VARIFLEX
PROSPECTUS
JUNE 1, 1995
AS SUPPLEMENTED
FEBRUARY 5, 1996
Also including a prospectus
for SBL Fund, a Member of
the Security Benefit Group
of Companies
[SBLIC LOGO]
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VARIFLEX
VARIABLE ANNUITY CONTRACTS
SOLD BY--
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON, TOPEKA, KANSAS 66636-0001
(913) 295-3000
This Prospectus describes the Variflex Variable Annuity Contracts (the
"Variflex Contracts" or "Contracts") offered by Security Benefit Life Insurance
Company ("SBL"). The Contracts may be issued for use with retirement plans
qualified for favorable tax treatment under the Internal Revenue Code, such as
pension and profit sharing plans, annuity purchase plans of public school
systems and certain tax-exempt organizations, individual retirement plans and
individual retirement annuities, and certain deferred compensation plans of
state and local governments and with plans and trusts which are not so
qualified. This Prospectus offers Contracts which may be purchased with single
or multiple purchase payments, with annuity payments commencing immediately or
at some later date. The Contracts are offered on both an individual and group
basis.
Variflex Contracts offer Contractowners and Participants the opportunity to
arrange for a Variable Annuity, with lifetime or other annuity payments based on
the investment performance of one or more Series of Variflex. Variflex, a
separate account of SBL, is registered as a unit investment trust and issues
eleven separate series--Growth Series, Growth-Income Series (formerly the
"Income-Growth Series"), Money Market Series, Worldwide Equity Series (formerly
the "High Yield Series"), High Grade Income Series (formerly the "U.S.
Government Series"), Social Awareness Series, Emerging Growth Series, Global
Aggressive Bond Series, Specialized Asset Allocation Series, Managed Asset
Allocation Series, and Equity Income Series. Each Series reflects the investment
results of a corresponding series of SBL Fund ("the Fund"), a registered
open-end management investment company.
Contractowners and Participants may additionally elect to accumulate values
and receive all or a portion of the benefits in the form of Guaranteed Annuity
payments funded by the General Account assets of SBL.
Depending on the state where the Contract is sold, it may contain a
provision which allows the Contract to be canceled within 10 or more days after
receipt of the Contract.
This Prospectus sets forth the information that a prospective investor
should know before investing. A Statement of Additional Information about the
Variflex Contract and Variflex is free and may be obtained by writing SBL at the
address above or by calling (913) 295-3112 or (800) 888-2461, extension 3112.
The Statement of Additional Information, which has the same date as this
Prospectus, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Table of Contents of the Statement of
Additional Information is set forth at the end of this Prospectus.
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ATTACHED TO THIS PROSPECTUS IS A CURRENT PROSPECTUS OF SBL FUND. BOTH
PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CONTRACT AND CERTAIN VARIFLEX SERIES ARE NOT AVAILABLE IN ALL STATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESPERSON, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE CONTRACT INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT A DEPOSIT OR
OBLIGATION OF, OR GUARANTEED BY, ANY BANK. THE CONTRACT IS NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY.
PROSPECTUS DATED: JUNE 1, 1995, AS SUPPLEMENTED FEBRUARY 5, 1996 RETAIN FOR
FUTURE REFERENCE
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VARIFLEX CONTENTS
Page
Glossary of Terms........................................................... 3
Summary of the Contract .................................................... 4
Summary of Expenses ........................................................ 5
Condensed Financial Information ............................................ 7
Financial Statements ..................................................... 9
Security Benefit Life Insurance Company and Variflex ....................... 9
Security Benefit Life Insurance Company .................................. 9
Variflex ................................................................. 9
SBL Fund ................................................................... 9
Voting Rights ............................................................ 10
Substituted Securities ................................................... 10
Variflex Contracts ......................................................... 10
Purpose of the Contracts.................................................. 10
Types of Variflex Contracts .............................................. 11
Contract Application and Purchase Payments ............................... 11
Allocation of Purchase Payments .......................................... 12
Crediting of Accumulation Units .......................................... 12
Dollar Cost Averaging Option.............................................. 12
Asset Reallocation Option................................................. 12
Transfer of Contract Value ............................................... 13
Contract Value............................................................ 13
Determination of Contract Value........................................... 13
Contractowner Inquiries .................................................. 14
Charges and Deductions ..................................................... 14
Contingent Deferred Sales Charge ......................................... 14
Other Charges ............................................................ 15
(a) Administrative Fees .................................................. 15
(b) State Premium Taxes .................................................. 15
(c) Actuarial Risk Fee ................................................... 15
(d) Charges for Taxes .................................................... 16
Sequential Deduction of Fees ............................................. 16
Variations in Charges .................................................... 16
Distributions Under the Contract ........................................... 16
Accumulation Period ...................................................... 16
Full and Partial Withdrawals ............................................. 16
Systematic Withdrawals ................................................... 17
Free-Look Right........................................................... 17
Death Benefit During Accumulation Period ................................. 18
Loans Available from Certain Qualified Contracts ......................... 18
Constraints on Distributions from Certain Section 403(b) Annuity Contracts 19
Taxation of Owners of Two or More Contracts .............................. 19
Annuity Period ........................................................... 20
Annuity Provisions ....................................................... 20
Election of Annuity Commencement Date and Form of Annuity ................ 20
Allocation of Benefits ................................................... 20
Optional Annuity Forms ................................................... 21
Value of Variable Annuity Payments:
Assumed Investment Rates ............................................... 21
Restrictions Under the Texas Optional Retirement Program ................. 22
Federal Tax Matters ........................................................ 22
Qualified Contracts....................................................... 22
Non-Qualified Contracts................................................... 23
Distributor of the Contracts ............................................... 24
Performance Information .................................................. 24
The General Account ........................................................ 24
Statement of Additional Information ........................................ 25
THE CONTRACT AND CERTAIN VARIFLEX SERIES ARE NOT AVAILABLE IN ALL STATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, THE FUND'S PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION OF
THE FUND OR ANY SUPPLEMENT THERETO.
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GLOSSARY OF TERMS
THE FOLLOWING DEFINITIONS MAY BE USEFUL IN READING THIS PROSPECTUS.
CERTAIN ADDITIONAL TERMS ARE DEFINED IN THE TEXT.
ACCUMULATION PERIOD--The period from the date Accumulation Units are first
purchased under the Contract to the Annuity Commencement Date, or, if earlier,
when the Contract is terminated, either through a full withdrawal, payment of
charges or payment of the death benefit.
ACCUMULATION UNIT--Unit of measure used to calculate the value of a
Contractowner's or Participant's interest in Variflex during the Accumulation
Period. The value of an Accumulation Unit fluctuates with the value of shares of
the corresponding series of the underlying Fund.
ANNUITANT--The person designated to receive, or actually receiving, annuity
payments under a Variflex Contract.
ANNUITY COMMENCEMENT DATE--The date when annuity payments are to begin.
CONTRACTOWNER--The person or entity entitled to exercise all legal rights of
ownership in a Variflex Contract and in whose name the Contract is issued.
CONTRACT DATE--The date shown as the Contract Date in a Contract. Annual
Contract anniversaries are measured from the Contract Date. It is usually the
date that the initial Purchase Payment is credited to the Contract.
CONTRACT DEBT--The unpaid loan balance including accrued loan interest.
CONTRACT VALUE--The total value of the amounts in a Contract allocated to the
Series of Variflex and the General Account, as well as any amount set aside in
the General Account to secure loans as of any Valuation Date.
CONTRACT YEAR--Each twelve-month period measured from the Contract Date.
GUARANTEED ANNUITY--An annuity under which the amount of each annuity payment
does not vary with the investment experience of the Variflex Separate Account
and which is guaranteed by SBL.
GROUP ALLOCATED CONTRACT--A master agreement between the Contractowner and SBL
under which a Participant's individual account is established for each person
for whom payments are being made under the Plan.
GROUP UNALLOCATED CONTRACT--A Contract between the Contractowner and SBL under
which individual accounts are not established for each Participant, but instead,
all Accumulation Units are credited to one accumulation account; when a Plan
Participant becomes entitled to receive payments under the Plan, the appropriate
number of units may be withdrawn to purchase an Annuity.
NON-QUALIFIED CONTRACT--A Variflex Contract issued in connection with a
retirement plan that does not receive favorable tax treatment under Section 401,
403, 408 or 457 of the Internal Revenue Code.
PARTICIPANT--Any person who is covered under the terms of a group Variflex
Contract, and for whom an Annuity is being funded, particularly a person for
whom annuity payments have not commenced.
PARTICIPANT'S INDIVIDUAL ACCOUNT--The Participant's allocated share of the value
of a Group Allocated Variflex Contract.
PLAN--The document or agreement defining the retirement benefits and those who
are eligible to receive them. The Plan is not part of the Variflex Contract and
Security Benefit Life Insurance Company is not a party to the Plan.
PURCHASE PAYMENT--A payment made into a Variflex Contract.
QUALIFIED CONTRACT--A Variflex Contract issued in connection with a retirement
plan that receives favorable tax treatment under Section 401, 403, 408 or 457 of
the Internal Revenue Code.
VALUATION DATE--Each date on which Variflex is valued, which currently includes
each day that the New York Stock Exchange is open for trading. The New York
Stock Exchange is closed on weekends and on the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, July Fourth, Labor Day,
Thanksgiving Day, and Christmas Day.
VALUATION PERIOD--A period used in measuring the investment experience of each
Series of Variflex. The Valuation Period begins at the close of one Valuation
Date and ends at the close of the next succeeding Valuation Date.
VARIABLE ANNUITY--An Annuity providing payments which vary in dollar amount
depending on the investment results of Variflex and the Fund.
VARIFLEX CONTRACTS-401(K) AND 408(K)--A version of the Variflex Contract offered
prior to May 1, 1990, to plans that qualify under Section 401(k) and 408(k)(6)
of the Internal Revenue Code. The differences between this contract and the
currently offered versions of the Variflex Contract qualifying under Section
401(k) and 408(k)(6) of the Code are noted where appropriate.
VARIFLEX INCOME VARIABLE ANNUITY ("VIVA") CONTRACT--A version of the Variflex
Contract offered prior to May 1, 1995 that is funded by a single payment, with
additional purchase payments allowed during the first Contract Year, pursuant to
which annuity payments will commence at some agreed time in the future. The
differences between this contract and the currently offered versions of the
Variflex Contract are noted where appropriate.
VARIFLEX CONTRACT--A contract issued pursuant to this Prospectus which sets
forth the obligations and contractual promises which SBL makes to the
Contractowner to provide a Guaranteed or Variable Annuity or combination
Guaranteed and Variable Annuity in return for Purchase Payments made for
allocation in any combination at the discretion of the Contractowner for
investment in one or more Series of Variflex or the General Account during the
Accumulation Period. Depending on the allocations made by the Contractowner,
benefits will be guaranteed (to the extent based on SBL's General Account) or
will reflect the investment results of selected Series of SBL Fund. A group
Variflex Contract is a master agreement between the Contractowner and the
insurance company covering the Participants in a Plan.
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SUMMARY OF THE CONTRACT
PURPOSE OF THE CONTRACTS
The objective of a Variable Annuity is to provide benefits which will tend,
to a greater degree than a Guaranteed Annuity, to reflect the changes in the
cost of living. The Contracts offer Contractowners and Participants the
opportunity to arrange for a Variable Annuity with lifetime or other annuity
payments based on the investment performance of the investments chosen by the
Contractowner or Participant.
There is no assurance that a Contract's objective will be obtained or that
its value will increase. Because a Variable Annuity value is based on investment
performance and is not guaranteed, a Variflex Contract entails more risk than
traditional guaranteed insurance. There is, however, a General Account option
whereby Contractowners or Participants can elect to accumulate values, and
receive all or a portion of their benefits in the form of guaranteed payments.
INVESTMENT ALTERNATIVES
You may choose to invest the payments made under the Contracts in one or
more of the eleven separate Variflex Series: Growth Series, Growth-Income Series
(formerly the "Income-Growth Series"), Money Market Series, Worldwide Equity
Series (formerly the "High Yield Series"), High Grade Income Series (formerly
the "U.S. Government Series"), Social Awareness Series, Emerging Growth Series,
Global Aggressive Bond Series, Specialized Asset Allocation Series, Managed
Asset Allocation Series, and Equity Income Series. Each of the Series invests
exclusively in the shares of a corresponding series of the SBL Fund. Each Series
has a different investment objective. (See "SBL Fund," page 9).
PURCHASING A CONTRACT
Individuals wishing to purchase a Contract must complete an application and
provide an initial Purchase Payment which will be sent to the SBL home office.
The minimum and maximum amount of Purchase Payments vary depending upon the type
of Contract purchased. (See "Contract Application and Purchase Payments," page
11 and "Limits on Purchase Payments" in the Statement of Additional
Information.)
ALLOCATION AND TRANSFER AMONG
INVESTMENT ALTERNATIVES
Payments will be allocated to each Variflex Series pursuant to instructions
in the application. Changes in the allocation of future Purchase Payments may be
made by writing to the SBL home office. However, no allocation will be allowed
that would result in less than $25 being allocated to any one Variflex Series.
Prior to the Annuity Commencement Date, transfers may be made among the
Variflex Series. At present, there is no charge for such transfers. Transfers
among the Variflex Series, changes in allocation of future Purchase Payments and
changes to an existing Dollar Cost Averaging or Asset Reallocation Option may be
made by telephone instruction, provided that either the Telephone Transfer
section of the application has been completed or a Telephone Transfer
Authorization form is on file with SBL. (See "Transfer of Contract Value" on
page 13.)
HOW THE DEATH BENEFIT VARIES
The death benefit will vary depending on your Contract's investment
results. For individual and Group Allocated Contracts, in the event of death of
the Annuitant during the Accumulation Period, prior to the Annuitant's 76th
birthday, the death benefit will equal the greater of the value of the Variflex
Contract on the date that proof of death is received by SBL; the value of the
Contract on certain Contract Year anniversaries reduced by any subsequent
withdrawals; or the total Purchase Payments made, reduced by any withdrawals. In
the event of death, on or after the Annuitant's 76th birthday, the death benefit
will equal the Contract Value less any applicable contingent deferred sales
charge. The death benefit, less any outstanding Contract Debt, will be paid to
the beneficiary named in the Contract. Under a Group Unallocated Contract, the
death benefit will be determined by the provisions of the Plan. (See "Death
Benefit During Accumulation Period" on page 18.)
WITHDRAWALS FROM THE CONTRACT PRIOR TO MATURITY
Prior to the Annuity Commencement Date, all or part of a Contract's value
may be withdrawn upon your written request. In addition to potential losses due
to investment risks, your withdrawals may be reduced by any Contract Debt, a
contingent deferred sales charge, a 10% penalty tax and income tax. Contracts
purchased in connection with retirement plans may be subject to additional
withdrawal restrictions imposed by the Plan. (See "Full and Partial Withdrawals"
on page 16, "Constraints on Distributions from Certain Section 403(b) Annuity
Contracts" on page 19 and "Federal Tax Matters" on page 22.)
HOW ANNUITY PAYMENTS ARE DETERMINED
There are a number of ways to receive annuity payments. They include
monthly payments for a specified number of years, an annuity for life with
payments guaranteed for 5, 10, 15 or 20 years, or a joint and survivor annuity.
Payments may be received on a fixed basis or on a variable basis. The amount of
a variable annuity payment will increase or decrease according to the investment
experience of the Variflex Series you select.
CHARGES AND DEDUCTIONS
An Actuarial Risk Fee is assessed daily against Variflex net assets at an
annual rate of 1.2%. Variflex Contracts also provide for certain deductions and
charges against the contract. These deductions and charges include a $30
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annual Administrative Fee (not applicable to all Contracts), and any state
premium taxes that may be assessed. Additionally, a contingent deferred sales
charge may be assessed against certain withdrawals during the first eight
Contract Years (declining from 8% in the first Contract Year to 0% in the ninth
such year). (See "Charges and Deductions" on page 14.)
FREE-LOOK RIGHT
The laws of certain states require that Contractowners be given an
examination period, generally ten days, within which a Contractowner may return
the Contract to SBL's home office. In such cases, SBL will refund payments made,
adjusted to the extent permitted by state law, to reflect changes in the value
of the applicable Variflex Series during the period the contract was held. (See
"Free-Look Right" on page 17.)
SUMMARY OF EXPENSES
CONTRACTOWNER TRANSACTION EXPENSES
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Sales Load Imposed on Purchase (as a percentage of Purchase Payments) .... 0%
Contingent Deferred Sales Load
(as a percentage of Purchase Payments or amount withdrawn, as applicable)(1) 8%
Surrender Fees (as a percentage of amount surrendered, if applicable) .... 0%
Exchange Fee ............................................................. 0
ANNUAL CONTRACT FEE(2) .................................................... $30
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SEPARATE ACCOUNT ANNUAL FEE (as a percentage of average account value)
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Mortality and Expense Risk Fees........................................... 1.2%
Account Fees and Expenses................................................. 0.0%
----
Total Separate Account Annual Expenses ................................... 1.2%
SBL FUND ANNUAL EXPENSES (as a percentage of average net assets)
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<TABLE>
<CAPTION>
HIGH GLOBAL SPECIALIZED MANAGED
GROWTH- MONEY WORLDWIDE GRADE SOCIAL EMERGING AGGRESSIVE ASSET ASSET EQUITY
GROWTH INCOME MARKET EQUITY INCOME AWARENESS GROWTH BOND ALLOCATION ALLOCATION INCOME
(SERIES A)(SERIES B)(SERIES C)(SERIES D)(SERIES E)(SERIES S)(SERIES J)(SERIES K) (SERIES M)(SERIES N)(SERIES O)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees ...... .75% .75% .50% 1.00% .75% .75% .75% .75% 1.00% 1.00% 1.00%
Other Expenses (3).... .09% .09% .11% .34% .10% .15% .13% .65% .65% .65% .35%
---- ---- ---- ----- ---- ---- ---- ----- ----- ----- -----
Total Annual Expenses. .84% .84% .61% 1.34% .85% .90% .88% 1.40% 1.65% 1.65% 1.35%
</TABLE>
(1) The contingent deferred sales load is decreased based on the Contract Year
in which the withdrawal is made from 8% in the first Contract Year to 0%
in the ninth Contract Year. Variflex Contracts-401(k) and 408(k) are
subject to a schedule of charges that has a different rate of decline in
the percentage than other Contracts. Under certain circumstances, the
contingent deferred sales load may be reduced or waived, including certain
annuity options.
(2) The annual Administrative Fee for Variflex Contracts-401(k) and 408(k) is
the lesser of 2% of assets valued as of the year end or $30.
(3) The "Other Expenses" of the Global Aggressive Bond, Specialized Asset
Allocation, Managed Asset Allocation and Equity Income Series are based on
estimated expenses for the fiscal year ending December 31, 1995.
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EXAMPLE: VARIFLEX CONTRACTS (EXCLUDING VARIFLEX CONTRACTS - 401(K) AND 408(K) )
If you surrender your contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
GROWTH SERIES............................................... $103 $128 $159 $256
GROWTH-INCOME SERIES........................................ $103 $128 $159 $256
MONEY MARKET SERIES......................................... $100 $122 $148 $233
WORLDWIDE EQUITY SERIES..................................... $108 $142 $184 $306
HIGH GRADE INCOME SERIES.................................... $103 $129 $160 $257
SOCIAL AWARENESS SERIES..................................... $103 $130 $163 $263
EMERGING GROWTH SERIES...................................... $103 $129 $162 $261
GLOBAL AGGRESSIVE BOND SERIES............................... $108 $144 --- ---
SPECIALIZED ASSET ALLOCATION SERIES......................... $111 $151 --- ---
MANAGED ASSET ALLOCATION SERIES............................. $111 $151 --- ---
EQUITY INCOME SERIES........................................ $108 $143 --- ---
</TABLE>
If you do not surrender your contract:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GROWTH SERIES............................................... $23 $70 $119 $256
GROWTH-INCOME SERIES........................................ $23 $70 $119 $256
MONEY MARKET SERIES......................................... $20 $63 $108 $233
WORLDWIDE EQUITY SERIES..................................... $28 $85 $144 $306
HIGH GRADE INCOME SERIES.................................... $23 $70 $120 $257
SOCIAL AWARENESS SERIES..................................... $23 $72 $123 $263
EMERGING GROWTH SERIES...................................... $23 $71 $122 $261
GLOBAL AGGRESSIVE BOND SERIES............................... $28 $87 --- ---
SPECIALIZED ASSET ALLOCATION SERIES......................... $31 $94 --- ---
MANAGED ASSET ALLOCATION SERIES............................. $31 $94 --- ---
EQUITY INCOME SERIES........................................ $28 $85 --- ---
</TABLE>
EXAMPLE: VARIFLEX CONTRACTS - 401(K) AND 408(K) (SOLD PRIOR TO MAY 1, 1990)
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If you surrender your contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GROWTH SERIES............................................... $103 $130 $162 $262
GROWTH-INCOME SERIES........................................ $103 $130 $162 $262
MONEY MARKET SERIES......................................... $101 $123 $149 $236
WORLDWIDE EQUITY SERIES..................................... $109 $145 $189 $316
HIGH GRADE INCOME SERIES.................................... $103 $130 $162 $262
SOCIAL AWARENESS SERIES..................................... $104 $131 $165 $267
EMERGING GROWTH SERIES...................................... $104 $131 $164 $266
GLOBAL AGGRESSIVE BOND SERIES............................... $109 $145 --- ---
SPECIALIZED ASSET ALLOCATION SERIES......................... $111 $152 --- ---
MANAGED ASSET ALLOCATION SERIES............................. $111 $152 --- ---
EQUITY INCOME SERIES........................................ $108 $144 --- ---
</TABLE>
If you do not surrender your contract:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GROWTH SERIES............................................... $23 $71 $122 $262
GROWTH-INCOME SERIES........................................ $23 $71 $122 $262
MONEY MARKET SERIES......................................... $21 $64 $109 $236
WORLDWIDE EQUITY SERIES..................................... $29 $88 $149 $316
HIGH GRADE INCOME SERIES.................................... $23 $71 $122 $262
SOCIAL AWARENESS SERIES..................................... $24 $73 $125 $267
EMERGING GROWTH SERIES...................................... $24 $72 $124 $266
GLOBAL AGGRESSIVE BOND SERIES............................... $28 $87 --- ---
SPECIALIZED ASSET ALLOCATION SERIES......................... $31 $95 --- ---
MANAGED ASSET ALLOCATION SERIES............................. $31 $95 --- ---
EQUITY INCOME SERIES........................................ $28 $86 --- ---
</TABLE>
The purpose of the preceding table is to assist Contractowners in
understanding the various costs and expenses that a Contractowner will bear
directly or indirectly and, thus, the table reflects expenses of both the
Variflex separate account and the SBL Fund. The example should not be considered
to be a representation of past or future expenses, and the example does not
include the deduction of state premium taxes, which in a number of states may be
assessed. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The example
assumes a 5% annual rate of return pursuant to the requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of the Fund.
Pursuant to the requirements of the Securities and Exchange Commission, any
annual contract fee is deducted pro rata from each Series; however, under the
contract the annual Administrative Fee is deducted sequentially from the Series
as specified under "Sequential Deduction of Fees" in the Prospectus. For a more
complete description of the various costs and expenses of the Fund, see the
prospectus for SBL Fund.
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CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit
values at the beginning and end of each year as well as ending accumulation
units outstanding for Qualified and Non-Qualified Contracts under each Series of
Variflex.
<TABLE>
<CAPTION>
1994 1993 1992(D) 1991(B)(C) 1990 1989 1988 1987 1986 1985(A)
QUALIFIED CONTRACTS
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Growth Series (Series A)
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41 $12.77 $12.15 $ 9.98
End of period $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41 $12.77 $12.15
Accumulation units
outstanding at the end
of period 7,723,910 6,900,722 6,640,177 5,420,372 4,616,955 3,191,257 3,032,118 3,620,263 2,475,018 1,433,710
Growth-Income Series (Series B)
- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81 $14.46 $12.28 $ 9.93
End of period $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81 $14.46 $12.28
Accumulation units
outstanding at the end
of period 14,312,801 13,236,948 11,381,462 8,753,337 6,449,776 4,613,783 3,388,090 2,932,678 1,628,800 644,172
Money Market Series (Series C)
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56 $11.94 $11.36 $10.65
End of period $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56 $11.94 $11.36
Accumulation units
outstanding at the end
of period 3,578,026 2,680,809 2,373,251 2,161,924 1,913,734 3,216,085 2,774,046 962,056 404,485 219,344
Worldwide Equity Series (Series D)
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.18 $11.80 $10.31
End of period $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74 $11.33 $12.18 $11.80
Accumulation units
outstanding at the end
of period 9,361,197 5,863,967 2,070,715 917,833 466,703 607,650 633,816 648,066 732,878 314,755
High Grade Income Series (Series E)
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17 $12.04 $11.11 $ ---
End of period $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17 $12.04 $11.11
Accumulation units
outstanding at the end
of period 3,891,426 3,731,587 2,912,605 2,255,909 1,673,154 1,403,313 1,037,740 1,013,973 935,218 232,691
Social Awareness Series (Series S)
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $13.31 $12.04 $10.47 $10.00 --- --- --- --- --- ---
End of period $12.65 $13.31 $12.04 $10.47 --- --- --- --- --- ---
Accumulation units
outstanding at the end
of period 1,344,063 993,233 513,953 127,699 --- --- --- --- --- ---
Emerging Growth Series (Series J)
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $13.97 $12.44 $10.00 --- --- --- --- --- --- ---
End of period $13.10 $13.97 $12.44 --- --- --- --- --- --- ---
Accumulation units
outstanding at the end
of period 3,947,047 2,131,858 455,105 --- --- --- --- --- --- ---
</TABLE>
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7
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992(D) 1991(B)(C) 1990 1989 1988 1987 1986 1985(A)
NON-QUALIFIED CONTRACTS
- -----------------------
Growth Series (Series A)
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41 $12.76 $12.14 $ 9.97
End of period $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41 $12.76 $12.14
Accumulation units
outstanding at the end
of period 1,578,797 1,483,618 1,766,896 1,328,865 952,806 594,856 493,463 664,251 375,309 356,272
Growth-Income Series (Series B)
- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80 $14.45 $12.27 $ 9.92
End of period $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80 $14.45 $12.27
Accumulation units
outstanding at the end
of period 3,515,364 3,262,600 2,560,986 1,774,534 1,293,121 1,000,815 836,735 801,802 480,437 155,927
Money Market Series (Series C)
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55 $11.94 $11.36 $10.64
End of period $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55 $11.94 $11.36
Accumulation units
outstanding at the end
of period 2,475,349 1,913,212 1,031,855 1,000,378 954,107 846,414 853,615 422,130 268,446 85,193
Worldwide Equity Series (Series D)
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.19 $11.81 $10.31
End of period $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74 $11.33 $12.19 $11.81
Accumulation units
outstanding at the end
of period 2,803,304 2,150,932 678,110 279,878 125,010 211,920 214,723 225,118 242,989 123,980
High Grade Income Series (Series E)
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17 $12.03 $11.11 $ ---
End of period $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17 $12.03 $11.11
Accumulation units
outstanding at the end
of period 1,392,830 1,290,268 962,775 784,496 582,285 519,624 419,410 420,483 453,028 135,700
Social Awareness Series (Series S)
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $13.31 $12.04 $10.47 $10.00 --- --- --- --- --- ---
End of period $12.66 $13.31 $12.04 $10.47 --- --- --- --- --- ---
Accumulation units
outstanding at the end
of period 543,287 389,861 226,145 98,344 --- --- --- --- --- ---
Emerging Growth Series (Series J)
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value:
Beginning of period $13.96 $12.44 $10.00 --- --- --- --- --- --- ---
End of period $13.09 $13.96 $12.44 --- --- --- --- --- --- ---
Accumulation units
outstanding at the end
of period 1,211,099 610,801 68,338 --- --- --- --- --- ---
</TABLE>
(a) High Grade Income Series of Variflex was first publicly offered on April
30, 1985.
(b) Social Awareness Series of Variflex was first publicly offered on May 1,
1991.
(c) Effective May 1, 1991, the investment objective of Worldwide Equity Series
of Variflex was changed from high current income to long-term capital
growth through investment in common stocks and equivalents of companies
domiciled in foreign countries and the United States.
(d) Emerging Growth Series of Variflex was first publicly offered on October
1, 1992
(e) Financial information for Global Aggressive Bond, Specialized Asset
Allocation, Managed Asset Allocation and Equity Income Series is not
included as these Series were not publicly offered until June 1, 1995.
(f) Effective June 1, 1995, the investment objective of Growth-Income Series
of Variflex was changed from seeking to provide income with secondary
emphasis on capital appreciation to seeking long-term growth of capital
with secondary emphasis on income.
- --------------------------------------------------------------------------------
8
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FINANCIAL STATEMENTS
The full financial statements for Variflex and the financial statements of
SBL as well as the auditor's reports thereon are in the Statement of Additional
Information.
SECURITY BENEFIT LIFE INSURANCE
COMPANY AND VARIFLEX
SECURITY BENEFIT LIFE INSURANCE COMPANY
Security Benefit Life Insurance Company ("SBL") is a mutual life insurance
company. SBL, which was formed originally as a fraternal benefit society under
the laws of Kansas and commenced business February 22, 1892, became a mutual
life insurance company under its present name on January 2, 1950. Its home
office is 700 Harrison Street, Topeka, Kansas 66636-0001. SBL is licensed in the
District of Columbia, and in all states except New York.
VARIFLEX
Variflex was established by SBL as a separate account on January 31, 1984,
and is registered with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940 (the "Act"). Variflex
is designed to provide the funding for Variable Annuities. Under Kansas law,
regulation of SBL by the Commissioner of Insurance includes regulation of
Variflex. The insurance laws of Kansas under which Variflex was established
provide that the assets of Variflex shall not be chargeable with liabilities
arising out of any other business which SBL may conduct (except to the extent
that the assets of Variflex exceed the reserves and other liabilities of the
separate account). Accordingly, Variflex Contracts provide that the income,
gains and losses from the assets allocated to Variflex, whether or not realized,
are credited to or charged against Variflex without regard to other income,
gains, or losses of SBL. The assets of Variflex will thus be held exclusively
for the benefit of Contractowners and beneficiaries under the Contracts (and
other contracts which may be offered in the future under which net premiums are
placed in Variflex and which provide benefits varying in accordance with the
investment results of Variflex) to the extent they are entitled to benefits
based on Variflex.
Variflex contains eleven Series--Growth Series, Growth-Income Series, Money
Market Series, Worldwide Equity Series, High Grade Income Series, Social
Awareness Series, Emerging Growth Series, Global Aggressive Bond Series,
Specialized Asset Allocation Series, Managed Asset Allocation Series, and Equity
Income Series. Amounts allocated by Contractowners or Participants to each of
these Series are invested, respectively, in Series A, B, C, D, E, S, J, K, M, N
and O of SBL Fund (the "Fund"). Additional Series may be added to Variflex at
the discretion of SBL.
SBL FUND
The Fund is a diversified, open-end management investment company. The
assets of the Fund are managed by Security Management Company (the "Investment
Manager"), the investment adviser to the Fund, under the supervision of the
Fund's board of directors.
The Fund currently issues its shares in eleven separate series: Series A,
Series B, Series C, Series D, Series E, Series S, Series J, Series K, Series M,
Series N and Series O ("Series"). The assets of each Series are held separate
from the assets of other Series, and each Series has different investment
objectives and policies. As a result, each Series operates as a separate
investment fund. Each Series of Variflex invests solely in a corresponding
Series of the Fund.
SERIES A--Amounts allocated to the GROWTH SERIES of Variflex are invested
in Series A. The investment objective of Series A is to seek long-term capital
growth by investing in a broadly diversified portfolio of common stocks,
securities convertible into common stocks, preferred stocks, bonds and other
debt securities.
SERIES B--Amounts allocated to the GROWTH-INCOME SERIES of Variflex are
invested in Series B. Series B seeks long-term growth of capital, with secondary
emphasis on income, by investing in various types of securities, including
common stocks, convertible securities, preferred stocks and debt securities.
Series B's investments in debt securities may include securities rated below
investment grade (commonly referred to as "junk bonds").
SERIES C--Amounts allocated to the MONEY MARKET SERIES of Variflex are
invested in Series C. The investment objective of Series C is to provide as high
a level of current income as is consistent with preserving capital. It invests
in high quality money market instruments with maturities of not longer than
thirteen months.
SERIES D--Amounts allocated to the WORLDWIDE EQUITY SERIES of Variflex are
invested in Series D. The investment objective of Series D is to seek long-term
growth of capital primarily through investment in common stocks and equivalents
of companies domiciled in foreign countries and the United States.
SERIES E--Amounts allocated to the HIGH GRADE INCOME SERIES of Variflex are
invested in Series E. The investment objective of Series E is to provide current
income with security of principal. Series E seeks to achieve this investment
objective by investing in a broad range of debt securities, including U.S. and
foreign corporate debt securities and securities issued by the U.S. and foreign
governments.
SERIES S--Amounts allocated to the SOCIAL AWARENESS SERIES of Variflex are
invested in Series S. The investment objective of Series S is to seek high total
return through a combination of income and capital appreciation by investing
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
in various types of securities which meet certain social criteria established
for the Series. Series S will invest in a diversified portfolio of common
stocks, convertible securities, preferred stocks and debt securities.
SERIES J--Amounts allocated to the EMERGING GROWTH SERIES of Variflex are
invested in Series J. The investment objective of Series J is to seek capital
appreciation through investment in a broadly diversified portfolio of securities
which may include common stocks, preferred stocks, debt securities and
securities convertible into common stocks.
SERIES K--Amounts allocated to the GLOBAL AGGRESSIVE BOND SERIES of
Variflex are invested in Series K. The investment objective of Series K is to
seek high current income and, as a secondary objective, capital appreciation by
investing in a combination of foreign and domestic high-yield, lower rated debt
securities (commonly referred to as "junk bonds").
SERIES M--Amounts allocated to the SPECIALIZED ASSET ALLOCATION SERIES of
Variflex are invested in Series M. The investment objective of Series M is to
seek high total return consisting of capital appreciation and current income.
Series M seeks this objective by following an asset allocation strategy that
contemplates shifts among a wide range of investment categories and market
sectors, including equity and debt securities of domestic and foreign issuers.
SERIES N--Amounts allocated to the MANAGED ASSET ALLOCATION SERIES of
Variflex are invested in Series N. The investment objective of Series N is to
seek a high level of total return by investing primarily in a diversified
portfolio of debt and equity securities.
SERIES O--Amounts allocated to the EQUITY INCOME SERIES of Variflex are
invested in Series O. The investment objective of Series O is to seek to provide
substantial dividend income and also capital appreciation by investing primarily
in dividend-paying common stocks of established companies.
The Investment Adviser has engaged Lexington Management Corporation, Park
80 West Plaza Two, Saddle Brook, New Jersey 07662, to provide certain investment
advisory services to Series D and K of the Fund. The Investment Adviser has
engaged T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202 to provide certain investment advisory services to Series N and
O. The Investment Adviser has engaged Meridian Investment Management
Corporation, 12835 East Arapahoe Road, Tower II, 7th Floor, Englewood, Colorado
80112 and Templeton/Franklin Investment Services, Inc., 777 Mariners Island
Boulevard, San Mateo, California 94404, to provide certain analytic research
services with respect to Series M.
THERE IS NO ASSURANCE THAT ANY OF THESE SERIES WILL ATTAIN THEIR RESPECTIVE
STATED OBJECTIVES.
ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJECTIVES AND POLICIES OF
THE SERIES AND THE INVESTMENT ADVISORY SERVICES AND CHARGES CAN BE FOUND IN THE
CURRENT PROSPECTUS FOR THE FUND, WHICH IS ATTACHED TO AND SHOULD BE READ IN
CONJUNCTION WITH THIS PROSPECTUS BEFORE ANY DECISION IS MADE CONCERNING THE
ALLOCATION OF PURCHASE PAYMENTS, SINCE THE INVESTMENT PERFORMANCE OF THE SERIES
WILL AFFECT THE VARIABLE ANNUITY VALUES.
VOTING RIGHTS
As the record owner of the Fund shares which represent the assets of
Variflex, including the Variflex assets represented by reserves for Annuitants
currently receiving Annuity payments, SBL will vote at all Fund shareholder
meetings. However, Contractowners will have the right to instruct SBL with
respect to such voting. Each Contractowner will receive all Fund periodic
reports and proxy materials and a form with which to give voting instructions. A
Participant under a group Contract will have no rights with regard to voting or
instructing SBL unless the Participant's views are solicited by the
Contractowner. It should be noted that the number of votes allocable to a
particular Contract will gradually decrease as annuity payments are made during
the annuity period.
In addition, the bylaws of SBL provide that each SBL policyholder, without
regard to the number of contracts owned or the amount of each such contract,
shall have the right to cast one vote, in person or by proxy, for the election
of directors of SBL, and on all other corporate matters brought before its
policyholders.
SUBSTITUTED SECURITIES
If shares of the Fund or any Series should become unavailable for purchase
by Variflex, or if in the judgment of SBL further investment in such shares is
no longer appropriate in view of the purposes of Variflex, SBL reserves the
right, subject to any applicable law, to make certain changes including (i) to
substitute therefor shares of another fund or another Series of the Fund; or
(ii) net payments received after a date specified by SBL may be applied to the
purchase of shares of such other fund or of another Series of the Fund. In
either event, to the extent required by the Act, prior approval by a vote of a
majority of the votes to be cast by persons having a voting interest in the Fund
shares held in the affected Series within Variflex and the Securities and
Exchange Commission shall be obtained.
VARIFLEX CONTRACTS
PURPOSE OF THE CONTRACTS
The Contracts described in this Prospectus may be issued for use with
retirement plans and trusts qualified under the Internal Revenue Code of 1986,
as amended (the "Code"), for favorable tax treatment ("Qualified Contracts") and
for use with plans and trusts which are not so qualified ("Non-Qualified
Contracts"). Retirement plans qualified for favorable tax treatment include
pension and profit sharing plans qualified under Section 401 or 403(a) of the
Internal Revenue Code, annuity purchase plans of public school systems and
certain tax-exempt organizations which qualify
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
for tax deferred treatment under Section 403(b) or 403(c) of the Code,
individual retirement plans and individual retirement annuities under Section
408 of the Code and deferred compensation plans under Section 457 of the Code.
See section entitled "Federal Tax Matters-Qualified Contracts," page 22 for
further details.
The basic objective of the Contracts is to provide a Guaranteed or Variable
Annuity or a combination Guaranteed and Variable Annuity. Variable Annuities
pursuant to the Contracts are funded by Variflex. The objective of a Variable
Annuity is to provide benefits which will tend to a greater degree than a
Guaranteed Annuity to reflect the changes in the cost of living. There can be no
assurance that this objective will be attained. Annuity payments based on any of
the Series of Variflex are not guaranteed and entail more risk to the Annuitant
than traditional guaranteed insurance.
This Prospectus generally describes only the variable aspects of the
Variflex Contracts, except where guaranteed aspects are specifically mentioned.
For a discussion of the guaranteed investment option and guaranteed benefits
available in connection with Variflex Contracts, see "The General Account" on
page 24.
The terms of the Contracts may only be changed by mutual agreement between
SBL and each Contractowner, except as described in "Substituted Securities,"
above, and except for changes required to make the contracts comply with, or
give Contractowners the benefit of, any law or regulation issued by a
governmental agency to which SBL or the Variflex Contracts are subject.
TYPES OF VARIFLEX CONTRACTS
Different types of the Contracts are offered by SBL through this
Prospectus. The Contracts vary in the amount and timing of the minimum payments,
and in various other respects. The different types of Contracts are described
below:
a. Single Payment Immediate Annuity Contract - This type of contract is
used for an individual where a single Purchase Payment has been allocated to
provide for life contingent annuity payments to commence immediately.
b. Single and Installment Payment Deferred Annuity Contracts - This type of
contract is used for an individual where either a single Purchase Payment (which
may be supplemented with additional payments within thirteen months) or periodic
Purchase Payments will be made to the individual's account with annuity payments
to commence at a later date.
c. Group Single and Installment Payment Deferred Annuity Contract - This
type of contract may be used when Purchase Payments, either single or
installment, under group plans are to be accumulated until the retirement date
of each Participant. Generally, under a Group Allocated Contract, an Individual
Account is established for each Participant for whom payments are being made and
normally the benefit at retirement will be determined by the value of the
Participant's Individual Account at that time.
Under a Group Unallocated Contract, the Purchase Payments are applied to
acquire Accumulation Units. However, the Accumulation Units are not allocated to
the individual Participants but are credited to the Contractowner's accumulation
account. When a Participant becomes entitled to receive pension payments under
the provisions of the Plan, the appropriate number of Accumulation Units may be
withdrawn from the accumulation account by the Contractowner to provide the
Participant with an annuity.
CONTRACT APPLICATION AND PURCHASE PAYMENTS
Individuals wishing to purchase a Contract must complete an application and
provide an initial Purchase Payment which will be sent to the SBL home office.
If the application can be accepted in the form received, the initial Purchase
Payment will be credited within two business days after receipt by the SBL home
office. If an incomplete application cannot be completed within five days of its
receipt, the applicant will be notified of the reasons for the delay and any
payments received will be returned immediately unless the applicant specifically
consents to have SBL retain them pending completion of the application.
The Contracts set certain minimum amounts for the initial and subsequent
Purchase Payments. For Qualified Contracts, the minimum initial and subsequent
payments are $25, except Group Unallocated Contracts, which require a minimum
initial payment of $500 and subsequent payments of $25. For Non-Qualified
Contracts, the minimum initial payment is $500 and subsequent payments must be
at least $25. For Single Payment Immediate and Single Payment Deferred Annuity
Contracts, the minimum initial payment is $2,500. The maximum amount of Purchase
Payments under Variflex Contracts is $1,000,000, without the prior approval of
SBL. These amounts may be changed at the sole discretion of SBL. In addition,
SBL reserves the right to terminate any individual or Group Contract for certain
specified reasons, including failure of the Contract Value to meet certain
specified minimums. (See "Termination of the Contract" in the Statement of
Additional Information for a detailed listing of such circumstances.)
For an Installment Payment Deferred Annuity, Purchase Payments may be made
at such intervals as desired, but are usually made on an annual, semiannual,
quarterly or monthly basis. The frequency of Purchase Payments may be changed by
the Contractowner. If Purchase Payments cease, they may be resumed at a future
date, subject to the Annuity Commencement Date requirements. The amount of
future Purchase Payments may be increased or decreased on any date a payment is
submitted. Submission of a Purchase Payment different from the previous payment
will automatically effect an increase or decrease. The number of changes
permitted and the maximum payments allowed under the Internal Revenue Code for
Qualified Plans vary depending on the type of plan. For a discussion
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
of those limitations see "Limits on Purchase Payments" in the Statement of
Additional Information. Failure to comply with those limitations may subject the
Contract to adverse tax treatment.
ALLOCATION OF PURCHASE PAYMENTS
The Purchase Payments will be allocated to each Series within Variflex in
accordance with the written instructions contained in the application. The
Contractowner or Participant may by written instruction to the home office
indicate one or more Series to which a specified portion or portions of the
Purchase Payment should be applied, except that no allocation is permitted which
would result in less than $25 per payment being allocated to any one Series
within Variflex. Changes in allocation of future Purchase Payments (with the
same $25 minimum per Series) may be made at any time by specific written
instruction to the home office or by telephone instruction, provided that a
properly completed Telephone Transfer Authorization form is on file with SBL or
the Telephone Transfer section of the application has been completed. (See
"Transfer of Contract Value" on page 13.)
CREDITING OF ACCUMULATION UNITS
During the Accumulation Period, when a Purchase Payment is received in its
home office, SBL currently credits the entire payment to the Variflex Contract.
Amounts allocated to Series of Variflex are credited in the form of Accumulation
Units. The number of Accumulation Units that may be purchased for any Series is
found by dividing the Purchase Payment allocated to that Series by the
Accumulation Unit value for that Series determined at the end of the Valuation
Period in which the Purchase Payment is credited. The Accumulation Unit value
for each Series is determined as of 3:00 p.m. Central time on each Valuation
Date and on any other day in which there is a sufficient degree of trading in
the portfolio securities of a Series of the Fund that the Accumulation Unit
value of an applicable Series of Variflex might be materially affected.
The value of an Accumulation Unit in each Series is expected to increase or
decrease, reflecting the investment experience of the corresponding Series of
the underlying Fund less any deductions for charges or taxes. The Statement of
Additional Information contains a detailed description of how the Accumulation
Units are valued.
DOLLAR COST AVERAGING OPTION
SBL currently offers an option under which Contractowners may dollar cost
average their allocations in the Series under the Contract by authorizing SBL to
make periodic allocations of Contract Value from any one Series to one or more
of the other Series. Dollar cost averaging is a systematic method of investing
in which securities are purchased at regular intervals in fixed dollar amounts
so that the cost of the securities gets averaged over time and possibly over
various market cycles. The option will result in the allocation of Contract
Value to one or more Series, and these amounts will be credited at the
Accumulation Unit value as of the end of the Valuation Dates on which the
transfers are effected. Since the value of Accumulation Units will vary, the
amounts allocated to a Series will result in the crediting of a greater number
of units when the Accumulation Unit value is low and a lesser number of units
when the Accumulation Unit value is high. Similarly, the amounts transferred
from a Series will result in a debiting of a greater number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that a Contractowner will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the
form, the Contractowner must designate whether a specific dollar amount,
percentage of Contract Value or earnings only are to be transferred, the Series
to and from which the transfers will be made, the desired frequency of the
transfers, which may be on a monthly or quarterly basis, and the length of time
during which the transfers shall continue or the total amount to be transferred
over time.
After SBL has received a Dollar Cost Averaging Request in proper form at
its home office, Security Benefit will transfer Contract Value in amounts
designated by the Contractowner from the Series from which transfers are to be
made to the Series chosen by the Contractowner. The minimum amount that may be
transferred to any one Series is $25. Each transfer will be effected on the
monthly or quarterly anniversary, whichever corresponds to the period selected
by the Contractowner, of the date of receipt at SBL's home office of a Dollar
Cost Averaging Request in proper form, until the total amount elected has been
transferred, or until Contract Value in the Series from which transfers are made
has been depleted. Amounts periodically transferred under this option are not
currently subject to any transfer charges.
A Contractowner may instruct SBL at any time to terminate the option by
written request to SBL's home office. In that event, the Contract Value in the
Series from which transfers were being made that has not been transferred will
remain in that Series unless the Contractowner instructs otherwise. If a
Contractowner wishes to continue transferring on a dollar cost averaging basis
after the expiration of the applicable period, the total amount elected has been
transferred, or the Series has been depleted, or after the Dollar Cost Averaging
Option has been canceled, a new Dollar Cost Averaging Request must be completed
and sent to SBL's home office. SBL may discontinue, modify, or suspend the
Dollar Cost Averaging Option at any time.
Contract Value may also be dollar cost averaged to or from the General
Account, provided that such transfers do not violate the restrictions on
transfers as described in "The General Account," page 24.
ASSET REALLOCATION OPTION
SBL currently offers an option under which Contractowners authorize SBL to
automatically transfer
- --------------------------------------------------------------------------------
12
<PAGE>
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their Contract Value each quarter to maintain a particular percentage allocation
among the Series as selected by the Contractowner. The Contract Value allocated
to each Series will grow or decline in value at different rates during the
quarter, and Asset Reallocation automatically reallocates the Contract Value in
the Series each quarter to the allocation selected by the Contractowner. Asset
Reallocation is intended to transfer Contract Value from those Series that have
increased in value to those Series that have declined in value. Over time, this
method of investing may help a Contractowner buy low and sell high. This
investment method does not guarantee profits, nor does it assure that a
Contractowner will not have losses.
To elect the Asset Reallocation Option, an Asset Reallocation Request in
proper form must be received by SBL at its home office. An Asset Reallocation
Request form is available upon request. On the form, the Contractowner must
indicate the applicable Series and the percentage of Contract Value which should
be allocated to each of the applicable Series each quarter ("Asset Reallocation
Program"). If the Asset Reallocation Option is elected, all Contract Value
invested in the Series must be included in the Asset Reallocation Program.
This option will result in the transfer of Contract Value to one or more of
the Series on the date of SBL's receipt of the Asset Reallocation Request in
proper form and each quarterly anniversary of that date thereafter. The amounts
transferred will be credited at the Accumulation Unit value as of the end of the
Valuation Dates on which the transfers are effected. Amounts periodically
transferred under this option are not currently subject to any transfer charges.
A Contractowner may instruct SBL at any time to terminate this option by
written request to SBL's home office. In that event, the Contract Value in the
Series that has not been transferred will remain in those Series regardless of
the percentage allocation unless the Contractowner instructs otherwise. If a
Contractowner wishes to continue Asset Reallocation after it has been canceled,
a new Asset Reallocation Request form must be completed and sent to SBL's home
office. SBL may discontinue, modify, or suspend, and reserves the right to
charge a fee for the Asset Reallocation Option at any time. Asset Reallocation
is not available for Group Unallocated Contracts.
Contract Value invested in the General Account may be included in the Asset
Reallocation Program, provided that transfers from the General Account do not
violate the restrictions on transfers as described in "The General Account,"
page 24.
TRANSFER OF CONTRACT VALUE
During the Accumulation Period, the Contractowner or Participant may elect
by written notice to the SBL home office to transfer all or any part of the
Contract Value invested in a particular Variflex Series to any other Variflex
Series. Such transfers (and changes to an existing Dollar Cost Averaging or
Asset Reallocation Option) may be made by telephone if a properly completed
Telephone Transfer Authorization form, which may be obtained from SBL, is on
file with SBL or the Telephone Transfer section of the application has been
completed. SBL reserves the right to deny any telephone transfer request. SBL
has established procedures to confirm that instructions communicated by
telephone are genuine and may be liable for any losses due to fraudulent or
unauthorized instructions if it fails to comply with its procedures. SBL`s
procedures require that any person requesting a telephone transfer provide the
account and contract number and the owner`s tax identification number and such
instructions must be received on a recorded line. Neither SBL nor any of its
affiliates will be liable for any claim, loss or expense resulting from any
alleged error or mistake in connection with a telephone transfer which was
authorized by the Contractowner, or by anyone else who purports to give
instructions on his or her behalf, provided that SBLcomplied with its
procedures. The frequency of transfers generally is not limited, although SBL
reserves the right to limit them as to any individual, or in the future, in
general, to not more than once every 30 days. Such transfers are currently made
without charge. The telephone transfer privilege may be suspended, modified or
discontinued at any time without notice. SBL's policy concerning telephone
transfers may require a Contractowner who authorizes telephone transfers to bear
the risk of loss from a fraudulent or unauthorized telephone transfer. For a
discussion of transfers after the Annuity Commencement Date, see "Allocation of
Benefits" on page 20.
CONTRACT VALUE
The Contract Value is the sum of the amounts under the Contract held in
each Series of Variflex and in the General Account, including amounts set aside
in the General Account to secure loans.
On each Valuation Date, the portion of the Contract Value allocated to any
particular Series will be adjusted to reflect the investment experience of that
Series. See "Determination of Contract Value," below. No minimum amount of
Contract Value is guaranteed. A Contractowner bears the entire investment risk
relating to the investment performance of Contract Value allocated to the
Variflex Series.
DETERMINATION OF CONTRACT VALUE
The Contract Value will vary to a degree that depends upon several factors,
including investment performance of the Series to which Contract Value has been
allocated, payment of Purchase Payments, the amount of any outstanding Contract
Debt, partial withdrawals, and the charges assessed in connection with the
Contract. The amounts allocated to the Series will be invested in shares of the
corresponding Series of the SBL Fund. The investment performance of the Series
will reflect increases or decreases in the net asset value per share of the
corresponding Series of SBL Fund and any dividends or distributions declared by
such Series.
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Assets in the Series are divided into Accumulation Units, which are
accounting units of measure used to calculate the value of a Contractowner's
interest in a Series. When a Contractowner allocates Purchase Payments to a
Series, the Contract is credited with Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Series by the Accumulation Unit value for the
particular Series at the end of the Valuation Period in which the Purchase
Payment is credited. In addition, other transactions including loans, full or
partial withdrawals, transfers, and assessment of certain charges against the
Contract affect the number of Accumulation Units credited to a Contract. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Series. The Accumulation Unit value of each Series is determined
on each Valuation Date. The number of Accumulation Units credited to a Contract
shall not be changed by any subsequent change in the value of an Accumulation
Unit, but the dollar value of an Accumulation Unit may vary from Valuation Date
to Valuation Date depending upon the investment experience of the Series and
charges against the Series.
The Accumulation Unit value of each Series' unit initially was $10. The
unit value of a Series on any Valuation Date is calculated by dividing the value
of each Series' net assets by the number of Accumulation Units credited to the
Series on that date. Determination of the value of the net assets of a Series
takes into account the following: (1) the investment performance of the Series,
which is based upon the investment performance of the corresponding Series of
the SBL Fund, (2) any dividends or distributions paid by the corresponding
Series, (3) the charges, if any, that may be assessed by SBL for taxes
attributable to the operation of the Series, and (4) the Actuarial Risk Fee
under the Contract.
CONTRACTOWNER INQUIRIES
Contractowner inquiries and Purchase Payments should be addressed to
Security Benefit Life Insurance Company at its home office, P.O. Box 750497,
Topeka, Kansas 66675-0497, or made by calling (913) 295-3112 or (800) 888-2461,
extension 3112.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
No deduction for a sales charge is made from the Purchase Payments for
Variflex Contracts. However, except as set forth below, a contingent deferred
sales charge (which may also be referred to as a withdrawal charge), may be
assessed by SBL on a full or partial withdrawal from the Contracts, to the
extent the amount withdrawn is attributable to Purchase Payments made. During
the first Contract Year, the withdrawal charge applies against the total amount
withdrawn attributable to total Purchase Payments made. Each Contract Year
thereafter, a withdrawal charge will not be assessed upon the first withdrawal
in the Contract Year of up to 10% of the Contract Value, as of the date of the
withdrawal (the "Free Withdrawal Right"). All or any part of the Free Withdrawal
Right for that Contract Year that is not applied to the first withdrawal is
forfeited. The free withdrawal is not available to Contractowners receiving
"systematic withdrawals" as discussed under "Systematic Withdrawals," page 17.
The Free Withdrawal Right for certain Contracts funding charitable
remainder trusts is available immediately and allows free withdrawals to the
extent that such withdrawals do not in any Contract Year exceed 10% of the
Contract Value on the date of the first withdrawal in that Contract Year. For
Group Unallocated Contracts, after the first Contract Year the Contractowner
shall be allowed one free withdrawal per calendar month. (Any partial month
immediately following a Contract Year anniversary shall be treated as a calendar
month for this purpose.) The free withdrawal for such Contracts applies only to
the first withdrawal in any calendar month. In any Contract Year, the total free
withdrawals from Group Unallocated Contracts cannot exceed 10% of the Contract
Value as of the beginning of such Contract Year. All or any part of the free
withdrawal for a month that is not applied to the first withdrawal in that month
is forfeited and once the 10% level described in the previous sentence is met,
the right to any further monthly free withdrawals is forfeited for the remainder
of the Contract Year.
For purposes of determining the withdrawal charge, a withdrawal will be
attributed first to Purchase Payments and then will be attributed to earnings,
even if the Contractowner elects to redeem amounts allocated to an Account
(including the General Account) other than an Account to which Purchase Payments
were allocated. The amount of the charge will depend upon the Contract Year in
which the withdrawal is made.
The applicable withdrawal charge for the Contracts except Variflex
Contracts-401(k) and 408(k), is as follows, based on the Contract Year in which
the withdrawal is made:
Contract
Year of Withdrawal
Withdrawal Charge
---------- ------
1 8
2 7
3 6
4 5
5 4
6 3
7 2
8 1
9 and after 0
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For Variflex Contracts-401(k) and 408(k), the following withdrawal charges
apply:
Contract
Year of Withdrawal
Withdrawal Charge
---------- ------
1 8
2 8
3 8
4 8
5 7
6 6
7 5
8 4
9 and after 0
In no event will the amount of any withdrawal charge, when added to any
such charge previously assessed against any amount withdrawn from the Contract,
exceed 8% of the Purchase Payments paid under a Contract. In addition, no charge
will be imposed (1) upon payment of the death benefit under the Contract (except
when the Annuitant is older than age 75 upon the date of death); (2) upon
annuity payments under Annuity Options 1, 2, 3, 4 or any similar life contingent
payment option that is mutually agreed upon between the Contractowner and SBL;
or (3) upon certain systematic withdrawals. The contingent deferred sales charge
will be deducted, to the extent applicable, from withdrawals and annuity
payments under Annuity Options 5, 6, 7, 8 and other non-life contingent payment
options, unless annuity payments extend over a period of at least five years and
are made in substantially equal amounts.
The contingent deferred sales charge will be paid to SBL for its services
and expenses relating to the sales of the Contracts, including commissions to
sales personnel, the costs of preparing sales literature and other promotional
activity. SBL anticipates it will pay the selling broker-dealer or any national
banks that sell Variflex a sales commission or fee of not more than 6% of all
Purchase Payments. In addition, under certain circumstances, SBL may pay certain
broker-dealers persistency bonuses which will take into account, among other
things, the length of time and the amount of Purchase Payments held under
Variflex Contracts invested in certain Series of Variflex. A persistency bonus
is not anticipated to exceed .25%, on an annual basis, of the Contract Values
considered in connection with the bonus. If total contingent deferred sales
charges realized are not sufficient to pay sales expenses for Variflex Contracts
in any one year or in total, SBL will pay the difference from its general
account assets, including charges realized from the Actuarial Risk Fee. The
Actuarial Risk Fee includes a charge of .10% to cover the risk that sales
charges will not cover the costs of these selling expenses. To the extent such
amount is not needed to meet sales costs, SBL will realize a gain. SBL
anticipates recovering its sales expenses through the contingent deferred sales
charge and through .10% of the Actuarial Risk Fee over the life of the contract.
OTHER CHARGES
(a) Administrative Fees
Except as noted below, SBL deducts at each calendar year-end from each
individual and Group Contract and from each Participant's Individual Account an
annual administrative fee ("Administrative Fee") of $30 to cover expenses
relating to maintenance of the Contract or account. The Administrative Fee is
$30 for all Contracts except the Variflex Contracts-401(k) and 408(k) for which
the fee is the lesser of 2% of Contract Value valued as of the calendar year-end
or $30. This fee is designed only to reimburse SBL for the expenses of
maintaining the Contracts. When a Contract is withdrawn for its full value or
where a Contract has been in force for less than a full calendar year, a pro
rata annual Administrative Fee will be deducted at the time of the withdrawal or
at year-end. The Administrative Fee is deducted both during the Accumulation
Period and after annuity payments have commenced; however, no Administrative Fee
is charged on life-contingent Single Stipulated Payment Immediate Annuity
Contracts or during any payout under Options 1, 2, 3, 4 or similar
life-contingent payment options agreed to by SBL. Once the contract is issued,
the amount of the Administrative Fee under that Contract may not be increased by
SBL.
(b) State Premium Taxes
An amount for state premium taxes (which presently range from 0% to 3.5%)
customarily will be deducted when assessed by a given state. In most cases, if
the Contract is to be annuitized, the dollar amount of any such tax is assessed
and deducted from the Contract Value at the time annuity payments commence. In
some states, premium taxes are assessed by the state at the time Purchase
Payments are made rather than at the time annuity payments commence. In such
states, SBL will pay the tax when assessed and will deduct a pro rata share of
the amount of any such tax from any partial withdrawal and any remaining amount
of tax from the Contract Value at the time the contract is surrendered or
annuity payments commence. SBL, however, reserves the right to deduct the
premium tax when assessed.
(c) Actuarial Risk Fee
SBL assumes a number of risks under the Variflex Contracts. While Variable
Annuity payments will vary in accordance with the investment performance of the
selected Series, the amount of such payments will not be decreased because of
adverse mortality experience of Annuitants as a class or because of an increase
in actual expenses of SBL over the expense charges provided for in the
Contracts. SBL assumes the risk that Annuitants as a class may live longer than
expected (necessitating a greater number of annuity payments) and that fees
deducted may not prove sufficient to cover its actual costs. In assuming these
risks, SBL agrees
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to continue annuity payments under life-contingent annuity options, determined
in accordance with the annuity tables and other provisions of the Variflex
Contracts, to the Annuitant or other payee for as long as he or she may live. In
addition, SBL is at risk for the death benefits payable under the Variflex
Contracts, to the extent that the death benefit in such cases exceeds the
Contract Value.
For SBL's contractual promise to accept these risks, an Actuarial Risk Fee
will be assessed daily against Variflex based on the value of its net assets, at
an annual rate of 1.2%. This fee is assessed during the Accumulation Period and
the Annuity Period against life-contingent and non-life-contingent options, even
though certain of the covered risks are not present in the latter case. Of the
1.2% Actuarial Risk Fee, 0.60% is for mortality risk, 0.10% is for death benefit
risk and 0.50% is for expense risk. SBL would realize a gain from such fee to
the extent, if any, that the entire amount is not needed to provide for excess
annuity payments or to reimburse costs and expenses.
(d) Charges for Taxes
Charges may be made against Variflex only as may be appropriate in the
future to reimburse SBL for the amount of any tax liability (state or federal)
paid or reserved by SBL which results from the maintenance of Variflex. SBL does
not currently expect that there will be any charge for such taxes. (See the
Statement of Additional Information -- Federal Tax Status of Variflex.)
SEQUENTIAL DEDUCTION OF FEES
When annual Administrative Fees are deducted from the value of a Contract,
they shall be deducted from the Contractowner's Contract value in the Variflex
Series in the following order: Money Market Series, High Grade Income
Series,Global Aggressive Bond Series, Growth-Income Series, Equity Income
Series, Managed Asset Allocation Series, Specialized Asset Allocation Series,
Growth Series, Worldwide Equity Series, Social Awareness Series, and Emerging
Growth Series, and then from the General Account. The value in each Variflex
Series will be depleted before the next Series is charged. This sequence is
designed to charge first those account assets which are more liquid or tend to
experience less capital fluctuation.
VARIATIONS IN CHARGES
SBL may reduce or waive the amount of the contingent deferred sales charge
and administrative charge for a Contract where the expenses associated with the
sale of the Contract or the administrative and maintenance costs associated with
the Contract are reduced for reasons such as the amount of the initial Purchase
Payment, the amounts of projected Purchase Payments, or that the Contract is
sold in connection with a group or sponsored arrangement. SBL may also reduce or
waive the contingent deferred sales charge and administrative charge on
Contracts sold to directors, officers and bona fide full-time employees of SBL
and its affiliated companies; the spouses, grandparents, parents, children,
grandchildren and siblings of such directors, officers and employees and their
spouses; and salespersons (and their spouses and minor children) who are
licensed with SBL to sell variable annuities.
SBL will only reduce or waive such charges where expenses associated with
the sale of the Contract or the costs associated with administering and
maintaining the Contract are reduced. Additional information about reductions in
charges is contained in the Statement of Additional Information.
DISTRIBUTIONS UNDER THE CONTRACT
ACCUMULATION PERIOD
Full and Partial Withdrawals
To the extent permitted by the Plan under the terms of which the Contract
was purchased, any Contract or Participant's Individual Account may be
withdrawn, in full or partially, during the Accumulation Period, subject to the
limitations discussed herein. If any partial withdrawal exceeds 90% of the then
current Contract Value of a Participant's Individual Account or an individual
Contract, the then current full value may be paid and the account shall be
closed or the Contract canceled, respectively. A request for a partial
withdrawal under a Contract should specify the allocation of that withdrawal, as
applicable, from the General Account and each Series of Variflex. In the absence
of specification, SBL will, without further instruction, take the amounts needed
to satisfy the withdrawal from the Series in the manner set forth in "Sequential
Deduction of Fees," above.
The proceeds received upon a full withdrawal will be equal to the Contract
Value as of the end of the Valuation Period during which a proper withdrawal
request is received by SBL at its home office, minus any pro rata Administrative
Fee, any applicable contingent deferred sales charge, and any outstanding
Contract Debt. To the extent possible, upon a partial withdrawal, any charges
will be deducted from the value remaining in the Contract after the
Contractowner has received the amount requested.
Upon receipt of an application for a partial or full withdrawal of a
Contract or account signed by the Contractowner, the applicable Accumulation
Unit value will be that determined as of the end of the Valuation Period that a
proper written request is received in SBL's home office.
A full or partial withdrawal may subject a Contractowner to adverse tax
consequences, including the 10% penalty tax that may be imposed on withdrawals
made prior to the Contractowner attaining age 59 1/2. For a discussion of the
tax consequences of withdrawals, see "Constraints on Distributions from Certain
Section 403(b) Annuity Contracts" on page 19 and "Federal Tax Matters" on page
22.
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Payment of any withdrawal will be made in cash as soon as practicable, but
in no event later than seven days after a request is received in SBL's home
office, subject to postponement (i) for any period during which the New York
Stock Exchange is closed other than customary weekend and holiday closing or
when trading on such exchange is restricted, (ii) for any period during which an
emergency exists as a result of which disposal by Variflex of securities owned
by it is not reasonably practicable or it is not reasonably practicable for
Variflex fairly to determine the value of its net assets, or (iii) for such
other periods as the Securities and Exchange Commission may by order permit for
the protection of Contractowners and Participants. The Securities and Exchange
Commission shall, by rules and regulations, determine the conditions under which
trading shall be deemed to be restricted, and an emergency shall be deemed to
exist.
Except as specified with respect to partial withdrawals exceeding 90%, no
partial withdrawal will directly affect future requirements to make Purchase
Payments or the maturity date of the Contract or account. Contracts have other
provisions which encourage the Contractowner to continue the Contract in times
of emergency, including the right to discontinue Purchase Payments for such
periods as may be permitted by the Plan and to resume payments at a later date
without penalty.
Systematic Withdrawals
SBL currently offers a feature under which systematic withdrawals may be
elected. Under this feature, a Contractowner may elect, before the Annuity
Commencement Date, to receive systematic withdrawals that are not subject to a
contingent deferred sales charge by sending a properly completed Systematic
Withdrawal Request form to SBL. Systematic withdrawals are available immediately
from VIVA Contracts and generally are available from other Variflex Contracts
beginning 37 months after the date that the initial Purchase Payment is credited
to the Contract. Systematic withdrawals are available, however, during the first
37 months of a Contract, provided that Contract Value is $40,000 or more at the
time the systematic withdrawal request is received by SBL.
A Contractowner may request that systematic withdrawals be made monthly,
quarterly, semiannually, or annually (1) in a fixed amount not to exceed in any
Contract Year an amount equal to 10% of Contract Value as of the date of the
first systematic withdrawal under the current request; (2) in Level Payments
calculated by SBL subject to the 10% limit described in (1) above; (3) for a
specified period of at least five years for Variflex Contracts that have been in
force 37 months or more, 10 years for other Variflex Contracts and 15 years for
VIVA Contracts; (4) of all earnings in the Contract; or (5) calculated according
to age recalculation which is described under "Optional Annuity Forms" on page
21.
Each systematic withdrawal must be at least $25. Upon payment of a
systematic withdrawal, the Contractowner's Contract Value will be reduced by an
amount equal to the payment proceeds plus any applicable premium taxes and, if
withdrawals exceed the amounts described in (1) through (5) above, any
applicable contingent deferred sales charges. Any systematic withdrawal that
equals or exceeds the Contract Value will be treated as a full withdrawal. The
Contract will automatically terminate if a systematic withdrawal causes the
Contract Value to equal zero.
Each systematic withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
systematic withdrawal will be allocated to the Contractowner's Contract Value in
the Variflex Series and the General Account as instructed by the Contractowner.
If no instructions are provided, SBL will make systematic withdrawals from the
Variflex Series and the General Account in the order set forth under "Sequential
Deduction of Fees," on page 16.
The Free Withdrawal Right discussed under "Charges and Deductions" on page
14 is not available while a Contractowner is receiving systematic withdrawals
and systematic withdrawals in excess of the amounts described above are subject
to any applicable contingent deferred sales charges. Upon termination of
systematic withdrawals, the Free Withdrawal Right will be available in the
Contract Year following termination. Systematic withdrawals may be terminated
upon proper written request by the Contractowner received by SBL at least 30
days in advance of the requested date of termination.
The tax consequences of systematic withdrawals, including the 10% penalty
tax that may be imposed on withdrawals made prior to the Owner attaining age 59
1/2, should be carefully considered. For a discussion of the tax consequences of
withdrawals, see "Constraints on Distributions from Certain Section 403(b)
Annuity Contracts" on page 19 and "Federal Tax Matters" on page 22. SBL may, at
any time, discontinue, modify or suspend systematic withdrawals.
Free-Look Right
A Contractowner may return a Contract within the Free-Look Period, which is
generally a ten-day period beginning when the Contractowner receives the
Contract. The returned Contract will then be deemed void and SBL will refund any
Purchase Payments allocated to the General Account plus the Contract Value in
the Variflex Series plus any charges deducted from the Series and premium taxes,
if any. SBL will refund Purchase Payments allocated to the Series rather than
Contract Value in those states that require it to do so.
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Death Benefit During Accumulation Period
If the Annuitant under a Variflex Contract, other than a Group Unallocated
Contract, dies during the Accumulation Period, a death benefit will be payable.
If the Annuitant's death occurs prior to his or her 76th birthday, the death
benefit will be equal to the greater of (a) the Contract Value of the individual
Contract or the Participant's Individual Account on the date that proof of death
in proper form is received by SBL at its home office, (b) 100% of all Purchase
Payments made reduced by the amount of any partial withdrawals, or (c) the
largest Contract Value on any Contract Year anniversary that is a multiple of
six, less any partial withdrawals since then. For Contracts which had been in
effect for six Contract Years or more as of May 1, 1991, the Contract Value on
the Contract Year anniversary immediately preceding May 1, 1991, will be used in
lieu of the Contract Value on the sixth Contract Year anniversary in (c) above.
For Contracts issued to North Carolina residents, the death benefit is the
greater of (a) or (b) above. The death benefit, less any outstanding Contract
Debt, will be paid in a lump sum to the beneficiary named in the Contract within
two business days of receipt of proof of death in proper form.
If the Annuitant dies during the Accumulation Period on or after his or her
76th birthday, the beneficiary will receive the Contract Value of the Contract
or account less any outstanding Contract Debt and the applicable contingent
deferred sales charge.
In lieu of payment in one lump sum, an individual Contractowner or a
Participant under a Group Allocated Contract may elect that the death benefit be
applied under any one of the optional annuity forms described on page 21. If the
Contractowner or Participant did not make such an election, the beneficiary may
do so. The person selecting the optional annuity settlement may also designate
contingent beneficiaries to receive any further amounts due, should the first
beneficiary die before completion of the specified payments. The manner in which
annuity payments to the beneficiary are determined and in which they may vary
from month to month are described under "Annuity Period," on page 20.
The death benefit under a Group Unallocated Contract will be an amount not
greater than that under the provisions of the Plan to be paid in the case of the
death of the Participant. The death benefit for a Participant cannot exceed the
present value of the current accrued portion of the pension benefit payable at
the normal retirement date under the Plan for the Participant. If the Plan is
being funded by more than one method and/or contract, the maximum death benefit
payable under a Variflex Contract will be reduced. In this case of multiple
funding, the maximum death benefit will be reduced by multiplying it by the
following ratio of "a" divided by "b" where:
a. is the total value under the Variflex Contract.
b. is the total of the contract values and/or funds accumulated under all
funding methods and/or contracts.
The Contractowner must provide the information to calculate the death benefit
before it will be paid and the death benefit amount will be paid as a partial
surrender under the Group Unallocated Contract. The partial surrender will be
paid without imposition of a contingent deferred sales charge and will not be
considered as a free withdrawal.
For Non-Qualified Contracts issued after January 18, 1985, if the
Contractowner dies during the Accumulation Period and before the Annuitant, the
entire death benefit with interest will be paid within 5 years of the death of
the Contractowner, unless the beneficiary is a natural person and the death
benefit is applied under options 1, 2, 3, 5 or 6 on page 21, with the payments
extended over a period that does not exceed the life or life expectancy of the
beneficiary. The first installment must begin within 12 months of the death of
the Contractowner. A spouse who is the sole beneficiary of the Contractowner may
elect to become the Contractowner of the Contract with no requirement to begin
death benefit distribution. The beneficiary of the death benefit payable upon
the death of the Contractowner prior to maturity is the same beneficiary as that
designated for the Annuitant's death benefit, unless another beneficiary is
designated. If the Contractowner dies on or after the Annuity Commencement Date
and before the entire interest in the contract has been distributed, the
remaining value in the contract must be distributed at least as rapidly as the
method of distribution to the Annuitant.
Loans Available From Certain Qualified Contracts
The Contractowner of a Contract issued in connection with a retirement plan
that is qualified under Section 401 or 403(b) of the Internal Revenue Code may
borrow money from SBL using his or her Contract Value as the only security for
the loan by submitting a written request to SBL. A loan may be taken while the
Owner is living and prior to the Annuity Commencement Date. The minimum loan
that may be taken is $1,000. For Contracts with a Contract Value of $20,000 or
less, the maximum loan that can be taken is the amount that produces a loan
balance immediately after the loan that is the lesser of $10,000 or 75% of the
Contract Value. For Contracts with Contract Value over $20,000, the maximum loan
that can be taken is the amount that produces a loan balance immediately after
the loan that is the lesser of (1) $50,000 reduced by the excess of (a) the
highest outstanding loan balance within the preceding 12 month period ending on
the day before the date the loan is made over (b) the outstanding loan balance
on the date the loan is made or (2) 50% of the
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Contract Value. Reference should be made to the terms of the particular
Qualified Plan for any additional loan restrictions.
When an eligible Contractowner takes a loan, Contract Value is transferred
from the Variflex Series to the General Account in an amount equal to the loan
amount into an account called the Loan Account. Amounts allocated to the Loan
Account earn interest at the rate of 3.5%, the minimum rate of interest
guaranteed under the General Account. In addition, Contract Value is transferred
from the Variflex Series to the General Account in an amount equal to the loan
amount for loans from Contracts with Contract Value of $20,000 or more or in an
amount equal to 1/3 of the loan amount for loans from Contracts with Contract
Value of less than $20,000. This Contract Value earns the current rate of
interest paid by SBL on General Account assets and is security for the loan.
Interest will be charged for the loan and will accrue on the loan balance
from the effective date of any loan. The loan interest rate will be 5.5%.
Because the Contract Value maintained in the Loan Account will always be equal
in amount to the outstanding loan balance, the net cost of a loan is 2%.
Loans must be repaid within five years and before the Annuity Commencement
Date, unless Security Benefit determines that the loan is to be used to acquire
a principal residence for the Owner, in which case the loan must be repaid
within 30 years and before the Annuity Commencement Date. Loan repayments must
be made at least quarterly. Loans that are not repaid within the required time
periods will be subject to taxation as distributions from the Contract. Loans
may be prepaid at any time. Upon receipt of a loan payment, Security Benefit
will transfer Contract Value from the Loan Account to the General Account and/or
the Series according to the Contractowner's current instructions with respect to
Purchase Payments in an amount equal to the amount by which the payment reduces
the amount of the loan outstanding. If a loan payment is not received when due,
a partial withdrawal equal to the repayment amount due and any applicable
withdrawal charge will be made from the Contract and paid to Security Benefit.
The portion of the partial withdrawal equal to the unpaid principal due will be
deducted from the Contract Value serving as security for the loan and the
portion equal to interest due will be deducted from other Contract Value.
The partial withdrawal may be subject to taxation as a distribution.
Contractowners should consult with their tax advisers before requesting a loan.
While the amount to secure the loan is held in the General Account and the
amount of the outstanding loan balance is held in the Loan Account, the Owner
forgoes the investment experience of the Series and the current rate of interest
on the Loan Account. Outstanding Contract Debt will reduce the amount of
proceeds paid upon full withdrawal or upon payment of the death benefit.
A Contractowner should consult with his or her tax adviser on the effect of
a loan.
The foregoing discussion of Contract loans is general and does not address
the tax consequences resulting from all situations in which a person may receive
a Contract loan. For plans that are subject to the Employee Retirement Income
Security Act ("ERISA"), loans may not be available or may be subject to certain
restrictions. A competent tax adviser should be consulted before obtaining a
Contract loan.
Constraints on Distributions from Certain Section 403(b)
Annuity Contracts
The Internal Revenue Code imposes restrictions on certain distributions
from tax-sheltered annuity contracts meeting the requirements of Section 403(b).
Section 403(b) of the Code permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to
certain limitations, exclude the amount of purchase payments from gross income
for tax purposes. Section 403(b)(11) requires that distributions from Section
403(b) annuities that are attributable to employee contributions under a salary
reduction agreement not begin before the employee (i) reaches age 59 1/2, (ii)
separates from service, (iii) dies, (iv) becomes disabled or (v) incurs a
hardship. SBL reserves the right to require satisfactory written proof of the
events in items (i) through (v) prior to any distribution from the Contract.
Furthermore, distributions of income attributable to such contributions may not
be made on account of hardship. Hardship, for this purpose, is generally defined
as an immediate and heavy financial need, such as for paying medical expenses,
the purchase of a principal residence, or paying certain tuition expenses. A
Participant in a Variflex Contract purchased as a Section 403(b) annuity
contract will not, therefore, be entitled to exercise the right of withdrawal,
including systematic withdrawals, as described in this Prospectus, in order to
receive amounts attributable to elective contributions credited to such
Participant after December 31, 1988 under the Contract unless one of the
foregoing conditions has been satisfied. A Participant's value in a Contract may
be able to be transferred to certain other investment alternatives meeting the
requirements of Section 403(b) that are available under an employer's Section
403(b) arrangement.
Taxation of Owners of Two or More Contracts
For Contracts entered into on or after October 21, 1988, the Internal
Revenue Code provides that all annuity contracts issued by the same life
insurance company to the same Contractowner during a twelve-month period shall
be treated as one annuity contract for purposes of determining the amount
includable in the Contractowner's gross income for amounts that are not received
as an annuity. This rule
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will apply to a distribution received under the Contract, including a
distribution by full surrender, or partial withdrawal, or other distribution
that is not in the form of a payment received pursuant to an annuity option
under the Contract.
ANNUITY PERIOD
Annuity Provisions
Life-contingent Variable Annuity payments are determined on the basis of
(a) the mortality table (1983 Table a) specified in the contract (except for
single payment immediate contracts which contain no tables, but for which
annuity rates are available upon request) which generally reflects the age and
sex of the Variable Annuitant and the type of annuity payment option selected,
and (b) the investment performance of Variflex.
Pursuant to the U.S. Supreme Court decision in Arizona Governing Committee
for Tax Deferral Annuity and Deferred Compensation Plans v. Norris, which held
that an employer subject to Title VI of the Civil Rights Act of 1964 may not
offer its employees the option of receiving retirement benefits calculated on
the basis of sex, Variflex Contracts for Participants in such Plans will offer
retirement benefits calculated only on a unisex basis. To the extent that future
legislation expands requirements for unisex rates, Variflex Contracts will
conform to such requirements.
Election of Annuity Commencement Date and Form of Annuity
(a) Non-Qualified Contracts
The date on which annuity payments are to begin and the form of option are
elected in the application. A Contract may not be purchased after age 80 and
annuity payments must begin no later than age 90, except that for Contracts
purchased on or before June 1, 1986, payments must begin no later than age 85.
If no such elections are made, SBL reserves the right to automatically begin
payments at age 65 (or if age at purchase was over 55, then 10 years after
issue) under Option 2 set out below, with 120 monthly payments certain. The
Annuity Commencement Date of individual and Group Allocated Contracts cannot be
less than 37 months after the date the first contribution is credited to the
Contract, except for Single Stipulated Payment Immediate Annuity Contracts.
(b) Qualified Contracts
For Qualified Contracts, the Annuity Commencement Date cannot be less than
37 months after the date the first contribution is credited to the contract,
except for Single Payment Immediate Annuity Contracts.
Contracts purchased in accordance with Plans qualifying under Section 401
or 403(a) of the Internal Revenue Code provide for annuity payments to begin on
the date and under the annuity options provided for in the Plan. Contracts
qualifying under Section 408 of the Code provide that annuity payments may not
commence without penalty until after the Participant attains age 59 1/2, but no
later than age 70 1/2, and that the optional annuity form selected must conform
to the distribution requirements of Section 408.
For contracts qualifying under Section 403(b) of the Code, the date on
which annuity payments are to begin and the form of option are elected in the
application. The option may be any one of Options 1 through 5 or Option 8 as
shown below (provided that distributions under the option comply with the
minimum distribution rules of the Code), and the Annuity Commencement Date must
be no later than that allowed by law. Distributions from 403(b) contracts must
generally begin by the April 1 following the year in which the Annuitant reaches
age 70 1/2.
For Contracts qualifying under Section 403(c) or 457 of the Code, the date
on which annuity payments are to begin and the form of option are provided for
in the Plan agreement. Changes in such election of option may be made at any
time up to 30 days prior to the date on which annuity payments are to begin.
Payments under a Contract qualifying under Section 457 of the Code must comply
with minimum distribution rules generally applicable to qualified retirement
plans.
If no election of an Annuity Commencement Date is made, SBL reserves the
right to automatically begin payments at age 65 (or if age at purchase was over
55, then 10 years after issue) under Option 2, with 120 monthly payments
certain.
Allocation of Benefits
For the Annuity Period, if no election is made to the contrary, the
Accumulation Units of each Series in Variflex (held on the Annuity Commencement
Date) will be changed into Variable Annuity Units and applied to provide a
Variable Annuity based on that Series.
In lieu of this automatic allocation of annuity benefits, the Contractowner
or Participant may elect to convert his or her Accumulation Units to any other
Series in Variflex. After the Annuity Commencement Date, further changes
affecting the account allocation may be made only once each calendar year except
for contracts receiving payments pursuant to annuity options 5, 6, 7 or 8, the
allocation of which may be changed as described under "Transfer of Contract
Value" on page 13. Each Contractowner or Participant may convert Variable
Annuity Units of one Series into Variable Annuity Units of another Series as
discussed above at any time other than the five-day interval prior to and
including any annuity payment date.
No election may be made for any individual unless such election would
produce a periodic payment of at least $25 to that individual and if a
combination benefit is elected, no election may be made unless the guaranteed
and variable payments would each be at least $25.
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Optional Annuity Forms
The following optional annuity forms are available. Individual factual
situations or Plan provisions may vary, however, and special rules not discussed
herein may control.
Option 1 -- Life Income -- Monthly payments will be made during the
lifetime of the Annuitant with payments ceasing upon death, regardless of the
number of payments received. There is no minimum number of payments guaranteed
under this option and it is possible for an Annuitant to receive only one
annuity payment if the Annuitant's death occurred prior to the due date of the
second annuity payment, or only two if death occurred prior to the third annuity
payment due date, etc.
Option 2 -- Life Income with Guaranteed Payments of 5, 10, 15, or 20 Years
- -- Monthly payments will be made during the lifetime of the Annuitant with
payments made for a stated period of not less than 5, 10, 15, or 20 years, as
elected. If, at the death of the Annuitant, payments have been made for less
than the stated period, annuity payments will be continued during the remainder
of such period to the beneficiary.
Option 3 -- Unit Refund Life Income -- Monthly payments will be made during
the lifetime of the Annuitant. If, at the death of the Annuitant, payments have
been made for less than the number of months determined by dividing the amount
applied under this Option by the first monthly payment, the remainder of such
payments will continue to the beneficiary. The Option guarantees that the
annuity units but not necessarily the dollar value applied under a variable
payout will be repaid to the Annuitant or his or her beneficiary.
Option 4 -- Joint and Survivor Annuity -- Monthly payments will be made
during the lifetime of the Annuitant and another named Annuitant and thereafter
during the lifetime of the survivor, ceasing upon the death of the survivor.
There is no minimum number of payments guaranteed under this option and it is
possible for only one annuity payment to be made if both Annuitants under the
Option died prior to the due date of the second annuity payment, or only two
payments if both died prior to the third annuity payment due date, etc.
Option 5 -- Installment Payments for a Fixed Period -- Monthly payments
will be made for a specified number of years. The amount of each payment will be
determined by multiplying (a) the Accumulation Unit Value for the day the
payment is made, times (b) the result of dividing the number of Accumulation
Units applied under this Option by the number of remaining monthly payments. If
at the death of the Annuitant, payments have been made for less than the
specified number of years, the remaining unpaid payments will be paid to the
beneficiary.
Option 6 -- Installment Payments for a Fixed Amount -- Equal monthly
payments will be made until the amount applied, adjusted daily by the investment
results, is exhausted. The final payment will be the amount remaining with SBL.
Option 7 -- Deposit Option -- The amount due under the Contract on the
Maturity Date may be left on deposit with SBL for placement in its General
Account with interest at the rate of not less than 2% per year. Interest will be
paid annually, semiannually, quarterly or monthly as elected. This option may
not be available under certain Qualified Contracts.
Option 8 -- IRC Age Recalculation -- Monthly payments will be made until
the amount applied to this Option, adjusted daily by the investment results, is
exhausted. The amount of monthly payments will be based upon the Annuitant's
life expectancy, or the joint life expectancies of the Annuitant and his or her
beneficiary, at the Annuitant's attained age (and the beneficiary's attained or
adjusted age, if applicable) each year as computed by reference to actuarial
tables prescribed by the Treasury Secretary.
The contingent deferred sales charge, where applicable, will be deducted
from annuity payments under Annuity Options 5, 6, 7 and 8 and other non-life
contingent payment options mutually agreed to with SBL, except that the
contingent deferred sales charge is waived if annuity payments extend over a
period of at least 5 years and are made in substantially equal amounts.
Other Annuity Forms -- Provision may be made for annuity payments in any
reasonable arrangement mutually agreed upon.
If the beneficiary dies while receiving payments certain under Option 2, 3,
5, 6 or 8 above, the present value will be paid in a lump sum to the estate of
the beneficiary.
Value of Variable Annuity Payments:
Assumed Investment Rates
The annuity tables in the Contract which are used to calculate the annuity
payments are based on an "assumed investment rate" of 3 1/2%. If the actual
investment performance of the particular Series selected is such that the net
investment return to Variflex is 3 1/2% per annum, payments will remain
constant. If the net investment return exceeds 3 1/2%, the payments will
increase and if the return is less than 3 1/2%, the payments will decline. Use
of a higher investment rate assumption would mean a higher initial payment but a
more slowly rising series of subsequent payments in a rising market (or a more
rapidly falling series of subsequent payments in a declining market). A lower
assumption would have the opposite effect. Generally, one might expect an equity
investment to experience more significant market fluctuations than a debt
investment, and a longer term debt investment to experience more market
fluctuation than a shorter term debt investment. Thus, while there can be no
certainty, more fluctuation might be expected in the value of Growth,
Growth-Income, Worldwide Equity, Social Awareness,
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Emerging Growth, Global Aggressive Bond, Equity Income, Specialized Asset
Allocation and Managed Asset Allocation Series. The High Grade Income Series
should experience a lesser amount of fluctuation, and the Money Market Series
should experience the least fluctuation.
The payment amount will be greater for shorter guaranteed periods than for
longer guaranteed periods, and greater for life annuities than for joint and
survivor annuities, because the life annuities are expected to be made for a
shorter period.
At the election of the Contractowner, where state law permits, a Single
Payment Immediate Annuity Contract with annuity payments commencing immediately
may provide annuity benefits based on an assumed investment rate other than 3
1/2%. The annuity rates for Single Payment Immediate Annuity Contracts are
available upon request from the home office.
The method of computing the Variable Annuity payment is described in more
detail in the Statement of Additional Information.
Restrictions Under the Texas
Optional Retirement Program
Plans for participants in the Texas Optional Retirement Program contain
restrictions required under the Texas Education Code. In accordance with those
restrictions, a participant in such a Plan will not be permitted to make
withdrawals prior to such participant's retirement, death or termination of
employment in a Texas public institution of higher education.
FEDERAL TAX MATTERS
The following discussion is general and is not intended as tax advice. This
discussion does not address the tax consequences resulting from all of the
situations in which a person may be entitled to or may receive a distribution
under a Variflex Contract. Each person should consult a competent tax adviser
before making a Purchase Payment. This discussion is based upon SBL's
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service. No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of the
current interpretation, nor does this discussion consider any applicable state
or other tax laws.
The following discusses the taxation of annuities in general. The tax
treatment of Variflex is described in the Statement of Additional Information,
including diversification requirements imposed on Variflex.
QUALIFIED CONTRACTS
The Qualified Contracts were designed for use with several types of
qualified plans. The tax rules applicable to Participants in such qualified
plans vary according to the type of Plan and the terms and conditions of the
Plan itself. In addition, certain requirements must be satisfied in purchasing a
Qualified Contract with proceeds from a tax qualified plan in order to continue
receiving favorable tax treatment, including the requirement that distributions
under the Variflex Contract must satisfy certain minimum distribution
requirements. Therefore, purchasers of Qualified Contracts should seek competent
legal and tax advice regarding the suitability of the Contract for their
situation, the applicable requirements and the tax treatment of the rights and
benefits under a Contract. The following discussion assumes that Variflex
Contracts are used in retirement plans that qualify for special federal income
tax treatment.
The investment results credited to a Variflex Contract are not taxable to a
Participant until benefits are received. At that time there is no distinction
made between investment income and realized or unrealized capital gains in
determining the amount of taxes payable. Under current federal income tax laws,
when annuity payments begin, the total of the after tax payments made by the
Participant for a Variflex Contract establishes the Participant's cost basis. A
portion of each annuity payment will be treated as a return of the Participant's
cost basis, and will not be taxable. The remainder of each payment is taxable.
The portion of the payment that is not taxable is determined by multiplying each
payment by a fraction, the numerator of which is the Participant's cost and the
denominator of which is the total expected payments under the annuity. Once the
Participant's cost basis is returned, the entire amount of the payment is
taxable as ordinary income.
For Contracts, issued under a Plan that qualifies under Section 401, 403,
408, or 457 of the Code, the cost basis normally is zero as the Participant will
not normally have made any payment with income on which he or she has been
previously taxed. If such is the case, the entire amount of the annuity payments
is taxable when received as ordinary income. If, on the other hand, the
Participant has been taxed previously on amounts paid to the Contract, such
amounts become his or her cost basis.
If a Contract issued under a Plan that qualifies under Section 403(b),
403(c), 408, or 457 of the Code (or a Participant's Individual Account in such a
group contract) is fully withdrawn in a lump sum, the entire amount in excess of
the Participant's cost basis is taxed as ordinary income to the Participant. For
Contracts purchased to fund Section 401 plans, including plans covering
self-employed individuals, and 403(a) plans, if a Participant receives his or
her withdrawal value in a qualifying lump sum distribution, a special taxation
election may be available.
Early distributions from a Contract under a qualified retirement plan may
be subject to 10% additional federal income tax on the amount of the taxable
distribution. The general exceptions to this early distribution tax include
distributions after age 59 1/2, death, disability, or separation from service
after reaching age 55; distributions in the form of substantially equal periodic
payments for life; or distributions used to pay deductible medical expenses.
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The provisions of the Retirement Equity Act of 1984 also impose certain
requirements with respect to payouts from qualified plans for married
Participants and provide certain restrictions involving qualified domestic
relations orders.
Distributions from a Contract issued under Section 403(b) of the Code that
are attributable to salary reduction contributions may be limited. (See
"Constraints on Distributions from Certain Section 403(b) Annuity Contracts,"
page 19.)
Periodic distributions (e.g., annuities and installment payments) from a
qualified retirement plan or individual retirement annuity that will last for a
period of ten or more years are subject to voluntary income tax withholding. The
amount withheld on such periodic distributions is determined at the rate
applicable to wages. The recipient of a periodic distribution may elect not to
have withholding apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than 10 years) from a qualified retirement plan are generally
subject to mandatory 20 percent income tax withholding. However, no withholding
is imposed if the distribution is transferred directly to another qualified
retirement plan or individual retirement account or annuity.
In addition, nonperiodic distributions from an individual retirement
account or annuity are subject to income tax withholding at a flat 10 percent
rate. The recipient of such a distribution may elect not to have withholding
apply.
NON-QUALIFIED CONTRACTS
A Contractowner is not subject to income tax on increases in the Contract
Value of the Contract until payments are received under the Contract. Income
taxation of benefits received under the Contract, whether received before or
after the Annuity Commencement Date, is determined under Section 72 of the Code.
(a) Distributions before the Annuity Commencement Date.
A distribution by full or partial withdrawal prior to the Annuity
Commencement Date may subject the Contractowner to income tax. For this purpose,
a loan under any Contract, or an assignment or pledge (or an agreement to assign
or pledge) is considered a distribution prior to maturity.
If the distribution is by full withdrawal, the Contractowner is taxed on
the amount distributed less premiums paid reduced by any prior partial
surrenders which were not subject to income tax.
A distribution by partial withdrawal is deemed to come first from any
previously untaxed accumulation and then from principal. The Contractowner is
subject to income tax on any previously untaxed accumulation which is
distributed.
Premiums may be paid by means of a tax free exchange of annuity contracts
under Section 1035 of the Code. Contracts exchanged under Code Section 1035
after January 18, 1985 will be subject to the annuity income tax rules of
Section 72 of the Code in effect after that date, with exceptions set out in (c)
regarding the First-in First-out treatment of pre-August 14, 1982 contracts.
(b) Distributions after the Annuity Commencement Date
If payments are received after the Annuity Commencement Date pursuant to an
Annuity option, that portion of each payment which represents the
Contractowner's investment in the contract is excluded from gross income for
income tax purposes. The "investment in the contract" is equal to the total
consideration paid for the Contract less any payments under the Contract that
were excluded from the individual's gross income. Once the Contractowner's
investment in the contract is returned in full, the entire amount of each
annuity payment is taxable as ordinary income.
(c) Penalty tax.
If there is a taxable distribution from the Annuity, there is a penalty tax
equal to 10% of the taxable amount distributed to the extent the taxable
distribution is considered to be an early distribution under the annuity
contract. The penalty tax does not apply to taxable distributions made as a
result of the death or disability of the Contractowner; to distributions made
after the Contractowner reaches age 59 1/2; to distributions made under
immediate annuities; to distributions made under Optional Annuity Forms 1 or 4,
provided the distribution under such plans are substantially equal; and to
distributions attributable to premiums paid prior to August 14, 1982. In
addition, for contracts issued during the period August 14, 1982 through January
18, 1985 and for additional Purchase Payments to contracts issued prior to
August 14, 1982, the penalty tax will not apply to distributions attributable to
premiums paid ten (10) years or more prior to the distribution. For this
purpose, distributions will be attributed to Purchase Payments on a "First-in
First-out" basis (i.e., to the earliest Purchase Payment which has not been
fully allocated to prior distributions).
(d) Withholding.
All distributions from the Contract are subject to voluntary income tax
withholding. The recipient may elect not to have withholding apply.
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DISTRIBUTOR OF THE CONTRACTS
Subject to arrangements with SBL, the Contracts will be sold by independent
broker/dealers who are members of the National Association of Securities
Dealers, Inc. and who become licensed to sell life insurance and variable
annuities for SBL, and by national banks. Variflex Contracts may also be sold by
individuals who in addition to being licensed as agents for SBL, are associated
persons of Security Distributors, Inc., which is registered as a broker/dealer
under the Securities Exchange Act of 1934.
PERFORMANCE INFORMATION
Performance information for the Series of Variflex may appear in
advertisements, sales literature or reports to Contractowners or prospective
purchasers. All Series except the Money Market Series may advertise "average
annual total return" and "total return." The Money Market Series may advertise
"yield" and "effective yield." Each of these figures is based upon historical
results and is not necessarily representative of the future performance of the
Series.
Average annual total return and total return calculations measure both the
net income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the investments underlying the Series for the
designated period. Average annual total return will be quoted for periods of 1,
5 and 10 years (up to the life of the Series) ending with a recent calendar
quarter. Average annual total return figures are annualized and, therefore,
represent the average annual percentage change in the value of an investment in
a Series over the designated period. Total return figures are not annualized and
represent the actual percentage change over the designated period. Yield is a
measure of the net dividend and interest income earned over a specific seven-day
period for the Money Market Series expressed as a percentage of the offering
price of the Series' units. Yield is an annualized figure, which means that it
is assumed that the Series generates the same level of net income over a one
year period. The effective yield for the Money Market Series is calculated
similarly but includes the effect of assumed compounding calculated under rules
prescribed by the Securities and Exchange Commission. The Money Market Series'
effective yield will be slightly higher than its yield due to this compounding
effect.
The Series' units are sold at Accumulation Unit value. The Series'
performance figures and Accumulation Unit values will fluctuate. Units of the
Series are redeemable by an investor at Accumulation Unit value, which may be
more or less than original cost. The performance figures include the deduction
of all expenses and fees, including a prorated portion of the Administrative
Fee, except total return figures which do not reflect deduction of the
Administrative Fee. Redemptions within the first eight years after purchase may
be subject to a contingent deferred sales charge that ranges from 8% the first
year to 0% after eight years. Yield, effective yield and total return figures do
not include the effect of any contingent deferred sales charge that may be
imposed upon the redemption of units, and thus may be higher than if such
charges were deducted. Average annual total return figures include the effect of
the applicable sales charge that may be imposed at the end of the designated
period.
Although the Contracts were not available for purchase until June 8, 1984,
the underlying investment vehicle of Variflex, the SBL Fund, has been in
existence since May 26, 1977. Performance information for Variflex may also
include quotations of total return for periods beginning prior to the
availability of Variflex contracts that incorporate the performance of the SBL
Fund.
From time to time, performance information for a Series may be compared to
the Standard & Poor's 500 Stock Index, the Dow Jones Industrial Average or other
unmanaged indices; other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Morningstar and the Variable
Annuity Research and Data Service ("VARDS(R)"), widely used independent research
firms that rank variable annuities and in the case of Lipper and Morningstar,
other investment companies by overall performance, and investment objectives, or
tracked by other ratings services, companies, publications, or persons who rank
separate accounts or other investment products on overall performance or other
criteria; and the Consumer Price Index (measure for inflation). Additional
information concerning the Series' performance appears in the Statement of
Additional Information.
THE GENERAL ACCOUNT
In addition to the eleven Series of Variflex, the Contracts provide an
additional General Account option for Qualified and Non-Qualified Contracts
during the Accumulation Period and a Guaranteed Annuity Option for Qualified and
Non-Qualified Contracts during the Annuity Period. Allocations and transfers to
the General Account become part of SBL's General Account, which supports its
insurance and annuity obligations.
Interests in the General Account are not registered under the Securities
Act of 1933 ("1933 Act") nor is the General Account registered as an investment
company under the Investment Company Act of 1940 ("1940 Act"). Accordingly,
neither the General Account nor any interests therein are generally subject to
the 1933 and 1940 Acts and we have been advised that the staff of the Securities
and Exchange Commission has not reviewed the disclosure in this Prospectus which
relates to the General Account or Guaranteed Annuity. Disclosures regarding the
General Account and Guaranteed Annuities, however, may be subject to certain
generally applicable provisions of the federal securities laws relating to the
accuracy and completeness of statements made in prospectuses.
Amounts allocated to the General Account for a Guaranteed Annuity are
guaranteed with a fixed rate of interest declared in advance. Excess interest
for a period is
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declared at the discretion of SBL. Pursuant to Qualified and Non-Qualified
Contracts, amounts may be allocated to the General Account in addition to, or in
lieu of, allocation to Series of Variflex, subject to the same $25 minimum
allocation applicable in the case of Variflex. Amounts allocated to the General
Account or for a Guaranteed Annuity are also subject to the annual
Administrative Fee. (See "Administrative Fees," page 15).
Annuity options available for Variable Annuities (see "Optional Annuity
Forms," page 21) are also available for Guaranteed Annuities as well as for
combined Variable and Guaranteed Annuities. With respect to Option 5 (Fixed
Period Option), installment payments under Guaranteed Annuities will be
determined by SBL and will reflect an effective yearly interest rate of not less
than 2.5%. Under Option 6 (Fixed Installment Option), interest on any unpaid
balance allocated to a Guaranteed Annuity will be at least 2.5% per year and the
last installment will be the remaining sum left in the General Account for that
Contract or account. The Annuity Unit value under a Guaranteed Annuity otherwise
remains constant throughout the payout period.
Any amounts allocated to the General Account during the Accumulation Period
will automatically be allocated to provide a Guaranteed Annuity unless an
alternative allocation to one or more Series of Variflex is made at least 30
days prior to the Annuity Commencement Date. The annual conversion right during
the Annuity Period (see "Allocation of Benefits," page 20) does not include the
right to convert Variable Annuity Units of any Series into Guaranteed Annuity
Units, nor Guaranteed Annuity Units into any Variable Annuity Unit.
During the Accumulation Period, a Contractowner or Participant in a
Qualified or Non-Qualified Contract may elect, during any Contract Year, to
transfer amounts from the General Account to the various Series of Variflex. The
amount which may be transferred during any Contract Year is the greatest of (1)
$5,000, (2) 1/3 of the Contract Value in the General Account at the time of the
first transfer in the Contract Year,or (3) 120% of the dollar amount transferred
from the General Account in the prior Contract Year. SBL reserves the right for
a period of time to allow transfers from the General Account in amounts that
exceed the limits set forth above ("Waiver Period"). In any Contract Year
following such a Waiver Period, the total dollar amount that may be transferred
from the General Account is the greatest of: (1) above; (2) above; or (3) 120%
of the lesser of: (i) the dollar amount transferred from the General Account in
the prior Contract Year; or (ii) the maximum dollar amount that would have been
allowed in the prior Contract Year under the transfer provisions above absent
the Waiver Period.
The frequency of transfers of units from the General Account is not
currently limited; however, SBL reserves the right to limit them to no more
frequently than once each 30 days. All of the Contract Value of the General
Account may be transferred at the final conversion prior to the Annuity
Commencement Date.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available which contains more
details concerning the subjects discussed in this Prospectus. The following is a
Table of Contents for that Statement:
TABLE OF CONTENTS
Page
THE CONTRACT ............................................. 1
Valuation of Accumulation Units...................... 1
Computation of Variable Annuity Payments ............ 1
Illustration ........................................ 2
Variations in Charges ............................... 2
Termination of Contract ............................. 3
Group Contracts ..................................... 3
PERFORMANCE INFORMATION .................................. 3
ADDITIONAL FEDERAL TAX MATTERS ........................... 5
Limits on Stipulated Payments
(Under the Internal Revenue Code) ................... 5
Taxation of SBL ..................................... 5
Tax Status of the Contracts.......................... 5
ASSIGNMENT ............................................... 5
DISTRIBUTION OF THE CONTRACTS ............................ 5
SAFEKEEPING OF VARIFLEX ACCOUNT ASSETS ................... 6
STATE REGULATION ......................................... 6
RECORDS AND REPORTS ...................................... 6
LEGAL MATTERS ............................................ 6
EXPERTS .................................................. 6
OTHER INFORMATION ........................................ 6
FINANCIAL STATEMENTS ..................................... 7
- --------------------------------------------------------------------------------
25
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
A Member of The Security Benefit Group of Companies
VARIFLEX
Variable Annuity Contracts
Statement of Additional Information
June 1, 1995, as supplemented February 5, 1996
RELATING TO THE PROSPECTUS DATED JUNE 1, 1995, AS SUPPLEMENTED FEBRUARY 5, 1996
(913) 295-3112
(800) 888-2461
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
A Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
VARIFLEX
VARIABLE ANNUITY CONTRACTS
STATEMENT OF
ADDITIONAL INFORMATION
June 1, 1995
As Supplemented February 5, 1996
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Variflex Variable Annuity Contracts (the
"Contract") offered by Security Benefit Life Insurance Company. You may obtain a
copy of the Prospectus dated June 1, 1995, as supplemented February 5, 1996, by
calling (913) 295-3112, or writing to Security Benefit Life Insurance Company,
700 SW Harrison, Topeka, Kansas 66636-0001. Terms used in the current Prospectus
for the Contract are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
TABLE OF CONTENTS
Page
The Contract................................................................ 1
Valuation of Accumulation Units........................................... 1
Computation of Variable Annuity Payments.................................. 1
Illustration.............................................................. 2
Variations in Charges..................................................... 2
Termination of Contract................................................... 3
Group Contracts........................................................... 3
Performance Information..................................................... 3
Additional Federal Tax Matters.............................................. 5
Limits on Stipulated Payments (Under the Internal Revenue Code)........... 5
Taxation of SBL........................................................... 5
Tax Status of the Contracts............................................... 5
Assignment.................................................................. 5
Distribution of the Contracts............................................... 5
Safekeeping of Variflex Account Assets...................................... 6
State Regulation............................................................ 6
Records and Reports......................................................... 6
Legal Matters............................................................... 6
Experts..................................................................... 6
Other Information........................................................... 6
Financial Statements........................................................ 7
<PAGE>
THE CONTRACT
The following provides additional information about the Contracts which
supplements the description in the Prospectus and which may be of interest to
some Contractowners.
Valuation of Accumulation Units
The objective of a Variable Annuity is to provide level payments during
periods when the market is relatively stable and to reflect as increased
payments only the excess investment results following from inflation or an
increase in productivity.
The Accumulation Unit value for a Series on any day is equal to (a) divided
by (b), where (a) is the net asset value of the underlying Fund shares of the
Series less the Actuarial Risk Fee and any deduction for provision for federal
income taxes and (b) is the number of Accumulation Units of that Series at the
beginning of that day.
The value of a contract on any Valuation Date during the Accumulation
Period can be determined by subtracting (b) from (a), where (a) is determined by
multiplying the total number of Accumulation Units of each Series within
Variflex credited to the Contract by the applicable Accumulation Unit value of
each such Series, and (b) is any pro rata Annual Administrative Fee. During the
Accumulation Period, all cash dividends and other cash distributions made to
each Variflex Series will be reinvested in additional shares of the appropriate
Series of SBL Fund.
Computation of Variable Annuity Payments
(a) Determination of Amount of First Annuity Payment
For Annuities under options 1, 2, 3, and 4, the Contracts contain tables
indicating the dollar amount of the first monthly payment under each optional
form of Annuity for each $1,000 applied. The total first monthly annuity payment
is determined by multiplying the value of the Contract or participant's
Individual Account (expressed in thousands of dollars) by the amount of the
first monthly payment per $1,000 of value, in accordance with the tables set out
in the Contract. The value of the contract or Participant's Individual Account
for the purpose of establishing the first periodic payment under options 1, 2,
3, 4 or similar life contingent payment options mutually agreed upon is equal to
the number of Accumulation Units applied to the option times the Accumulation
Unit value at the end of the second day preceding the date the first annuity
payment is made. For Annuities under these options, any pro rata Administrative
Fee is assessed prior to the first annuity payment under such option. For
Annuities under options 5, 6, 7, 8 or other mutually agreed upon non-life
contingent payment option, the value of the Contract or Participant's Individual
Account for the purpose of the first and subsequent periodic payments is based
on the Accumulation Unit value at the end of the day the annuity payment is
made.
Each deferred annuity Contract contains a provision that the first monthly
payment will be not less than the first monthly payment determined on the most
favorable mortality risk basis used in determining rates for immediate Variable
Annuities then being issued by SBL for the same class of Participants. This
provision assures the Annuitants that if, at retirement, the annuity rates then
applicable to new immediate annuity contracts are more favorable than those
provided in their contracts, they will be given the benefit of the new annuity
rates.
(b) Amount of the Second and Subsequent Annuity Payments
For Variable Annuities under options 1, 2, 3 and 4, the amount of the first
monthly annuity payment determined as described above is divided by the
applicable value of an Annuity Unit (see "(c)" below) for the day in which the
payment is due in order to determine the number of Annuity Units represented by
the first payment. This number of Annuity Units remains fixed during the Annuity
period and each subsequent payment period. The dollar amount of the annuity
payment is determined by multiplying the fixed number of Annuity Units by the
Annuity Unit value for the day the payment is due.
(c) Annuity Unit
The value of an Annuity Unit of Series A, B, C and D was set at $1.00 on
April 1, 1984. The value of an Annuity Unit of Series E was set at $1.00 on
April 25, 1985. The value of an annuity unit of Series S was set at $1.00 on
April 23, 1991. The value of an annuity unit of Series J was set at $1.00 on
October 1, 1992. The value of an Annuity Unit of Series K, M, N and O was set at
$1.00 on June 1, 1995. The value of an Annuity Unit for any subsequent day is
determined by multiplying the value for the immediately preceding day by the
product of (a) the
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<PAGE>
Net Investment Factor for the second day preceding the day for which the value
is being calculated and (b) .9999057540, the interest neutralization factor (the
factor required to neutralize the assumed investment rate of 3 1/2% built into
the annuity rates contained in the Contract). The Net Investment Factor of any
Series is determined by subtracting 0.00003307502, the Actuarial Risk Fee, from
the ratio of (a) to (b) where (a) is the value of a share of the underlying
Series of SBL Fund at the end of the day plus the value of any dividends or
other distributions attributable to such share during a day and minus any
applicable income tax liabilities as determined by SBL (see "Additional Federal
Tax Matters"), and (b) is the value of a share of the underlying Series of SBL
Fund at the end of the previous day.
The formula for daily valuation of annuity units is set forth below:
Dollar Amount of First Monthly Payment
Number of Annuity Units=--------------------------------------------------------
Annuity Unit Value for Day on Which First Payment is Due
Value of Annuity Unit Net Investment Factor
Annuity Unit Value= for Preceding Day x for Second Preceding Day x 0.9999057540
Value of a Dividends or Other
Series Share* Distributions
at End of Day + During Day Per Share
Net Investment Factor=------------------------------------------ - 0.00003307502
Value of a Series Share*
at End of the Previous Day
Annuity Unit Value
Dollar Amount of Second and for Day on Which
Subsequent Annuity Payments = Number of Annuity Units x Payment is Due
*A share of the underlying Series of SBL Fund.
ILLUSTRATION
The Annuity Unit and the Annuity payment may be illustrated by the
following hypothetical example: Assume an annuitant at the annuity commencement
date has credited to his Contract 4,000 Accumulation Units and that the value of
an Accumulation Unit at the end of the second day preceding the day on which
retirement occurs was $5.13, producing a total value for the contract of
$20,520. Any premium taxes due would reduce the total value of the Contract that
could be applied towards the Annuity, however, in this illustration it is
assumed no premium taxes are applicable. Assume also the Annuitant elects an
option for which the annuity table in the Contract indicates the first monthly
payment is $6.40 per $1,000 of value applied; the resulting first monthly
payment would be 20.520 multiplied by $6.40 or $131.33.
Assume the Annuity Unit value for the day on which the first payment was
due was $1.0589108749. When this is divided into the first monthly payment the
number of Annuity Units represented by that payment is 124.0236578101. The value
of the same number of Annuity Units will be paid in each subsequent month
Assume further the value of a Series share was $5.15 at the end of the
third day preceding the date of the second annuity payment, that it was $5.17 at
the end of the second day preceding the due date of the second Annuity payment
and that there was no cash income during such second day. The Net Investment
Factor for that second day was 1.0038504201 ($5.17 divided by $5.15 minus
.00003307502). Multiplying this factor by 0.9999057540 to neutralize the assumed
investment rate (the 3 1/2% per annum built into the number of Annuity Units as
determined above) produces a result of 1.0037558112. The Annuity Unit value for
the valuation period is therefore 1.0639727137 which is 1.0037558112 x
$1.0599915854 (the value at the beginning of the day).
The current monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value or 124.0236578101 times
1.0639727127 which produces a current monthly payment of $131.96.
VARIATIONS IN CHARGES
The contingent deferred sales charges or other charges or deductions may be
reduced or waived for sales of Variflex Contracts where the expenses associated
with the sale of the Contract or the administrative and
2
<PAGE>
maintenance costs associated with the Contract are reduced for reasons such as
the amount of the initial Purchase Payment, the amounts of projected Purchase
Payments, or that the Contract is sold in connection with a group or sponsored
arrangement. SBL will only reduce or waive such charges where expenses
associated with the sale of the Contract or the costs associated with
administering and maintaining the Contract are reduced.
Directors, officers and bona fide full-time employees of Security
Management Company, SBL, Security Benefit Group, Inc., SBL Fund, or Security
Distributors, Inc.; the spouses, grandparents, parents, children, grandchildren
and siblings of such directors, officers and employees and their spouses; any
trust, pension, profit-sharing or other benefit plan established by any of the
foregoing corporations for persons described above; and salespersons (and their
spouses and minor children) who are licensed with SBL to sell variable annuities
are permitted to purchase contracts with substantial reduction of the contingent
deferred sales charges or other administrative charges or deductions. Contracts
so purchased are for investment purposes only and may not be resold except to
SBL. No sales commission will be paid on such contracts.
TERMINATION OF CONTRACT
SBL reserves the right to terminate any Group Unallocated Contract under
the following circumstances: (1) the contract value is less than $10,000 after
the end of the first contract year, or $20,000 after the end of the third
contract year; (2) the Plan pursuant to which the contract is issued is
terminated for any reason or becomes disqualified under Section 401 or 403 of
the Internal Revenue Code; or (3) for any reason after the eighth policy year.
SBL may also terminate individual and Group Allocated contracts during the
accumulation period if certain conditions exist. These conditions are that (1)
no purchase payments have been received by SBL for the contract or account for
two full years; (2) the combined value of the contract or account in the
Separate and General Accounts is less than $2,000; and (3) the value of the
contract or account which is allocated to the General Account, projected to the
maturity date, would produce installments of less than $20 per month using
contractual guarantees. Termination of a Variflex Contract may have adverse tax
consequences. (See the Prospectus at "Full and Partial Withdrawals," page 16,
"Constraints on Distributions from Certain Section 403(b) Annuity Contracts,"
page 19, and "Federal Tax Matters," page 22.)
GROUP CONTRACTS
In the case of Group Allocated Variflex Contracts, a master group contract
is issued to the employer or other organization, or to the trustee, who is the
Contractowner. The master group contract covers all Participants. Where funds
are allocated to a participant's individual contract, each participant receives
a certificate which summarizes the provisions of the master group contract and
evidences participation in the Plan established by the organization. A Group
Unallocated Contract is a contract between the Contractowner and the insurance
company and individual accounts are not established for Participants.
PERFORMANCE INFORMATION
Performance information for the Series of the Variflex Separate Account may
appear in advertisements, sales literature or reports to Contractowners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed as yield and effective yield of the Money Market
Series, and average annual total return and total return of all Series except
the Money Market Series. Current yield for the Money Market Series will be based
on the change in the value of a hypothetical investment (exclusive of capital
changes) over a particular seven-day period, less a hypothetical charge
reflecting deductions from Contractowner accounts during the period (the "base
period"), and stated as a percentage of the investment at the start of the base
period (the "base period return"). The base period return is then annualized by
multiplying by 365/7, with the resulting yield figure carried to at least the
nearest hundredth of 1%. "Effective yield" for the Money Market Series assumes
that all dividends received during an annual period have been reinvested.
Calculation of "effective yield" begins with the same "base period return" used
in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = ((Base Period Return + 1)365/7) - 1
For the seven-day period ended December 31, 1994, the yield of the Money
Market Series was 3.58% and the effective yield of the Series was 3.64%.
3
<PAGE>
Quotations of average annual total return for any Series of the Separate
Account will be expressed in terms of the average annual compounded rate of
return of a hypothetical investment in the Series over certain periods that will
include periods of 1, 5 and 10 years (up to the life of the Series), calculated
pursuant to the following formula:
P(1+T)n=ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). Such total
return figures reflect the deduction of the applicable contingent deferred sales
charge and other recurring Variflex fees and charges on an annual basis,
including charges for Actuarial Risk Fee of the account and the annual
administrative fee, although other quotations may be simultaneously given that
do not assume a surrender and do not take into account deduction of a contingent
deferred sales charge or the annual administrative fee.
For the 1-, 5- and 10-year periods ended December 31, 1994, respectively,
the average annual total return was -13.35%, 4.06% and 8.81% for the Growth
Series; -14.57%, 3.61% and 10.27% for the Growth-Income Series (formerly the
"Income-Growth Series"); and -9.37%, -2.80% and -2.48% for the Worldwide Equity
Series (formerly the High Yield Series). For the 1- and 5-year periods ended
December 31, 1994, and the period between April 30, 1985 (date of inception) and
December 31, 1994, respectively, the average annual total return was -18.16%,
2.38% and 4.41% for the High Grade Income Series. For the 1-year period ended
December 31, 1994 and the period between May 1, 1991 (date of inception) and
December 31, 1994, respectively, the average annual total return was -15.32% and
2.40% for the Social Awareness Series. For the 1-year period ended December 31,
1994 and the period between October 1, 1992 (date of inception) and December 31,
1994, respectively, the average annual total return was -16.49% and 7.82% for
the Emerging Growth Series. Total return figures for Global Aggressive Bond
Series, Specialized Asset Allocation Series, Managed Asset Allocation Series and
Equity Income Series are not yet available as these series did not begin
operations until June 1, 1995.
Quotations of total return for any Series of the Separate Account will be
based on a hypothetical investment in an Account over a certain period and will
be computed by subtracting the initial value of the investment from the ending
value and dividing the remainder by the initial value of the investment. Such
quotations of total return will reflect the deduction of all applicable charges
to the contract and the separate account (on an annual basis) except the Annual
Administrative fee and the applicable contingent deferred sales charge.
For the year ended December 31, 1994, and the period between June 8, 1984
(date of inception) and December 31, 1994, respectively, the total return for
the Growth Series was -13.35% and 123.67%.
Although Variflex Contracts were not available for purchase until June 8,
1984, the underlying investment vehicle of Variflex, the SBL Fund, has been in
existence since May 26, 1977. Performance information for Variflex may also
include quotations of average annual total return and total return for periods,
beginning prior to the availability of Variflex contracts, that incorporate the
performance of the SBL Fund.
Performance information for a Series may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), or other unmanaged indices so that
investors may compare a Series' results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of variable annuity separate accounts or
other investment products tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds and other investment
companies by overall performance, investment objectives, and assets, or tracked
by The Variable Annuity Research and Data Service ("VARDS"), an independent
service which monitors and ranks the performance of variable annuity issuers by
investment objectives on an industry-wide basis or tracked by other services,
companies, publications, or persons who rank such investment companies on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment in
the Variable Account. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses. Such investment company rating services include the following:
Lipper Analytical Services; VARDS; Morningstar, Inc.; Investment Company Data;
Schabacker Investment Management; Wiesenberger Investment Companies Service;
Computer Directions Advisory (CDA); and Johnson's Charts.
Performance information for any Series reflects only the performance of a
hypothetical investment in the Series during the particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality of
the portfolio of the
4
<PAGE>
Series of the Fund in which the Series of the Separate Account invests, and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
ADDITIONAL FEDERAL TAX MATTERS
LIMITS ON STIPULATED PAYMENTS (UNDER THE INTERNAL REVENUE CODE)
The amount of the Stipulated Payment may be increased or decreased on any
date, and submission of a Stipulated Payment different from the previous payment
will automatically effect such an increase or decrease. However, U.S. Treasury
Regulations currently permit only one change to a salary reduction agreement in
any taxable year for contracts issued to qualify under Section 403(b) of the
Internal Revenue Code. Contracts issued under Section 408 of the Code provide
that the maximum Stipulated Payment for each Participant for a taxable year
shall be $2,000 or other such amount as may become permissible under amended
laws. Contracts issued to qualify under Section 408(k) of the Code provide that
the maximum annual Stipulated Payment by an employer for each employee shall be
$30,000 or such other amount as may become permissible under amended law.
Contracts issued to qualify under Section 457 of the Code provide that the
maximum Stipulated Payment in any taxable year shall be $7,500 for each
Participant or such other amount as may become permissible under amended law.
Such contracts further provide for an increase in Stipulated Payments for one or
more of the Participant's last three taxable years ending before normal
retirement age in accordance with the provisions of the applicable Plan
agreement.
Stipulated Payments pursuant to the salary reduction agreements to
contracts issued under Section 403(b), 408(k), 401(k) or 457 of the Code that
are in excess of $7,000 in a taxable year ($9,500 in the case of Section 403(b)
contracts), may be subject to adverse tax treatment.
TAXATION OF SBL
SBL is taxed as a life insurance company under Part I of Subchapter L of
the Code. Since Variflex is not an entity separate from SBL and its operations
form a part of SBL, it will not be taxed separately as a "regulated investment
company" under Subchapter M of the Code. Investment income and realized net
capital gains on the Variflex assets are reinvested and are taken into account
in determining the contract values. As a result, such investment income and
realized net capital gains are automatically retained as part of the reserves
under the Contract. Under existing federal income tax law, SBL believes that
Variflex investment income and realized net capital gains should not be taxed to
the extent that such income and gains are retained as part of the reserves under
the Contract.
TAX STATUS OF THE CONTRACTS
To comply with regulations under Section 817(h) of the Code, the investment of
Variflex must be "adequately diversified" in order for the Contracts to qualify
as annuity contracts under Section 72 of the code. Variflex, through the Fund,
intends to comply with the diversification requirements prescribed by the
Treasury which affect how the Fund's assets may be invested. Although the Fund's
investment adviser is an affiliate of SBL, SBL does not completely control the
Fund, or its investments. However, SBL believes the Fund will meet the
diversification requirements and SBL will monitor compliance with this
requirement. Thus, SBL believes that the Contracts will be treated as annuity
contracts for federal tax purposes.
ASSIGNMENT
Variflex Contracts may be assigned by the Contractowner except when issued
to plans or trusts qualified under Section 403(b) or 408 of the Internal Revenue
Code or the plans of self-employed individuals (either under the HR-10 Act or
later acts).
DISTRIBUTION OF THE CONTRACTS
Subject to arrangements with SBL, Variflex contracts are sold by
independent broker-dealers who are members of the National Association of
Security Dealers, Inc., and who become licensed to sell variable annuities for
SBL and by national banks. Security Distributors, Inc., acts as the principal
underwriter on behalf of SBL for the distribution of the Variflex contracts.
5
<PAGE>
The Variflex offering is continuous. During the years ended December 31,
1994, 1993, and 1992, SBL received contingent deferred sales and other contract
charges from Variflex as follows: $881,215, $545,569 and $540,962, respectively.
SAFEKEEPING OF VARIFLEX ACCOUNT ASSETS
All assets of Variflex are held in the custody and safekeeping of SBL.
Additional protection for such assets is offered by SBL's blanket fidelity bond
presently covering all officers and employees for a total of $5,000,000 per
loss.
STATE REGULATION
As a mutual insurance company organized under the laws of Kansas, SBL
(including Variflex) is subject to regulation by the Commissioner of Insurance
of the State of Kansas. An annual statement is filed with the Kansas
Commissioner of Insurance on or before March 1 each year covering the operations
of SBL for the prior year and its financial condition on December 31 of that
year. SBL is subject to a complete examination of its operations, including an
examination of the liabilities and reserves of SBL and Variflex, by the Kansas
Commissioner of Insurance whenever such examination is deemed necessary by the
Commissioner. Such regulation and examination does not, however, involve any
supervision of the investment policies applicable to Variflex.
In addition, SBL is subject to insurance laws and regulations of the other
jurisdictions in which it is or may become licensed to operate. Generally, the
insurance department of any such other jurisdiction applies the laws of the
state of domicile in determining permissible investments.
RECORDS AND REPORTS
Reports concerning each Contract will be sent annually to each
Contractowner. Contractowners will additionally receive annual and semiannual
reports concerning SBL Fund and annual reports concerning Variflex.
Contractowners will also receive confirmations of receipt of payments, changes
in allocation of payments and conversion of variable Accumulation Units and
variable Annuity Units.
LEGAL MATTERS
Matters of Kansas law pertaining to the validity of the Contracts,
including SBL's right to issue the Contracts under Kansas insurance law and its
qualification to do so under applicable regulations issued thereunder, have been
passed upon by Amy J. Lee, Assistant Counsel of SBL.
EXPERTS
The financial statements of Security Benefit Life Insurance Company and
Variflex included in this Statement have been audited by Ernst & Young LLP,
independent auditors, for the periods indicated in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
OTHER INFORMATION
There have been filed with the Securities and Exchange Commission ("SEC"),
Washington, DC, a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Variflex Contracts and under the Investment Company
Act of 1940, with respect to Variflex. Statements in this Prospectus relating to
Variflex and the Variflex Contracts are summaries only. For further information,
reference is made to the Registration Statements and the exhibits filed as parts
thereof. Copies of the Variflex Contracts also will be on file with the
Insurance Commissioner of each state in which SBL is authorized to issue such
Contracts.
There has also been filed with the SEC a Registration Statement with
respect to SBL Fund. Further information about the Fund may be obtained from
such Registration Statement.
6
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ERNST & YOUNG LLP One Kansas City Place Phone: 816 474-5200
1200 Main Street
Kansas City
Missouri 64105-2143
Report of Independent Auditors
The Contract Owners of VARIFLEX and
The Board of Directors of Security
Benefit Life Insurance Company
We have audited the accompanying balance sheet of VARIFLEX (the Company) as of
December 31, 1994, and the related statement of operations and changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1994, by correspondence
with the custodian. 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 financial position of VARIFLEX at December 31, 1994,
and the results of its operations and changes in its net assets for each of the
two years in the period then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
February 3, 1995
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VARIFLEX
Balance Sheet
December 31, 1994
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
SBL Fund:
Series A (Growth Series) -- 16,310,317 shares at net asset
value of $16.00 per share (cost, $293,859) $ 260,966
Series B (Income-Growth Series) -- 20,923,884 shares at
net asset value of $26.54 per share (cost, $578,235) 555,320
Series C (Money Market Series) -- 8,349,735 shares at net
asset value of $12.27 per share (cost, $102,090) 102,451
Series D (Worldwide Equity Series) -- 27,452,890 shares at
net asset value of $5.07 per share (cost, $138,284) 139,186
Series E (High Grade Income Series) -- 8,696,566 shares at
net asset value of $11.52 per share (cost, $112,210) 100,184
Series S (Social Awareness Series) -- 1,841,865 shares at
net asset value of $12.97 per share (cost, $23,454) 23,889
Series J (Emerging Growth Series) -- 5,034,800 shares at
net asset value of $13.44 per share (cost, $67,105) 67,668
--------------
Total assets $1,249,664
==============
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LIABILITIES AND NET ASSETS
Mortality guarantee payable
Net assets are represented by (NOTE 3): $ 8
NUMBER
OF UNITS UNIT VALUE AMOUNT
---------------------------------------
Growth Series:
Accumulation units 9,302,707 $27.93 $259,861
Annuity Reserves 39,459 27.93 1,102 260,963
----------
Income-Growth Series:
Accumulation units 17,828,165 31.02 553,053
Annuity reserves 72,887 31.02 2,261 555,314
----------
Money Market Series:
Accumulation units 6,053,375 16.89 102,247
Annuity reserves 12,109 16.89 204 102,451
----------
Worldwide Equity Series:
Accumulation units 12,164,502 11.42 138,873
Annuity reserves 27,385 11.42 313 139,186
----------
High Grade Income Series:
Accumulation units 5,284,256 18.87 99,690
Annuity reserves 26,220 18.87 495 100,185
----------
Social Awareness Series:
Accumulation units 1,887,349 12.65 23,881
Annuity reserves 595 12.65 8 23,889
----------
Emerging Growth Series:
Accumulation units 5,158,146 13.10 67,550
Annuity reserves 8,998 13.10 118 67,668
--------------------------
Total liabilities and net assets $1,249,664
============
SEE ACCOMPANYING NOTES.
3
<PAGE>
VARIFLEX
Statement of Operations and Changes in Net Assets
Years ended December 31, 1994 and 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994
------------------------------------------------------------------------------------
HIGH
INCOME- MONEY WORLDWIDE GRADE SOCIAL EMERGING
GROWTH GROWTH MARKET EQUITY INCOME AWARENESS GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions $ 4,949 $ 13,001 $ 1,928 $ 133 $ 5,565 $ 243 $ ---
Expenses (NOTE 2):
Mortality and expense risk fee (2,981) (6,563) (1,094) (1,473) (1,252) (258) (657)
Administrative fee (235) (1,414) (137) (69) (307) (24) (18)
------------------------------------------------------------------------------------
Net investment income (loss) 1,733 5,024 697 (1,409) 4,006 (39) (675)
Capital gains distributions 41,645 32,121 --- --- 4,976 112 33
Realized gain (loss) on investments 2,421 19,783 722 9,947 (4,015) 865 512
Unrealized appreciation (depreciation)
on investments (53,256) (81,207) 707 (8,531) (14,453) (1,982) (2,094)
------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (9,190) (29,303) 1,429 1,416 (13,492) (1,005) (1,549)
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (7,457) (24,279) 2,126 7 (9,486) (1,044) (2,224)
Net assets at beginning of year 241,939 536,273 75,883 90,268 104,210 18,415 38,326
Variable annuity deposits
(NOTES 2 AND 3) 115,575 136,892 142,301 93,464 59,425 9,916 47,812
Terminations and withdrawals
(NOTES 2 AND 3) (88,925) (93,270) (117,757) (44,500) (53,208) (3,398) (16,235)
Annuity payments (NOTES 2 AND 3) (163) (294) (103) (53) (755) (2) (11)
Net mortality guarantee transfer (6) (8) 1 --- (1) 2 ---
------------------------------------------------------------------------------------
Net assets at end of year $260,963 $555,314 $ 102,451 $139,186 $100,185 $23,889 $ 67,668
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993
------------------------------------------------------------------------------------
HIGH
INCOME- MONEY WORLDWIDE GRADE SOCIAL EMERGING
GROWTH GROWTH MARKET EQUITY INCOME AWARENESS GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES SERIES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions $ 2,707 $ 11,517 $ 2,078 $ 70 $ 5,140 $ 14 $ 2
Expenses (NOTE 2):
Mortality and expense risk fee (2,800) (5,780) (702) (556) (1,078) (155) (280)
Administrative fee (202) (1,268) (133) (36) (223) (18) (13)
------------------------------------------------------------------------------------
Net investment income (loss) (295) 4,469 1,243 (522) 3,839 (159) (291)
Capital gains distributions 9,087 --- --- --- 716 --- ---
Realized gain (loss) on investments 18,514 24,864 (1,363) 1,968 3,430 343 797
Unrealized appreciation (depreciation)
on investments (438) 7,616 800 9,656 353 1,313 2,350
------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 27,163 32,480 (563) 11,624 4,499 1,656 3,147
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 26,868 36,949 680 11,102 8,338 1,497 2,856
Net assets at beginning of year 215,762 418,956 55,520 23,792 72,424 8,912 6,512
Variable annuity deposits
(NOTES 2 AND 3) 107,229 157,092 111,073 67,191 49,094 9,789 40,629
Terminations and withdrawals
(NOTES 2 AND 3) (107,820) (76,334) (91,295) (11,812) (25,507) (1,781) (11,668)
Annuity payments (NOTES 2 AND 3) (95) (387) (96) (4) (138) --- (1)
Net mortality guarantee transfer (5) (3) 1 (1) (1) (2) (2)
-----------------------------------------------------------------------------------
Net assets at end of year $ 241,939 $536,273 $ 75,883 $ 90,268 $104,210 $18,415 $ 38,326
===================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
VARIFLEX
Notes to Financial Statements
December 31, 1994 and 1993
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
VARIFLEX (the Account) is a separate account of Security Benefit Life Insurance
Company (SBL). The Account is registered as a unit investment trust under the
Investment Company Act of 1940, as amended. All deposits received by the Account
have been invested in the SBL Fund, a mutual fund not otherwise available to the
public. As directed by the owners, amounts deposited are invested in shares of
Series A (Growth Series - emphasis on capital appreciation), Series B
(Income-Growth Series - emphasis on income with secondary emphasis on capital
appreciation), Series C (Money Market Series emphasis on capital preservation
while generating interest income), Series D (Worldwide Equity Series - emphasis
on long-term capital growth through investment in foreign and domestic common
stocks and equivalents), Series E (High Grade Income Series - emphasis on
current income with security of principal), Series S (Social Awareness Series -
emphasis on high total return) and Series J (Emerging Growth Series - emphasis
on capital appreciation).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, a
wholly-owned subsidiary of Security Benefit Group, Inc., a wholly-owned
subsidiary of SBL.
INVESTMENT VALUATION
Investments in mutual fund shares are carried in the balance sheet at market
value (net asset value of the underlying mutual fund). The first-in, first-out
method is used to determine gains and losses. Security transactions are
accounted for on the trade date.
5
<PAGE>
VARIFLEX
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold were as
follows:
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
-------------------------------------------------------------
(IN THOUSANDS)
Series A $169,533 $ 99,674 $124,385 $116,289
Series B 191,017 110,544 179,406 94,566
Series C 149,838 124,699 116,302 95,376
Series D 101,635 54,135 69,298 14,445
Series E 78,424 63,985 57,406 29,399
Series S 10,755 4,165 10,376 2,527
Series J 51,005 20,083 42,191 13,522
ANNUITY RESERVES
Annuity reserves relate to contracts which have matured and are in the payout
stage. Such reserves are computed on the basis of published mortality tables,
using assumed interest rates that will provide reserves as prescribed by law. In
cases where the payout option selected is life contingent, SBL periodically
recalculates the required annuity reserves, and any resulting adjustment is
either charged or credited to SBL and not to the Account.
REINVESTMENT OF DIVIDENDS
Dividend and capital gains distributions paid by the mutual fund to the Account
are reinvested in additional shares of each respective Series. Dividend income
and capital gains distributions are recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES
Under current law, no federal income taxes are payable with respect to the
Account.
6
<PAGE>
VARIFLEX
Notes to Financial Statements (continued)
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each contract. Mortality
and expense risks assumed by SBL are compensated for by a fee equivalent to an
annual rate of 1.2% of the asset value of each contract, of which 0.7% is for
assuming mortality risks and the remainder is for assuming expense risks.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
A contingent deferred sales charge is assessed against certain withdrawals
during the first eight years of the contract, declining from 8% in the first
year to 1% in the eighth year. Such surrender charges and other contract charges
totaled $881,215 and $545,569 for 1994 and 1993, respectively.
3. SUMMARY OF UNIT TRANSACTIONS
Unit transactions during the period from August 15, 1994 to December 31, 1994
were as follows:
UNITS
--------------------------------
1994 1993
--------------------------------
(IN THOUSANDS)
Growth Series:
Variable annuity deposits 4,110 4,016
Terminations, withdrawals and annuity payments 3,184 4,033
Income-Growth Series:
Variable annuity deposits 4,377 5,093
Terminations, withdrawals and annuity payments 3,046 2,540
Money Market Series:
Variable annuity deposits 8,552 6,793
Terminations, withdrawals and annuity payments 7,090 5,605
Worldwide Equity Series:
Variable annuity deposits 8,007 6,452
Terminations, withdrawals and annuity payments 3,841 1,175
High Grade Income Series:
Variable annuity deposits 3,080 2,437
Terminations, withdrawals and annuity payments 2,848 1,286
Social Awareness Series:
Variable annuity deposits 772 789
Terminations, withdrawals and annuity payments 268 145
Emerging Growth Series:
Variable annuity deposits 3,686 3,115
Terminations, withdrawals and annuity payments 1,263 894
7
<PAGE>
ERNST & YOUNG LLP One Kansas City Place Phone: 816 474-5200
1200 Main Street
Kansas City
Missouri 64105-2143
Report of Independent Auditors
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying balance sheets of Security Benefit Life
Insurance Company (the Company) as of December 31, 1994 and 1993, and the
related statements of operations, surplus and cash flows for each of the three
years in the period ended December 31, 1994. 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 financial position of Security Benefit Life Insurance
Company at December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles and with reporting
practices prescribed or permitted by the Kansas Insurance Department.
ERNST & YOUNG LLP
February 3, 1995
<PAGE>
Security Benefit Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments (Note 2):
Fixed maturities, at amortized cost (fair value:
1994 - $1,987,040; 1993 - $2,072,553) $2,160,550 $2,026,884
Equity securities:
Preferred stock, at cost (fair value: 1994 - $6,423;
1993 - $5,786) 5,979 4,950
Common stock, at fair value (cost: 1994 - $2,509;
1993 - $2,802) 3,071 4,279
----------------------------------
9,050 9,229
Affiliated entities (Note 5) 21,028 21,013
Mortgage loans 90,509 80,104
Real estate, less accumulated depreciation
(1994 - $10,821; 1993 - $10,197):
Home office properties 9,953 10,151
Investment properties 14,576 16,116
----------------------------------
24,529 26,267
Policy loans 92,130 86,551
Short-term investments 50,406 29,602
Other invested assets 27,402 12,917
----------------------------------
Total investments 2,475,604 2,292,567
Cash and certificates of deposit 10,820 4,486
Premiums deferred and uncollected 9,101 9,700
Investment income due and accrued 25,857 25,280
Other assets 14,088 11,394
Separate account assets (Note 3) 1,517,627 1,395,518
----------------------------------
$4,053,097 $3,738,945
==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND SURPLUS
Policy reserves:
Life $ 355,338 $ 343,723
Annuity 1,927,591 1,773,040
Accident and health 1,204 1,360
Policy proceeds left at interest 19,600 21,910
----------------------------------
2,303,733 2,140,033
Policy and contract claims 8,058 11,894
Other policyholders' funds:
Dividend accumulations 19,697 20,075
Dividends payable in subsequent year 2,787 2,832
Premium deposit funds and other 2,446 2,262
----------------------------------
24,930 25,169
Other liabilities, including income taxes of
$3,111 in 1994 and $1,210 in 1993 13,203 7,012
Investment reserve 27,834 24,876
Interest maintenance reserve 6,986 5,658
Separate account liabilities (Note 3) 1,517,627 1,395,518
----------------------------------
Total liabilities 3,902,371 3,610,160
Commitments and contingencies (Notes 6 and 11)
Surplus:
Contingency surplus 35,771 33,219
Unassigned surplus 114,955 95,566
----------------------------------
Total surplus 150,726 128,785
----------------------------------
$4,053,097 $3,738,945
==================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Individual life premiums $ 49,837 $ 59,373 $ 64,512
Annuity considerations and deposits 530,530 467,396 413,054
Group life and health premiums 18,435 15,632 13,878
Reinsurance premiums 944 988 452
Amortization of interest maintenance reserve 1,077 804 914
Net investment income (Note 2) 173,391 172,879 174,557
Other income 27,972 26,431 27,570
----------------------------------------------------
Total revenues 802,186 743,503 694,937
Benefits and expenses:
Death benefits 29,368 34,990 27,960
Annuity benefits 17,765 26,661 22,765
Accident and health and disability benefits 2,177 2,912 1,650
Surrender benefits 294,105 244,636 192,107
Increase in reserves and funds for all policies 333,749 319,457 339,387
Other benefits 12,126 13,407 12,132
Commissions 39,059 41,116 39,915
Other insurance operating expenses 31,994 29,226 30,007
----------------------------------------------------
Total benefits and expenses 760,343 712,405 665,923
----------------------------------------------------
Gain from operations before dividends to
policyholders, federal income taxes and
realized capital losses 41,843 31,098 29,014
Dividends to policyholders 2,689 2,725 2,834
----------------------------------------------------
Gain from operations before federal income
taxes and realized capital losses 39,154 28,373 26,180
Federal income taxes (Note 8) 10,678 4,569 4,316
----------------------------------------------------
Gain from operations before realized
capital losses 28,476 23,804 21,864
Realized capital losses, net (Note 2) (1,122) (3,280) (2,836)
----------------------------------------------------
Net income $ 27,354 $ 20,524 $ 19,028
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statements of Surplus
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $128,785 $106,000 $ 83,290
Add (deduct):
Net income 27,354 20,524 19,028
Decrease (increase) in investment reserves (2,958) (4,854) 1,092
Unrealized gain on investments 546 6,027 2,068
Other (3,001) 1,088 522
----------------------------------------------------
21,941 22,785 22,710
----------------------------------------------------
Balance at end of year $150,726 $128,785 $106,000
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,354 $ 20,524 $ 19,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in investment income due and
accrued (577) (4,147) (1,169)
Increase in policy reserves 163,700 138,931 201,150
Accretion of discount on investments (3,580) (5,135) (21,280)
Amortization of premium on investments 15,623 16,440 19,855
Other 1,529 (16,820) 5,794
----------------------------------------------------
Net cash provided by operating activities 204,049 149,793 223,378
INVESTING ACTIVITIES
Investments sold or matured:
Fixed maturities 460,070 1,251,398 1,762,236
Equity securities 3,830 2,103 2,737
Mortgage loans 20,432 16,969 17,562
Real estate 2,782 1,293 2,300
Short-term investments 834,082 2,416,685 1,829,730
Other invested assets 3,602 2,458 1,329
----------------------------------------------------
1,324,798 3,690,906 3,615,894
Acquisition of investments:
Fixed maturities 606,368 1,403,541 2,024,000
Equity securities 4,627 741 3,631
Mortgage loans 33,516 12,021 7,043
Real estate 554 448 2,318
Short-term investments 854,833 2,426,336 1,789,021
Other invested assets 17,036 875 1,583
----------------------------------------------------
1,516,934 3,843,962 3,827,596
Net increase in policy loans (5,579) (2,212) (4,565)
----------------------------------------------------
Net cash used in investing activities (197,715) (155,268) (216,267)
----------------------------------------------------
Increase (decrease) in cash and certificates
of deposit 6,334 (5,475) 7,111
Cash and certificates of deposit at beginning
of year 4,486 9,961 2,850
----------------------------------------------------
Cash and certificates of deposit at end of
year $ 10,820 $ 4,486 $ 9,961
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for federal income taxes $ 8,851 $ 6,284 $ 6,335
====================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Conversion of mortgage loans to real
estate owned $ 2,350 $ 673 $ 1,269
====================================================
</TABLE>
See accompanying notes.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements
December 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements have been prepared on the basis of accounting practices
prescribed or permitted by the Kansas Insurance Department, which practices
presently are regarded as generally accepted accounting principles for mutual
life insurance companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises." Under this
Interpretation, financial statements of mutual life insurance companies prepared
on the basis of statutory accounting principles no longer will be considered to
be prepared in conformity with generally accepted accounting principles. In
January 1995, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts," and
the American Institute of Certified Public Accountants issued its Statement of
Position No. 95-1, "Accounting for Certain Insurance Activities of Mutual Life
Insurance Enterprises," which define generally accepted accounting principles
for mutual life insurance enterprises. Interpretation No. 40, SFAS No. 120 and
Statement of Position No. 95-1 are concurrently effective for fiscal years
beginning after December 15, 1995.
Security Benefit Life Insurance Company (the Company) has not yet determined
whether it will continue to file statutory financial statements with the
Securities and Exchange Commission as currently permitted by Regulation S-X,
Rule 7-02(b) or file financial statements prepared in accordance with all
applicable authoritative accounting pronouncements that define generally
accepted accounting principles for all enterprises. Because the Company has not
yet determined which action it will take to comply with FASB Interpretation No.
40, SFAS No. 120 and Statement of Position No. 95-1, it is unable at this time
to assess the impact of such compliance on its financial statements.
INVESTMENTS
Investments are valued as prescribed by the National Association of Insurance
Commissioners (NAIC).
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed maturities are reported at cost, adjusted for amortization of discount or
premium using the effective interest method. For mortgage-backed fixed
maturities, anticipated prepayments are considered when determining the
amortization of discount or premium. Preferred stocks in good standing are
carried at cost. Bonds and preferred stocks not in good standing are carried at
market value. Common stocks are valued at market except investments in stocks of
unconsolidated subsidiaries, which are carried at cost adjusted to reflect
subsequent operating results. Home Office property (including the portion
reported as investment real estate) is reported at 1989 appraised value less
accumulated depreciation as permitted by the Kansas Insurance Department. As of
December 31, 1994, this permitted practice increased statutory surplus by $4.2
million. Investment real estate or property acquired in satisfaction of debt is
reported at the lower of depreciated cost, less encumbrances, or estimated
market value. Other investments are reported on the equity basis. Policy loans
are stated at the aggregate unpaid balance. Mortgage loans on real estate are
carried at the aggregate unpaid balance adjusted for any unamortized discount or
premium.
Investment reserve represents the Asset Valuation Reserve (AVR). The AVR is
computed in accordance with the formula prescribed by the NAIC and represents a
provision for possible fluctuations in the value of bonds, equity securities,
mortgage loans, and other invested assets. Changes to the AVR are charged or
credited directly to unassigned surplus.
Realized gains and losses are determined on a specific identification basis and
are reported in income net of related federal income tax. Beginning in 1992,
under a formula prescribed by the NAIC, the Company reported an Interest
Maintenance Reserve (IMR) that represents the net accumulated unamortized
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates. Such gains or losses are amortized into income on a
straight-line basis over the remaining period to maturity based on groupings of
individual securities sold in five-year bands.
The investment in Security Benefit Group, Inc. (SBG), a wholly-owned subsidiary,
is reported on an equity basis, as permitted by the Kansas Insurance Department.
Changes in SBG's equity are reflected as unrealized gains (losses) on
investments and are accounted for through surplus and investment reserves as
described above. Dividends received from SBG are recorded as investment income
when received.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESERVES FOR LIFE AND ANNUITY POLICIES
The reserves for life and annuity policies are developed by actuarial methods,
and the life reserves are established and maintained on the basis of published
mortality tables. Life and annuity reserves are computed using assumed interest
rates and valuation methods that will provide, in the aggregate, reserves that
are greater than the minimum valuation required by law and greater than the
guaranteed policy cash values.
For life policies, the 1941, 1958 and 1980 CSO mortality tables have been used
principally, and interest assumptions range from 2% to 5 1/2%. For annuity
contracts, the PAT, 1971 IAM and 1983a mortality tables have been used
principally, and interest assumptions range from 2 1/2% to 11 1/2%.
RECOGNITION OF PREMIUM REVENUES AND ACQUISITION COSTS
For life and annuity contracts, premiums are recognized as revenues over the
premium-paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and certificates of deposits, short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate
their fair values.
Investment securities: The fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair values are estimated using values
obtained from independent pricing services or estimated by discounting
expected future cash flows using a current market rate applicable to the
yield, credit quality and maturity of the investments. The fair values
for equity securities are based on quoted market prices.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and policy loans: The fair values for mortgage loans and
policy loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using the assumption
reinsurance method, whereby the amount of statutory profit the assuming
company would realize from the business is calculated. Those amounts are
then discounted at a rate of return commensurate with the rate presently
offered by the Company on similar contracts.
RECLASSIFICATIONS
Certain balances in the accompanying financial statements have been reclassified
to conform with the 1994 presentation.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses and
estimated fair values of the Company's portfolio of fixed maturities at December
31, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 10,490 $ 55 $ 622 $ 9,923
Obligations of states and political subdivisions 21,147 - 2,615 18,532
Corporate securities 773,714 1,809 64,494 711,029
Mortgage-backed securities 1,355,199 200 107,843 1,247,556
---------------------------------------------------------------
Totals $2,160,550 $2,064 $175,574 $1,987,040
===============================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 12,491 $ 221 $ 94 $ 12,618
Obligations of states and political subdivisions 21,453 41 366 21,128
Corporate securities 622,763 21,182 4,001 639,944
Mortgage-backed securities 1,370,177 34,043 5,357 1,398,863
---------------------------------------------------------------
Totals $2,026,884 $55,487 $9,818 $2,072,553
===============================================================
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1994, 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.
AMORTIZED FAIR
COST VALUE
----------------------------------
(In Thousands)
Due in one year or less $ 37 $ 37
Due after one year through five years 172,701 167,396
Due after five years through 10 years 188,972 174,987
Due after 10 years 443,641 397,064
----------------------------------
805,351 739,484
Mortgage-backed securities 1,355,199 1,247,556
----------------------------------
$2,160,550 $1,987,040
==================================
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
The cost and the estimated fair values of the Company's equity securities at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Preferred stock $5,979 $ 568 $ 124 $ 6,423
Common stock 2,509 599 37 3,071
-------------------------------------------------------------------------------
$8,488 $1,167 $ 161 $ 9,494
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------------------------------------------
GROSS GROSS
COST UNREALIZED UNREALIZED FAIR
AMOUNT GAINS LOSSES VALUE
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Preferred stock $4,950 $ 836 $ - $ 5,786
Common stock 2,802 2,484 1,007 4,279
-------------------------------------------------------------------------------
$7,752 $3,320 $1,007 $10,065
===============================================================================
</TABLE>
The carrying amounts and the estimated fair values of the Company's investment
in mortgage loans and policy loans at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage loans $90,509 $88,894 $80,104 $82,370
Policy loans 92,130 91,492 86,551 85,325
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Proceeds from sales of fixed maturities and related realized gains and losses,
including valuation adjustments, are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Proceeds from sales $119,773 $891,044 $677,781
Gross realized gains 4,966 35,955 21,974
Gross realized losses 4,813 21,375 26,631
</TABLE>
The composition of the Company's portfolio of fixed maturity securities by
quality rating at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
QUALITY RATING AMOUNT %
---------------------------- ---------------------------------
(In Thousands)
<S> <C> <C>
AAA $1,327,192 61%
AA 78,462 4
A 329,517 15
BBB 287,502 13
Noninvestment grade 137,877 7
---------------------------------
$2,160,550 100%
=================================
</TABLE>
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 26 states. The loans are somewhat geographically
concentrated in the midwestern and southwestern United States with the largest
outstanding balances at December 31, 1994 being in the states of Kansas (31%)
and Texas (16%).
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
Major categories of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Interest on fixed maturities $ 151,688 $ 150,930 $ 154,105
Interest on mortgage loans 7,552 7,835 8,708
Real estate income 3,563 3,451 3,441
Interest on policy loans 5,446 5,174 5,030
Dividends on equity securities 708 566 1,135
Dividends from subsidiary (Note 5) 5,200 8,300 4,800
Other 5,149 2,139 2,913
----------------------------------------------------
Total investment income 179,306 178,395 180,132
Investment expenses 5,915 5,516 5,575
----------------------------------------------------
Net investment income $ 173,391 $ 172,879 $ 174,557
====================================================
</TABLE>
The Company did not hold any investments that individually exceeded 10% of
surplus at December 31, 1994 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
Realized gains (losses) consist of the following:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities $ 153 $14,580 $(4,657)
Equity Securities (62) (5,179) 247
Other (2,401) (1,934) (606)
----------------------------------------------------
Total realized gains (losses) (2,310) 7,467 (5,016)
Income tax expense (benefit) (3,593) 1,937 (747)
----------------------------------------------------
1,283 5,530 (4,269)
Transferred to interest maintenance
reserve, net of tax (2,405) (8,810) 1,433
----------------------------------------------------
$(1,122) $(3,280) $(2,836)
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
The Company's principal objective in holding derivatives for purposes other than
trading is asset-liability management. The operations of the Company are subject
to risk of interest rate fluctuations to the extent that there is a difference
between the amount of the Company's interest earning assets and interest bearing
liabilities that mature in specified periods. The principal objective of the
Company's asset-liability management activities is to provide maximum levels of
net interest income while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company. To achieve
that objective, the Company uses financial futures instruments. Interest rate
futures contracts are commitments to either purchase or sell a financial
instrument at a specific future date for a specified price and may be settled in
cash or through delivery of the financial instrument.
If a financial futures contract that is used to manage interest rate risk is
terminated early or results in a single payment based on the change in value of
an underlying asset, any resulting gain or loss is deferred and amortized as an
adjustment to yield of the designated asset over its remaining life. Deferred
gains totaling $1.8 million at December 31, 1994, resulting from terminated and
expired futures contracts are included in fixed maturities and will be amortized
as an adjustment to interest income.
3. SEPARATE ACCOUNT TRANSACTIONS
The separate accounts are established in conformity with Kansas Insurance Laws
and are not chargeable with liabilities that arise from any other business of
the Company. Premiums designated for investment in the separate accounts are
included in income with corresponding liability increases included in benefits.
Separate account reserves are treated as miscellaneous reserves with the
corresponding change reflected in operations as permitted by the Kansas
Insurance Department. This permitted practice does not have any effect on the
surplus of the Company. Assets and liabilities of the separate accounts,
representing net deposits and accumulated net investment earnings held primarily
for the benefit of contract holders, are shown as separate captions in the
balance sheet. Assets held in the separate accounts are carried at quoted market
values, or where quoted market values are not available, at fair market value as
determined by Security Management Company, a wholly-owned subsidiary of SBG, and
the investment manager for the separate account assets. The Company receives
administrative and risk fees relating to amounts invested in the separate
accounts.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
3. SEPARATE ACCOUNT TRANSACTIONS (CONTINUED)
The statement of operations includes the following separate account
transactions, which have no effect on net income:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Annuity considerations and deposits $256,061 $235,624 $191,450
====================================================
Benefits:
Benefits and other charges $ 83,933 $ 52,283 $ 33,947
Net transfers to separate accounts 172,128 183,341 157,503
----------------------------------------------------
$256,061 $235,624 $191,450
====================================================
</TABLE>
4. EMPLOYEE BENEFIT PLANS
Substantially all Company employees are covered by a qualified, noncontributory
defined benefit pension plan sponsored by the Company and certain of its
affiliates. Benefits are based on years of service and an employee's average
compensation during the last five years of service. The Company's policy has
been to contribute funds to the plan in amounts required to maintain sufficient
plan assets to provide for accrued benefits. In applying this general policy,
the Company considers, among other factors, the recommendations of its
independent consulting actuaries, the requirements of federal pension law and
the limitations on deductibility imposed by federal income tax law.
The Company records pension cost in accordance with the provisions of SFAS No.
87, "Employers' Accounting for Pensions." Pension cost for the year is allocated
to each sponsoring company based on the ratio of salary costs for each company
to total salary cost. Pension cost allocated to the Company for 1994, 1993 and
1992 was $218,000, $139,000 and $78,000, respectively.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Separate information disaggregated by sponsoring employer company is not
available on the components of the net pension cost or on the funded status of
the plan. Pension cost for the total plan for 1994, 1993 and 1992 is summarized
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 679 $ 571 $ 480
Interest cost 535 483 453
Actual return on plan assets 310 (966) (567)
Net amortization and deferral (949) 277 (172)
---------------------------------------------------------
Net pension cost $ 575 $ 365 $ 194
=========================================================
</TABLE>
The funded status of the total plan as of December 31, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
------------------------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(4,589) $(3,838)
Non-vested benefit obligation (157) (292)
------------------------------------
Accumulated benefit obligation (4,746) (4,130)
Excess of projected benefit obligation over
accumulated benefit obligation (2,405) (3,108)
------------------------------------
Projected benefit obligation (7,151) (7,238)
Plan assets at fair market value 6,514 6,775
------------------------------------
Plan assets less than projected benefit obligation (637) (463)
Unrecognized net loss 1,971 2,228
Unrecognized prior service cost 815 640
Unrecognized net asset established at the date
of initial application (2,209) (2,394)
------------------------------------
Net prepaid (accrued) pension expense $ (60) $ 11
====================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions were as follows:
1994 1993 1992
-------------------------------
Weighted average discount rate 8.5% 7.5% 8.5%
Weighted average compensation rate for
participants age 45 and older 4.5 4.5 6.0
Weighted average expected long-term return
on plan assets 9.0 9.0 9.5
Salary increase rates that vary by age for participants under age 45 were used
in determining the actuarial present value of the projected benefit obligation
in 1994. Plan assets are invested in a diversified portfolio of affiliated
mutual funds that invest in equity and debt securities.
In addition to the Company's defined benefit pension plan, the Company and
certain of its affiliates provide certain medical and life insurance benefits to
full-time employees who have retired after the age of 55 with five years of
service. The plan is contributory, with retiree contributions adjusted annually,
and contains other cost-sharing features, such as deductibles and coinsurance.
Contributions vary based on the employee's years of service earned after age 40.
The Company and its affiliates' portion of the costs is frozen after 1996 with
all future cost increases passed on to the retirees. Retirees in the plan prior
to July 1, 1993 are covered 100% by the Company.
In 1993, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," electing the cumulative method.
The effect of adopting the new rules was a one-time charge of $1,735,000, net of
a $1,103,000 tax benefit. The net periodic cost is allocated among the Company
and its affiliates based on the number of eligible employees. The net periodic
cost allocated to the Company was $171,000 and $166,000 for 1994 and 1993,
respectively. Postretirement benefit costs of $89,000 for 1992 were recorded on
a cash basis and have not been restated.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Separate information disaggregated by sponsoring employer company is not
available on the components of the net retiree medical care and life insurance
costs or on the funded status of the plan. Retiree medical care and life
insurance costs for the total plan for 1994 and 1993 are summarized as follows:
1994 1993
------------------------------------
(In Thousands)
Service cost $116 $118
Interest cost 275 233
------------------------------------
$391 $351
====================================
The funded status of the total plan as of December 31, 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
----------------------------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(2,418) $(2,144)
Active participants:
Retirement eligible (620) (384)
Others (706) (737)
----------------------------------------------
(3,744) (3,265)
Unrecognized net (gain) loss (30) 253
----------------------------------------------
Accrued postretirement benefit cost $(3,774) $(3,012)
==============================================
</TABLE>
The annual assumed rate of increase in the per capita cost of covered benefits
is 12% for 1994 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health cost trend rate has a significant effect on
the amount reported. For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994 by $209,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1994 by $58,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.5% and 7.5% at December 31, 1994 and 1993, respectively.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a profit-sharing and savings plan for which substantially all
employees are eligible after one year of employment with the Company.
Contributions for profit sharing are based on a formula established by the Board
of Directors with pro rata allocation among employees based on salaries. The
savings plan is a tax-deferred 401(k) retirement plan. Employees may contribute
up to 10% of their eligible compensation. The Company matches 50% of the first
6% of the employee contributions. Employee contributions are fully vested and
Company contributions are vested over a five-year period. Company contributions
to the profit-sharing and savings plan charged to operations were $371,000,
$463,000 and $426,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
5. RELATED PARTIES
SBG provides certain management and administrative services to the Company.
During 1994, 1993 and 1992, the Company incurred $16,852,000, $14,729,000 and
$12,795,000, respectively, for such services. The Company leases certain office
space to SBG for which rent income of $1,133,000, $1,133,000 and $1,062,000 was
recorded in 1994, 1993 and 1992. Additionally, in 1994, 1993 and 1992, the
Company paid commissions of $2,700,000, $2,985,000 and $2,476,000, respectively,
to Security Distributors, Inc., a wholly-owned subsidiary of SBG.
At December 31, 1994 and 1993, the Company's investment in SBG was $21,028,000
and $21,013,000, respectively. The Company recorded cash dividends of
$5,200,000, $8,300,000 and $4,800,000 from SBG during 1994, 1993 and 1992.
Condensed financial information related to SBG is as follows:
<TABLE>
<CAPTION>
1994 1993
----------------------------------------------
(In Thousands)
<S> <C> <C>
Cash and investments $19,456 $24,753
Property and equipment 8,736 7,888
Other assets 7,991 4,867
----------------------------------------------
$36,183 $37,508
==============================================
Accounts payable and other liabilities $15,155 $16,495
Stockholder's equity 21,028 21,013
----------------------------------------------
$36,183 $37,508
==============================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
5. RELATED PARTIES (CONTINUED)
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Management fees $16,852 $14,729 $12,795
Mutual fund fees 22,608 21,352 20,296
Other (including in 1993 a gain
from sale of management rights) 2,373 7,287 1,720
----------------------------------------------------
41,833 43,368 34,811
General, administrative and other expenses 32,940 30,080 27,080
Income taxes 3,430 5,233 3,111
Cumulative effect of SFAS No. 106 - 1,735 -
----------------------------------------------------
Net income $ 5,463 $ 6,320 $ 4,620
====================================================
</TABLE>
6. REINSURANCE
The Company is involved in both the cession and assumption of reinsurance with
other companies. The Company's maximum retention on any one life is $500,000.
Risks are reinsured with other companies to permit recovery of a portion of
direct losses.
Principal reinsurance transactions are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Reinsurance assumed:
Premiums received $ 1,276 $ 1,359 $ 579
====================================================
Commissions paid $ 239 $ 96 $ 205
====================================================
Claims paid $ 1,469 $ 7,290 $ 1,621
====================================================
Reinsurance ceded:
Premiums paid $ 12,018 $ 4,194 $ 3,739
====================================================
Commissions received $ 1,443 $ 148 $ 165
====================================================
Claim recoveries $ 2,485 $ 2,231 $ 3,205
====================================================
Reinsurance in force (at December 31):
Assumed policies $ 30,814 $ 39,730 $ 18,515
====================================================
Ceded policies $1,150,828 $1,081,591 $999,558
====================================================
</TABLE>
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
6. REINSURANCE (CONTINUED)
The liabilities for policy reserves and policy and contract claims include the
following amounts for reinsurance assumed: $120,000 and $3,187,000 at December
31, 1994 and $132,000 and $6,145,000 at December 31, 1993.
The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriters to the insured. However,
statutory accounting practices treat risks that have been reinsured, to the
extent of reinsurance, as though they were not risks for which the original
insurer is liable. Therefore, in financial statement presentations, policy
reserves and policy and contract claim liabilities are presented net of that
portion of risk reinsured. Accordingly, policy reserves and policy and contract
claim liabilities have been shown net of reinsurance credits of $11,048,000 and
$459,000 at December 31, 1994 and $4,157,000 and $474,000 at December 31, 1993.
Effective December 31, 1994, the Company transferred through a 100% coinsurance
agreement, a block of limited payment whole life insurance business that had
aggregate claim and policy reserves of $7.5 million. The Company recorded a gain
of $1.3 million which represented the initial ceding commission.
In prior years, the Company was involved in litigation arising out of its
participation from 1986 to 1990 in a reinsurance pool. The litigation related to
the pool manager and a reinsurance intermediary placing major medical business
in the pool without authorization. During 1993, the Company settled the major
medical portion of the pool's activity with no significant adverse effect on the
Company. The nonmajor medical business placed in the pool has experienced
significant losses. At December 31, 1994, the Company believes adequate
provision has been made for such losses.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
7. INVESTMENT-TYPE INSURANCE CONTRACTS
The carrying amounts and the fair values of the Company's liabilities for
investment-type insurance contracts (included with policy reserves in the
balance sheet) at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Supplementary contracts
without life contingencies $ 41,239 $ 39,771 $ 38,322 $ 37,780
Individual and group annuities 1,828,753 1,690,693 1,711,440 1,586,182
--------------------------------- ---------------------------------
$1,869,992 $1,730,464 $1,749,762 $1,623,962
</TABLE>
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts.
8. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return with
SBG. Income taxes are allocated to the Company on the basis of its filing a
separate tax return. The Company is taxed at usual corporate rates as defined by
the applicable income tax laws for mutual life insurance companies. These laws
provide for differences in the recognition of certain income and expenses, and
provide for deductions that may result in a provision for income taxes that does
not have the customary relationship of taxes to income. The capitalization of
acquisition expenses required by the Revenue Reconciliation Act of 1990
increased the Company's effective tax rate for the year ended December 31, 1992,
but this was offset by the dividends received deduction and policy and contract
reserve changes. The principal item reducing the Company's effective rate in
subsequent years is the dividends received deduction.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
During the year ended December 31, 1993, the Company began establishing deferred
income taxes on its tax-basis deferred policy acquisition costs. Prior to this
time, no deferred income taxes had been established on any difference between
the financial statement and income tax bases of assets and liabilities and, at
December 31, 1994, this remains the only item to which deferred income tax
accounting has been applied. The Company's policy is to nonadmit any resulting
deferred tax asset; accordingly, this practice has no impact on capital and
surplus. The cumulative effect of adopting this change as of January 1, 1993
amounted to $3,464,000 and was reflected as a nonadmitted asset at that time.
Prior year financial statements have not been restated to reflect the new
accounting method. The effect of the new method was to decrease income tax
expense by $927,000 and $1,444,000 for the years ended December 31, 1994 and
1993.
9. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," requires
disclosures of fair value information about financial instruments, whether
recognized or not recognized in a company's balance sheet, for which it is
practicable to estimate that value. The methods and assumptions used by the
Company to estimate the following fair value disclosures for financial
instruments are set forth in Note 1.
SFAS No. 107 excludes certain insurance liabilities and other nonfinancial
instruments from its disclosure requirements. The fair value amounts presented
herein do not include an amount for the value associated with customer or agent
relationships, the expected interest margin (interest earnings over interest
credited) to be earned in the future on investment-type products, or other
intangible items. Accordingly, the aggregate fair value amounts presented herein
do not necessarily represent the underlying value of the Company; likewise, care
should be exercised in deriving conclusions about the Company's business or
financial condition based on the fair value information presented herein.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
9. CONDENSED FAIR VALUE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------- ---------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities (Note 2) $2,160,550 $1,987,040 $2,026,884 $2,072,553
Equity securities (Note 2) 9,050 9,494 9,229 10,065
Mortgage loans 90,509 88,894 80,104 82,370
Policy loans 92,130 91,492 86,651 85,325
Short-term investments 50,406 50,406 29,602 29,602
Cash and certificates of deposit 10,820 10,820 4,486 4,486
Investment income due and accrued 25,857 25,857 25,280 25,280
Futures contracts - 240 - -
Investment type:
Insurance contracts (Note 7) 1,869,992 1,730,464 1,749,762 1,623,962
</TABLE>
10. BUSINESS DISPOSITION
Security Management Company (SMC), a wholly-owned subsidiary of SBG, a
wholly-owned subsidiary of the Company, entered into an agreement with Fidelity
Management & Research Company (FMR) in connection with the acquisition of
Security Action Fund by a fund managed by FMR. Pursuant to its agreement with
FMR, SMC agreed to provide various consulting and other services to FMR in
connection with and following the acquisition and to forgo competition in this
market for one year.
On March 26, 1993, the transaction closed and FMR paid SMC $5.1 million in cash
at the time of closing with the remaining $1.3 million of proceeds paid in March
1994. SMC realized a pretax gain of $5.8 million in 1993 after deducting certain
costs associated with the transaction.
11. COMMITMENTS AND CONTINGENCIES
The Company has a $10 million line of credit facility from a bank. Any
borrowings in connection with this facility bear interest at 1/4% over the prime
rate. At December 31, 1994, there were no borrowings outstanding under this
facility.
<PAGE>
Security Benefit Life Insurance Company
Notes to Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Open investment funding commitments at December 31, 1994 and 1993 equal $1.2
million and $16.4 million, respectively.
The economy and other factors have caused an increase in the number of insurance
companies that have required regulatory supervision. This circumstance is
expected to result in an increase in assessments by state guaranty funds, or
voluntary payments by solvent insurance companies, to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments can
be partially recovered through a reduction in future premium taxes in some
states. The Company records these assessments on a cash basis and has paid
$2,270,000, $2,077,000 and $1,259,000 for the years ended December 31, 1994,
1993 and 1992, respectively. The ultimate amounts or the ultimate effect of any
such increased assessments or voluntary payments on the Company's financial
position and results of operations are not currently determinable. The
accompanying financial statements do not include any provision for any such
potential assessments.
12. SUBSEQUENT EVENTS
Effective January 2, 1995, the Company acquired from Pioneer National Life
Insurance Company (Pioneer), a wholly-owned subsidiary of Pioneer National
Corporation (PNC), a wholly-owned subsidiary of SBG, substantially all of
Pioneer's life insurance business by assuming liability for the business through
an assumption reinsurance agreement. Concurrent with the assumption reinsurance
agreement, the Company entered into a 100% coinsurance agreement with Pioneer
reinsuring the remaining business. The Company did not recognize any gain or
loss on the above transactions. The Company received $2.7 million of assets as
consideration for the liabilities assumed by the Company in the assumption
reinsurance and coinsurance agreement.
Pursuant to an Agreement and Plan of Merger, Pioneer merged with the First
Security Benefit Life Insurance and Annuity Company of New York (FSBL), a
wholly-owned subsidiary of Security Benefit Group, Inc. FSBL (the surviving
corporation) will be in the business of transacting life insurance in the state
of New York.
On February 8, 1995, the Company purchased 200,000 shares of common stock of
FSBL, at a par value of $10 per share ($2,000,000). Concurrent with this
transaction, the Company (the sole shareholder) contributed $4,000,000 to FSBL
to meet the minimum capital requirements of New York. The Company will
contribute the common stock of FSBL to its downstream holding company, Security
Benefit Group, Inc.
