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VARIFLEX
VARIABLE ANNUITY CONTRACTS
ISSUED BY--
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON, TOPEKA, KANSAS 66636-0001
(785) 431-3000
THE DATE OF THIS SUPPLEMENT IS MAY 1, 1998
This Supplement updates certain information in the Prospectuses dated April 30,
1996, as supplemented July 1, 1996, and May 1, 1997, 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 following paragraph is added after the last paragraph on page 1:
The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding
companies that file electronically with the Securities and Exchange
Commission.
The "SUMMARY OF EXPENSES," page 5, is updated below:
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or amount withdrawn, as applicable)(1)............................... 8%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 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%
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THIS SUPPLEMENT SHOULD BE RETAINED FOR FUTURE REFERENCE.
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1
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SBL FUND ANNUAL EXPENSES (as a percentage of average net assets)
MANAGEMENT OTHER TOTAL ANNUAL
FEES (3) EXPENSES EXPENSES(3)
---------- -------- ------------
Growth (Series A)......................... 0.75% 0.06% 0.81%
Growth-Income (Series B).................. 0.75% 0.08% 0.83%
Money Market (Series C)................... 0.50% 0.08% 0.58%
Worldwide Equity (Series D)............... 1.00% 0.24% 1.24%
High Grade Income (Series E).............. 0.75% 0.08% 0.83%
Emerging Growth (Series J)................ 0.75% 0.07% 0.82%
Global Aggressive Bond (Series K)......... 0.75% 0.64% 1.39%
Specialized Asset Allocation (Series M)... 1.00% 0.26% 1.26%
Managed Asset Allocation (Series N)....... 1.00% 0.35% 1.35%
Equity Income (Series O).................. 1.00% 0.09% 1.09%
Social Awareness (Series S)............... 0.75% 0.08% 0.83%
(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, 1997, the Investment Manager
waived the management fees of Series K. Beginning May 1, 1998, the
Investment Manager will no longer waive Series K's management fee. The
expense information above has been restated to reflect what Series K's
expenses would have been during fiscal year 1997 absent the fee waiver.
EXAMPLE: VARIFLEX CONTRACTS (EXCLUDING VARIFLEX CONTRACTS - 401(K) AND 408(K))
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If you surrender your contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return on assets:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Growth Series............................. 101 125 153 244
Growth-Income Series...................... 102 125 154 246
Money Market Series....................... 99 118 142 220
Worldwide Equity Series................... 110 149 197 330
High Grade Income Series.................. 102 125 154 246
Emerging Growth Series.................... 102 125 154 245
Global Aggressive Bond Series............. 100 120 145 226
Specialized Asset Allocation Series....... 106 138 176 290
Managed Asset Allocation Series........... 107 140 181 298
Equity Income Series...................... 104 133 168 273
Social Awareness Series................... 102 125 154 246
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............................. 21 66 113 244
Growth-Income Series...................... 22 67 114 246
Money Market Series....................... 19 59 102 220
Worldwide Equity Series................... 30 92 157 330
High Grade Income Series.................. 22 67 114 246
Emerging Growth Series.................... 22 66 114 245
Global Aggressive Bond Series............. 20 61 105 226
Specialized Asset Allocation Series....... 26 80 136 290
Managed Asset Allocation Series........... 27 82 141 298
Equity Income Series...................... 24 75 128 273
Social Awareness Series................... 22 67 114 246
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2
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EXAMPLE: VARIFLEX CONTRACTS - 401(K) AND 408(K) (SOLD PRIOR TO MAY 1, 1990)
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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............................. 102 145 184 246
Growth-Income Series...................... 102 146 185 248
Money Market Series....................... 99 139 173 222
Worldwide Equity Series................... 110 169 227 332
High Grade Income Series.................. 102 146 185 248
Emerging Growth Series.................... 102 145 185 247
Global Aggressive Bond Series............. 100 140 176 229
Specialized Asset Allocation Series....... 106 158 207 291
Managed Asset Allocation Series........... 107 160 212 300
Equity Income Series...................... 104 153 199 275
Social Awareness Series................... 102 146 185 248
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 67 114 246
Growth-Income Series...................... 22 67 115 248
Money Market Series....................... 19 60 103 222
Worldwide Equity Series................... 30 93 158 332
High Grade Income Series.................. 22 67 115 248
Emerging Growth Series.................... 22 67 115 247
Global Aggressive Bond Series............. 20 62 106 229
Specialized Asset Allocation Series....... 26 80 137 291
Managed Asset Allocation Series........... 27 83 142 300
Equity Income Series...................... 24 75 129 275
Social Awareness Series................... 22 67 115 248
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.
The "CONDENSED FINANCIAL INFORMATION" set forth below has been updated to
include financial information for the period ended December 31, 1997:
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>
1997 1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GROWTH SERIES (SERIES A)
Accumulation unit value:
Beginning of period ... $45.76 $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59 $13.41
End of period ......... $58.19 $45.76 $37.75 $27.94 $28.75 $25.59 $23.30 $17.33 $19.45 $14.59
Accumulation units
outstanding at the
end of period ......... 11,293,953 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
</TABLE>
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<TABLE>
<CAPTION>
1997 1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
GROWTH-INCOME SERIES (SERIES B)
Accumulation unit value:
Beginning of period ... $46.58 $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46 $14.81
End of period ......... $58.22 $46.58 $39.88 $31.03 $32.37 $29.89 $28.47 $20.92 $22.16 $17.46
Accumulation units
outstanding at the
end of period ......... 15,086,547 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
MONEY MARKET SERIES (SERIES C)
Accumulation unit value:
Beginning of period ... $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30 $12.56
End of period ......... $18.97 $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.27 $14.33 $13.30
Accumulation units
outstanding at the
end of period ......... 2,479,744 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
WORLDWIDE EQUITY SERIES (SERIES D)
Accumulation unit value:
Beginning of period ... $14.51 $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33
End of period ......... $15.26 $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74
Accumulation units
outstanding at the
end of period ......... 12,804,601 11,881,450 10,236,349 9,361,197 5,863,967 2,070,715 917,833 466,703 607,650 633,816
HIGH GRADE INCOME SERIES (SERIES E)
Accumulation unit value:
Beginning of period ... $21.69 $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90 $12.17
End of period ......... $23.58 $21.69 $22.11 $18.87 $20.52 $18.44 $17.37 $15.04 $14.26 $12.90
Accumulation units
outstanding at the
end of period ......... 3,446,850 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
EMERGING GROWTH SERIES (SERIES J)
Accumulation unit value:
Beginning of period ... $18.03 $15.46 $13.10 $13.97 $12.44 $10.00 --- --- --- ---
End of period ......... $21.37 $18.03 $15.46 $13.10 $13.97 $12.44 --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 6,738,379 5,563,881 4,387,739 3,947,047 2,131,858 455,105 --- --- --- ---
GLOBAL AGGRESSIVE BOND SERIES (SERIES K)
Accumulation unit value:
Beginning of period ... $12.00 $10.69 $10.00 --- --- --- --- --- --- ---
End of period ......... $12.50 $12.00 $10.69 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 425,354 306,339 129,589 --- --- --- --- --- --- ---
SPECIALIZED ASSET ALLOCATION SERIES (SERIES M)
Accumulation unit value:
Beginning of period ... $12.01 $10.64 $10.00 --- --- --- --- --- --- ---
End of period ......... $12.59 $12.01 $10.64 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 1,672,896 1,274,106 611,652 --- --- --- --- --- --- ---
MANAGED ASSET ALLOCATION SERIES (SERIES N)
Accumulation unit value:
Beginning of period ... $11.87 $10.66 $10.00 --- --- --- --- --- --- ---
End of period ......... $13.89 $11.87 $10.66 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 1,057,271 626,179 295,053 --- --- --- --- --- --- ---
</TABLE>
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<TABLE>
<CAPTION>
1997 1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QUALIFIED CONTRACTS
EQUITY INCOME SERIES (SERIES O)
Accumulation unit value:
Beginning of period ... $13.78 $11.62 $10.00 --- --- --- --- --- --- ---
End of period ......... $17.49 $13.78 $11.62 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 4,135,375 2,016,966 604,325 --- --- --- --- --- --- ---
SOCIAL AWARENESS SERIES (SERIES S)
Accumulation unit value:
Beginning of period ... $18.75 $15.97 $12.65 $13.31 $12.04 $10.47 $10.00 --- --- ---
End of period ......... $22.72 $18.75 $15.97 $12.65 $13.31 $12.04 $10.47 --- --- ---
Accumulation units
outstanding at the
end of period ......... 2,531,119 2,083,090 1,615,845 1,344,063 993,233 513,953 127,699 --- --- ---
NON-QUALIFIED CONTRACTS
GROWTH SERIES (SERIES A)
Accumulation unit value:
Beginning of period ... $45.74 $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59 $13.41
End of period ......... $58.17 $45.74 $37.74 $27.92 $28.74 $25.58 $23.30 $17.32 $19.45 $14.59
Accumulation units
outstanding at the
end of period ......... 2,652,767 2,575,426 2,306,163 1,578,797 1,483,618 1,766,896 1,328,865 952,806 594,856 493,463
GROWTH-INCOME SERIES (SERIES B)
Accumulation unit value:
Beginning of period ... $46.54 $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46 $14.80
End of period ......... $58.17 $46.54 $39.84 $31.00 $32.34 $29.87 $28.44 $20.91 $22.16 $17.46
Accumulation units
outstanding at the
end of period ......... 3,653,913 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
MONEY MARKET SERIES (SERIES C)
Accumulation unit value:
Beginning of period ... $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29 $12.55
End of period ......... $18.98 $18.26 $17.59 $16.89 $16.48 $16.26 $15.94 $15.28 $14.32 $13.29
Accumulation units
outstanding at the
end of period ......... 1,089,550 1,681,230 1,469,153 2,475,349 1,913,212 1,031,855 1,000,378 954,107 846,414 853,615
WORLDWIDE EQUITY SERIES (SERIES D)
Accumulation unit value:
Beginning of period ... $14.51 $12.51 $11.42 $11.25 $ 8.65 $8.99 $8.07 $10.57 $11.74 $11.33
End of period ......... $15.26 $14.51 $12.51 $11.42 $11.25 $8.65 $8.99 $ 8.07 $10.57 $11.74
Accumulation units
outstanding at the
end of period ......... 3,730,734 3,484,411 3,140,486 2,803,304 2,150,932 678,110 279,878 125,010 211,920 214,723
HIGH GRADE INCOME SERIES (SERIES E)
Accumulation unit value:
Beginning of period ... $21.67 $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89 $12.17
End of period ......... $23.56 $21.67 $22.09 $18.85 $20.50 $18.42 $17.36 $15.02 $14.25 $12.89
Accumulation units
outstanding at the
end of period ......... 1,535,471 1,377,342 1,325,159 1,392,830 1,290,268 962,775 784,496 582,285 519,624 419,410
</TABLE>
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5
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<TABLE>
<CAPTION>
1997 1996 1995(D)(E) 1994 1993 1992(C) 1991(A)(B) 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NON-QUALIFIED CONTRACTS
EMERGING GROWTH SERIES (SERIES J)
Accumulation unit value:
Beginning of period ... $18.03 $15.46 $13.09 $13.96 $12.44 $10.00 --- --- --- ---
End of period ......... $21.36 $18.03 $15.46 $13.09 $13.96 $12.44 --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 2,019,008 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 ... $12.00 $10.69 $10.00 --- --- --- --- --- --- ---
End of period ......... $12.49 $12.00 $10.69 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 212,934 178,818 74,528 --- --- --- --- --- --- ---
SPECIALIZED ASSET ALLOCATION SERIES (SERIES M)
Accumulation unit value:
Beginning of period ... $12.00 $10.64 $10.00 --- --- --- --- --- --- ---
End of period ......... $12.59 $12.00 $10.64 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 687,020 532,893 297,967 --- --- --- --- --- --- ---
MANAGED ASSET ALLOCATION SERIES (SERIES N)
Accumulation unit value:
Beginning of period ... $11.87 $10.66 $10.00 --- --- --- --- --- --- ---
End of period ......... $13.89 $11.87 $10.66 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 459,560 374,276 226,555 --- --- --- --- --- --- ---
EQUITY INCOME SERIES (SERIES O)
Accumulation unit value:
Beginning of period ... $13.78 $11.62 $10.00 --- --- --- --- --- --- ---
End of period ......... $17.48 $13.78 $11.62 --- --- --- --- --- --- ---
Accumulation units
outstanding at the
end of period ......... 1,257,818 710,206 234,242 --- --- --- --- --- --- ---
SOCIAL AWARENESS SERIES (SERIES S)
Accumulation unit value:
Beginning of period ... $18.75 $15.98 $12.66 $13.31 $12.04 $10.47 $10.00 --- --- ---
End of period ......... $22.73 $18.75 $15.98 $12.66 $13.31 $12.04 $10.47 --- --- ---
Accumulation units
outstanding at the
end of period ......... 904,831 746,852 612,235 543,287 389,861 226,145 98,344 --- --- ---
</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 1997 Annual Report to
Contractowners which contains audited financial statements of the Variflex
separate account for the year ended December 31, 1997.
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6
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The following paragraph is added under "SECURITY BENEFIT LIFE INSURANCE
COMPANY," page 11:
The Board of Directors and the policyholders of SBL have approved a Plan
of Conversion ("Plan") under which SBL would convert from a mutual life
insurance company to a stock life insurance company ultimately controlled
by a newly-formed mutual holding company to be named Security Benefit
Mutual Holding Company. Under the Plan, membership interests of current SBL
policyholders would become membership interests in Security Benefit Mutual
Holding Company upon conversion. After the conversion, persons who acquire
policies from SBL would automatically be members in the mutual holding
company. The conversion will not increase premiums or reduce policy
benefits, values, guarantees or other policy obligations to policyholders.
The Plan is subject to approval by the Insurance Commissioner of the State
of Kansas, among other approvals and conditions. If the necessary approvals
are obtained and conditions met, the conversion could occur in the second
quarter of 1998.
The following section is added following "SECURITY BENEFIT LIFE INSURANCE
COMPANY," page 11:
YEAR 2000 COMPLIANCE
Like other insurance companies, as well as other financial and business
organizations around the world, SBL could be adversely affected if the
computer systems used by SBL in performing its administrative functions do
not properly process and calculate date-related information and data
before, during and after January 1, 2000. Some computer software and
hardware systems currently cannot distinguish between the year 2000 and the
year 1900 or some other date because of the way date fields were encoded.
This is commonly known as the "Year 2000 Problem." If not addressed, the
Year 2000 Problem could impact (i) the administrative services provided by
SBL with respect to the Contract, and (ii) the management services provided
to the Fund by the Investment Manager, as well as transfer agency,
accounting, custody, distribution and other services provided to the Fund.
SBL has adopted a plan to be "Year 2000 Compliant" with respect to both
its internally built systems as well as systems provided by external
vendors. "Year 2000 Compliant" means that systems and programs which
require modification will have the date fields expanded to include the
century information and that for interfaces to external organizations as
well as new systems development, the year portion of the date field will be
expanded to four digits using the format YYYYMMDD. SBL's overall approach
to addressing the Year 2000 issue is as follows: (1) to inventory its
internal and external hardware, software, telecommunications and data
transmissions to customers and conduct a risk assessment with respect to
the impact that a failure on any such system would have on its business
operations; (2) to modify or replace its internal systems and obtain vendor
certifications of Year 2000 compliance for systems provided by vendors or
replace such systems that are not Year 2000 Compliant; and (3) to implement
and test its systems for Year 2000 compliance. SBL has completed the
inventory of its internal and external systems and has made substantial
progress toward completing the modification/replacement of its internal
systems as well as toward obtaining Year 2000 Compliant certifications from
its external vendors. Overall systems testing is scheduled to commence in
December 1998 and extend into the first six months of 1999.
Although SBL has taken steps to ensure that its systems will function
properly before, during and after the Year 2000, its key operating systems
and information sources are provided by or through external vendors which
creates uncertainty to the extent SBL is relying on the assurance of such
vendors as to whether its systems will be Year 2000 Compliant. The costs or
consequences of incomplete or untimely resolution of the Year 2000 issue
are unknown to SBL at this time but could have a material adverse impact on
the operations of the Separate Account and administration of the Contracts.
The Year 2000 Problem is also expected to impact companies, which may
include issuers of portfolio securities held by the Fund, to varying
degrees based upon various factors, including, but not limited to, industry
sector and degree of technological sophistication. SBL is unable to predict
what impact, if any, the Year 2000 Problem will have on issuers of
portfolio securities held by the Fund.
The Prospectus is updated by replacing the last paragraph under "SBL FUND," page
11, with the following:
The Investment Manager has engaged Lexington Management Corporation,
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663 to provide
investment advisory services to Series D and K. Lexington has entered into
an agreement with MFR Advisors, Inc., One Liberty Plaza, 46th Floor, New
York, New York 10006 to provide investment advisory services to Series K of
the Fund. The Investment Manager has engaged T. Rowe Price Associates,
Inc., 100 East Pratt Street, Baltimore, Maryland 21202 to provide
investment advisory services to Series N and O, and has engaged Meridian
Investment Management Corporation, 12835 East Arapahoe Road, Tower II, 7th
Floor, Engelwood, Colorado 80112, to provide investment advisory and
analytical services to Series M.
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7
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"CONTRACTOWNER INQUIRIES," page 16, is replaced with the following:
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 (785) 431-3112 or
(800) 888-2461, extension 3112.
The explanation of "LOANS AVAILABLE FROM CERTAIN QUALIFIED CONTRACTS," page 20,
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.
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 use
only 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 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.
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.
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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 24, is replaced with the following:
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
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
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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 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 Commencement Date
Code Section 72 provides that amounts received upon a total or partial
withdrawal (including systematic withdrawals) from a Contract prior to the
Annuity Commencement 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 Commencement 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:
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(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 Commencement 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 Commencement 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
Commencement 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 Commencement 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 Commencement 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
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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, and President Clinton's
fiscal-year 1999 Budget proposal includes a provision that, if adopted,
would impose new taxes on owners of variable 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 Commencement 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, 408A 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.
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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 five-year averaging
has been repealed for distributions after 1999.) 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
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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 and Section 408A
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits
eligible individuals to establish individual retirement programs through
the purchase of Individual Retirement Annuities ("traditional IRAs"). The
Contract may be purchased as an IRA. The IRAs described in this paragraph
are called "traditional IRAs" to distinguish them from the new "Roth IRAs"
which became available in 1998. Roth IRAs are described below.
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 a traditional 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, traditional 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
traditional 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 a traditional IRA may be eligible for a tax-free
rollover to another traditional IRA. In certain cases, a distribution from
a traditional 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" on page 32.
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.
ROTH IRAS. Section 408A of the Code permits eligible individuals to
establish a Roth IRA, a new type of IRA which became available in 1998. The
Contract may be purchased as a Roth IRA. Contributions to a Roth IRA are
not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. Sale of the contract for use with Roth 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 requirements. Unlike a traditional IRA, Roth IRAs
are not subject to minimum required distribution rules during the
Contractowner's life time. Generally, however, the amount in a remaining
Roth IRA must be distributed by the end of the fifth year after the death
of the Contractowner.
The Internal Revenue Service has not reviewed the Contract for
qualification as a Roth 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 Roth 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
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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.
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.
Beginning in 1998 the owner of a traditional IRA may convert the
traditional IRA into a Roth IRA under certain circumstances. The conversion
of a traditional IRA to a Roth IRA will subject the amount of the converted
traditional IRA to federal income tax. If a traditional IRA is converted to
a Roth IRA, the taxable
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amount in the owner's traditional IRA will be considered taxable income for
federal income tax purposes for the year of the conversion. Generally, all
amounts in a traditional IRA are taxable except for the owner's prior
non-deductible contributions to the traditional IRA.
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. Starting January 1, 1998, there are two additional
exceptions to the 10 percent penalty tax on withdrawals from IRAs before
age 59 1/2: withdrawals made to pay "qualified" higher education expenses
and withdrawals made to pay certain "eligible first-time home buyer
expenses."
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. The penalty tax of 15 percent
which was imposed (in addition to any ordinary income tax) on large plan
distributions and the "excess retirement accumulations" of an individual
has been repealed effective January 1, 1997.
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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