
qualified retirement plan, such amounts are not considered to be part of your
investment in the contract and will be taxed when paid to you.
If you surrender part or all of your contract before the date on which you have
decided to begin to receive annuity payments, you will be taxed on the payments
which you receive, to the extent that the value of your contract exceeds your
investment in the contract, and you may have to pay an IRS penalty tax for early
withdrawal.
If you begin receiving annuity payments under a non-tax qualified annuity
contract, a portion of each payment will be subject to tax and a portion of each
payment will be considered to be part of your investment in the contract and
will not be taxed. All amounts received after your investment in the contract is
recovered will be subject to tax. If you begin receiving payments from a tax
qualified annuity, all of the payments generally will be subject to taxation
except to the extent that the contributions were from after-tax dollars.
Unlike life insurance proceeds, the death benefit under an annuity contract is
not tax exempt. The gain, if any, is taxable as ordinary income to the
beneficiary in the year(s) he or she receives the payments. The gain is subject
to income tax, not estate or inheritance tax.
<PAGE>
Tax law requires that all non-qualified deferred annuity contracts issued by the
same company to the same contract owner during a calendar year are to be treated
as a single, unified contract. The amount of income included and taxed in a
distribution (or a transaction deemed a distribution under tax law) taken from
any one of such contracts is determined by summing all such contracts.
The income earned on a non-tax qualified contract held by such entities as
corporations, partnerships or trusts generally will be treated as ordinary
income received during that year. However, if the trust was set up for the
benefit of a natural person only, the income will continue to be tax-deferred.
If you receive amounts from your contract before reaching age 59-1/2, you may
have to pay a 10% IRS penalty on the amount includible in your ordinary income.
If you receive amounts from your SIMPLE IRA before reaching age 59-1/2,
generally the IRS 10% penalty provisions apply. However, if you receive these
amounts before age 59-1/2 and within the first two years of your participation
in the SIMPLE IRA plan, the IRS penalty will be assessed at the rate of 25%
instead of 10%. However, this penalty will not apply to any amount received:
o after you reach age 59-1/2;
o because of your death;
o because you become disabled (as defined in the Code);
o if the distribution is part of a series of substantially equal periodic
payments over your life or life expectancy (or joint lives or life
expectancies of you and your designated beneficiary); or
o if it is allocable to a purchase payment before Aug. 14, 1982 (except
for contracts in tax qualified plans).
These are the major exceptions to the 10% IRS penalty tax. Additional exceptions
may apply depending upon whether or not the annuity is tax qualified. For tax
qualified contracts, other penalties apply if you surrender an annuity bought
under your plan before the plan specifies that payments can be made under the
plan.
In general, if you receive all or part of the contract value from an annuity,
withholding may be imposed against the taxable income portion of the payment.
Any withholding that is done represents a prepayment of your tax due for the
year. You take credit for such amounts on the annual tax return that you file.
If the payment is part of an annuity payment plan, the amount of withholding
generally is computed using payroll tables. You can provide us with a statement
of how many exemptions to use in calculating the withholding. As long as you've
provided us with a valid Social Security Number or Taxpayer Identification
Number, you can elect not to have any withholding occur.
If the distribution is any other type of payment (such as a partial or full
surrender), withholding is computed using 10% of the taxable portion. Similar to
above, as long as you've provided us with a valid Social Security Number or
Taxpayer Identification Number, you can elect not to have this withholding
occur.
If a distribution is taken from a contract offered under a Section 457 Plan
(deferred compensation plan of state and local governments and tax-exempt
organizations), withholding is computed using payroll methods depending upon the
type of payment.
<PAGE>
Some states also impose withholding requirements similar to the federal
withholding described above. If this should be the case, any payment from which
federal withholding is deducted may also have state withholding deducted.
The withholding requirements may differ if payment is being made to a non-U.S.
citizen or if the payment is being delivered outside the United States.
If you receive all or part of the contract value from a tax qualified annuity
(except an IRA, SIMPLE IRA, SEP or Section 457 plan), a mandatory 20% income tax
withholding generally will be imposed at the time the payment is made. In
addition, federal income tax and the 10% IRS penalty tax for early withdrawals
may apply to amounts properly includible in income. This mandatory 20% income
tax withholding will not be imposed if:
o instead of receiving the payment, you elect to have the payment rolled
over directly to an IRA or another eligible plan;
o the payment is one of a series of substantially equal periodic
payments, made at least annually, over your life or life expectancy (or
joint lives or life expectancies of you and your designated
beneficiary) or made over a period of 10 years or more; or
o the payment is a minimum distribution required under the Code.
These are the major exceptions to the mandatory 20% income tax withholding.
Payments made to a surviving spouse instead of being directly rolled over to an
IRA may be subject to 20% income tax withholding. For taxable distributions that
are not subject to the mandatory 20% withholding, federal income tax will be
withheld from the taxable part of your distribution unless you elect otherwise.
State withholding also may be imposed on taxable distributions.
You will receive a tax statement for any year that you receive a taxable
distribution from your annuity contract according to our records.
We intend the contract to qualify as an annuity for federal income tax purposes.
To that end, the provisions of the contract are to be interpreted to ensure or
maintain such tax qualification, notwithstanding any other provisions of the
contract. We reserve the right to amend the contract to reflect any
clarifications that may be needed or are appropriate to maintain such
qualification or to conform the contract to any applicable changes in the tax
qualification requirements. We will send you a copy of any such amendments.
Our discussion of federal tax laws is based upon our understanding of these laws
as they are currently interpreted. Either federal tax laws or current
interpretations of them may change. You are urged to consult your tax advisor
concerning your specific circumstances.
The Company
Business
IDS Life is a stock insurance company organized in 1957 under the laws of the
State of Minnesota. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation (AEFC), which is a wholly owned subsidiary of American
Express Company. IDS Life acts as a direct writer of insurance policies and
annuities and as the investment manager of various investment companies. IDS
Life is licensed to write life insurance and annuity contracts in 49 states and
the District of Columbia. The headquarters of IDS Life is IDS Tower 10,
Minneapolis, MN 55440-0010.
<PAGE>
IDS Life files reports on Forms 10K and 10Q with the Securities and Exchange
Commission (SEC). The public may read and copy materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a
Internet site (http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC.
Investments by IDS Life
IDS Life must invest its assets in its general account in accordance with
requirements established by applicable state laws regarding the nature and
quality of investments that life insurance companies may make and the percentage
of their assets that they may commit to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred and common stocks, real estate mortgages, real estate and
certain other investments. All claims by purchasers of the contracts, and other
general account products, will be funded by the general account.
IDS Life intends to construct and manage the investment portfolio relating to
these market value annuity contracts using a strategy known as "immunization."
Immunization seeks to lock in a defined return on the pool of assets versus the
pool of liabilities over a specified time horizon. Since the return on the
assets versus the liabilities is locked in, it is "immune" to any potential
fluctuations in interest rates during the given time. Immunization is achieved
by constructing a portfolio of assets with a price sensitivity to interest rate
changes (i.e., price duration) that is essentially equal to the price duration
of the corresponding portfolio of liabilities. Portfolio immunization provides
flexibility and efficiency to IDS Life in creating and managing the asset
portfolio, while still assuring safety and soundness for funding liability
obligations.
IDS Life's investment strategy will incorporate the use of a variety of debt
instruments having price durations tending to match the applicable guaranteed
interest periods. These instruments include, but are not necessarily limited to,
the following:
o Securities issued by the U.S. government or its agencies or
instrumentalities, which issues may or may not be guaranteed by
the U.S. government;
o Debt securities that have an investment grade, at the time of
purchase, within the four highest grades assigned by the
nationally recognized rating agencies;
o Debt instruments that are unrated, but which are deemed by IDS
Life to have an investment quality within the four highest grades;
o Other debt instruments, which are rated below investment grade,
limited to 15% of assets at the time of purchase; and
o Real estate mortgages, limited to 30% of portfolio assets at the
time of acquisition.
In addition, options and futures contracts on fixed income securities will be
used from time to time to achieve and maintain appropriate investment and
liquidity characteristics on the overall asset portfolio.
While this information generally describes our investment strategy, we are not
obligated to follow any particular strategy except as may be required by federal
law and Minnesota and other state insurance laws.
<PAGE>
Selected financial data
You should read the following selected financial data for IDS Life and its
subsidiaries in conjunction with the consolidated financial statements and notes
included in the prospectus beginning on page __.
<TABLE>
<CAPTION>
Years ended Dec. 31, (thousands)
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Premiums $ 229,430 $ 206,494 $ 182,921 $ 161,530 144,640
Net investment income ,986,485 1,988,389 1,965,362 1,907,309 1,781,873
Net realized (loss) on 6,902 860 (159) (4,898) (4,282)
investments
Other 785,022 682,618 574,341 472,035 384,105
------- ------- ------- ------- -------
Total revenues $ 3,007,839 $ 2,878,361 $ 2,722,465 $ 2,535,976 $,306,336
Income before income taxes $ 775,792 $ 680,911 $ 621,714 $ 560,782 $ 512,512
Net income $ 540,111 $ 474,247 $ 414,576 $ 364,940 $ 336,169
Total assets $56,550,563 $52,974,124 $47,305,981 $42,900,078 $35,747,543
</TABLE>
Management's discussion and analysis of consolidated financial condition and
results of operations.
1998 Compared to 1997:
Consolidated net income increased 14 percent to $540 million in 1998, compared
to $474 million in 1997. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1998.
Consolidated income before income taxes totaled $776 million in 1998, compared
with $681 million in 1997.
Total premiums and investment contract deposits received decreased to $4.4
billion in 1998, compared with $5.2 billion in 1997. This decrease is primarily
due to a decrease in sales of fixed annuities in 1998, reflecting the low
interest rate environment.
Total revenues increased to $3.0 billion in 1998, compared with $2.9 billion in
1997. The increase is primarily due to increased policyholder and contractholder
charges and management fees. Net investment income, the largest component of
revenues, decreased slightly from the prior year, reflecting slight decreases in
investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12 percent to $384
million in 1998, compared with $342 million in 1997. This increase reflects
increased total life insurance in force, which grew 8 percent to $81 billion at
December 31, 1998.
Management and other fees increased 18 percent to $401 million in 1998, compared
with $341 million in 1997. This is primarily due to an increase in separate
account assets, which grew 18 percent to $27.3 billion at December 31, 1998, due
to market appreciation and sales. The Company provides investment management
services for the mutual funds used as investment options for variable annuities
and variable life insurance. The Company also receives a mortality and expense
risk fee from the separate accounts.
<PAGE>
Total benefits and expenses increased slightly to $2.2 billion in 1998. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.3
billion, reflecting a decrease in fixed annuities in force and lower interest
rates. Amortization of deferred policy acquisition costs increased to $383
million, compared to $323 million in 1997. This increase was due primarily to
increased aggregate amounts in force, as well as accelerating amortization to
reflect actual lapse experience on certain fixed annuities.
1997 Compared to 1996:
Consolidated net income increased 14 percent to $474 million in 1997, compared
to $415 million in 1996. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1997.
Consolidated income before income taxes totaled $681 million in 1997, compared
with $622 million in 1996. In 1997, $179 million was from the life, disability
income and long-term care insurance segment, compared with $161 million in 1996
and $502 million was from the annuity segment, compared with $461 million in
1996.
Total premiums received decreased to $5.2 billion in 1997, compared with $6.1
billion in 1996. This decrease is primarily due to a decrease in sales of fixed
annuities in 1997.
Total revenues increased to $2.9 billion in 1997, compared with $2.7 billion in
1996. The increase is primarily due to increases in net investment income,
policyholder and contractholder charges, and management fees. Net investment
income, the largest component of revenues, increased slightly from the prior
year, reflecting slight increases in investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 13 percent to $342
million in 1997, compared with $303 million in 1996. This increase reflects
increased total life insurance in force which grew 12 percent to $75 billion at
December 31, 1997.
Management and other fees increased 26 percent to $341 million in 1997, compared
with $271 million in 1996. This is primarily due to an increase in separate
account assets, which grew 25 percent to $23 billion at December 31, 1997, due
to market appreciation and sales. The Company provides investment management
services for the mutual funds used as investment options for variable annuities
and variable life insurance. The Company also receives a mortality and expense
risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.2 billion in 1997. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, remained steady at $1.4
billion. Amortization of deferred policy acquisition costs increased to $323
million compared to $279 million in 1996. These increases were due primarily to
increased aggregate amounts in force.
<PAGE>
Risk Management
The sensitivity analysis of two different tests of market risk discussed below
estimates the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100 basis
point increase in market interest rates and a 10% decline in equity prices.
Computations of the prospective effects of hypothetical interest rate and equity
price changes are based on numerous assumptions, including relative levels of
market interest rates and equity prices, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The fees earned by the Company for managing fixed income securities in mutual
funds are generally based on the value of the portfolios. To manage the level of
1999 fee income, the committee's strategy is to enter into a series of swaps
designed to mitigate the negative effect on fees that would result from an
increase in interest rates.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1998, would be approximately $34 million.
On a certain annuity product, the interest is credited to contractholders'
accounts based upon the relative change in a major stock market index between
the beginning and end of the product's term. As a means of hedging the Company's
obligation under the provisions of this product, the committee's strategy is to
purchase and write options on the major stock market index.
The amount of the fee income the Company receives is based upon the daily market
value of the separate account assets. As a result, the Company's fee income
would be negatively impacted by a decline in the equity markets. Another part of
the committee's strategy is to enter into index option collars (combination of
puts and calls) for hedging purposes. These derivatives protect fee income by
providing option income when there is a significant decline in the equity
markets. The Company finances the cost of this protection through selling a
portion of the upside potential from an increasing market through written
options.
<PAGE>
The negative effect on the Company's pretax earnings of the 10% decline in
equity prices would be approximately $32 million based on assets under
management and the index options as of December 31, 1998.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities and
periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has an available line of credit with its parent aggregating $100
million. The line of credit is used strictly as short-term sources of funds. No
borrowings were outstanding under the agreement at December 31, 1998. At
December 31, 1998, outstanding reverse repurchase agreements totaled $187
million.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 33 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1998, approximately 13 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in fair value is determined to be other
than temporary, and has written them down to fair value with a charge to
earnings.
At December 31, 1998, net unrealized appreciation on fixed maturities held to
maturity included $483 million of gross unrealized appreciation and $27 million
of gross unrealized depreciation. Net unrealized appreciation on fixed
maturities available for sale included $427 million of gross unrealized
appreciation and $159 million of gross unrealized depreciation.
At December 31, 1998, the Company had an allowance for losses for mortgage loans
totaling $40 million and for real estate investments totaling $6 million.
The economy and other factors have caused a number of insurance companies to go
under regulatory supervision. This circumstance has resulted in assessments by
state guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through a
reduction in future premium taxes in certain states. The Company established an
asset for guaranty association assessments paid to those states allowing a
reduction in future premium taxes over a reasonable period of time. The asset is
being amortized as premium taxes are reduced. The Company has also estimated the
potential effect of future assessments on the Company's financial position and
results of operations and has established a reserve for such potential
assessments. The Company has not adopted Statement of Position 97-3 providing
guidance when an insurer should recognize a liability for guaranty fund
assessments. The SOP is effective for fiscal years beginning after December 15,
1998. Adoption will not have a material impact on the Company's results of
operations or financial condition.
In the first quarter of 1999, the Company paid a $70 million dividend to its
parent. In 1998, dividends paid to its parent were $240 million.
<PAGE>
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. As of December 31, 1998, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
Year 2000 Issue
The Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American Express
Company (American Express). All of the major systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and affiliates of
AEFC. American Express is coordinating Year 2000 (Y2K) efforts on behalf of all
of its businesses and subsidiaries. Representatives of AEFC are participating in
these efforts. The Y2K issue is the result of computer programs having been
written using two digits rather than four to define a year. Some programs may
recognize a date using "00" as the year 1900 rather than 2000. This
misinterpretation could result in the failure of major systems or
miscalculations, which could have a material impact on American Express and its
businesses or subsidiaries through business interruption or shutdown, financial
loss, reputation damage and legal liability to third parties. American Express
and AEFC began addressing the Y2K issue in 1995 and have established a plan for
resolution, which involves the remediation, decommissioning and replacement of
relevant systems, including mainframe, mid-range and desktop computers,
application software, operating systems, systems software, date back-up archival
and retrieval services, telephone and other communications systems, and hardware
peripherals and facilities dependent on embedded technology. As a part of their
plan, American Express has generally followed and utilized the specific policies
and guidelines established by the Federal Financial Institutions Examination
Council, as well as other U.S. and international regulatory agencies.
Additionally, American Express continues to participate in Y2K related industry
consortia sponsored by various partners and suppliers. Progress is reviewed
regularly with the Company's senior management and American Express's senior
management and Board of Directors.
American Express' and AEFC's Y2K compliance effort related to information
technology (IT) systems is divided into two initiatives. The first, which is the
much larger initiative, is known internally as "Millenniax," and relates to
mainframe and other technological systems maintained by the American Express
Technologies organization. The second, known as "Business T," relates to the
technological assets that are owned, managed or maintained by American Express'
individual business units, including AEFC. Business T also encompasses the
remediation of non-IT systems. These initiatives involve a substantial number of
employees and external consultants. This multiple sourcing approach is intended
to mitigate the risk of becoming dependent on any one vendor or resource. While
the vast majority of American Express' and AEFC's systems that require
modification are being remediated, in some cases they have chosen to migrate to
new applications that are already Y2K compliant.
American Express' and AEFC's plans for remediation with respect to Millenniax
and Business T include the following program phases: (i) employee awareness and
mobilization, (ii) inventory collection and assessment, (iii) impact analysis,
(iv) remediation/decommission, (v) testing and (vi) implementation. As part of
the first three phases, American Express and AEFC have identified their
mission-critical systems for purposes of prioritization. American Express and
AEFC targeted substantial testing of critical systems for completion early in
1999 and have a goal to continue compliance efforts including but not limited
to, the testing of systems on an integrated basis and independent validation of
such testing, through 1999.** American Express and AEFC currently are on track
with this schedule. With respect to systems maintained by American Express
<PAGE>
and AEFC, the first three phases referred to above have been substantially
completed for both Millenniax and Business T. In addition, remediation of
critical systems is substantially complete. As of December 31, 1998, for
Millenniax for American Express, the remediation/decommission, testing and
implementation phases for critical and non-critical systems in total are 82%,
75% and 60% complete, respectively. For Millenniax for AEFC, such phases are
99%, 97% and 97% complete, respectively. For Business T for American Express,
such phases are 85%, 70% and 69% complete, respectively. For Business T for
AEFC, such phases are 74%, 62% and 62% complete, respectively.
American Express' most commonly used methodology for remediation is the sliding
window. Once an application/system has been remediated, American Express applies
specific types of tests, such as stress, regression, unit, future date and
baseline to ensure that the remediation process has achieved Y2K compliance
while maintaining the fundamental data processing integrity of the particular
system. To assist with remediation and testing, American Express is using
various standardized tools obtained from a variety of vendors.
American Express' cumulative costs since inception of the Y2K initiatives were
$383 million through December 31, 1998 and are estimated to be in the range of
$135-$160 million for the remainder through 2000.** AEFC's cumulative costs
since inception of the Y2K initiative were $56 million through December 31, 1998
and are estimated to be in the range of $13-$19 million for the remainder
through 2000.** These include both remediation costs and costs related to
replacements that were or will be required as a result of Y2K. These costs,
which are expensed as incurred, relate to both Millenniax and Business T, and
have not had, nor are they expected to have, a material adverse impact on
American Express', AEFC's, or the Company's results of operations or financial
condition.** Costs related to Milleniax, which represent most of the total Y2K
costs of American Express, are managed by and included in the American Express
corporate level financial results; costs related to Business T are included in
American Express' individual business segment's financial results, including
AEFC's. American Express and AEFC have not deferred other critical technology
projects or investment spending as a result of Y2K. However, because American
Express and AEFC must continually prioritize the allocation of finite financial
and human resources, certain non-critical spending initiatives have been
deferred.
American Express' and AEFC's major businesses are heavily dependent upon
internal computer systems, and all have significant interaction with systems of
third parties, both domestically and internationally. American Express and AEFC
are working with key external parties, including merchants, clients,
counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory
agencies to mitigate the potential risks to American Express and AEFC of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to American Express or AEFC. As
part of their overall compliance program, American Express and AEFC are actively
communicating with third parties through face-to-face meetings and
correspondence, on an ongoing basis, to ascertain their state of readiness.
Although numerous third parties have indicated to American Express and AEFC in
writing that they are addressing their Y2K issues on a timely basis, the
readiness of third parties overall varies across the spectrum. Because American
Express' and AEFC's Y2K compliance is dependent on key third parties being
compliant on a timely basis, there can be no assurances that American Express'
and AEFC's efforts alone will resolve all Y2K issues.
At this point, American Express and AEFC are in the process of performing an
assessment of reasonably likely Y2K systems failures and related consequences.
American Express is also preparing specific Y2K contingency plans for all key
American Express business units, including AEFC, to mitigate the potential
impact of such failures. This effort is a full-scale initiative that includes
both internal and external experts under the guidance of an American
Express-wide steering committee. The contingency plans, which will be based in
part on an assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring, or if
they should occur, to detect them quickly,
<PAGE>
minimize their impact and expedite their repair. The Y2K contingency plans will
supplement disaster recovery and business continuity plans already in place, and
are expected to include measures such as selecting alternative suppliers and
channels of distribution, and developing American Express' and AEFC's own
technology infrastructure in lieu of those provided by third parties. The
contingency plans are being amended to include specific Year 2000
considerations, and will continue to be refined throughout 1999 as additional
information related to American Express' and AEFC's potential Year 2000 exposure
is gathered.**
Reinsurance
Reinsurance arrangements are used to reduce exposure to large losses. The
maximum amount of risk retained by IDS Life on any one life is $750,000 of life
and waiver of premium benefits plus $50,000 of accidental death benefits. The
excesses are reinsured with other life insurance companies. At Dec. 31, 1998,
traditional life and universal life-type insurance in force aggregated $80.8
billion, of which $4.7 billion was reinsured.
Reserves
In accordance with the insurance laws and regulations under which IDS Life
operates, it is obligated to carry on its books, as liabilities, actuarially
determined reserves to meet its obligations on its outstanding life and health
insurance policies and annuity contracts. Reserves for policies and contracts
are based on mortality and morbidity tables in general use in the United States.
These reserves are computed amounts that, with additions from premiums to be
received, and with interest on such reserves compounded annually at assumed
rates, will be sufficient to meet IDS Life's policy obligations at their
maturities or in the event of an insured's death. In the accompanying financial
statements, these reserves are determined in accordance with generally accepted
accounting principles. (See Note 1, "Liabilities for future policy benefits," in
the "Notes to Consolidated Financial Statements.")
Investments
Of IDS Life's consolidated total investments of $26 billion at Dec. 31, 1998,
30% was invested in mortgage-backed securities, 53% in corporate and other
bonds, 13% in primary mortgage loans on real estate, 2% in policy loans and the
remaining 2% in other investments.
Competition
IDS Life is engaged in a business that is highly competitive due to the large
number of stock and mutual life insurance companies and other entities marketing
insurance products. There are over 1,600 stock, mutual and other types of
insurers in the life insurance business. Best's Insurance Reports, Life-Health
edition, 1998, assigned IDS Life one of its highest classifications, A+
(Superior).
** Statements in this Y2K discussion marked with two asterisks are
forward-looking statements which are subject to risks and uncertainties.
Important factors that could cause results to differ materially from these
forward-looking statements include, among other things, the ability of American
Express or AEFC to successfully identify systems containing two-digit codes, the
nature and amount of programming required to fix the affected systems, the costs
of labor and consultants related to such efforts, the continued availability of
such resources, and the ability of third parties that interface with American
Express or AEFC to successfully address their Y2K issues.
Employees
As of Dec. 31, 1998, IDS Life and its subsidiaries had 282 employees; including
227 employed at the corporate office in Minneapolis, MN, 8 employed at the
American Centurion Life Assurance Company, located in Albany, NY and 47 employed
at IDS Life Insurance Company of New York, located in Albany, NY.
<PAGE>
Properties
IDS Life occupies office space in Minneapolis, MN, which is rented by its
parent, AEFC. IDS Life reimburses AEFC for rent based on direct and indirect
allocation methods. Facilities occupied by IDS Life and our subsidiaries are
believed to be adequate for the purposes for which they are used and are well
maintained.
State Regulation
IDS Life is subject to the laws of the State of Minnesota governing insurance
companies and to the regulations of the Minnesota Department of Commerce. An
annual statement in the prescribed form is filed with the Minnesota Department
of Commerce each year covering our operation for the preceding year and its
financial condition at the end of such year. Regulation by the Minnesota
Department of Commerce includes periodic examination to determine IDS Life's
contract liabilities and reserves so that the Minnesota Department of Commerce
may certify that these items are correct. The Company's books and accounts are
subject to review by the Minnesota Department of Commerce at all times. Such
regulation does not, however, involve any supervision of the account's
management or the company's investment practices or policies. In addition, IDS
Life is subject to regulation under the insurance laws of other jurisdictions in
which it operates. A full examination of IDS Life's operations is conducted
periodically by the National Association of Insurance Commissioners.
Under insurance guaranty fund laws, in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses incurred
by insolvent companies. Most of these laws do provide however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
Directors and executive officers
The members of the Board of Directors and the principal executive officers of
IDS Life, together with the principal occupation of each during the last five
years, are as follows:
Directors*
David R. Hubers
Born in 1943
Director since September 1989; president and chief executive officer, AEFC,
since August 1993, and director since January 1984. Senior vice president,
Finance and chief financial officer, AEFC, from January 1984 to August 1993.
Richard W. Kling
Born in 1940
Director since February 1984; president since March 1994. Executive vice
president, Marketing and Products from January 1988 to March 1994. Senior vice
president, AEFC, since May 1994. Director of IDS Life Series Fund, Inc. and
member of the board of managers and president of IDS Life Variable Annuity Funds
A and B.
<PAGE>
Paul F. Kolkman
Born in 1946
Director since May 1984; executive vice president since March 1994; vice
president, Finance from May 1984 to March 1994; vice president, AEFC, since
January 1987. Vice president and chief actuary of IDS Life Series Fund, Inc.
Paula R. Meyer
Born in 1954
Director and executive vice president since 1998; vice president, AEFC since
1998; Piper Capital Management (PCM) President from October 1997 to May 1998;
PCM Director of Marketing from June 1995 to October 1997; PCM Director of Retail
Marketing from December 1993 to June 1995.
James A. Mitchell
Born in 1941
Chairman of the board since March 1994; director since July 1984; chief
executive officer since November 1986; president from July 1984 to March 1994;
executive vice president, AEFC, since March 1994; director, AEFC, since July
1984; senior vice president, AEFC, from July 1984 to March 1994.
Barry J. Murphy
Born in 1951
Director and executive vice president, Client Service, since March 1994; senior
vice president, AEFC, since May 1994; senior vice president, Travel Related
Services (TRS), a subsidiary of American Express Company, from July 1992 to
April 1994; vice president, TRS, from November 1989 to July 1992.
Stuart A. Sedlacek
Born in 1957
Director since 1994, executive vice president since 1998; executive vice
president, Assured Assets from March 1994 to 1998; senior vice president and
chief financial officer, AEFC, since 1998; vice president, AEFC, from September
1988 to 1998.
Officers other than directors*
Timothy V. Bechtold
Born in 1953
Executive vice president, Risk Management Products since 1995; vice president,
Risk Management, AEFC since 1995; and vice president, Insurance Product
Development from 1989 to 1995.
Mark W. Carter
Born in 1954
Executive vice president, Marketing since 1997; senior vice president and chief
marketing officer, AEFC since 1997; vice president of TVSM Inc. from 1996 to
1997; and regional vice president and general manager of ADVO Inc. from 1991 to
1996.
<PAGE>
Lorraine R. Hart
Born in 1951
Vice president, Investments since 1992; vice president , Insurance Investments,
AEFC since 1989; and vice president, Investments, IDS certificate Company since
1994.
Jeffrey S. Horton
Born in 1961
Vice president and treasurer since December 1997; vice president and corporate
treasurer, AEFC, since December 1997; controller, American Express Technologies
- - Financial Services, AEFC, from July 1997 to December 1997; controller, Risk
Management Products, AEFC, from May 1994 to July 1997; director of finance and
analysis, Corporate Treasury, AEFC, from June 1990 to May 1994.
Pamela J. Moret
Born in 1956
Executive vice president, Variable Assets since 1997; vice president, Variable
Assets, AEFC since 1997; vice president, Retail Service Group of AEFC from 1996
to 1997; and vice president, Communications, AEFC from 1993 to 1996.
William A. Stoltzmann
Born in 1948
Vice president, general counsel and secretary since 1989; vice president and
assistant general counsel, AEFC, since November 1985.
Philip C. Wentzel
Born in 1961
Vice president and controller since 1998; vice president - Finance, Risk
Management Products, AEFC since 1997; and director of financial reporting and
analysis from 1992 to a997.
*The address for all of the directors and principal officers is: IDS Tower 10,
Minneapolis, MN 55440-0010.
<PAGE>
Executive compensation
Executive officers of IDS Life also may serve one or more affiliated companies.
The following table reflects cash compensation paid to the five most highly
compensated executive officers as a group for services rendered in the most
recent calendar year to IDS Life and its affiliates. The table also shows the
total cash compensation paid to all executive officers of IDS Life, as a group,
who were executive officers at any time during the most recent calendar year.
<TABLE>
<CAPTION>
<S> <C> <C>
Name of individual or number in group Cash
Position held compensation
- ---------------------------------------- ------------------------------------------------- ------------------
Five most highly compensated executive $ 6,640,964
officers as a group:
James A. Mitchell Chairman of the Board and Chief Executive
Officer
Pamela J. Moret Exec. Vice President, Variable Assets
Barry J. Murphy Exec. Vice President, Client Service
Stuart A. Sedlacek Executive Vice President
Lorraine Hart Vice President, Investments
All executive officers as a group (10) $ 9,938,094
Security ownership of management
</TABLE>
IDS Life's directors and officers do not beneficially own any outstanding shares
of stock of IDS Life. All of the outstanding shares of stock of IDS Life are
beneficially owned by its parent, American Express Financial Corporation. The
percentage of shares of American Express Financial Corporation owned by any
director, and by all directors and officers of IDS Life as a group, does not
exceed 1% of the class outstanding.
Legal proceedings and opinion
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and AEFC do business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. IDS Life and AEFC, like other life and health insurers, from time
to time are involved in such litigation. On December 13, 1996, and action
entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance Company
and American Express Financial Corporation was commenced in Minnesota State
court. The action was brought by individuals who replaced an existing IDS Life
insurance policy with a new IDS Life policy. The plaintiffs purport to represent
a class consisting of all persons who replaced existing IDS Life policies with
new policies from and after January 1, 1985. The complaints puts at issue
various alleged sales practices and misrepresentations, alleged breaches of
fiduciary duties and alleged violations of consumer fraud statutes. IDS Life and
AEFC filed an answer to the complaint on February 18, 1997, denying the
allegations. A second action, entitled Arnold Mork, Isabella Mork, Ronald
Melchart and Susan Melchart vs. IDS Life Insurance Company and American Express
Financial Corporation was commenced in the same court on March 21, 1997. In
addition to claims
<PAGE>
that are included in the Benacquisto lawsuit, the second action includes an
allegation of improper replacement of an existing IDS Life annuity contract. A
subsequent class action , Richard Thoresen and Elizabeth Thoresen vs. AEFC,
American Partners Life Insurance Company, American Enterprise Life Insurance
Company, American Centurion Life Assurance Company, IDS Life Insurance Company
and IDS Life Insurance Company of New York, was filed in the same court on
October 13, 1998 alleging that the sale of annuities in tax-deferred
contributory retirement investment plans (e.g. IRAs) was done through deceptive
marketing practices, which IDS Life denies. Plaintiffs in each of the above
actions seeks damages in an unspecified amount and also seek to establish a
claims resolution facility for the determination of individual issues
Experts
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements of IDS Life Insurance Company at Dec. 31, 1998 and 1997, and for each
of the three years in the period ended Dec. 31, 1998, as set forth in their
report. We've included our consolidated financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
<PAGE>
Appendix A
Partial surrender illustration
Involving a market value adjustment
Annuity assumptions:
Single payment $10,000
Guarantee period 10 years
Guarantee rate (ig) 6% effective annual yield
End of contract year accumulation
values
Contract year if no surrenders
- ------------------------------------- -----------------------------------
1 $ 10,600.00
2 11,236.00
3 11,910.16
4 12,624.77
5 13,382.26
6 14,185.19
7 15,036.30
8 15,938.48
9 16,894.79
10 17,908.48
Partial surrender assumptions:
On the first day of your 4th contract year you request a partial surrender of:
Example I -- $2,000 of your accumulation value
Example II -- A $2,000 net surrender check
The accumulation value surrendered is subject to a market value adjustment.
The current rate (ic) for applicable new sales and renewals = 5.5%
The number of full years left in your guarantee period (N) = 7
The number of fractional years left in your guarantee period (t) = 0
Example I - $2,000 of accumulation value surrendered
<PAGE>
What will be your market value adjustment amount?
The market adjusted value of your $2,000 partial surrender will be:
Renewal value of accumulation value surrendered
(1 + ic + .0025)(N + t)
= $2,000 (1 + ig)7
(1 + ic + .0025)7
= $2,000 (1.06)7
(1.0575)7
= $2,033.33
The market value adjustment = the market adjusted value surrendered less the
accumulation value surrendered
$2,033.33 - $2,000 = $33.33
(NOTE: This market value adjustment is positive. In other cases the market value
adjustment may be negative.)
What net amount will you receive?
Your contract's accumulation value will decrease by $2,000 and we will send you
a check for:
Accumulation value surrendered $2,000.00
Market value adjustment 33.33
Net surrender amount $2,033.33
Example II - $2,000 net surrender check requested
What will be the accumulation value surrendered?
Tell us if you want a specific net surrender check amount. We will work
backwards using an involved formula to determine how much accumulation value
must be surrendered to result in a net check to you for a specific amount. For a
$2,000 net check to you, the formula results in $1,967.21 of accumulation value
to be surrendered.
<PAGE>
What will be your market value adjustment amount?
The market adjusted value is:
Renewal value of accumulation value surrendered
(1 + ic + .0025)(N + t)
= $1,967.21 (1 + ig)7
(1 + ic + .0025)7
= $1,967.21 (1.06)7
(1.0575)7
= $2,000.00
The market value adjustment = the market adjusted value surrendered less the
accumulation value surrendered
$2,000.00 - $1,967.21 = $32.79
(NOTE: This market value adjustment is positive. In other cases the market value
adjustment may be negative.)
What net amount will you receive?
Your contract's accumulation value will decrease by $1,967.21 and we will send
you a check for:
Accumulation value surrendered $1,967.21
Market value adjustment 32.79
Net surrender amount $2,000.00
<PAGE>
Appendix B
Market value adjustment illustration
Annuity assumptions:
Single payment $50,000
Guarantee period 10 years
Guarantee rate 6% effective annual yield
Market adjustment assumptions: These examples show how the market value
adjustment may affect your contract values. The surrenders in these examples
occur one year after the contract date.
There are no previous surrenders.
The accumulation value at the end of one year is $53,000. If there aren't any
surrenders, the renewal value at the end of the 10 year guarantee period will be
$89,542.38.
We base the market value adjustment on the rate we are crediting (at the time of
your surrender) on new contracts with the same length guarantee period as the
time remaining in your guarantee period. After one year, you have 9 years left
of your 10 year guarantee period.
Example I shows a downward market value adjustment. Example II shows an upward
market value adjustment.
Market adjusted value formula:
Market adjusted value = (Renewal value)
(1 + ic + .0025)(N + t)
Renewal value -- The accumulation value at the end of the current
guarantee period
ic -- The current interest rate offered for new contract
sales and renewals for the number of years remaining
in the guarantee period
N -- The number of complete contract years to the end of
the current guarantee period
t -- The fraction of the contract year remaining to the end
of the contract year
Example I - Downward market value adjustment
A surrender results in a downward market value adjustment when interest rates
have increased. Assume after 1 year, we are now crediting 6.5% for a new
contract with a 9 year guarantee period. If you fully surrender, the market
adjusted value would be:
Renewal value
(1 + ic + .0025)(N + t)
= $89,542.38
(1 + .065 + .0025)9
= $49,741.36
<PAGE>
The market value adjustment is a $3,258.64 reduction of the accumulation value:
($3,258.64) = $49,741.36 - $53,000
If you surrendered half of your contract instead of all, the market adjusted
value of the surrendered portion would be one-half that of the full surrender:
$24,870.68 = $44,771.19
------------------------
(1 + .065 + .0025)9
Example II - Upward market value adjustment
A surrender results in an upward market value adjustment when interest rates
have decreased more than .25%. Assume after 1 year, we are now crediting 5.5%
for a new contract with a 9 year guarantee period. If you fully surrender, the
market adjusted value would be:
Renewal value
(1 + ic + .0025)(N + t)
= $89,542.38
(1 + .055 + .0025)9
= $54,138.38
The market value adjustment is a $1,138.38 increase of the accumulation value:
$1,138.38 = $54,138.38 - $53,000
If you surrendered half of your contract instead of all, the market adjusted
value of the surrendered portion would be one-half that of the full surrender:
$27,069.19 = $44,771.19
------------------------
(1 + .055 + .0025)9
<PAGE>
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
IDS LIFE FINANCIAL INFORMATION
- -----------------------------------------------------------------
The financial statements shown below are those of the insurance company and not
those of any other entity. They are included for the purpose of informing the
investor as to the financial condition of the insurance company and its ability
to carry out its obligations under its variable contracts.
IDS LIFE INSURANCE COMPANY
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DEC. 31, 1998 DEC. 31, 1997
ASSETS ($ thousands, except share amounts)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value: 1998,
$8,420,035; 1997, $9,743,410).................................... $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost: 1998,
$13,344,949; 1997, $12,515,030).................................. 13,613,139 12,876,694
Mortgage loans on real estate.................................... 3,505,458 3,618,647
Policy loans..................................................... 525,431 498,874
Other investments................................................ 366,604 318,591
- -------------------------------------------------------------------------------------------------
Total investments................................................ 25,974,746 26,628,256
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents........................................ 22,453 19,686
Amounts recoverable from reinsurers.............................. 262,260 205,716
Amounts due from brokers......................................... 327 8,400
Other accounts receivable........................................ 47,963 37,895
Accrued investment income........................................ 366,574 357,390
Deferred policy acquisition costs................................ 2,496,352 2,479,577
Other assets..................................................... 30,487 22,700
Separate account assets.......................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total assets..................................................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities.................................................. $ 21,172,303 $ 22,009,747
Universal life-type insurance.................................... 3,343,671 3,280,489
Traditional life insurance....................................... 225,306 213,676
Disability income and long-term care insurance................... 660,320 533,124
Policy claims and other policyholders' funds..................... 70,309 68,345
Deferred income taxes, net....................................... 16,930 61,582
Amounts due to brokers........................................... 195,406 381,458
Other liabilities................................................ 410,285 345,383
Separate account liabilities..................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total liabilities................................................ 53,443,931 50,108,308
- -------------------------------------------------------------------------------------------------
Stockholder's equity:
Capital stock, $30 par value per share; 100,000 shares
authorized, issued and outstanding............................... 3,000 3,000
Additional paid-in capital....................................... 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains.................................. 169,584 226,359
Retained earnings................................................ 2,645,721 2,345,610
- -------------------------------------------------------------------------------------------------
Total stockholder's equity....................................... 3,106,632 2,865,816
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity....................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-1
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF INCOME ($ thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Revenues:
Premiums:
Traditional life insurance....................................... $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance................... 176,298 154,021 131,518
- ------------------------------------------------------------------------------------------------------------
Total premiums................................................... 229,430 206,494 182,921
- ------------------------------------------------------------------------------------------------------------
Policyholder and contractholder charges.......................... 383,965 341,726 302,999
Management and other fees........................................ 401,057 340,892 271,342
Net investment income............................................ 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments.......................... 6,902 860 (159)
- ------------------------------------------------------------------------------------------------------------
Total revenues................................................... 3,007,839 2,878,361 2,722,465
- ------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits:
Traditional life insurance....................................... 29,835 28,951 26,919
Universal life-type insurance and investment contracts........... 108,349 92,814 85,017
Disability income and long-term care insurance................... 27,414 22,333 19,185
Increase in liabilities for future policy benefits:
Traditional life insurance....................................... 6,052 3,946 1,859
Disability income and long-term care insurance................... 73,305 63,631 57,230
Interest credited on universal life-type insurance and investment
contracts........................................................ 1,317,124 1,386,448 1,370,468
Amortization of deferred policy acquisition costs................ 382,642 322,731 278,605
Other insurance and operating expenses........................... 287,326 276,596 261,468
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses...................................... 2,232,047 2,197,450 2,100,751
- ------------------------------------------------------------------------------------------------------------
Income before income taxes....................................... 775,792 680,911 621,714
Income taxes..................................................... 235,681 206,664 207,138
- ------------------------------------------------------------------------------------------------------------
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY OTHER
TOTAL ADDITIONAL COMPREHENSIVE
STOCKHOLDER'S CAPITAL PAID-IN INCOME, RETAINED
THREE YEARS ENDED DEC. 31, 1998 ($ thousands) EQUITY STOCK CAPITAL NET OF TAX EARNINGS
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995................................ $2,331,708 $3,000 $278,814 $ 230,129 $1,819,765
Comprehensive income:
Net income................................................ 414,576 -- -- -- 414,576
Unrealized holding losses arising during the year, net of
deferred policy acquisition costs of $10,325 and taxes of
$82,982................................................... (154,111) -- -- (154,111) --
Reclassification adjustment for losses included in net
income, net of tax of $(5,429)............................ 10,084 -- -- 10,084 --
----------- ----------
Other comprehensive loss.................................. (144,027) -- -- (144,027) --
-----------
Comprehensive income...................................... 270,549 -- -- -- --
Capital contribution from parent.......................... 4,801 -- 4,801 -- --
Other changes............................................. 2,022 -- -- -- 2,022
Cash dividends to parent.................................. (165,000) -- -- -- (165,000)
---------------------------------------------------------------
Balance, December 31, 1996................................ 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income................................................ 474,247 -- -- -- 474,247
Unrealized holding gains arising during the year, net of
effect on deferred policy acquisition costs of $(7,714)
and taxes of $(75,215).................................... 139,686 -- -- 139,686 --
Reclassification adjustment for losses included in net
income, net of tax of $(308).............................. 571 -- -- 571 --
----------- ----------
Other comprehensive income................................ 140,257 -- -- 140,257 --
-----------
Comprehensive income...................................... 614,504 -- -- -- --
Capital contribution from parent.......................... 7,232 -- 7,232 -- --
Cash dividends to parent.................................. (200,000) -- -- -- (200,000)
---------------------------------------------------------------
Balance, December 31, 1997................................ 2,865,816 3,000 290,847 226,359 2,345,610
Comprehensive income:
Net income................................................ 540,111 -- -- -- 540,111
Unrealized holding losses arising during the year, net of
effect on deferred policy acquisition costs of $6,333 and
taxes of $32,826.......................................... (60,964) -- -- (60,964) --
Reclassification adjustment for losses included in net
income, net of tax of $(2,254)............................ 4,189 -- -- 4,189 --
----------- ----------
Other comprehensive loss.................................. (56,775) -- -- (56,775) --
-----------
Comprehensive income...................................... 483,336 -- -- -- --
Other changes............................................. (2,520) -- (2,520) -- --
Cash dividends to parent.................................. (240,000) -- -- -- (240,000)
---------------------------------------------------------------
Balance, December 31, 1998................................ $3,106,632 $3,000 $288,327 $ 169,584 $2,645,721
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Policy loan issuance, excluding universal life-type insurance.... (53,883) (54,665) (49,314)
Policy loan repayment, excluding universal life-type insurance... 57,902 46,015 41,179
Change in amounts recoverable from reinsurers.................... (56,544) (47,994) (43,335)
Change in other accounts receivable.............................. (10,068) 6,194 (4,981)
Change in accrued investment income.............................. (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net................. (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for traditional
life, disability income and long-term care insurance............. 138,826 112,915 97,479
Change in policy claims and other policyholders' funds........... 1,964 (15,289) 27,311
Change in deferred income tax provision (benefit)................ (19,122) 19,982 (65,609)
Change in other liabilities...................................... 64,902 13,305 46,724
Amortization of premium (accretion of discount), net............. 9,170 (5,649) (23,032)
Net realized (gain) loss on investments.......................... (6,902) (860) 159
Policyholder and contractholder charges, non-cash................ (172,396) (160,885) (154,286)
Other, net....................................................... 10,786 7,161 (10,816)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities.............. $ 485,119 $ 223,914 $ (14,005)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities held to maturity:
Purchases........................................................ $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls...................... 1,162,731 686,503 759,248
Sales............................................................ 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases........................................................ (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls...................... 2,967,311 1,206,213 1,270,240
Sales............................................................ 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases........................................................ (555,647) (524,521) (904,536)
Sales............................................................ 579,038 335,765 236,912
Change in amounts due from brokers............................... 8,073 2,647 (11,047)
Change in amounts due to brokers................................. (186,052) 119,471 140,369
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities.............. 390,114 (641,705) (333,352)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Activity related to universal life-type insurance and
investment contracts:
Considerations received.......................................... 1,873,624 2,785,758 3,567,586
Surrenders and death benefits.................................... (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances............................ 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance......................................................... (97,602) (84,835) (86,501)
Repayment........................................................ 67,000 54,513 58,753
Capital transaction with parent.................................. -- 7,232 4,801
Dividends paid................................................... (240,000) (200,000) (165,000)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities........................ (872,466) 212,874 499,813
- ------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents............. 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year................... 19,686 224,603 72,147
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year......................... $ 22,453 $ 19,686 $ 224,603
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS)
- -----------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in certain
respects from reporting practices prescribed or permitted by state insurance
regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Fixed maturities that the Company has both the positive intent and the ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. All other fixed maturities and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized gains and
losses on securities classified as available for sale are reported as a separate
component of other comprehensive income, net of deferred policy acquisition
costs and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed securities
in determining the constant effective yield used to recognize interest income.
Prepayment estimates are based on information received from brokers who deal in
mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less reserves for
mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate, or the fair value of
collateral. The amount of the impairment is recorded in a reserve for mortgage
loan losses. The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical
F-5
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
experience, expected future principal and interest payments, estimated
collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve for
mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on management's
judgment as to the ultimate collectibility of principal, interest payments
received are either recognized as income or applied to the recorded investment
in the loan.
The cost of interest rate caps and floors is amortized to investment income over
the life of the contracts and payments received as a result of these agreements
are recorded as investment income when realized. The amortized cost of interest
rate caps and floors is included in other investments. Amounts paid or received
under interest rate swap agreements are recognized as an adjustment to
investment income.
The Company purchases and writes index options to hedge the fee income earned on
the management of equity securities in separate accounts and the underlying
mutual funds. These index options are carried at market value and are included
in other investments or other liabilities, as appropriate. Gains or losses on
index options that qualify as hedges are deferred and recognized in management
and other fees in the same period as the hedged fee income. Gains or losses on
index options that do not qualify as hedges are marked to market through the
income statement.
The Company also uses index options to manage the risks related to a certain
annuity product that pays interest based upon the relative change in a major
stock market index between the beginning and end of the product's term.
Purchased options used in conjunction with this product are reported in other
investments and written options are included in other liabilities. The
amortization of the cost of purchased options, the proceeds of written options
and the changes in intrinsic value of the contracts are included in net
investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which do
not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such investments
are written down to the fair value by a charge to income.
STATEMENTS OF CASH FLOWS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost, which approximates fair value.
Supplementary information to the consolidated statements of cash flows for the
years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Income taxes....................... $215,003 $174,472 $317,283
Interest on borrowings............. 14,529 8,213 4,119
- -----------------------------------------------------------------
</TABLE>
RECOGNITION OF PROFITS ON ANNUITY CONTRACTS AND INSURANCE POLICIES
Profits on fixed deferred annuities are recognized by the Company over the lives
of the contracts, using primarily the interest method. Profits represent the
excess of investment income earned from investment of contract considerations
over interest credited to contract owners and other expenses.
F-6
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The retrospective deposit method is used in accounting for universal life-type
insurance. Under this method, profits are recognized over the lives of the
policies in proportion to the estimated gross profits expected to be realized.
Premiums on traditional life, disability income and long-term care insurance
policies are recognized as revenue when due, and related benefits and expenses
are associated with premium revenue in a manner that results in recognition of
profits over the lives of the insurance policies. This association is
accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of insurance
charges, issue and administrative fees and surrender charges. These charges also
include the minimum death benefit guarantee fees received from the variable life
insurance separate accounts. Management and other fees include investment
management fees from underlying proprietary mutual funds and mortality and
expense risk fees received from the variable annuity and variable life insurance
separate accounts.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most single
premium deferred annuities and installment annuities are amortized using
primarily the interest method. The costs for universal life-type insurance and
certain installment annuities are amortized as a percentage of the estimated
gross profits expected to be realized on the policies. For traditional life,
disability income and long-term care insurance policies, the costs are amortized
over an appropriate period in proportion to premium revenue.
LIABILITIES FOR FUTURE POLICY BENEFITS
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 5% to 9.5%, depending
on year of issue.
Liabilities for future benefits on traditional life insurance are based on the
net level premium method, using anticipated mortality, policy persistency and
interest earning rates. Anticipated mortality rates are based on established
industry mortality tables. Anticipated policy persistency rates vary by policy
form, issue age and policy duration with persistency on cash value plans
generally anticipated to be better than persistency on term insurance plans.
Anticipated interest rates range from 4% to 10%, depending on policy form, issue
year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and anticipated
interest earnings. Anticipated claim continuance rates are based on established
industry tables. Anticipated interest rates for claim reserves for both
disability income and long-term care range from 6% to 8%.
REINSURANCE
The maximum amount of life insurance risk retained by the Company on any one
life is $750 of life benefit plus $50 of accidental death benefits. The maximum
amount of life insurance risk retained on any joint-life
F-7
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care policies
are primarily reinsured on a coinsurance basis. Beginning in 1998, the Company
retains all disability income and waiver of premium risk.
FEDERAL INCOME TAXES
The Company's taxable income is included in the consolidated federal income tax
return of American Express Company. The Company provides for income taxes on a
separate return basis, except that, under an agreement between AEFC and American
Express Company, tax benefit is recognized for losses to the extent they can be
used on the consolidated tax return. It is the policy of AEFC and its
subsidiaries that AEFC will reimburse subsidiaries for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $26,291 payable
to and $12,061, receivable from, respectively, AEFC for federal income taxes.
SEPARATE ACCOUNT BUSINESS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners. The Company receives investment management fees from the proprietary
mutual funds used as investment options for variable annuities and variable life
insurance. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or losses
on available-for-sale securities, net of the effect on deferred policy
acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." The SOP, which is effective
January 1, 1999, requires the capitalization of certain costs incurred after the
date of adoption to develop or obtain software for internal use. Software
utilized by the Company is owned by AEFC and will be capitalized by AEFC. As a
result, the new rule will not have a material impact on the Company's results of
operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," providing guidance for the
timing of recognition of liabilities related to guaranty fund assessments. The
Company will adopt the SOP on January 1, 1999. The Company has historically
carried a balance
F-8
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in other liabilities on the balance sheet for potential guaranty fund assessment
exposure. Adoption of the SOP will not have a material impact on the Company's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective January 1, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Earlier application of all of the provisions of this Statement is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of the Statement. This Statement cannot be applied retroactively.
The ultimate financial impact of the new rule will be measured based on the
derivatives in place at adoption and cannot be estimated at this time.
RECLASSIFICATION
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
- --------------------------------------------------------------------------------
2. INVESTMENTS
Fair values of investments in fixed maturities represent quoted market prices
and estimated values when quoted prices are not available. Estimated values are
determined by established procedures involving, among other things, review of
market indices, price levels of current offerings of comparable issues, price
estimates and market data from independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations.............. 9,683 491 -- 10,173
Corporate bonds and obligations.............. 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities................... 1,609,067 30,458 152 1,639,373
- ----------------------------------------------------------------------------------------------------
$7,964,114 $483,161 $ 27,239 $ 8,420,035
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations.............. 11,060 1,231 -- 12,291
Corporate bonds and obligations.............. 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities................... 5,949,502 151,511 3,869 6,097,144
- ----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 13,344,949 427,240 159,050 13,613,139
Equity securities............................ 3,000 158 -- 3,158
- ----------------------------------------------------------------------------------------------------
$13,347,949 $427,398 $159,050 $ 13,616,297
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
The amortized cost, gross unrealized gains and losses and fair values of
investmentsin fixed maturities and equity securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
HELD TO MATURITY COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations.............. 9,684 568 -- 10,252
Corporate bonds and obligations.............. 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities................... 1,983,188 25,976 7,911 2,001,253
- -----------------------------------------------------------------------------------------------------
$9,315,450 $445,193 $17,233 $ 9,743,410
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations.............. 11,045 1,348 -- 12,393
Corporate bonds and obligations.............. 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities................... 7,130,565 160,478 6,879 7,284,164
- -----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 12,515,030 398,741 37,077 12,876,694
Equity securities............................ 3,000 361 -- 3,361
- -----------------------------------------------------------------------------------------------------
$12,518,030 $399,102 $37,077 $ 12,880,055
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of investments in fixed maturities at December
31, 1998 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>
AMORTIZED FAIR
HELD TO MATURITY COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 354,296 $ 359,020
Due from one to five years.............. 2,111,369 2,249,847
Due from five to ten years.............. 3,012,227 3,189,789
Due in more than ten years.............. 877,155 982,006
Mortgage-backed securities.............. 1,609,067 1,639,373
- ------------------------------------------------------------------
$7,964,114 $ 8,420,035
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
AVAILABLE FOR SALE COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 102,463 $ 104,475
Due from one to five years.............. 682,336 725,859
Due from five to ten years.............. 3,904,326 4,044,378
Due in more than ten years.............. 2,718,659 2,654,382
Mortgage-backed securities.............. 5,937,165 6,084,045
- ------------------------------------------------------------------
$13,344,949 $13,613,139
- ------------------------------------------------------------------
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales were
not significant. The sale of these fixed maturities was due to significant
deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities
F-10
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
available for sale were sold during 1997 with proceeds of $457,585 and gross
realized gains and losses of $6,639 and $7,518, respectively. Fixed maturities
available for sale were sold during 1996 with proceeds of $238,905 and gross
realized gains and losses of $571 and $16,084, respectively.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. These securities are rated by Moody's and
Standard & Poor's (S&P), except for securities carried at approximately $3.6
billion which are rated by AEFC's internal analysts using criteria similar to
Moody's and S&P. A summary of investments in fixed maturities, at amortized
cost, by rating on December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------
Aaa/AAA................................. $ 7,629,628 $ 9,195,619
Aaa/AA.................................. 2,277 --
Aa/AA................................... 308,053 232,451
Aa/A.................................... 301,325 246,792
A/A..................................... 2,525,283 2,787,936
A/BBB................................... 1,148,736 1,200,345
Baa/BBB................................. 6,237,014 5,226,616
Baa/BB.................................. 492,696 475,084
Below investment grade.................. 2,664,051 2,465,637
- ------------------------------------------------------------------
$21,309,063 $21,830,480
- ------------------------------------------------------------------
</TABLE>
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA, FNMA
and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than one percent of the Company's total investments in fixed maturities.
At December 31, 1998, approximately 13 percent of the Company's invested assets
were mortgage loans on real estate. Summaries of mortgage loans by region of the
United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
REGION SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
East North Central............ $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central............ 491,006 81,648 456,934 14,340
South Atlantic................ 839,233 21,020 922,172 14,619
Middle Atlantic............... 476,448 6,169 545,601 15,507
New England................... 263,761 2,824 316,250 2,136
Pacific....................... 195,851 16,946 184,917 3,204
West South Central............ 136,841 1,412 125,227 --
East South Central............ 46,029 -- 60,274 --
Mountain...................... 345,379 8,473 297,545 28,717
- --------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- --------------------------------------------------------------------------------------
$3,505,458 $154,885 $3,618,647 $110,985
- --------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
PROPERTY TYPE SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Department/retail stores...... $ 1,139,349 $ 59,305 $ 1,189,203 $ 27,314
Apartments.................... 960,808 9,272 1,089,127 16,576
Office buildings.............. 783,576 50,450 716,729 34,546
Industrial buildings.......... 298,549 13,263 295,889 21,200
Hotels/motels................. 109,185 14,122 101,052 --
Medical buildings............. 124,369 -- 99,979 9,748
Nursing/retirement homes...... 46,696 -- 72,359 --
Mixed Use..................... 65,151 -- 71,007 --
Other......................... 17,570 8,473 21,947 1,601
- -----------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- -----------------------------------------------------------------------------------------
$ 3,505,458 $ 154,885 $ 3,618,647 $ 110,985
- -----------------------------------------------------------------------------------------
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory authorities
to 80 percent or less of the market value of the real estate at the time of
origination of the loan. The Company holds the mortgage document, which gives it
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreement. Commitments to purchase mortgages are
made in the ordinary course of business. The fair value of the mortgage
commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in impaired
loans was $24,941 and $45,714, respectively, with allowances of $6,662 and
$9,812, respectively. During 1998 and 1997, the average recorded investment in
impaired loans was $37,873 and $61,870, respectively.
The Company recognized $1,809, $2,981and $4,889 of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Balance, January 1................. $38,645 $37,495 $37,340
Provision for investment losses.... 7,582 8,801 10,005
Loan payoffs....................... (800) (3,851) (4,700)
Foreclosures and writeoffs......... (5,632) (3,800) (5,150)
- --------------------------------------------------------------
Balance, December 31............... $39,795 $38,645 $37,495
- --------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company had commitments to purchase investments other
than mortgage loans for $223,011. Commitments to purchase investments are
made in the ordinary course of business. The fair value of these commitments is
$nil.
Net investment income for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Interest on fixed maturities....... $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans......... 301,253 305,742 283,830
Other investment income............ 43,518 25,089 43,283
Interest on cash equivalents....... 5,486 5,914 5,754
- -----------------------------------------------------------------------
2,027,241 2,029,226 1,999,796
Less investment expenses........... 40,756 40,837 34,434
- -----------------------------------------------------------------------
$1,986,485 $1,988,389 $1,965,362
- -----------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Fixed maturities................... $12,084 $16,115 $ 8,736
Mortgage loans..................... (5,933) (6,424) (8,745)
Other investments.................. 751 (8,831) (150)
- --------------------------------------------------------------
$ 6,902 $ 860 $ (159)
- --------------------------------------------------------------
</TABLE>
Changes in net unrealized appreciation (depreciation) of investments for the
years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Fixed maturities available for sale..... $(93,474) $ 223,441 $(231,853)
Equity securities....................... (203) 53 (52)
- ------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
3. INCOME TAXES
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the
Internal Revenue Code provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
Federal income taxes:
Current............................ $244,946 $176,879 $260,357
Deferred........................... (16,602) 19,982 (65,609)
- -----------------------------------------------------------------
228,344 196,861 194,748
State income taxes-current......... 7,337 9,803 12,390
- -----------------------------------------------------------------
Income tax expense................. $235,681 $206,664 $207,138
- -----------------------------------------------------------------
</TABLE>
Increases (decreases) to the federal tax provision applicable to pretax income
based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes based
on the statutory rate....................................... $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases are attributable to:
Tax-excluded interest and dividend income................... (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal benefit......................... 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits.................................. (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net.................................................. (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes........................................ $235,681 30.4% $206,664 30.4% $207,138 33.3%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
A portion of life insurance company income earned prior to 1984 was not subject
to current taxation but was accumulated, for tax purposes, in a policyholders'
surplus account. At December 31, 1998, the Company had a policyholders' surplus
account balance of $20,114. The policyholders' surplus account is only
F-13
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
3. INCOME TAXES (CONTINUED)
taxable if dividends to the stockholder exceed the stockholder's surplus account
or if the Company is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------
Deferred tax assets:
Policy reserves........................................ $756,769 $748,204
Life insurance guaranty fund assessment reserve........ 15,289 20,101
Other.................................................. 4,253 9,589
- ---------------------------------------------------------------------------
Total deferred tax assets.............................. 776,311 777,894
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs...................... 698,471 700,032
Unrealized gain on investments......................... 91,315 121,885
Investments, other..................................... 3,455 17,559
- ---------------------------------------------------------------------------
Total deferred tax liabilities......................... 793,241 839,476
- ---------------------------------------------------------------------------
Net deferred tax liabilities........................... $ 16,930 $ 61,582
- ---------------------------------------------------------------------------
</TABLE>
The Company is required to establish a valuation allowance for any portion of
the deferred tax assets that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
- --------------------------------------------------------------------------------
4. STOCKHOLDER'S EQUITY
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $1,598,203 as of December 31, 1998 and $1,468,677
as of December 31, 1997 (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 1999 in
excess of approximately $353,933 would require approval of the Department of
Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and surplus as
of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Statutory net income............... $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus...... 1,883,405 1,765,290 1,565,082
- -----------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
The Company loans funds to AEFC under a collateral loan agreement. The balance
of the loan was $nil at December 31, 1998 and 1997. This loan can be increased
to a maximum of $75,000 and pays interest at a rate equal to the preceding
month's effective new money rate for the Company's permanent investments.
Interest income on related party loans totaled $nil, $103 and $780 in 1998, 1997
and 1996, respectively.
The Company participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain employment
requirements. Employer contributions to the plan are based on participants' age,
years of service and total compensation for the year. Funding of retirement
costs for this plan complies with the applicable minimum funding requirements
specified by ERISA. The Company's share of the total net periodic pension cost
was $211, $201 and $174 in 1998, 1997 and 1996, respectively.
The Company also participates in defined contribution pension plans of American
Express Company which cover all employees who have met certain employment
requirements. Company contributions to the plans are a percent of either each
employee's eligible compensation or basic contributions. Costs of these plans
charged to operations in 1998, 1997 and 1996 were $1,503, $1,245 and $990,
respectively.
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and retired
financial advisors. The plans include participant contributions and service
related eligibility requirements. Upon retirement, such employees are considered
to have been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. The Company's share of postretirement benefits in
1998, 1997 and 1996 was $1,352, $1,330 and $1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for 1998,
1997 and 1996, respectively. Certain of these costs are included in deferred
policy acquisition costs.
- --------------------------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $81,074,928, $74,730,720 and
$67,274,354, respectively, of which $4,912,313, $4,351,904 and $3,875,921 were
reinsured at the respective year ends. The Company also reinsures a portion of
the risks assumed under disability income and long-term care policies. Under all
reinsurance agreements, premiums ceded to reinsurers amounted to $66,378,
$60,495 and $48,250 and reinsurance recovered from reinsurers amounted to
$20,982, $19,042, and $15,612 for the years ended December 31, 1998, 1997 and
1996, respectively. Reinsurance contracts do not relieve the Company from its
primary obligation to policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company, its parent and its subsidiaries conduct
business involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters. The Company has been named as a
defendant in three of these types of actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from the Company and its subsidiaries. The
complaints put at issue various alleged sales practices and misrepresentations,
alleged breaches of fiduciary duties and alleged violations of consumer fraud
statutes. The Company and its subsidiaries believe they have meritorious
defenses to the claims raised in these lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the opinion
of
F-15
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, however, the ultimate resolution of these lawsuits, taken in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns, and is
currently auditing the Company's returns for the 1990 through 1992 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of this audit.
- --------------------------------------------------------------------------------
7. LINES OF CREDIT
The Company has available lines of credit with its parent aggregating $100,000.
The interest rate for any borrowings is established by reference to various
indices plus 20 to 45 basis points, depending on the term. Borrowings
outstanding under this agreement were $nil at December 31, 1998 and 1997.
- --------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into transactions involving derivative financial instruments
to manage its exposure to interest rate risk and equity market risk, including
hedging specific transactions. The Company does not hold derivative instruments
for trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market index.
The Company is not impacted by market risk related to derivatives held for
non-trading purposes beyond that inherent in cash market transactions.
Derivatives held for purposes other than trading are largely used to manage risk
and, therefore, the cash flow and income effects of the derivatives are inverse
to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the terms
of the contract. The Company monitors credit risk related to derivative
financial instruments through established approval procedures, including setting
concentration limits by counterparty, and requiring collateral, where
appropriate. A vast majority of the Company's counterparties are rated A or
better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over the
life of the agreement. Notional amounts are not recorded on the balance sheet.
Notional amounts far exceed the related credit risk.
F-16
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
TOTAL
DECEMBER 31, 1998 NOTIONAL CARRYING FAIR CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Assets:
Interest rate caps............ $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors.......... 1,000,000 1,082 13,971 13,971
Options purchased............. 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written..... 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps........... 1,667,000 -- (73,477) --
- -------------------------------------------------------------------------------
$ 30,635 $ (36,859) $47,680
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 NOTIONAL CARRYING FAIR TOTAL CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
Assets:
Interest rate caps............ $4,600,000 $24,963 $ 15,665 $15,665
Interest rate floors.......... 1,000,000 1,561 4,551 4,551
Options purchased/written..... 279,737 9,808 10,449 10,449
Liabilities:
Options written............... 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps........... 1,267,000 -- (45,799) --
- ---------------------------------------------------------------------------------
$36,243 $ (15,020) $30,655
- ---------------------------------------------------------------------------------
</TABLE>
The fair values of derivative financial instruments are based on market values,
dealer quotes or pricing models. The interest rate caps, floors and swaps expire
on various dates from 1999 to 2003. The put and call options expire on various
dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the margin
between interest rates earned on investments and the interest rates credited to
related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount of
fee income received is based upon the daily market value of the separate account
and mutual fund assets. As a result, changing interest rate conditions could
impact the Company's fee income significantly. The Company entered into interest
rate swaps to hedge anticipated fee income for 1999 related to separate accounts
and mutual funds which invest in fixed income securities. Interest will be
accrued and reported in accrued investment income and other liabilities, as
appropriate, and management and other fees.
The Company offers a certain annuity product that pays interest based upon the
relative change in a major stock market index between the beginning and end of
the product's term. As a means of hedging its obligation under the provisions of
this product, the Company purchases and writes options on the major stock market
index.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the underlying
mutual funds. The amount of the fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a result, the
Company's fee income could be impacted significantly by changing economic
conditions in the equity market. The Company entered into index option
F-17
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
collars (combination of puts and calls) to hedge anticipated fee income for 1998
and 1999 related to separate accounts and mutual funds which invest in equity
securities. Testing has demonstrated the impact of these instruments on the
income statement closely correlates with the amount of fee income the Company
realizes. In the event that testing demonstrates that this correlation no longer
exists, or in the event the Company disposes of the index options collars, the
instruments will be marked-to-market through the income statement. At December
31, 1998 deferred losses on purchased put and written call index options were
$2,933 and $7,435, respectively. At December 31, 1997 deferred losses on
purchased put index options were $2,428 and deferred gains on written call index
options were $5,275.
- --------------------------------------------------------------------------------
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company discloses fair value information for most on- and off-balance sheet
financial instruments for which it is practicable to estimate that value. Fair
values of life insurance obligations and all non-financial instruments, such as
deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force, are
also excluded. Management believes the value of excluded assets and liabilities
is significant. The fair value of the Company, therefore, cannot be estimated by
aggregating the amounts presented.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
FINANCIAL ASSETS
Investments:
Fixed maturities (Note 2):
Held to maturity.............. $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale............ 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on real estate
(Note 2)...................... 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2).... 3,158 3,158 3,361 3,361
Derivative financial
instruments (Note 8).......... 41,161 47,680 36,332 30,665
Other......................... 28,872 28,872 82,347 85,383
Cash and cash equivalents
(Note 1)...................... 22,453 22,453 19,686 19,686
Separate account assets
(Note 1)...................... 27,349,401 27,349,401 23,214,504 23,214,504
FINANCIAL LIABILITIES
Future policy benefits for
fixed annuities............... $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8).......... 10,526 84,539 89 45,685
Separate account
liabilities................... 25,005,732 24,179,115 21,488,282 20,707,620
- ----------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,226,985 and $1,185,155, respectively, and policy loans of $90,115
and $93,540, respectively. The fair value of these benefits is based on the
status of the annuities at December 31, 1998 and 1997. The fair value of
deferred annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in non-life
contingent payout status is estimated as the present value of projected benefit
payments at rates appropriate for contracts issued in 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to separate
accounts is estimated as the carrying amount less any applicable surrender
charges and less variable insurance contracts carried at $2,343,669 and
$1,726,222, respectively.
F-18
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- -----------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 4, 1999
F-19
<PAGE>
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
IDS LIFE FINANCIAL INFORMATION
- -----------------------------------------------------------------
The financial statements shown below are those of the insurance company and not
those of any other entity. They are included for the purpose of informing the
investor as to the financial condition of the insurance company and its ability
to carry out its obligations under its variable contracts.
IDS LIFE INSURANCE COMPANY
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DEC. 31, 1998 DEC. 31, 1997
ASSETS ($ thousands, except share amounts)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value: 1998,
$8,420,035; 1997, $9,743,410).................................... $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost: 1998,
$13,344,949; 1997, $12,515,030).................................. 13,613,139 12,876,694
Mortgage loans on real estate.................................... 3,505,458 3,618,647
Policy loans..................................................... 525,431 498,874
Other investments................................................ 366,604 318,591
- -------------------------------------------------------------------------------------------------
Total investments................................................ 25,974,746 26,628,256
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents........................................ 22,453 19,686
Amounts recoverable from reinsurers.............................. 262,260 205,716
Amounts due from brokers......................................... 327 8,400
Other accounts receivable........................................ 47,963 37,895
Accrued investment income........................................ 366,574 357,390
Deferred policy acquisition costs................................ 2,496,352 2,479,577
Other assets..................................................... 30,487 22,700
Separate account assets.......................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total assets..................................................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities.................................................. $ 21,172,303 $ 22,009,747
Universal life-type insurance.................................... 3,343,671 3,280,489
Traditional life insurance....................................... 225,306 213,676
Disability income and long-term care insurance................... 660,320 533,124
Policy claims and other policyholders' funds..................... 70,309 68,345
Deferred income taxes, net....................................... 16,930 61,582
Amounts due to brokers........................................... 195,406 381,458
Other liabilities................................................ 410,285 345,383
Separate account liabilities..................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total liabilities................................................ 53,443,931 50,108,308
- -------------------------------------------------------------------------------------------------
Stockholder's equity:
Capital stock, $30 par value per share; 100,000 shares
authorized, issued and outstanding............................... 3,000 3,000
Additional paid-in capital....................................... 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains.................................. 169,584 226,359
Retained earnings................................................ 2,645,721 2,345,610
- -------------------------------------------------------------------------------------------------
Total stockholder's equity....................................... 3,106,632 2,865,816
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity....................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-1
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF INCOME ($ thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Revenues:
Premiums:
Traditional life insurance....................................... $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance................... 176,298 154,021 131,518
- ------------------------------------------------------------------------------------------------------------
Total premiums................................................... 229,430 206,494 182,921
- ------------------------------------------------------------------------------------------------------------
Policyholder and contractholder charges.......................... 383,965 341,726 302,999
Management and other fees........................................ 401,057 340,892 271,342
Net investment income............................................ 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments.......................... 6,902 860 (159)
- ------------------------------------------------------------------------------------------------------------
Total revenues................................................... 3,007,839 2,878,361 2,722,465
- ------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits:
Traditional life insurance....................................... 29,835 28,951 26,919
Universal life-type insurance and investment contracts........... 108,349 92,814 85,017
Disability income and long-term care insurance................... 27,414 22,333 19,185
Increase in liabilities for future policy benefits:
Traditional life insurance....................................... 6,052 3,946 1,859
Disability income and long-term care insurance................... 73,305 63,631 57,230
Interest credited on universal life-type insurance and investment
contracts........................................................ 1,317,124 1,386,448 1,370,468
Amortization of deferred policy acquisition costs................ 382,642 322,731 278,605
Other insurance and operating expenses........................... 287,326 276,596 261,468
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses...................................... 2,232,047 2,197,450 2,100,751
- ------------------------------------------------------------------------------------------------------------
Income before income taxes....................................... 775,792 680,911 621,714
Income taxes..................................................... 235,681 206,664 207,138
- ------------------------------------------------------------------------------------------------------------
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY OTHER
TOTAL ADDITIONAL COMPREHENSIVE
STOCKHOLDER'S CAPITAL PAID-IN INCOME, RETAINED
THREE YEARS ENDED DEC. 31, 1998 ($ thousands) EQUITY STOCK CAPITAL NET OF TAX EARNINGS
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995................................ $2,331,708 $3,000 $278,814 $ 230,129 $1,819,765
Comprehensive income:
Net income................................................ 414,576 -- -- -- 414,576
Unrealized holding losses arising during the year, net of
deferred policy acquisition costs of $10,325 and taxes of
$82,982................................................... (154,111) -- -- (154,111) --
Reclassification adjustment for losses included in net
income, net of tax of $(5,429)............................ 10,084 -- -- 10,084 --
----------- ----------
Other comprehensive loss.................................. (144,027) -- -- (144,027) --
-----------
Comprehensive income...................................... 270,549 -- -- -- --
Capital contribution from parent.......................... 4,801 -- 4,801 -- --
Other changes............................................. 2,022 -- -- -- 2,022
Cash dividends to parent.................................. (165,000) -- -- -- (165,000)
---------------------------------------------------------------
Balance, December 31, 1996................................ 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income................................................ 474,247 -- -- -- 474,247
Unrealized holding gains arising during the year, net of
effect on deferred policy acquisition costs of $(7,714)
and taxes of $(75,215).................................... 139,686 -- -- 139,686 --
Reclassification adjustment for losses included in net
income, net of tax of $(308).............................. 571 -- -- 571 --
----------- ----------
Other comprehensive income................................ 140,257 -- -- 140,257 --
-----------
Comprehensive income...................................... 614,504 -- -- -- --
Capital contribution from parent.......................... 7,232 -- 7,232 -- --
Cash dividends to parent.................................. (200,000) -- -- -- (200,000)
---------------------------------------------------------------
Balance, December 31, 1997................................ 2,865,816 3,000 290,847 226,359 2,345,610
Comprehensive income:
Net income................................................ 540,111 -- -- -- 540,111
Unrealized holding losses arising during the year, net of
effect on deferred policy acquisition costs of $6,333 and
taxes of $32,826.......................................... (60,964) -- -- (60,964) --
Reclassification adjustment for losses included in net
income, net of tax of $(2,254)............................ 4,189 -- -- 4,189 --
----------- ----------
Other comprehensive loss.................................. (56,775) -- -- (56,775) --
-----------
Comprehensive income...................................... 483,336 -- -- -- --
Other changes............................................. (2,520) -- (2,520) -- --
Cash dividends to parent.................................. (240,000) -- -- -- (240,000)
---------------------------------------------------------------
Balance, December 31, 1998................................ $3,106,632 $3,000 $288,327 $ 169,584 $2,645,721
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Policy loan issuance, excluding universal life-type insurance.... (53,883) (54,665) (49,314)
Policy loan repayment, excluding universal life-type insurance... 57,902 46,015 41,179
Change in amounts recoverable from reinsurers.................... (56,544) (47,994) (43,335)
Change in other accounts receivable.............................. (10,068) 6,194 (4,981)
Change in accrued investment income.............................. (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net................. (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for traditional
life, disability income and long-term care insurance............. 138,826 112,915 97,479
Change in policy claims and other policyholders' funds........... 1,964 (15,289) 27,311
Change in deferred income tax provision (benefit)................ (19,122) 19,982 (65,609)
Change in other liabilities...................................... 64,902 13,305 46,724
Amortization of premium (accretion of discount), net............. 9,170 (5,649) (23,032)
Net realized (gain) loss on investments.......................... (6,902) (860) 159
Policyholder and contractholder charges, non-cash................ (172,396) (160,885) (154,286)
Other, net....................................................... 10,786 7,161 (10,816)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities.............. $ 485,119 $ 223,914 $ (14,005)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities held to maturity:
Purchases........................................................ $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls...................... 1,162,731 686,503 759,248
Sales............................................................ 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases........................................................ (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls...................... 2,967,311 1,206,213 1,270,240
Sales............................................................ 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases........................................................ (555,647) (524,521) (904,536)
Sales............................................................ 579,038 335,765 236,912
Change in amounts due from brokers............................... 8,073 2,647 (11,047)
Change in amounts due to brokers................................. (186,052) 119,471 140,369
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities.............. 390,114 (641,705) (333,352)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Activity related to universal life-type insurance and
investment contracts:
Considerations received.......................................... 1,873,624 2,785,758 3,567,586
Surrenders and death benefits.................................... (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances............................ 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance......................................................... (97,602) (84,835) (86,501)
Repayment........................................................ 67,000 54,513 58,753
Capital transaction with parent.................................. -- 7,232 4,801
Dividends paid................................................... (240,000) (200,000) (165,000)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities........................ (872,466) 212,874 499,813
- ------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents............. 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year................... 19,686 224,603 72,147
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year......................... $ 22,453 $ 19,686 $ 224,603
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS)
- -----------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in certain
respects from reporting practices prescribed or permitted by state insurance
regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Fixed maturities that the Company has both the positive intent and the ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. All other fixed maturities and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized gains and
losses on securities classified as available for sale are reported as a separate
component of other comprehensive income, net of deferred policy acquisition
costs and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed securities
in determining the constant effective yield used to recognize interest income.
Prepayment estimates are based on information received from brokers who deal in
mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less reserves for
mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate, or the fair value of
collateral. The amount of the impairment is recorded in a reserve for mortgage
loan losses. The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical
F-5
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
experience, expected future principal and interest payments, estimated
collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve for
mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on management's
judgment as to the ultimate collectibility of principal, interest payments
received are either recognized as income or applied to the recorded investment
in the loan.
The cost of interest rate caps and floors is amortized to investment income over
the life of the contracts and payments received as a result of these agreements
are recorded as investment income when realized. The amortized cost of interest
rate caps and floors is included in other investments. Amounts paid or received
under interest rate swap agreements are recognized as an adjustment to
investment income.
The Company purchases and writes index options to hedge the fee income earned on
the management of equity securities in separate accounts and the underlying
mutual funds. These index options are carried at market value and are included
in other investments or other liabilities, as appropriate. Gains or losses on
index options that qualify as hedges are deferred and recognized in management
and other fees in the same period as the hedged fee income. Gains or losses on
index options that do not qualify as hedges are marked to market through the
income statement.
The Company also uses index options to manage the risks related to a certain
annuity product that pays interest based upon the relative change in a major
stock market index between the beginning and end of the product's term.
Purchased options used in conjunction with this product are reported in other
investments and written options are included in other liabilities. The
amortization of the cost of purchased options, the proceeds of written options
and the changes in intrinsic value of the contracts are included in net
investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which do
not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such investments
are written down to the fair value by a charge to income.
STATEMENTS OF CASH FLOWS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost, which approximates fair value.
Supplementary information to the consolidated statements of cash flows for the
years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Income taxes....................... $215,003 $174,472 $317,283
Interest on borrowings............. 14,529 8,213 4,119
- -----------------------------------------------------------------
</TABLE>
RECOGNITION OF PROFITS ON ANNUITY CONTRACTS AND INSURANCE POLICIES
Profits on fixed deferred annuities are recognized by the Company over the lives
of the contracts, using primarily the interest method. Profits represent the
excess of investment income earned from investment of contract considerations
over interest credited to contract owners and other expenses.
F-6
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The retrospective deposit method is used in accounting for universal life-type
insurance. Under this method, profits are recognized over the lives of the
policies in proportion to the estimated gross profits expected to be realized.
Premiums on traditional life, disability income and long-term care insurance
policies are recognized as revenue when due, and related benefits and expenses
are associated with premium revenue in a manner that results in recognition of
profits over the lives of the insurance policies. This association is
accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of insurance
charges, issue and administrative fees and surrender charges. These charges also
include the minimum death benefit guarantee fees received from the variable life
insurance separate accounts. Management and other fees include investment
management fees from underlying proprietary mutual funds and mortality and
expense risk fees received from the variable annuity and variable life insurance
separate accounts.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most single
premium deferred annuities and installment annuities are amortized using
primarily the interest method. The costs for universal life-type insurance and
certain installment annuities are amortized as a percentage of the estimated
gross profits expected to be realized on the policies. For traditional life,
disability income and long-term care insurance policies, the costs are amortized
over an appropriate period in proportion to premium revenue.
LIABILITIES FOR FUTURE POLICY BENEFITS
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 5% to 9.5%, depending
on year of issue.
Liabilities for future benefits on traditional life insurance are based on the
net level premium method, using anticipated mortality, policy persistency and
interest earning rates. Anticipated mortality rates are based on established
industry mortality tables. Anticipated policy persistency rates vary by policy
form, issue age and policy duration with persistency on cash value plans
generally anticipated to be better than persistency on term insurance plans.
Anticipated interest rates range from 4% to 10%, depending on policy form, issue
year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and anticipated
interest earnings. Anticipated claim continuance rates are based on established
industry tables. Anticipated interest rates for claim reserves for both
disability income and long-term care range from 6% to 8%.
REINSURANCE
The maximum amount of life insurance risk retained by the Company on any one
life is $750 of life benefit plus $50 of accidental death benefits. The maximum
amount of life insurance risk retained on any joint-life
F-7
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care policies
are primarily reinsured on a coinsurance basis. Beginning in 1998, the Company
retains all disability income and waiver of premium risk.
FEDERAL INCOME TAXES
The Company's taxable income is included in the consolidated federal income tax
return of American Express Company. The Company provides for income taxes on a
separate return basis, except that, under an agreement between AEFC and American
Express Company, tax benefit is recognized for losses to the extent they can be
used on the consolidated tax return. It is the policy of AEFC and its
subsidiaries that AEFC will reimburse subsidiaries for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $26,291 payable
to and $12,061, receivable from, respectively, AEFC for federal income taxes.
SEPARATE ACCOUNT BUSINESS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners. The Company receives investment management fees from the proprietary
mutual funds used as investment options for variable annuities and variable life
insurance. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or losses
on available-for-sale securities, net of the effect on deferred policy
acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." The SOP, which is effective
January 1, 1999, requires the capitalization of certain costs incurred after the
date of adoption to develop or obtain software for internal use. Software
utilized by the Company is owned by AEFC and will be capitalized by AEFC. As a
result, the new rule will not have a material impact on the Company's results of
operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," providing guidance for the
timing of recognition of liabilities related to guaranty fund assessments. The
Company will adopt the SOP on January 1, 1999. The Company has historically
carried a balance
F-8
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in other liabilities on the balance sheet for potential guaranty fund assessment
exposure. Adoption of the SOP will not have a material impact on the Company's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective January 1, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Earlier application of all of the provisions of this Statement is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of the Statement. This Statement cannot be applied retroactively.
The ultimate financial impact of the new rule will be measured based on the
derivatives in place at adoption and cannot be estimated at this time.
RECLASSIFICATION
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
- --------------------------------------------------------------------------------
2. INVESTMENTS
Fair values of investments in fixed maturities represent quoted market prices
and estimated values when quoted prices are not available. Estimated values are
determined by established procedures involving, among other things, review of
market indices, price levels of current offerings of comparable issues, price
estimates and market data from independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations.............. 9,683 491 -- 10,173
Corporate bonds and obligations.............. 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities................... 1,609,067 30,458 152 1,639,373
- ----------------------------------------------------------------------------------------------------
$7,964,114 $483,161 $ 27,239 $ 8,420,035
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations.............. 11,060 1,231 -- 12,291
Corporate bonds and obligations.............. 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities................... 5,949,502 151,511 3,869 6,097,144
- ----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 13,344,949 427,240 159,050 13,613,139
Equity securities............................ 3,000 158 -- 3,158
- ----------------------------------------------------------------------------------------------------
$13,347,949 $427,398 $159,050 $ 13,616,297
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
The amortized cost, gross unrealized gains and losses and fair values of
investmentsin fixed maturities and equity securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
HELD TO MATURITY COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations.............. 9,684 568 -- 10,252
Corporate bonds and obligations.............. 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities................... 1,983,188 25,976 7,911 2,001,253
- -----------------------------------------------------------------------------------------------------
$9,315,450 $445,193 $17,233 $ 9,743,410
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations.............. 11,045 1,348 -- 12,393
Corporate bonds and obligations.............. 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities................... 7,130,565 160,478 6,879 7,284,164
- -----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 12,515,030 398,741 37,077 12,876,694
Equity securities............................ 3,000 361 -- 3,361
- -----------------------------------------------------------------------------------------------------
$12,518,030 $399,102 $37,077 $ 12,880,055
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of investments in fixed maturities at December
31, 1998 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>
AMORTIZED FAIR
HELD TO MATURITY COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 354,296 $ 359,020
Due from one to five years.............. 2,111,369 2,249,847
Due from five to ten years.............. 3,012,227 3,189,789
Due in more than ten years.............. 877,155 982,006
Mortgage-backed securities.............. 1,609,067 1,639,373
- ------------------------------------------------------------------
$7,964,114 $ 8,420,035
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
AVAILABLE FOR SALE COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 102,463 $ 104,475
Due from one to five years.............. 682,336 725,859
Due from five to ten years.............. 3,904,326 4,044,378
Due in more than ten years.............. 2,718,659 2,654,382
Mortgage-backed securities.............. 5,937,165 6,084,045
- ------------------------------------------------------------------
$13,344,949 $13,613,139
- ------------------------------------------------------------------
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales were
not significant. The sale of these fixed maturities was due to significant
deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities
F-10
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
available for sale were sold during 1997 with proceeds of $457,585 and gross
realized gains and losses of $6,639 and $7,518, respectively. Fixed maturities
available for sale were sold during 1996 with proceeds of $238,905 and gross
realized gains and losses of $571 and $16,084, respectively.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. These securities are rated by Moody's and
Standard & Poor's (S&P), except for securities carried at approximately $3.6
billion which are rated by AEFC's internal analysts using criteria similar to
Moody's and S&P. A summary of investments in fixed maturities, at amortized
cost, by rating on December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------
Aaa/AAA................................. $ 7,629,628 $ 9,195,619
Aaa/AA.................................. 2,277 --
Aa/AA................................... 308,053 232,451
Aa/A.................................... 301,325 246,792
A/A..................................... 2,525,283 2,787,936
A/BBB................................... 1,148,736 1,200,345
Baa/BBB................................. 6,237,014 5,226,616
Baa/BB.................................. 492,696 475,084
Below investment grade.................. 2,664,051 2,465,637
- ------------------------------------------------------------------
$21,309,063 $21,830,480
- ------------------------------------------------------------------
</TABLE>
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA, FNMA
and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than one percent of the Company's total investments in fixed maturities.
At December 31, 1998, approximately 13 percent of the Company's invested assets
were mortgage loans on real estate. Summaries of mortgage loans by region of the
United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
REGION SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
East North Central............ $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central............ 491,006 81,648 456,934 14,340
South Atlantic................ 839,233 21,020 922,172 14,619
Middle Atlantic............... 476,448 6,169 545,601 15,507
New England................... 263,761 2,824 316,250 2,136
Pacific....................... 195,851 16,946 184,917 3,204
West South Central............ 136,841 1,412 125,227 --
East South Central............ 46,029 -- 60,274 --
Mountain...................... 345,379 8,473 297,545 28,717
- --------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- --------------------------------------------------------------------------------------
$3,505,458 $154,885 $3,618,647 $110,985
- --------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
PROPERTY TYPE SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Department/retail stores...... $ 1,139,349 $ 59,305 $ 1,189,203 $ 27,314
Apartments.................... 960,808 9,272 1,089,127 16,576
Office buildings.............. 783,576 50,450 716,729 34,546
Industrial buildings.......... 298,549 13,263 295,889 21,200
Hotels/motels................. 109,185 14,122 101,052 --
Medical buildings............. 124,369 -- 99,979 9,748
Nursing/retirement homes...... 46,696 -- 72,359 --
Mixed Use..................... 65,151 -- 71,007 --
Other......................... 17,570 8,473 21,947 1,601
- -----------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- -----------------------------------------------------------------------------------------
$ 3,505,458 $ 154,885 $ 3,618,647 $ 110,985
- -----------------------------------------------------------------------------------------
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory authorities
to 80 percent or less of the market value of the real estate at the time of
origination of the loan. The Company holds the mortgage document, which gives it
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreement. Commitments to purchase mortgages are
made in the ordinary course of business. The fair value of the mortgage
commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in impaired
loans was $24,941 and $45,714, respectively, with allowances of $6,662 and
$9,812, respectively. During 1998 and 1997, the average recorded investment in
impaired loans was $37,873 and $61,870, respectively.
The Company recognized $1,809, $2,981and $4,889 of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Balance, January 1................. $38,645 $37,495 $37,340
Provision for investment losses.... 7,582 8,801 10,005
Loan payoffs....................... (800) (3,851) (4,700)
Foreclosures and writeoffs......... (5,632) (3,800) (5,150)
- --------------------------------------------------------------
Balance, December 31............... $39,795 $38,645 $37,495
- --------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company had commitments to purchase investments other
than mortgage loans for $223,011. Commitments to purchase investments are
made in the ordinary course of business. The fair value of these commitments is
$nil.
Net investment income for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Interest on fixed maturities....... $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans......... 301,253 305,742 283,830
Other investment income............ 43,518 25,089 43,283
Interest on cash equivalents....... 5,486 5,914 5,754
- -----------------------------------------------------------------------
2,027,241 2,029,226 1,999,796
Less investment expenses........... 40,756 40,837 34,434
- -----------------------------------------------------------------------
$1,986,485 $1,988,389 $1,965,362
- -----------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Fixed maturities................... $12,084 $16,115 $ 8,736
Mortgage loans..................... (5,933) (6,424) (8,745)
Other investments.................. 751 (8,831) (150)
- --------------------------------------------------------------
$ 6,902 $ 860 $ (159)
- --------------------------------------------------------------
</TABLE>
Changes in net unrealized appreciation (depreciation) of investments for the
years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Fixed maturities available for sale..... $(93,474) $ 223,441 $(231,853)
Equity securities....................... (203) 53 (52)
- ------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
3. INCOME TAXES
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the
Internal Revenue Code provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
Federal income taxes:
Current............................ $244,946 $176,879 $260,357
Deferred........................... (16,602) 19,982 (65,609)
- -----------------------------------------------------------------
228,344 196,861 194,748
State income taxes-current......... 7,337 9,803 12,390
- -----------------------------------------------------------------
Income tax expense................. $235,681 $206,664 $207,138
- -----------------------------------------------------------------
</TABLE>
Increases (decreases) to the federal tax provision applicable to pretax income
based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes based
on the statutory rate....................................... $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases are attributable to:
Tax-excluded interest and dividend income................... (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal benefit......................... 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits.................................. (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net.................................................. (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes........................................ $235,681 30.4% $206,664 30.4% $207,138 33.3%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
A portion of life insurance company income earned prior to 1984 was not subject
to current taxation but was accumulated, for tax purposes, in a policyholders'
surplus account. At December 31, 1998, the Company had a policyholders' surplus
account balance of $20,114. The policyholders' surplus account is only
F-13
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
3. INCOME TAXES (CONTINUED)
taxable if dividends to the stockholder exceed the stockholder's surplus account
or if the Company is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------
Deferred tax assets:
Policy reserves........................................ $756,769 $748,204
Life insurance guaranty fund assessment reserve........ 15,289 20,101
Other.................................................. 4,253 9,589
- ---------------------------------------------------------------------------
Total deferred tax assets.............................. 776,311 777,894
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs...................... 698,471 700,032
Unrealized gain on investments......................... 91,315 121,885
Investments, other..................................... 3,455 17,559
- ---------------------------------------------------------------------------
Total deferred tax liabilities......................... 793,241 839,476
- ---------------------------------------------------------------------------
Net deferred tax liabilities........................... $ 16,930 $ 61,582
- ---------------------------------------------------------------------------
</TABLE>
The Company is required to establish a valuation allowance for any portion of
the deferred tax assets that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
- --------------------------------------------------------------------------------
4. STOCKHOLDER'S EQUITY
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $1,598,203 as of December 31, 1998 and $1,468,677
as of December 31, 1997 (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 1999 in
excess of approximately $353,933 would require approval of the Department of
Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and surplus as
of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Statutory net income............... $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus...... 1,883,405 1,765,290 1,565,082
- -----------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
The Company loans funds to AEFC under a collateral loan agreement. The balance
of the loan was $nil at December 31, 1998 and 1997. This loan can be increased
to a maximum of $75,000 and pays interest at a rate equal to the preceding
month's effective new money rate for the Company's permanent investments.
Interest income on related party loans totaled $nil, $103 and $780 in 1998, 1997
and 1996, respectively.
The Company participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain employment
requirements. Employer contributions to the plan are based on participants' age,
years of service and total compensation for the year. Funding of retirement
costs for this plan complies with the applicable minimum funding requirements
specified by ERISA. The Company's share of the total net periodic pension cost
was $211, $201 and $174 in 1998, 1997 and 1996, respectively.
The Company also participates in defined contribution pension plans of American
Express Company which cover all employees who have met certain employment
requirements. Company contributions to the plans are a percent of either each
employee's eligible compensation or basic contributions. Costs of these plans
charged to operations in 1998, 1997 and 1996 were $1,503, $1,245 and $990,
respectively.
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and retired
financial advisors. The plans include participant contributions and service
related eligibility requirements. Upon retirement, such employees are considered
to have been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. The Company's share of postretirement benefits in
1998, 1997 and 1996 was $1,352, $1,330 and $1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for 1998,
1997 and 1996, respectively. Certain of these costs are included in deferred
policy acquisition costs.
- --------------------------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $81,074,928, $74,730,720 and
$67,274,354, respectively, of which $4,912,313, $4,351,904 and $3,875,921 were
reinsured at the respective year ends. The Company also reinsures a portion of
the risks assumed under disability income and long-term care policies. Under all
reinsurance agreements, premiums ceded to reinsurers amounted to $66,378,
$60,495 and $48,250 and reinsurance recovered from reinsurers amounted to
$20,982, $19,042, and $15,612 for the years ended December 31, 1998, 1997 and
1996, respectively. Reinsurance contracts do not relieve the Company from its
primary obligation to policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company, its parent and its subsidiaries conduct
business involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters. The Company has been named as a
defendant in three of these types of actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from the Company and its subsidiaries. The
complaints put at issue various alleged sales practices and misrepresentations,
alleged breaches of fiduciary duties and alleged violations of consumer fraud
statutes. The Company and its subsidiaries believe they have meritorious
defenses to the claims raised in these lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the opinion
of
F-15
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, however, the ultimate resolution of these lawsuits, taken in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns, and is
currently auditing the Company's returns for the 1990 through 1992 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of this audit.
- --------------------------------------------------------------------------------
7. LINES OF CREDIT
The Company has available lines of credit with its parent aggregating $100,000.
The interest rate for any borrowings is established by reference to various
indices plus 20 to 45 basis points, depending on the term. Borrowings
outstanding under this agreement were $nil at December 31, 1998 and 1997.
- --------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into transactions involving derivative financial instruments
to manage its exposure to interest rate risk and equity market risk, including
hedging specific transactions. The Company does not hold derivative instruments
for trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market index.
The Company is not impacted by market risk related to derivatives held for
non-trading purposes beyond that inherent in cash market transactions.
Derivatives held for purposes other than trading are largely used to manage risk
and, therefore, the cash flow and income effects of the derivatives are inverse
to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the terms
of the contract. The Company monitors credit risk related to derivative
financial instruments through established approval procedures, including setting
concentration limits by counterparty, and requiring collateral, where
appropriate. A vast majority of the Company's counterparties are rated A or
better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over the
life of the agreement. Notional amounts are not recorded on the balance sheet.
Notional amounts far exceed the related credit risk.
F-16
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 NOTIONAL CARRYING FAIR TOTAL CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------
Assets:
Interest rate caps............ $3,400,000 $15,985 $ 4,256 $ 4,256
Interest rate floors.......... 1,000,000 1,082 13,971 13,971
Options purchased............. 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written..... 265,454 (10,526 ) (11,062) --
Off balance sheet:
Interest rate swaps........... 1,667,000 -- (73,477) --
- ----------------------------------------------------------------------------
$30,635 $(36,859) $47,680
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 NOTIONAL CARRYING FAIR TOTAL CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
Assets:
Interest rate caps............ $4,600,000 $24,963 $ 15,665 $15,665
Interest rate floors.......... 1,000,000 1,561 4,551 4,551
Options purchased/written..... 279,737 9,808 10,449 10,449
Liabilities:
Options written............... 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps........... 1,267,000 -- (45,799) --
- ---------------------------------------------------------------------------------
$36,243 $ (15,020) $30,655
- ---------------------------------------------------------------------------------
</TABLE>
The fair values of derivative financial instruments are based on market values,
dealer quotes or pricing models. The interest rate caps, floors and swaps expire
on various dates from 1999 to 2003. The put and call options expire on various
dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the margin
between interest rates earned on investments and the interest rates credited to
related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount of
fee income received is based upon the daily market value of the separate account
and mutual fund assets. As a result, changing interest rate conditions could
impact the Company's fee income significantly. The Company entered into interest
rate swaps to hedge anticipated fee income for 1999 related to separate accounts
and mutual funds which invest in fixed income securities. Interest will be
accrued and reported in accrued investment income and other liabilities, as
appropriate, and management and other fees.
The Company offers a certain annuity product that pays interest based upon the
relative change in a major stock market index between the beginning and end of
the product's term. As a means of hedging its obligation under the provisions of
this product, the Company purchases and writes options on the major stock market
index.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the underlying
mutual funds. The amount of the fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a result, the
Company's fee income could be impacted significantly by changing economic
conditions in the equity market. The Company entered into index option
F-17
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
collars (combination of puts and calls) to hedge anticipated fee income for 1998
and 1999 related to separate accounts and mutual funds which invest in equity
securities. Testing has demonstrated the impact of these instruments on the
income statement closely correlates with the amount of fee income the Company
realizes. In the event that testing demonstrates that this correlation no longer
exists, or in the event the Company disposes of the index options collars, the
instruments will be marked-to-market through the income statement. At December
31, 1998 deferred losses on purchased put and written call index options were
$2,933 and $7,435, respectively. At December 31, 1997 deferred losses on
purchased put index options were $2,428 and deferred gains on written call index
options were $5,275.
- --------------------------------------------------------------------------------
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company discloses fair value information for most on- and off-balance sheet
financial instruments for which it is practicable to estimate that value. Fair
values of life insurance obligations and all non-financial instruments, such as
deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force, are
also excluded. Management believes the value of excluded assets and liabilities
is significant. The fair value of the Company, therefore, cannot be estimated by
aggregating the amounts presented.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
FINANCIAL ASSETS
Investments:
Fixed maturities (Note 2):
Held to maturity.............. $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale............ 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on real estate
(Note 2)...................... 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2).... 3,158 3,158 3,361 3,361
Derivative financial
instruments (Note 8).......... 41,161 47,680 36,332 30,665
Other......................... 28,872 28,872 82,347 85,383
Cash and cash equivalents
(Note 1)...................... 22,453 22,453 19,686 19,686
Separate account assets
(Note 1)...................... 27,349,401 27,349,401 23,214,504 23,214,504
FINANCIAL LIABILITIES
Future policy benefits for
fixed annuities............... $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8).......... 10,526 84,539 89 45,685
Separate account
liabilities................... 25,005,732 24,179,115 21,488,282 20,707,620
- ----------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,226,985 and $1,185,155, respectively, and policy loans of $90,115
and $93,540, respectively. The fair value of these benefits is based on the
status of the annuities at December 31, 1998 and 1997. The fair value of
deferred annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in non-life
contingent payout status is estimated as the present value of projected benefit
payments at rates appropriate for contracts issued in 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to separate
accounts is estimated as the carrying amount less any applicable surrender
charges and less variable insurance contracts carried at $2,343,669 and
$1,726,222, respectively.
F-18
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
10. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Company. All of the
systems used by the Company are maintained by AEFC and are utilized by multiple
subsidiaries and affiliates of AEFC. The Company's business is heavily dependent
upon AEFC's computer systems and has significant interactions with systems of
third parties.
A comprehensive review of AEFC's computer systems and business processes,
including those specific to the Company, has been conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps are being
taken to resolve any potential problems including modification to existing
software and the purchase of new software. These measures are scheduled to be
completed and tested on a timely basis. AEFC's target date for substantially
completing corrective measures on business critical systems was December 31,
1998. Substantial testing of these systems was targeted for completion early in
1999. AEFC is currently on track with this schedule and is also on track to
finish the work on non-critical systems by June 30, 1999.
AEFC continues to evaluate the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's operations.
The potential materiality of any such impact is not known at this time.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential 2000 exposure is gathered.
F-19
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- -----------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 4, 1999
F-20
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses of the issuance and distribution of the interests in the
IDS Life Account MGA of IDS Life Insurance Company to be registered, other than
commissions on sales of the Contracts, are to be borne by the Registrant.
Item 14. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law provides in part that a corporation
organized under such law shall have power to indemnify anyone made, or
threatened to be made, a party to a threatened, pending or completed proceeding,
whether civil or criminal, administrative or investigative, because he is or was
a director or officer of the corporation, or served as a director or officer of
another corporation at the request of the corporation. Indemnification in such a
proceeding may extend to judgments, penalties, fines and amounts paid in
settlement, as well as to reasonable expenses, including attorneys' fees and
disbursements. In a civil proceeding, there can be no indemnification under the
statute, unless it appears that the person seeking indemnification has acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation and its shareholders and unless such
person has received no improper personal benefit; in a criminal proceeding, the
person seeking indemnification must also have no reasonable cause to believe his
conduct was unlawful.
Article IX of the By-laws of IDS Life Insurance Company requires IDS
Life Insurance Company to indemnify directors and officers to the extent
indemnification is permitted as stated by the preceding paragraph, and contains
substantially the same language as the above-mentioned Section 300.083.
Article IX, paragraph (2), of the By-laws of IDS Life Insurance Company
provides as follows:
"Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party, by reason of the fact that he is or
was a director, officer, employee or agent of this Corporation, or is or was
serving at the direction of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to any threatened, pending or completed action, suit or proceeding,
wherever brought, to the fullest extent permitted by the laws of the State of
Minnesota, as now existing or hereafter amended, provided that this Article
shall not indemnify or protect any such director, officer, employee or agent
against any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of his duties or by reason of his reckless
disregard of his obligations and duties."
The parent company of IDS Life Insurance Company maintains an insurance
policy which affords liability coverage to directors and officers of IDS Life
Insurance Company while acting in that capacity. IDS Life Insurance Company pays
its proportionate share of the premiums for the policy.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. Recent Sales of Unregistered Securities
None
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1. - 2. Not applicable.
3.1 Copy of Certificate of Incorporation of IDS Life Insurance
Company filed electronically as Exhibit 3.1 to
Post-Effective Amendment No. 5 to Registration Statement
No. 33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company
filed electronically as Exhibit 3.2 to Post-Effective
Amendment No. 5 to Registration Statement No. 33-28976 is
incorporated herein by reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life
Insurance Company, dated May 5, 1989, establishing IDS
Life Account MGA filed electronically as Exhibit 3.3 to
Post-Effective Amendment No. 5 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.1 Copy of Non-tax qualified Group Annuity Contract,
Form 33111, filed electronically as Exhibit 4.1 to
Registration Statement No. 333-42793 is incorporated
herein by reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate,
Form 33114, filed electronically as Exhibit 4.2 to
Registration Statement No. 333-42793 is incorporated
herein by reference.
4.3 Copy of Tax qualified Group Annuity Contract, Form 33112,
filed electronically as Exhibit 4.3 to Registration
Statement No. 333-42793 is incorporated herein by
reference.
<PAGE>
4.4 Copy of Tax qualified Group Annuity Certificate,
Form 33115, filed electronically as Exhibit 4.4 to
Registration Statement No. 333-42793 is incorporated
herein by reference.
4.5 Copy of Group IRA Annuity Contract, Form 33113, filed
electronically as Exhibit 4.5 to Registration Statement
No. 333-42793 is incorporated herein by reference.
4.6 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement
No. 333-42793 is incorporated herein by reference.
4.7 Copy of Non-tax qualified Individual Annuity Contract,
Form 30484, is filed electronically herewith.
4.8 Copy of Tax qualified Individual Annuity Contract,
Form 30485, is filed electronically herewith.
4.9 Copy of Individual IRA Contract, Form 30486, is filed
electronically herewith.
5. Copy of Opinion of Counsel regarding legality of
Contracts, filed electronically as Exhibit 5 to
Post-Effective Amendment No. 1 to Registration Statement
No. 33-42793 is incorporated herein by reference.
6. - 20. Not applicable.
21. Copy of List of Subsidiaries filed electronically as
Exhibit 22 to Post-Effective Amendment No. 8 to
Registration Statement No. 333-28976 is incorporated
herein by reference.
22. Not applicable.
23. Consent of Independent Auditors, filed electronically
herewith.
24.1 Power of Attorney, dated August 19, 1997, filed
electronically as Exhibit 25 to Registration Statement No.
333-42793 is incorporated herein by reference.
24.2 Power of Attorney, dated April 9, 1998, filed
electronically as Exhibit 24.2 to Registration Statement
No. 333-42793 is incorporated herein by reference.
25. - 27. Not applicable.
(b) Not Applicable.
<PAGE>
Item 17. Undertakings
A. The Registrant undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933,
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement,
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement,
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such
securities at that time may be deemed to be the initial bona
fide offering thereof, and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
B. The Registrant represents that it is relying upon the no-action
assurance given to the American Council of Life Insurance (pub. avail.
Nov. 28, 1988). Further, the Registrant represents that it has
complied with the provisions of paragraphs (1) - (4) of the no-action
letter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in this City of Minneapolis, and State of
Minnesota on the 30th day of April, 1999.
IDS Life Insurance Company
(Registrant)
By /s/ James A. Mitchell*
James A. Mitchell, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 30th day of April, 1999.
Signature Title
/s/ James A. Mitchell* Chairman of the Board
James A. Mitchell and Chief Executive Officer
/s/ Richard W. Kling* Director and President
Richard W. Kling
/s/ Jeffrey S. Horton** Vice President and Treasurer
Jeffrey S. Horton
/s/ David R. Hubers* Director
David R. Hubers
/s/ Paul F. Kolkman* Director and Executive Vice President
Paul F. Kolkman
/s/ Director and Executive Vice President,
Paula R. Meyer Assured Assets
/s/ Barry J. Murphy* Director and Executive Vice
Barry J. Murphy President, Client Service
/s/ Stuart A. Sedlacek* Director and Executive Vice
Stuart A. Sedlacek President
/s/ Philip C. Wentzel** Vice President and Controller
Philip C. Wentzel
<PAGE>
*Signed pursuant to Power of Attorney dated August 19, 1997, filed
electronically as Exhibit 25 to Registration Statement No. 333-42793 for IDS
Life Insurance Company (IDS Life Account MGA) to Registration Statement No.
333-42793 and incorporated herein by reference.
**Signed pursuant to Power of Attorney dated April 9, 1998, filed electronically
as Exhibit 24.2 for IDS Life Insurance Company (IDS Life Account MGA) to
Registration Statement No. 333-42793 and incorporated herein by reference.
By:
_________________________________
Bruce A. Kohn
Portfolio Guaranteed Term Annuity
Registration Number 333-42793
EXHIBIT INDEX
Exhibit 4.7 Copy of Non-tax qualified Individual Annuity Contract.
Exhibit 4.8 Copy of Tax qualified Individual Annuity Contract.
Exhibit 4.9 Copy of Individual IRA Contract.
Exhibit 23 Consent of Independent Auditors.
- -------------------------------------------------------------------------------
==================================
Individual
==================================
==================================
Annuity
==================================
==================================
Contract
==================================
- --------------------------------------------------------------------------------
This is a deferred annuity contract. It is a legal contract between you, as the
owner, and us, IDS Life Insurance Company, a stock company. PLEASE READ YOUR
CONTRACT CAREFULLY.
If the annuitant is living on the Settlement Date, we will begin to pay you
monthly annuity payments. Any payments made by us are subject to the terms of
this contract. The owner and beneficiary are as named in the application unless
they are changed as provided for in this contract.
We issue this contract in consideration of your application, and payment of the
single purchase payment.
Signed for and issued by IDS Life Insurance Company, Minneapolis, Minnesota, as
of the contract date shown below.
THIS ANNUITY CONTRACT CONTAINS A MARKET VALUE ADJUSTMENT FORMULA WHICH MAY
RESULT IN BOTH UPWARD AND DOWNWARD ADJUSTMENTS IN CASH SURRENDER BENEFITS.
Surrenders are available without market value adjustment on the last day of each
contract period.
NOTICE OF YOUR RIGHT TO EXAMINE THIS CONTRACT FOR TEN DAYS. If for any reason
you are not satisfied with this contract, return it to us or our agent within
ten days after you receive it. We will then cancel this contract and refund all
purchase payments which you have made. This contract will then be considered
void from the start.
President:
[GRAPHIC OMITTED]
Richard W. Kling
Secretary:
[GRAPHIC OMITTED]
William A. Stoltzmann
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
IDS Life Insurance Company
IDS Tower 10
Minneapolis, Minnesota 55440
- - Individual Annuity Contract
- - Purchase payment is payable in a single sum.
- - Annuity payments to begin on the settlement date.
- - This contract is nonparticipating. Dividends are not payable.
- --------------------------------------------------------------------------------
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
- --------------------------------------------------------------------------------
<PAGE>
==================================
Guide to Contract Provisions
==================================
Definitions Important words and meanings/Page 3
The Annuity Contract Entire contract; Incontestability;
Benefits based on incorrect
data/Page 4
Owner Owner's rights; Change of ownership;
Assignment/Page 4
Purchase Payment Payment of the purchase payment/Page 5
Beneficiary and Payments to Who is the beneficiary; Change of
Beneficiary beneficiary; Payments to beneficiary;
Pre-election of beneficiary
plans/Page 6
Accumulation Value, How the accumulation value is
Cash Surrender Value, and determined; Surrender of the contract for
Market Adjusted Value the cash surrender value; How the market
adjusted value is determined; Annual
statement of value/Pages 7-8
Annuity Payment Plans When annuity payments begin; Different
ways to receive annuity payments/Page 9
Table of Settlement Rates Table showing monthly annuity payment
amounts for the various plans/Page
10
<PAGE>
CONTRACT DATA
CONTRACT OWNER: John Doe
PURCHASE PAYMENT: $100,000.00
INITIAL GUARANTEE RATE: 8.00%
INITIAL GUARANTEE PERIOD: 5 Years
SURRENDER CHARGE: There are no surrender charges.
MARKET VALUE ADJUSTMENT: Applied at any time other than the last
day of a Guarantee Period or for death
benefits.
ACCUMULATION VALUE AT END OF INITIAL GUARANTEE PERIOD: $146,932.81
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
- -------------------------------------------------------------------------------
<PAGE>
================================
Definitions
================================
The following words are used often in this contract. When we use these words,
this is what we mean:
the annuitant
The person on whose life monthly annuity payments depend.
you, your, owner
The owner of this contract. The owner may be someone other than the annuitant.
The owner may be changed as provided in this contract.
we, our, us
IDS Life Insurance Company.
contract date
It is the date from which contract anniversaries, contract years, and contract
months are determined. Your contract date is shown under Contract Data.
contract anniversary
The same day and month as the contract date each year that the contract remains
in force.
initial guarantee period
The period during which the initial guarantee rate will be credited. It is shown
under Contract Data.
initial guarantee rate
The rate of interest credited to the purchase payment as described in the
accumulation value section. It is shown under Contract Data.
renewal guarantee period
A renewal guarantee period will begin at the end of each guarantee period. It is
determined in accordance with the terms of the contract.
renewal guarantee rate
The rate of interest credited to the renewal value as described in the
accumulation value section.
renewal date
The first day of a renewal guarantee period. It will always be on a contract
anniversary.
current rate
The applicable interest rate contained in a schedule of rates established by us
from time to time for various guarantee periods.
accumulation value
The value of the purchase payment plus interest credited, adjusted for any
surrenders.
market adjusted value
The accumulation value adjusted by the market adjusted value formula.
market value adjustment
The market adjusted value minus the accumulation value.
renewal value
The accumulation value at the end of the guarantee period.
cash surrender value
The market adjusted value is the cash surrender value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
<PAGE>
written request
A request in writing signed by you and delivered to us at our corporate office.
settlement
If the settlement date is not the last day of a guarantee period, settlement is
the application of the market adjusted value of a contract to provide annuity
payments. On the last day of a guarantee period, settlement is the application
of the accumulation value of a contract to provide annuity payments.
settlement date
The date on which annuity payments are to begin. This date may be changed as
provided in this contract.
<PAGE>
- --------------------------------------------------------------------------------
===============================================================================
The Annuity Contract
===============================================================================
What is the entire contract?
This contract form is the entire contract between you and us.
No one except one of our corporate officers (President, Vice President,
Secretary, or Assistant Secretary) can change or waive any of our rights or
requirements under the contract. That person must do so in writing. None of our
agents or other persons has the authority to change or waive any of our rights
or requirements under the contract.
Can this contract be modified?
This contract may be modified at any time by written agreement between the
contractholder and us. The modification must be signed by one of our corporate
officers (President, Vice President, Secretary or Assistant Secretary). No
modification will affect the amount or term of any contracts issued before the
effective date of the modification unless it is required to conform the contract
to, or give the contractholder the benefit of, any Federal or State statutes.
When will this contract become incontestable?
This contract is incontestable from its date of issue.
What if benefits are based on incorrect data?
If the amount of benefits is determined by data as to a person's age or sex that
is incorrect, benefits will be recalculated on the basis of the correct data.
Any underpayments made by us will be made up immediately. Any overpayments made
by us will be subtracted from the future payments under this contract and/or as
otherwise legally permissible.
What federal and state laws govern the contract?
This contract is intended to qualify as an annuity contract for Federal income
tax purposes. To that end, the provisions of this contract are to be interpreted
to ensure or maintain such tax qualification, despite any other provisions to
the contrary. We reserve the right to amend this contract to reflect any
clarifications that may be needed or are appropriate to maintain such
qualification or to conform the contract to any applicable changes in the tax
qualification requirements. We will send you a copy of any such amendments.
This contract is governed by the law of the state in which it is delivered. The
values and benefits of this contract are at least equal to those required by
such state.
<PAGE>
- -------------------------------------------------------------------------------
====================================
Owner
====================================
What are your rights as owner of this contract?
As long as the annuitant is living and unless otherwise provided in the
contract, you may exercise all rights and privileges in this contract or allowed
by us.
How can you change ownership for this contract?
You can change the ownership of this contract by written request on a form
approved by us. The change must be made while the annuitant is living. Once the
change is recorded by us, it will take effect as of the date of your request,
subject to any action taken or payment made by us before the recording.
Can you assign this contract as collateral?
Yes. While the annuitant is living, you can assign this contract or any interest
in it. Your interest and the interest of any beneficiary is subject to the
interest of the assignee. An assignment is not a change of ownership and an
assignee is not an owner as these terms are used in the contract. Any amounts
payable to the assignee will be paid in a single sum.
A copy of any assignment must be submitted to us at our corporate office. Any
assignment is subject to any action taken or payment made by us before the
assignment was recorded at our corporate office. We are not responsible for the
validity or effect -- tax or otherwise -- of any assignment.
- -------------------------------------------------------------------------------
==================================
Purchase Payment
==================================
What is the purchase payment for this contract?
The purchase payment for this contract is shown under contract data. It is
payable to us on or before the date we deliver this contract. It must be paid or
mailed to us at our corporate office or to an authorized agent.
- -----------------------------------------------------------------------------
====================================
Beneficiary and Payments to Beneficiary
====================================
What death benefits are paid if the annuitant or owner dies before settlement?
If the annuitant or owner dies before settlement while this contract is in
force, we will pay the beneficiary the accumulation value.
The above described payment will also be made upon the first to die if ownership
is in a joint tenancy except where spouses are joint owners with right of
survivorship and the surviving spousal joint owner elects to continue the
contract. For joint spousal ownership with rights of survivorship, the surviving
spouse is deemed the sole beneficiary superseding any other beneficiary
designation. The beneficiary may elect to receive payment any time within 5
years after the date of death of the annuitant.
Unless you have provided otherwise during the lifetime of the annuitant, the
beneficiary may elect by written request to have the amount payable applied
under the terms of the annuity payment plans section of this contract provided:
1. the beneficiary elects the plan within 60 days after we receive due proof of
death; and
2. payments begin no later than one year after the date of death; and
3. the plan provides equal or substantially equal payments over a period which
does not exceed the life of the beneficiary or the life expectancy of the
beneficiary.
In this event, the references to "annuitant" in the annuity payment plans
section of this contract will apply to the beneficiary.
<PAGE>
Can you pre-elect an annuity payment plan for a beneficiary?
During their lifetime you may elect how the death benefit described herein is to
be paid under the contract in the event of death before the settlement date. Any
such election must be made on a form satisfactory to us. We must receive the
form in our corporate office prior to the first to die of the owner or
annuitant. In this event the death benefit shall be payable as so elected by
you, rather than the beneficiary. If for any reason such election does not
satisfy Internal Revenue Code section 72 distribution requirements, the election
will be void and the beneficiary will then be permitted to elect payment
pursuant to the provisions of the contract.
To whom are the death benefits payable?
Benefits will be paid equally to all primary beneficiaries surviving the
annuitant. If none survive, proceeds will be paid equally to all contingent
beneficiaries surviving the annuitant. If no beneficiary survives the annuitant,
we will pay the benefits to you, if living, otherwise to your estate.
Who is the beneficiary?
Beneficiaries are those you name, in a form satisfactory to us, to
receive the benefits of this contract if the owner or annuitant dies while this
contract is in force. You may change the beneficiary as provided below. If the
beneficiary has been changed, we will pay any benefits in accordance with your
last change of beneficiary request.
How do you change the beneficiary?
You may change the beneficiary any time while the annuitant is living by
satisfactory written request to us. Once the change is recorded by us, it will
take effect as of the date of your request, subject to any action taken or
payment made by us before the recording.
What are the rights of the beneficiary?
If the death benefit under this contract becomes payable to a beneficiary
(payee) under an Annuity Payment Plan, that payee shall have the right to name a
beneficiary. Any such request from the payee must be made on a form satisfactory
to us.
What is the spouse's option to continue this contract?
If the owner's death occurs prior to the settlement date, the owner's spouse, if
designated as sole beneficiary, may elect in writing to forego receipt of the
death benefit and instead continue this contract in force as its owner. The
election by the spouse must be made within 60 days after we receive due proof of
death.
What if the annuitant dies after settlement?
If the annuitant dies after settlement, the amount payable, if any, will be as
provided in the annuity payment plan then in effect.
- -------------------------------------------------------------------------------
==================================
Accumulation Value,
==================================
==================================
Cash Surrender Value,
==================================
==================================
Market Adjusted Value
==================================
How is the accumulation value determined?
On the contract date the accumulation value of this contract is the purchase
payment. Thereafter interest accrues from day to day for the guarantee period at
the rate shown under contract data. This rate represents an effective annual
yield. At no time while the contract is in force shall interest accrue at a rate
less than 3% compounded annually. The accumulation value will be adjusted for
any amounts surrendered.
Are there premium tax charges?
We reserve the right to deduct an amount from the accumulation value of this
contract at the time that any applicable premium taxes not previously deducted
are payable.
If a tax is payable at the time of your purchase payment and we choose to not
deduct it at that time, we further reserve the right to deduct it at a later
date.
How are renewal guarantee periods determined?
At the end of any guarantee period, a renewal guarantee period will begin. We
will notify you in writing 45 days before the renewal guarantee period. Each
renewal guarantee period will be one year unless you elect a different length
from those offered at the time. We must receive your written request at least 15
days before the renewal date. The renewal guarantee period may never extend
beyond the settlement date.
<PAGE>
The accumulation value on the renewal date will be equal to the accumulation
value at the end of the guarantee period just ending. This value will earn
interest at the renewal guarantee rate. Upon written request, within 45 days of
the renewal guarantee period, we will notify you of the renewal guarantee rate
then in effect for contracts renewing at that time. The actual renewal guarantee
rate will be determined on the renewal date.
What is the market adjusted value and how is it determined?
The market adjusted value is the accumulation value on any date before the end
of the current guarantee period adjusted by a formula. The formula adjustment
reflects the relationship between:
1. the interest rate we are then crediting for new contract sales and renewals
(Form 30484) for the time remaining in your contract's current guarantee
period; and
2. the guaranteed interest rate applicable to your contract's current guarantee
period.
The market adjusted value may be more or less than the accumulation value.
The market adjusted value formula is as follows:
market adjusted value = renewal value
(1 + ic + .0025)(N + t)
where: renewal value = the accumulation value at the end of your curren
guarantee period.
N = the number of complete contract years to the end
of your guarantee period.
t = the fraction of the contract year remaining to
the end of your contract year (for example, if 180
days remain in a 365 day contract year, t would be
.493)
ic = the current rate offered for new contract sales
and renewals (Form 30484) for the number of years
left in your guarantee period (straight line
interpolation between whole year rates). If N is
zero, ic is the rate for one year guarantee
periods.
The market value adjustment is as follows:
market value adjustment =
market adjusted value _ accumulation value
There will be no market value adjustment made on the last day of a guarantee
period.
Can you request surrender of any amounts under this contract before settlement?
Yes. By written request to us and subject to the rules below you may:
1. surrender this contract for the total cash surrender value;
2. partially surrender this contract for a part of the cash surrender value.
How is the cash surrender value determined?
The cash surrender value is the market adjusted value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
What are the rules for a surrender or partial surrender?
The amount surrendered and any applicable market value adjustment will be
deducted from the accumulation value of the contract on the date of surrender.
You may surrender all or a portion of the cash surrender value. However, the
accumulation value that remains after a partial surrender must be at least
$2,000. Any partial surrender must be at least $250.
The surrender payment will normally be mailed to you within seven days of the
receipt of your written request.
Upon surrender of this contract for the total cash surrender value, this
contract will terminate. We may require that you return this contract to our
corporate office before we pay the total cash surrender value.
Can we delay or suspend payment of a partial or full surrender?
We may defer payment of any partial or full surrender for a period not to exceed
6 months from the date we receive your surrender request or the period permitted
by state insurance law, if less. If we defer payment more than 30 days, we will
pay annual interest of at least 3% on the amount deferred.
<PAGE>
Will you receive information about your contract values?
Yes. At least once a year we will send you a statement showing both the
accumulation value and the cash surrender value of this contract. The statement
will specify the market value adjustment used to determine the cash surrender
value. This statement will be based on any laws or regulations that apply.
We will also notify you 45 days before the end of a guarantee period concerning
renewal periods available and your right to surrender without a market value
adjustment on the last day of your guarantee period.
- --------------------------------------------------------------------------------
==================================
Annuity Payment Plans
==================================
When will annuity payments begin?
The first payment will be made as of the settlement date. Before payments begin,
we will require satisfactory proof that the annuitant is alive. We may also
require that you exchange this contract for a supplemental contract which
provides the annuity payments.
Can you change the settlement date?
Yes. Tell us the new date by written request. However, the settlement date
cannot be later than the later of:
1. the contract anniversary nearest the annuitant's 85th birthday; or
2. the 10th contract anniversary.
Also, if you select a new date, it must be at least 30 days after we receive
your written request at our corporate office.
What are the annuity payment plans?
There are different ways to receive annuity payments. We call these plans.
Plan A - This provides monthly annuity payments for the lifetime of the
annuitant. No payments will be made after the annuitant dies.
Plan B - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a period of at
least five, ten, or fifteen years. You must select the guaranteed period.
Plan C - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a certain number
of months. We determine the number of months by dividing the market adjusted
value applied under this plan by the amount of the monthly annuity payment.
Plan D - We call this a joint and survivor life annuity. Monthly payments will
be paid for the lifetime of the annuitant and a joint annuitant. When either the
annuitant or joint annuitant dies, we will continue to make monthly payments for
the lifetime of the survivor. No payments will be paid after the death of both
the annuitant and joint annuitant.
Plan E - This provides monthly fixed dollar annuity payments for a period of
years. The period of years may be no less than 10 nor more than 30.
What are the requirements for selecting a plan?
By written request to us at least 30 days before the settlement date, you may
select the plan or change to another plan. If at least 30 days before the
settlement date we have not received at our corporate office your written
request to select a plan, we will make payments according to Plan B with
payments guaranteed for ten years.
If the amount to be applied to a plan is not at least $2,000, or if payments are
to be made to other than a natural person, we have the right to make a lump sum
payment of the cash surrender value.
How will payments be made?
Payments will be made by us by check. The check must be personally endorsed by
the payee or payees as well as the annuitant (or joint annuitant under Plan D).
If the annuitant or joint annuitant does not endorse the check, other evidence
must be furnished to show that the annuitant or joint annuitant is still alive.
<PAGE>
- -------------------------------------------------------------------------------
==================================
Table of Settlement Rates
==================================
What will be the amount of the monthly annuity payments?
If the settlement date is the last day of a guarantee period, the amount applied
to provide a payment will be the accumulation value on that date. The market
adjusted value is applied if the settlement date is not the last day of a
guarantee period. The amount applied to provide a payment will be the
accumulation value on the settlement date. The amount of each monthly annuity
payment for each $1,000 applied under any payment plan will be based on our
Table of Settlement Rates in effect at the time of the first payment. The
amounts will not be less than those shown in the table below.
The amount of such payments under plans A, B, and C will depend on the sex and
the adjusted age of the annuitant on the settlement date. The amount of such
payments under plan D will depend on the sex and the adjusted age of the
annuitant and the joint annuitant on the settlement date. Adjusted age means the
age on the annuitant's nearest birthday minus an "adjustment" based on the
calendar year of the birth of the annuitant as follows:
Calendar Calendar
Year of Year of
Annuitant's Adjust- Annuitant's Adjust-
Birth ment Birth ment
- ----- ---- ----- ----
Prior to 1920 0 1945 through 1949 6
1920 through 1924 1 1950 through 1959 7
1925 through 1929 2 1960 through 1969 8
1930 through 1934 3 1970 through 1979 9
1935 through 1939 4 1980 through 1989 10
1940 through 1944 5 After 1989 11
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Amount of Each Monthly Annuity Payment Per $1,000 Applied
- -------------------------------------------------------------------------------
Plan A Plan B Plan C Plan D - Joint and Survivor
Adjusted Age of Female Joint Annuitant
- ---------------------------------------------------------------------------------------------------
Life 5 Years 10 Years 15 Years With Adj.
Adj. Income Certain Certain Certain Refund Male 10 Years 5 YearsSame 5 Years
10 Years
Age* M F M F M F M F M F Age* Younger Younger Age Older Older
- ---------------------------------------------------------------------------------------------------
55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.42 4.10 55 3.51 3.69 3.88 4.06 4.23
60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.86 4.48 60 3.76 3.99 4.24 4.49 4.72
65 6.10 5.35 6.03 5.32 5.81 5.22 5.46 5.05 5.43 4.97 65 4.07 4.38 4.72 5.07 5.39
66 6.29 5.51 6.21 5.47 5.96 5.36 5.56 5.16 5.56 5.08 66 4.15 4.48 4.84 5.21 5.55
67 6.50 5.67 6.41 5.63 6.11 5.50 5.66 5.26 5.70 5.20 67 4.23 4.58 4.97 5.36 5.73
68 6.73 5.85 6.62 5.80 6.28 5.65 5.76 5.37 5.85 5.33 68 4.31 4.69 5.10 5.53 5.92
69 6.97 6.04 6.84 5.98 6.44 5.80 5.86 5.49 6.00 5.47 69 4.40 4.80 5.25 5.70 6.12
70 7.23 6.25 7.07 6.18 6.61 5.96 5.96 5.60 6.16 5.61 70 4.50 4.93 5.40 5.89 6.34
71 7.51 6.47 7.32 6.39 6.78 6.14 6.05 5.71 6.33 5.76 71 4.60 5.06 5.57 6.10 6.57
72 7.80 6.71 7.58 6.62 6.96 6.31 6.14 5.83 6.51 5.93 72 4.71 5.20 5.75 6.31 6.82
73 8.12 6.97 7.85 6.86 7.14 6.50 6.23 5.94 6.70 6.10 73 4.83 5.35 5.94 6.55 7.09
74 8.45 7.26 8.14 7.12 7.32 6.69 6.31 6.04 6.90 6.28 74 4.95 5.51 6.15 6.80 7.37
75 8.82 7.56 8.44 7.39 7.49 6.89 6.38 6.14 7.11 6.48 75 5.08 5.68 6.37 7.07 7.68
76 9.21 7.90 8.76 7.69 7.67 7.09 6.45 6.24 7.33 6.68 76 5.22 5.87 6.61 7.36 8.01
77 9.62 8.26 9.09 8.01 7.84 7.29 6.51 6.33 7.56 6.90 77 5.37 6.07 6.87 7.67 8.36
78 10.07 8.65 9.44 8.34 8.01 7.49 6.57 6.41 7.80 7.13 78 5.54 6.29 7.15 8.01 8.74
79 10.55 9.07 9.80 8.69 8.17 7.69 6.62 6.48 8.05 7.38 79 5.71 6.52 7.45 8.37 9.14
80 11.06 9.53 10.17 9.07 8.33 7.89 6.66 6.55 8.32 7.64 80 5.90 6.78 7.77 8.76 9.57
81 11.61 10.03 10.55 9.46 8.48 8.08 6.70 6.61 8.60 7.91 81 6.10 7.05 8.12 9.17 10.02
82 12.19 10.57 10.94 9.87 8.61 8.26 6.73 6.66 8.89 8.21 82 6.32 7.34 8.49 9.61 10.51
83 12.81 11.16 11.33 10.30 8.74 8.43 6.76 6.70 9.20 8.51 83 6.55 7.65 8.90 10.08 11.02
84 13.46 11.79 11.72 10.74 8.86 8.59 6.79 6.74 9.52 8.83 84 6.80 7.99 9.33 10.58 11.56
85 14.16 12.48 12.12 11.19 8.97 8.74 6.81 6.77 9.85 9.18 85 7.07 8.36 9.78 11.11 12.13
90 18.25 16.68 14.04 13.42 9.36 9.26 6.86 6.85 11.81 11.11 90 8.79 10.65 12.57 14.22 15.63
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
*Adjusted age of annuitant. M = Male F = Female
- --------------------------------------------------------------------------------
The table above is based on the "1983 Individual Annuitant Mortality Table A"
assuming an interest rate of 3% per year compounded annually. Settlement rates
for any age, or any combination of age and sex not shown above, will be
calculated on the same basis as those rates shown in the table above. Such rates
will be furnished by us upon request. Amounts shown in the Table below are based
on an assumed interest rate of 3% per year compounded annually.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Plan E Dollar Amount of Each Monthly Fixed Dollar Annuity Payment Per $1,000 Applied
- ------------------------------------------------------------------------------------------
Years Monthly Years Monthly Years Monthly
Payable Payment Payable Payment Payable Payment
------- ------- ------- ------- ------- -------
10 $9.61 17 $6.23 24 $4.84
11 8.86 18 5.96 25 4.71
12 8.24 19 5.73 26 4.59
13 7.71 20 5.51 27 4.47
14 7.26 21 5.32 28 4.37
15 6.87 22 5.15 29 4.27
16 6.53 23 4.99 30 4.18
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
==================================
Individual
==================================
Annuity
Contract
- --------------------------------------------------------------------------------
This is a deferred annuity contract. It is a legal contract between you, as the
owner, and us, IDS Life Insurance Company, a stock company. PLEASE READ YOUR
CONTRACT CAREFULLY.
If the annuitant is living on the Settlement Date, we will begin to pay you
monthly annuity payments. Any payments made by us are subject to the terms of
this contract. The owner and beneficiary are as named in the application unless
they are changed as provided for in this contract.
We issue this contract in consideration of your application, and payment of the
single purchase payment.
Signed for and issued by IDS Life Insurance Company, Minneapolis, Minnesota, as
of the contract date shown below.
THIS ANNUITY CONTRACT CONTAINS A MARKET VALUE ADJUSTMENT FORMULA WHICH MAY
RESULT IN BOTH UPWARD AND DOWNWARD ADJUSTMENTS IN CASH SURRENDER BENEFITS.
Surrenders are available without market value adjustment on the last day of each
contract period.
NOTICE OF YOUR RIGHT TO EXAMINE THIS CONTRACT FOR TEN DAYS. If for any reason
you are not satisfied with this contract, return it to us or our agent within
ten days after you receive it. We will then cancel this contract and refund all
purchase payments which you have made. This contract will then be considered
void from the start.
President:
[GRAPHIC OMITTED]
Richard W. Kling
Secretary:
[GRAPHIC OMITTED]
William A. Stoltzmann
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
IDS Life Insurance Company
IDS Tower 10
Minneapolis, Minnesota 55440
- - Individual Annuity Contract
- - Purchase payment is payable in a single sum.
- - Annuity payments to begin on the settlement date.
- - This contract is nonparticipating. Dividends are not payable.
- --------------------------------------------------------------------------------
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
<PAGE>
==================================
Guide to Contract Provisions
==================================
Definitions Important words and meanings/Page 3
The Annuity Contract Entire contract; Modification;
Incontestability; Benefits based on
incorrect data/Page 4
Owner Owner's rights; Change of ownership;
Assignment/Page 5
Beneficiary and Payments to Who is the beneficiary; Change of
Beneficiary beneficiary; Payments to beneficiary/
Page 6
Purchase Payment Payment of the purchase payment;
Limit on
elective deferrals/Page 6
Accumulation Value, How the accumulation value is
Cash Surrender Value, and determined; How the market adjusted
Market Adjusted Value value is determined; Surrender of the
contract for the cash surrender
value; TSA prohibited distributions;
Annual statement of value/Pages 7-8
Annuity Payment Plans When annuity payments begin;
Different
ways to receive annuity payments;
Direct rollover of
distributions/Pages 9-10
Table of Settlement Rates Table showing monthly annuity payment
amounts for the various plans/Page
11
<PAGE>
CONTRACT DATA
CONTRACT OWNER: John Doe
PURCHASE PAYMENT: $100,000.00
INITIAL GUARANTEE RATE: 8.00%
INITIAL GUARANTEE PERIOD: 5 Years
SURRENDER CHARGE: There are no surrender charges.
MARKET VALUE ADJUSTMENT: Applied at any time other than the last
day of a Guarantee Period or for death
benefits.
ACCUMULATION VALUE AT END OF INITIAL GUARANTEE PERIOD: $146,932.81
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
- --------------------------------------------------------------------------------
<PAGE>
==================================
Definitions
==================================
The following words are used often in this contract. When we use these words,
this is what we mean:
the annuitant
The person on whose life monthly annuity payments depend.
you, your, owner
The owner of this contract. The owner may be someone other than the annuitant.
The owner may be changed as provided in this contract.
we, our, us
IDS Life Insurance Company
contract date
It is the date from which contract anniversaries, contract years, and contract
months are determined. Your contract date is shown under contract data, in the
contract.
contract anniversary
The same day and month as the contract date each year that the contract remains
in force.
initial guarantee period
The period during which the initial guarantee rate will be credited. It is shown
under contract data, in the contract.
initial guarantee rate
The rate of interest credited to the purchase payment as described in the
accumulation value section. It is shown under contract data, in the contract.
renewal guarantee period
A renewal guarantee period will begin at the end of each guarantee period. It is
determined in accordance with the terms of the contract.
renewal guarantee rate
The rate of interest credited to the renewal value as described in the
accumulation value section.
renewal date
The first day of a renewal guarantee period. It will always be on a contract
anniversary.
current rate
The applicable interest rate contained in a schedule of rates established by us
from time to time for various guarantee periods.
accumulation value
The value of the purchase payment plus interest credited, adjusted for any
surrenders.
market adjusted value
The accumulation value adjusted by the market adjusted value formula.
market value adjustment
The market adjusted value minus the accumulation value.
renewal value
The accumulation value at the end of the guarantee period.
cash surrender value
The market adjusted value is the cash surrender value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
<PAGE>
written request
A request in writing signed by you and delivered to us at our corporate office.
settlement
If the settlement date is not the last day of a guarantee period, settlement is
the application of the market adjusted value of a contract to provide annuity
payments. On the last day of a guarantee period, settlement is the application
of the accumulation value of a contract to provide annuity payments.
settlement date
The date on which annuity payments are to begin under a contract. This date may
be changed as provided in the contract.
elective deferrals
Employer contributions to the annuity that are excludable from the taxpayer's
current income as provided in the Code.
Code
The Internal Revenue Code of 1986, as amended, and all related laws and
regulations which are in effect during the term of this contract.
TSA
A Tax Sheltered Annuity as described in Section 403(b) of the Code.
- -------------------------------------------------------------------------------
==================================
The Annuity Contract
==================================
What is the entire contract?
This contract form is the entire contract between you and us.
No one except one of our corporate officers (President, Vice President,
Secretary, or Assistant Secretary) can change or waive any of our rights or
requirements under the contract. That person must do so in writing. None of our
agents or other persons has the authority to change or waive any of our rights
or requirements under the contract.
Can the contract be modified?
We reserve the right to modify the contract to the extent necessary to qualify
this contract, if purchased as part of a 401(a) qualified plan or a TSA, to the
extent necessary to comply with Section 401, 403 or any other applicable section
of the Code, or to comply with the provisions of your 401(a) qualified plan or
TSA. We also reserve the right to modify the contract to the extent necessary to
qualify the contract, if purchased as part of a deferred compensation plan under
Section 457 of the Code, to the extent necessary to comply with Section 457 or
any other applicable section of the Code, or to comply with the provisions of
your deferred compensation plan.
When will this contract become incontestable?
This contract is incontestable from its date of issue.
What if benefits are based on incorrect data?
If the amount of benefits is determined by data as to a person's age that is
incorrect, benefits will be recalculated on the basis of the correct data. Any
underpayments made by us will be made up immediately. Any overpayments made by
us will be subtracted from the future payments under this contract and/or as
otherwise legally permissible.
What federal and state laws govern this contract?
This contract is intended to qualify as an annuity contract for Federal income
tax purposes. To that end, the provisions of this contract are to be interpreted
to ensure or maintain such tax qualification, despite any other provisions to
the contrary. We reserve the right to amend this contract to reflect any
clarifications that may be needed or are appropriate to maintain such
qualification or to conform this contract to any applicable changes in the tax
qualification requirements. We will send you a copy of any such amendments.
This contract is governed by the law of the state in which it is delivered. The
values and benefits of this contract are at least equal to those required by
such state.
<PAGE>
- ------------------------------------------------------------------------------
==================================
Owner
==================================
What are your rights as owner of this contract?
As long as the annuitant is living and unless otherwise provided in this
contract, you may exercise all rights and privileges in this contract or allowed
by us.
What are your rights as owner if you are a trust or custodial account?
If you are a tax-qualified trust or tax-qualified custodial account, then your
trustees or custodians (or their successors), properly named by your trust or
custodial agreement, may exercise all rights and privileges provided in this
contract or allowed by us.
Can you change the ownership of this contract?
This contract may not be sold, assigned, transferred, discounted, or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose to any person other than as may be required or permitted under
Sections 401, 403, 457, or other applicable sections of the Code.
However, if you are the trustee of a tax-qualified trust or the custodian of a
tax-qualified custodial account, you may transfer ownership of this contract to
the annuitant or to a qualified successor trustee or custodian if permitted by
the Code.
Or, if you are a trust or custodian or an employer as part of a qualified plan
under Section 401 or 403 or a deferred compensation plan under Section 457 of
the Code, you may transfer ownership of this contract to the annuitant if
permitted by the Code.
Any permitted transfers must be on a form approved by us. The change must be
made while the annuitant is living. Once the change is recorded by us, it will
take effect subject to any action taken or payment made by us before the
recording.
- -------------------------------------------------------------------------------
==================================
Beneficiary and Payments To Beneficiary
==================================
What death benefits are paid if the annuitant or owner dies before settlement?
If the annuitant or owner dies before settlement while this contract is in
force, we will pay the beneficiary the accumulation value.
The above amount will be payable in a lump sum upon receipt of due proof of
death of the annuitant. The beneficiary may elect to receive payment any time
within 5 years after the date of death of the annuitant.
Instead of a lump sum, payment may be made under an annuity payment plan
provided amounts are calculated in accordance with the Code, and:
1. the beneficiary elects the plan within 60 days after we receive due proof of
death; and
2. payments begin no later than:
a. one year after the date of death, in the case of a non-spouse
beneficiary; or
b the date on which the annuitant would have attained age 70 1/2, in the
case of a spouse beneficiary; and
3. the plan provides equal or substantially equal payments over a period which
does not exceed the life of the beneficiary or the life expectancy of the
beneficiary, or in the case of a non-spouse beneficiary of a Section 457
plan, payments do not exceed a period of 15 years.
In this event, the reference to "annuitant" in the annuity payment plans section
will apply to the beneficiary.
To whom are the death benefits payable?
Benefits will be paid equally to all primary beneficiaries surviving the
annuitant. If none survive, proceeds will be paid equally to all contingent
beneficiaries surviving the annuitant. If no beneficiary survives the annuitant,
we will pay the benefits to you, if living, otherwise to your estate.
Who is the beneficiary?
Beneficiaries are those you name, in a form satisfactory to us, to receive the
benefits of this contract if the owner or annuitant die while this contract is
in force. You may change the beneficiary as provided below. If the beneficiary
has been changed, we will pay any benefits in accordance with your last change
of beneficiary request.
<PAGE>
How do you change the beneficiary?
You may change the beneficiary any time while the annuitant is living by
satisfactory written request to us. Once the change is recorded by us, it will
take effect as of the date of your request, subject to any action taken or
payment made by us before the recording.
What are the rights of the beneficiary?
If the death benefit under this contract becomes payable to a beneficiary
(payee) under an Annuity Payment Plan, that payee shall have the right to name a
beneficiary. Any such request from the payee must be made on a form satisfactory
to us.
What is the spouse's option to continue this contract?
If the annuitant's death occurs before the settlement date and before the
annuitant's age 70 1/2, the annuitant's spouse, if designated as sole
beneficiary, may elect in writing to postpone receipt of the death benefit and
instead continue this contract in force. The election by the spouse must be made
within 60 days after we receive due proof of death. The contract may be
continued in force only until the date on which the annuitant would have
attained age 70 1/2. Any annuity payment plan later elected by the spouse must
provide amounts calculated in accordance with the Code.
What if the annuitant dies after settlement?
If the annuitant dies after settlement, the amount payable, if any, will be as
provided in the annuity payment plan then in effect.
- -------------------------------------------------------------------------------
==================================
Purchase Payment
==================================
What is the purchase payment for this contract?
The purchase payment for this contract is shown under contract data. It is
payable to us on or before the date we deliver this contract. It must be paid or
mailed to us at our corporate office or to an authorized agent.
Is there a limit on elective deferrals?
Elective deferrals made under the contract may not exceed the annual limit on
elective deferrals as provided in the Code.
- -------------------------------------------------------------------------------
==================================
Accumulation Value,
==================================
Cash Surrender Value,
==================================
Market Adjusted Value
==================================
How is the accumulation value determined?
On the contract date, the accumulation value of this contract is the purchase
payment. Thereafter, interest accrues from day to day for the guarantee period
at the rate shown under contract data. This rate represents an effective annual
yield. At no time while the contract is in force shall interest accrue at a rate
less than 3% compounded annually. The accumulation value will be adjusted for
any amounts surrendered.
Are there premium tax charges?
We reserve the right to deduct an amount from the accumulation value of this
contract at the time that any applicable premium taxes not previously deducted
are payable.
If a tax is payable at the time of your purchase payment and we choose to not
deduct it at that time, we further reserve the right to deduct it at a later
date.
How are renewal guarantee periods determined?
At the end of any guarantee period, a renewal guarantee period will begin. We
will notify you in writing 45 days before the renewal guarantee period. Each
renewal guarantee period will be one year unless you elect a different length
from those offered at the time. We must receive your written request at least 15
days before the renewal date. The renewal guarantee period may never extend
beyond the settlement date.
The accumulation value on the renewal date will be equal to the accumulation
value at the end of the guarantee period just ending. This value will earn
interest at the renewal guarantee rate. Upon written request, within 45 days of
the renewal guarantee period, we will notify you of the renewal guarantee rate
then in effect for contracts renewing at that time. The actual renewal guarantee
rate will be determined on the renewal date.
<PAGE>
What is the market adjusted value and how is it determined?
The market adjusted value is the accumulation value on any date before the end
of the current guarantee period adjusted by a formula. The formula adjustment
reflects the relationship between:
1. the interest rate we are then crediting for new contract sales and renewals
(Form 30485) for the time remaining in your contract's current guarantee
period; and
2. the guaranteed interest rate applicable to your contract's current guarantee
period.
The market adjusted value may be more or less than the accumulation value.
The market adjusted value formula is as follows:
market adjusted value = renewal value
(1 + ic + .0025)(N + t)
where: renewal value = the accumulation value at the end of your current
guarantee period.
N = the number of complete contract years to the end
of your guarantee period.
t = the fraction of the contract year remaining to
the end of your contract year (for example, if
180 days remain in a 365 day contract year, t
would be .493)
ic = the current rate offered for new contract sales
and renewals (Form 30485) for the number of years
left in your guarantee period (straight line
interpolation between whole year rates). If N is
zero, ic is the rate for one year guarantee
periods.
The market value adjustment is as follows:
market value adjustment =
market adjusted value __ accumulation value
There will be no market value adjustment made on the last day of a guarantee
period.
Can you request surrender of any amounts under this contract before settlement?
Yes. By written request to us and subject to the rules below you may:
1. surrender this contract for the total cash surrender value;
2. partially surrender this contract for a part of the cash surrender value.
How is the cash surrender value determined?
The cash surrender value is the market adjusted value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
What are the rules for a surrender or partial surrender?
The amount surrendered and any applicable market value adjustment will be
deducted from the accumulation value of the contract on the date of surrender.
You may surrender all or a portion of the cash surrender value. However, the
accumulation value that remains after a partial surrender must be at least
$2,000. Any partial surrender must be at least $250.
The surrender payment will normally be mailed to you within seven days of the
receipt of your written request.
Upon surrender of this contract for the total cash surrender value, this
contract will terminate. We may require that you return this contract to our
corporate office before we pay the total cash surrender value.
<PAGE>
What distributions are prohibited if your contract is a TSA?
To meet the requirements of Section 403(b) of the Code, unless otherwise
provided in the Code, no amounts may be distributed unless you have:
1. attained age 59-1/2; or
2. separated from service; or
3. died; or
4. become disabled (as defined in Section 72(m)(7) of the Code); or
5. encountered hardship (within the meaning of Section 401(k) of the Code); and
then only such amounts as the Code may provide.
We will require satisfactory written proof of the event(s) in items 1 through 5
above prior to any distribution from the contract.
Can we delay or suspend payment of a partial or full surrender?
We may defer payment of any partial or full surrender for a period not to exceed
6 months from the date we receive your surrender request or the period permitted
by state insurance law, if less. If we defer payment more than 30 days, we will
pay annual interest of at least 3% on the amount deferred.
Will you receive information about your contract values?
Yes. At least once a year we will send you a statement showing both the
accumulation value and the cash surrender value of this contract. The statement
will specify the market value adjustment used to determine the cash surrender
value. This statement will be based on any laws or regulations that apply.
We will also notify you 45 days before the end of a guarantee period concerning
renewal periods available and your right to surrender without a market value
adjustment on the last day of your guarantee period.
- --------------------------------------------------------------------------------
==================================
Annuity Payment Plans
==================================
When will annuity payments begin?
The first payment will be made as of the settlement date. Before payments begin,
we will require satisfactory proof that the annuitant is alive. We may also
require that you exchange this contract for a supplemental contract which
provides the annuity payments.
Can you change the settlement date?
Yes. Tell us the new date by written request. If you select a new date, it must
be at least 30 days after we receive your written request at our corporate
office.
The settlement date cannot be later than the later of:
1. April 1 following the calendar year in which the annuitant attains age
70 1/2; or
2. except for 5% owners, if later, April 1 following the calendar year in
which the annuitant retires; or
3. such other date which satisfies the minimum distribution requirements under
the Internal Revenue Code of 1986, as amended, its regulations and/or
promulgations by the Internal Revenue Service; or
4. such other date as agreed upon by us.
Notwithstanding either of the above, the settlement date cannot be later than
the later of:
1. the contract anniversary nearest the annuitant's 85th birthday; or
2. the 10th contract anniversary.
What are the annuity payment plans?
There are different ways to receive annuity payments. We call these plans.
Plan A - This provides monthly annuity payments for the lifetime of the
annuitant. No payments will be made after the annuitant dies.
Plan B - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a period of at
least five, ten, or fifteen years.
You must select the guaranteed period.
<PAGE>
Plan C - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a certain number
of months. We determine the number of months by dividing the market adjusted
value applied under this plan by the amount of the monthly annuity payment.
Plan D - We call this a joint and survivor life annuity. Monthly payments will
be paid for the lifetime of the annuitant and a joint annuitant. When either the
annuitant or joint annuitant dies, we will continue to make monthly payments for
the lifetime of the survivor. No payments will be paid after the death of both
the annuitant and joint annuitant.
Plan E - This provides monthly fixed dollar annuity payments for a period of
years. The period of years may be no less than 10 nor more than 30.
What are the requirements for selecting a plan?
You may elect by written notice to us at any time at least 30 days prior to the
settlement date, to have the market adjusted value applied on the settlement
date to provide:
1. a lump-sum payment as a result of a total surrender as provided under cash
surrender value provision of this contract; or
2. one of the annuity payment plans shown herein. Amounts payable under any
such annuity payment plan will be calculated in accordance with the Code.
Any such annuity payment plan must be provided:
a. in equal or substantially equal payments over a period no longer than the
life of the annuitant or the lives of the annuitant and a joint
annuitant; or
b. in equal or substantially equal payments over a period which does not
exceed the life expectancy of the annuitant , or the life expectancy of
the annuitant and a joint annuitant; and
c. any annuity payment plan selected must also meet the incidental death
benefit requirements under the Code.
If at least 30 days before the settlement date we have not received at our
corporate office your written request to select a plan, we will make payments
according to Plan B with payments guaranteed for 10 years, unless otherwise
required by the Code.
If the amount to be applied to a plan is not at least $2,000, or if payments are
to be made to other than a natural person, we have the right to make a lump-sum
payment of the cash surrender value.
How will payments be made?
Payments will be made by us by check. The check must be personally endorsed by
the payee or payees as well as the annuitant (or joint annuitant under Plan D).
If the annuitant or joint annuitant does not endorse the check, other evidence
must be furnished to show that the annuitant or joint annuitant is still alive.
Can I delay distributions at settlement?
When you are eligible to receive a distribution from your contract, you may be
able to have all or a portion of that distribution paid in a "direct rollover."
A direct rollover means that, instead of paying you, we will make your payment
directly to an individual retirement account or annuity (IRA, as defined in
Section 408 of the Code) or to another Code Section 403(b) contract or custodial
account that accepts direct rollovers. If you choose a direct rollover, you will
not be taxed on your distribution until you later take it out of the IRA or
403(b) plan. However, you will be subject to any applicable charges under your
contract at the time of the distribution.
Do all distributions qualify for direct rollover?
Only an "eligible rollover distribution" (as defined in Code Section 402(c)) may
be paid as a direct rollover. In general, eligible rollover distributions DO NOT
include any payment that is part of a series of equal or almost equal payments
made at least once a year over:
- your life or life expectancy;
- the life or life expectancies of you and your beneficiary; or
- for a period of ten years or more.
Also, required minimum distributions made beginning in the year you retire or
reach age 70-1/2, as applicable, are not "eligible rollover distributions"
available for direct rollover.
<PAGE>
Are eligible rollover distributions available for alternate payees or
beneficiaries?
The rules outlined above apply to your former spouse who is an "alternate payee"
under a "qualified domestic relations order" (as defined in Code Section
414(p)). A qualified domestic relations order is issued by a court, usually in
connection with a divorce or legal separation.
A beneficiary who is your surviving spouse may elect to have an eligible
rollover distribution directly rolled over into an IRA, but not into another
403(b) plan.
A distribution to a non-spouse is not an eligible rollover distribution.
- --------------------------------------------------------------------------------
==================================
Table of Settlement Rates
==================================
What will be the amount of the monthly annuity payments?
If the settlement date is the last day of a guarantee period, the amount applied
to provide a payment will be the accumulation value on that date. The market
adjusted value is applied if the settlement date is not the last day of a
guarantee period. The amount applied to provide a payment will be the
accumulation value on the settlement date. The amount of each monthly annuity
payment for each $1,000 applied under any payment plan will be based on our
Table of Settlement Rates in effect at the time of the first payment. The
amounts will not be less than those shown in the table below.
The amount of such payments under plans A, B, and C will depend on the adjusted
age of the annuitant on the settlement date. The amount of such payments under
plan D will depend on the adjusted age of the annuitant and the joint annuitant
on the settlement date. Adjusted age means the age on the annuitant's nearest
birthday minus an "adjustment" based on the calendar year of the birth of the
annuitant as follows:
Calendar Calendar
Year of Year of
Annuitant's Adjust- Annuitant's Adjust-
Birth ment Birth ment
- ----- ---- ----- ----
Prior to 1920 0 1945 through 1949 6
1920 through 1924 1 1950 through 1959 7
1925 through 1929 2 1960 through 1969 8
1930 through 1934 3 1970 through 1979 9
1935 through 1939 4 1980 through 1989 10
1940 through 1944 5 After 1989 11
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of Each Monthly Annuity Payment Per $1,000 Applied
- ---------------------------------------------------------------------------------------------------
Plan A Plan B Plan C Plan D - Joint and Survivor
Adjusted Age of Joint Annuitant
- ---------------------------------------------------------------------------------------------------
Adj. Life 5 Years 10 Years 15 Years With Adj. 10 Years 5 Years Same 5 Years
10 Years
Age* Income Certain Certain Certain Refund Age* Younger Younger Age Older Older
- --------------------------------------------------------------------------------------------------------------------------
55 4.25 4.25 4.22 4.18 4.10 55 3.47 3.62 3.77 3.90 4.01
60 4.72 4.70 4.66 4.57 4.48 60 3.71 3.90 4.10 4.28 4.42
65 5.35 5.32 5.22 5.05 4.97 65 4.01 4.28 4.54 4.79 4.99
66 5.51 5.47 5.36 5.16 5.08 66 4.08 4.36 4.65 4.91 5.13
67 5.67 5.63 5.50 5.26 5.20 67 4.16 4.46 4.76 5.04 5.28
68 5.85 5.80 5.65 5.37 5.33 68 4.24 4.56 4.89 5.19 5.43
69 6.04 5.98 5.80 5.49 5.47 69 4.33 4.67 5.02 5.34 5.61
70 6.25 6.18 5.96 5.60 5.61 70 4.42 4.79 5.16 5.51 5.79
71 6.47 6.39 6.14 5.71 5.76 71 4.52 4.91 5.31 5.69 5.99
72 6.71 6.62 6.31 5.83 5.93 72 4.63 5.04 5.48 5.88 6.20
73 6.97 6.86 6.50 5.94 6.10 73 4.74 5.19 5.66 6.09 6.43
74 7.26 7.12 6.69 6.04 6.28 74 4.86 5.34 5.85 6.32 6.68
75 7.56 7.39 6.89 6.14 6.48 75 4.99 5.51 6.06 6.56 6.96
76 7.90 7.69 7.09 6.24 6.68 76 5.13 5.69 6.28 6.82 7.25
77 8.26 8.01 7.29 6.33 6.90 77 5.28 5.88 6.52 7.11 7.56
78 8.65 8.34 7.49 6.41 7.13 78 5.43 6.09 6.78 7.42 7.90
79 9.07 8.69 7.69 6.48 7.38 79 5.61 6.32 7.07 7.75 8.27
80 9.53 9.07 7.89 6.55 7.64 80 5.79 6.56 7.38 8.11 8.67
81 10.03 9.46 8.08 6.61 7.91 81 5.99 6.82 7.71 8.50 9.09
82 10.57 9.87 8.26 6.66 8.21 82 6.20 7.11 8.07 8.92 9.55
83 11.16 10.30 8.43 6.70 8.51 83 6.43 7.42 8.45 9.37 10.04
84 11.79 10.74 8.59 6.74 8.83 84 6.68 7.75 8.87 9.86 10.57
85 12.48 11.19 8.74 6.77 9.18 85 6.96 8.11 9.32 10.38 11.14
90 16.68 13.42 9.26 6.85 11.11 90 8.67 10.38 12.09 13.50 14.67
- ------------------------------------------------------------------------------
*Adjusted age of annuitant.
- -------------------------------------------------------------------------------
The table above is based on the "1983 Individual Annuitant Mortality Table A"
assuming an interest rate of 3% per year compounded annually. Settlement rates
for any age not shown above, will be calculated on the same basis as those rates
shown in the table above. Such rates will be furnished by us upon request.
Amounts shown in the Table below are based on an assumed interest rate of 3% per
year compounded annually.
</TABLE>
<TABLE>
<CAPTION>
<S>
<C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Plan E Dollar Amount of Each Monthly Fixed Dollar Annuity Payment Per $1,000 Applied
- --------------------------------------------------------------------------------------------------
Years Monthly Years Monthly Years Monthly
Payable Payment Payable Payment Payable Payment
------- ------- ------- ------- ------- -------
10 $9.61 17 $6.23 24 $4.84
11 8.86 18 5.96 25 4.71
12 8.24 19 5.73 26 4.59
13 7.71 20 5.51 27 4.47
14 7.26 21 5.32 28 4.37
15 6.87 22 5.15 29 4.27
16 6.53 23 4.99 30 4.18
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
==================================
Individual IRA
==================================
==================================
Annuity
==================================
==================================
Contract
==================================
- -------------------------------------------------------------------------------
This is a deferred annuity contract. It is a legal contract between you, as the
owner, and us, IDS Life Insurance Company, a stock company. PLEASE READ YOUR
CONTRACT CAREFULLY.
If the annuitant is living on the Settlement Date, we will begin to pay you
monthly annuity payments. Any payments made by us are subject to the Terms of
this contract.
We issue this contract in consideration of your application and payment of the
single purchase payment.
Signed for and issued by IDS Life Insurance Company, Minneapolis, Minnesota, as
of the contract date shown below.
THIS ANNUITY CONTRACT CONTAINS A MARKET VALUE ADJUSTMENT FORMULA WHICH MAY
RESULT IN BOTH UPWARD AND DOWNWARD ADJUSTMENTS IN CASH SURRENDER BENEFITS.
Surrenders are available without market value adjustment on the last day of each
contract guarantee period.
NOTICE OF YOUR RIGHT TO EXAMINE THIS CONTRACT FOR TEN DAYS. If for any reason
you are not satisfied with this contract, return it to us or our agent within
ten days after you receive it. We will then cancel this contract and refund all
purchase payments which you have made. This contract will then be considered
void from the start.
President:
[GRAPHIC OMITTED]
Richard W. Kling
Secretary:
[GRAPHIC OMITTED]
William A. Stoltzmann
<PAGE>
- -------------------------------------------------------------------------------
[GRAPHIC OMITTED]
IDS Life Insurance Company
IDS Tower 10
Minneapolis, Minnesota 55440
- - Individual Annuity Contract
- - Purchase payment is payable in a single sum.
- - Annuity payments to begin on the settlement date.
- - This contract is nonparticipating. Dividends are not payable.
- -------------------------------------------------------------------------------
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
<PAGE>
- --------------------------------------------------------------------------------
==================================
Guide to Contract Provisions
==================================
Definitions Important words and meanings/Page 3
The Annuity Contract Entire contract; Modification;
Incontestability; Benefits based on
incorrect data/Page 4
Owner Owner's rights; Change of
ownership/Page 4
Beneficiary and Payments Who is the beneficiary; Change of
to Beneficiary beneficiary; Payments to
beneficiary/Page 5
Purchase Payment Payment of the purchase
payment/Page 6
Accumulation Value, How the accumulation value is determined;
Cash Surrender Value, Surrender of the contract for the cash
and Market Adjusted Value surrender value; How the market adjusted
value is determined; Annual statement of
value/Pages 7-8
Annuity Payment Plans When annuity payments begin;
Different ways to receive annuity
payments/Page 9
Table of Settlement Rates Table showing monthly annuity
payment amounts for the various
plans/Page 10
<PAGE>
CONTRACT DATA
CONTRACT OWNER: John Doe
PURCHASE PAYMENT: $100,000.00
INITIAL GUARANTEE RATE: 8.00%
INITIAL GUARANTEE PERIOD: 5 Years
SURRENDER CHARGE: There are no surrender charges.
MARKET VALUE ADJUSTMENT: Applied at any time other than the last
day of a Guarantee Period or for death
benefits.
ACCUMULATION VALUE AT END OF INITIAL GUARANTEE PERIOD: $146,932.81
ANNUITANT: John Doe
CONTRACT NUMBER: XXX-XXXXXX
CONTRACT DATE: March 18, 1999
CONTRACT SETTLEMENT DATE: March 18, 2049
<PAGE>
- -----------------------------------------------------------------------------
==================================
Definitions
==================================
The following words are used often in this contract. When we use these words,
this is what we mean:
the annuitant
The person on whose life monthly annuity payments depend.
you, your, owner
The owner of this contract. The owner is the same as the annuitant. The owner is
shown in the application unless the owner has been changed as provided in this
contract.
we, our, us
IDS Life Insurance Company
contract date
It is the date from which contract anniversaries, contract years, and contract
months are determined. Your contract date is shown under contract data, in the
contract.
contract anniversary
The same day and month as the contract date each year that the contract remains
in force.
initial guarantee period
The period during which the initial guarantee rate will be credited. It is shown
under contract data, in the contract.
initial guarantee rate
The rate of interest credited to the purchase payment as described in the
accumulation value section. It is shown under contract data, in the contract.
renewal guarantee period
A renewal guarantee period will begin at the end of each guarantee period. It is
determined in accordance with the terms of the contract.
renewal guarantee rate
The rate of interest credited to the renewal value as described in the
accumulation value section.
renewal date
The first day of a renewal guarantee period. It will always be on a contract
anniversary.
current rate
The applicable interest rate contained in a schedule of rates established by us
from time to time for various guarantee periods.
accumulation value
The value of the purchase payment plus interest credited, adjusted for any
surrenders.
market adjusted value
The accumulation value adjusted by the market adjusted value formula.
market value adjustment
The market adjusted value minus the accumulation value.
renewal value
The accumulation value at the end of the guarantee period.
cash surrender value
The market adjusted value is the cash surrender value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
<PAGE>
written request
A request in writing signed by you and delivered to us at our corporate office.
settlement
If the settlement date is not the last day of a guarantee period, settlement is
the application of the market adjusted value of a contract to provide annuity
payments. On the last day of a guarantee period, settlement is the application
of the accumulation value of a contract to provide annuity payments.
settlement date
The date on which annuity payments are to begin under a contract. This date may
be changed as provided in the contract.
Code
The Internal Revenue Code of 1986, as amended, and all related laws and
regulations which are in effect during the term of this contract.
IRA
An Individual Retirement Annuity as described in Section 408(b) of the Code.
<PAGE>
- -------------------------------------------------------------------------------
==================================
The Annuity Contract
==================================
What is the entire contract?
This contract form is the entire contract between you and us.
No one except one of our corporate officers (President, Vice President,
Secretary, or Assistant Secretary) can change or waive any of our rights or
requirements under the contract. That person must do so in writing. None of our
agents or other persons has the authority to change or waive any of our rights
or requirements under the contract.
Can this contract be modified?
We reserve the right to modify the contract to the extent necessary to qualify
it as an IRA as described in Section 408(b) of the Code or in any other
applicable section of the Code.
When will this contract become incontestable?
This contract is incontestable from its date of issue.
What if benefits are based on incorrect data?
If the amount of benefits is determined by data as to a person's age or sex that
is incorrect, benefits will be recalculated on the basis of the correct data.
Any underpayments made by us will be made up immediately. Any overpayments made
by us will be subtracted from the future payments under this contract and/or as
otherwise legally permissible.
What federal and state laws govern this contract?
This contract is intended to qualify as an annuity contract for Federal income
tax purposes. To that end, the provisions of this contract are to be interpreted
to ensure or maintain such tax qualification, despite any other provisions to
the contrary. We reserve the right to amend this contract to reflect any
clarifications that may be needed or are appropriate to maintain such
qualification or to conform the contract to any applicable changes in the tax
qualification requirements. We will send you a copy of any such amendments.
This contract is governed by the law of the state in which it is delivered. The
values and benefits of this contract is at least equal to those required by such
state.
- ------------------------------------------------------------------------------
==================================
Owner
==================================
What are your rights as owner of this contract?
As long as the annuitant is living and unless otherwise provided in this
contract, you may exercise all rights and privileges in the contract or allowed
by us. Your entire interest as owner is nonforfeitable. Can you change the
ownership of this contract?
Your right to change ownership of this contract is restricted. This contract may
not be sold, assigned, transferred, discounted, or pledged as collateral for a
loan or as security for the performance of an obligation or for any other
purpose to any person other than as may be required or permitted under Section
408 of the Code or under any other applicable section of the Code. Your interest
in this contract may be transferred to your former spouse, if any, under a
divorce decree or a written instrument incident to such divorce.
Any permitted transfers must be on a form approved by us. The change must be
made while the annuitant is living. Once the change is recorded by us, it will
take effect subject to any action taken or payment made by us before the
recording.
<PAGE>
- -------------------------------------------------------------------------------
==================================
Beneficiary and Payments
==================================
==================================
to Beneficiary
==================================
What death benefits are paid if the annuitant or owner dies before settlement?
If the annuitant or owner dies before settlement while this contract is in
force, we will pay the beneficiary the accumulation value.
The above amount will be payable in a lump sum upon receipt of due proof of
death of the annuitant. The beneficiary may elect to receive payment any time
within 5 years after the date of death of the annuitant.
Instead of a lump sum, payment may be made under an annuity payment plan
provided amounts are calculated in accordance with the Code and:
1. the beneficiary elects the plan within 60 days after we receive due proof of
death; and
2. payments begin no later than:
a. one year after the date of death, in the case of a non-spouse
beneficiary; or
b. the date on which the annuitant would have attained age 70 1/2 if later
than one year after the date of death, in case of a spouse beneficiary;
and
3. the plan provides equal or substantially equal payments over a period which
does not exceed the life of the beneficiary or the life expectancy of the
beneficiary.
In this event, the reference to "annuitant" in the annuity payment plans section
will apply to the beneficiary.
To whom are the death benefits payable?
Benefits will be paid equally to all primary beneficiaries surviving the
annuitant. If none survive, proceeds will be paid equally to all contingent
beneficiaries surviving the annuitant. If no beneficiary survives the annuitant,
we will pay the benefits to you, if living, otherwise to your estate.
Who is the beneficiary?
Beneficiaries are those you name, in a form satisfactory to us, to receive the
benefits of this contract if the owner or annuitant dies while this contract is
in force. You may change the beneficiary as provided below. If the beneficiary
has been changed, we will pay any benefits in accordance with your last change
of beneficiary request.
How do you change the beneficiary?
You may change the beneficiary any time while the annuitant is living by
satisfactory written request to us. Once the change is recorded by us, it will
take effect as of the date of your request, subject to any action taken or
payment made by us before the recording.
What is the spouse's option to continue this contract?
If the annuitant's death occurs before the settlement date, the annuitant's
spouse, if designated as sole beneficiary, may elect in writing to forego
receipt of the death benefit and instead continue this contract in force as its
owner and annuitant. The election by the spouse must be made within 60 days
after we receive due proof of death. In this event, the settlement date may not
be later than the April 1 following the calendar year in which the spouse
attains age 70 1/2.
What if the annuitant dies after settlement?
If the annuitant dies after settlement, the amount payable, if any, will be as
provided in the annuity payment plan then in effect.
<PAGE>
- -----------------------------------------------------------------------------
==================================
Purchase Payment
==================================
What is the purchase payment for this contract?
The purchase payment for this contract is shown under contract data. It is
payable to us on or before the date we deliver this contract. It must be paid or
mailed to us at our corporate office or to an authorized agent.
Except as otherwise provided in this paragraph, a purchase payment is that
amount which is a qualified transfer contribution from another individual
retirement account or individual retirement annuity, or a qualified rollover
contribution described in Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of
the Code. If this contract is maintained in connection with a Simplified
Employee Pension Plan or a SIMPLE Savings Plan, an employer's purchase payment
may not exceed the applicable contribution limits described in Section 408(k)
and 408(p) of the Code. In addition, if this contract is maintained in
connection with a Simple Savings Plan, no purchase payment may be made to this
contract other than an employer contribution described in Sections
408(p)(2)(A)(i) and (ii) of the Code, or a rollover contribution described in
Section 408(d)(3)(G) of the Code.
All purchase payments must be made in cash.
- ------------------------------------------------------------------------------
==================================
Accumulation Value,
==================================
==================================
Cash Surrender Value,
==================================
==================================
Market Adjusted Value
==================================
How is the accumulation value determined?
On the contract date the accumulation value of this contract is the purchase
payment. Thereafter interest accrues from day to day for the guarantee period at
the rate shown under contract data. This rate represents an effective annual
yield. At no time while the contract is in force shall interest accrue at a rate
less than 3% compounded annually. The accumulation value will be adjusted for
any amounts surrendered.
Are there premium tax charges?
We reserve the right to deduct an amount from the accumulation value of this
contract at the time that any applicable premium taxes not previously deducted
are payable. If a tax is payable at the time of your purchase payment and we
choose to not deduct it at that time, we further reserve the right to deduct it
at a later date.
How are renewal guarantee periods determined?
At the end of any guarantee period, a renewal guarantee period will begin. We
will notify you in writing 45 days before the renewal guarantee period. Each
renewal guarantee period will be one year unless you elect a different length
from those offered at the time. We must receive your written request at least 15
days before the renewal date. The renewal guarantee period may never extend
beyond the settlement date.
The accumulation value on the renewal date will be equal to the accumulation
value at the end of the guarantee period just ending. This value will earn
interest at the renewal guarantee rate. Upon written request, within 45 days of
the renewal guarantee period, we will notify you of the renewal guarantee rate
then in effect for contracts renewing at that time. The actual renewal guarantee
rate will be determined on the renewal date.
<PAGE>
What is the market adjusted value and how is it determined?
The market adjusted value is the accumulation value on any date before the end
of the current guarantee period adjusted by a formula. The formula adjustment
reflects the relationship between:
1. the interest rate we are then crediting for new contract sales and renewals
(Form 30486) for the time remaining in your contract's current guarantee
period; and
2. the guaranteed interest rate applicable to your contract's current guarantee
period.
The market adjusted value may be more or less than the accumulation value.
The market adjusted value formula is as follows:
market adjusted value = renewal value
(1 + ic + .0025)(N + t)
where: renewal value = the accumulation value at the end of your current
guarantee period.
N = the number of complete contract years to the end
of your guarantee period.
t = the fraction of the contract year remaining to
the end of your contract year (for example, if 180
days remain in a 365 day contract year, t would be
.493)
ic = the current rate offered for new contract sales
and renewals (Form 30486) for the number of years
left in your guarantee period (straight line
interpolation between whole year rates). If N is
zero, ic is the rate for one year guarantee
periods.
The market value adjustment is as follows:
market value adjustment =
market adjusted value __ accumulation value
There will be no market value adjustment made on the last day of a guarantee
period.
Can you request surrender of any amounts under this contract before settlement?
Yes. By written request to us and subject to the rules below you may:
1. surrender this contract for the total cash surrender value;
2. partially surrender this contract for a part of the cash surrender value.
How is the cash surrender value determined?
The cash surrender value is the market adjusted value. On the last day of a
guarantee period, the cash surrender value is the accumulation value.
What are the rules for a surrender or partial surrender?
The amount surrendered and any applicable market value adjustment will be
deducted from the accumulation value of the contract on the date of surrender.
You may surrender all or a portion of the cash surrender value. However, the
accumulation value that remains after a partial surrender must be at least
$2,000. Any partial surrender must be at least $250.
The surrender payment will normally be mailed to you within seven days of the
receipt of your written request.
Upon surrender of this contract for the total cash surrender value, this
contract will terminate. We may require that you return this contract to our
corporate office before we pay the total cash surrender value.
Can we delay or suspend payment of a partial or full surrender?
We may defer payment of any partial or full surrender for a period not to exceed
6 months from the date we receive your surrender request or the period permitted
by state insurance law, if less. If we defer payment more than 30 days, we will
pay annual interest of at least 3% on the amount deferred.
<PAGE>
Will you receive information about your contract values?
Yes. Separate records are maintained for the interest of each IRA participant.
At least once a year we will send you a statement showing both the accumulation
value and the cash surrender value of this contract. The statement will specify
the market value adjustment used to determine the cash surrender value. This
statement will be based on any laws or regulations that apply.
We will also notify you 45 days before the end of a guarantee period concerning
renewal periods available and your right to surrender without a market value
adjustment on the last day of your guarantee period.
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==================================
Annuity Payment Plans
==================================
When will annuity payments begin?
The first payment will be made as of the settlement date. Before payments begin,
we will require satisfactory proof that the annuitant is alive. We may also
require that you exchange this contract for a supplemental contract which
provides the annuity payments.
Can you change the settlement date?
Yes. Tell us the new date by written request. If you select a new date, it must
be at least 30 days after we receive your written request at our corporate
office. The settlement date cannot be later than the later of
1. the April 1 following the calendar year in which the annuitant attains age
70 1/2; or
2. such other date, provided the Code allows you to satisfy the minimum
distribution requirements of Section 408(b)(3) of the Code with respect to
this contract through a means other than settlement of this contract,
including the ability to satisfy such distribution requirements from other
individual retirement accounts and/or individual retirement annuities that
you may own.
Notwithstanding either of the above, the settlement date cannot be later than
the later of:
1. the contract anniversary nearest the annuitant's 85th birthday; or
2. the 10th contract anniversary.
What are the annuity payment plans?
There are different ways to receive annuity payments. We call these plans.
Plan A - This provides monthly annuity payments for the lifetime of the
annuitant. No payments will be made after the annuitant dies.
Plan B - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a period of at
least five, ten, or fifteen years. You must select the guaranteed period.
Plan C - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a certain number
of months. We determine the number of months by dividing the market adjusted
value applied under this plan by the amount of the monthly annuity payment.
Plan D - We call this a joint and survivor life annuity. Monthly payments will
be paid for the lifetime of the annuitant and a designated beneficiary. When
either the annuitant or designated beneficiary dies, we will continue to make
monthly payments for the lifetime of the survivor. No payments will be paid
after the death of both the annuitant and designated beneficiary.
Plan E - This provides monthly fixed dollar annuity payments for a period of
years. The period of years may be no less than 10 nor more than 30.
<PAGE>
What are the requirements for selecting a plan?
You may elect by written notice to us at any time at least 30 days before the
settlement date to have the market adjusted value applied on the settlement date
to provide:
1. a lump sum payment as a result of a total surrender as provided
under the cash surrender value provision of this contract; or
2. one of the annuity payment plans shown herein. Amounts payable under any
such annuity payment plan will be calculated in accordance with the Code.
Any such annuity payment plan must be provided:
a. in equal or substantially equal payments over a period no longer than the
life of the annuitant or over the life of the annuitant and the
designated beneficiary; or
b. in equal or substantially equal payments over a period which does not
exceed the life expectancy of the annuitant, or the life expectancy of
the annuitant and the designated beneficiary.
c in the case of a non-spouse beneficiary, payments must be such that at
least 50% of the present value of the contract is expected to be
distributed within the life expectancy of the annuitant.
If at least 30 days before the settlement date we have not received at our
corporate office your written request to select a plan, we will make payments
according to Plan B with payments guaranteed for 10 years, unless otherwise
required by the Code.
If the amount to be applied to a plan is not at least $2,000, or if payments are
to be made to other than a natural person, we have the right to make a lump sum
payment of the cash surrender value.
How will payments be made?
Payments will be made by us by check. The check must be personally endorsed by
the payee or payees as well as the annuitant (or designated beneficiary under
Plan D). If the annuitant or designated beneficiary does not endorse the check,
other evidence must be furnished to show that the annuitant or designated
beneficiary is still alive.
<PAGE>
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==================================
Table of Settlement Rates
==================================
What will be the amount of the monthly annuity payments?
If the settlement date is the last day of a guarantee period, the amount applied
to provide a payment will be the accumulation value on that date. The market
adjusted value is applied if the settlement date is not the last day of a
guarantee period. The amount applied to provide a payment will be the
accumulation value on the settlement date. The amount of each monthly annuity
payment for each $1,000 applied under any payment plan will be based on our
Table of Settlement Rates in effect at the time of the first payment. The
amounts will not be less than those shown in the table below.
The amount of such payments under plans A, B, and C will depend on the sex and
the adjusted age of the annuitant on the settlement date. The amount of such
payments under plan D will depend on the sex and the adjusted age of the
annuitant and the designated beneficiary on the settlement date. Adjusted age
means the age on the annuitant's nearest birthday minus an "adjustment" based on
the calendar year of the birth of the annuitant as follows:
Calendar Calendar
Year of Year of
Annuitant's Adjust- Annuitant's Adjust-
Birth ment Birth ment
Prior to 1920 0 1945 through 1 6
1920 through 1924 1 1950 through 1959 7
1925 through 1929 2 1960 through 1969 8
1930 through 1934 3 1970 through 1979 9
1935 through 1939 4 1980 through 1989 10
1940 through 1944 5 After 1989 11
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount of Each Monthly Annuity Payment Per $1,000 Applied
- ------------------------------------------------------------------------------
Plan A Plan B Plan C Plan D - Joint and Survivor
Adjusted Age of Female Designated
Beneficiary
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Life 5 Years 10 Years 15 Years With Adj.
Adj. Income Certain Certain Certain Refund Male 10 Years 5 Years Same 5 Years
10 Years
Age* M F M F M F M F M F Age* Younger Younger Age Older Older
- ---------------------------------------------------------------------------------------------------
55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.42 4.10 55 3.51 3.69 3.88 4.06 4.23
60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.86 4.48 60 3.76 3.99 4.24 4.49 4.72
65 6.10 5.35 6.03 5.32 5.81 5.22 5.46 5.05 5.43 4.97 65 4.07 4.38 4.72 5.07 5.39
66 6.29 5.51 6.21 5.47 5.96 5.36 5.56 5.16 5.56 5.08 66 4.15 4.48 4.84 5.21 5.55
67 6.50 5.67 6.41 5.63 6.11 5.50 5.66 5.26 5.70 5.20 67 4.23 4.58 4.97 5.36 5.73
68 6.73 5.85 6.62 5.80 6.28 5.65 5.76 5.37 5.85 5.33 68 4.31 4.69 5.10 5.53 5.92
69 6.97 6.04 6.84 5.98 6.44 5.80 5.86 5.49 6.00 5.47 69 4.40 4.80 5.25 5.70 6.12
70 7.23 6.25 7.07 6.18 6.61 5.96 5.96 5.60 6.16 5.61 70 4.50 4.93 5.40 5.89 6.34
71 7.51 6.47 7.32 6.39 6.78 6.14 6.05 5.71 6.33 5.76 71 4.60 5.06 5.57 6.10 6.57
72 7.80 6.71 7.58 6.62 6.96 6.31 6.14 5.83 6.51 5.93 72 4.71 5.20 5.75 6.31 6.82
73 8.12 6.97 7.85 6.86 7.14 6.50 6.23 5.94 6.70 6.10 73 4.83 5.35 5.94 6.55 7.09
74 8.45 7.26 8.14 7.12 7.32 6.69 6.31 6.04 6.90 6.28 74 4.95 5.51 6.15 6.80 7.37
75 8.82 7.56 8.44 7.39 7.49 6.89 6.38 6.14 7.11 6.48 75 5.08 5.68 6.37 7.07 7.68
76 9.21 7.90 8.76 7.69 7.67 7.09 6.45 6.24 7.33 6.68 76 5.22 5.87 6.61 7.36 8.01
77 9.62 8.26 9.09 8.01 7.84 7.29 6.51 6.33 7.56 6.90 77 5.37 6.07 6.87 7.67 8.36
78 10.07 8.65 9.44 8.34 8.01 7.49 6.57 6.41 7.80 7.13 78 5.54 6.29 7.15 8.01 8.74
79 10.55 9.07 9.80 8.69 8.17 7.69 6.62 6.48 8.05 7.38 79 5.71 6.52 7.45 8.37 9.14
80 11.06 9.53 10.17 9.07 8.33 7.89 6.66 6.55 8.32 7.64 80 5.90 6.78 7.77 8.76 9.57
81 11.61 10.03 10.55 9.46 8.48 8.08 6.70 6.61 8.60 7.91 81 6.10 7.05 8.12 9.17 10.02
82 12.19 10.57 10.94 9.87 8.61 8.26 6.73 6.66 8.89 8.21 82 6.32 7.34 8.49 9.61 10.51
83 12.81 11.16 11.33 10.30 8.74 8.43 6.76 6.70 9.20 8.51 83 6.55 7.65 8.90 10.08 11.02
84 13.46 11.79 11.72 10.74 8.86 8.59 6.79 6.74 9.52 8.83 84 6.80 7.99 9.33 10.58 11.56
85 14.16 12.48 12.12 11.19 8.97 8.74 6.81 6.77 9.85 9.18 85 7.07 8.36 9.78 11.11 12.13
90 18.25 16.68 14.04 13.42 9.36 9.26 6.86 6.85 11.81 11.11 90 8.79 10.65 12.57 14.22 15.63
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
*Adjusted age of annuitant. M = Male F = Female
- --------------------------------------------------------------------------------
The table above is based on the "1983 Individual Annuitant Mortality Table A"
assuming an interest rate of 3% per year compounded annually. Settlement rates
for any age, or any combination of age and sex not shown above, will be
calculated on the same basis as those rates shown in the table above. Such rates
will be furnished by us upon request. Amounts shown in the Table below are based
on an assumed interest rate of 3% per year compounded annually.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Plan E Dollar Amount of Each Monthly Fixed Dollar Annuity Payment Per $1,000 Applied
- ------------------------------------------------------------------------------------------------
Years Monthly Years Monthly Years Monthly
Payable Payment Payable Payment Payable Payment
------- ------- ------- ------- ------- -------
10 $9.61 17 $6.23 24 $4.84
11 8.86 18 5.96 25 4.71
12 8.24 19 5.73 26 4.59
13 7.71 20 5.51 27 4.47
14 7.26 21 5.32 28 4.37
15 6.87 22 5.15 29 4.27
16 6.53 23 4.99 30 4.18
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 4, 1999 on the consolidated financial
statements of IDS Life Insurance Company in Post-Effective Amendment No. 1 to
the Registration Statement (Form S-1, No. 333-42793) for the registration of the
Portfolio Guaranteed Term Annuity Contracts to be offered by IDS Life Insurance
Company.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 30, 1999
