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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, 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. 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: MAY 1, 1997 RETAIN FOR FUTURE REFERENCE
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1
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VARIFLEX CONTENTS
Page
Glossary of Terms......................................................... 4
Summary of the Contract................................................... 5
Summary of Expenses....................................................... 6
Condensed Financial Information........................................... 8
Financial Statements.................................................... 12
Security Benefit Life Insurance Company and Variflex...................... 12
Security Benefit Life Insurance Company................................. 12
Variflex................................................................ 12
SBL Fund.................................................................. 12
Voting Rights........................................................... 13
Substituted Securities.................................................. 13
Variflex Contracts........................................................ 13
Purpose of the Contracts................................................ 13
Types of Variflex Contracts............................................. 14
Contract Application and Purchase Payments.............................. 14
Allocation of Purchase Payments......................................... 14
Crediting of Accumulation Units......................................... 15
Dollar Cost Averaging Option............................................ 15
Asset Reallocation Option............................................... 15
Transfer of Contract Value.............................................. 16
Contract Value.......................................................... 16
Determination of Contract Value......................................... 16
Contractowner Inquiries................................................. 17
Charges and Deductions.................................................... 17
Contingent Deferred Sales Charge........................................ 17
Hospital/Nursing Home Waiver............................................ 18
Other Charges........................................................... 18
(a) Administrative Fees................................................. 18
(b) State Premium Taxes................................................. 19
(c) Actuarial Risk Fee.................................................. 19
(d) Charges for Taxes................................................... 19
Sequential Deduction of Fees............................................ 19
Variations in Charges................................................... 19
Distributions Under the Contract.......................................... 19
Accumulation Period..................................................... 19
Full and Partial Withdrawals............................................ 19
Systematic Withdrawals.................................................. 20
Free-Look Right......................................................... 21
Death Benefit During Accumulation Period................................ 21
Loans Available from Certain Qualified Contracts........................ 22
Constraints on Distributions from Certain Section 403(b)
Annuity Contracts..................................................... 23
Annuity Period.......................................................... 24
Annuity Provisions...................................................... 24
Election of Annuity Commencement Date and Form of Annuity............... 24
Allocation of Benefits.................................................. 24
Optional Annuity Forms.................................................. 25
Value of Variable Annuity Payments:
Assumed Investment Rates.............................................. 25
Restrictions Under the Texas Optional Retirement Program................ 26
2
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VARIFLEX CONTENTS (CONTINUED)
Page
Federal Tax Matters....................................................... 26
Introduction......................................................... 26
Tax Status of SBL and the Separate Account........................... 26
General.......................................................... 26
Charge for SBL Taxes............................................. 26
Diversification Standards........................................ 26
Income Taxation of Annuities in General -- Non-Qualified Plans....... 27
Surrenders or Withdrawals Prior to the Annuity Start Date........ 27
Surrenders or Withdrawals On or After Annuity Start Date......... 27
Penalty Tax on Certain Surrenders and Withdrawals................ 27
Additional Considerations............................................ 28
Distribution-at-Death Rules...................................... 28
Gift of Annuity Contracts........................................ 28
Contracts Owned by Non-Natural Persons........................... 28
Multiple Contract Rule........................................... 28
Possible Tax Charges............................................. 28
Transfers, Assignments or Exchanges of a Contract................ 29
Qualified Plans...................................................... 29
Section 401...................................................... 29
Section 403(b)................................................... 30
Section 408...................................................... 30
Section 457...................................................... 31
Rollovers........................................................ 32
Tax Penalties.................................................... 32
Withholdings..................................................... 32
Distributor of the Contracts.............................................. 33
Performance Information.............................................. 33
The General Account....................................................... 33
Statement of Additional Information....................................... 34
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.
3
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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.
HOSPITAL--An institution that is licensed as such by the Joint Commission of
Accreditation of Hospitals, or any lawfull operated institution that provides
in-patient treatment of sick and injured persons through medical, diagnostic and
surgical facilities directed by physicians and 24 hour nursing services.
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.
QUALIFIED SKILLED NURSING FACILITY--A facility licensed by the state to provide
on a daily basis convalescent or chronic care for in-patients who, by reason of
infirmity or illness, are not able to care for themselves.
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.
4
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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, 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. 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 12).
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
14 and "Limits on Purchase Payments Paid Under Tax-Qualified Retirement Plans"
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 16.)
THE DEATH BENEFIT
For individual and Group Allocated Contracts, the Contract provides for a
death benefit upon the death of the Annuitant during the Accumulation Period.
The death benefit will vary depending on your Contract's investment results and
the age of the Annuitant on the Contract Date. SBL will pay the death benefit
proceeds to the beneficiary upon receipt of due proof of the Annuitant's death
and instructions regarding payment. For Non-Qualified Contracts, the death
benefit will be paid upon the death of the Annuitant OR CONTRACTOWNER to meet
the distribution requirements of Section 72(s) of the Internal Revenue Code.
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
21.)
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 percent 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 19, "Constraints on Distributions from Certain Section
403(b) Annuity Contracts" on page 23 and "Federal Tax Matters" on page 26.)
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 percent. Variflex Contracts also provide for certain
deductions and charges against the contract. These deductions and charges
include a $30 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 percent in the first Contract
5
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Year to 0 percent in the ninth such year). (See "Charges and Deductions" on page
17.)
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 21.)
SUMMARY OF EXPENSES
CONTRACTOWNER TRANSACTION EXPENSES
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 Fee2..................................................... $30
SEPARATE ACCOUNT ANNUAL FEE (as a percentage of average account value)
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)
<TABLE>
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE SOCIAL
GROWTH INCOME MARKET EQUITY INCOME AWARENESS
(SERIES A) (SERIES B) (SERIES C) (SERIES D) (SERIES E) (SERIES S)
<S> <C> <C> <C> <C> <C> <C>
Management Fees
(after fee waiver)3 .75% .75% .50% 1.00% .75% .75%
Other Expenses
(after expense
reimbursement) .08% .09% .08% .30% .08% .09%
------ ------ ------ ------ ------ -----
Total Annual
Expenses3 .83% .84% .58% 1.30% .83% .84%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL SPECIALIZED MANAGED
EMERGING AGGRESSIVE ASSET ASSET EQUITY
GROWTH BOND ALLOCATION ALLOCATION INCOME
(SERIES J) (SERIES K) (SERIES M) (SERIES N) (SERIES O)
<S> <C> <C> <C> <C> <C>
Management Fees
(after fee waiver)3 .75% .00% 1.00% 1.00% 1.00%
Other Expenses
(after expense
reimbursement) .09% .84% .34% .45% .15%
------ ------ ------ ------ -----
Total Annual
Expenses3 .84% .84% 1.34% 1.45% 1.15%
</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) During the fiscal year ended December 31, 1996, the Investment Manager
waived the management fees of Series K and, during the fiscal year ending
December 31, 1997, the Investment Manager will waive the management fees of
Series K; absent such expense waiver, the management fee of Series K would
have been .75%. There can be no assurance that the Investment Manager will
continue to waive the Series' management fees after December 31, 1997.
6
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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:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
GROWTH SERIES............... 102 126 155 248
GROWTH-INCOME SERIES........ 102 126 156 249
MONEY MARKET SERIES......... 99 119 143 222
WORLDWIDE EQUITY SERIES..... 107 139 179 295
HIGH GRADE INCOME SERIES.... 102 126 155 248
SOCIAL AWARENESS SERIES..... 102 126 156 249
EMERGING GROWTH SERIES...... 102 126 156 249
GLOBAL AGGRESSIVE
BOND SERIES............ 102 126 156 249
SPECIALIZED ASSET
ALLOCATION SERIES...... 107 140 181 299
MANAGED ASSET
ALLOCATION SERIES...... 108 144 186 310
EQUITY INCOME SERIES........ 105 135 172 281
If you do not surrender your contract:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
GROWTH SERIES............... 22 67 115 248
GROWTH-INCOME SERIES........ 22 68 116 249
MONEY MARKET SERIES......... 19 60 103 222
WORLDWIDE EQUITY SERIES..... 27 81 139 295
HIGH GRADE INCOME
SERIES.................... 22 67 115 248
SOCIAL AWARENESS SERIES..... 22 68 116 249
EMERGING GROWTH SERIES...... 22 68 116 249
GLOBAL AGGRESSIVE
BOND SERIES............... 22 68 116 249
SPECIALIZED ASSET
ALLOCATION SERIES......... 27 83 141 299
MANAGED ASSET
ALLOCATION SERIES......... 28 86 146 310
EQUITY INCOME SERIES........ 25 77 132 281
EXAMPLE: VARIFLEX CONTRACTS - 401(K) AND 408(K) (SOLD PRIOR TO MAY 1, 1990)
If you do not surrender your contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
GROWTH SERIES.............. 102 147 188 254
GROWTH-INCOME SERIES....... 103 148 189 255
MONEY MARKET SERIES........ 100 140 176 229
WORLDWIDE EQUITY SERIES.... 107 160 212 301
HIGH GRADE INCOME SERIES... 102 147 188 254
SOCIAL AWARENESS SERIES.... 103 148 189 255
EMERGING GROWTH SERIES..... 103 148 189 255
GLOBAL AGGRESSIVE BOND
SERIES................ 103 148 189 255
SPECIALIZED ASSET
ALLOCATION SERIES...... 108 161 214 305
MANAGED ASSET ALLOCATION
SERIES................ 109 164 219 316
EQUITY INCOME SERIES....... 106 156 205 287
If you do not surrender your contract:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
GROWTH SERIES.............. 22 69 118 254
GROWTH-INCOME SERIES....... 23 69 119 255
MONEY MARKET SERIES........ 20 62 106 229
WORLDWIDE EQUITY SERIES.... 27 83 142 301
HIGH GRADE INCOME SERIES... 22 69 118 254
SOCIAL AWARENESS SERIES.... 23 69 119 255
EMERGING GROWTH SERIES..... 23 69 119 255
GLOBAL AGGRESSIVE
BOND SERIES........... 23 69 119 255
SPECIALIZED ASSET
ALLOCATION SERIES..... 28 84 144 305
MANAGED ASSET
ALLOCATION SERIES..... 29 88 149 316
EQUITY INCOME SERIES....... 26 79 135 287
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 percent 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 this Prospectus. For a more
complete description of the various costs and expenses of the Fund, see the
prospectus for SBL Fund.
7
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CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit
values at the beginning and end of each period as well as ending accumulation
units outstanding for Qualified and Non-Qualified Contracts under each Series of
Variflex.
<TABLE>
<CAPTION>
1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GROWTH SERIES
(SERIES A)
Accumulation unit
value:
Beginning of period $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41 $12.77
End of period $45.76 $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41
Accumulation units
outstanding at
the end of period 10,310,079 9,203,332 7,723,910 6,900,722 6,640,177 5,420,372 4,616,955 3,191,257 3,032,118 3,620,263
GROWTH-INCOME
SERIES (SERIES B)
Accumulation unit
value:
Beginning of period $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81 $14.46
End of period $46.58 $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81
Accumulation units
outstanding at
the end of period 15,264,292 14,963,215 14,312,801 13,236,948 11,381,462 8,753,337 6,449,776 4,613,783 3,388,090 2,932,678
MONEY MARKET
SERIES (SERIES C)
Accumulation unit
value:
Beginning of period $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56 $11.94
End of period $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56
Accumulation units
outstanding at
the end of period 3,252,140 2,989,809 3,578,026 2,680,809 2,373,251 2,161,924 1,913,734 3,216,085 2,774,046 962,056
WORLDWIDE EQUITY
SERIES (SERIES D)
Accumulation unit
value:
Beginning of period $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.18
End of period $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $8.07 $10.57 $11.74 $11.33
Accumulation units
outstanding at
the end of period 11,881,450 10,236,349 9,361,197 5,863,967 2,070,715 917,833 466,703 607,650 633,816 648,066
HIGH GRADE INCOME
SERIES (SERIES E)
Accumulation unit
value:
Beginning of period $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17 $12.04
End of period $21.69 $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17
Accumulation units
outstanding at
the end of period 3,673,833 3,912,046 3,891,426 3,731,587 2,912,605 2,255,909 1,673,154 1,403,313 1,037,740 1,013,973
SOCIAL AWARENESS
SERIES (SERIES S)
Accumulation unit
value:
Beginning of period $15.97 $12.65 $13.31 $12.04 $10.47 $10.00 --- --- --- ---
End of period $18.75 $15.97 $12.65 $13.31 $12.04 $10.47 --- --- --- ---
Accumulation units
outstanding at
the end of period 2,083,090 1,615,845 1,344,063 993,233 513,953 127,699 --- --- --- ---
EMERGING GROWTH
SERIES (SERIES J)
Accumulation unit
value:
Beginning of period $15.46 $13.10 $13.97 $12.44 $10.00 --- --- --- --- ---
End of period $18.03 $15.46 $13.10 $13.97 $12.44 --- --- --- --- ---
Accumulation units
outstanding at
the end of period 5,563,881 4,387,739 3,947,047 2,131,858 455,105 --- --- --- --- ---
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GLOBAL AGGRESSIVE
BOND SERIES (SERIES K)
Accumulation unit
value:
Beginning of period $10.69 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.69 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 306,339 129,589 --- --- --- --- --- --- --- ---
SPECIALIZED ASSET
ALLOCATION SERIES
(SERIES M)
Accumulation unit
value:
Beginning of period $10.64 $10.00 --- --- --- --- --- --- --- ---
End of period $12.01 $10.64 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 1,274,106 611,652 --- --- --- --- --- --- --- ---
MANAGED ASSET
ALLOCATION SERIES
(SERIES N)
Accumulation unit
value:
Beginning of period $10.66 $10.00 --- --- --- --- --- --- --- ---
End of period $11.87 $10.66 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 626,179 295,053 --- --- --- --- --- --- --- ---
EQUITY INCOME
SERIES (SERIES O)
Accumulation unit
value:
Beginning of period $11.62 $10.00 --- --- --- --- --- --- --- ---
End of period $13.78 $11.62 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 2,016,966 604,325 --- --- --- --- --- --- --- ---
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-QUALIFIED
CONTRACTS
GROWTH SERIES
(SERIES A)
Accumulation unit
value:
Beginning of period $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41 $12.76
End of period $45.74 $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41
Accumulation units
outstanding at
the end of period 2,575,426 2,306,163 1,578,797 1,483,618 1,766,896 1,328,865 952,806 594,856 493,463 664,251
GROWTH-INCOME
SERIES (SERIES B)
Accumulation unit
value:
Beginning of period $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80 $14.45
End of period $46.54 $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80
Accumulation units
outstanding at
the end of period 3,721,884 3,669,299 3,515,364 3,262,600 2,560,986 1,774,534 1,293,121 1,000,815 836,735 801,802
MONEY MARKET
SERIES (SERIES C)
Accumulation unit
value:
Beginning of period $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55 $11.94
End of period $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55
Accumulation units
outstanding at
the end of period 1,681,230 1,469,153 2,475,349 1,913,212 1,031,855 1,000,378 954,107 846,414 853,615 422,130
WORLDWIDE EQUITY
SERIES (SERIES D)
Accumulation unit
value:
Beginning of period $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.19
End of period $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74 $11.33
Accumulation units
outstanding at
the end of period 3,484,411 3,140,486 2,803,304 2,150,932 678,110 279,878 125,010 211,920 214,723 225,118
HIGH GRADE INCOME
SERIES (SERIES E)
Accumulation unit
value:
Beginning of period $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17 $12.03
End of period $21.67 $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17
Accumulation units
outstanding at
the end of period 1,377,342 1,325,159 1,392,830 1,290,268 962,775 784,496 582,285 519,624 419,410 420,483
SOCIAL AWARENESS
SERIES (SERIES S)
Accumulation unit
value:
Beginning of period $15.98 $12.66 $13.31 $12.04 $10.47 $10.00 --- --- --- ---
End of period $18.75 $15.98 $12.66 $13.31 $12.04 $10.47 --- --- --- ---
Accumulation units
outstanding at
the end of period 746,852 612,235 543,287 389,861 226,145 98,344 --- --- --- ---
EMERGING GROWTH
SERIES (SERIES J)
Accumulation unit
value:
Beginning of period $15.46 $13.09 $13.96 $12.44 $10.00 --- --- --- --- ---
End of period $18.03 $15.46 $13.09 $13.96 $12.44 --- --- --- --- ---
Accumulation units
outstanding at
the end of period 1,559,302 1,248,987 1,211,099 610,801 68,338 --- --- --- --- ---
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-QUALIFIED
CONTRACTS
GLOBAL AGGRESSIVE
BOND SERIES (SERIES K)
Accumulation unit
value:
Beginning of period $10.69 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.69 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 178,818 74,528 --- --- --- --- --- --- --- ---
SPECIALIZED ASSET
ALLOCATION SERIES
(SERIES M)
Accumulation unit
value:
Beginning of period $10.64 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.64 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 532,893 297,967 --- --- --- --- --- --- --- ---
MANAGED ASSET
ALLOCATION SERIES
(SERIES N)
Accumulation unit
value:
Beginning of period $10.66 $10.00 --- --- --- --- --- --- --- ---
End of period $11.87 $10.66 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 374,276 226,555 --- --- --- --- --- --- --- ---
EQUITY INCOME
SERIES (SERIES O)
Accumulation unit
value:
Beginning of period $11.62 $10.00 --- --- --- --- --- --- --- ---
End of period $13.78 $11.62 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 710,206 234,242 --- --- --- --- --- --- --- ---
</TABLE>
(a) Social Awareness Series of Variflex was first publicly offered on May 1,
1991.
(b) 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.
(c) Emerging Growth Series of Variflex was first publicly offered on October 1,
1992.
(d) Global Aggressive Bond, Specialized Asset Allocation, Managed Asset
Allocation and Equity Income Series were first publicly offered on June 1,
1995.
(e) 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.
11
<PAGE>
- --------------------------------------------------------------------------------
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, LLC
(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 capital
appreciation by investing 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
12
<PAGE>
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 07663, and MFR Advisors, Inc., One
Liberty Plaza, 46th Floor, New York, New York 10006 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, 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 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 Plans," page 26 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
13
<PAGE>
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 33.
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 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 of those
limitations see "Limits on Purchase Payments Paid Under Tax-Qualified Retirement
Plans" 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
14
<PAGE>
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 16.)
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 low and a lesser 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, SBL 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 33.
ASSET REALLOCATION OPTION
SBL currently offers an option under which Contractowners authorize SBL to
automatically transfer 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
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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 33.
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 SBL complied 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 24.
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.
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
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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 percent 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 20.
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 percent 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 percent 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 percent 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 percent 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;
(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; (3) upon withdrawals that qualify for the hospital/nursing home waiver,
discussed below; or (4) 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 percent 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 percent, 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 amounts derived indirectly from the Actuarial
Risk Fee. SBL anticipates sales expenses will be greater than the contingent
deferred sales charge.
HOSPITAL/NURSING HOME WAIVER
SBL will waive the withdrawal charge on any full or partial withdrawal upon
the Contractowner's request for such a waiver, provided that the Contractowner:
(1) has been confined to a "hospital" or "qualified skilled nursing facility"
for at least 90 consecutive days prior to the date of the withdrawal; (2) is so
confined when SBL receives the withdrawal request; and (3) became so confined
after the date the Contract was issued. (See the "Glossary of Terms" on page 4.)
Any request for the hospital/nursing home waiver must be accompanied by a
properly completed claim form which may be obtained from SBL and a written
physician's statement acceptable to SBL certifying that such confinement is a
medical necessity and is due to illness or infirmity. SBL reserves the right to
have the Contractowner examined by a physician of SBL's choice and at SBL's
expense to determine if the Contractowner is eligible for the hospital/nursing
home waiver. The hospital/nursing home waiver is not available in certain states
pending department of insurance approval. If the waiver is later approved by the
insurance department of a state, SBL intends to make the waiver available to all
Contractowners in that state at that time, but there can be no assurance that
the waiver will be approved. Prospective contractowners should contact their
agent concerning availability of the waiver in their state.
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 percent of Contract Value valued as of the calendar
year-end or $30. SBL will waive the Administrative Fee during a Contract Year
for any Contract that has been in force for eight Contract Years or more AND the
Contract Value of which is $25,000 or more at year-end (or in the event of a
full withdrawal, on the date of the withdrawal). 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.
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(B) STATE PREMIUM TAXES
An amount for state premium taxes (which presently range from 0 percent to
3.5 percent) 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 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 percent. 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. SBL may ultimately realize a profit from this fee to the extent it is not
needed to cover mortality and administrative expenses, but SBL may realize a
loss to the extent the fee is not sufficient. SBL may use any profit derived
from this fee for any lawful purpose, including distribution 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 "Charge
for SBL Taxes," page 26.)
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 percent 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
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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, less 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 percent 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 23 and
"Federal Tax Matters" on page 26.
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 closings 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
percent, 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 percent 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 percent 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 25.
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 19.
The Free Withdrawal Right discussed under "Charges and Deductions" on page
17 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
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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 percent
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 23 and "Federal Tax Matters" on page
26. 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.
DEATH BENEFIT DURING ACCUMULATION PERIOD
If the Annuitant under a Variflex Contract, other than a Group Unallocated
Contract, dies during the Accumulation Period, SBL will pay the death benefit
proceeds to the beneficiary upon receipt of due proof of the Annuitant's death
and instructions regarding payment. The death benefit proceeds will be the death
benefit reduced by any outstanding Contract Debt and any uncollected premium
taxes. If the Annuitant dies during the Accumulation Period and the age of the
Annuitant was 75 or younger on the Contract Date, the amount of the death
benefit will be the greatest of: (1) the sum of all Purchase Payments made
reduced by any partial withdrawals; (2) the Contract Value on the date due proof
of death and instructions regarding payment are received by SBL at its home
office; or (3) the stepped-up death benefit. The stepped-up death benefit is:
(a) the largest Contract Value on any Contract anniversary that is both an exact
multiple of six and occurs prior to the Annuitant reaching age 76, plus (b) any
Purchase Payments received since the applicable Contract anniversary, less (c)
any reductions caused by partial withdrawals since the applicable Contract
anniversary. For Contracts in effect for six Contract Years or more as of May 1,
1991, the Contract Value on the Contract anniversary immediately preceding May
1, 1991, will be used as the sixth Contract anniversary in determining the
stepped-up death benefit.
If the Annuitant dies during the Accumulation Period and the age of the
Annuitant was 76 or greater on the Contract Date, the amount of the death
benefit will be the greater of: (1) the sum of all Purchase Payments made
reduced by any partial withdrawals; or (2) the Contract Value on the date due
proof of death and instructions regarding payment are received by SBL at its
home office.
Notwithstanding the foregoing, the death benefit for Contracts issued in
Florida is as follows. If the Annuitant was 75 or younger on the date of death,
the death benefit is the greatest of (1) or (2) above or (3) the largest
Contract Value on any Contract anniversary that is an exact multiple of six,
less any partial withdrawals since that anniversary. If the Annuitant was 76 or
older on the date of death, the death benefit is the Contract Value on the date
due proof of death and instructions regarding payment are received, less any
applicable withdrawal charges. SBL currently waives any withdrawal charges
applicable to the death benefit.
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 25. 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 24.
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, the death benefit described herein will be
paid in the event of the death of the Annuitant OR CONTRACTOWNER to meet the
requirements of Section 72(s) of the Internal Revenue Code. The amount of the
death benefit in the event of the Contractowner's death
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will be based on the age of the Contractowner on the Contract Date. For
Non-Qualified Contracts, if the surviving spouse of the deceased Contractowner
is the sole beneficiary, such spouse may elect to continue the Contract in force
until the earliest of the surviving spouse's death or the Annuity Commencement
Date or receive the death benefit proceeds. For any beneficiary other than a
surviving spouse, only those options may be chosen that provide for complete
distribution of the Contractowner's interest in the Contract within five years
of the death of the Owner. If the beneficiary is a natural person, that person
alternatively can elect to begin receiving annuity payments within one year of
the Contractowner's death over a period not extending beyond the beneficiary's
life or life expectancy. 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.
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. SBL has developed
and plans to install new loan processing procedures before the end of 1997,
subject to state insurance department approvals. Described below are the loan
procedures which are currently in effect. This is followed by a description of
how loans will be administered after implementation of the new procedures.
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 percent 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 percent of the
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 percent, 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 percent.
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 percent.
Loans must be repaid within five years and before the Annuity Commencement
Date, unless SBL 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.
Outlined below is a description of how loans will be administered after
implementation of the new procedures. The minimum loan that may be taken is
$1,000. The maximum loan that can be taken is generally equal to 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 percent of the Contract Value or $10,000, whichever is greater. However,
an amount may not be borrowed which exceeds the annuity's total value minus the
amount needed as security for the loan as described below. The Internal Revenue
Code requires aggregation of all loans made to an individual employee under a
single employer plan. However, since SBL has no information concerning
outstanding loans with other providers, we will only use information available
under annuity contracts issued by us. In addition, 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 in an amount
equal to the loan amount is transferred from the Variflex Series and/or the
General Account into an
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account called the "Loan Account." In addition, 10 percent of the loaned amount
will be held in the General Account as security for the loan. Amounts allocated
to the Loan Account earn 3.5 percent, the minimum rate of interest guaranteed
under the General Account. Amounts acting as security for the loan in the
General Account will earn the current rate of interest.
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 5.50
percent. 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
percent.
Loans must be repaid within five years, unless SBL determines that the loan
is to be used to acquire a principal residence of the Owner, in which case the
loan must be repaid within 30 years. Loan payments must be made at least
quarterly and may be prepaid at any time. Upon receipt of a loan payment, SBL
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. The amount held as security for the loan
will also be reduced by each loan payment so that the security is again equal to
10 percent of the outstanding loan balance immediately after the loan payment is
made. However, amounts which are no longer needed as security for the loan will
not automatically be allocated back among the General Account and/or Series in
accordance with the Contractowner's Purchase Payment instructions.
If any required loan payment is not made, within 30 days of the due date
for loans with a monthly repayment schedule or within 90 days of the due date
for loans with a quarterly repayment schedule, the TOTAL OUTSTANDING LOAN
BALANCE will be deemed to be in default, and the entire loan balance, with any
accrued interest, will be reported as income to the Internal Revenue Series
("IRS"). Once a loan has gone into default, regularly scheduled payments will
not be accepted, and no new loans will be allowed while a loan is in default.
Interest will continue to accrue on a loan in default and if such interest is
not paid by December 31st of each year, it will be added to the outstanding
balance of the loan and will be reported to the IRS. Contract Value equal to the
amount of the accrued interest will be transferred to the Loan Account. If a
loan continues to be in default, the total outstanding balance will be deducted
from Contract Value upon the Contractowner's attained age 59 1/2. The Contract
will be automatically terminated if the outstanding loan balance on a loan in
default equals or exceeds the amount for which the Contract may be surrendered,
plus any withdrawal charge. The proceeds from the Contract will be used to repay
the debt and any applicable withdrawal charge. Because of the adverse tax
consequences associated with defaulting on a loan, a Contractowner should
carefully consider his or her ability to repay the loan and should consult with
a tax advisor before requesting a loan.
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
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403(b) that are available under an employer's Section 403(b) arrangement.
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 16. 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 due date of
the third annuity payment, 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 percent 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 may 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 3.5 percent. If the actual
investment performance of the particular Series selected is such that the net
investment return to Variflex is 3.5 percent per annum, payments will remain
constant. If the net investment return exceeds 3.5 percent, the payments will
increase and if the return is less than 3.5 percent, 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, Emerging Growth, Global
Aggressive Bond, Equity Income, Specialized Asset
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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 3.5
percent. 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
INTRODUCTION
The Contract described in this Prospectus is designed for use by
individuals in retirement plans which may or may not be Qualified Plans under
the provisions of the Internal Revenue Code ("Code"). The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payments,
and on the economic benefits to the Owner, the Annuitant, and the Beneficiary or
other payee will depend upon the type of retirement plan, if any, for which the
Contract is purchased, the tax and employment status of the individuals involved
and a number of other factors. The discussion contained herein and in the
Statement of Additional Information is general in nature and is not intended to
be an exhaustive discussion of all questions that might arise in connection with
a Contract. It is based upon SBL's understanding of the present federal income
tax laws as currently interpreted by the Internal Revenue Service ("IRS"), and
is not intended as tax advice. No representation is made regarding the
likelihood of continuation of the present federal income tax laws or of the
current interpretations by the IRS or the courts. Future legislation may affect
annuity contracts adversely. Moreover, no attempt has been made to consider any
applicable state or other laws. Because of the inherent complexity of the tax
laws and the fact that tax results will vary according to the particular
circumstances of the individual involved and, if applicable, the Qualified Plan,
a person should consult with a qualified tax adviser regarding the purchase of a
Contract, the selection of an Annuity Option under a Contract, the receipt of
annuity payments under a Contract or any other transaction involving a Contract.
SBL DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF, OR TAX CONSEQUENCES
ARISING FROM, ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF SBL AND THE SEPARATE ACCOUNT
GENERAL
SBL intends to be taxed as a life insurance company under Part I,
Subchapter L of the Code. Because the operations of the Separate Account form a
part of SBL, SBL will be responsible for any federal income taxes that become
payable with respect to the income of the Separate Account and its Subaccounts.
CHARGE FOR SBL TAXES
A charge may be made for any federal taxes incurred by SBL that are
attributable to the Separate Account, the Subaccounts or to the operations of
SBL with respect to the Contracts or attributable to payments, premiums, or
acquisition costs under the Contracts. SBL will review the question of a charge
to the Separate Account, the Subaccounts or the Contracts for SBL's federal
taxes periodically. Charges may become necessary if, among other reasons, the
tax treatment of SBL or of income and expenses under the Contracts is ultimately
determined to be other than what SBL currently believes it to be, if there are
changes made in the federal income tax treatment of variable annuities at the
insurance company level, or if there is a change in SBL's tax status.
DIVERSIFICATION STANDARDS
Each Series of the Mutual Fund will be required to adhere to regulations
adopted by the Treasury Department pursuant to Section 817(h) of the Code
prescribing asset diversification requirements for investment companies whose
shares are sold to insurance company separate accounts funding variable
contracts. Pursuant to these regulations, on the last day of each calendar
quarter (or on any day within 30 days thereafter), no more than 55 percent of
the total assets of a Series may be represented by any one investment, no more
than 70 percent may be represented by any two investments, no more than 80
percent may be represented by any three investments, and no more than 90 percent
may be represented by any four investments. For purposes of Section 817(h),
securities of a single issuer
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generally are treated as one investment but obligations of the U.S. Treasury and
each U.S. Governmental agency or instrumentality generally are treated as
securities of separate issuers. The Separate Account, through the Series,
intends to comply with the diversification requirements of Section 817(h).
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contractowner's gross income. The IRS has stated in published rulings that a
variable contractowner will be considered the owner of separate account assets
if the contractowner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department also announced, in connection with the issuance of regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the policyowner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets." As of the date of this Prospectus, no such guidance has been
issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Contractowner has additional flexibility in allocating purchase
payments and Contract Values. These differences could result in a Contractowner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, SBL does not know what standards will be set forth, if
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. SBL therefore reserves the right to modify the Contract, as it
deems appropriate, to attempt to prevent a Contractowner from being considered
the owner of a pro rata share of the assets of the Separate Account. Moreover,
in the event that regulations or rulings are adopted, there can be no assurance
that the Series will be able to operate as currently described in the
Prospectus, or that the Mutual Fund will not have to change any Series'
investment objective or investment policies.
INCOME TAXATION OF ANNUITIES IN GENERAL -- NON-QUALIFIED PLANS
Section 72 of the Code governs the taxation of annuities. In general, a
Contractowner is not taxed on increases in value under an annuity contract until
some form of distribution is made under the contract. However, the increase in
value may be subject to tax currently under certain circumstances. See
"Contracts Owned by Non-Natural Persons" on page 28 and "Diversification
Standards" on page 26. Withholding of federal income taxes on all distributions
may be required unless a recipient who is eligible elects not to have any
amounts withheld and properly notifies SBL of that election.
1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
withdrawal (including systematic withdrawals) from a Contract prior to the
Annuity Start Date generally will be treated as gross income to the extent that
the cash value of the Contract immediately before the withdrawal (determined
without regard to any surrender charge in the case of a partial withdrawal)
exceeds the "investment in the contract." The "investment in the contract" is
that portion, if any, of purchase payments paid under a Contract less any
distributions received previously under the Contract that are excluded from the
recipient's gross income. The taxable portion is taxed at ordinary income tax
rates. For purposes of this rule, a pledge or assignment of a contract is
treated as a payment received on account of a partial withdrawal of a Contract.
2. Surrenders or Withdrawals on or after the Annuity Start Date
Upon a complete surrender, the receipt is taxable to the extent that the
cash value of the Contract exceeds the investment in the Contract. The taxable
portion of such payments will be taxed at ordinary income tax rates.
For fixed annuity payments, the taxable portion of each payment generally
is determined by using a formula known as the "exclusion ratio," which
establishes the ratio that the investment in the Contract bears to the total
expected amount of annuity payments for the term of the Contract. That ratio is
then applied to each payment to determine the non-taxable portion of the
payment. The remaining portion of each payment is taxed at ordinary income
rates. For variable annuity payments, the taxable portion of each payment is
determined by using a formula known as the "excludable amount," which
establishes the non-taxable portion of each payment. The non-taxable portion is
a fixed dollar amount for each payment, determined by dividing the investment in
the Contract by the number of payments to be made. The remainder of each
variable annuity payment is taxable. Once the excludable portion of annuity
payments to date equals the investment in the Contract, the balance of the
annuity payments will be fully taxable.
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10 percent of the portion
of such amount which is includable in gross income. However, the penalty tax is
not applicable to withdrawals: (i) made on or after the
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death of the owner (or where the owner is not an individual, the death of the
"primary annuitant," who is defined as the individual the events in whose life
are of primary importance in affecting the timing and amount of the payout under
the Contract); (ii) attributable to the taxpayer's becoming totally disabled
within the meaning of Code Section 72(m)(7); (iii) which are part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the taxpayer, or the joint lives (or joint
life expectancies) of the taxpayer and his or her beneficiary; (iv) from certain
qualified plans; (v) under a so-called qualified funding asset (as defined in
Code Section 130(d)); (vi) under an immediate annuity contract; or (vii) which
are purchased by an employer on termination of certain types of qualified plans
and which are held by the employer until the employee separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax for
the first year in which the modification occurs will be increased by an amount
(determined by the regulations) equal to the tax that would have been imposed
but for item (iii) above, plus interest for the deferral period, if the
modification takes place (a) before the close of the period which is five years
from the date of the first payment and after the taxpayer attains age 59 1/2, or
(b) before the taxpayer reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must provide the
following two distribution rules: (a) if any owner dies on or after the Annuity
Start Date, and before the entire interest in the Contract has been distributed,
the remainder of the owner's interest will be distributed at least as quickly as
the method in effect on the owner's death; and (b) if any owner dies before the
Annuity Start Date, the entire interest in the Contract must generally be
distributed within five years after the date of death, or, if payable to a
designated beneficiary, must be annuitized over the life of that designated
beneficiary or over a period not extending beyond the life expectancy of that
beneficiary, commencing within one year after the date of death of the owner. If
the sole designated beneficiary is the spouse of the deceased owner, the
Contract (together with the deferral of tax on the accrued and future income
thereunder) may be continued in the name of the spouse as owner.
Generally, for purposes of determining when distributions must begin under
the foregoing rules, where an owner is not an individual, the primary annuitant
is considered the owner. In that case, a change in the primary annuitant will be
treated as the death of the owner. Finally, in the case of joint owners, the
distribution-at-death rules will be applied by treating the death of the first
owner as the one to be taken into account in determining generally when
distributions must commence, unless the sole Beneficiary is the deceased owner's
spouse.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified Contracts prior to the Annuity Start
Date will trigger tax on the gain on the Contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10 percent
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
3. Contracts Owned by Non-Natural Persons
If the Contract is held by a non-natural person (for example, a
corporation) the income on that Contract (generally the increase in net
surrender value less the purchase payments) is includable in taxable income each
year. The rule does not apply where the Contract is acquired by the estate of a
decedent, where the Contract is held by certain types of retirement plans, where
the Contract is a qualified funding asset for structured settlements, where the
Contract is purchased on behalf of an employee upon termination of a qualified
plan, and in the case of an immediate annuity. An annuity contract held by a
trust or other entity as agent for a natural person is considered held by a
natural person.
4. Multiple Contract Rule
For purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in gross
income, all Non-Qualified annuity contracts issued by the same insurer to the
same Contractowner during any calendar year are to be aggregated and treated as
one contract. Thus, any amount received under any such contract prior to the
contract's Annuity Start Date, such as a partial surrender, dividend, or loan,
will be taxable (and possibly subject to the 10 percent penalty tax) to the
extent of the combined income in all such contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this rule. It is
possible that, under this authority, the Treasury Department may apply this rule
to amounts that are paid as annuities (on and after the Annuity Start Date)
under annuity contracts issued by the same company to the same owner during any
calendar year. In this case, annuity payments could be fully taxable (and
possibly subject to the 10 percent penalty tax) to the extent of the combined
income in all such contracts and regardless of whether any amount would
otherwise have been excluded from income because of the "exclusion ratio" under
the contract.
5. Possible Tax Changes
In recent years, legislation has been proposed that would have adversely
modified the federal taxation of
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certain annuities. Although as of the date of this Prospectus, it does not
appear that Congress is considering any legislation regarding the taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as IRS regulations, revenue
rulings, and judicial decisions). Moreover, although unlikely, it is also
possible that any legislative change could be retroactive (that is, effective
prior to the date of such change).
6. Transfers, Assignments or Exchanges of a Contract
A transfer of ownership of a Contract, the designation of an Annuitant,
Payee or other Beneficiary who is not also the Owner, the selection of certain
Annuity Start Dates or the exchange of a Contract may result in certain tax
consequences to the Owner that are not discussed herein. An Owner contemplating
any such transfer, assignment, selection or exchange should contact a competent
tax adviser with respect to the potential effects of such a transaction.
QUALIFIED PLANS
The Contract may be used with Qualified Plans that meet the requirements of
Section 401, 403(b), 408 or 457 of the Code. The tax rules applicable to
participants in such Qualified Plans vary according to the type of plan and the
terms and conditions of the plan itself. No attempt is made herein to provide
more than general information about the use of the Contract with the various
types of Qualified Plans. These Qualified Plans may permit the purchase of the
Contracts to accumulate retirement savings under the plans. Adverse tax or other
legal consequences to the plan, to the participant or to both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Contract. Contractowners,
Annuitants, and Beneficiaries, are cautioned that the rights of any person to
any benefits under such Qualified Plans may be subject to the terms and
conditions of the plans themselves or limited by applicable law, regardless of
the terms and conditions of the Contract issued in connection therewith. For
example, SBL may accept beneficiary designations and payment instructions under
the terms of the Contract without regard to any spousal consents that may be
required under the Employee Retirement Income Security Act of 1974 (ERISA).
Consequently, a Contractowner's Beneficiary designation or elected payment
option may not be enforceable.
The amounts that may be contributed to Qualified Plans are subject to
limitations that vary depending on the type of Plan. In addition, early
distributions from most Qualified Plans may be subject to penalty taxes, or in
the case of distributions of amounts contributed under salary reduction
agreements, could cause the Plan to be disqualified. Furthermore, distributions
from most Qualified Plans are subject to certain minimum distribution rules.
Failure to comply with these rules could result in disqualification of the Plan
or subject the Owner or Annuitant to penalty taxes. As a result, the minimum
distribution rules may limit the availability of certain Annuity Options to
certain Annuitants and their beneficiaries. These requirements may not be
incorporated into SBL's Contract administration procedures. Owners, participants
and beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Section 401
Code Section 401 permits employers to establish various types of retirement
plans (e.g., pension, profit sharing and 401(k) plans) for their employees. For
this purpose, self-employed individuals (proprietors or partners operating a
trade or business) are treated as employees and therefore eligible to
participate in such plans. Retirement plans established in accordance with
Section 401 may permit the purchase of Contracts to provide benefits thereunder.
In order for a retirement plan to be "qualified" under Code Section 401, it
must: (i) meet certain minimum standards with respect to participation, coverage
and vesting; (ii) not discriminate in favor of "highly compensated" employees;
(iii) provide contributions or benefits that do not exceed certain limitations;
(iv) prohibit the use of plan assets for purposes other than the exclusive
benefit of the employees and their beneficiaries covered by the plan; (v)
provide for distributions that comply with certain minimum distribution
requirements; (vi) provide for certain spousal survivor benefits; and (vii)
comply with numerous other qualification requirements.
A retirement plan qualified under Code Section 401 may be funded by
employer contributions, employee contributions or a combination of both. Plan
participants are not subject to tax on employer contributions until such amounts
are actually distributed from the plan. Depending upon the terms of the
particular plan, employee contributions may be made on a pre-tax or after-tax
basis. In addition, plan participants are not taxed on plan earnings derived
from either employer or employee contributions until such earnings are
distributed.
Each employee's interest in a retirement plan qualified under Code Section
401 must generally be distributed or begin to be distributed not later than
April 1 of the calendar year following the later of the calendar year in which
the employee reaches age 70 1/2 or retires ("required beginning date"). Periodic
distributions must not extend beyond the life of the employee or the lives of
the employee and a designated beneficiary (or over a period extending beyond the
life expectancy of the employee or the joint life expectancy of the employee and
a designated beneficiary).
If an employee dies before reaching his or her required beginning date, the
employee's entire interest in the plan
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must generally be distributed within five years of the employee's death.
However, the five-year rule will be deemed satisfied, if distributions begin
before the close of the calendar year following the year of the employee's death
to a designated beneficiary and are made over the life of the beneficiary (or
over a period not extending beyond the life expectancy of the beneficiary). If
the designated beneficiary is the employee's surviving spouse, distributions may
be delayed until the employee would have reached age 70 1/2.
If an employee dies after reaching his or her required beginning date, the
employee's interest in the plan must generally be distributed at least as
rapidly as under the method of distribution in effect at the time of the
employee's death.
Annuity payments distributed from a retirement plan qualified under Code
Section 401 are taxable under Section 72 of the Code. Section 72 provides that
the portion of each payment attributable to contributions that were taxable to
the employee in the year made, if any, is excluded from gross income as a return
of the employee's investment. The portion so excluded is determined by dividing
the employee's investment in the plan by (1) the number of anticipated payments
determined under a table set forth in Section 72 of the Code or (2) in the case
of a contract calling for installment payments, the number of monthly annuity
payments under such contract. The portion of each payment in excess of the
exclusion amount is taxable as ordinary income. Once the employee's investment
has been recovered, the full annuity payment will be taxable. If the employee
should die prior to recovering his or her entire investment, the unrecovered
investment will be allowed as a deduction on the employee's final return. If the
employee made no contributions that were taxable when made, the full amount of
each annuity payment is taxable as ordinary income.
A "lump-sum" distribution from a retirement plan qualified under Code
Section 401 is eligible for favorable tax treatment. A "lump-sum" distribution
means the distribution within one taxable year of the balance to the credit of
the employee which becomes payable: (i) on account of the employee's death, (ii)
after the employee attains age 59 1/2, (iii) on account of the employee's
termination of employment (in the case of a common law employee only) or (iv)
after the employee has become disabled (in the case of a self-employed person
only).
As a general rule, a lump-sum distribution is fully taxable as ordinary
income except for an amount equal to the employee's investment, if any, which is
recovered tax-free. However, special five-year averaging may be available,
provided the employee has reached age 59 1/2 and has not previously elected to
use income averaging. Special ten-year averaging and capital-gains treatment may
be available to an employee who reached age 50 before 1986.
Distributions from a retirement plan qualified under Code Section 401 may
be eligible for a tax-free rollover to either another qualified retirement plan
or to an individual retirement account or annuity (IRA). See "Rollovers" on page
32.
2. Section 403(b)
Code Section 403(b) 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, to exclude the amount of purchase payments from gross
income for tax purposes. The Contract may be purchased in connection with a
Section 403(b) annuity program.
Section 403(b) annuities must generally be provided under a plan which
meets certain minimum participation, coverage, and nondiscrimination
requirements. Section 403(b) annuities are generally subject to minimum
distribution requirements similar to those applicable to retirement plans
qualified under Section 401 of the Code. See "Section 401" on page 29.
A Section 403(b) annuity contract may be purchased with employer
contributions, employee contributions or a combination of both. An employee's
rights under a Section 403(b) contract must be nonforfeitable. Numerous
limitations apply to the amount of contributions that may be made to a Section
403(b) annuity contract. The applicable limit will depend upon, among other
things, whether the annuity contract is purchased with employer or employee
contributions.
Amounts used to purchase Section 403(b) annuities generally are excludable
from the taxable income of the employee. As a result, all distributions from
such annuities are normally taxable in full as ordinary income to the employee.
A Section 403(b) annuity contract must prohibit the distribution of
employee contributions (including earnings thereon) until the employee: (i)
attains age 59 1/2, (ii) terminates employment; (iii) dies; (iv) becomes
disabled; or (v) incurs a financial hardship (earnings may not be distributed in
the event of hardship).
Distributions from a Section 403(b) annuity contract may be eligible for a
tax-free rollover to either another Section 403(b) annuity contract or to an
individual retirement account or annuity (IRA). See "Rollovers" on page 32.
3. Section 408
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to establish individual retirement programs through the purchase of
Individual Retirement Annuities ("IRAs"). The Contract may be purchased as an
IRA.
IRAs are subject to limitations on the amount that may be contributed, the
persons who may be eligible and on the time when distributions must commence.
Depending upon the circumstances of the individual, contributions to an IRA may
be made on a deductible or non-deductible basis. IRAs may not be transferred,
sold, assigned, discounted or
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pledged as collateral for a loan or other obligation. The annual premium for an
IRA may not be fixed and may not exceed $2,000 (except in the case of a rollover
contribution). Any refund of premium must be applied to the payment of future
premiums or the purchase of additional benefits.
Sale of the Contract for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the Contract
for such purposes will be provided with such supplementary information as may be
required by the Internal Revenue Service or other appropriate agency, and will
have the right to revoke the Contract under certain circumstances.
In general, IRAs are subject to minimum distribution requirements similar
to those applicable to retirement plans qualified under Section 401 of the Code;
however, the required beginning date for IRAs is generally the date that the
Contractowner reaches age 70 1/2--the Contractowner's retirement date, if any,
will not affect his or her required beginning date. See "Section 401" on page
29. Distributions from IRAs are generally taxed under Code Section 72. Under
these rules, a portion of each distribution may be excludable from income. The
amount excludable from the individual's income is the amount of the distribution
which bears the same ratio as the individual's nondeductible contributions bears
to the expected return under the IRA.
Distributions from an IRA may be eligible for a tax-free rollover to
another IRA. In certain cases, a distribution from an IRA may be eligible to be
rolled over to a retirement plan qualified under Code Section 401(a) or a
Section 403(b) annuity contract. See "Rollovers" below.
The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the provision in the
Contract comports with IRA qualification requirements.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES. The Small Business Job Protection
Act of 1996 created a new retirement plan, the Savings Incentive Match Plan for
Employees of Small Employers (SIMPLE plans). Depending upon the type of SIMPLE
plan, employers may deposit the plan contributions into a single trust or into
SIMPLE Individual Retirement Annuities ("SIMPLE IRA") established by each
participant.
Information on eligibility to participate in an employer's SIMPLE Plan will
be included in the summary description of the plan furnished to the participants
by their employer. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. On a pre-tax basis, participants may
elect to contribute (through salary deferrals) up to $6,000 of their
compensation to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to their account each year. Finally, participants may roll over or transfer
contributions to their SIMPLE IRA from another SIMPLE IRA.
In general, SIMPLE IRAs are subject to minimum distribution requirements
similar to those applicable to retirement plans qualified under Section 401 of
the Code; however, the required beginning date for SIMPLE IRAs is generally the
date that the Contractowner reaches age 70 1/2 -- the Contractowner's retirement
date will not affect his or her required beginning date. Amounts used to
purchase SIMPLE IRAs generally are excludable from the taxable income of the
participant. As a result, all distributions from such annuities are normally
taxable in full as ordinary income to the participant.
Distributions from a SIMPLE IRA may be eligible for a tax-free rollover or
transfer to another SIMPLE IRA. However, a distribution from a SIMPLE IRA is
NEVER eligible to be rolled over to a retirement plan qualified under Code
Section 401(a) or a Section 403(b) annuity contract.
The Internal Revenue Service has not reviewed the Contract for
qualification as a SIMPLE IRA, and has not addressed in a ruling of general
applicability whether the death benefit provision such as the provision in the
Contract comports with SIMPLE IRA qualification requirements.
4. Section 457
Section 457 of the Code permits employees of state and local governments
and units and agencies of state and local governments as well as tax-exempt
organizations described in Section 501(c)(3) of the Code to defer a portion of
their compensation without paying current taxes if those employees are
participants in an eligible deferred compensation plan. A Section 457 plan may
permit the purchase of Contracts to provide benefits thereunder.
Although a participant under a Section 457 plan may be permitted to direct
or choose methods of investment in the case of a tax-exempt employer sponsor,
all amounts deferred under the plan, and any income thereon, remain solely the
property of the employer and subject to the claims of its general creditors,
until paid to the participant. The assets of a Section 457 plan maintained by a
state or local government employer must be held in trust (or custodial account
or an annuity contract) for the exclusive benefit of plan participants, who will
be responsible for taxes upon distribution. A Section 457 plan must not permit
the distribution of a participant's benefits until the participant attains age
70 1/2, terminates employment or incurs an "unforeseeable emergency."
Section 457 plans are generally subject to minimum distribution
requirements similar to those applicable to retirement plans qualified under
Section 401 of the Code. See "Section 401" on page 29. Since under a Section 457
plan, contributions are generally excludable from the taxable income of the
employee, the full amount received will usually be taxable as ordinary income
when annuity payments commence or other distributions are made. Distributions
from a Section 457 plan are not eligible for tax-free rollovers.
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5. Rollovers
A "rollover" is the tax-free transfer of a distribution from one Qualified
Plan to another. Distributions which are rolled over are not included in the
employee's gross income until some future time.
If any portion of the balance to the credit of an employee in a Section 401
plan or Section 403(b) plan is paid to the employee in an "eligible rollover
distribution" and the employee transfers any portion of the amount received to
an "eligible retirement plan," then the amount so transferred is not includable
in income. An "eligible rollover distribution" generally means any distribution
that is not one of a series of periodic payments made for the life of the
distributee or for a specified period of at least ten years. In addition, a
required minimum distribution will not qualify as an eligible rollover
distribution. A rollover must be completed within 60 days after receipt of the
distribution.
In the case of a Section 401 plan, an "eligible retirement plan" will be
another retirement plan qualified under Code Section 401 or an individual
retirement account or annuity under Code Section 408. With respect to a Section
403(b) plan, an "eligible retirement plan" will be another Section 403(b) plan
or an individual retirement account or annuity described in Code Section 408.
A Section 401 plan and a Section 403(b) plan must generally provide a
participant receiving an eligible rollover distribution, the option to have the
distribution transferred directly to another eligible retirement plan.
The owner of an IRA may make a tax-free rollover of any portion of the IRA.
The rollover must be completed within 60 days of the distribution and generally
may only be made to another IRA. However, an individual may receive a
distribution from his or her IRA and within 60 days roll it over into a
retirement plan qualified under Code Section 401(a) if all of the funds in the
IRA are attributable to a rollover from a Section 401(a) plan. Similarly, a
distribution from an IRA may be rolled over to a Section 403(b) plan only if all
of the funds in the IRA are attributable to a rollover from a Section 403(b)
annuity.
6. Tax Penalties
PREMATURE DISTRIBUTION TAX. Distributions from a Qualified Plan before the
participant reaches age 59 1/2 are generally subject to an additional tax equal
to 10 percent of the taxable portion of the distribution. The 10 percent penalty
tax does not apply to distributions: (i) made on or after the death of the
employee; (ii) attributable to the employee's disability; (iii) which are part
of a series of substantially equal periodic payments made (at least annually)
for the life (or life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and a designated beneficiary and which begin
after the employee terminates employment; (iv) made to an employee after
termination of employment after reaching age 55; (v) made to pay for certain
medical expenses; (vi) that are exempt withdrawals of an excess contribution;
(vii) that are rolled over or transferred in accordance with Code requirements;
or (viii) that are transferred pursuant to a decree of divorce or separate
maintenance or written instrument incident to such a decree.
The exception to the 10 percent penalty tax described in item (iv) above is
not applicable to IRAs. However, distributions from an IRA to unemployed
individuals can be made without application of the 10 percent penalty tax to pay
health insurance premiums in certain cases. In addition, the 10 percent penalty
tax is generally not applicable to distributions from a Section 457 plan.
MINIMUM DISTRIBUTION TAX. If the amount distributed from a Qualified Plan
is less than the minimum required distribution for the year, the participant is
subject to a 50 percent tax on the amount that was not properly distributed.
EXCESS DISTRIBUTION ACCUMULATION TAX. If the aggregate distributions from
all Qualified Plans (other than Section 457 plans) with respect to an individual
in a calendar year exceed the greater of (i) $150,000, or (ii) $112,500, as
indexed for inflation ($160,000 for 1997), a penalty tax of 15 percent is
generally imposed (in addition to any ordinary income tax) on the excess portion
of the distribution. In addition, a 15 percent tax is imposed on the "excess
retirement accumulations" of an individual whose aggregate retirement benefits
exceed the value of a hypothetical life annuity determined as of the date of his
or her death. The 15 percent excise tax on excess distributions will not apply
to withdrawals during calendar years 1997, 1998 and 1999.
7. Withholding
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of ten or more years are generally
subject to voluntary income tax withholding. The amount withheld on such
periodic distributions is determined at the rate applicable to wages. The
recipient of a periodic distribution may generally elect not to have withholding
apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than ten years) from a Qualified Plan (other than IRAs and
Section 457 plans) are generally subject to mandatory 20 percent income tax
withholding. However, no withholding is imposed if the distribution is
transferred directly to another eligible Qualified Plan. Nonperiodic
distributions from an IRA 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.
The above description of the federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contractowner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and
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competent tax adviser, with regard to the suitability of the Contract as an
investment vehicle for the Qualified Plan.
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 percent the
first year to 0 percent 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 a
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 SBL has 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.
33
<PAGE>
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 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 as 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 18).
Annuity options available for Variable Annuities (see "Optional Annuity
Forms," page 25) 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 percent. Under Option 6 (Fixed Installment Option), interest on any
unpaid balance allocated to a Guaranteed Annuity will be at least 2.5 percent
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 24) 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 percent 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 percent 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
LIMITS ON PURCHASE PAYMENTS PAID UNDER TAX QUALIFIED RETIREMENT PLANS..... 6
Section 401............................................................. 6
Section 403(b).......................................................... 6
Section 408............................................................. 6
Section 457............................................................. 7
ASSIGNMENT................................................................ 7
DISTRIBUTION OF THE CONTRACTS............................................. 7
SAFEKEEPING OF VARIFLEX ACCOUNT ASSETS.................................... 7
STATE REGULATION.......................................................... 7
RECORDS AND REPORTS....................................................... 7
LEGAL MATTERS............................................................. 8
EXPERTS................................................................... 8
OTHER INFORMATION......................................................... 8
FINANCIAL STATEMENTS...................................................... 9
34
<PAGE>
VARIFLEX
VARIABLE ANNUITY CONTRACTS
ISSUED BY--
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON, TOPEKA, KANSAS 66636-0001
(913) 295-3000
THE DATE OF THIS SUPPLEMENT IS MAY 1, 1997
This Supplement updates certain information in the Prospectus dated April 30,
1996, as supplemented July 1, 1996, for Variflex Variable Annuity Contracts
offered by Security Benefit Life Insurance Company. Please read this Supplement
carefully. You should attach this Supplement to your copy of the Prospectus and
retain both for future reference. You may obtain an additional copy of the
Prospectus, free of charge, by calling 1-800-888-2461, extension 3112.
The "SUMMARY OF EXPENSES," page 5, is updated below:
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
CONTRACTOWNER TRANSACTION EXPENSES
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
SEPARATE ACCOUNT ANNUAL FEE (as a percentage of average account value)
Mortality and Expense Risk Fees......................................................................................... 1.2%
Account Fees and Expenses............................................................................................... 0.0%
Total Separate Account Annual Expenses ................................................................................. 1.2%
</TABLE>
SBL FUND ANNUAL EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
HIGH
GROWTH- MONEY WORLDWIDE GRADE SOCIAL
GROWTH INCOME MARKET EQUITY INCOME AWARENESS
(SERIES A) (SERIES B) (SERIES C) (SERIES D) (SERIES E) (SERIES S)
<S> <C> <C> <C> <C> <C> <C>
Management Fees
(after fee waiver) .75% .75% .50% 1.00% .75% .75%
Other Expenses (after
expense reimbursement) .08% .09% .08% .30% .08% .09%
--- --- --- ---- --- ---
Total Annual Expenses(3) .83% .84% .58% 1.30% .83% .84%
</TABLE>
<TABLE>
<CAPTION>
GLOBAL SPECIALIZE MANAGED
EMERGING AGGRESSIVE ASSET ASSET EQUITY
GROWTH BOND ALLOCATION ALLOCATION INCOME
(SERIES J) (SERIES K) (SERIES M) (SERIES N) (SERIES O)
<S> <C> <C> <C> <C> <C>
Management Fees
(after fee waiver) .75% .00% 1.00% 1.00% 1.00%
Other Expenses (after
expense reimbursement) .09% .84% .34% .45% .58%
--- --- ---- ---- ----
Total Annual Expenses(3) .84% .84% 1.34% 1.45% 1.58%
</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) During the fiscal year ended December 31, 1996, the Investment Manager
waived the management fees of Series K and, during the fiscal year ending
December 31, 1997, the Investment Manager will waive the management fees of
Series K; absent such expense waiver, the management fee of Series K would
have been .75%. There can be no assurance that the Investment Manager will
continue to waive the Series' management fees after December 31, 1997.
- --------------------------------------------------------------------------------
THIS SUPPLEMENT SHOULD BE RETAINED FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
1
<PAGE>
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............................................. 102 126 155 248
GROWTH-INCOME SERIES...................................... 102 126 156 249
MONEY MARKET SERIES....................................... 99 119 143 222
WORLDWIDE EQUITY SERIES................................... 107 139 179 295
HIGH GRADE INCOME SERIES.................................. 102 126 155 248
SOCIAL AWARENESS SERIES................................... 102 126 156 249
EMERGING GROWTH SERIES.................................... 102 126 156 249
GLOBAL AGGRESSIVE BOND SERIES............................. 102 126 156 249
SPECIALIZED ASSET ALLOCATION SERIES....................... 107 140 181 299
MANAGED ASSET ALLOCATION SERIES........................... 108 144 186 310
EQUITY INCOME SERIES...................................... 109 147 193 322
</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............................................. 22 67 115 248
GROWTH-INCOME SERIES...................................... 22 68 116 249
MONEY MARKET SERIES....................................... 19 60 103 222
WORLDWIDE EQUITY SERIES................................... 27 81 139 295
HIGH GRADE INCOME SERIES.................................. 22 67 115 248
SOCIAL AWARENESS SERIES................................... 22 68 116 249
EMERGING GROWTH SERIES.................................... 22 68 116 249
GLOBAL AGGRESSIVE BOND SERIES............................. 22 68 116 249
SPECIALIZED ASSET ALLOCATION SERIES....................... 27 83 141 299
MANAGED ASSET ALLOCATION SERIES........................... 28 86 146 310
EQUITY INCOME SERIES...................................... 29 90 153 322
</TABLE>
EXAMPLE: VARIFLEX CONTRACTS - 401(K) AND 408(K) (SOLD PRIOR TO MAY 1, 1990)
If you do not 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............................................. 102 147 188 254
GROWTH-INCOME SERIES...................................... 103 148 189 255
MONEY MARKET SERIES....................................... 100 140 176 229
WORLDWIDE EQUITY SERIES................................... 107 160 212 301
HIGH GRADE INCOME SERIES.................................. 102 147 188 254
SOCIAL AWARENESS SERIES................................... 103 148 189 255
EMERGING GROWTH SERIES.................................... 103 148 189 255
GLOBAL AGGRESSIVE BOND SERIES............................. 103 148 189 255
SPECIALIZED ASSET ALLOCATION SERIES....................... 108 161 214 305
MANAGED ASSET ALLOCATION SERIES........................... 109 164 219 316
EQUITY INCOME SERIES...................................... 110 168 225 328
</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............................................. 22 69 118 254
GROWTH-INCOME SERIES...................................... 23 69 119 255
MONEY MARKET SERIES....................................... 20 62 106 229
WORLDWIDE EQUITY SERIES................................... 27 83 142 301
HIGH GRADE INCOME SERIES.................................. 22 69 118 254
SOCIAL AWARENESS SERIES................................... 23 69 119 255
EMERGING GROWTH SERIES.................................... 23 69 119 255
GLOBAL AGGRESSIVE BOND SERIES............................. 23 69 119 255
SPECIALIZED ASSET ALLOCATION SERIES....................... 28 84 144 305
MANAGED ASSET ALLOCATION SERIES........................... 29 88 149 316
EQUITY INCOME SERIES...................................... 30 92 156 328
</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 percent 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 this Prospectus. For a more
complete description of the various costs and expenses of the Fund, see the
prospectus for SBL Fund.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
The "CONDENSED FINANCIAL INFORMATION" set forth below has been updated to
include financial information for the period ended December 31, 1996:
CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit
values at the beginning and end of each period as well as ending accumulation
units outstanding for Qualified and Non-Qualified Contracts under each Series of
Variflex.
<TABLE>
<CAPTION>
1996 1995(d)(e) 1994 1993 1992(c) 1991(a)(b) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GROWTH SERIES (SERIES A)
Accumulation unit value:
Beginning of period $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41 $12.77
End of period $45.76 $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41
Accumulation units
outstanding at
the end of period 10,310,079 9,203,332 7,723,910 6,900,722 6,640,177 5,420,372 4,616,955 3,191,257 3,032,118 3,620,263
GROWTH-INCOME SERIES (SERIES B)
Accumulation unit value:
Beginning of period $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81 $14.46
End of period $46.58 $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81
Accumulation units
outstanding at
the end of period 15,264,292 14,963,215 14,312,801 13,236,948 11,381,462 8,753,337 6,449,776 4,613,783 3,388,090 2,932,678
MONEY MARKET SERIES (SERIES C)
Accumulation unit
value:
Beginning of period $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56 $11.94
End of period $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56
Accumulation units
outstanding at
the end of period 3,252,140 2,989,809 3,578,026 2,680,809 2,373,251 2,161,924 1,913,734 3,216,085 2,774,046 962,056
WORLDWIDE EQUITY SERIES (SERIES D)
Accumulation unit value:
Beginning of period $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.18
End of period $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74 $11.33
Accumulation units
outstanding at
the end of period 11,881,450 10,236,349 9,361,197 5,863,967 2,070,715 917,833 466,703 607,650 633,816 648,066
HIGH GRADE INCOME SERIES (SERIES E)
Accumulation unit value:
Beginning of period $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17 $12.04
End of period $21.69 $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17
Accumulation units
outstanding at
the end of period 3,673,833 3,912,046 3,891,426 3,731,587 2,912,605 2,255,909 1,673,154 1,403,313 1,037,740 1,013,973
SOCIAL AWARENESS SERIES (SERIES S)
Accumulation unit value:
Beginning of period $15.97 $12.65 $13.31 $12.04 $10.47 $10.00 --- --- --- ---
End of period $18.75 $15.97 $12.65 $13.31 $12.04 $10.47 --- --- --- ---
Accumulation units
outstanding at
the end of period 2,083,090 1,615,845 1,344,063 993,233 513,953 127,699 --- --- --- ---
EMERGING GROWTH SERIES (SERIES J)
Accumulation unit value:
Beginning of period $15.46 $13.10 $13.97 $12.44 $10.00 --- --- --- --- ---
End of period $18.03 $15.46 $13.10 $13.97 $12.44 --- --- --- --- ---
Accumulation units
outstanding at
the end of period 5,563,881 4,387,739 3,947,047 2,131,858 455,105 --- --- --- --- ---
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
<TABLE>
<CAPTION>
1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GLOBAL AGGRESSIVE BOND SERIES (SERIES K)
Accumulation unit value:
Beginning of period $10.69 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.69 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 306,339 129,589 --- --- --- --- --- --- --- ---
SPECIALIZED ASSET ALLOCATION SERIES (SERIES M)
Accumulation unit value:
Beginning of period $10.64 $10.00 --- --- --- --- --- --- --- ---
End of period $12.01 $10.64 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 1,274,106 611,652 --- --- --- --- --- --- --- ---
MANAGED ASSET ALLOCATION SERIES (SERIES N)
Accumulation unit value:
Beginning of period $10.66 $10.00 --- --- --- --- --- --- --- ---
End of period $11.87 $10.66 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 626,179 295,053 --- --- --- --- --- --- --- ---
EQUITY INCOME SERIES (SERIES O)
Accumulation unit value:
Beginning of period $11.62 $10.00 --- --- --- --- --- --- --- ---
End of period $13.78 $11.62 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at
the end of period 2,016,966 604,325 --- --- --- --- --- --- --- ---
1996 1995(d)(e) 1994 1993 1992(c) 1991(a)(b) 1990 1989 1988 1987
NON-QUALIFIED CONTRACTS
GROWTH SERIES (SERIES A)
Accumulation unit value:
Beginning of period $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41 $12.76
End of period $45.74 $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41
Accumulation units
outstanding at the
end of period 2,575,426 2,306,163 1,578,797 1,483,618 1,766,896 1,328,865 952,806 594,856 493,463 664,251
GROWTH-INCOME SERIES (SERIES B)
Accumulation unit value:
Beginning of period $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80 $14.45
End of period $46.54 $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80
Accumulation units
outstanding at the
end of period 3,721,884 3,669,299 3,515,364 3,262,600 2,560,986 1,774,534 1,293,121 1,000,815 836,735 801,802
MONEY MARKET SERIES (SERIES C)
Accumulation unit value:
Beginning of period $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55 $11.94
End of period $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55
Accumulation units
outstanding at the
end of period 1,681,230 1,469,153 2,475,349 1,913,212 1,031,855 1,000,378 954,107 846,414 853,615 422,130
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
<TABLE>
<CAPTION>
1996 1995(d)(e) 1994 1993 1992(c) 1991(a)(b) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-QUALIFIED CONTRACTS
WORLDWIDE EQUITY SERIES (SERIES D)
Accumulation unit value:
Beginning of period $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33 $12.19
End of period $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74 $11.33
Accumulation units
outstanding at the
end of period 3,484,411 3,140,486 2,803,304 2,150,932 678,110 279,878 125,010 211,920 214,723 225,118
HIGH GRADE INCOME SERIES (SERIES E)
Accumulation unit value:
Beginning of period $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17 $12.03
End of period $21.67 $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17
Accumulation units
outstanding at the
end of period 1,377,342 1,325,159 1,392,830 1,290,268 962,775 784,496 582,285 519,624 419,410 420,483
SOCIAL AWARENESS SERIES (SERIES S)
Accumulation unit value:
Beginning of period $15.98 $12.66 $13.31 $12.04 $10.47 $10.00 --- --- --- ---
End of period $18.75 $15.98 $12.66 $13.31 $12.04 $10.47 --- --- --- ---
Accumulation units
outstanding at the
end of period 746,852 612,235 543,287 389,861 226,145 98,344 --- --- --- ---
EMERGING GROWTH SERIES (SERIES J)
Accumulation unit value:
Beginning of period $15.46 $13.09 $13.96 $12.44 $10.00 --- --- --- --- ---
End of period $18.03 $15.46 $13.09 $13.96 $12.44 --- --- --- --- ---
Accumulation units
outstanding at the
end of period 1,559,302 1,248,987 1,211,099 610,801 68,338 --- --- --- --- ---
GLOBAL AGGRESSIVE BOND SERIES (SERIES K)
Accumulation unit value:
Beginning of period $10.69 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.69 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period 178,818 74,528 --- --- --- --- --- --- --- ---
SPECIALIZED ASSET ALLOCATION SERIES (SERIES M)
Accumulation unit value:
Beginning of period $10.64 $10.00 --- --- --- --- --- --- --- ---
End of period $12.00 $10.64 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period 532,893 297,967 --- --- --- --- --- --- --- ---
MANAGED ASSET ALLOCATION SERIES (SERIES N)
Accumulation unit value:
Beginning of period $10.66 $10.00 --- --- --- --- --- --- --- ---
End of period $11.87 $10.66 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period 374,276 226,555 --- --- --- --- --- --- --- ---
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
<TABLE>
<CAPTION>
1996 1995(d)(e) 1994 1993 1992(c) 1991(a)(b) 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-QUALIFIED CONTRACTS
EQUITY INCOME SERIES (SERIES O)
Accumulation unit value:
Beginning of period $11.62 $10.00 --- --- --- --- --- --- --- ---
End of period $13.78 $11.62 --- --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period 710,206 234,242 --- --- --- --- --- --- --- ---
</TABLE>
(a) Social Awareness Series of Variflex was first publicly offered on May 1,
1991.
(b) 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.
(c) Emerging Growth Series of Variflex was first publicly offered on October 1,
1992.
(d) Global Aggressive Bond, Specialized Asset Allocation, Managed Asset
Allocation and Equity Income Series were first publicly offered on June 1,
1995.
(e) 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.
This supplement is preceded or accompanied by the 1996 Annual Report to
Contractowners which contains audited financial statements of the Variflex
separate account for the year ended December 31, 1996.
- --------------------------------------------------------------------------------
6
<PAGE>
The Prospectus is updated by replacing the first and last paragraphs under "SBL
FUND," page 9, with the following:
The Fund is a diversified, open-end management investment company. The
assets of the Fund are managed by Security Management Company, LLC (the
"Investment Manager"), the investment adviser to the Fund, under the
supervision of the Fund's board of directors.
The Investment Adviser has engaged Lexington Management Corporation,
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, and MFR Advisors,
Inc., One Liberty Plaza, 46th Floor, New York, New York 10006 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, to provide certain analytic
research services with respect to Series M.
The description of Series S under "SBL FUND," page 9, is replaced with the
following:
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
capital appreciation by investing 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.
The last paragraph under "CONTINGENT DEFERRED SALES CHARGE" which begins on page
14, is replaced with the following:
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 percent 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 percent, 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 amounts derived
indirectly from the Actuarial Risk Fee. SBL anticipates sales expenses will
be greater than the contingent deferred sales charge.
The last paragraph under "(C) ACTUARIAL RISK FEES," page 15, is replaced with
the following:
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 percent. 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. SBL may ultimately realize a profit from
this fee to the extent it is not needed to cover mortality and
administrative expenses, but SBL may realize a loss to the extent the fee
is not sufficient. SBL may use any profit derived from this fee for any
lawful purpose, including distribution expenses.
The explanation of "LOANS AVAILABLE FROM CERTAIN QUALIFIED CONTRACTS," page 18,
is replaced with the following:
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.
SBL has developed and plans to install new loan processing procedures in
July of 1997, subject to state insurance department approvals. Described
below are the loan procedures which are currently in effect. This is
followed by a description of how loans will be administered after
implementation of the new procedures.
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 percent 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 percent of the Contract Value. Reference should
be made to the terms of the particular Qualified Plan for any additional
loan restrictions.
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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 percent, 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 percent. 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 percent.
Loans must be repaid within five years and before the Annuity
Commencement Date, unless SBL 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.
Outlined below is a description of how loans will be administered after
implementation of the new procedures. The minimum loan that may be taken is
$1,000. The maximum loan that can be taken is generally equal to 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 percent of the Contract Value or $10,000,
whichever is greater. However, an amount may not be borrowed which exceeds
the annuity's total value minus the amount needed as security for the loan
as described below. The Internal Revenue Code requires aggregation of all
loans made to an individual employee under a single employer plan. However,
since SBL has no information concerning outstanding loans with other
providers, we will only use information available under annuity contracts
issued by us. In addition, 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 in an
amount equal to the loan amount is transferred from the Variflex Series
and/or the General Account into an account called the "Loan Account." In
addition, 10 percent of the loaned amount will be held in the General
Account as security for the loan. Amounts allocated to the Loan Account
earn 3.5 percent, the minimum rate of interest guaranteed under the General
Account. Amounts acting as security for the loan in the General Account
will earn the current rate of interest.
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
5.50 percent. 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 percent.
Loans must be repaid within five years, unless SBL determines that the
loan is to be used to acquire a principal residence of the Owner, in which
case the loan must be repaid within 30 years. Loan payments must be made at
least quarterly and may be prepaid at any time. Upon receipt of a loan
payment, SBL 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. The
amount held as security for the loan will also be reduced by each loan
payment so that the security is again equal to 10 percent of the
outstanding loan balance immediately after the loan payment is made.
However, amounts which are no longer needed as security for the loan will
not automatically be allocated back among the General Account and/or Series
in accordance with the Contractowner's Purchase Payment instructions.
If any required loan payment is not made, within 30 days of the due
date for loans with a monthly repayment schedule or within 90 days of the
due date for loans with a quarterly repayment schedule, the TOTAL
OUTSTANDING LOAN BALANCE will be deemed to be in default, and the entire
loan balance, with any accrued interest, will be reported as income to the
Internal Revenue Series ("IRS"). Once a loan has gone into default,
regularly scheduled payments will not be accepted, and no new loans will be
allowed while a loan is in default. Interest will continue to accrue on a
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loan in default and if such interest is not paid by December 31st of each
year, it will be added to the outstanding balance of the loan and will be
reported to the IRS. Contract Value equal to the amount of the accrued
interest will be transferred to the Loan Account. If a loan continues to be
in default, the total outstanding balance will be deducted from Contract
Value upon the Contractowner's attained age 59 1/2. The Contract will be
automatically terminated if the outstanding loan balance on a loan in
default equals or exceeds the amount for which the Contract may be
surrendered, plus any withdrawal charge. The proceeds from the Contract
will be used to repay the debt and any applicable withdrawal charge.
Because of the adverse tax consequences associated with defaulting on a
loan, a Contractowner should carefully consider his or her ability to repay
the loan and should consult with a tax advisor before requesting a loan.
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.
"FEDERAL TAX MATTERS," page 22, is replaced with the following:
INTRODUCTION
The Contract described in this Prospectus is designed for use by
individuals in retirement plans which may or may not be Qualified Plans
under the provisions of the Internal Revenue Code ("Code"). The ultimate
effect of federal income taxes on the amounts held under a Contract, on
annuity payments, and on the economic benefits to the Owner, the Annuitant,
and the Beneficiary or other payee will depend upon the type of retirement
plan, if any, for which the Contract is purchased, the tax and employment
status of the individuals involved and a number of other factors. The
discussion contained herein and in the Statement of Additional Information
is general in nature and is not intended to be an exhaustive discussion of
all questions that might arise in connection with a Contract. It is based
upon SBL's understanding of the present federal income tax laws as
currently interpreted by the Internal Revenue Service ("IRS"), and is not
intended as tax advice. No representation is made regarding the likelihood
of continuation of the present federal income tax laws or of the current
interpretations by the IRS or the courts. Future legislation may affect
annuity contracts adversely. Moreover, no attempt has been made to consider
any applicable state or other laws. Because of the inherent complexity of
the tax laws and the fact that tax results will vary according to the
particular circumstances of the individual involved and, if applicable, the
Qualified Plan, a person should consult with a qualified tax adviser
regarding the purchase of a Contract, the selection of an Annuity Option
under a Contract, the receipt of annuity payments under a Contract or any
other transaction involving a Contract. SBL DOES NOT MAKE ANY GUARANTEE
REGARDING THE TAX STATUS OF, OR TAX CONSEQUENCES ARISING FROM, ANY CONTRACT
OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF SBL AND THE SEPARATE ACCOUNT
GENERAL
SBL intends to be taxed as a life insurance company under Part I,
Subchapter L of the Code. Because the operations of the Separate Account
form a part of SBL, SBL will be responsible for any federal income taxes
that become payable with respect to the income of the Separate Account and
its Subaccounts.
CHARGE FOR SBL TAXES
A charge may be made for any federal taxes incurred by SBL that are
attributable to the Separate Account, the Subaccounts or to the operations
of SBL with respect to the Contracts or attributable to payments, premiums,
or acquisition costs under the Contracts. SBL will review the question of a
charge to the Separate Account, the Subaccounts or the Contracts for SBL's
federal taxes periodically. Charges may become necessary if, among other
reasons, the tax treatment of SBL or of income and expenses under the
Contracts is ultimately determined to be other than what SBL currently
believes it to be, if there are changes made in the federal income tax
treatment of variable annuities at the insurance company level, or if there
is a change in SBL's tax status.
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DIVERSIFICATION STANDARDS
Each Series of the Mutual Fund will be required to adhere to
regulations adopted by the Treasury Department pursuant to Section 817(h)
of the Code prescribing asset diversification requirements for investment
companies whose shares are sold to insurance company separate accounts
funding variable contracts. Pursuant to these regulations, on the last day
of each calendar quarter (or on any day within 30 days thereafter), no more
than 55 percent of the total assets of a Series may be represented by any
one investment, no more than 70 percent may be represented by any two
investments, no more than 80 percent may be represented by any three
investments, and no more than 90 percent may be represented by any four
investments. For purposes of Section 817(h), securities of a single issuer
generally are treated as one investment but obligations of the U.S.
Treasury and each U.S. Governmental agency or instrumentality generally are
treated as securities of separate issuers. The Separate Account, through
the Series, intends to comply with the diversification requirements of
Section 817(h).
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of
the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable contractowner's gross income. The IRS has stated
in published rulings that a variable contractowner will be considered the
owner of separate account assets if the contractowner possesses incidents
of ownership in those assets, such as the ability to exercise investment
control over the assets. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification,
that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated
asset account may cause the investor (i.e., the policyowner), rather than
the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by
way of regulations or rulings on the "extent to which policyholders may
direct their investments to particular subaccounts without being treated as
owners of the underlying assets." As of the date of this Prospectus, no
such guidance has been issued.
The ownership rights under the Contract are similar to, but different
in certain respects from, those described by the IRS in rulings in which it
was determined that policyowners were not owners of separate account
assets. For example, the Contractowner has additional flexibility in
allocating purchase payments and Contract Values. These differences could
result in a Contractowner being treated as the owner of a pro rata portion
of the assets of the Separate Account. In addition, SBL does not know what
standards will be set forth, if any, in the regulations or rulings which
the Treasury Department has stated it expects to issue. SBL therefore
reserves the right to modify the Contract, as it deems appropriate, to
attempt to prevent a Contractowner from being considered the owner of a pro
rata share of the assets of the Separate Account. Moreover, in the event
that regulations or rulings are adopted, there can be no assurance that the
Series will be able to operate as currently described in the Prospectus, or
that the Mutual Fund will not have to change any Series' investment
objective or investment policies.
INCOME TAXATION OF ANNUITIES IN GENERAL -- NON-QUALIFIED PLANS
Section 72 of the Code governs the taxation of annuities. In general, a
Contractowner is not taxed on increases in value under an annuity contract
until some form of distribution is made under the contract. However, the
increase in value may be subject to tax currently under certain
circumstances. See "Contracts Owned by Non-Natural Persons" on page 28 and
"Diversification Standards" on page 26. Withholding of federal income taxes
on all distributions may be required unless a recipient who is eligible
elects not to have any amounts withheld and properly notifies SBL of that
election.
1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
withdrawal (including systematic withdrawals) from a Contract prior to the
Annuity Start Date generally will be treated as gross income to the extent
that the cash value of the Contract immediately before the withdrawal
(determined without regard to any surrender charge in the case of a partial
withdrawal) exceeds the "investment in the contract." The "investment in
the contract" is that portion, if any, of purchase payments paid under a
Contract less any distributions received previously under the Contract that
are excluded from the recipient's gross income. The taxable portion is
taxed at ordinary income tax rates. For purposes of this rule, a pledge or
assignment of a contract is treated as a payment received on account of a
partial withdrawal of a Contract.
2. Surrenders or Withdrawals on or after the Annuity Start Date
Upon a complete surrender, the receipt is taxable to the extent that
the cash value of the Contract exceeds the investment in the Contract. The
taxable portion of such payments will be taxed at ordinary income tax
rates.
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For fixed annuity payments, the taxable portion of each payment
generally is determined by using a formula known as the "exclusion ratio,"
which establishes the ratio that the investment in the Contract bears to
the total expected amount of annuity payments for the term of the Contract.
That ratio is then applied to each payment to determine the non-taxable
portion of the payment. The remaining portion of each payment is taxed at
ordinary income rates. For variable annuity payments, the taxable portion
of each payment is determined by using a formula known as the "excludable
amount," which establishes the non-taxable portion of each payment. The
non-taxable portion is a fixed dollar amount for each payment, determined
by dividing the investment in the Contract by the number of payments to be
made. The remainder of each variable annuity payment is taxable. Once the
excludable portion of annuity payments to date equals the investment in the
Contract, the balance of the annuity payments will be fully taxable.
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10 percent of the
portion of such amount which is includable in gross income. However, the
penalty tax is not applicable to withdrawals: (i) made on or after the
death of the owner (or where the owner is not an individual, the death of
the "primary annuitant," who is defined as the individual the events in
whose life are of primary importance in affecting the timing and amount of
the payout under the Contract); (ii) attributable to the taxpayer's
becoming totally disabled within the meaning of Code Section 72(m)(7);
(iii) which are part of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy)
of the taxpayer, or the joint lives (or joint life expectancies) of the
taxpayer and his or her beneficiary; (iv) from certain qualified plans; (v)
under a so-called qualified funding asset (as defined in Code Section
130(d)); (vi) under an immediate annuity contract; or (vii) which are
purchased by an employer on termination of certain types of qualified plans
and which are held by the employer until the employee separates from
service.
If the penalty tax does not apply to a surrender or withdrawal as a
result of the application of item (iii) above, and the series of payments
are subsequently modified (other than by reason of death or disability),
the tax for the first year in which the modification occurs will be
increased by an amount (determined by the regulations) equal to the tax
that would have been imposed but for item (iii) above, plus interest for
the deferral period, if the modification takes place (a) before the close
of the period which is five years from the date of the first payment and
after the taxpayer attains age 59 1/2, or (b) before the taxpayer reaches
age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must provide
the following two distribution rules: (a) if any owner dies on or after the
Annuity Start Date, and before the entire interest in the Contract has been
distributed, the remainder of the owner's interest will be distributed at
least as quickly as the method in effect on the owner's death; and (b) if
any owner dies before the Annuity Start Date, the entire interest in the
Contract must generally be distributed within five years after the date of
death, or, if payable to a designated beneficiary, must be annuitized over
the life of that designated beneficiary or over a period not extending
beyond the life expectancy of that beneficiary, commencing within one year
after the date of death of the owner. If the sole designated beneficiary is
the spouse of the deceased owner, the Contract (together with the deferral
of tax on the accrued and future income thereunder) may be continued in the
name of the spouse as owner.
Generally, for purposes of determining when distributions must begin
under the foregoing rules, where an owner is not an individual, the primary
annuitant is considered the owner. In that case, a change in the primary
annuitant will be treated as the death of the owner. Finally, in the case
of joint owners, the distribution-at-death rules will be applied by
treating the death of the first owner as the one to be taken into account
in determining generally when distributions must commence, unless the sole
Beneficiary is the deceased owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified Contracts prior to the Annuity
Start Date will trigger tax on the gain on the Contract, with the donee
getting a stepped-up basis for the amount included in the donor's income.
The 10 percent penalty tax and gift tax also may be applicable. This
provision does not apply to transfers between spouses or incident to a
divorce.
3. Contracts Owned by Non-Natural Persons
If the Contract is held by a non-natural person (for example, a
corporation) the income on that Contract (generally the increase in net
surrender value less the purchase payments) is includable in taxable income
each year. The rule does not apply where the Contract is acquired by the
estate of a decedent, where the Contract is held by certain types of
retirement plans, where the Contract is a qualified funding asset for
structured settlements, where the Contract is purchased on behalf of an
employee upon termination of a
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qualified plan, and in the case of an immediate annuity. An annuity
contract held by a trust or other entity as agent for a natural person is
considered held by a natural person.
4. Multiple Contract Rule
For purposes of determining the amount of any distribution under Code
Section 72(e) (amounts not received as annuities) that is includable in
gross income, all Non-Qualified annuity contracts issued by the same
insurer to the same Contractowner during any calendar year are to be
aggregated and treated as one contract. Thus, any amount received under any
such contract prior to the contract's Annuity Start Date, such as a partial
surrender, dividend, or loan, will be taxable (and possibly subject to the
10 percent penalty tax) to the extent of the combined income in all such
contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this rule.
It is possible that, under this authority, the Treasury Department may
apply this rule to amounts that are paid as annuities (on and after the
Annuity Start Date) under annuity contracts issued by the same company to
the same owner during any calendar year. In this case, annuity payments
could be fully taxable (and possibly subject to the 10 percent penalty tax)
to the extent of the combined income in all such contracts and regardless
of whether any amount would otherwise have been excluded from income
because of the "exclusion ratio" under the contract.
5. Possible Tax Changes
In recent years, legislation has been proposed that would have
adversely modified the federal taxation of certain annuities. Although as
of the date of this Prospectus, it does not appear that Congress is
considering any legislation regarding the taxation of annuities, there is
always the possibility that the tax treatment of annuities could change by
legislation or other means (such as IRS regulations, revenue rulings, and
judicial decisions). Moreover, although unlikely, it is also possible that
any legislative change could be retroactive (that is, effective prior to
the date of such change).
6. Transfers, Assignments or Exchanges of a Contract
A transfer of ownership of a Contract, the designation of an Annuitant,
Payee or other Beneficiary who is not also the Owner, the selection of
certain Annuity Start Dates or the exchange of a Contract may result in
certain tax consequences to the Owner that are not discussed herein. An
Owner contemplating any such transfer, assignment, selection or exchange
should contact a competent tax adviser with respect to the potential
effects of such a transaction.
QUALIFIED PLANS
The Contract may be used with Qualified Plans that meet the
requirements of Section 401, 403(b), 408 or 457 of the Code. The tax rules
applicable to participants in such Qualified Plans vary according to the
type of plan and the terms and conditions of the plan itself. No attempt is
made herein to provide more than general information about the use of the
Contract with the various types of Qualified Plans. These Qualified Plans
may permit the purchase of the Contracts to accumulate retirement savings
under the plans. Adverse tax or other legal consequences to the plan, to
the participant or to both may result if this Contract is assigned or
transferred to any individual as a means to provide benefit payments,
unless the plan complies with all legal requirements applicable to such
benefits prior to transfer of the Contract. Contractowners, Annuitants, and
Beneficiaries, are cautioned that the rights of any person to any benefits
under such Qualified Plans may be subject to the terms and conditions of
the plans themselves or limited by applicable law, regardless of the terms
and conditions of the Contract issued in connection therewith. For example,
SBL may accept beneficiary designations and payment instructions under the
terms of the Contract without regard to any spousal consents that may be
required under the Employee Retirement Income Security Act of 1974 (ERISA).
Consequently, a Contractowner's Beneficiary designation or elected payment
option may not be enforceable.
The amounts that may be contributed to Qualified Plans are subject to
limitations that vary depending on the type of Plan. In addition, early
distributions from most Qualified Plans may be subject to penalty taxes, or
in the case of distributions of amounts contributed under salary reduction
agreements, could cause the Plan to be disqualified. Furthermore,
distributions from most Qualified Plans are subject to certain minimum
distribution rules. Failure to comply with these rules could result in
disqualification of the Plan or subject the Owner or Annuitant to penalty
taxes. As a result, the minimum distribution rules may limit the
availability of certain Annuity Options to certain Annuitants and their
beneficiaries. These requirements may not be incorporated into SBL's
Contract administration procedures. Owners, participants and beneficiaries
are responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Section 401
Code Section 401 permits employers to establish various types of
retirement plans (e.g., pension, profit
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sharing and 401(k) plans) for their employees. For this purpose,
self-employed individuals (proprietors or partners operating a trade or
business) are treated as employees and therefore eligible to participate in
such plans. Retirement plans established in accordance with Section 401 may
permit the purchase of Contracts to provide benefits thereunder.
In order for a retirement plan to be "qualified" under Code Section
401, it must: (i) meet certain minimum standards with respect to
participation, coverage and vesting; (ii) not discriminate in favor of
"highly compensated" employees; (iii) provide contributions or benefits
that do not exceed certain limitations; (iv) prohibit the use of plan
assets for purposes other than the exclusive benefit of the employees and
their beneficiaries covered by the plan; (v) provide for distributions that
comply with certain minimum distribution requirements; (vi) provide for
certain spousal survivor benefits; and (vii) comply with numerous other
qualification requirements.
A retirement plan qualified under Code Section 401 may be funded by
employer contributions, employee contributions or a combination of both.
Plan participants are not subject to tax on employer contributions until
such amounts are actually distributed from the plan. Depending upon the
terms of the particular plan, employee contributions may be made on a
pre-tax or after-tax basis. In addition, plan participants are not taxed on
plan earnings derived from either employer or employee contributions until
such earnings are distributed.
Each employee's interest in a retirement plan qualified under Code
Section 401 must generally be distributed or begin to be distributed not
later than April 1 of the calendar year following the later of the calendar
year in which the employee reaches age 70 1/2 or retires ("required
beginning date"). Periodic distributions must not extend beyond the life of
the employee or the lives of the employee and a designated beneficiary (or
over a period extending beyond the life expectancy of the employee or the
joint life expectancy of the employee and a designated beneficiary).
If an employee dies before reaching his or her required beginning date,
the employee's entire interest in the plan must generally be distributed
within five years of the employee's death. However, the five-year rule will
be deemed satisfied, if distributions begin before the close of the
calendar year following the year of the employee's death to a designated
beneficiary and are made over the life of the beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary). If the
designated beneficiary is the employee's surviving spouse, distributions
may be delayed until the employee would have reached age 70 1/2.
If an employee dies after reaching his or her required beginning date,
the employee's interest in the plan must generally be distributed at least
as rapidly as under the method of distribution in effect at the time of the
employee's death.
Annuity payments distributed from a retirement plan qualified under
Code Section 401 are taxable under Section 72 of the Code. Section 72
provides that the portion of each payment attributable to contributions
that were taxable to the employee in the year made, if any, is excluded
from gross income as a return of the employee's investment. The portion so
excluded is determined by dividing the employee's investment in the plan by
(1) the number of anticipated payments determined under a table set forth
in Section 72 of the Code or (2) in the case of a contract calling for
installment payments, the number of monthly annuity payments under such
contract. The portion of each payment in excess of the exclusion amount is
taxable as ordinary income. Once the employee's investment has been
recovered, the full annuity payment will be taxable. If the employee should
die prior to recovering his or her entire investment, the unrecovered
investment will be allowed as a deduction on the employee's final return.
If the employee made no contributions that were taxable when made, the full
amount of each annuity payment is taxable as ordinary income.
A "lump-sum" distribution from a retirement plan qualified under Code
Section 401 is eligible for favorable tax treatment. A "lump-sum"
distribution means the distribution within one taxable year of the balance
to the credit of the employee which becomes payable: (i) on account of the
employee's death, (ii) after the employee attains age 59 1/2, (iii) on
account of the employee's termination of employment (in the case of a
common law employee only) or (iv) after the employee has become disabled
(in the case of a self-employed person only).
As a general rule, a lump-sum distribution is fully taxable as ordinary
income except for an amount equal to the employee's investment, if any,
which is recovered tax-free. However, special five-year averaging may be
available, provided the employee has reached age 59 1/2 and has not
previously elected to use income averaging. Special ten-year averaging and
capital-gains treatment may be available to an employee who reached age 50
before 1986.
Distributions from a retirement plan qualified under Code Section 401
may be eligible for a tax-free rollover to either another qualified
retirement plan or to an individual retirement account or annuity (IRA).
See "Rollovers" on page 31.
2. Section 403(b)
Code Section 403(b) 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, to exclude
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13
<PAGE>
the amount of purchase payments from gross income for tax purposes. The
Contract may be purchased in connection with a Section 403(b) annuity
program.
Section 403(b) annuities must generally be provided under a plan which
meets certain minimum participation, coverage, and nondiscrimination
requirements. Section 403(b) annuities are generally subject to minimum
distribution requirements similar to those applicable to retirement plans
qualified under Section 401 of the Code. See "Section 401" on page 29.
A Section 403(b) annuity contract may be purchased with employer
contributions, employee contributions or a combination of both. An
employee's rights under a Section 403(b) contract must be nonforfeitable.
Numerous limitations apply to the amount of contributions that may be made
to a Section 403(b) annuity contract. The applicable limit will depend
upon, among other things, whether the annuity contract is purchased with
employer or employee contributions.
Amounts used to purchase Section 403(b) annuities generally are
excludable from the taxable income of the employee. As a result, all
distributions from such annuities are normally taxable in full as ordinary
income to the employee.
A Section 403(b) annuity contract must prohibit the distribution of
employee contributions (including earnings thereon) until the employee: (i)
attains age 59 1/2, (ii) terminates employment; (iii) dies; (iv) becomes
disabled; or (v) incurs a financial hardship (earnings may not be
distributed in the event of hardship).
Distributions from a Section 403(b) annuity contract may be eligible
for a tax-free rollover to either another Section 403(b) annuity contract
or to an individual retirement account or annuity (IRA). See "Rollovers" on
page 31.
3. Section 408
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits
eligible individuals to establish individual retirement programs through
the purchase of Individual Retirement Annuities ("IRAs"). The Contract may
be purchased as an IRA.
IRAs are subject to limitations on the amount that may be contributed,
the persons who may be eligible and on the time when distributions must
commence. Depending upon the circumstances of the individual, contributions
to an IRA may be made on a deductible or non-deductible basis. IRAs may not
be transferred, sold, assigned, discounted or pledged as collateral for a
loan or other obligation. The annual premium for an IRA may not be fixed
and may not exceed $2,000 (except in the case of a rollover contribution).
Any refund of premium must be applied to the payment of future premiums or
the purchase of additional benefits.
Sale of the Contract for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the
Contract for such purposes will be provided with such supplementary
information as may be required by the Internal Revenue Service or other
appropriate agency, and will have the right to revoke the Contract under
certain circumstances.
In general, IRAs are subject to minimum distribution requirements
similar to those applicable to retirement plans qualified under Section 401
of the Code; however, the required beginning date for IRAs is generally the
date that the Contractowner reaches age 70 1/2--the Contractowner's
retirement date, if any, will not affect his or her required beginning
date. See "Section 401" on page 29. Distributions from IRAs are generally
taxed under Code Section 72. Under these rules, a portion of each
distribution may be excludable from income. The amount excludable from the
individual's income is the amount of the distribution which bears the same
ratio as the individual's nondeductible contributions bears to the expected
return under the IRA.
Distributions from an IRA may be eligible for a tax-free rollover to
another IRA. In certain cases, a distribution from an IRA may be eligible
to be rolled over to a retirement plan qualified under Code Section 401(a)
or a Section 403(b) annuity contract. See "Rollovers" below.
The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the provision in
the Contract comports with IRA qualification requirements.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES. The Small Business Job
Protection Act of 1996 created a new retirement plan, the Savings Incentive
Match Plan for Employees of Small Employers (SIMPLE plans). Depending upon
the type of SIMPLE plan, employers may deposit the plan contributions into
a single trust or into SIMPLE Individual Retirement Annuities ("SIMPLE
IRA") established by each participant.
Information on eligibility to participate in an employer's SIMPLE Plan
will be included in the summary description of the plan furnished to the
participants by their employer. Contributions to a SIMPLE IRA may be either
salary deferral contributions or employer contributions. On a pre-tax
basis, participants may elect to contribute (through salary deferrals) up
to $6,000 of their compensation to a SIMPLE IRA. In addition, employers are
required to make either (1) a dollar-for-dollar matching contribution or
(2) a nonelective contribution to their account each year. Finally,
participants may roll over or transfer contributions to their SIMPLE IRA
from another SIMPLE IRA.
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14
<PAGE>
In general, SIMPLE IRAs are subject to minimum distribution
requirements similar to those applicable to retirement plans qualified
under Section 401 of the Code; however, the required beginning date for
SIMPLE IRAs is generally the date that the Contractowner reaches age 70 1/2
-- the Contractowner's retirement date will not affect his or her required
beginning date. Amounts used to purchase SIMPLE IRAs generally are
excludable from the taxable income of the participant. As a result, all
distributions from such annuities are normally taxable in full as ordinary
income to the participant.
Distributions from a SIMPLE IRA may be eligible for a tax-free rollover
or transfer to another SIMPLE IRA. However, a distribution from a SIMPLE
IRA is NEVER eligible to be rolled over to a retirement plan qualified
under Code Section 401(a) or a Section 403(b) annuity contract.
The Internal Revenue Service has not reviewed the Contract for
qualification as a SIMPLE IRA, and has not addressed in a ruling of general
applicability whether the death benefit provision such as the provision in
the Contract comports with SIMPLE IRA qualification requirements.
4. Section 457
Section 457 of the Code permits employees of state and local
governments and units and agencies of state and local governments as well
as tax-exempt organizations described in Section 501(c)(3) of the Code to
defer a portion of their compensation without paying current taxes if those
employees are participants in an eligible deferred compensation plan. A
Section 457 plan may permit the purchase of Contracts to provide benefits
thereunder.
Although a participant under a Section 457 plan may be permitted to
direct or choose methods of investment in the case of a tax-exempt employer
sponsor, all amounts deferred under the plan, and any income thereon,
remain solely the property of the employer and subject to the claims of its
general creditors, until paid to the participant. The assets of a Section
457 plan maintained by a state or local government employer must be held in
trust (or custodial account or an annuity contract) for the exclusive
benefit of plan participants, who will be responsible for taxes upon
distribution. A Section 457 plan must not permit the distribution of a
participant's benefits until the participant attains age 70 1/2, terminates
employment or incurs an "unforeseeable emergency."
Section 457 plans are generally subject to minimum distribution
requirements similar to those applicable to retirement plans qualified
under Section 401 of the Code. See "Section 401" on page 29. Since under a
Section 457 plan, contributions are generally excludable from the taxable
income of the employee, the full amount received will usually be taxable as
ordinary income when annuity payments commence or other distributions are
made. Distributions from a Section 457 plan are not eligible for tax-free
rollovers.
5. Rollovers
A "rollover" is the tax-free transfer of a distribution from one
Qualified Plan to another. Distributions which are rolled over are not
included in the employee's gross income until some future time.
If any portion of the balance to the credit of an employee in a Section
401 plan or Section 403(b) plan is paid to the employee in an "eligible
rollover distribution" and the employee transfers any portion of the amount
received to an "eligible retirement plan," then the amount so transferred
is not includable in income. An "eligible rollover distribution" generally
means any distribution that is not one of a series of periodic payments
made for the life of the distributee or for a specified period of at least
ten years. In addition, a required minimum distribution will not qualify as
an eligible rollover distribution. A rollover must be completed within 60
days after receipt of the distribution.
In the case of a Section 401 plan, an "eligible retirement plan" will
be another retirement plan qualified under Code Section 401 or an
individual retirement account or annuity under Code Section 408. With
respect to a Section 403(b) plan, an "eligible retirement plan" will be
another Section 403(b) plan or an individual retirement account or annuity
described in Code Section 408.
A Section 401 plan and a Section 403(b) plan must generally provide a
participant receiving an eligible rollover distribution, the option to have
the distribution transferred directly to another eligible retirement plan.
The owner of an IRA may make a tax-free rollover of any portion of the
IRA. The rollover must be completed within 60 days of the distribution and
generally may only be made to another IRA. However, an individual may
receive a distribution from his or her IRA and within 60 days roll it over
into a retirement plan qualified under Code Section 401(a) if all of the
funds in the IRA are attributable to a rollover from a Section 401(a) plan.
Similarly, a distribution from an IRA may be rolled over to a Section
403(b) plan only if all of the funds in the IRA are attributable to a
rollover from a Section 403(b) annuity.
6. Tax Penalties
PREMATURE DISTRIBUTION TAX. Distributions from a Qualified Plan before
the participant reaches age 59 1/2 are generally subject to an additional
tax equal to 10 percent of the taxable portion of the distribution. The 10
percent penalty tax does not apply to distributions: (i) made on or after
the death of the employee; (ii) attributable to the employee's disability;
(iii) which are part of a series of substantially equal periodic
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15
<PAGE>
payments made (at least annually) for the life (or life expectancy) of the
employee or the joint lives (or joint life expectancies) of the employee
and a designated beneficiary and which begin after the employee terminates
employment; (iv) made to an employee after termination of employment after
reaching age 55; (v) made to pay for certain medical expenses; (vi) that
are exempt withdrawals of an excess contribution; (vii) that are rolled
over or transferred in accordance with Code requirements; or (viii) that
are transferred pursuant to a decree of divorce or separate maintenance or
written instrument incident to such a decree.
The exception to the 10 percent penalty tax described in item (iv)
above is not applicable to IRAs. However, distributions from an IRA to
unemployed individuals can be made without application of the 10 percent
penalty tax to pay health insurance premiums in certain cases. In addition,
the 10 percent penalty tax is generally not applicable to distributions
from a Section 457 plan.
MINIMUM DISTRIBUTION TAX. If the amount distributed from a Qualified
Plan is less than the minimum required distribution for the year, the
participant is subject to a 50 percent tax on the amount that was not
properly distributed.
EXCESS DISTRIBUTION ACCUMULATION TAX. If the aggregate distributions
from all Qualified Plans (other than Section 457 plans) with respect to an
individual in a calendar year exceed the greater of (i) $150,000, or (ii)
$112,500, as indexed for inflation ($160,000 for 1997), a penalty tax of 15
percent is generally imposed (in addition to any ordinary income tax) on
the excess portion of the distribution. In addition, a 15 percent tax is
imposed on the "excess retirement accumulations" of an individual whose
aggregate retirement benefits exceed the value of a hypothetical life
annuity determined as of the date of his or her death. The 15 percent
excise tax on excess distributions will not apply to withdrawals during
calendar years 1997, 1998 and 1999.
7. Withholding
Periodic distributions (e.g., annuities and installment payments) from
a Qualified Plan that will last for a period of ten or more years are
generally subject to voluntary income tax withholding. The amount withheld
on such periodic distributions is determined at the rate applicable to
wages. The recipient of a periodic distribution may generally elect not to
have withholding apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than ten years) from a Qualified Plan (other than IRAs and
Section 457 plans) are generally subject to mandatory 20 percent income tax
withholding. However, no withholding is imposed if the distribution is
transferred directly to another eligible Qualified Plan. Nonperiodic
distributions from an IRA 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.
The above description of the federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract
offered by this Prospectus is only a brief summary and is not intended as
tax advice. The rules governing the provisions of Qualified Plans are
extremely complex and often difficult to comprehend. Anything less than
full compliance with the applicable rules, all of which are subject to
change, may have adverse tax consequences. A prospective Contractowner
considering adoption of a Qualified Plan and purchase of a Contract in
connection therewith should first consult a qualified and competent tax
adviser, with regard to the suitability of the Contract as an investment
vehicle for the Qualified Plan.
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16
<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
MAY 1, 1997
RELATING TO THE PROSPECTUS DATED MAY 1, 1997,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
(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
May 1, 1997
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 May 1, 1997, 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
Limits on Purchase Payments Paid Under
Tax-Qualified Retirement Plans..................................... 6
Section 401........................................................ 6
Section 403(b)..................................................... 6
Section 408........................................................ 6
Section 457........................................................ 7
Assignment............................................................ 7
Distribution of the Contracts......................................... 7
Safekeeping of Variflex Account Assets................................ 7
State Regulation...................................................... 7
Records and Reports................................................... 7
Legal Matters......................................................... 8
Experts............................................................... 8
Other Information..................................................... 8
Financial Statements.................................................. 9
<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, 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:
Number of Annuity Units = Dollar Amount of First Monthly Payment
-------------------------------------------------------
Annuity Unit Value for Day on Which First Payment is Due
Value of Net Investment
Annuity Annuity Unit for Factor for
Unit Value= Preceding Day x Second Preceding Day x 0.9999057540
Value of a Dividends of
Net Series Share* Other Distributions
Investment Factor= at End of Day + During Day Per Share - 0.000033007502
-------------------------------------------------------------
Value of a Series Share* at End of the Previous Day
Dollar Amount of Second and Annuity Unit Value for Day
Subsequent Annuity Payments=Number of Annuity Units x on Which 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 maintenance costs
associated with the Contract are reduced for reasons such as the amount of the
initial
2
<PAGE>
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, LLC, 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 19,
"Constraints on Distributions from Certain Section 403(b) Annuity Contracts,"
page 23, and "Federal Tax Matters," page 26.)
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]
For the seven-day period ended December 31, 1996, the yield of the Money
Market Series was 4.98% and the effective yield of the Series was 5.11%.
Quotations of yield for the Series, other than the Money Market Series,
will be based on all investment income per Accumulation Unit earned during a
particular 30-day period, less expenses accrued during the period
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<PAGE>
("net investment income"), and will be computed by dividing net investment
income by the value of the Accumulation Unit on the last day of the period,
according to the following formula:
YIELD = 2[(A-B + 1)6 - 1]
---
cd
where a= net investment income earned during the period by the Series
attributable to shares owned by the Subaccount,
b= expenses accrued for the period (net of any reimbursements),
c= the average daily number of Accumulation Units outstanding during
the period that were entitled to receive dividends, and
d= the maximum offering price per Accumulation Unit on the last day of
the period.
For the 30-day period ended December 31, 1996, the yield for the High
Grade Series was 9.92%.
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, 1996, respectively,
the average annual total return was 10.22%, 11.29% and 11.47% for the Growth
Series; 5.80%, 6.90% and 10.31% for the Growth-Income Series (formerly the
"Income-Growth Series"); 4.99%, 6.69% and -2.45% for the Worldwide Equity Series
(formerly the High Yield Series); and -12.51%, .95% and 3.50% for the High Grade
Income Series. For the 1- and 5-year periods ended December 31, 1996 and the
period between May 1, 1991 (date of inception) and December 31, 1996,
respectively, the average annual total return was 6.41%, 9.26% and 8.53% for the
Social Awareness Series. For the 1-year period ended December 31, 1996 and the
period between October 1, 1992 (date of inception) and December 31, 1996,
respectively, the average annual total return was 5.62% and 11.49% for the
Emerging Growth Series. For the 1-year period ended December 31, 1996, and the
period between June 1, 1995 (date of inception) and December 31, 1996, the
average annual total return was 1.39% and 4.35% for Global Aggressive Bond
Series; 1.96% and 4.41% for Specialized Asset Allocation Series; .55% and 3.56%
for Managed Asset Allocation Series; and 7.59% and 14.94% for Equity-Income
Series.
Absent deduction of the contingent deferred sales charge and the annual
administrative fee, the average annual total return for the stated periods above
would be 21.22%, 14.45% and 13.61% for the Growth Series; 16.80%, 10.35% and
12.41% for the Growth-Income Series; 15.99%, 10.05% and 1.77% for the Worldwide
Equity Series; -1.90%, 4.54% and 6.06% for the High Grade Income Series. For the
1- and 5-year periods ended December 31, 1996, and the period between May 1,
1991 (date of inception), and December 31, 1996, respectively, the average
annual total return would be 17.41%, 12.36% and 11.72% for the Social Awareness
Series. For the 1-year period ended December 31, 1996, and the period between
October 1, 1992 (date of inception), and December 31, 1996, respectively, the
average annual total return would be 16.62% and 14.88% for the Emerging Growth
Series. For the 1-year period ended December 31, 1996, and the period between
June 1, 1995 (date of inception), and December 31, 1996, the average annual
total return would be 12.25% and 12.20% for the Global Aggressive Bond Series;
12.88% and 12.26% for the Specialized Asset Allocation Series; 11.35% and 11.43%
for the Managed Asset Allocation Series; and 18.59% and 22.44% for Equity-Income
Series.
4
<PAGE>
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 fiscal years ended 1996 through 1986, the total return for each
Series was the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Series 21.22% 35.11% (2.82%) 12.35% 9.83% 34.45% (10.90%) 33.31% 8.80% 5.01% 5.10%
Growth-Income Series 16.80% 28.52% (4.14%) 8.30% 4.99% 36.16% (5.60%) 26.86% 17.89% 2.42% 17.75%
Money Market Series 3.81% 4.14% 2.49% 1.35% 2.01% 4.39% 6.56% 7.74% 5.89% 5.19% 5.11%
Worldwide
Equity Series 15.99% 9.55% 1.51% 30.06% (3.78%) 3.01%1 --- --- --- --- ---
High Grade
Income Series (1.90%) 17.17% (8.04%) 11.28% 6.16% 15.57% 5.40% 10.54% 5.91% 1.16% 8.37%
Social Awareness
Series 17.41% 26.25% (4.96%) 10.55% 15.00% 4.70%1 --- --- --- --- ---
Emerging Growth
Series 16.62% 18.02% (6.23%) 12.30% 24.40%2 --- --- --- --- --- ---
Global Aggressive
Bond Series 12.25% 6.90%3 --- --- --- --- --- --- --- --- ---
Specialized Asset
Allocation Series 12.88% 6.40%3 --- --- --- --- --- --- --- --- ---
Managed Asset
Allocation Series 11.35% 6.60%3 --- --- --- --- --- --- --- --- ---
Equity Income Series 18.59% 16.20%3 --- --- --- --- --- --- --- --- ---
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1. From May 1, 1991 to December 31, 1991.
2. From October 1, 1992 to December 31, 1992.
3. From June 1, 1995 to December 31, 1995.
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 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.
5
<PAGE>
LIMITS ON PURCHASE PAYMENTS PAID UNDER TAX-QUALIFIED RETIREMENT PLANS
SECTION 401
The applicable annual limits on purchase payments for a Contract used in
connection with a retirement plan that is qualified under Section 401 of the
Internal Revenue Code depend upon the type of plan. Total purchase payments on
behalf of a participant to all defined contribution plans maintained by an
employer are limited under Section 415(c) of the Internal Revenue Code to the
lesser of (a) $30,000, or (b) 25% of the participant's annual compensation.
Salary reduction contributions to a cash-or-deferred arrangement under a profit
sharing plan are subject to additional annual limits. Contributions to a defined
benefit pension plan are actuarially determined based upon the amount of
benefits the participants will receive under the plan formula. The maximum
annual benefit any individual may receive under an employer's defined benefit
plan is limited under Section 415(b) of the Internal Revenue Code. The limits
determined under Section 415(b) and (c) of the Internal Revenue Code are further
reduced for an individual who participates in a defined contribution plan and a
defined benefit plan maintained by the same employer. Rollover contributions are
not subject to the annual limitations described above.
SECTION 403(B)
Contributions to 403(b) annuities are excludable from an employee's gross
income if they do not exceed the smallest of the limits calculated under
Sections 402(g), 403(b)(2), and 415 of the Code. The applicable limit will
depend upon whether the annuities are purchased with employer or employee
contributions. Rollover contributions are not subject to these annual limits.
Section 402(g) generally limits an employee's salary reduction
contributions to a 403(b) annuity to $9,500 a year. The $9,500 limit will be
reduced by salary reduction contributions to other types of retirement plans. An
employee with at least 15 years of service for a "qualified employer" (i.e., an
educational organization, hospital, home health service agency, health and
welfare service agency, church or convention or association of churches)
generally may exceed the $9,500 limit by $3,000 per year, subject to an
aggregate limit of $15,000 for all years.
Section 403(b)(2) provides an overall limit on employer and employee salary
reduction contributions that may be made to a 403(b) annuity. Section 403(b)(2)
generally provides that the maximum amount of contributions an employee may
exclude from his or her gross income in any taxable year is equal to the excess,
if any, of:
(i) the amount determined by multiplying 20% of the employee's includable
compensation by the number of his or her years of service with the
employer, over
(ii) the total amount contributed to retirement plans sponsored by the
employer, that were excludable from his gross income in prior years.
Section 415(c) also provides an overall limit on the amount of employer and
employee salary reduction contributions to a Section 403(b) annuity that will be
excludable from an employee's gross income in a given year. The Section 415(c)
limit is the lesser of (i) $30,000, or (ii) 25% of the employee's annual
compensation.
SECTION 408
Premiums (other than rollover contributions) paid under a Contract used in
connection with an individual retirement annuity (IRA) that is described in
Section 408 of the Internal Revenue Code are subject to the limits on
contributions to IRA's under Section 219(b) of the Internal Revenue Code. Under
Section 219(b) of the Code, contributions (other than rollover contributions) to
an IRA are limited to the lesser of $2,000 per year or the Owner's annual
compensation. Spousal IRAs allow an Owner and his or her spouse to contribute up
to $2,000 to their respective IRAs so long as a joint tax return is filed and
joint income is $4,000 or more. The maximum amount the higher compensated spouse
may contribute for the year is the lesser of $2,000 or 100% of that spouse's
compensation. The maximum the lower compensated spouse may contribute is the
lesser of (i) $2,000 or (ii) 100% of that spouse's compensation plus the amount
by which the higher compensated spouse's compensation exceeds the amount the
higher compensated spouse contributes to his or her IRA. The extent to which an
Owner may deduct contributions to an IRA depends on the gross income of the
Owner and his or her spouse for the year and whether either participate in an
employer-sponsored retirement plan.
Premiums under a Contract used in connection with a simplified employee
pension plan described in Section 408 of the Internal Revenue Code are subject
to limits under Section 402(h) of the Internal Revenue Code. Section 402(h)
currently limits employer contributions and salary reduction contributions (if
permitted) under a
6
<PAGE>
simplified employee pension plan to the lesser of (a) 15% of the compensation of
the participant in the Plan, or (b) $30,000. Salary reduction contributions, if
any, are subject to additional annual limits.
SECTION 457
Contributions on behalf of an employee to a Section 457 plan generally are
limited to the lesser of (i) $7,500 or (ii) 33 1/3% of the employee's includable
compensation. The current $7,500 limit will be indexed for inflation (in $500
increments) for tax years beginning after December 31, 1996. If the employee
participates in more than one Section 457 plan, the $7,500 limit applies to
contributions to all such programs. The $7,500 limit is reduced by the amount of
any salary reduction contribution the employee makes to a 403(b) annuity, an IRA
or a retirement plan qualified under Section 401. The Section 457 limit may be
increased during the last three years ending before the employee reaches his or
her normal retirement age. In each of these last three years, the plan may
permit a "catch-up" amount in addition to the regular amount to be deferred. The
maximum combined amount which may be deferred in each of these three years is
$15,000 reduced by any amount excluded from the employee's income for the
taxable year as a contribution to another plan.
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.
The Variflex offering is continuous. During the years ended December 31,
1996, 1995 and 1994, SBL received contingent deferred sales charges from
Variflex as follows: $1,285,409, $1,182,820 and $881,215, 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.
7
<PAGE>
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, Associate General Counsel of SBL.
EXPERTS
The consolidated financial statements of Security Benefit Life Insurance
Company at December 31, 1996 and 1995, and for each of the three years ended
December 31, 1996 and the financial statements of Variflex for the years ended
December 31, 1996 and 1995, 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 has 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.
FINANCIAL STATEMENTS
The consolidated financial statements of SBL at December 31, 1996 and 1995,
and for each of the three years ended December 31, 1996, and the financial
statements of the Separate Account for the years ended December 31, 1996 and
1995, are set forth herein, starting on page 9.
The consolidated financial statements of SBL, which are included in this
Statement of Additional Information, should be considered only as bearing on the
ability of the Company to meet its obligations under the Contracts. They should
not be considered as bearing on the investment performance of the assets held in
the Separate Account.
8
<PAGE>
Variflex
Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors........................................ 10
Audited Financial Statements
Balance Sheet......................................................... 11
Statements of Operations and Changes in Net Asset..................... 13
Notes to Financial Statements......................................... 15
9
<PAGE>
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, 1996, and the related statements 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, 1996, 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, 1996,
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 7, 1997
10
<PAGE>
Variflex
Balance Sheet
December 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
SBL Fund:
Series A (Growth Series)-24,335,456 shares at net asset value
of $24.31 per share (cost, $491,521)......................... $ 591,595
Series B (Growth-Income Series)-25,054,388 shares at net asset
value of $35.40 per share (cost, $773,880)................... 886,925
Series C (Money Market Series)-7,202,675 shares at net asset
value of $12.56 per share (cost, $90,317).................... 90,466
Series D (Worldwide Equity Series)-36,359,956 shares at net asset
value of $6.14 per share (cost, $200,363)..................... 223,250
Series E (High Grade Income Series)-9,165,850 shares at net asset
value of $12.00 per share (cost, $112,408).................... 109,990
Series J (Emerging Growth Series)-7,055,809 shares at net asset
value of $18.25 per share (cost, $114,558).................... 128,769
Series K (Global Aggressive Bond Series)-543,779 shares at net
asset value of $10.72 per share (cost, $5,880)................ 5,829
Series M (Specialized Asset Allocation Series)-1,803,897 shares
at net asset value of $12.05 per share (cost, $19,971)........ 21,737
Series N (Managed Asset Allocation Series)-994,920 shares at net
asset value of $12.02 per share (cost, $10,791)............... 11,959
Series O (Equity Income Series)-2,684,197 shares at net asset value
of $14.01 per share (cost, $33,684)........................... 37,606
Series S (Social Awareness Series)-2,796,723 shares at net asset
value of $19.08 per share (cost, $43,382)..................... 53,361
----------
Total assets $2,161,487
==========
11
<PAGE>
LIABILITIES AND NET ASSETS
Mortality guarantee payable $ 37
Net assets are represented by (NOTE 3):--------------------------
NUMBER UNIT
OF UNITS VALUE AMOUNT
----------------------------
Growth Series:
Accumulation units.............12,885,505 $45.75 $589,560
Annuity reserves............... 44,385 45.75 2,031 591,591
------------------
Growth-Income Series:
Accumulation units.............18,986,176 46.58 884,317
Annuity reserves............... 56,114 46.58 2,614 886,931
------------------
Money Market Series:
Accumulation units............. 4,933,370 18.26 90,095
Annuity reserves............... 20,313 18.26 371 90,466
------------------
Worldwide Equity Series:
Accumulation units.............15,365,862 14.51 222,983
Annuity reserves............... 18,348 14.51 266 223,249
------------------
High Grade Income Series:
Accumulation units............. 5,051,175 21.68 109,531
Annuity reserves............... 21,148 21.68 459 109,990
------------------
Emerging Growth Series:
Accumulation units............. 7,123,183 18.03 128,442
Annuity reserves............... 18,109 18.03 326 128,768
------------------
Global Aggressive Bond Series:
Accumulation units............. 485,157 12.00 5,823
Annuity reserves............... 480 12.00 6 5,829
------------------
Specialized Asset Allocation Series:
Accumulation units............. 1,806,999 12.00 21,692
Annuity reserves............... 3,738 12.00 45 21,737
------------------
Managed Asset Allocation Series:
Accumulation units............. 1,000,455 11.87 11,880
Annuity reserves............... 6,665 11.87 79 11,959
------------------
Equity Income Series:
Accumulation units............. 2,727,172 13.78 37,586
Annuity reserves............... 1,466 13.78 20 37,606
------------------
Social Awareness Series:
Accumulation units............. 2,829,942 18.74 53,021
Annuity reserves............... 16,185 18.74 303 53,324
------------------
==================
Total liabilities and net assets.... $2,161,487
==================
SEE ACCOMPANYING NOTES.
12
<PAGE>
Variflex
Statement of Operations and Changes in Net Assets
Year ended December 31, 1996
(IN THOUSANDS)
HIGH
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
---------------------------------------------------------
Dividend
distributions......... $ 4,003 $ 17,133 $ 3,780 $ 6,404 $ 6,701 $ 202
Expenses (NOTE 2):
Mortality and
expense risk fee..... (6,014) (9,988) (1,246) (2,420) (1,368) (1,367)
Administrative fee... (369) (1,399) (122) (69) (267) (22)
---------------------------------------------------------
Net investment
income (loss)......... (2,380) 5,746 2,412 3,915 5,066 (1,187)
Capital gains
distributions......... 24,782 82,844 - 6,043 - 4,663
Realized gain
on investments........ 29,813 41,904 785 7,793 459 11,087
Unrealized appreciation
(depreciation) on
investments.......... 40,511 (5,823) 488 10,720 (8,258) 2,657
---------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments........ 95,106 118,925 1,273 24,556 (7,799) 18,407
---------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations....... 92,726 124,671 3,685 28,471 (2,733) 17,220
Net assets at
beginning of year.... 436,043 745,482 78,686 167,450 116,344 87,329
Variable annuity deposits
(NOTES 2 AND 3)...... 205,769 161,528 213,354 73,798 45,516 63,675
Terminations and withdrawal
(NOTES 2 AND 3)...... (142,679) (144,272) (204,943) (46,433) (48,977) (39,303)
Annuity payments
(NOTES 2 AND 3)...... (255) (478) (316) (33) (161) (152)
Net mortality
guarantee transfer... (13) - - (4) 1 (1)
==========================================================
Net assets at
end of year.......... $591,591 $886,931 $90,466 $223,249 $109,990 $128,768
==========================================================
GLOBAL SPECIALIZED MANAGED
AGGRESSIVE ASSET ASSET EQUITY SOCIAL
BOND ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES
---------------------------------------------------------
Dividend
distributions......... $ 385 $ 186 $ 57 $ 66 $ 206
Expenses (NOTE 2):
Mortality and
expense risk fee..... (49) (197) (110) (287) (539)
Administrative fee... (10) (15) (9) (40) (29)
---------------------------------------------------------
Net investment
income (loss)......... 326 (26) (62) (261) (362)
Capital gains
distributions......... 64 86 12 4 1,068
Realized gain
on investments........ 165 381 182 1,234 2,212
Unrealized appreciation
(depreciation) on (60) 1,512 911 3,221 3,689
investments
---------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments........ 169 1,979 1,105 4,459 6,969
---------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations....... 495 1,953 1,043 4,198 6,607
Net assets at
beginning of year.... 2,188 9,689 5,590 9,755 35,596
Variable annuity deposits
(NOTES 2 AND 3)...... 5,122 13,786 6,553 29,396 16,769
Terminations and withdrawal
(NOTES 2 AND 3)...... (1,974) (3,686) (1,220) (5,738) (5,604)
Annuity payments
(NOTES 2 AND 3)...... (2) (2) (5) (3) (7)
Net mortality
guarantee transfer... - (3) (2) (2) (37)
=========================================================
Net assets at
end of year.......... $ 5,829 $21,737 $11,959 $37,606 $53,324
=========================================================
SEE ACCOMPANYING NOTES.
13
<PAGE>
Variflex
Statement of Operations and Changes in Net Assets
Year ended December 31, 1995
(IN THOUSANDS)
HIGH
GROWTH- MONEY WORLDWIDE GRADE EMERGING
GROWTH INCOME MARKET EQUITY INCOME GROWTH
SERIES SERIES SERIES SERIES SERIES SERIES
----------------------------------------------------------
Dividend
distributions......... $ 2,960 $ 11,576 $ 3,092 $ 27 $ 7,165 $ -
Expenses (NOTE 2):
Mortality and
expense risk fee... (4,280) (7,839) (921) (1,848) (1,330) (935)
Administrative fee. (340) (1,520) (136) (73) (303) (21)
----------------------------------------------------------
Net investment
income (loss)......... (1,660) 2,217 2,035 (1,894) 5,532 (956)
Capital gains
distributions......... 12,476 - - 1,732 - -
Realized gain (loss)
on investments........ 1,019 16,514 1,623 3,960 (6,221) 2,488
Unrealized appreciation
(depreciation) on 92,456 141,783 (700) 11,265 17,866 10,991
investments
---------------------------------------------------------
Net realized and unrealized
gain on investments.. 105,951 158,297 923 16,957 11,645 13,479
---------------------------------------------------------
Net increase in net assets
resulting from
operations....... 104,291 160,514 2,958 15,063 17,177 12,523
Net assets at
beginning of year.... 260,963 555,314 102,451 139,186 100,185 67,668
Variable annuity deposits
(NOTES 2 AND 3)...... 156,379 132,721 132,678 70,832 50,070 39,149
Terminations and withdrawals
(NOTES 2 AND 3)...... (85,337) (102,434)(159,213) (57,355) (50,939) (31,968)
Annuity payments
(NOTES 2 AND 3)...... (264) (642) (189) (277) (149) (44)
Net mortality
guarantee transfer... 11 9 1 1 - 1
==========================================================
Net assets at
end of year.......... $436,043 $745,482 $78,686 $167,450 $116,344 $87,329
==========================================================
GLOBAL SPECIALIZED MANAGED
AGGRESSIVE ASSET ASSET EQUITY SOCIAL
BOND ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES
---------------------------------------------------------
Dividend
distributions......... $ 100 $ - $ - $ - $ 154
Expenses (NOTE 2):
Mortality and
expense risk fee... (10) (32) (25) (28) (350)
Administrative fee. (3) (6) (2) (11) (27)
---------------------------------------------------------
Net investment
income (loss)......... 87 (38) (27) (39) (223)
Capital gains
distributions......... 9 - - - -
Realized gain (loss)
on investments........ 7 44 11 60 1,049
Unrealized appreciation
(depreciation) on 9 254 257 701 5,855
investments
---------------------------------------------------------
Net realized and unrealized
gain on investments.. 25 298 268 761 6,904
---------------------------------------------------------
Net increase in net assets
resulting from
operations....... 112 260 241 722 6,681
Net assets at
beginning of year.... - - - - 23,889
Variable annuity deposits
(NOTES 2 AND 3)...... 2,207 9,955 5,539 9,395 9,024
Terminations and withdrawals
(NOTES 2 AND 3)...... (130) (526) (182) (362) (3,992)
Annuity payments
(NOTES 2 AND 3)...... (1) - (1) - (6)
Net mortality
guarantee transfer... - - (7) - -
==========================================================
Net assets at
end of year......... $2,188 $9,689 $5,590 $9,755 $35,596
==========================================================
SEE ACCOMPANYING NOTES.
14
<PAGE>
Variflex
Notes to Financial Statements
December 31, 1996 and 1995
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. Deposits received by the Account are
invested in the SBL Fund, a mutual fund not otherwise available to the public.
As directed by the owners, amounts deposited may be invested in shares of Series
A (Growth Series - emphasis on capital appreciation), Series B (Growth-Income
Series - emphasis on capital appreciation with secondary emphasis on income),
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 J (Emerging Growth Series - emphasis
on capital appreciation), Series K (Global Aggressive Bond Series emphasis on
high current income with secondary emphasis on capital appreciation), Series M
(Specialized Asset Allocation Series - emphasis on high total return consisting
of capital appreciation and current income), Series N (Managed Asset Allocation
Series - emphasis on high level of total return), Series O (Equity Income Series
- - emphasis on substantial dividend income and capital appreciation) and Series S
(Social Awareness Series - emphasis on high total return).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC),
which is owned 50% by SBL and 50% by Security Benefit Group, Inc. (SBG), a
wholly-owned subsidiary of SBL. SMC has engaged Lexington Management Corporation
to provide sub-advisory services for the Worldwide Equity Series and Global
Aggressive Bond Series and has engaged T. Rowe Price Associates, Inc. to provide
sub-advisory services for the Managed Asset Allocation Series and the Equity
Income Series. SMC has also entered into agreements with Templeton Quantitative
Advisors, Inc. and Meridian Investment Management Corporation to provide certain
quantitative research services with respect to the Specialized Asset Allocation
Series.
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
cost method is used to determine gains and losses. Security transactions are
accounted for on the trade date.
15
<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:
1996 1995
----------------------------------------------------------
COST OF PROCEEDS FROM COST OF PROCEEDS FROM
PURCHASES SALES PURCHASES SALES
---------------------------------------------------------
(IN THOUSANDS)
Growth Series......... $247,011 $161,782 $177,876 $ 96,275
Growth-Income Series.. 270,233 164,899 152,642 120,749
Money Market Series... 122,800 112,293 139,143 163,831
Worldwide Equity
Series................ 89,191 51,904 74,933 61,894
High Grade
Income Series......... 55,000 53,555 59,080 54,565
Emerging Growth
Series................ 70,096 42,400 40,723 34,541
Global Aggressive
Bond Series........... 5,717 2,181 3,363 1,191
Specialized Asset
Allocation Series..... 14,523 4,368 11,354 1,963
Managed Asset
Allocation Series..... 6,962 1,693 5,594 265
Equity Income Series.. 30,483 7,088 9,546 551
Social Awareness
Series................. 18,705 6,841 9,710 4,907
SBG's investment in the subaccounts represented the following number of units
and contract value of Variflex contracts owned at December 31, 1996 (DOLLARS IN
THOUSANDS):
NUMBER OF UNITS CONTRACT VALUE
------------------------------------------
Global Aggressive Bond Series........ 99,992 $1,200
Managed Asset Allocation Series...... 230,000 2,730
ANNUITY RESERVES
Annuity reserves relate to contracts that 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.
16
<PAGE>
Variflex
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts an administrative fee of $30 per year for each contract, except for
certain contracts based on a minimum account value and the period of time the
contract has been in force. 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 by SBL 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 $1,285,380 and $1,182,819 during 1996 and 1995,
respectively.
17
<PAGE>
Variflex
Notes to Financial Statements (continued)
3. SUMMARY OF UNIT TRANSACTIONS
UNITS
---------------------------------
1996 1995
---------------------------------
(IN THOUSANDS)
Growth Series:
Variable annuity deposits................... 4,887 4,863
Terminations, withdrawals
and annuity payments...................... 3,508 2,655
Growth-Income Series:
Variable annuity deposits................... 3,756 3,787
Terminations, withdrawals
and annuity payments...................... 3,412 2,989
Money Market Series:
Variable annuity deposits................... 11,926 7,695
Terminations, withdrawals and
annuity payments.......................... 11,446 9,288
Worldwide Equity Series:
Variable annuity deposits................... 5,428 6,154
Terminations, withdrawals and
annuity payments.......................... 3,434 4,955
High Grade Income Series:
Variable annuity deposits................... 2,124 2,466
Terminations, withdrawals and
annuity payments.......................... 2,314 2,514
Emerging Growth Series:
Variable annuity deposits................... 3,810 2,712
Terminations, withdrawals and
annuity payments.......................... 2,316 2,231
Global Aggressive Bond Series:
Variable annuity deposits................... 455 218
Terminations, withdrawals and
annuity payments.......................... 174 13
Specialized Asset Allocation Series:
Variable annuity deposits................... 1,233 962
Terminations, withdrawals and
annuity payments.......................... 333 51
Managed Asset Allocation Series:
Variable annuity deposits................... 594 543
Terminations, withdrawals and
annuity payments.......................... 112 18
Equity Income Series:
Variable annuity deposits................... 2,346 873
Terminations, withdrawals and
annuity payments.......................... 456 34
Social Awareness Series:
Variable annuity deposits................... 939 626
Terminations, withdrawals and
annuity payments.......................... 322 285
18
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
Report of Independent Auditors........................................... 20
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................... 21
Consolidated Statements of Income................................... 23
Consolidated Statements of Changes in Equity........................ 24
Consolidated Statements of Cash Flows............................... 25
Notes to Consolidated Financial Statements.......................... 27
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying consolidated balance sheets of Security Benefit
Life Insurance Company and Subsidiaries (the Company) as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Benefit
Life Insurance Company and Subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, in 1996, the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises and retroactively
restated the 1994 and 1995 financial statements for the change. Also, as
discussed in NOTE 1 to the consolidated financial statements, the Company
changed its method of accounting for debt securities as of January 1, 1994.
Ernst & Young LLP
February 7, 1997
20
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1996 1995*
----------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available-for-sale, at
fair value (NOTES 2 AND 9):
Fixed maturities.............................. $1,805,066 $1,778,370
Equity securities ............................ 89,188 21,880
Fixed maturities held-to-maturity, at
amortized cost (NOTE 2)......................... 528,045 536,137
Mortgage loans.................................. 66,611 74,342
Real estate..................................... 4,000 5,864
Policy loans.................................... 106,822 100,452
Short-term investments.......................... - 992
Cash and cash equivalents....................... 8,310 16,788
Other invested assets........................... 40,531 37,769
---------------------------
Total investments.................................. 2,648,573 2,572,594
Premiums deferred and uncollected.................. 149 574
Accrued investment income.......................... 32,161 30,623
Accounts receivable................................ 4,256 3,064
Reinsurance recoverable (NOTE 4)................... 92,197 78,877
Notes receivable................................... 110 147
Property and equipment, net........................ 18,592 18,884
Deferred policy acquisition costs (NOTE 1)......... 216,918 186,940
Other assets....................................... 24,680 36,221
Separate account assets (NOTE 10).................. 2,802,927 2,065,306
---------------------------
$5,840,563 $4,993,230
===========================
21
<PAGE>
DECEMBER 31
1996 1995*
-------------------------
(IN THOUSANDS)
LIABILITIES AND EQUITY
Liabilities:
Policy reserves and annuity account values........ $2,497,998 $2,495,113
Policy and contract claims........................ 10,607 10,571
Other policyholder funds.......................... 24,073 21,305
Accounts payable and accrued expenses............. 18,003 13,609
Income taxes payable (NOTE 5):
Current......................................... 6,686 10,371
Deferred........................................ 54,847 53,659
Long-term debt (NOTE 8)........................... 65,000 -
Other liabilities................................. 11,990 11,619
Separate account liabilities...................... 2,793,911 2,051,292
-------------------------
Total liabilities.................................... 5,483,115 4,667,539
Equity:
Retained earnings................................. 357,927 314,084
Unrealized appreciation (depreciation)
of securities
available-for-sale, net......................... (479) 11,607
---------------------------
Total equity......................................... 357,448 325,691
===========================
$5,840,563 $4,993,230
===========================
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance premiums and other considerations........... $28,848 $49,608 $55,148
Net investment income................................. 192,636 179,940 166,857
Asset based fees...................................... 55,977 40,652 33,809
Other product charges................................. 10,470 10,412 7,335
Realized gains (losses) on investments................ (244) 3,876 134
Other revenues........................................ 20,033 22,164 27,241
------------------------------------------------------
Total revenues........................................... 307,720 306,652 290,524
Benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances............... 108,705 113,700 103,087
Benefit claims in excess of account balances........ 7,541 6,808 7,145
Traditional life insurance benefits................... 6,474 7,460 6,203
Supplementary contract payments....................... 11,121 11,508 11,286
Increase in traditional life reserves................. 8,580 13,212 12,977
Dividends to policyholders............................ 2,374 2,499 2,669
Other benefits........................................ 20,790 22,379 29,924
------------------------------------------------------
Total benefits........................................... 165,585 177,566 173,291
Commissions and other operating expenses................. 45,539 46,233 39,998
Amortization of deferred policy acquisition costs........ 25,930 26,628 24,674
Other expenses........................................... 1,667 1,099 785
Interest expense......................................... 4,285 7 630
------------------------------------------------------
Total benefits and expenses.............................. 243,006 251,533 239,378
------------------------------------------------------
Income before income taxes............................... 64,714 55,119 51,146
Income taxes (NOTE 5).................................... 20,871 17,927 17,129
------------------------------------------------------
Net income............................................... $43,843 $37,192 $34,017
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Retained earnings:
Beginning of year, as previously reported............. $207,669 $150,726 $128,785
Cumulative effect of change in accounting principle... 106,415 126,166 114,090
------------------------------------------------------
Beginning of year, as restated........................ 314,084 276,892 242,875
Net income............................................ 43,843 37,192 34,017
------------------------------------------------------
End of year........................................... 357,927 314,084 276,892
Unrealized appreciation (depreciation)
of securities available-for-sale, net:
Beginning of year................................... 11,607 (48,466) (10,034)
Cumulative effect of change in accounting principle
(NOTE 1).......................................... - - 10,733
Change in unrealized appreciation (depreciation) of
securities available-for-sale, net................ (12,086) 60,073 (49,165)
------------------------------------------------------
End of year......................................... (479) 11,607 (48,466)
------------------------------------------------------
Total equity............................................. $357,448 $325,691 $228,426
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $43,843 $37,192 $34,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Annuity and interest sensitive life products:
Interest credited to account balances............. 108,705 113,700 103,087
Charges for mortality and administration.......... (13,115) (16,585) (17,000)
Decrease (increase) in traditional life policy
reserves.......................................... 10,697 2,142 (5,950)
Increase in accrued investment income............... (1,538) (4,573) (567)
Policy acquisition costs deferred................... (36,865) (33,021) (38,737)
Policy acquisition costs amortized.................. 25,930 26,628 24,674
Accrual of discounts on investments................. (3,905) (3,421) (3,588)
Amortization of premiums on investments............. 11,284 9,782 15,726
Provision for depreciation and amortization......... 3,748 3,750 3,201
Other............................................... (3,379) (4,225) 2,511
------------------------------------------------------
Net cash provided by operating activities................ 145,405 131,369 117,374
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities available-for-sale................... 870,240 517,480 318,252
Fixed maturities held-to-maturity..................... 58,874 59,873 147,043
Equity securities available-for-sale.................. 8,857 10,242 3,830
Mortgage loans........................................ 12,545 23,248 21,096
Real estate........................................... 2,935 3,173 2,782
Short-term investments................................ 20,069 229,871 834,082
Other invested assets................................. 6,224 22,839 6,748
------------------------------------------------------
979,744 866,726 1,333,833
Acquisition of investments:
Fixed maturities available-for-sale................... (936,376) (591,121) (552,433)
Fixed maturities held-to-maturity..................... (52,422) (125,276) (56,398)
Equity securities available-for-sale.................. (68,222) (19,500) (4,627)
Mortgage loans........................................ (4,538) (4,179) (34,260)
Real estate........................................... (2,637) (1,511) (554)
Short-term investments................................ (19,070) (180,259) (854,833)
Other invested assets................................. (3,712) (31,861) (18,581)
------------------------------------------------------
(1,086,977) (953,707) (1,521,686)
</TABLE>
25
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Other investing activities:
Purchase of property and equipment.................... $(1,879) $(2,036) $(2,932)
Net increase in policy loans.......................... (6,370) (8,058) (5,569)
Net cash transferred per coinsurance agreement........ - (16,295) -
------------------------------------------------------
Net cash used in investing activities.................... (115,482) (113,370) (196,354)
FINANCING ACTIVITIES
Issuance of long-term debt............................... 65,000 - -
Annuity and interest sensitive life products:
Deposits credited to account balances................. 705,118 509,183 553,542
Withdrawals from account balances..................... (808,519) (526,509) (466,760)
------------------------------------------------------
Net cash provided by (used in) financing activities...... (38,401) (17,326) 86,782
------------------------------------------------------
Increase (decrease) in cash and cash equivalents......... (8,478) 673 7,802
Cash and cash equivalents at beginning of year........... 16,788 16,115 8,313
------------------------------------------------------
Cash and cash equivalents at end of year................. $8,310 $16,788 $16,115
======================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $2,966 $120 $157
======================================================
Income taxes.......................................... $16,213 $11,551 $14,634
======================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of mortgage loans to real estate owned........ $844 $- $2,350
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Security Benefit Life Insurance Company (SBL or the Company) is a
Kansas-domiciled mutual life insurance company whose insurance operations are
licensed to sell insurance products in 50 states. The Company offers a
diversified portfolio of individual and group annuities, ordinary life and
mutual fund products through multiple distribution channels. In recent years,
the Company's new business activities have increasingly been concentrated in the
individual flexible premium variable annuity markets.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles (GAAP). Prior to 1996, the
Company prepared its financial statements in conformity with accounting
practices prescribed or permitted by the Kansas Insurance Department, which
practices were considered GAAP for mutual life insurance companies and their
stock life insurance subsidiaries. Financial Accounting Standards Board (FASB)
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 annual financial statements and thereafter, no longer permits
statutory-basis financial statements to be described as being prepared in
conformity with GAAP. Accordingly, the Company has adopted GAAP, including
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 Statement of Position 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises," which address the accounting for long-duration and short-duration
insurance and reinsurance contracts, including all participating business.
Pursuant to the requirements of FASB Interpretation No. 40 and SFAS No. 120, the
effect of the changes in accounting have been applied retroactively, and the
previously issued 1995 and 1994 financial statements have been restated for the
change. The effect of the changes applicable to years prior to January 1, 1994
has been presented as a restatement of retained earnings as of that date. The
adoption had the effect of increasing net income for 1996, 1995 and 1994 by
approximately $5,897,000, $8,436,000 and $6,663,000, respectively.
The consolidated financial statements include the operations and accounts of
Security Benefit Life Insurance Company and the following wholly-owned
subsidiaries: Security Benefit Group, Inc., First Security Benefit Life
Insurance and Annuity Company of New York, Security
27
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management Company, LLC, Security Distributors, Inc., Security Benefit Academy,
Inc., First Advantage Insurance Agency, Inc. and Creative Impressions, Inc.
Significant intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING CHANGE
Prior to January 1, 1994, fixed maturities were reported at cost, adjusted for
amortization of premiums and accrual of discounts. Effective January 1, 1994,
the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 requires that fixed maturities are to be
classified as either held-to-maturity, trading or available-for-sale. Equity
securities are to be classified as either available-for-sale or trading. The
adoption had no effect on net income and resulted in an increase in equity at
January 1, 1994 of $10,733,000, net of the related effect of deferred policy
acquisition costs and deferred income taxes.
INVESTMENTS
Fixed maturities have been classified as either held-to-maturity or
available-for-sale. Fixed maturities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accrual of discounts. Such amortization and accrual
on these securities are included in investment income. Fixed maturities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale fixed maturities are stated at fair value with the unrealized
appreciation or depreciation, net of adjustment of deferred policy acquisition
costs and deferred income taxes, reported in a separate component of equity and,
accordingly, have no effect on net income. The DPAC offsets to the unrealized
appreciation or depreciation represent valuation adjustments or restatements of
DPAC that would have been required as a charge or credit to operations had such
unrealized amounts been realized. The amortized cost of fixed maturities
classified as available-for-sale is adjusted for amortization of premiums and
accrual of discounts. Premiums and discounts are recognized over the estimated
lives of the assets adjusted for prepayment activity.
Equity securities consisting of common stocks, mutual funds and nonredeemable
preferred stock are carried at fair value and are reported in accordance with
SFAS No. 115. Mortgage loans and short-term investments are reported at cost,
adjusted for amortization of premiums and accrual of
28
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
discounts. Real estate investments are carried at the lower of depreciated cost
or estimated realizable value. Policy loans are reported at unpaid principal.
Investments accounted for by the equity method include investments in, and
advances to, various joint ventures and partnerships. Realized gains and losses
on sales of investments are recognized in revenues on the specific
identification method.
The carrying amounts of all the Company's investments are reviewed on an ongoing
basis. If this review indicates a decline in value that is other than temporary
for any investment, the amortized cost of the investment is reduced to its fair
value. Such reductions in carrying amount are recognized as realized losses in
the determination of net income.
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 reprice or 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 and
interest rate exchange agreements. Financial 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. Interest rate exchange agreements generally involve the
exchange of fixed and floating rate interest payments without an exchange of the
underlying principal.
Interest rate exchange agreements are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those of the
related insurance liabilities that the investments are supporting. The net
interest effect of such swap transactions is reported as an adjustment of
interest income as incurred.
Gains and losses on those instruments are included in the carrying amount of the
underlying hedged investments, or anticipated investment transactions, and are
amortized over the remaining lives of the hedged investments as adjustments to
investment income. Any unamortized gains or losses are recognized when the
underlying investments are sold.
DEFERRED POLICY ACQUISITION COSTS
To the extent recoverable from future policy revenues and gross profits,
commissions and other policy-issue, underwriting and marketing costs incurred to
acquire or renew traditional life insurance, interest sensitive life and
deferred annuity business that vary with and are primarily related to the
production of new and renewal business have been deferred.
29
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Traditional life insurance deferred policy acquisition costs are being amortized
in proportion to premium revenues over the premium-paying period of the related
policies using assumptions consistent with those used in computing policy
benefit reserves.
For interest sensitive life and deferred annuity business, deferred policy
acquisition costs are amortized in proportion to the present value (discounted
at the crediting rate) of expected gross profits from investment, mortality and
expense margins. That amortization is adjusted retrospectively when estimates of
current or future gross profits to be realized from a group of products are
revised.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers certificates
of deposits with original maturities of 90 days or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment, including real estate, furniture and fixtures, and data
processing hardware and related systems, are recorded at cost, less accumulated
depreciation. The provision for depreciation of property and equipment is
computed using the straight-line method over the estimated lives of the related
assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for the benefit of
contractholders who bear the investment risk. The separate account assets and
liabilities are carried at fair value. Revenues and expenses related to separate
account assets and liabilities, to the extent of benefits paid or provided to
the separate account contractholders, are excluded from the amounts reported in
the consolidated statements of income. Investment income and gains or losses
arising from separate accounts accrue directly to the contractholders and are,
therefore, not included in investment earnings in the accompanying statements of
income. Revenues to the Company from separate accounts consist principally of
contract maintenance charges, administrative fees, and mortality and expense
risk charges.
POLICY RESERVES AND ANNUITY ACCOUNT VALUES
The liabilities for future policy benefits for traditional life and reinsurance
products are computed using a net level premium method, including assumptions as
to investment yields, mortality, withdrawals, and other assumptions that
approximate expected experience.
30
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liabilities for future policy benefits for interest sensitive life and deferred
annuity products represent accumulated contract values without reduction for
potential surrender charges and deferred front-end contract charges that are
amortized over the life of the policy. Interest on accumulated contract values
is credited to contracts as earned. Crediting rates ranged from 3.5% to 7.25%
during 1996, 4.0% to 7.75% during 1995, and 4.5% to 7.75% during 1994.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under that method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws. Deferred income tax expenses or credits
reflected in the Company's statements of income are based on the changes in
deferred tax assets or liabilities from period to period (excluding the SFAS No.
115 adjustment, which is charged or credited directly to equity).
RECOGNITION OF REVENUES
Traditional life insurance products include whole life insurance, term life
insurance and certain annuities. Premiums for these traditional products are
recognized as revenues when due. Revenues from interest sensitive life insurance
products and deferred annuities consist of policy charges for the cost of
insurance, policy administration charges and surrender charges assessed against
contractholder account balances during the period.
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, certificates of deposits and short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate
their fair values.
Investment securities: Fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities 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.
Mortgage loans and policy loans: Fair values for mortgage loans and policy
loans are estimated using discounted cash flow analyses based on interest
rates currently being offered
31
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
for similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations.
Investment-type 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.
Long-term debt: Fair values for long-term debt are estimated using
discounted cash flow analyses based on current borrowing rates available
for similar types of borrowing arrangements.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses, and
fair values of the Company's portfolio of fixed maturities and equity securities
at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $173,884 $414 $1,431 $172,867
Obligations of states and political subdivisions. 23,244 361 705 22,900
Special revenue and assessment................... 330 - - 330
Corporate securities............................. 863,124 13,758 18,651 858,231
Mortgage-backed securities....................... 627,875 9,091 9,308 627,658
Asset-backed securities.......................... 122,523 832 275 123,080
=================================================================
Total fixed maturities........................... $1,810,980 $24,456 $30,370 $1,805,066
=================================================================
Equity securities................................ $86,991 $2,422 $225 $89,188
=================================================================
</TABLE>
32
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Obligations of states and political subdivisions. $81,791 $463 $1,036 $81,218
Special revenue and assessment................... 420 - - 420
Corporate securities............................. 128,487 2,003 1,830 128,660
Mortgage-backed securities....................... 264,155 2,121 1,347 264,929
Asset-backed securities.......................... 53,192 382 97 53,477
-----------------------------------------------------------------
Total fixed maturities........................... $528,045 $4,969 $4,310 $528,704
=================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $5,746 $522 $- $6,268
Obligations of states and political subdivisions. 23,304 510 139 23,675
Special revenue and assessment................... 330 2 - 332
Corporate securities............................. 857,926 29,671 13,146 874,451
Mortgage-backed securities....................... 857,685 17,838 1,879 873,644
-----------------------------------------------------------------
Total fixed securities........................... $1,744,991 $48,543 $15,164 $1,778,370
=================================================================
Equity securities................................ $21,278 $687 $85 $21,880
=================================================================
HELD-TO-MATURITY
Obligations of states and political subdivisions. $67,160 $1,221 $- $68,381
Special revenue and assessment................... 870 - - 870
Corporate securities............................. 163,032 6,426 43 169,415
Mortgage-backed securities....................... 305,075 5,539 4 310,610
-----------------------------------------------------------------
Totals........................................... $536,137 $13,186 $47 $549,276
=================================================================
</TABLE>
The change in the Company's unrealized appreciation (depreciation) on fixed
maturities was $(51,773,000), $220,048,000 and $(219,496,000) during 1996, 1995
and 1994, respectively; the corresponding amounts for equity securities were
$1,595,000, $1,034,000 and $(1,702,000) during 1996, 1995 and 1994,
respectively.
33
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------------------------------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less........................ $17,711 $17,764 $320 $320
Due after one year through five years.......... 197,414 197,267 12,184 12,240
Due after five years through 10 years.......... 469,394 471,099 47,804 48,193
Due after 10 years............................. 376,063 368,198 150,390 149,545
Mortgage-backed securities..................... 627,875 627,658 264,155 264,929
Asset-backed securities........................ 122,523 123,080 53,192 53,477
-------------------------------------------------------------------
$1,810,980 $1,805,066 $528,045 $528,704
===================================================================
</TABLE>
Late in 1995, the FASB issued a special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." This report provided companies with an opportunity for a one-time
reassessment and reclassification of securities as of a single measurement date
without tainting the held-to-maturity debt securities classification. On
December 8, 1995, the Company reclassified securities with an amortized cost of
$202,417,000 from held-to-maturity to available-for-sale. The transfer resulted
in an increase to unrealized gains on securities of approximately $2,162,000 net
of related adjustments for deferred policy acquisition costs and deferred income
taxes.
The Company did not hold any investments that individually exceeded 10% of
equity at December 31, 1996 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
34
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Major categories of net investment income are summarized as follows:
1996 1995 1994
--------------------------------
(IN THOUSANDS)
Interest on fixed maturities............. $174,592 $165,684 $154,739
Dividends on equity securities........... 5,817 1,309 712
Interest on mortgage loans............... 6,680 7,876 7,746
Real estate income....................... 781 1,287 1,326
Interest on policy loans................. 6,372 5,927 5,462
Interest on short-term investments....... 1,487 2,625 2,272
Other.................................... 3,418 1,453 525
--------------------------------
Total investment income.................. 199,147 186,161 172,782
Investment expenses...................... 6,511 6,221 5,925
================================
Net investment income.................... $192,636 $179,940 $166,857
================================
Proceeds from sales of fixed maturities and equity securities and related
realized gains and losses, including valuation adjustments, are as follows:
1996 1995 1994
-------------------------------------------
(IN THOUSANDS)
Proceeds from sales............... $393,189 $310,590 $128,533
Gross realized gains.............. 9,407 5,901 5,814
Gross realized losses............. 9,723 3,361 4,889
The composition of the Company's portfolio of fixed maturities by quality rating
at December 31, 1996 is as follows:
QUALITY RATING CARRYING AMOUNT %
- -------------------------- ------------------------- --------------------
(IN THOUSANDS)
AAA...................... $1,199,762 51.4%
AA....................... 158,785 6.8
A........................ 361,008 15.5
BBB...................... 416,589 17.9
Noninvestment grade...... 196,967 8.4
========================= ====================
$2,333,111 100.0%
========================= ====================
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 14 states. The loans are somewhat geographically
concentrated in the midwestern
35
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
and southwestern United States with the largest outstanding balances at December
31, 1996 being in the states of Kansas (34%), Iowa (15%) and Texas (14%).
Net realized gains (losses) consist of the following:
1996 1995 1994
--------------------------------------
(IN THOUSANDS)
Fixed maturities...................... $(1,329) $1,805 $397
Equity securities..................... 1,013 735 528
Other................................. 72 1,336 (791)
======================================
Total realized gains (losses)......... $(244) $3,876 $134
======================================
Deferred losses totaling $2.2 million and $3.9 million at December 31, 1996 and
1995, respectively, resulting from terminated and expired futures contracts are
included in fixed maturities and will be amortized as an adjustment to net
investment income. The notional amount of outstanding agreements to sell
securities was $79 million at December 31, 1995. There were no outstanding
agreements at December 31, 1996.
For interest rate exchange agreements, one agreement was terminated during 1996
resulting in a deferred gain of $1.1 million. The notional amount of the
remaining outstanding agreements was $30 million at December 31, 1996. Also, as
of December 31, 1996, these agreements have maturities ranging from March 1997
to May 2005. Under these agreements, the Company receives variable rates based
on the one- and three-month LIBOR and pays fixed rates ranging from 6.875% to
7.215%.
3. 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 highest
average compensation over a period of five consecutive years during the last 10
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."
36
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Pension cost for the plan for 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Service cost................................ $670 $528 $679
Interest cost............................... 587 508 535
Actual return on plan assets................ (1,064) (1,568) 310
Net amortization and deferral............... 284 900 (949)
----------------------------------
Net pension cost............................ $477 $368 $575
==================================
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
-------------------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $(6,059) $(5,243)
Non-vested benefit obligation..................... (202) (165)
-------------------------
Accumulated benefit obligation.................... (6,261) (5,408)
Excess of projected benefit
obligation over accumulated
benefit obligation.............................. (2,961) (2,865)
-------------------------
Projected benefit obligation...................... (9,222) (8,273)
Plan assets, at fair market value.................... 10,085 8,342
-------------------------
Plan assets greater than projected
benefit obligation................................ 863 69
Unrecognized net loss................................ 1,007 1,560
Unrecognized prior service cost...................... 700 758
Unrecognized net asset established
at the date of initial application................. (1,841) (2,025)
-------------------------
Net prepaid pension cost............................. $729 $362
=========================
Assumptions were as follows:
1996 1995 1994
-------------------------
Weighted average discount rate................... 7.75% 7.5% 8.5%
Weighted average rate of increase in
compensation for participants age
45 and older.................................. 4.5 4.5 4.5
Weighted average expected long-term
return on plan assets......................... 9.0 9.0 9.0
37
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Compensation rates that vary by age for participants under age 45 were used in
determining the actuarial present value of the projected benefit obligation in
1996. 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 provides
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's
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.
Retiree medical care and life insurance cost for the total plan for 1996, 1995
and 1994 is summarized as follows:
1996 1995 1994
--------------------------------
(IN THOUSANDS)
Service cost........................ $157 $151 $116
Interest cost....................... 280 305 275
--------------------------------
$437 $456 $391
================================
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
----------------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.......................................... $(2,498) $(2,514)
Active participants:
Retirement eligible............................... (568) (632)
Others............................................ (1,023) (1,035)
----------------------
(4,089) (4,181)
Unrecognized net (gain) loss......................... (348) 67
----------------------
Accrued postretirement benefit cost.................. $(4,437) $(4,114)
======================
The annual assumed rate of increase in the per capita cost of covered benefits
is 10% for 1996 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health care 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, 1996 by
$191,000
38
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by $54,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.75%, 7.5% and 8.5% at December 31, 1996, 1995 and 1994,
respectively.
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 $1,783,000,
$1,567,000 and $1,075,000 for 1996, 1995 and 1994, respectively.
4. REINSURANCE
The Company assumes and cedes reinsurance with other companies to provide for
greater diversification of business, allow management to control exposure to
potential losses arising from large risks, and provide additional capacity for
growth. The Company's maximum retention on any one life is $500,000. The Company
does not use financial or surplus relief reinsurance. Life insurance in force
ceded at December 31, 1996 and 1995 was $4.0 and $3.9 billion, respectively.
Principal reinsurance transactions are summarized as follows:
1996 1995 1994
-----------------------------------
(IN THOUSANDS)
Reinsurance ceded:
Premiums paid...................... $25,442 $5,305 $3,980
===================================
Commissions received............... $4,669 $230 $1,443
===================================
Claim recoveries................... $5,235 $3,089 $2,485
===================================
In the accompanying financial statements, premiums, benefits, settlement
expenses and deferred policy acquisition costs are reported net of reinsurance
ceded; policy liabilities and accruals are reported gross of reinsurance ceded.
The Company remains liable to policyholders if the reinsurers are unable to meet
their contractual obligations under the applicable reinsurance agreements. To
minimize its exposure to significant losses from reinsurance insolvencies, the
39
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE (CONTINUED)
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of reinsurers. At December 31, 1996 and
1995, the Company had established a receivable totaling $92,197,000 and
$78,877,000 for reserve credits, reinsurance claims and other receivables from
its reinsurers. The amount of reinsurance assumed is not significant.
In 1995, the Company transferred, through a 100% coinsurance agreement, $66.9
million in policy reserves and claim liabilities. The agreement related to a
block of whole life and decreasing term life insurance business.
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 significantly adverse effect on
the Company. The nonmajor medical business placed in the pool has experienced
significant losses. At December 31, 1996, the Company believes adequate
provision has been made for such losses.
5. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return. The
provision for income taxes includes current federal income tax expense or
benefit and deferred income tax expense or benefit due to temporary differences
between the financial reporting and income tax bases of assets and liabilities.
Such differences relate principally to liabilities for future policy benefits
and accumulated contract values, deferred compensation, deferred policy
acquisition costs, postretirement benefits, deferred selling commissions,
depreciation expense and unrealized appreciation (depreciation) on securities
available-for-sale.
Income tax expense consists of the following for 1996, 1995 and 1994:
1996 1995 1994
----------------------------------------------
(IN THOUSANDS)
Current......................... $12,528 $15,200 $11,361
Deferred........................ 8,343 2,727 5,768
----------------------------------------------
$20,871 $17,927 $17,129
==============================================
The provision for income taxes differs from the amount computed at the statutory
federal income tax rate due primarily to dividends received deductions and tax
credits.
40
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Income taxes paid by the Company were $16,213,000, $11,551,000, and $14,634,000
during 1996, 1995, and 1994, respectively.
Net deferred tax assets or liabilities consist of the following:
1996 1995
-------------------------
(IN THOUSANDS)
Deferred tax assets:
Future policy benefits.......................... $20,487 $17,780
Net unrealized depreciation on
securities available-for-sale................. 1,409 -
Guaranty fund assessments....................... 1,400 1,260
Employee benefits............................... 4,852 3,836
Other........................................... 4,620 3,662
-------------------------
Total deferred tax assets.......................... 32,768 26,538
Deferred tax liabilities:
Deferred policy acquisition costs............... 69,647 50,580
Net unrealized appreciation on
securities available-for-sale................. - 12,539
Deferred gain on investments.................... 10,446 8,681
Depreciation.................................... 2,061 988
Other........................................... 5,461 7,409
-------------------------
Tax deferred tax liabilities....................... 87,615 80,197
-------------------------
Net deferred tax liabilities....................... $54,847 $53,659
=========================
6. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Value 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. However, the liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk that minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts. 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 in excess of 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.
41
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONDENSED FAIR VALUE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------- -------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investments:
Fixed maturities (NOTE 2)................. $2,333,111 $2,333,770 $2,314,507 $2,327,646
Equity securities (NOTE 2)................ 89,188 89,188 21,880 21,880
Mortgage loans............................ 66,611 69,004 74,342 80,175
Policy loans.............................. 106,822 108,685 100,452 104,077
Short-term investments.................... - - 992 992
Cash and cash equivalents................. 8,310 8,310 16,788 16,788
Accrued investment income................. 32,161 32,161 30,623 30,623
Futures contracts......................... - - - (737)
Interest rate exchange agreements ........ - (282) - (2,291)
Liabilities:
Supplementary contracts without life
contingencies........................... 33,225 33,803 34,363 35,387
Individual and group annuities............ 1,942,697 1,767,692 1,922,901 1,774,642
Long-term debt............................ 65,000 67,683 - -
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under several operating lease agreements.
Total expense for all operating leases amounted to $1,904,000, $1,302,000 and
$1,450,000 for 1996, 1995 and 1994, respectively. The Company has aggregate
future lease commitments at December 31, 1996 of $4,337,000 for noncancelable
operating leases consisting of $992,000 in 1997, $941,000 in 1998, $829,000 in
1999, $818,000 in 2000 and $757,000 in 2001 and thereafter.
In addition, in 2001, under the terms of an operating lease for an airplane, the
Company has the option to renew the lease for another five years, purchase the
airplane for approximately $4.7 million, or return the airplane to the lessor
and pay a termination charge of approximately $3.7 million. If the option to
renew the lease for five years is selected, at the end of the five-year period
(2006), the Company has the option to purchase the airplane for approximately
$3.4 million or return the airplane to the lessor and pay a termination charge
of approximately $2.7 million.
42
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The economy and other factors have caused an increase in the number of insurance
companies that have required regulatory supervision. Guaranty fund assessments
are levied on the Company by life and health guaranty associations in most
states in which it is licensed to cover losses of policyholders of insolvent or
rehabilitated insurers. In some states, these assessments can be partially
recovered through a reduction in future premium taxes. The Company cannot
predict whether and to what extent legislative initiatives may affect the right
to offset. Based on information from the National Organization of Life and
Health Guaranty Association and information from the various state guaranty
associations, the Company believes that it is probable that these insolvencies
will result in future assessments. The Company regularly evaluates its reserve
for these insolvencies and updates its reserve based on the Company's
interpretation of information recently received. The associated costs for a
particular insurance company can vary significantly based on its premium volume
by line of business in a particular state and its potential for premium tax
offset. The Company accrued and charged to expense $1,574,000, $2,302,000 and
$237,000 for 1996, 1995 and 1994, respectively. At December 31, 1996, the
Company has reserved $4,000,000 to cover current and estimated future
assessments net of related premium tax credits.
8. LONG-TERM DEBT
The Company has a $75.5 million line of credit facility from the Federal Home
Loan Bank of Topeka. Any borrowings in connection with this facility bear
interest at .1% over the Federal Funds rate. No amounts were outstanding at
December 31, 1996.
In February 1996, the Company negotiated three separate $5,000,000 advances with
the Federal Home Loan Bank of Topeka. The advances are due February 27, 1998,
February 26, 1999 and February 28, 2001 and carry interest rates of 5.59%, 5.76%
and 6.04%, respectively.
In May 1996, the Company issued $50 million of 8.75% surplus notes maturing on
May 15, 2016. The surplus notes were issued pursuant to Rule 144A under the
Securities Act of 1933. The surplus notes have repayment conditions and
restrictions whereby each payment of interest on or principal of the surplus
notes may be made only with the prior approval of the Kansas Insurance
Commissioner and only out of surplus funds that the Kansas Insurance
Commissioner determines to be available for such payment under the Kansas
Insurance Code.
9. RELATED-PARTY TRANSACTIONS
The Company owns shares of mutual funds managed by Security Management Company,
LLC with a net asset value totaling $60,559,000 and $5,364,000 at December 31,
1996 and 1995, respectively.
43
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets were as follows:
1996 1995
--------------------------
(IN THOUSANDS)
Premium and annuity considerations
for the variable annuity products and
variable universal life product for
which the contractholder, rather than
the Company, bears the
investment risk................................ $2,793,911 $2,051,292
Assets of the separate accounts owned by
the Company, at fair value..................... 9,016 14,014
--------------------------
$2,802,927 $2,065,306
==========================
11. STATUTORY INFORMATION
The Company and its insurance subsidiary prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Kansas and New York Insurance regulatory authorities, respectively.
Accounting practices used to prepare statutory-basis financial statements for
regulatory filings of life insurance companies differ in certain instances from
GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. Statutory
capital and surplus of the insurance operations are $286,689,000 and
$207,669,000 at December 31, 1996 and 1995, respectively.
44
