<PAGE>
As filed with the Securities and Exchange Commission
on March 2, 1999
Registration No. 33-56654
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
----
Post-Effective Amendment No. 10 [X]
----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 [X]
----
(Check appropriate box or boxes)
Separate Account I of Integrity Life Insurance Company
(Exact Name of Registrant)
Integrity Life Insurance Company
(Name of Depositor)
515 West Market Street, Louisville, KY 40202
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (502) 582-7900
Kevin L. Howard
Integrity Life Insurance Company
515 West Market Street
Louisville, Kentucky 40202
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon after the effective date
of this Registration Statement as is practicable.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on May 1, 1998 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ X / on May 1, 1999 pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Prospectus
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc. The
contracts offered by this prospectus provide several types of benefits, some of
which have tax-favored status under the Internal Revenue Code of 1986, as
amended. You may allocate contributions to the various investment divisions of
our Separate Account I (VARIABLE ACCOUNT OPTIONS, or individually, OPTION) or to
our Fixed Accounts, or both.
Contributions you make to the Variable Account Options are invested in shares of
corresponding Portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III) (the PORTFOLIO OR PORTFOLIOS). The Portfolios are part of the Fidelity
Investments(R) group of companies. The values allocated to the Options reflect
the investment performance of the Portfolios. The prospectus for the Portfolios
describes each one's investment objectives, policies and risks. The thirteen
Variable Account Options invest in the following Portfolios:
- - VIP Money Market Portfolio
- - VIP High Income Portfolio
- - VIP Equity-Income Portfolio
- - VIP Growth Portfolio
- - VIP Overseas Portfolio
- - VIP III Balanced Portfolio
- - VIP III Growth & Income Portfolio
- - VIP II Investment Grade Bond Portfolio
- - VIP II Asset Manager Portfolio
- - VIP II Index 500 Portfolio
- - VIP II Contrafund Portfolio
- - VIP II Asset Manager: Growth Portfolio
- - VIP III Growth Opportunities Portfolio
We also offer Guaranteed Rate Options (GROS) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a GRO
grows at a fixed interest rate that we declare at the beginning of the duration
you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution plus interest compounded at an annual effective rate of 3%
(MINIMUM VALUE). Withdrawal charges and an annual administrative charge may
apply, which may invade principal. The money you contribute to the STO grows at
a fixed interest rate that we declare each calendar quarter, guaranteed never to
be less than an effective annual yield of 3%. YOU MUST TRANSFER ALL
CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER INVESTMENT OPTIONS WITHIN ONE YEAR
OF CONTRIBUTION ON A MONTHLY OR QUARTERLY BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville, KY 40201-0074.
The express mail address is Integrity Life Insurance Company, 515 West Market
Street, Louisville, Kentucky 40202. You may also call the following toll-free
number: 1-800-325-8583.
A registration statement relating to the contracts, which includes a Statement
of Additional Information dated May 1, 1999, has been filed with the Securities
and Exchange Commission. The SAI is incorporated by reference into this
prospectus. A free copy of the SAI is available by writing to or calling our
Administrative Office. A table of contents for the SAI is found in the
Appendix to this prospectus.
* NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM
VARIABLE ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL
REFERENCES TO FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR THIS
STATE.
THESE SECURITIES HAVEN'T BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
THE SEC MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION AS WELL AS ANY MATERIAL INCORPORATED BY REFERENCE
RELATING TO THIS PROSPECTUS.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1 - SUMMARY
Your Variable Annuity Contract.............................................
Your Benefits..............................................................
How Your Contract is Taxed.................................................
Your Contributions.........................................................
Your Investment Options....................................................
Variable Account Options...................................................
Account Value, Adjusted Account Value and Cash Value ......................
Transfers..................................................................
Charges and Fees...........................................................
Withdrawals................................................................
Your Initial Right to Revoke...............................................
Risk/Return Summary: Investments and Risks.................................
Year 2000..................................................................
Glossary...................................................................
Table of Annual Fees and Expenses..........................................
Examples...................................................................
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company...........................................
The Separate Account and the Variable Account Options......................
Assets of Our Separate Account.............................................
Changes In How We Operate..................................................
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios ............................................................
The Portfolios' Investment Adviser...................................
Investment Objectives of the Portfolios..............................
Fixed Accounts.............................................................
Guaranteed Rate Options..............................................
Renewals of GRO Accounts..........................................
Market Value Adjustments..........................................
Systematic Transfer Option...........................................
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges...................................................
Annual Administrative Charge...............................................
Reduction or Elimination of Separate Account or Administrative Charges.....
Portfolio Charges..........................................................
State Premium Tax Deduction................................................
Contingent Withdrawal Charge...............................................
Reduction or Elimination of the Contingent Withdrawal Charge...............
Transfer Charge............................................................
Hardship Waiver............................................................
Tax Reserve................................................................
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract..........................................
Your Account Value.........................................................
Your Purchase of Units in Our Separate Account.............................
How We Determine Unit Value................................................
Transfers..................................................................
Withdrawals................................................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Assignments
Death Benefits and Similar Benefit Distributions...........................
Annuity Benefits...........................................................
Annuities..................................................................
Annuity Payments...........................................................
Timing of Payment..........................................................
How You Make Requests and Give Instructions................................
PART 6 - VOTING RIGHTS
Voting Rights..............................................................
How We Determine Your Voting Shares........................................
How Portfolio Shares Are Voted.............................................
Separate Account Voting Rights.............................................
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction...............................................................
Tax Status of Integrity....................................................
Your Contract is an Annuity................................................
Taxation of Annuities Generally............................................
Distribution-at-Death Rules................................................
Diversification Standards..................................................
Tax-Favored Retirement Programs............................................
Federal and State Income Tax Withholding...................................
Impact of Taxes to Integrity...............................................
Transfers Among Investment Options.........................................
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals.....................................................
Income Plus Withdrawal Program.............................................
Dollar Cost Averaging......................................................
Systematic Transfer Program................................................
Customized Asset Rebalancing...............................................
Callan Asset Allocation and Rebalancing Program............................
Systematic Contributions...................................................
Performance Information....................................................
PART 9 - PRIOR CONTRACTS
Prior Contracts............................................................
Death Benefit Information for Contracts Issued Before January 1, 1997......
Reduction in Charges.......................................................
Contingent Withdrawal Charge...............................................
APPENDIX A - FINANCIAL INFORMATION.......................................
APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT...................
APPENDIX C - SAI TABLE OF CONTENTS.......................................
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "WE," "OUR" and "US" mean Integrity Life Insurance Company
(INTEGRITY), a subsidiary of ARM Financial Group, Inc. (ARM). The terms "YOU"
and "YOUR" mean the Annuitant, the person upon whose life the Annuity Benefit
and the Death Benefit are based, usually the Owner of the contract. If the
Annuitant doesn't own the contract, all of the rights under the contract belong
to the Owner until annuity payments begin. If a Joint Owner is named, the Owners
share the contract rights. Contract changes or any transactions allowed under
the Contract require both Owners' signatures. The rules governing distribution
at death apply when the first Owner dies. See Part 7, "Distribution-at-Death
Rules."
You can invest for retirement by buying a GrandMaster III contract if you
properly complete a Customer Profile form (an application or enrollment form may
be required in some states) and make a minimum initial contribution. Because the
premium is flexible, your future contributions can be any amount you choose, as
long as it is above the minimum required contribution, discussed below.
The latest your endowment or "retirement date" can be is your 98th birthday,
unless your state law requires it to be a different date, or unless you specify
an earlier date.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under a contract may be controlled by the usual rules for taxation
of annuities, including the deferral of taxes on your investment growth until
you actually make a withdrawal. The contract also can provide your benefits
under certain tax-favored retirement programs, which may be subject to special
eligibility and contribution rules. See Part 7, "Tax Aspects of the Contracts"
and the Statement of Additional Information for detailed information.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
YOUR CONTRIBUTIONS
Your minimum initial contribution is $1,000 ($3,000 in Pennsylvania and South
Carolina). Contributions after your first one can be as little as $100. Some
tax-favored retirement plans allow smaller contributions. See "Contributions
Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine Investment Options at
any one time. See "Contributions Under Your Contract" in Part 5. To select
Investment Options most suitable for you, see Part 3, "Your Investment Options."
The Variable Account Options invest in shares of investment portfolios of mutual
funds. Each investment portfolio is referred to as a PORTFOLIO. The investment
goal of each Variable Account Option and its corresponding Portfolio is the
same. For example, if your investment goal is to save money for retirement, you
might choose a GROWTH oriented Variable Account Option, which invests in GROWTH
Portfolios. Your value in a Variable Account Option will vary with the
performance of the corresponding Portfolio. For a full description of the
Portfolios, see the Portfolios' prospectus and Statement of Additional
Information.
2
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Account added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your CASH VALUE is equal to your Adjusted Account
Value, minus any contingent withdrawal charge and minus the pro rata portion of
the annual administrative charge, if it applies. See "Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these in
Part 5, "Transfers." Any transfer must be for at least $250 and may be arranged
through our telephone transfer service. Transfers may also be made among certain
Investment Options under the following special programs: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and
Rebalancing Program, or (iv) to transfer your STO contributions. All of these
programs are discussed in Part 8. If you make more than twelve transfers between
your Investment Options in one contract year, your account can be charged up to
$20 for each transfer after the first twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account.
A daily charge at an annual rate of 1.35% is deducted from the Account Value of
each of your Variable Account Options to cover mortality and expense risks
(1.20%) and certain administrative expenses (.15%). The charge will never be
greater than this. For more information, see Part 4, "Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company receives investment management fees from the Portfolios based on the
average net assets of each Portfolio. Advisory fees can't be increased without
the consent of Portfolio shareholders. See "Table of Annual Fees and Expenses"
below and "The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make any number of withdrawals from your contract as often as you wish.
Each withdrawal must be for at least $300. You may withdraw up to 10% of your
Account Value each year with no withdrawal charges. After the first 10%, there
will be a charge for any withdrawals you make, based upon the length of time
your money has been in your account. See "Contingent Withdrawal Charge" in Part
4.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in some states. If you cancel your contract, we'll return your entire
contribution, with adjustments made for any investment gain or loss experienced
by the Variable Account Option from the date you purchased it until the date we
receive your cancelled contract, including any charges deducted. If your state
requires, we'll return all of your contributions without any adjustment. We'll
return the amount of any contribution to the Guaranteed Rate Options upon
cancellation.
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the GrandMaster III Variable Annuity are protecting your
investment, building for retirement and providing future income. We strive to
achieve these goals through extensive portfolio diversification and superior
portfolio management.
3
<PAGE>
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most of
the Variable Account Options are in common stocks, there's also the inherent
risk that holders of common stock generally are behind creditors and holders of
preferred stock for payments in the event of the bankruptcy of a stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900. This could cause many programs to malfunction. Integrity is evaluating, on
an ongoing basis, its computer systems and the systems of other companies on
which we rely, to determine if they'll function properly, and make the
transition from 1999 to 2000 smoothly. These activities are designed to ensure
that there is no adverse effect on our business operations. While we've been
working very hard to make sure that this process will be problem-free, we can't
guarantee that there won't be some Year 2000 problems experienced by our systems
and we can't make any representations or guarantees that the outside sources on
which we rely will be ready to make a smooth transition to Year 2000 with their
systems.
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Investment Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize
your contract.
ARM - ARM Financial Group, Inc.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
CONTRACT - your variable annuity contract.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of three, five, seven and
ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
4
<PAGE>
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account if you make an early
withdrawal or early transfer.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges) accumulated at 3% interest annually,
less company charges.
OWNER ("You," "Your") - the person who owns the contract, and is usually the
annuitant. Includes any person named as Joint Owner.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 98th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in the contract.
UNIT VALUE - the value of each unit calculated on any Valuation Date.
VALUATION DATE - The Valuation Date for purposes of determining unit values is 4
p.m. Eastern Time on each day the New York Stock Exchange is open for business.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, consisting of the Portfolios. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
WE, OUR AND US - Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc.
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<CAPTION>
<S> <C>
Contract Owner Transaction Expenses
- -----------------------------------
Sales Load on Purchases ..................................... $ 0
Deferred Sales Load (as a percentage of contributions) (1)... 8% Maximum
Exchange Fee (2) ............................................ $ 0
Administrative Charge
- ---------------------
Annual Administrative Charge* ............................... $ 30
</TABLE>
* This charge applies only if the account Value is less than $50,000 at the
end of any contract year prior to your Retirement Date. See "Annual
Administrative Charge" in Part 4
<TABLE>
<CAPTION>
Separate Account Annual Expenses
(as a percentage of average account value) (3)
- ----------------------------------------------
<S> <C>
Mortality and Expense Risk Fees ............................. 1.20%
Administrative Expenses ..................................... .15%
Total Separate Account Annual Expenses ...................... 1.35%
</TABLE>
Portfolio Annual Expenses After Reimbursement
(as a percentage of average net assets)
- ---------------------------------------
5
<PAGE>
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market......................... .20% .10% .30%
VIP High Income.......................... .58% .12% .70%
VIP Equity-Income........................ .49% .08% .57% (4)
VIP Growth............................... .59% .07% .66% (4)
VIP Overseas............................. .74% .15% .89% (4)
VIP II Investment Grade Bond............. .43% .14% .57%
VIP II Asset Manager..................... .54% .09% .63% (4)
VIP II Index 500......................... .24% .11% .35% (5)
VIP II Contrafund........................ .59% .07% .66% (4)
VIP II Asset Manager: Growth............. .59% .13% .72% (4)
VIP III Balanced......................... .44% .14% .58% (4)
VIP III Growth Opportunities............. .59% .11% .70% (4)
VIP III Growth & Income.................. .49% .11% .60% (4)
</TABLE>
- ----------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract year or
the investment gain under the contract during the previous contract year,
whichever is greater, minus withdrawals during the current contract year.
(2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to transfers
made for dollar cost averaging, asset rebalancing, or systematic transfers. See
"Deductions and Charges - Transfer Charge" in Part 4.
(3) See "Deductions and Charges - Separate Account Charges" in Part 4.
(4) Part of the brokerage commissions that certain Portfolios pay was used to
reduce the Portfolios' expenses. In addition, certain Portfolios have arranged
with their custodian to use uninvested cash balances to reduce custodian
expenses. Without these reductions, the total operating expenses presented in
the table would have been .58% for VIP Equity-Income Portfolio, .68% for VIP
Growth Portfolio, .91% for VIP Overseas Portfolio, .64% for VIP II Asset Manager
Portfolio, .70% for VIP II Contrafund Portfolio, .73% for VIP II Asset Manager:
Growth Portfolio, .58% for VIP III Balanced Portfolio, .71% for VIP III Growth
Opportunities Portfolio, and .61% for VIP III Growth and Income Portfolio.
(5) The investment adviser agreed to reimburse part of VIP II Index 500
Portfolio's expenses during the period. Without this reimbursement, the Fund's
total expenses would have been .28%, .11%, and .39%, respectively.
6
<PAGE>
EXAMPLES
The examples below show the expenses that the Annuitant would be charged for
each $1,000 investment, assuming a $40,000 average contract value and a 5%
annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market ............... $ 97.66 $ 114.61 $ 133.86 $ 203.09
VIP High Income ................ $ 101.76 $ 127.03 $ 154.77 $ 245.84
VIP Equity-Income .............. $ 100.53 $ 123.32 $ 148.53 $ 233.20
VIP Growth ..................... $ 101.55 $ 126.41 $ 153.73 $ 243.75
VIP Overseas ................... $ 103.91 $ 133.51 $ 165.60 $ 267.61
VIP II Investment Grade Bond ... $ 100.42 $ 123.01 $ 148.01 $ 232.14
VIP II Asset Manager ........... $ 102.17 $ 128.27 $ 156.84 $ 250.03
VIP II Index 500 ............... $ 98.17 $ 116.17 $ 136.49 $ 208.53
VIP II Contrafund .............. $ 101.76 $ 127.03 $ 154.77 $ 245.84
VIP II Asset Manager: Growth ... $ 102.06 $ 127.96 $ 156.32 $ 248.98
VIP III Balanced ............... $ 100.63 $ 123.63 $ 149.06 $ 234.26
VIP III Growth Opportunities ... $ 101.86 $ 127.34 $ 155.29 $ 246.89
VIP III Growth & Income ........ $ 100.83 $ 124.25 $ 150.10 $ 236.37
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF ANNUITY OR DON'T
SURRENDER YOUR CONTRACT AT THE END OF THE PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market ............... $ 17.66 $ 54.61 $ 93.86 $ 203.09
VIP High Income ................ $ 21.76 $ 67.03 $ 114.77 $ 245.84
VIP Equity-Income .............. $ 20.53 $ 63.32 $ 108.53 $ 233.20
VIP Growth ..................... $ 21.55 $ 66.41 $ 113.73 $ 243.75
VIP Overseas ................... $ 23.91 $ 73.51 $ 125.60 $ 267.61
VIP II Investment Grade Bond ... $ 20.42 $ 63.01 $ 108.01 $ 232.14
VIP II Asset Manager ........... $ 21.14 $ 65.17 $ 111.66 $ 239.54
VIP II Index 500 ............... $ 18.17 $ 56.17 $ 96.49 $ 208.53
VIP II Contrafund .............. $ 21.76 $ 67.03 $ 114.77 $ 245.84
VIP II Asset Manager: Growth ... $ 22.06 $ 67.96 $ 116.32 $ 248.98
VIP III Balanced ............... $ 20.63 $ 63.63 $ 109.06 $ 234.26
VIP III Growth Opportunities ... $ 21.86 $ 67.34 $ 115.29 $ 246.89
VIP III Growth & Income ........ $ 20.83 $ 64.25 $ 110.10 $ 236.37
</TABLE>
These examples assume that all of the fixed charges of the Separate Account and
of the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE OR
LESS. The annual rate of return assumed in the examples isn't an estimate or
guarantee of future investment performance. The table assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. Such per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The table and examples above are to help you understand the various costs and
expenses that apply to your contract. These tables show expenses of the Separate
Account as well as those of the Portfolios. Premium taxes may also apply when
you receive a payout of your contributions.
CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNT IS PROVIDED IN APPENDIX
A.
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive office is in Louisville, Kentucky. We are authorized to
sell life insurance and annuities in 45 states and the District of Columbia. We
sell flexible premium annuities with underlying investment options other than
the Portfolios, fixed single premium annuities, and flexible premium annuities
offering both traditional fixed guaranteed interest rates and fixed equity
indexed options. We also provide administrative and investment support for
products designed, underwritten and sold by other companies.
Integrity is a subsidiary of ARM Financial Group, Inc., which specializes
providing retail and institutional customers with products and services designed
for long-term savings and retirement planning. ARM is a publicly traded company
listed on the New York Stock Exchange under the symbol "ARM." At December 31,
1998, ARM had $9.9 billion of assets under management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws of
the State of Ohio. It is a unit investment trust registered with the Securities
and Exchange Commission (the SEC) under the Investment Company Act of 1940 (1940
ACT). A unit investment trust is a type of investment company. SEC registration
doesn't mean that the SEC is involved in any way in supervising the management
or investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio. We may establish additional
Options from time to time. The Variable Account Options currently available to
you are listed in Part 3, "Your Investment Options." Prior to September 3, 1991,
the Portfolios invested in shares of corresponding portfolios of Prism
Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of yours and other variable annuity contracts.
Annuitants under other variable annuity contracts participate in the Separate
Account in proportion to the amounts in their contracts. We can't use the
Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. We'll
notify you if any changes result in a material change in the underlying
investments of a Variable Account Option. WE MAY:
- add Options to, or remove Options from, our Separate Account, combine two or
more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- register or end the registration of the Separate Account under the 1940 Act;
- operate our Separate Account under the direction of a committee or discharge
a committee at any time (the committee may be composed of a majority of
persons who are "interested persons" of Integrity under the 1940 Act);
- restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
8
<PAGE>
- operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we'll rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-325-8583.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios currently are
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with Fidelity Management or Integrity. The Board of
Trustees of each of the Portfolios is responsible for monitoring the Fund for
any material irreconcilable conflict between the interests of the policyowners
of all separate accounts investing in the Portfolio and determining what action,
if any, should be taken in response. If we believe that a Portfolio's response
to any of those events doesn't adequately protect our contract owners, we'll see
to it that appropriate and available action is taken. See "The Fund and the
Fidelity Organization" in the Portfolios' prospectus for a further discussion of
the risks associated with the offering of shares to our Separate Account and the
separate accounts of other insurance companies.
THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company
(FIDELITY MANAGEMENT) is a registered investment adviser under the Investment
Advisers Act of 1940. It serves as the investment adviser to each Portfolio.
Bankers Trust Company ("BT") is the VIP II Index 500 Portfolio's sub-adviser.
BT, a New York banking corporation, is a wholly owned subsidiary of Bankers
Trust New York Corporation.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO
VIP Money Market Portfolio seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO
VIP High Income Portfolio seeks a high current income by investing primarily in
high-yielding, lower rated, fixed-income securities, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities and preferred stocks, including convertible
securities, and up to 20% in common stocks and other equity securities. In view
of the types of securities in which this Portfolio invests, you should read the
complete risk disclosure for this Portfolio in its prospectus before investing
in it.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
9
<PAGE>
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth may
be measured by factors such as earnings or revenue. Companies with high growth
potential tend to be companies with higher than average price/earnings (P/E)
ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities for have a strong
industry market position. The stocks of these companies are often called
"growth" stocks.
VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
while preserving capital by investing in a broad range of investment-grade
fixed-income securities.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include companies experiencing positive fundamental change such as a
new management team or product launch, a significant cost-cutting initiative, a
merger or acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earning potential has increased or is expected
to increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO
VIP II Asset Manager: Growth Portfolio is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
RANGE NEUTRAL MIX
----- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
10
<PAGE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVEN'T BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), OR THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE CONTRACTS NOR
OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT. DISCLOSURES
REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO
CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING
TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of three, five, seven and ten years. We can change
the durations available from time to time. When you put money in a GRO, that
locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select (your GRO ACCOUNT). The duration of
your GRO Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO
establishes a new GRO Account for the duration you choose at the then-current
Guaranteed Interest Rate we declare. We won't declare an interest rate less than
3%. Each GRO Account expires at the end of the duration you have selected. See
"Renewals of GRO Accounts" below. All contributions you make to a GRO are placed
in a non-unitized separate account. Values and benefits under your contract
attributable to GROs are guaranteed by the reserves in our GRO separate account
as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be
guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to your GRO Account will be separate from the Guaranteed
Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED
RATE OR ADDITIONAL INTEREST MAY NOT BE MADE AVAILABLE IN CERTAIN STATES.
11
<PAGE>
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
The ten-year GRO isn't available in Oregon.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO, your new one will be for seven years. You can tell us if you want something
different within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. A Market Value Adjustment will be made for each
transaction made from a GRO Account other than your free withdrawals or those
made within 30 days before the expiration of the Account. There will be no
Market Value Adjustment made for a death benefit. The market adjusted value may
be higher or lower than the GRO Value, but will never be less than the MINIMUM
VALUE. Minimum Value is an amount equal to your contribution to the GRO Account
plus 3% interest, compounded annually, less previous withdrawals and less any
applicable contingent withdrawal charges. The Minimum Value for partial
withdrawals or transfers will be calculated on a pro-rata basis. Withdrawal
charges and the administrative expense charge could take away part of your
principal.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a GRO
Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if that
remaining period isn't equal to an exact period for which we have declared a
new Guaranteed Interest Rate, B will be determined by a formula that finds a
value between the Guaranteed Interest Rates for GRO Accounts of the next
highest and next lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with state requirements.
If for any reason we are no longer declaring current Guaranteed Interest Rates,
then to determine B we will use the yield to maturity of United States Treasury
Notes with the same remaining term as your GRO Account, using a formula when
necessary, in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
12
<PAGE>
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions within the STO Account at the time the rate is declared. You
MUST transfer all STO contributions into other Investment Options within one
year of your most recent STO contribution. Transfers will be made automatically
in approximately equal quarterly or monthly installments of not less than $1,000
each. You can't transfer from other Investment Options into the STO. Normal
contingent withdrawal charges apply to withdrawals from the STO. We guarantee
that the STO's effective annual yield will never be less than 3.0%. See
"Systematic Transfer Program" in Part 8 for details. This option may not be
available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts a daily expense amount from the unit value an amount equal to
an effective annual rate of 1.35% of the Account Value in the Variable Account
Options. This daily expense rate can't be increased without your consent.
Of the 1.35% total charge, .15% of the value of each Variable Account Option is
used to reimburse us for administrative expenses not covered by the annual
administrative charge described below. The remaining 1.20% is deducted for
Integrity's assuming the expense risk (.85%) and the mortality risk (.35%) under
the contract. The expense risk is the risk that our actual expenses of
administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk Integrity takes that
annuitants, as a class of persons, will live longer than estimated and Integrity
will be required to pay out more annuity benefits than anticipated. The relative
proportion of the mortality and expense risk charges may be changed, but the
total 1.20% effective annual risk charge can't be increased.
Integrity may realize a gain from these daily charges if they aren't needed to
meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, Integrity charges an annual administrative charge
of $30. This charge is deducted pro-rata from your Account Value in each
Investment Option. The part of the charge deducted from the Variable Account
Options will reduce the number of units credited to you. The part of the charge
deducted from the Fixed Accounts is withdrawn in dollars. The annual
administrative charge is pro-rated in the event of the Annuitant's retirement,
death, or termination of a contract during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if it saves us expenses. We may do this
based on the size and type of the group and the amount of the contributions.
We won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
13
<PAGE>
STATE PREMIUM TAX DEDUCTION
Integrity won't deduct state premium taxes from your contributions before
investing them in the Investment Options, unless required to by your state law.
If the Annuitant elects an annuity benefit, we'll deduct any applicable state
premium taxes from the amount available for an annuity benefit. State premium
taxes currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up to
8%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal- that is, the number of years that have
passed since each contribution was made. The maximum percentage of 8% would
apply if the entire amount of the withdrawal consisted of contributions made
during your current contribution year. We don't deduct withdrawal charges when
you withdraw contributions made more than seven years prior to your withdrawal.
To calculate the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount aren't considered a withdrawal. For
partial withdrawals, the total amount deducted from your Account will include
the withdrawal amount requested, any Market Value Adjustment that applies, and
any withdrawal charge and administrative expense charge that apply, so that the
net amount you receive will be the amount you requested.
You may take up to 10% of your account value (less any earlier withdrawal in the
same year) each year without any contingent withdrawal charge or Market Value
Adjustment. This is referred to as your "free withdrawal." If you don't take any
free withdrawals in one year, you can't add it to the next year's free
withdrawal. If you aren't 59-1/2, federal tax penalties may apply.
<TABLE>
<CAPTION>
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE
WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN
------------------------------- ----------------------
<S> <C>
Current.............................................. 8%
First Prior.......................................... 7
Second Prior......................................... 6
Third Prior.......................................... 5
Fourth Prior......................................... 4
Fifth Prior.......................................... 3
Sixth Prior ......................................... 2
Seventh Prior and Earlier............................ 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from Integrity either an immediate annuity benefit with life contingencies or an
immediate annuity without life contingencies with a restricted prepayment option
that provides for level payments over five or more years. Similarly, we won't
deduct a charge if the Annuitant dies and the withdrawal is made by the
Annuitant's beneficiary. See "Death Benefits and Similar Benefit Distributions"
in Part 5.
Unless you tell us otherwise, we will make withdrawals (including any applicable
charges) from the Investment Options in the same proportion that you contributed
to them. For example, if you have your contributions put into four different
Investment Options, your withdrawal will be taken in equal quarters from each
Account. You must withdraw at least $300. Residents of Pennsylvania and South
Carolina must keep a $3,000 minimum account balance.
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge individuals or a
group of individuals it saves us expenses. We may do this based on the size and
type of the group and the amount of the contribution or whether there is some
relationship with Integrity. Examples of these relationships would include being
an employee of Integrity or an affiliate, receiving distributions or making
internal transfers from other contracts issued by Integrity, or making transfers
of amounts held under qualified plans sponsored by Integrity or an affiliate. We
won't unlawfully discriminate against any person or group if we reduce or
eliminate the contingent withdrawal charge.
14
<PAGE>
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Asset Allocation and
Rebalancing, or (iv) systematic transfers from the STO, nor so these transfers
count toward the twelve free transfers you may make in a contract year.
HARDSHIP WAIVER
We can waive withdrawal charges on full or partial withdrawal requests of $1,000
or more under a hardship circumstance. We can also waive the Market Value
Adjustment on any amounts withdrawn from the GRO Accounts. Hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital or
long term care facility, (2) diagnosis of terminal illness with any medical
condition which would result in death or total disability, and (3) unemployment.
We can require reasonable notice and documentation including, but not limited
to, a physician's certification and Determination Letter from a State Department
of Labor. Some of the hardship circumstances listed above may not apply in some
states, and, in other states, may not be available at all.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment experience of the Variable Account
Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($3,000 in Pennsylvania and South Carolina). We'll accept contributions of at
least $50 for salary allotment programs. We have special rules for minimum
contribution amounts for tax-favored retirement programs. See "Special Rules for
Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by Integrity for
all Annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits. Each contribution is credited as of
the date we have RECEIVED it (as defined below) at our Administrative Office
both the contribution and instructions for allocation among the Investment
Options, PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE
INVESTMENT OPTIONS. In determining the nine Investment Options, each of your GRO
Accounts counts as one Investment Option. Wire transfers of federal funds are
deemed received on the day of transmittal if credited to our account by 3 p.m.
Eastern Time, otherwise they are deemed received on the next Business Day.
Contributions by check or mail are deemed received when they are delivered in
good order to our Administrative Office. A BUSINESS DAY is defined as any day
that the New York Stock Exchange is open.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
15
<PAGE>
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Withdrawal charges and Market Value Adjustments, if applicable, are made as of
the effective date of the transaction. Charges against our Separate Account are
reflected daily. Any amount allocated to a Variable Account Option will go up or
down in value depending on the investment experience of that Option. The value
of contributions made to the Variable Account Options isn't guaranteed. The
value of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as the its expenses. The unit values also change because of
deductions and charges we make to our Separate Account. The number of units
credited to you, however, won't vary because of changes in unit values. Units of
a Variable Account Option are purchased when you make new contributions or
transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a NET INVESTMENT FACTOR for each Option as follows:
- First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Portfolios.
- Next, we add any dividends or capital gains distributions by the
Portfolio on that day.
- Then, we charge or credit for any taxes or amounts set aside as a
reserve for taxes.
- Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was
determined (after giving effect to any transactions on that day).
- Finally, we subtract a daily asset charge for each calendar day since
the last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily
charge is .00003721, which is an effective annual rate of 1.35%. This
charge is for the mortality risk, administrative expenses and expense
risk assumed by us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Portfolio, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
16
<PAGE>
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's transfer restrictions. You can't make a transfer
into the STO. Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Transfers you make from a GRO Account, except within
30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs will be
made according to the order in which money was originally allocated to the GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program or systematic transfer programs, described in Part 8.
Once annuity payments begin, transfers aren't permitted.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service if you
have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
we believed to be genuine in accordance with these procedures. You bear the risk
of loss if unauthorized persons make transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it. A transfer request doesn't change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' unit values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using unit values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed no later than the next Business Day after
our Administrative Office receives the requests.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be for at least $300. The money will be taken from your Accounts in the
same proportions as you contributed it to them. For example, if your
contributions are divided in equal 25% shares among four Investment Options,
when you make a withdrawal, 25% of the money withdrawn will come from each of
your Investment Options. You can tell us if you want your withdrawal handled
differently. During the first seven years of your contract, there is a
contingent withdrawal charge for any withdrawals other than your free
withdrawals. The charge starts at 8% and decreases depending on the age of your
account. This charge is in addition to any Market Value Adjustments made to
early withdrawals from GRO Accounts. Under some circumstances, the contingent
withdrawal charge and Market Value Adjustment may be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59-1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contracts" in Part 7. Residents of
Pennsylvania and South Carolina are required to keep at least $3,000 in their
Accounts.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
17
<PAGE>
consequences. See Part 7, "Tax Aspects of the Contracts." We won't be bound by
an assignment unless it is in writing and our Administrative Office has received
it.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day when we receive proof of death.
Similarly, if the Contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the contract account value at the end of the
business day when we receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the highest of:
a) the contract account value at the end of the business day when we
receive proof of death;
b) the total of all contributions; and
c) the highest contract account value on any contract anniversary which
occurred before the Annuitant's 81st birthday and before the
Annuitant's death, plus any subsequent contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). We'll determine the
amount of the reduction by dividing the amount of the withdrawal by the annuity
account value on the transaction date and multiplying this percentage by the
then current guaranteed minimum death benefit.
Death benefits and benefit distributions required because of a separate Owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The Owner selects the beneficiary of the death benefit. An Owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. No death benefit will be paid after
the Annuitant's death if there is a contingent Annuitant. In that case, the
contingent Annuitant becomes the new Annuitant under the contract.
The death benefit described above is retroactive to all contracts issued on or
after January 1, 1997.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time as an annuity.
A lump sum payment will provide the Annuitant with the Cash Value under the
contract, shortly after the Retirement Date. The amount applied toward the
purchase of an annuity benefit will be the Adjusted Account Value, except that
the Cash Value will be the amount applied instead if the annuity benefit doesn't
have a life contingency and either the term is less than five years or the
annuity can be commuted to a lump sum payment without a withdrawal charge
applying.
ANNUITIES
Annuity benefits can provide for fixed or variable payments, which may be made
monthly, quarterly, semi-annually or annually. Variable payments will be funded
through one or more Separate Account Divisions. For any annuity, the minimum
initial payment must be at least $20.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the
18
<PAGE>
normal form of annuity, as defined below. However, if we don't receive a
completed form from you on or before your Retirement Date, we'll extend the
Retirement Date until we receive your written instructions at our Administrative
Office. During this extension, the values under your contract in the various
Investment Options will remain invested in those options and amounts remaining
in Variable Account Options will continue to be subject to the associated
investment risks. However, your Retirement Date can't be extended beyond your
98th birthday or earlier, if required by law. You'll receive a lump sum benefit
if you don't make an election by then.
We currently offer the following types of annuities:
The NORMAL FORM OF ANNUITY is a fixed life income annuity with 10 years of
payments guaranteed, funded through our General Account.
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. If the payee dies before the end of
the period selected, the payee's beneficiary, may elect to receive the total
present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You can't change
or redeem the annuity once payments have begun. If the payee (or the payee and
the other annuitant under a joint and survivor annuity) dies before the period
selected ends, the remaining payments will go to another named payee. That payee
can redeem the annuity and receive the present value of future guaranteed
payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or for
the lives of the payee and another annuitant under a joint and survivor annuity.
Once a life income annuity is selected, the form of annuity can't be changed or
redeemed for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the payee's age (or payee
and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If our annuity rates then
in effect would yield a larger payment, those rates will apply instead of the
tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected can't be changed after annuity payments begin. The Statement of
Additional Information (SAI) has more information about the determination of
annuity payments. The number of units purchased is equal to the amount of the
first annuity payment divided by the new annuity unit value for the valuation
period that includes the due date of the first annuity payment. The amount of
the first annuity payment is determined in the same manner for a variable
annuity as it is for a fixed annuity. The number of annuity units stays the same
for the annuity payment period but the new annuity unit value changes to reflect
the investment income and the realized and unrealized capital gains and losses
of the Variable Account Option or Options selected, after charges made against
it. Annuity unit values assume a base rate of net investment return of 5%,
except in states which require a lower rate in which case 3.5% will be used. The
annuity unit value will rise or fall depending on whether the actual rate of net
investment return is higher or lower than the assumed base rate. In the SAI, see
"Determination of Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
that would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we'll deduct the overpayment from the next payment or payments
due. We add underpayments to the next payment.
19
<PAGE>
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after we
receive the required form at our Administrative Office. We can defer our action,
however, for any period during which
(1) the New York Stock Exchange has been closed or trading on it is restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits us to defer action in order to protect persons
with interests in the Separate Account. We can defer payment of your Fixed
Accounts for up to six months, and interest will be paid on any such
payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your requests unless they are in proper and
complete form. Whenever possible, use one of our printed forms, which you can
get from our Administrative Office.
PART 6 - VOTING RIGHTS
VOTING RIGHTS
Integrity is the legal owner of the shares of the Portfolios held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all Owners, we'll vote shares in a
Portfolio for which no instructions have been received in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportions that other Owners vote. If the federal securities laws
or regulations or interpretations of them change so that we are permitted to
vote shares of the Portfolios in our own right or to restrict Owner voting, we
may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
have been invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing the amount of your Account Value
allocated to that Option by the net asset value of one share of the
corresponding Portfolio as of the record date set by the Portfolios' Boards for
the shareholders' meeting. We count fractional shares. The record date for this
purpose can't be more than 60 days before the shareholders' meeting. After
annuity payments have begun, voting rights are calculated in a similar manner
based on the actuarially determined value of your interest in each Variable
Account Option.
20
<PAGE>
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by Integrity from its Owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It's
based upon our understanding of the present federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We can't
guarantee that the tax code or the courts will or won't change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we haven't attempted to consider any applicable
state or other tax laws. Because of the complexity of tax laws and the fact that
tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOESN'T MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL,
STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Accounts aren't separate entities from Integrity and their operations form a
part of Integrity, they aren't taxed separately as "regulated investment
companies" under Subchapter M of the Code. Investment income and realized
capital gains on the assets of the Separate Accounts are reinvested and taken
into account in determining the accumulation value. Under existing federal
income tax law, the Separate Accounts' investment income, including realized net
capital gains, isn't taxed to Integrity. Integrity can make a tax deduction if
federal tax laws change to include these items in our taxable income.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars and
your annuity earnings won't be taxed until you make a withdrawal. Or, an
individual (or employer) may buy the annuity to fund a tax-favored retirement
program (contributions are with pre-tax dollars), such as an IRA or qualified
plan. Finally, the individual (or employer) may buy the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules that apply to an annuity purchased to fund a tax-favored
21
<PAGE>
retirement program (QUALIFIED ANNUITY). A qualified annuity may restrict your
rights and benefits to qualify for its special treatment under the federal tax
law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) won't be taxed when you receive those amounts back in a distribution.
Also, an Owner isn't taxed on the annuity's earnings until some form of
withdrawal or distribution is made under the contract. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. For example, corporations, partnerships, and other non-natural persons
can't defer tax on the annuity's income unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or former spouse), all increases in its value are taxed at the time of
transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code says that the proceeds of a full or
partial withdrawal from a contract before annuity payments begin are treated
first as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, isn't
taxable. Generally, the investment or basis in the contract equals the
contributions made by you or on your behalf, minus any amounts previously
withdrawn that weren't treated as taxable income. Special rules may apply if the
contract includes contributions made prior to August 14, 1982 that were rolled
over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is figured using a ratio of the Owner's investment to
his or her expected return under the contract (exclusion Ratio). Once you get
the tax-free part, the rest of each payment will be considered the increase of
your Account Value, and is ordinary income. That means that part of your payment
is tax-free and part of it is taxable. When all of these tax-free portions add
up to your investment in the annuity, future payments are all counted as an
increase in your Account Value, and are taxable income. If the Annuitant dies
before recovering the total investment, a deduction for the remaining basis will
generally be allowed on the Owner's final federal income tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59-1/2;
(2) as a result of the Owner's death;
(3) part of a series of substantially equal periodic payments (paid at least
annually) for the life (or life expectancy) of the taxpayer or joint lives
(or joint life expectancies) of the taxpayer and beneficiary;
(4) attributable to the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the Code);
(7) purchased by an employer on termination of certain types of qualified plans
and held by the employer until the employee separates from service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
Part 5.
22
<PAGE>
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any Owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the Owner died; and (b) if any Owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a death
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the Owner's death. If the beneficiary
is the Owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the Owner.
DIVERSIFICATION STANDARDS
Integrity manages the investments in the annuities under Section 817(h) of the
Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An Owner can use this annuity with certain types of retirement plans that
receive favorable treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. Owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries before
taking any loans from the plan.) Special rules also apply to the time at which
distributions must begin and the form in which the distributions must be paid.
THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE
USE OF CONTRACTS WITH THE VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO INTEGRITY
The contracts allow Integrity to charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
23
<PAGE>
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract prior to your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is to be
made. You may specify a dollar amount for each withdrawal or an annual
percentage to be withdrawn. The minimum systematic withdrawal currently is $100.
Residents of Pennsylvania and South Carolina are required to keep a $3,000
minimum account balance. You may also specify an account for direct deposit of
your systematic withdrawals. To enroll in our systematic withdrawal program,
send the appropriate form to our Administrative Office. Withdrawals may begin as
soon as one business day after we receive the form. You may terminate your
participation in the program upon one day's prior written notice, and we may
terminate or change the systematic withdrawal program at any time. If on any
withdrawal date you don't have enough money in your Account to make all of the
withdrawals you have specified, no withdrawal will be made and your enrollment
in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
and no Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. AMOUNTS WITHDRAWN UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN EXCESS
OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE,
AN ADMINISTRATIVE EXPENSE CHARGE AND A MARKET VALUE ADJUSTMENT IF APPLICABLE.
WITHDRAWALS ALSO MAY BE SUBJECT TO THE 10% FEDERAL TAX PENALTY FOR EARLY
WITHDRAWALS UNDER THE CONTRACTS AND TO INCOME TAXATION. See Part 7, "Tax Aspects
of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59-1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Part 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date you reach age 59-1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions before you reached age 59-1/2 made under the Income Plus Program
plus interest.
You can choose the Income Plus Withdrawal Program any time before you reach age
59-1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your Income Plus Withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Your withdrawals may begin as soon as one Business
Day after we receive your form. You may end your participation in the program
upon seven Business Day's prior written notice, and we may terminate or change
the Income Plus Program at any time. If on any withdrawal date you don't have
enough money to make all of the withdrawals you have specified, no withdrawal
will be made and your enrollment in the program will be ended. This program
isn't available in connection with the Systematic Withdrawal Program, Dollar
Cost Averaging, Systematic Transfer Option or Asset Allocation and Rebalancing
Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. AMOUNTS
WITHDRAWN
24
<PAGE>
UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A CONTINGENT WITHDRAWAL CHARGE AND A MARKET
VALUE ADJUSTMENT IF APPLICABLE.
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program, and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you don't have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the year during
which transfers are required to be made will be transferred on a pro rata basis
at the end of that year to the Options you have chosen for this program. We
won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers won't count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among those Options, and you will
receive a confirmation notice after each rebalancing. Transfers will occur only
to and from those Variable Account Options where you have current contribution
allocations. We won't charge a transfer charge for transfers under our
Customized Asset Rebalancing program, and they won't count towards your twelve
free transfers.
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. If we change the Model, your account
values will be
25
<PAGE>
automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
When you select this program, your account values will be allocated and your
variable portfolios will be rebalanced automatically at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under the
Asset Allocation and Rebalancing Program. These transfers won't count toward
your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative office. You should be aware
that other allocation programs, such as dollar cost averaging, transfers and
withdrawals that you make, may not work with the Customized Asset Rebalancing
program. If, after selecting one of the five models, you request a transaction
that results in a reallocation outside one of the Models, your participation in
the Model program automatically ends. You should, therefore, monitor your use of
other programs, transfers, and withdrawals while the Customized Asset
Rebalancing program is in effect. This program isn't available with the
Customized Asset Rebalancing program. We can terminate or change this program in
whole or in part, or restrict contributions to the program. This program may not
be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll in
this program, send the appropriate form to our Administrative Office. You may
terminate your participation in the program upon 30 days' prior written notice.
We may terminate your participation if your bank declines to make any payment.
The minimum amount for systematic contributions is $100 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period shown. Total returns also may be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually seven years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would have produced the same cumulative total
return if the Investment Option experienced exactly the same return each year
for the entire period shown. Because performance will fluctuate on a
year-by-year basis, the average annual total returns tend to show a smooth
result that won't mirror actual performance, even though the end result will be
the same.
26
<PAGE>
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical period.
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested amount is included. The VIP II Investment Grade Bond and VIP High
Income Option may advertise a 30-day yield which reflects the income generated
by an investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
PART 9 - PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
This section shows the Death Benefit information for contracts issued before
January 1, 1997. It may be different from other provisions in this prospectus.
For contracts issued before 1997, the following provisions apply:
For contracts issued before January 1, 1995, the amount of the death benefit is
the greatest of:
- your Adjusted Account Value
- the Account Value at the beginning of the seventh contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
- for Annuitants younger than 70 years old on the birthday nearest the
date on which their contract was issued, an enhanced minimum death
benefit, explained below.
For contracts issued during 1995, the amount of the death benefit is the
greatest of:
- your Adjusted Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
For contracts issued during 1996, the amount of the death benefit is the
greatest of:
- your Account Value
- the highest Account Value at the beginning of any contract year, plus
subsequent contributions and minus subsequent withdrawals
- your total contributions less the sum of withdrawals
"Subsequent withdrawals" for purposes of calculation of a death benefit reflect
any market value adjustments that apply to those withdrawals and reduce the
death benefit on a pro rata basis.
The enhanced minimum death benefit is the same as the guaranteed death benefit,
except that the guaranteed death benefit may not exceed the maximum guaranteed
death benefit. The guaranteed death benefit on your Participation Date is your
initial contribution. After that, every month we recalculate that portion of
your guaranteed death benefit allocated to the Separate Account by adding
interest at an annual rate of 7% until the contract anniversary nearest your
70th birthday, subject to the maximum. We subtract from that the sum of any
withdrawals or transfers from the Separate Account during the month and a pro
rata amount of the interest accumulated that applies to the withdrawn or
transferred amount. Therefore, your guaranteed death benefit at any time,
subject to the maximum, is the sum of (1) your Guarantee Period Values, and (2)
your Separate Account contributions, including the amount of interest calculated
on your Separate Account values for purposes of determining the guaranteed death
benefit, less any withdrawals or transfers and less the interest calculated on a
pro rata basis on those withdrawals or transfers. Your maximum guaranteed death
benefit is determined by totaling your contributions during your first five
participation years, subtracting all withdrawals, taking into consideration any
market value adjustments made under
27
<PAGE>
the contract, multiplying the result by two, and then adding that to your total
contributions made after the first five participation years.
REDUCTION IN CHARGES
If your contract was issued on or after January 1, 1995, but before January 1,
1997, the effective annual rate of mortality, expense and administrative charges
will reduce to 1.10% after your contract has been in effect for six years.
CONTINGENT WITHDRAWAL CHARGE
For contracts issued before February 15, 1997 (2/27/97 in Washington, 5/30/97 in
Pennsylvania, 7/7/97 in Maryland, 10/16/97 in Oregon) the following rules apply
even if they are different from other provisions in this prospectus:
There is a withdrawal charge of up to 7% on all contributions withdrawn. As
shown below, this charge varies, depending upon the "age" of the contributions
included in the withdrawal, that is, how long ago you made your contributions.
The maximum percentage of 7% would apply if the entire amount of the withdrawal
consisted of contributions made during your current contract year. No withdrawal
charge applies when you withdraw contributions made earlier than your fifth
prior contribution year. For purposes of calculating the withdrawal charge, (1)
the oldest contributions will be treated as the first withdrawn and more recent
contributions next, and (2) partial withdrawals up to the free withdrawal amount
won't be considered a withdrawal of any contributions. For partial withdrawals,
the total amount deducted from your Account Value will include the withdrawal
amount requested, any applicable Market Value Adjustment and any applicable
withdrawal charge, so that the net amount you receive will be the amount
requested.
No charge will be applied to your partial withdrawals that don't exceed the free
withdrawal amount in any contract year. On any Business Day, the free withdrawal
amount is the greater of (i) 10% of your Account Value and (ii) any investment
gain during the prior contract year, less withdrawals during the current
contract year. Investment gain is calculated as the increase in the Account
Value during the prior contract year, minus contributions during that year, plus
withdrawals made during that year. We'll deduct contingent withdrawal charges
for any partial withdrawal amount that is over the free withdrawal amount. The
contingent withdrawal charge is a sales charge to help pay our costs of selling
and promoting the contracts. We don't expect revenues from contingent withdrawal
charges to cover all of those costs. Any shortfall will be made up from our
General Account assets, which may include profits from other charges under the
contracts.
<TABLE>
<CAPTION>
CONTRIBUTION YEAR IN WHICH CHARGE AS A % OF THE
WITHDRAWN CONTRIBUTION WAS MADE CONTRIBUTION WITHDRAWN
------------------------------- ----------------------
<S> <C>
Current.............................................. 7%
First Prior.......................................... 6
Second Prior......................................... 5
Third Prior.......................................... 4
Fourth Prior......................................... 3
Fifth Prior.......................................... 2
Sixth Prior and Earlier.............................. 0
</TABLE>
We won't deduct a contingent withdrawal charge if the Annuitant uses the
withdrawal to buy from Integrity either an immediate annuity benefit with life
contingencies or an immediate annuity without life contingencies with a
restricted prepayment option that provides for level payments over five or more
years. Similarly, we won't deduct a charge if the Annuitant dies and the
withdrawal is made by the Annuitant's beneficiary. See "Death Benefits and
Similar Benefit Distributions" in Part 5.
Withdrawals will be taken from your Accounts in the same proportions as you
contributed it to them. For example if your contributions are divided in equal
25% shares among four Investment Options, when you make a withdrawal, 25% of the
money withdrawn will come from each of your Investment Options. You can tell us
if you want your withdrawal handled differently. The minimum withdrawal
permitted is $300.
28
<PAGE>
RETIREMENT DATE
For Contracts issued before January 1, 1997, the Retirement Date will be the
date you specify, but no later than your 85th birthday or the 10th Contract
Anniversary, whichever is later.
29
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
The table below shows the unit value for each Variable Account Option at
inception, the number of units outstanding at December 31 of each year since
inception, and the unit value at the end of each period. The unit value at the
beginning of each period is the unit value as of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
MONEY HIGH EQUITY- INVESTMENT
MARKET INCOME INCOME GROWTH OVERSEAS GRADE
DIVISION DIVISION DIVISION DIVISION DIVISION BOND
-------- -------- -------- -------- -------- DIVISION
---------
<S> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $10.18 - $7.74 $7.51 $8.13 $10.21
Number of Units 1,952 - 25,560 50 7,250 26,988
December 31, 1988 $10.75 - $8.49 $7.48 $8.93 $10.69
Number of Units 2,062 - 8,962 2,043 2,019 45,789
December 31, 1989 $11.57 - $10.41 $10.45 $11.02 $12.20
Number of Units 43,299 - 8,517 2,284 1,937 4,372
December 31, 1990 $12.34 - $9.04 $11.04 $10.16 $12.82
Number of Units 2,427 - 29,446 2,060 1,779 3,350
December 31, 1991 $12.90 - $12.92 $17.96 $12.44 $14.38
Number of Units 1,422 - 7,198 1,777 945 1,160
December 31, 1992 $13.22 - $14.90 $19.36 $10.95 $15.13
Number of Units 68,139 - 124,911 129,511 35,346 80,734
December 31, 1993 $13.46 $11.45 $17.38 $22.80 $14.83 $16.57
Number of Units 346,644 615,289 748,436 444,077 480,406 330,360
December 31, 1994 $13.84 $11.12 $18.35 $22.49 $14.88 $15.73
Number of Units 1,363,372 989,407 1,206,683 988,674 1,272,218 454,358
December 31, 1995 $14.46 $13.23 $24.46 $30.03 $16.10 $18.20
Number of Units 1,823,146 2,238,450 2,264,897 1,665,857 1,308,440 627,020
December 31, 1996 $15.03 $14.88 $27.57 $33.98 $17.98 $18.53
Number of Units 1,839,938 2,871,483 2,977,144 2,311,771 1,792,964 807,207
December 31, 1997 $15.64 $17.27 $34.85 $41.39 $19.79 $19.93
Number of Units 2,298,303 3,057,834 3,512,365 2,026,809 2,066,717 834,294
December 31, 1998 $16.28 $16.30 $38.37 $56.96 $22.01 $21.40
Number of Units 3,190,762 3,293,280 3,398,759 1,942,238 1,813,403 1,235,812
</TABLE>
*The Inception date for the VIP High Income Option was February 19, 1993 and for
the VIP II Index 500 Option was March 4, 1993. The inception date for the VIP
III Balanced Option, VIP III Growth Opportunities Option, and VIP III Growth &
Income Option was December 31, 1996. The inception date for the VIP II
Contrafund Option and the Asset Manager: Growth Option was February 6, 1995.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond and Balanced Options, respectively.
30
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
ASSET
ASSET INDEX CONTRA- MANAGER GROWTH GROWTH
MANAGER 500 FUND GROWTH BALANCED INCOME OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
December 31, 1987 $8.00 - - - - - -
Number of Units 29,166 - - - - - -
December 31, 1988 $8.98 - - - - - -
Number of Units 11,300 - - - - - -
December 31, 1989 $11.16 - - - - - -
Number of Units 10,635 - - - - - -
December 31, 1990 $11.02 - - - - - -
Number of Units 12,194 - - - - - -
December 31, 1991 $13.60 - - - - - -
Number of Units 5,272 - - - - - -
December 31, 1992 $15.01 - - - - - -
Number of Units 309,292 - - - - - -
December 31, 1993 $17.92 $10.52 - - - - -
Number of Units 1,748,246 98,288 - - - - -
December 31, 1994 $16.60 $10.49 - - - - -
Number of Units 3,509,145 218,119 - - - - -
December 31, 1995 $19.15 $14.20 $13.50 $12.03 - - -
Number of Units 2,973,440 474,834 1,068,907 175,138 - - -
December 31, 1996 $21.65 $17.20 $16.15 $14.23 - - -
Number of Units 2,708,795 1,207,882 2,382,588 479,960 - - -
December 31, 1997 $25.77 $22.51 $19.78 $17.56 $11.33 $12.11 $11.90
Number of Units 2,687,060 2,028,663 2,782,642 695,464 124,495 412,889 458,320
December 31, 1998 $29.25 $28.50 $25.36 $20.37 $13.15 $15.48 $14.62
Number of Units 2,454,761 2,724,340 3,185,222 745,989 300,468 1,438,416 1,094,151
</TABLE>
*The Inception date for the VIP High Income Option was February 19, 1993 and for
the VIP II Index 500 Option was March 4, 1993. The Inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: VIP Growth Option was February
6, 1995. The inception date for the VIP III Balanced Option, VIP III Growth
Opportunities Option, and VIP III Growth & Income Option was December 31, 1996.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond and Balanced Options, respectively.
31
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment and the
contingent withdrawal charge may affect the values of a contract upon a
withdrawal. The 5% assumed Guaranteed Interest Rate is the same rate used in the
Example under "Table of Annual Fees and Expenses" in this Prospectus. In these
examples, the withdrawal occurs three years after the initial contribution. The
Market Value Adjustment operates in a similar manner for transfers. No
contingent withdrawal charge applies to transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we don't declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account. These examples also show the
withdrawal charge which would be calculated separately.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0551589 = [(1 + .05)48/12 / (1 + .0625 + .0025)48/12] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
32
<PAGE>
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
.0290890 = [(1 + .05)48/12 / (1 + .04 + .0025)48/12] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
33
<PAGE>
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have more or less impact than shown in the
examples, depending on the actual change in interest crediting rate and the
timing of the withdrawal or transfer in relation to the time remaining in the
GRO Account. Also, the Market Value Adjustment can never decrease the Account
Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
34
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
<TABLE>
<S> <C>
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Tax-Favored Retirement Programs.........................................................
Traditional Individual Retirement Annuities................................................
Roth Individual Retirement Annuities.......................................................
SIMPLE Individual Retirement Annuities.....................................................
Tax Sheltered Annuities....................................................................
Simplified Employee Pensions...............................................................
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans.................................................................
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations............................................................
Distributions Under Tax-Favored Retirement Programs........................................
</TABLE>
Part 6 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account I (GrandMaster III)
Name:
---------------------------------------
Address:
---------------------------------------
City: State: Zip:
------------------ ---- -------
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Part 1 - Integrity and Custodian.................................................................................
Part 2 - Distribution of the Contracts...........................................................................
Part 3 - Performance Information.................................................................................
Part 4 - Determination of Annuity Unit Values....................................................................
Part 5 - Tax Favored Retirement Programs.........................................................................
Traditional Individual Retirement Annuities.................................................................
Roth Individual Retirement Annuities........................................................................
SIMPLE Individual Retirement Annuities......................................................................
Tax Sheltered Annuities.....................................................................................
Simplified Employee Pensions................................................................................
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit Sharing Plans.............................
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations.....................
Distributions Under Tax Favored Retirement Programs.........................................................
Part 6 - Financial Statements....................................................................................
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1999.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity Life Insurance Company is an Ohio stock life insurance company that
sells life insurance and annuities. Its principal executive offices are located
at 515 West Market Street, Louisville, Kentucky, 40202. Integrity, the depositor
of Separate Account I, is a wholly owned subsidiary of Integrity Holdings, Inc.,
a Delaware corporation that's a holding company engaged in no active business.
Integrity owns 100% of the stock of National Integrity Life Insurance Company, a
New York stock life insurance corporation. All outstanding shares of Integrity
Holdings, Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware
corporation that's a financial services company focusing on the long-term
savings and retirement marketplace by providing retail and institutional
products and services throughout the United States. ARM owns 100% of the stock
of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota corporation,
registered with the SEC as a broker-dealer and a member of the National
Association of Securities Dealers, Inc., (ii) Integrity Capital Advisors, Inc.,
a Delaware corporation registered with the SEC as an investment adviser, (iii)
SBM Certificate Company, a Minnesota corporation registered with the SEC as an
issuer of face-amount certificates, and (iv) ARM Transfer Agency, Inc., a
Delaware corporation registered with the SEC as a transfer and dividend
disbursing agency.
ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No
one has the direct or indirect power to control ARM, except power he or she may
have by virtue of his or her capacity as a director or executive officer of ARM;
no individual beneficially owns more than 5% of the common shares.
Since 1994, ARM has provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by Integrity
for management services in 1997 were $19,307,552 and in 1998 were $27,158,002
including services applicable to the Registrant.
Integrity is the custodian for the shares of the Funds owned by the Separate
Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company, Moody's
Investor Service, Standard & Poor's Corporation, Duff & Phelps Corporation, or
other recognized rating services. Integrity is currently rated "A" (Excellent)
by A.M. Best Company, and has received claims paying ability ratings of "A"
(Good) from Standard & Poor's Corporation, "Baa1" from Moody's Investors
Service, Inc., and "A+" (High) from Duff and Phelps Credit Rating Company.
However, Integrity doesn't guarantee the investment performance of the
portfolios, and these ratings don't reflect protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida that precluded it from writing new business in Florida from May, 1992 to
November, 1994. The consent order was
<PAGE>
entered into on May 6, 1992 as a result of noncompliance with certain investment
restrictions under Florida law. Due to the substantial asset restructuring and
capital infusions involved with Integrity's acquisition by ARM in November,
1993, Integrity was able to comply with the investment limitations of the State
of Florida. On November 4, 1994, the Florida Department of Insurance granted the
request for full relief from the consent order.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a continuous
basis.
We generally pay a maximum distribution allowance of 7.5% of initial
contribution and 7% of additional contributions, plus .50% trail commission paid
on Account Value after the 8th Contract Year. The amount of distribution
allowances paid was $7,795,349 for the year ended December 31, 1998, $6,750,503
for the year ended December 31, 1997 and $7,813,058 for the year ended December
31, 1996. Distribution allowances weren't retained by ARM Securities during
these years. Integrity may from time to time pay or allow additional promotional
incentives, in the form of cash or other compensation, to broker-dealers that
sell contracts. In some instances, those types of incentives may be offered only
to certain broker-dealers that sell or are expected to sell certain minimum
amounts of the contracts during specified time periods.
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and we can't guarantee that any historical results will
continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of contract
values, an average account value of $40,000 has been used. Quotations also will
assume a termination (surrender) at the end of the particular period and reflect
the deductions of the contingent withdrawal charge, if they would apply. Any
total return calculation will be based upon the assumption that the Option
corresponding to the investment portfolio was in existence throughout the stated
period and that the applicable contractual charges and expenses of the Option
during the stated period were equal to those that currently apply under the
contract. Total returns may be shown at the same time that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Option over certain
periods, including 1, 3, 5, and 10 years (up to the life of the Option), and
then calculating the annually
<PAGE>
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. Investors
should realize that the Option's performance is not constant over time, but
changes from year to year, and that the average annual returns represent the
averages of historical figures as opposed to the actual historical performance
of an Option during any portion of the period shown. Average annual returns are
calculated pursuant to the following formula: P(1+T)(n) = ERV, where P is a
hypothetical initial payment of $1,000, T is the average annual total return, n
is the number of years, and ERV is the withdrawal value at the end of the
period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or any contingent
withdrawal charge. Yields are annualized and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period,
less a hypothetical charge reflecting deductions from contract values 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 one percent. Effective yield
assumes that all dividends received during an annual period have been
reinvested. This compounding effect causes effective yield to be higher than
current yield. Calculation of effective yield begins with the same base
period return used in the calculation of current yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)(365/7)} - 1
<PAGE>
For the period ending: 12/31/98
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
VARIABLE SEC STANDARDIZED
ACCOUNT AVERAGE ANNUAL RETURN (1)
INCEPTION -------------------------------------------------------------------------------
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- ---------------- -------- ------ ------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Asset Manager 9/3/91 6.42% 8.33% n/a 11.47%
Asset Manager: Growth 2/8/95 8.91% n/a n/a 19.21%
Balanced 2/19/97 8.98% n/a n/a 13.37%
Contrafund 2/8/95 21.15% n/a n/a 26.28%
Equity-Income 9/3/91 3.05% 16.77% n/a 16.61%
Growth 9/3/91 30.54% 19.73% n/a 18.77%
Growth & Income 2/14/97 20.77% n/a n/a 23.53%
Growth Opportunities 2/19/97 15.86% n/a n/a 20.31%
High Income 2/19/93 -12.69% 6.79% n/a 8.62%
Index 500 3/4/93 19.52 21.71% n/a 19.48%
Investment Grade Bond 9/3/91 .30% 4.69% n/a 6.43%
Overseas 9/3/91 4.16% 7.70% n/a 8.50%
---------------------------------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that would
apply if an owner terminated the policy at the end of the period, but
exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through year-end.
(5) Represents the inception date of the underlying funds. Performance data for
periods prior to the actual inception of the variable account options is
hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
<PAGE>
For the period ending: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES (3) All figures are unaudited.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN CALENDAR YEAR RETURN(4)
FUND ---------------------------------------------------------------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (5) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND 1993 1994 1995 1996
--------- ------ ------ -------------- ------ ------ ------ ------- ------- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager 9/6/89 52.71% 63.23% n/a 174.86% 13.50% 15.16% 8.84% n/a 11.46% 19.50% -7.42% 15.38% 13.04%
Asset Manager: Growth 1/3/95 69.30 n/a n/a 105.67 15.98 19.18 n/a n/a 19.80 n/a n/a 21.49 18.30
Balanced 1/3/95 51.75 n/a n/a 70.57 16.05 14.92 n/a n/a 14.31 n/a n/a 12.40 8.48
Contrafund 1/3/95 87.90 n/a n/a 158.85 28.23 23.40 n/a n/a 26.90 n/a n/a 37.76 19.66
Equity-Income 10/9/86 56.88 120.84 272.76 339.63 10.12 16.20 17.17 14.06 12.87 16.76 5.48 33.27 12.73
Growth 10/9/86 89.66 149.81 414.42 499.79 37.61 23.78 20.09 17.80 15.78 17.51 -1.16 33.54 13.14
Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a 28.11 n/a n/a n/a n/a
Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a 24.58 n/a n/a 30.76 16.67
High Income 9/19/85 23.23 42.40 95.04 82.63 -5.62 7.21 7.33 6.91 4.64 18.68 -2.80 18.98 12.48
Index 500 8/27/92 100.78 170.86 n/a 210.26 26.60 26.16 22.05 n/a 19.54 8.77 -.79 35.34 21.15
Investment Grade Bond 12/5/88 17.58 29.21 n/a 65.10 7.38 5.55 5.26 n/a 5.10 9.56 -5.14 15.74 1.78
Overseas 1/28/87 36.70 48.43 128.03 127.29 11.23 10.98 8.22 8.59 7.13 35.21 .48 8.20 11.67
------------------------------------------------------------------------------------------------------------
VARIABLE OPTIONS 1997
- ---------------- ------
<S> <C>
Asset Manager 19.02%
- ------------- ------
Asset Manager: Growth 23.38
- --------------------- -----
Balanced 20.54
- -------- -----
Contrafund 22.47
- ---------- -----
Equity-Income 26.38
- ------------- -----
Growth 21.82
- ------ -----
Growth & Income 28.34
- --------------- -----
Growth Opportunities 28.20
- -------------------- -----
High Income 16.08
- ----------- -----
Index 500 30.91
- --------- -----
Investment Grade Bond 7.59
- --------------------- ----
Overseas 10.05
- -------- -----
</TABLE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services toat monitor the pNrformance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recobnized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY,
<PAGE>
MORNINGSTAR MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S
INVESTMENT ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT
COMPANY SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted issues
are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
<PAGE>
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index. The SEI Median Balanced Fund
Universe measures a group of funds with an average annual equity commitment and
an average annual bond - plus - private - placement commitment greater than 5%
each year. SEI must have at least two years of data for a fund to be considered
for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
<PAGE>
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by Integrity or any
of the Sub-Advisers derived from such indices or averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
<PAGE>
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same and will be based on the amount taken from the
tables in the contract or on our current rates, whichever is more favorable to
the participant. Where the Company's current annuity rates are used,
contributions in the current and five prior participation years will qualify for
the Company's current individual annuity rates applicable to funds derived from
sources outside the Company. The balance of the proceeds will qualify for the
Company's current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that, each
payment will be calculated by multiplying the number of annuity units credited
by the average annuity unit value for the second calendar month before the due
date of the payment. The number of annuity units credited equals the initial
periodic payment divided by the annuity unit value for the valuation period that
includes the due date of the first annuity payment. The average annuity unit
value is the average of the annuity unit values for the valuation periods ending
in that month. Each business day is considered a valuation period. Days that
aren't considered business days are added to the next business day and
constitute one valuation period. For example, Saturday, Sunday and Monday are
considered to be one valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units credited
under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments begin. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and get the cash value of future guaranteed payments in a lump sum. The
present value of future guaranteed payments for a period certain is based on the
number of payments left, the assumed base rate of net return, the number of
annuity units and the annuity unit value for the date the Company receives a
written request for lump sum payment of remaining values. Assets held in the
Account at least equal to all statutory reserves required for such Separate
Account.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are brief
descriptions of various types of qualified plans in connection with which
Integrity may issue a contract. Integrity reserves the right to change its
administrative rules, such as minimum contribution amounts, as needed to comply
with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the
<PAGE>
tax year may establish a Traditional IRA and make contributions up to the
deadline for filing his or her federal income tax return for that year (without
extensions). Traditional IRAs are subject to limitations on the amount that may
be contributed, the persons who may be eligible, and on the time when
distributions may begin. An individual may also rollover amounts distributed
from another Traditional IRA, Roth IRA or another tax-favored retirement program
to a Traditional IRA contract. Your Traditional IRA contract will be issued with
a rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose of
complying with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with these
plans should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
<PAGE>
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Plans in existence on
August 20, 1996, should have established a trust, custodial account, or annuity
contract by January 1, 1999. Loans to employees may be permitted under such
plans; however, a Section 457 plan is not required to allow loans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
<PAGE>
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
Traditional IRA holders, to begin receiving distributions by April 1 of the
calendar year following the later of either (i) the calendar year in which the
employee reaches age 70-1/2, or (ii) the calendar year in which the employee
retires. Additional distribution rules apply after the participant's death.
Failure to make mandatory distributions may result in the imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount distributed. Distributions to a participant from all plans (other than
457 plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a 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 plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1998, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1998 and 1997 included in this SAI have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
<PAGE>
PROSPECTUS
GRANDMASTER IV
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc. The
contracts offered by this prospectus provide several types of benefits, some of
which have tax-favored status under the Internal Revenue Code of 1986, as
amended. You may allocate contributions to the various investment divisions of
our Separate Account I (VARIABLE ACCOUNT OPTIONS, or individually, OPTION) or to
our Fixed Accounts, or both. There is no sales load on the contracts.
Contributions you make to the Variable Account Options are invested in shares of
corresponding Portfolios of the Variable Insurance Products Fund (VIP), Variable
Insurance Products Fund II (VIP II), and Variable Insurance Products Fund III
(VIP III) (the PORTFOLIOS or PORTFOLIO). The Portfolios are part of the Fidelity
Investments-Registered Trademark- group of companies. The values allocated to
the Options reflect the investment performance of the Portfolios. The prospectus
for the Portfolios describes each one's investment objectives, policies and
risks. The fourteen Variable Account Options invest in the following Portfolios:
<TABLE>
<S> <C>
- VIP Money Market Portfolio - VIP II Investment Grade Bond Portfolio
- VIP High Income Portfolio - VIP II Asset Manager Portfolio
- VIP Equity-Income Portfolio - VIP II Index 500 Portfolio
- VIP Growth Portfolio - VIP II Contrafund Portfolio
- VIP Overseas Portfolio - VIP II Asset Manager: Growth Portfolio
- VIP III Balanced Portfolio - VIP III Growth Opportunities Portfolio
- VIP III Growth & Income Portfolio - VIP III Mid Cap Portfolio
</TABLE>
We also offer Guaranteed Rate Options (GROs) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a GRO
grows at a fixed interest rate that we declare at the beginning of the duration
you select. A MARKET VALUE ADJUSTMENT will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your contribution plus interest compounded at an annual effective rate of 3%
(MINIMUM VALUE). An annual administrative charge may apply, which may invade
principal. The money you contribute to the STO grows at a fixed interest rate
that we declare each calendar quarter, guaranteed never to be less than an
effective annual yield of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO
THE STO INTO OTHER INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A
MONTHLY OR QUARTERLY BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville, KY 40201-0074.
The express mail address is Integrity Life Insurance Company, 515 West Market
Street, Louisville, Kentucky 40202. You may also call the following toll-free
number: 1-800-325-8583.
A registration statement relating to the contracts, which includes a Statement
of Additional Information dated May 1, 1999, has been filed with the Securities
and Exchange Commission. The SAI is incorporated by reference into this
prospectus. A free copy of the SAI is available by writing to or calling our
Administrative Office. A table of contents for the SAI is found in the Appendix
to this prospectus.
* NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM VARIABLE
ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL REFERENCES TO
FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR THIS STATE.
THESE SECURITIES HAVEN'T BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
THE SEC MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION AS WELL AS ANY MATERIAL INCORPORATED BY REFERENCE
RELATING TO THIS PROSPECTUS.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1999.
<PAGE>
TABLE OF CONTENTS
PART 1 - SUMMARY PAGE
Your Variable Annuity Contract . . . . . . . . . . . . . . . . . . . . . . . .
Your Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How Your Contract is Taxed . . . . . . . . . . . . . . . . . . . . . . . . . .
Your Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Your Investment Options. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Account Options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Account Value, Adjusted Account Value and Cash Value . . . . . . . . . . . . .
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Your Initial Right to Revoke . . . . . . . . . . . . . . . . . . . . . . . . .
Risk/Return Summary: Investments and Risks . . . . . . . . . . . . . . . . . .
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Annual Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . .
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . .
The Separate Account and the Variable Account Options. . . . . . . . . . . . .
Assets of Our Separate Account . . . . . . . . . . . . . . . . . . . . . . . .
Changes In How We Operate. . . . . . . . . . . . . . . . . . . . . . . . . . .
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Portfolios' Investment Adviser. . . . . . . . . . . . . . . . . . . . .
Investment Objectives of the Portfolios . . . . . . . . . . . . . . . . . .
Fixed Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed Rate Options. . . . . . . . . . . . . . . . . . . . . . . . . . .
Renewals of GRO Accounts. . . . . . . . . . . . . . . . . . . . . . . . . .
Market Value Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . .
Systematic Transfer Option . . . . . . . . . . . . . . . . . . . . . . . . .
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction or Elimination of Separate Account or Administrative Charges . . . .
Portfolio Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Premium Tax Deduction. . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . .
Reduction or Elimination of Contingent Withdrawal Charge . . . . . . . . . . .
Hardship Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
PAGE
Contributions Under Your Contract. . . . . . . . . . . . . . . . . . . . . . .
Your Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Your Purchase of Units in Our Separate Account . . . . . . . . . . . . . . . .
How We Determine Unit Value. . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Death Benefits and Similar Benefit Distributions . . . . . . . . . . . . . . .
Annuity Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Timing of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How You Make Requests and Give Instructions. . . . . . . . . . . . . . . . . .
PART 6 - VOTING RIGHTS
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How We Determine Your Voting Shares. . . . . . . . . . . . . . . . . . . . . .
How Portfolio Shares Are Voted . . . . . . . . . . . . . . . . . . . . . . . .
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . . . .
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Status of Integrity. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Your Contract is an Annuity. . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation of Annuities Generally. . . . . . . . . . . . . . . . . . . . . . . .
Distribution-at-Death Rules. . . . . . . . . . . . . . . . . . . . . . . . . .
Diversification Standards. . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-Favored Retirement Programs. . . . . . . . . . . . . . . . . . . . . . . .
Federal and State Income Tax Withholding . . . . . . . . . . . . . . . . . . .
Impact of Taxes to Integrity . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers Among Investment Options . . . . . . . . . . . . . . . . . . . . . .
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Plus Withdrawal Program . . . . . . . . . . . . . . . . . . . . . . . .
Dollar Cost Averaging. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Systematic Transfer Program. . . . . . . . . . . . . . . . . . . . . . . . . .
Customized Asset Rebalancing . . . . . . . . . . . . . . . . . . . . . . . . .
Callan Asset Allocation and Rebalancing Program. . . . . . . . . . . . . . . .
Systematic Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix A - Financial Information . . . . . . . . . . . . . . . . . . . . . .
Appendix B - Illustration of a Market Value Adjustment . . . . . . . . . . . .
Appendix C - Statement of Additional Information Table of Contents . . . . . .
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "WE," "OUR" and "US" mean Integrity Life Insurance Company
(INTEGRITY), a subsidiary of ARM Financial Group, Inc. (ARM). The terms "YOU"
and "YOUR" mean the Annuitant, the person upon whose life the Annuity Benefit
and the Death Benefit are based, usually the Owner of the contract. If the
Annuitant doesn't own the contract, all of the rights under the contract belong
to the Owner until annuity payments begin. If a Joint Owner is named, the Owners
share the contract rights. Contract changes or any transactions allowed under
the Contract require both Owners' signatures. The rules governing distribution
at death apply when the first Owner dies. See Section 7, "Distribution-at-Death
Rules."
You can invest for retirement by buying a GrandMaster IV contract if you
properly complete a Customer Profile form (an application or enrollment form may
be required in some states) and make a minimum initial contribution. Because the
premium is flexible, your future contributions can be any amount you choose, as
long as it is above the minimum required contribution, discussed below.
The latest your endowment or "retirement date" can be is your 98th birthday,
unless your state law requires it to be a different date, or unless you specify
an earlier date.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under a contract may be controlled by the usual rules for taxation
of annuities, including the deferral of taxes on your investment growth until
you actually make a withdrawal. The contract also can provide your benefits
under certain tax-favored retirement programs, which may be subject to special
eligibility and contribution rules. See Part 7, "Tax Aspects of the Contracts"
and the Statement of Additional Information for detailed information.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
YOUR CONTRIBUTIONS
Your minimum initial contribution is $1,000 ($3,000 in Pennsylvania and South
Carolina). Contributions after your first one can be as little as $100. Some
tax-favored retirement plans allow smaller contributions. See "Contributions
Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine Investment Options at
any one time. See "Contributions Under Your Contract" in Part 5. To select
Investment Options most suitable for you, see Part 3, "Your Investment Options."
The Variable Account Options invest in shares of investment portfolios of mutual
funds. Each investment portfolio is referred to as a PORTFOLIO. The investment
goal of each Variable Account Option and its corresponding Portfolio is the
same. For example, if your investment goal is to save money for retirement, you
might choose a GROWTH oriented Variable Account Option, which invests in GROWTH
Portfolios. Your value in a Variable Account Option will vary with the
performance of the corresponding Portfolio. For a full description of the
Portfolios, see the Portfolios' prospectus and Statement of Additional
Information.
2
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Account added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your CASH VALUE is equal to your Adjusted Account
Value, minus any contingent withdrawal charges and minus the pro rata portion of
the annual administrative charge, if it applies. See "Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these in
Part 5, "Transfers." Any transfer must be for at least $250 and may be arranged
through our telephone transfer service. Transfers may also be made among certain
Investment Options under the following special programs: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and
Rebalancing Program, or (iv) to transfer your STO contributions. All of these
programs are discussed in Part 8. If you make more than twelve transfers
between your Investment Options in one contract year, your account can be
charged up to $20 for each transfer after the first twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account.
A daily charge at an annual rate of 1.00% is deducted from the Account Value of
each of your Variable Account Options to cover mortality and expense risks
(.95%) and certain administrative expenses (.05%). The charge will never be
greater than this. For more information, see Part 4, "Deductions and Charges."
If you choose to receive the Optional Annual Stepped Up Death Benefit, an
additional daily charge at an annual rate of .25% is deducted from the Account
Value of each of your Variable Account Options. This charge is designed to
reimburse us for increased expenses and mortality risks.
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company receives investment management fees from the Portfolios based on the
average net assets of each Portfolio. Advisory fees can't be increased without
the consent of shareholders. See "Table of Annual Fees and Expenses" below and
"The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make any number of withdrawals from your contract as often as you wish.
Each withdrawal must be for at least $300. You may withdraw up to 10% of your
Account Value each year with no withdrawal charges. After the first 10%, there
will be a charge for any withdrawals you make, based upon the length of time
your money has been in your account. See "Contingent Withdrawal Charges" in
Part 4.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in some states. If you cancel your contract, we'll return your entire
contribution, with adjustments made for any investment gain or loss experienced
by the Variable Account Option from the date you purchased it until the date we
receive your cancelled contract, including any charges deducted. If your state
requires, we'll return all of your contributions without any adjustment. We'll
return the amount of any contribution to the Guaranteed Rate Options upon
cancellation.
3
<PAGE>
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the GrandMaster IV Variable Annuity are protecting your
investment, building for retirement and providing future income. We strive to
achieve these goals through extensive portfolio diversification and superior
portfolio management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most
of the Variable Account Options invest in common stocks, there's also the
inherent risk that holders of common stock generally are behind creditors and
holders of preferred stock for payments in the event of the bankruptcy of a
stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900. This could cause many programs to malfunction. Integrity is evaluating,
on an ongoing basis, its computer systems and the systems of other companies on
which we rely, to determine if they'll function properly, and make the
transition from 1999 to 2000 smoothly. These activities are designed to ensure
that there is no adverse effect on our business operations. While we've been
working very hard to make sure that this process will be problem-free, we can't
guarantee that there won't be some Year 2000 problems experienced by our systems
and we can't make any representations or guarantees that the outside sources on
which we rely will be ready to make a smooth transition to Year 2000 with their
systems.
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Fixed Accounts and Variable Account Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize
your contract.
ARM - ARM Financial Group, Inc.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
CONTRACT - your variable annuity contract.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of three, five, seven and
ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a
GRO Account, assuming you haven't withdrawn or transferred any amounts, will be
the amount you put in plus interest at the Guaranteed Interest
4
<PAGE>
Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account if you make an early
withdrawal or early transfer.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges) accumulated at 3% interest annually,
less company charges.
OWNER ("You," "Your") - the person who owns the contract, and is usually the
annuitant. Includes any person named as Joint Owner.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 98th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in the contract.
UNIT VALUE - the value of each unit calculated on any Valuation Date.
VALUATION DATE - The Valuation Date for purposes of determining unit values is 4
p.m. Eastern Time on each day the New York Stock Exchange is open for business.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, consisting of the Portfolios. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
WE, OUR AND US - Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc.
5
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load on Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (as a percentage of contributions) (1) . . . . 8% Maximum
Exchange Fee (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
</TABLE>
ANNUAL ADMINISTRATIVE CHARGE
<TABLE>
<S> <C>
Annual Administrative Charge * . . . . . . . . . . . . . . . . . . . . . . $30
* This charge applies only if the Account Value is less than $50,000 at the
end of any contract year prior to your Retirement Date. See "Annual
Administrative Charge" in Part 4.
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (3)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees. . . . . . . . . . . . . . . . . . . . . . .95%
Administrative Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .05%
-----
Total Separate Account Annual Expenses . . . . . . . . . . . . . . . . . . 1.00%
-----
-----
</TABLE>
OPTIONAL DEATH BENEFIT RIDER
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (4)
<TABLE>
<S> <C>
Optional Annual Stepped Up Death Benefit. . . . . . . . . . . . . . . . .25%
Total Separate Account Annual Expenses (Including Optional Death -----
Benefit Rider). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---- -------- --------
<S> <C> <C> <C>
VIP Money Market............................ .20% .10% .30%
VIP High Income............................. .58% .24% (5) .82%
VIP Equity-Income........................... .49% .19% (5) .68% (6)
VIP Growth.................................. .59% .21% (5) .80% (6)
VIP Overseas................................ .74% .27% (5) 1.01% (6)
VIP II Investment Grade Bond................ .43% .14% .57%
VIP II Asset Manager........................ .54% .24% (5) .78% (6)
VIP II Index 500............................ .24% .11% .35% (7)
VIP II Contrafund........................... .59% .21% (5) .80% (6)
VIP II Asset Manager: Growth................ .59% .30% (5) .89% (6)
VIP III Balanced............................ .44% .26% (5) .70% (6)
VIP III Growth Opportunities................ .59% .21% (5) .80% (6)
VIP III Growth & Income..................... .49% .22% (5) .71% (6)
VIP III Mid Cap Portfolio................... .56% 1.10% (5) 1.66% (7)
</TABLE>
- -------------------------
(1) See "Deductions and Charges - Contingent Withdrawal Charge" in Part 4. You
have a free withdrawal of up to 10% of the Account Value in any contract
year.
(2) After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
(3) See "Deductions and Charges - Separate Account Charges" in Part 4.
(4) At the time you apply for a contract, you can choose to receive the
Optional Annual Stepped Up Death Benefit in lieu of receiving the standard
Death Benefit. If you choose the Optional Death Benefit, we'll deduct an
additional charge equal to an annual rate of .25% of the average account
value. For more information, see "Deductions and
6
<PAGE>
Charges - Optional Death Benefit Rider Charge" in Part 4 and "Death
Benefits and Similar Benefit Distributions" in Part 5.
(5) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
(6) Part of the brokerage commissions that certain Portfolios pay was used to
reduce the Portfolios' expenses. In addition, certain Portfolios have
arranged with their custodian to use uninvested cash balances to reduce
custodian expenses. Including these reductions, the total operating
expenses presented in the table would have been .67% for VIP Equity-Income
Portfolio, .75% for VIP Growth Portfolio, .97% for VIP Overseas Portfolio,
.77% for VIP II Asset Manager Portfolio, .75% for VIP II Contrafund
Portfolio, .88% for VIP II Asset Manager: Growth Portfolio, .79% for VIP
III Growth Opportunities Portfolio, .69% for VIP III Balanced Portfolio and
.70% for VIP III Growth and Income Portfolio.
(7) The investment adviser agreed to reimburse part of the expenses for the VIP
II Index 500 Portfolio and the VIP III Mid Cap Portfolio during the period.
Without this reimbursement, the management fee, other expenses and total
expenses would have been .28%, .11%, and .39%, respectively for the VIP II
Index 500 Portfolio and .56%, 115.40% and 115.96% respectively for the VIP
III Mid Cap Portfolio.
7
<PAGE>
EXAMPLES
The examples below show the expenses that the Annuitant would be charged for
each $1,000 investment, assuming a $40,000 average contract value and a 5%
annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market............................ $ 96.63 $111.49 $128.58 $192.13
VIP High Income............................. $101.96 $127.65 $155.81 $247.94
VIP Equity-Income........................... $100.53 $123.32 $148.53 $233.20
VIP Growth.................................. $101.76 $127.03 $154.77 $245.84
VIP Overseas................................ $103.91 $133.51 $165.60 $267.61
VIP II Investment Grade Bond................ $ 99.40 $119.90 $142.79 $221.47
VIP II Asset Manager........................ $101.55 $126.41 $153.73 $243.75
VIP II Index 500............................ $ 97.15 $113.05 $131.22 $197.63
VIP II Contrafund........................... $101.76 $127.03 $154.77 $245.84
VIP II Asset Manager: Growth................ $102.68 $129.81 $159.42 $255.23
VIP III Balanced............................ $100.73 $123.94 $149.58 $235.32
VIP III Growth Opportunities................ $101.76 $127.03 $154.77 $245.84
VIP III Growth & Income..................... $100.83 $124.25 $150.10 $236.37
VIP III Mid Cap Portfolio................... $110.57 $153.39 $198.52 $332.09
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF ANNUITY OR DON'T
SURRENDER YOUR CONTRACT AT THE END OF THE PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market............................ $16.63 $51.49 $ 88.58 $192.13
VIP High Income............................. $21.96 $67.65 $115.81 $247.94
VIP Equity-Income........................... $20.53 $63.32 $108.53 $233.20
VIP Growth.................................. $21.76 $67.03 $114.77 $245.84
VIP Overseas................................ $23.91 $73.51 $125.60 $267.61
VIP II Investment Grade Bond................ $19.40 $59.90 $102.79 $221.47
VIP II Asset Manager........................ $21.55 $66.41 $113.73 $243.75
VIP II Index 500............................ $17.15 $53.05 $ 91.22 $197.63
VIP II Contrafund........................... $21.76 $67.03 $114.77 $245.84
VIP II Asset Manager: Growth................ $22.68 $69.81 $119.42 $255.23
VIP III Balanced............................ $20.73 $63.94 $109.58 $235.32
VIP III Growth Opportunities................ $21.76 $67.03 $114.77 $245.84
VIP III Growth & Income..................... $20.83 $64.25 $110.10 $236.37
VIP III Mid Cap Portfolio................... $30.57 $93.39 $158.52 $332.09
</TABLE>
These examples take into consideration the maximum amount that could be charged
to your contract (1.25%) for the election of the Optional Death Benefit Rider
(see "Death Benefits and Similar Benefit Distributions" in Part 5 for additional
information on the charges assessed). For those contracts under which the
Optional Death Benefit Rider has not been elected, the expenses in these
examples will be lower.
These examples assume that all of the fixed charges of the Separate Account and
of the investment advisory fees and other expenses of the Portfolios will
continue as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE MORE OR
LESS. The annual rate of return assumed in the examples isn't an estimate or
guarantee of future investment performance. The table assumes an estimated
$40,000 average contract value, so that the administrative charge per $1,000 of
net asset value in the Separate Account is $0.75. Such per $1,000 charge would
be higher for smaller Account Values and lower for higher values.
The table and examples above are to help you understand the various costs and
expenses that apply to your contract. These tables show expenses of the Separate
Account as well as those of the Portfolios. Premium taxes may also apply when
you receive a payout of your contributions.
8
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNT IS PROVIDED IN APPENDIX
A.
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive office is in Louisville, Kentucky. We are authorized to
sell life insurance and annuities in 45 states and the District of Columbia. We
sell flexible premium annuities with underlying investment options other than
the Portfolios, fixed single premium annuities, and flexible premium annuities
offering both traditional fixed guaranteed interest rates and fixed equity
indexed options. We also provide administrative and investment support for
products designed, underwritten and sold by other companies.
Integrity is a subsidiary of ARM Financial Group, Inc., which specializes
providing retail and institutional customers with products and services designed
for long-term savings and retirement planning. ARM is a publicly traded company
listed on the New York Stock Exchange under the symbol "ARM." At December 31,
1998, ARM had $9.9 billion of assets under management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws of
the State of Ohio. It is a unit investment trust registered with the Securities
and Exchange Commission (the SEC) under the Investment Company Act of 1940 (1940
ACT). A unit investment trust is a type of investment company. SEC registration
doesn't mean that the SEC is involved in any way in supervising the management
or investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio. We may establish additional
Options from time to time. The Variable Account Options currently available to
you are listed in Part 3, "Your Investment Options." Prior to September 3,
1991, the Portfolios invested in shares of corresponding portfolios of Prism
Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of yours and other variable annuity contracts.
Annuitants under other variable annuity contracts participate in the Separate
Account in proportion to the amounts in their contracts. We can't use the
Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. We'll
notify you if any changes result in a material change in the underlying
investments of a Variable Account Option. WE MAY:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- - register or end the registration of the Separate Account under the 1940
Act;
- - operate our Separate Account under the direction of a committee or
discharge a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of Integrity under the
1940 Act);
- - restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
9
<PAGE>
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
- - operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we'll rely on our own or outside counsel for advice.
PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-325-8583.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios currently are
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with Fidelity Management or Integrity. The Board of
Trustees of each of the Portfolios is responsible for monitoring the Fund for
any material irreconcilable conflict between the interests of the policyowners
of all separate accounts investing in the Portfolio and determining what action,
if any, should be taken in response. If we believe that a Portfolio's response
to any of those events doesn't adequately protect our contract owners, we'll see
to it that appropriate and available action is taken. See "The Fund and the
Fidelity Organization" in the Portfolios' prospectus for a further discussion of
the risks associated with the offering of shares to our Separate Account and the
separate accounts of other insurance companies.
THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company
(FIDELITY MANAGEMENT) is a registered investment adviser under the Investment
Advisers Act of 1940. It serves as the investment adviser to each Portfolio.
Bankers Trust Company ("BT") is the VIP II Index 500 Portfolios' sub-adviser.
BT, a New York banking corporation, is a wholly owned subsidiary of Bankers
Trust New York Corporation.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO
VIP Money Market Portfolio seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO
VIP High Income Portfolio seeks a high current income by investing primarily in
high-yielding, lower rated, fixed-income securities, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities and preferred stocks, including convertible
securities, and up to 20% in common stocks and other equity securities. In view
of the types of securities in which this Portfolio invests, you should read the
complete risk disclosure for this Portfolio in its prospectus before investing
in it.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
10
<PAGE>
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth
may be measured by factors such as earnings or revenue. Companies with high
growth potential tend to be companies with higher than average price/earnings
(P/E) ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities for have a strong
industry market position. The stocks of these companies are often called
"growth" stocks.
VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
while preserving capital by investing in a broad range of investment-grade
fixed-income securities.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include companies experiencing positive fundamental change such as a
new management team or product launch, a significant cost-cutting initiative, a
merger or acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earning potential has increased or is expected
to increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO
VIP II Asset Manager: Growth Portfolio is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
----- -----------
<S> <C> <C>
Stock Class 50-100% 70%
Bond Class 0-50% 25%
Short-Term/
Money Market Class 0-50% 5%
</TABLE>
11
<PAGE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition
after purchase continue to be considered to have a medium market capitalization
for purposes of the 65% policy.
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVEN'T BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), OR THE
INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE CONTRACTS NOR
OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS UNDER THOSE
CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS OF THE 1933
ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE STAFF OF THE
SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE IN THIS
PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT. DISCLOSURES
REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE SUBJECT TO
CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING
TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of three, five, seven and ten years. We can change
the durations available from time to time. When you put money in a GRO, that
locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST RATE) for the duration you select (your GRO ACCOUNT). The duration of
your GRO Account is the GUARANTEE PERIOD. Each contribution or transfer to a
GRO establishes a new GRO Account for the duration you choose at the
then-current Guaranteed Interest Rate we declare. We won't declare an interest
rate less than 3%. Each GRO Account expires at the end of the duration you have
selected. See "Renewals of GRO Accounts" below. All contributions you make to a
GRO are placed in a non-unitized separate account. Values and benefits under
your contract attributable to GROs are guaranteed by the reserves in our GRO
separate account as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
12
<PAGE>
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will be
guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to your GRO Account will be separate from the Guaranteed
Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED
RATE OR ADDITIONAL INTEREST MAY NOT BE MADE AVAILABLE IN CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
The ten-year GRO isn't available in Oregon.
ALLOCATIONS TO GROS CAN'T BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO, your new one will be for seven years. You can tell us if you want something
different within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make to your GRO Value if you make an early withdrawal or
transfer from your GRO Account. A Market Value Adjustment will be made for each
transaction made from a GRO Account other than your free withdrawals or those
made within 30 days before the expiration of the Account. There will be no
Market Value Adjustment made for a death benefit. The market adjusted value may
be higher or lower than the GRO Value, but will never be less than the MINIMUM
VALUE. Minimum Value is an amount equal to your contribution to the GRO Account
plus 3% interest, compounded annually, less previous withdrawals and less any
applicable contingent withdrawal charges. The Minimum Value for partial
withdrawals or transfers will be calculated on a pro-rata basis. Withdrawal
charges and the administrative expense charge could take away part of your
principal.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
N/12 N/12
MVA = GRO Value x [(1 + A) / (1 + B + .0025) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if that
remaining period isn't equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by a formula that
finds a value between the Guaranteed Interest Rates for GRO Accounts of the
next highest and next lowest durations.
N is the number of whole months remaining in your GRO Account.
13
<PAGE>
For contracts issued in certain states, the formula above will be adjusted to
comply with state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account will be zero. If for any reason we are no longer
declaring current Guaranteed Interest Rates, then to determine B we will use the
yield to maturity of United States Treasury Notes with the same remaining term
as your GRO Account, using a formula when necessary, in place of the current
Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions within the STO Account at the time the rate is declared. You
MUST transfer all STO contributions into other Investment Options within one
year of your most recent STO contribution. Transfers will be made automatically
in approximately equal quarterly or monthly installments of not less than $1,000
each. You can't transfer from other Investment Options into the STO. Normal
contingent withdrawal charges apply to withdrawals from the STO. We guarantee
that the STO's effective annual yield will never be less than 3.0%. See
"Systematic Transfer Program" in Part 8 for details. This option may not be
available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts a daily expense amount from the unit value an amount equal to
an effective annual rate of 1.00% of the Account Value in the Variable Account
Options. This daily expense rate can't be increased without your consent.
Of the 1.00% total charge, .05% of the value of each Variable Account Option is
used to reimburse us for administrative expenses not covered by the annual
administrative charge described below. The remaining .95% is deducted for
Integrity's assuming the expense risk (.65%) and the mortality risk (.30%) under
the contract. The expense risk is the risk that our actual expenses of
administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk Integrity takes that
annuitants, as a class of persons, will live longer than estimated and Integrity
will be required to pay out more annuity benefits than anticipated. The relative
proportion of the mortality and expense risk charges may be changed, but the
total .95% effective annual risk charge can't be increased.
Integrity may realize a gain from these daily charges if they aren't needed to
meet the actual expenses incurred.
OPTIONAL DEATH BENEFIT RIDER CHARGE
If you choose to receive the Optional Annual Stepped Up Death Benefit, an
additional daily charge at an annual rate of .25% is deducted from the Account
Value of each of your Variable Account Options. This charge is designed to
reimburse us for increased expenses and mortality risks.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, Integrity charges an annual administrative charge
of $30. This charge is deducted pro-rata from your Account Value in each
Investment Option. The part of the charge deducted from the Variable Account
Options will reduce the number of units credited to you. The part of the charge
deducted from the Fixed Accounts is withdrawn in dollars. The annual
administrative charge is pro-rated in the event of the Annuitant's retirement,
death, or termination of a contract during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if it saves us expenses. We may do this
based on the size and type of the group and the amount of the contributions. We
won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
14
<PAGE>
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
STATE PREMIUM TAX DEDUCTION
Integrity won't deduct state premium taxes from your contributions before
investing them in the Investment Options, unless required to by your state law.
If the Annuitant elects an annuity benefit, we'll deduct any applicable state
premium taxes from the amount available for an annuity benefit. State premium
taxes currently range up to 4%.
CONTINGENT WITHDRAWAL CHARGE
We don't deduct sales charges when you make a contribution to the contract.
However, contributions withdrawn may be subject to a withdrawal charge of up to
8%. As shown below, the charge varies, depending upon the "age" of the
contributions included in the withdrawal- that is, the number of years that have
passed since each contribution was made. The maximum percentage of 8% would
apply if the entire amount of the withdrawal consisted of contributions made
during your current contribution year. We don't deduct withdrawal charges when
you withdraw contributions made more than seven years prior to your withdrawal.
To calculate the withdrawal charge, (1) the oldest contributions will be treated
as the first withdrawn and more recent contributions next, and (2) partial
withdrawals up to the free withdrawal amount aren't considered a withdrawal.
For partial withdrawals, the total amount deducted from your Account will
include the withdrawal amount requested, any Market Value Adjustment that
applies, and any withdrawal charge and administrative expense charge that apply,
so that the net amount you receive will be the amount you requested.
You may take up to 10% of your account value (less any earlier withdrawal in the
same year) each year without any contingent withdrawal charge or Market Value
Adjustment. This is referred to as your "free withdrawal." If you don't take
any free withdrawals in one year, you can't add it to the next year's free
withdrawal. If you aren't 59-1/2, federal tax penalties may apply.
<TABLE>
<CAPTION>
Contribution Year in Which Charge as a % of the
Withdrawn Contribution Was Made Contribution Withdrawn
------------------------------- ----------------------
<S> <C>
Current. . . . . . . . . . . . 8%
First Prior. . . . . . . . . . 7
Second Prior . . . . . . . . . 6
Third Prior. . . . . . . . . . 5
Fourth Prior . . . . . . . . . 4
Fifth Prior. . . . . . . . . . 3
Sixth Prior . . . . . . . . . 2
Seventh Prior and Earlier. . . 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from Integrity either an immediate annuity benefit with life contingencies or an
immediate annuity without life contingencies with a restricted prepayment option
that provides for level payments over five or more years. Similarly, we won't
deduct a charge if the Annuitant dies and the withdrawal is made by the
Annuitant's beneficiary. See "Death Benefits and Similar Benefit Distributions"
in Part 5.
Unless you tell us otherwise, we will make withdrawals (including any applicable
charges) from the Investment Options in the same proportion that you contributed
to them. For example, if you have your contributions put into four different
Investment Options, your withdrawal will be taken in equal quarters from each
Account. You must withdraw at least $300. Residents of Pennsylvania and South
Carolina must keep a $3,000 minimum account balance.
15
<PAGE>
REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge individuals or a
group of individuals it saves us expenses. We may do this based on the size and
type of the group and the amount of the contribution or whether there is some
relationship with Integrity. Examples of these relationships would include
being an employee of Integrity or an affiliate, receiving distributions or
making internal transfers from other contracts issued by Integrity, or making
transfers of amounts held under qualified plans sponsored by Integrity or an
affiliate. We won't unlawfully discriminate against any person or group if we
reduce or eliminate the contingent withdrawal charge.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) Asset Allocation and
Rebalancing, or (iv) systematic transfers from the STO, nor so these transfers
count toward the twelve free transfers you may make in a contract year.
HARDSHIP WAIVER
We can waive the Market Value Adjustment on any amounts withdrawn from the GRO
Accounts under a hardship circumstance. Hardship circumstances include the
Owner's (1) confinement to a nursing home, hospital or long term care facility,
(2) diagnosis of terminal illness with any medical condition which would result
in death or total disability, and (3) unemployment. We can require reasonable
notice and documentation including, but not limited to, a physician's
certification and Determination Letter from a State Department of Labor. Some
of the hardship circumstances listed above may not apply in some states, and, in
other states, may not be available at all.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment experience of the Variable Account
Options.
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, can't be less than $1,000
($3,000 in Pennsylvania and South Carolina). We'll accept contributions of at
least $50 for salary allotment programs. We have special rules for minimum
contribution amounts for tax-favored retirement programs. See "Special Rules for
Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by Integrity for
all Annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options selected by you and
are used to pay annuity and death benefits. Each contribution is credited as of
the date we have RECEIVED it (as defined below) at our Administrative Office
both the contribution and instructions for allocation among the Investment
Options, PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE
INVESTMENT OPTIONS. In determining the nine Investment Options, each of your GRO
Accounts counts as one Investment Option. Wire transfers of federal funds are
deemed received on the day of transmittal if credited to our account by 3 p.m.
Eastern Time, otherwise they are deemed received on the next Business Day.
Contributions by check or mail are deemed received when they are delivered in
good order to our Administrative Office. A BUSINESS DAY is defined as any day
that the New York Stock Exchange is open.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that
16
<PAGE>
accompanies it and for all future contributions. We can also accept changes by
telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Market Value Adjustments, if applicable, are made as of the effective date of
the transaction. Charges against our Separate Account are reflected daily. Any
amount allocated to a Variable Account Option will go up or down in value
depending on the investment experience of that Option. The value of
contributions made to the Variable Account Options isn't guaranteed. The value
of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as the Portfolios' expenses. The unit values also change
because of deductions and charges we make to our Separate Account. The number of
units credited to you, however, won't vary because of changes in unit values.
Units of a Variable Account Option are purchased when you make new contributions
or transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a NET INVESTMENT FACTOR for each Option as follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Portfolios.
- - Next, we add any dividends or capital gains distributions by the Portfolio
on that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- - Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- - Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.35%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Portfolios, and also for the mortality and expense risk charge and any charge
for administrative expenses or taxes.
17
<PAGE>
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's transfer restrictions. You can't make a transfer
into the STO. Transfers to a GRO must be to a newly elected GRO (i.e. to a GRO
you haven't already purchased) at the then-current Guaranteed Interest Rate,
unless we agree otherwise. Transfers you make from a GRO Account, except within
30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs will
be made according to the order in which money was originally allocated to the
GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our Dollar Cost Averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program or systematic transfer programs, described in Part 8.
Once annuity payments begin, transfers aren't permitted.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service if you
have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
we believed to be genuine in accordance with these procedures. You bear the
risk of loss if unauthorized persons make transfers on your behalf.
A transfer request is effective as of the Business Day our Administrative Office
receives it. A transfer request doesn't change the allocation of current or
future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' unit values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using unit values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
Transfer requests submitted by agents or market timing services that represent
multiple policies will be processed no later than the next Business Day after
our Administrative Office receives the requests.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be for at least $300. The money will be taken from your Accounts in the
same proportions as you contributed it to them. For example, if your
contributions are divided in equal 25% shares among four Investment Options,
when you make a withdrawal, 25% of the money withdrawn will come from each of
your Investment Options. You can tell us if you want your withdrawal handled
differently. During the first seven years of your contract, there is a
contingent withdrawal charge for any withdrawals other than your free
withdrawals. The charge starts at 8% and decreases depending on the age of your
account. This charge is in addition to any Market Value Adjustments made to
early withdrawals from GRO Accounts. Under some circumstances, the contingent
withdrawal charge and Market Value Adjustment may be waived.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any contingent
withdrawal charges and any Market Value Adjustments. The total amount that you
receive will be the total that you requested. Most of the withdrawals you make
before you are 59-1/2 years old are subject to a 10% federal tax penalty. If
your contract is part of a tax-favored plan, the plan may limit your
withdrawals. See "Tax Aspects of the Contracts" in Part 7. Residents of
Pennsylvania and South Carolina are required to keep at least $3,000 in their
Accounts.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
18
<PAGE>
consequences. See Part 7, "Tax Aspects of the Contracts." We won't be bound by
an assignment unless it is in writing and our Administrative Office has received
it.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day when we receive proof of death.
Similarly, if the Contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the contract account value at the end of the
business day when we receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the standard death benefit is the higher of:
a) the contract account value at the end of the business day when we
receive proof of death; or
b) the total of all contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). We'll determine the
amount of the reduction by dividing the amount of the withdrawal by the annuity
account value on the transaction date and multiplying this percentage by the
then current guaranteed minimum death benefit.
If you choose the Optional Annual Stepped Up Death Benefit Rider, your death
benefit will be the highest of:
a) the contract account value at the end of the business day when we
receive proof of death;
b) the total of all contributions; or
c) the highest contract account value on any contract anniversary which
occurred before the Annuitant's 81st birthday and before the
Annuitant's death, plus any subsequent contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). We'll determine the
amount of the reduction by dividing the amount of the withdrawal by the annuity
account value on the transaction date and multiplying this percentage by the
then current guaranteed minimum death benefit.
Death benefits and benefit distributions required because of a separate Owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The Owner selects the beneficiary of the death benefit. An Owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. No death benefit will be paid
after the Annuitant's death if there is a contingent Annuitant. In that case,
the contingent Annuitant becomes the new Annuitant under the contract.
ANNUITY BENEFITS
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time as an annuity.
A lump sum payment will provide the Annuitant with the Cash Value under the
contract, shortly after the Retirement Date. The amount applied toward the
purchase of an annuity benefit will be the Adjusted Account Value, except that
the Cash Value will be the amount applied instead if the annuity benefit doesn't
have a life contingency and the term is less than five years.
19
<PAGE>
ANNUITIES
Annuity benefits can provide for fixed or variable payments, which may be made
monthly, quarterly, semi-annually or annually. Variable payments will be funded
through one or more Separate Account Divisions. For any annuity, the minimum
initial payment must be at least $20.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the normal
form of annuity, as defined below. However, if we don't receive a completed form
from you on or before your Retirement Date, we'll extend the Retirement Date
until we receive your written instructions at our Administrative Office. During
this extension, the values under your contract in the various Investment Options
will remain invested in those options and amounts remaining in Variable Account
Options will continue to be subject to the associated investment risks. However,
your Retirement Date can't be extended beyond your 98th birthday or earlier, if
required by law. You'll receive a lump sum benefit if you don't make an election
by then.
We currently offer the following types of annuities:
The NORMAL FORM OF ANNUITY is a fixed life income annuity with 10 years of
payments guaranteed, funded through our General Account.
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. If the payee dies before the end of
the period selected, the payee's beneficiary, may elect to receive the total
present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You can't change
or redeem the annuity once payments have begun. If the payee (or the payee and
the other annuitant under a joint and survivor annuity) dies before the period
selected ends, the remaining payments will go to another named payee. That
payee can redeem the annuity and receive the present value of future guaranteed
payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or for
the lives of the payee and another annuitant under a joint and survivor annuity.
Once a life income annuity is selected, the form of annuity can't be changed or
redeemed for a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the payee's age (or payee
and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If our annuity rates then
in effect would yield a larger payment, those rates will apply instead of the
tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected can't be changed after annuity payments begin. The Statement of
Additional Information (SAI) has more information about the determination of
annuity payments. The number of units purchased is equal to the amount of the
first annuity payment divided by the new annuity unit value for the valuation
period that includes the due date of the first annuity payment. The amount of
the first annuity payment is determined in the same manner for a variable
annuity as it is for a fixed annuity. The number of annuity units stays the same
for the annuity payment period but the new annuity unit value changes to reflect
the investment income and the realized and unrealized capital gains and losses
of the Variable Account Option or Options selected, after charges made against
it. Annuity unit values assume a base rate of net investment return of 5%,
except in states which require a lower rate in which case 3.5% will be used.
The annuity unit value will rise or fall depending on whether the actual rate of
net investment return is higher or lower than the assumed base rate. In the SAI,
see "Determination of Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
that would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest
20
<PAGE>
at the rate of 6% per year. If we have made overpayments because of incorrect
information about age or sex, we'll deduct the overpayment from the next payment
or payments due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after we
receive the required form at our Administrative Office. We can defer our action,
however, for any period during which
(1) the New York Stock Exchange has been closed or trading on it is
restricted;
(2) an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
(3) the SEC, by order, permits us to defer action in order to protect persons
with interests in the Separate Account. We can defer payment of your Fixed
Accounts for up to six months, and interest will be paid on any such
payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your requests unless they are in proper and
complete form. Whenever possible, use one of our printed forms, which you can
get from our Administrative Office.
PART 6 - VOTING RIGHTS
VOTING RIGHTS
Integrity is the legal owner of the shares of the Portfolios held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all Owners, we'll vote shares in a
Portfolio for which no instructions have been received in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportions that other Owners vote. If the federal securities laws
or regulations or interpretations of them change so that we are permitted to
vote shares of the Portfolios in our own right or to restrict Owner voting, we
may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You vote only on matters concerning the Portfolios in which your contributions
have been invested. We determine the number of Portfolio shares in each Variable
Account Option under your contract by dividing the amount of your Account Value
allocated to that Option by the net asset value of one share of the
corresponding Portfolio as of the record date set by the Portfolios' Boards for
the shareholders' meeting. We count fractional shares. The record date for this
purpose can't be more than 60 days before the shareholders' meeting. After
annuity payments have begun, voting rights are calculated in a similar manner
based on the actuarially determined value of your interest in each Variable
Account Option.
21
<PAGE>
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by Integrity from its Owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It's
based upon our understanding of the present federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We can't
guarantee that the tax code or the courts will or won't change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we haven't attempted to consider any applicable
state or other tax laws. Because of the complexity of tax laws and the fact that
tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOESN'T MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL,
STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF INTEGRITY
Integrity is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code of 1986, as amended (the CODE). Since the Separate
Accounts aren't separate entities from Integrity and their operations form a
part of Integrity, they aren't taxed separately as "regulated investment
companies" under Subchapter M of the Code. Investment income and realized
capital gains on the assets of the Separate Accounts are reinvested and taken
into account in determining the accumulation value. Under existing federal
income tax law, the Separate Accounts' investment income, including realized net
capital gains, isn't taxed to Integrity. Integrity can make a tax deduction if
federal tax laws change to include these items in our taxable income.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars and
your annuity earnings won't be taxed until you make a withdrawal. Or, an
individual (or employer) may buy the annuity to fund a tax-favored retirement
program (contributions are with pre-tax dollars), such as an IRA or qualified
plan. Finally, the individual (or employer) may buy the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules that apply to an annuity purchased to fund a tax-favored
22
<PAGE>
retirement program (QUALIFIED ANNUITY). A qualified annuity may restrict your
rights and benefits to qualify for its special treatment under the federal tax
law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) won't be taxed when you receive those amounts back in a distribution.
Also, an Owner isn't taxed on the annuity's earnings until some form of
withdrawal or distribution is made under the contract. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. For example, corporations, partnerships, and other non-natural persons
can't defer tax on the annuity's income unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or former spouse), all increases in its value are taxed at the time of
transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for
each type of distribution. Section 72 of the Code says that the proceeds of a
full or partial withdrawal from a contract before annuity payments begin are
treated first as taxable income, but only to the extent of the increase of the
Account Value. The rest of the withdrawal, representing your basis in the
annuity, isn't taxable. Generally, the investment or basis in the contract
equals the contributions made by you or on your behalf, minus any amounts
previously withdrawn that weren't treated as taxable income. Special rules may
apply if the contract includes contributions made prior to August 14, 1982 that
were rolled over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This tax-free
portion of each payment is figured using a ratio of the Owner's investment to
his or her expected return under the contract (exclusion Ratio). Once you get
the tax-free part, the rest of each payment will be considered the increase of
your Account Value, and is ordinary income. That means that part of your
payment is tax-free and part of it is taxable. When all of these tax-free
portions add up to your investment in the annuity, future payments are all
counted as an increase in your Account Value, and are taxable income. If the
Annuitant dies before recovering the total investment, a deduction for the
remaining basis will generally be allowed on the Owner's final federal income
tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipients elect not to have any amounts withheld and properly
notify us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59-1/2;
(2) as a result of the Owner's death;
(3) part of a series of substantially equal periodic payments (paid at
least annually) for the life (or life expectancy) of the taxpayer or
joint lives (or joint life expectancies) of the taxpayer and
beneficiary;
(4) attributable to the taxpayer becoming disabled within the meaning of
Code Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may
apply);
(6) under a qualified funding asset (as defined in Section 130(d) of the
Code);
(7) purchased by an employer on termination of certain types of qualified
plans and held by the employer until the employee separates from
service;
(8) under an immediate annuity as defined in Code Section 72(u)(4);
(9) purchase of a first home (distribution up to $10,000);
(10) for certain higher education expenses; or
(11) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only.
Any withdrawal provisions of your contract will also apply. See "Withdrawals"
in Section 5.
23
<PAGE>
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any Owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the Owner died; and (b) if any Owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a death
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the Owner's death. If the beneficiary
is the Owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the Owner.
DIVERSIFICATION STANDARDS
Integrity manages the investments in the annuities under Section 817(h) of the
Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An Owner can use this annuity with certain types of retirement plans that
receive favorable treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. Owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries before
taking any loans from the plan.) Special rules also apply to the time at which
distributions must begin and the form in which the distributions must be paid.
THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE
USE OF CONTRACTS WITH THE VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO INTEGRITY
The contracts allow Integrity to charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There won't be any tax liability if you transfer any part of the Account Value
among the Investment Options of your contract.
24
<PAGE>
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program that allows you to pre-authorize periodic withdrawals from
your contract prior to your Retirement Date. You can choose to have withdrawals
made monthly, quarterly, semi-annually or annually and can specify the day of
the month (other than the 29th, 30th or 31st) on which the withdrawal is to be
made. You may specify a dollar amount for each withdrawal or an annual
percentage to be withdrawn. The minimum systematic withdrawal currently is $100.
Residents of Pennsylvania and South Carolina and are required to keep a $3,000
minimum account balance. You may also specify an account for direct deposit of
your systematic withdrawals. To enroll in our systematic withdrawal program,
send the appropriate form to our Administrative Office. Withdrawals may begin as
soon as one business day after we receive the form. You may terminate your
participation in the program upon one day's prior written notice, and we may
terminate or change the systematic withdrawal program at any time. If on any
withdrawal date you don't have enough money in your Account to make all of the
withdrawals you have specified, no withdrawal will be made and your enrollment
in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't deduct a contingent withdrawal charge
and no Market Value Adjustment will be made. See "Contingent Withdrawal Charge"
in Part 4. Amounts withdrawn under the systematic withdrawal program in excess
of the free withdrawal amount will be subject to a contingent withdrawal charge,
an administrative expense charge and a Market Value Adjustment, if applicable.
Withdrawals may also be subject to the 10% federal tax penalty for early
withdrawals under the contracts and to income taxation. See Part 7, "Tax
Aspects of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
We offer an Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59-1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Section 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date you reach age 59-1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have been due on all prior
distributions before you reached age 59-1/2 made under the Income Plus Program
plus interest.
You can choose the Income Plus Withdrawal Program any time before you reach age
59-1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your Income Plus Withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Your withdrawals may begin as soon as one Business
Day after we receive your form. You may end your participation in the program
upon seven Business Day's prior written notice, and we may terminate or change
the Income Plus Program at any time. If on any withdrawal date you don't have
enough money to make all of the withdrawals you have specified, no withdrawal
will be made and your enrollment in the program will be ended. This program
isn't available in connection with the Systematic Withdrawal Program, Dollar
Cost Averaging, Systematic Transfer Option or Asset Allocation and Rebalancing
Program.
If you haven't used up your free withdrawals in any given contract year, amounts
you withdraw under the Income Plus Withdrawal Program may be within the free
withdrawal amount. If they are, no contingent withdrawal charge or Market Value
Adjustment will be made. See "Contingent Withdrawal Charge" in Part 4. Amounts
withdrawn under the Income Plus Withdrawal Program in excess of the free
withdrawal amount will be subject to a contingent withdrawal charge and a Market
Value Adjustment if applicable.
25
<PAGE>
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program, and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you don't have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the year during
which transfers are required to be made will be transferred on a pro rata basis
at the end of that year to the Options you have chosen for this program. We
won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers won't count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among those Options, and you will
receive a confirmation notice after each rebalancing. Transfers will occur only
to and from those Variable Account Options where you have current contribution
allocations. We won't charge a transfer charge for transfers under our
Customized Asset Rebalancing program, and they won't count towards your twelve
free transfers.
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contributions you are making will initially be allocated among
the Options established for each Model. If we change the Model, your account
values will be automatically reallocated accordingly unless you have terminated
your participation. You and your financial representative also have the option
to design a program that is tailored to your specific retirement needs.
26
<PAGE>
When you select this program, your account values will be allocated and your
variable portfolios will be rebalanced automatically at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under
the Asset Allocation and Rebalancing Program. These transfers won't count
toward your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative office. You should be aware
that other allocation programs, such as dollar cost averaging, transfers and
withdrawals that you make, may not work with the Customized Asset Rebalancing
program. If, after selecting one of the five models, you request a transaction
that results in a reallocation outside one of the Models, your participation in
the Model program automatically ends. You should, therefore, monitor your use
of other programs, transfers, and withdrawals while the Customized Asset
Rebalancing program is in effect. This program isn't available with the
Customized Asset Rebalancing program. We can terminate or change this program in
whole or in part, or restrict contributions to the program. This program may
not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
SYSTEMATIC CONTRIBUTIONS
We offer a program for systematic contributions that allows you to pre-authorize
monthly withdrawals from your checking account for payment to us. To enroll in
this program, send the appropriate form to our Administrative Office. You may
terminate your participation in the program upon 30 days' prior written notice.
We may terminate your participation if your bank declines to make any payment.
The minimum amount for systematic contributions is $100 per month.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply, including any
contingent withdrawal charge that would apply if an Owner surrendered the
contract at the end of the period shown. Total returns also may be shown that
don't take into account the contingent withdrawal charge or the annual
administrative charge that is applied when the Account Value is less than
$50,000 at the end of the contract year.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually seven years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would have produced the same cumulative total
return if the Investment Option experienced exactly the same return each year
for the entire period shown. Because performance will fluctuate on a
year-by-year basis, the average annual total returns tend to show a smooth
result that won't mirror actual performance, even though the end result will be
the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses or the contingent withdrawal charge that
may apply if you withdraw your money at the end of the hypothetical period.
27
<PAGE>
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested amount is included. The VIP II Investment Grade Bond and VIP High
Income Option may advertise a 30-day yield which reflects the income generated
by an investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
28
<PAGE>
APPENDIX A
FINANCIAL INFORMATION FOR THE SEPARATE ACCOUNT
No condensed financial information is provided for any of the Variable Account
Options because as of the date of this prospectus, the Options hadn't started
operations. The unit value for each Investment Option at inception will be
$10.00. The inception date for each of the Variable Account Options is May 1,
1999.
29
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
The following examples illustrate how the Market Value Adjustment charge may
affect the values of a contract upon a withdrawal. The 5% assumed Guaranteed
Interest Rate is the same rate used in the Example under "Table of Annual Fees
and Expenses" in this Prospectus. In these examples, the withdrawal occurs three
years after the initial contribution. The Market Value Adjustment operates in a
similar manner for transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we don't declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above. Three years after the initial contribution, there would
have been four years remaining in your GRO Account.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0551589 = [(1 + .05)(48/12) / (1 + .0625 + .0025)(48/12)] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
The Market Adjusted Value would be:
$54,688.58 = $57,881.25 - $3,192.67
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
30
<PAGE>
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
.0290890 = [(1 + .05)(48/12) / (1 + .04 + .0025)(48/12)] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
A withdrawal charge of 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
31
<PAGE>
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have more or less impact than shown in the
examples, depending on the actual change in interest crediting rate and the
timing of the withdrawal or transfer in relation to the time remaining in the
GRO Account. Also, the Market Value Adjustment can never decrease the Account
Value below premium plus 3% interest, before any applicable charges. Account
values less than $50,000 will be subject to a $30 annual charge.
32
<PAGE>
APPENDIX C
Statement of Additional Information Table of Contents
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Tax-Favored Retirement Programs . . . . . . . . . . . . . . . . . . .
Traditional Individual Retirement Annuities . . . . . . . . . . . . . . .
Roth Individual Retirement Annuities. . . . . . . . . . . . . . . . . . .
SIMPLE Individual Retirement Annuities. . . . . . . . . . . . . . . . . .
Tax Sheltered Annuities . . . . . . . . . . . . . . . . . . . . . . . . .
Simplified Employee Pensions. . . . . . . . . . . . . . . . . . . . . . .
Corporate and Self-Employed (H.R. 10 and Keogh) Pension and Profit Sharing
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations . . . . . . . . . . . . . . . . . . . .
Distributions Under Tax Favored Retirement Programs . . . . . . . . . . .
Part 6 - Financial Statements
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account I (GrandMaster IV)
Name:_____________________________________________________________________
Address:__________________________________________________________________
City:________________________________ State:_________ Zip:________________
33
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
GRANDMASTER IV
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
Page
Part 1 - Integrity and Custodian . . . . . . . . . . . . . . . . . . . . . . . .
Part 2 - Distribution of the Contracts . . . . . . . . . . . . . . . . . . . . .
Part 3 - Performance Information . . . . . . . . . . . . . . . . . . . . . . . .
Part 4 - Determination of Annuity Unit Values. . . . . . . . . . . . . . . . . .
Part 5 - Tax Favored Retirement Programs.. . . . . . . . . . . . . . . . . . . .
Traditional Individual Retirement Annuities . . . . . . . . . . . . . . . .
Roth Individual Retirement Annuities. . . . . . . . . . . . . . . . . . . .
SIMPLE Individual Retirement Annuities. . . . . . . . . . . . . . . . . . .
Tax Sheltered Annuities . . . . . . . . . . . . . . . . . . . . . . . . . .
Simplified Employee Pensions. . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit
Sharing Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions Under Tax Favored Retirement Programs . . . . . . . . . . . .
Part 6 - Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . .
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1999.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity Life Insurance Company is an Ohio stock life insurance company that
sells life insurance and annuities. Its principal executive offices are located
at 515 West Market Street, Louisville, Kentucky, 40202. Integrity, the
depositor of Separate Account I, is a wholly owned subsidiary of Integrity
Holdings, Inc., a Delaware corporation that's a holding company engaged in no
active business. Integrity owns 100% of the stock of National Integrity Life
Insurance Company, a New York stock life insurance corporation. All outstanding
shares of Integrity Holdings, Inc. are owned by ARM Financial Group, Inc. (ARM),
a Delaware corporation that's a financial services company focusing on the
long-term savings and retirement marketplace by providing retail and
institutional products and services throughout the United States. ARM owns 100%
of the stock of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota
corporation, registered with the SEC as a broker-dealer and a member of the
National Association of Securities Dealers, Inc., (ii) Integrity Capital
Advisors, Inc., a Delaware corporation registered with the SEC as an investment
adviser, (iii) SBM Certificate Company, a Minnesota corporation registered with
the SEC as an issuer of face-amount certificates, and (iv) ARM Transfer Agency,
Inc., a Delaware corporation registered with the SEC as a transfer and dividend
disbursing agency
ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No
one has the direct or indirect power to control ARM, except power he or she may
have by virtue of his or her capacity as a director or executive officer of ARM;
no individual beneficially owns more than 5% of the common shares.
Since 1994, ARM has provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by
Integrity for management services in 1997 were $19,307,552 and in 1998 were
$27,158,002 including services applicable to the Registrant.
Integrity is the custodian for the shares of the Funds owned by the Separate
Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company, Moody's
Investor Service, Standard & Poor's Corporation, Duff & Phelps Corporation, or
other recognized rating services. Integrity is currently rated "A" (Excellent)
by A.M. Best Company, and has received claims paying ability ratings of "A"
(Good) from Standard & Poor's Corporation, "Baa1" from Moody's Investors
Service, Inc., and "A+" (High) from Duff and Phelps Credit Rating Company.
However, Integrity doesn't guarantee the investment performance of the
portfolios, and these ratings don't reflect protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida that precluded it from writing new business in Florida from May, 1992 to
November, 1994. The consent order was entered into on May 6, 1992 as a result
of noncompliance with certain investment restrictions under Florida law. Due to
the substantial asset restructuring and capital infusions involved with
Integrity's acquisition by ARM in November, 1993, Integrity was able to comply
with the investment limitations of the State of Florida. On November 4, 1994,
the Florida Department of Insurance granted the request for full relief from the
consent order.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a
continuous basis.
We generally pay a maximum distribution allowance of 7% of initial and
additional contributions. The amount of distribution allowances paid was
$7,795,349 for the year ended December 31, 1998, $6,750,503 for the year ended
December 31, 1997 and $7,813,058 for the year ended December 31, 1996.
Distribution allowances weren't retained by ARM Securities during these years.
Integrity may from time to time pay or allow additional promotional incentives,
in the form of cash or other compensation, to broker-dealers that sell
contracts. In some instances, those types of incentives may be offered only to
certain broker-dealers that sell or are expected to sell certain minimum amounts
of the contracts during specified time periods.
<PAGE>
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money
Market Option may also from time to time include the Yield and Effective
Yield of its shares in information furnished to shareholders. Performance
information is computed separately for each Option in accordance with the
formulas described below. At any time in the future, total return and yields
may be higher or lower than in the past and we can't guarantee that any
historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of
contract values, an average account value of $40,000 has been used. Quotations
also will assume a termination (surrender) at the end of the particular period
and reflect the deductions of the contingent withdrawal charge, if they would
apply. Any total return calculation will be based upon the assumption that the
Option corresponding to the investment portfolio was in existence throughout the
stated period and that the applicable contractual charges and expenses of the
Option during the stated period were equal to those that currently apply under
the contract. Total returns may be shown at the same time that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Option over
certain periods, including 1, 3, 5, and 10 years (up to the life of the
Option), and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period. Investors should realize that the
Option's performance is not constant over time, but changes from year to
year, and that the average annual returns represent the averages of
historical figures as opposed to the actual historical performance of an
Option during any portion of the period shown. Average annual returns are
calculated pursuant to the following formula: P(1+T)TO THE POWER OF n = ERV,
where P is a hypothetical initial payment of $1,000, T is the average annual
total return, n is the number of years, and ERV is the withdrawal value at
the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or any contingent
withdrawal charge. Yields are annualized and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values 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 one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula: Effective Yield = {(Base
Period Return) + 1)TO THE POWER OF 365/7} - 1
<PAGE>
For the period ending: 12/31/98
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
VARIABLE SEC STANDARDIZED
ACCOUNT AVERAGE ANNUAL RETURN(1)
INCEPTION -----------------------------------------------
VARIABLE OPTIONS DATE(2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- -------------------------------------------------------------------------------------
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Manager 9/3/91 6.42% 8.33% N/A 11.47%
Asset Manager: Growth 2/8/95 8.91% N/A N/A 19.21%
Balanced 2/19/97 8.98% N/A N/A 13.37%
Contrafund 2/8/95 21.15% N/A N/A 26.28%
Equity-Income 9/3/91 3.05% 16.77% N/A 16.61%
Growth 9/3/91 30.54% 19.73% N/A 18.77%
Growth & Income 2/14/97 20.77% N/A N/A 23.53%
Growth 2/19/97 15.86% N/A N/A 20.31%
High Income 2/19/93 (12.69)% 6.79% N/A 8.62%
Index 500 3/4/93 19.52 21.71% N/A 19.48%
Investment Grade Bond 9/3/91 .30% 4.69% N/A 6.43%
Mid Cap Fund 5/1/99 N/A N/A N/A N/A
Overseas 9/3/91 4.16% 7.70% N/A 8.50%
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if an owner terminated the policy at the end of the period,
but exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through year-
end.
(5) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds.
This performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
<PAGE>
For the period ending: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES(3)All figures are unaudited.
<TABLE>
<CAPTION>
RETURNS WITHOUT SURRENDER CHARGES(3) All figures are unaudited
FUND CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
---------------------------------------------------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE(5) 3 YEAR 5 YEAR 10 YEAR FUND 1 YEAR 3 YEAR 5 YEAR 10 YEAR FUND
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager 9/6/89 52.71% 63.23% n/a 174.86% 13.50% 15.16% 8.84% n/a 11.46%
Asset Manager: Growth 1/3/95 69.30 n/a n/a 105.67 15.98 19.18 n/a n/a 19.80
Balanced 1/3/95 51.75 n/a n/a 70.57 16.05 14.92 n/a n/a 14.31
Contrafund 1/3/95 87.90 n/a n/a 158.85 28.23 23.40 n/a n/a 26.90
Equity-Income 10/9/86 56.88 120.84 272.76 339.63 10.12 16.20 17.17 14.06 12.87
Growth 10/9/86 89.66 149.81 414.42 499.79 37.61 23.78 20.09 17.80 15.78
Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a 28.11
Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a 24.58
High Income 9/19/85 23.23 42.40 95.04 82.63 (5.62) 7.21 7.33 6.91 4.64
Index 500 8/27/92 100.78 170.86 n/a 210.26 26.60 26.16 22.05 n/a 19.54
Mid Cap Fund 5/1/99 n/a n/a n/a n/a n/a n/a n/a n/a n/a
Investment Grade Bond 12/5/88 17.58 29.21 n/a 65.10 7.38 5.55 5.26 n/a 5.10
Overseas 1/28/87 36.70 48.43 128.03 127.29 11.23 10.98 8.22 8.59 7.13
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
CALENDAR YEAR RETURN(4)
----------------------------------------
VARIABLE OPTIONS 1993 1994 1995 1996 1997
- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Manager 19.50% 7.42% 15.38% 13.04% 19.02%
Asset Manager: Growth n/a n/a 21.49 18.30 23.38
Balanced n/a n/a 12.40 8.48 20.54
Contrafund n/a n/a 37.76 19.66 22.47
Equity-Income 16.76 5.48 33.27 12.73 26.38
Growth 17.51 (1.16) 33.54 13.14 21.82
Growth & Income n/a n/a n/a n/a 28.34
Growth Opportunities n/a n/a 30.76 16.67 28.20
High Income 18.68 2.80 18.98 12.48 16.08
Index 500 8.77 (.79) 35.34 21.15 30.91
Mid Cap Fund n/a n/a n/a n/a n/a
Investment Grade Bond 9.56 (5.14) 15.74 1.78 7.59
Overseas 35.21 .48 8.20 11.67 10.05
- -----------------------------------------------------------------
</TABLE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
<PAGE>
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage-backed securities, flower bonds and foreign targeted
issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE)
by a nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
<PAGE>
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a
value-weighted, total return index, including approximately 800 issues with
maturities of 12 years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P Index
and 35% Salomon Brothers High Grade Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
<PAGE>
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by Integrity or any
of the Sub-Advisers derived from such indices or averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various
information about one or more Options (such as information concerning total
return for various periods, fees and expenses, standard deviation, alpha and
beta, investment objective, inception date and net assets). We reserve the
right to republish figures independently provided by Morningstar or any similar
agency or service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment return
of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment return
of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same and will be based on the amount taken from the
tables in the contract or on our current rates, whichever is more favorable to
the participant. Where the Company's current annuity rates are used,
contributions in the current and five prior participation years will qualify for
the Company's current individual annuity rates applicable to funds derived from
sources outside the Company. The balance of the proceeds will qualify for the
Company's current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
<PAGE>
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month before
the due date of the payment. The number of annuity units credited equals the
initial periodic payment divided by the annuity unit value for the valuation
period that includes the due date of the first annuity payment. The average
annuity unit value is the average of the annuity unit values for the valuation
periods ending in that month. Each business day is considered a valuation
period. Days that aren't considered business days are added to the next
business day and constitute one valuation period. For example, Saturday, Sunday
and Monday are considered to be one valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units
credited under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments begin. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and get the cash value of future guaranteed payments in a lump sum. The
present value of future guaranteed payments for a period certain is based on the
number of payments left, the assumed base rate of net return, the number of
annuity units and the annuity unit value for the date the Company receives a
written request for lump sum payment of remaining values. Assets held in the
Account at least equal to all statutory reserves required for such Separate
Account.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are
brief descriptions of various types of qualified plans in connection with which
Integrity may issue a contract. Integrity reserves the right to change its
administrative rules, such as minimum contribution amounts, as needed to comply
with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may begin. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose
of complying with provisions of
<PAGE>
the Code and related regulations may be made without the consent of the Owner.
The Owner will be deemed to have consented to any other amendment unless the
Owner notifies us that he or she does not consent within 30 days from the date
we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such
retirement plans may permit the purchase of the contract in order to provide
benefits under the plans. Employers intending to use the contract in connection
with these plans should seek competent advice. The Company can request
documentation to substantiate that a qualified plan exists and is being properly
administered. Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Plans in existence
on August 20, 1996, should have established a trust, custodial account, or
annuity contract by January 1, 1999. Loans to employees may be permitted under
such plans; however, a Section 457 plan is not required to allow loans.
Contributions to a contract in connection with an eligible government plan are
subject to limitations. Those who intend to use the contracts in connection with
such plans should seek competent advice. The Company can request documentation
to substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
<PAGE>
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMs
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
Traditional IRA holders, to begin receiving distributions by April 1 of the
calendar year following the later of either (i) the calendar year in which the
employee reaches age 70-1/2, or (ii) the calendar year in which the employee
retires. Additional distribution rules apply after the participant's death.
Failure to make mandatory distributions may result in the imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount distributed. Distributions to a participant from all plans (other than
457 plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional
IRA; or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a 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 plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1998, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1998 and 1997 included in this SAI have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
<PAGE>
PROSPECTUS
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity offered by
Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc. The
contracts offered by this prospectus provide several types of benefits, some of
which have tax-favored status under the Internal Revenue Code of 1986, as
amended. You may allocate contributions to different investment divisions of our
Separate Account I, Variable Account Options, or Fixed Accounts, or both.
Together, the Variable Account Options and Fixed Account Options are referred to
as INVESTMENT OPTIONS. There is no sales load on the contracts.
Contributions you make to the Variable Account Options are invested in shares of
the Portfolios of the Variable Insurance Products Fund (VIP), Variable Insurance
Products Fund II (VIP II), and Variable Insurance Products Fund III (VIP III)
(the PORTFOLIOS or PORTFOLIO). The Portfolios are part of the Fidelity
Investments(R) group of companies. The values allocated to the Options reflect
the investment performance of the Portfolios. The prospectus for the Portfolios
describes each one's investment objectives, policies and risks. There are
fourteen Variable Account Options, which invest in the following Portfolios:
- VIP Money Market Portfolio
- VIP High Income Portfolio
- VIP Equity-Income Portfolio
- VIP Growth Portfolio
- VIP Overseas Portfolio
- VIP III Balanced Portfolio
- VIP III Growth & Income Portfolio
- VIP II Investment Grade Bond Portfolio
- VIP II Asset Manager Portfolio
- VIP II Index 500 Portfolio
- VIP II Contrafund Portfolio
- VIP II Asset Manager: Growth Portfolio
- VIP III Growth Opportunities Portfolio
- VIP III Mid Cap Portfolio
We also offer Guaranteed Rate Options (GROS) and a Systematic Transfer Option
(STO), together referred to as FIXED ACCOUNTS. The money you contribute to a GRO
grows at a fixed interest rate we declare at the beginning of the duration you
select. A Market Value Adjustment will be made for withdrawals, surrenders,
transfers and certain other transactions made before your GRO Account expires.
However, your value under a GRO Account can't be decreased below an amount equal
to your allocation plus interest compounded at an annual effective rate of 3%
(MINIMUM VALUE). An annual administration charge may apply, which may invade
principal. The money you contribute to the STO grows at a fixed interest rate
that we declare each calendar quarter, guaranteed never to be less than an
effective annual yield of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO
THE STO INTO OTHER INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A
MONTHLY OR QUARTERLY BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
Integrity Life Insurance Company, P.O. Box 740074, Louisville, KY 40201-0074.
The express mail address is Integrity Life Insurance Company, 515 West Market
Street, Louisville, Kentucky 40202. You may also call the following toll-free
number: 1-800-325-8583.
A registration statement relating to the contracts, which includes a Statement
of Additional Information (SAI) dated May 1, 1999, has been filed with the
Securities and Exchange Commission. The SAI is incorporated by reference into
this prospectus. A free copy of the SAI is available by writing to or calling
our Administrative Office. A table of contents for the SAI is found in the
Appendix to this prospectus.
* NOTE: CONTRACTS ISSUED IN THE STATE OF OREGON WILL BE SINGLE PREMIUM
VARIABLE ANNUITIES RATHER THAN FLEXIBLE PREMIUM VARIABLE ANNUITIES. ALL
REFERENCES TO FLEXIBLE CONTRIBUTIONS ARE SINGLE CONTRIBUTIONS FOR OREGON.
1
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SEC MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION AS WELL AS ANY MATERIAL INCORPORATED BY REFERENCE
RELATING TO THIS PROSPECTUS.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
The date of this Prospectus is May 1, 1999.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1 - SUMMARY PAGE
<S> <C>
Your Variable Annuity Contract...........................................
Your Benefits............................................................
How Your Contract is Taxed...............................................
Your Contributions.......................................................
Your Investment Options..................................................
Variable Account Options.................................................
Account Value, Adjusted Account Value and Cash Value ....................
Transfers
Charges and Fees.........................................................
Withdrawals..............................................................
Your Initial Right to Revoke.............................................
Risk/Return Summary: Investments and Risks...............................
Year 2000
Glossary
Table of Fees and Expenses...............................................
Examples
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company.........................................
The Separate Account and the Variable Account Options....................
Assets of Our Separate Account...........................................
Changes In How We Operate................................................
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios...........................................................
The Portfolios' Investment Adviser............................
Investment Objectives of the Portfolios.......................
Fixed Accounts ..........................................................
Guaranteed Rate Options.......................................
Renewals of GRO Accounts...................................
Market Value Adjustments...................................
Systematic Transfer Option....................................
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges.................................................
Annual Administrative Charge.............................................
Reduction or Elimination of Separate Account or Administrative Charges...
Portfolio Charges........................................................
State Premium Tax Deduction..............................................
Transfer Charge..........................................................
Tax Reserve..............................................................
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract........................................
Your Account Value.......................................................
Your Purchase of Units in Our Separate Account...........................
How We Determine Unit Value..............................................
Transfers
Withdrawals..............................................................
Assignments..............................................................
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Death Benefits and Similar Benefit Distributions.........................
Annuity Benefits.........................................................
Annuities
Annuity Payments.........................................................
Timing of Payment........................................................
How You Make Requests and Give Instructions..............................
PART 6 - VOTING RIGHTS
Voting Rights............................................................
How We Determine Your Voting Shares......................................
How Portfolio Shares Are Voted...........................................
Separate Account Voting Rights...........................................
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction.............................................................
Tax Status of Integrity..................................................
Your Contract is an Annuity..............................................
Taxation of Annuities Generally..........................................
Distribution-at-Death Rules..............................................
Diversification Standards................................................
Tax-Favored Retirement Programs..........................................
Federal and State Income Tax Withholding.................................
Impact of Taxes to Integrity.............................................
Transfers Among Investment Options.......................................
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals...................................................
Income Plus Withdrawal Program...........................................
Dollar Cost Averaging....................................................
Systematic Transfer Program..............................................
Customized Asset Rebalancing.............................................
Callan Asset Allocation and Rebalancing Program..........................
Performance Information..................................................
PART 9 - PRIOR CONTRACTS
Prior Contracts..........................................................
Death Benefit Information for Contracts Issued Before January 1, 1997....
Reduction in Charges.....................................................
Contingent Withdrawal Charge.............................................
APPENDIX A - FINANCIAL INFORMATION.....................................
APPENDIX B - ILLUSTRATION OF A MARKET VALUE ADJUSTMENT.................
APPENDIX C - SAI TABLE OF CONTENTS.....................................
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
4
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "WE," "OUR" and "US" mean Integrity Life Insurance Company
(INTEGRITY), a subsidiary of ARM Financial Group, Inc. (ARM). The terms "YOU"
and "YOUR" mean the Annuitant, the person upon whose life the Annuity Benefit
and the Death Benefit are based, usually the Owner of the contract. If the
Annuitant doesn't own the contract, all of the rights under the contract belong
to the Owner until annuity payments begin. If a Joint Owner is named, the owners
share contract rights. Contract changes or any transactions allowed under the
contract require both Owners' signatures. The rules governing distribution at
death apply when the first Owner dies. See Part 7, "Distribution-at-Death
Rules."
You can invest for retirement by buying an IQ Smart Annuity if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. Because the
premium is flexible, your future contributions can be any amount you choose, as
long as it is above the minimum required contribution, discussed below.
The latest your endowment or "retirement date" can be is your 98th birthday
unless your state law requires it to be a different date, or unless you specify
an earlier date.
YOUR BENEFITS
Your contract has an Account Value, an annuity benefit, and a death benefit.
These benefits are described in more detail below.
Your benefits under a contract may be controlled by the usual rules for taxation
of annuities, including the deferral of taxes on your investment growth until
you actually make a withdrawal. The contract also can provide your benefits
under certain tax-favored retirement programs, which may be subject to special
eligibility and contribution rules. See Part 7, "Tax Aspects of the Contracts"
for detailed information.
HOW YOUR CONTRACT IS TAXED
Under the current tax laws, any increases in the value of your contributions
won't be considered part of your taxable income until you make a withdrawal.
YOUR CONTRIBUTIONS
Your minimum initial contribution is $1,000 ($3,000 in Pennsylvania and South
Carolina). Contributions after your first one can be as little as $100. Some
tax-favored retirement plans allow smaller contributions. See "Contributions
Under Your Contract" in Part 5.
YOUR INVESTMENT OPTIONS
You may have your contributions placed in the Variable Account Options or the
Fixed Accounts, or place part of your contributions in each of them. The
Variable Account Options and the Fixed Accounts are together referred to as the
INVESTMENT OPTIONS. You may have money in as many as nine Investment Options at
any one time. See "Contributions Under Your Contract" in Part 5. To select
Investment Options most suitable for you, see Part 3, "Your Investment Options."
The Variable Account Options invest in shares of investment portfolios of mutual
funds. Each investment portfolio is referred to as a PORTFOLIO. The investment
goal of each Variable Account Option and its corresponding Portfolio is the
same. For example, if your investment goal is to save money for retirement, you
might choose a GROWTH oriented Variable Account Option, which invests in GROWTH
Portfolios. Your value in a Variable Account Option will vary with the
performance of the corresponding Portfolio. For a full description of the
Portfolios, see the Portfolios' prospectus and Statement of Additional
Information.
1
<PAGE>
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Account added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased (but not below the Minimum Value) by
any Market Value Adjustments. Your CASH VALUE is equal to your Adjusted Account
Value, minus the pro rata portion of the annual administrative charge, if it
applies. See "Charges and Fees" below.
TRANSFERS
You may transfer all or any part of your Account Value among the Investment
Options, although there are some restrictions that apply. You can find these in
Part 5, "Transfers." Any transfer must be for at least $250 and may be arranged
through our telephone transfer service. Transfers may also be made among certain
Investment Options under the following special programs: (i) Dollar Cost
Averaging, (ii) Customized Asset Rebalancing, (iii) Callan Asset Allocation and
Rebalancing Program, or (iv) to transfer your STO contributions. All of these
programs are discussed in Part 8. If you make more than twelve transfers between
your Investment Options in one contract year, your account can be charged up to
$20 for each transfer after twelve.
CHARGES AND FEES
If your Account Value is less than $50,000 as of the last day of any contract
year before your Retirement Date, an annual administrative expense charge of $30
is deducted from your Account.
A daily charge at an effective annual rate of 1.45% is deducted from the Account
Value of each of your Variable Account Options to cover mortality and expense
risks (1.30%) and certain administrative expenses (.15%). The charge will never
be greater than this. For more information, see Part 4, "Deductions and
Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company (FIDELITY MANAGEMENT) receives investment management fees from the
Portfolios based on the average net assets of each Portfolio. Advisory fees
can't be increased without the consent of shareholders. See "Table of Annual
Fees and Expenses" below and "The Portfolios' Investment Adviser" in Part 3.
WITHDRAWALS
You may make any number of withdrawals from your contract as frequently as you
wish. Each withdrawal must be for at least $300.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by returning
it to our Administrative Office. We will extend the ten-day period as required
by law in some states. If you cancel your contract, we'll return your entire
contribution, with adjustments made for any investment gain or loss experienced
by the Variable Account Option from the date you purchased it until the date we
receive your cancelled contract, including any charges deducted. If your state
requires, we'll return all of your contributions without any adjustment. We'll
return the amount of any contribution to the Guaranteed Rate Option upon
cancellation.
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the IQ SMARTAnnuity are protecting your investment,
building for retirement and providing future income. We strive to achieve these
goals through extensive portfolio diversification and superior portfolio
management.
RISKS
An investment in any of the Variable Account Options carries with it certain
risks, including the risk that the value of your investment will decline and you
could lose money. This could happen if one of the issuers of the stocks becomes
financially impaired or if the stock market as a whole declines. Because most of
the Variable Account Options are in
2
<PAGE>
common stocks, there's also the inherent risk that holders of common stock
generally are behind creditors and holders of preferred stock for payments in
the event of the bankruptcy of a stock issuer.
For a complete discussion of the risks associated with an investment in any
particular Variable Account Option, see the prospectus of the corresponding
Portfolio.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900. This could cause many programs to malfunction. Integrity is evaluating, on
an ongoing basis, its computer systems and the systems of other companies on
which we rely, to determine if they'll function properly, and make the
transition from 1999 to 2000 smoothly. These activities are designed to ensure
that there is no adverse effect on our business operations. While we've been
working very hard to make sure that this process will be problem-free, we can't
guarantee that there won't be some Year 2000 problems experienced by our systems
and we can't make any representations or guarantees that the outside sources on
which we rely will be ready to make a smooth transition to Year 2000 with their
systems.
GLOSSARY
ACCOUNT VALUE - the value of your contract, which consists of the values of your
Investment Options added together.
ADJUSTED ACCOUNT VALUE - your Account Value increased or decreased by any Market
Value Adjustment made to your GRO Account.
ANNUITANT - the person upon whose life an annuity benefit and death benefit are
based.
ANNUITY PAYMENT - one of a series of payments made if you choose to annuitize
your contract.
ARM - ARM Financial Group, Inc.
CASH VALUE - your Adjusted Account Value reduced by any withdrawal charges
and/or any pro rata annual administrative charges that may apply.
CONTRACT - your variable annuity contract.
ENHANCED RATE - a higher rate of interest we may declare for the first year of
any GRO Account that exceeds the Guaranteed Interest Rate credited during the
rest of the Guarantee Period.
FIXED ACCOUNTS - Guaranteed Rate Options and the Systematic Transfer Option.
GRO - Guaranteed Rate Option, which offer durations of three, five, seven and
ten years and lock in a fixed annual effective interest rate.
GRO VALUE - the value of a GRO Account. The GRO Value at the expiration of a GRO
Account, assuming you haven't withdrawn or transferred any amounts, will be the
amount you put in plus interest at the Guaranteed Interest Rate.
GUARANTEE PERIOD - the duration of your GRO Account.
GUARANTEED INTEREST RATE - a fixed annual effective interest rate that we
declare for the duration of your GRO Account.
INVESTMENT OPTIONS - Variable Account Options and Fixed Accounts, collectively.
MARKET VALUE ADJUSTMENT ("MVA")- an upward or downward adjustment (never below
the Minimum Value) made to the value of your GRO Account if you make an early
withdrawal or early transfer.
MINIMUM VALUE - an amount equal to your net allocation to a GRO Account, less
prior withdrawals (and associated charges)
3
<PAGE>
accumulated at 3% interest annually, less company charges.
OWNER ("You," "Your") - the person who owns the contract, and is usually the
annuitant. Includes any person named as Joint Owner.
PORTFOLIO - an investment portfolio of a mutual fund in which Separate Account
II invests its assets.
RETIREMENT DATE - All annuity benefits under your contract are calculated as of
your Retirement Date. The Retirement Date can't be later than your 98th
birthday, or earlier if required by law.
STO - Systematic Transfer Option - our STO provides a guaranteed interest rate;
contributions to the STO must be transferred into other Investment Options
within one year of your most recent STO contribution.
UNIT - a measure of your ownership interest in the contract.
UNIT VALUE - the value of each unit calculated on any Valuation Date.
VALUATION DATE - The Valuation Date for purposes of determining unit values is 4
p.m. Eastern Time on each day the New York Stock Exchange is open for business.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you under
the contract, consisting of the Portfolios. The value of your contract will
reflect the investment performance of the Variable Account Options you choose.
WE, OUR AND US - Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc.
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
Contract Owner Transaction Expenses
- -----------------------------------
<S> <C>
Sales Load on Purchases .................... $ 0
Exchange Fee (1) ........................... $ 0
Annual Administrative Charge
- ----------------------------
Annual Administrative Charge* .............. $ 30
</TABLE>
* This charge applies only if the Account Value is less than $50,000 at the
end of any contract year prior to your Retirement Date. See "Annual
Administrative Charge" in Part 4
<TABLE>
Separate Account Annual Expenses
(as a percentage of average account value) (2)
- ----------------------------------------------
<S> <C>
Mortality and Expense Risk Fees ............ 1.30%
Administrative Expenses .................... .15%
-----
Total Separate Account Annual Expenses ..... 1.45%
-----
</TABLE>
Portfolio Annual Expenses After Reimbursement
(as a percentage of average net assets)
- ---------------------------------------------
<TABLE>
Management Other Total Annual
PORTFOLIO Fees Expenses Expenses
<S> <C> <C> <C>
VIP Money Market................... .20% .10% .30%
VIP High Income.................... .58% .24% (3) .82% (4)
VIP Equity-Income.................. .49% .19% (3) .68% (4)
VIP Growth......................... .59% .21% (3) .80% (4)
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
VIP Overseas....................... .74% .27% (3) 1.01% (4)
VIP II Investment Grade Bond....... .43% .14% .57%
VIP II Asset Manager............... .54% .24% (3) .78% (4)
VIP II Index 500................... .24% .11% .35% (5)
VIP II Contrafund.................. .59% .21% (3) .80% (4)
VIP II Asset Manager: Growth....... .59% .30% (3) .89% (4)
VIP III Balanced................... .44% .26% (3) .70% (4)
VIP III Growth Opportunities....... .59% .21% (3) .80% (4)
VIP III Growth & Income............ .49% .22% (3) .71% (4)
VIP III Mid Cap Portfolio.......... .56% .54% (3)(5) 1.10% (5)
</TABLE>
- ----------
1. After the first twelve transfers during a contract year, we can charge a
transfer fee of $20 for each transfer. This charge doesn't apply to
transfers made for dollar cost averaging, asset rebalancing, or systematic
transfers. See "Deductions and Charges - Transfer Charge" in Part 4.
2. See "Deductions and Charges - Separate Account Charges" in Part 4.
3. The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule 12b-1
Plan adopted by the underlying Mutual Funds.
4. Part of the brokerage commissions that certain Portfolios pay was used to
reduce the Portfolios' expenses. In addition, certain Portfolios have
arranged with their custodian to use uninvested cash balances to reduce
custodian expenses. Including these reductions, the total operating
expenses presented in the table would have been .67% for VIP Equity-Income
Portfolio, .75% for VIP Growth Portfolio, .97% for VIP Overseas Portfolio,
.77% for VIP II Asset Manager Portfolio, .75% for VIP II Contrafund
Portfolio, .88% for VIP II Asset Manager: Growth Portfolio, .58% for VIP
III Balanced Portfolio, .79% for VIP III Growth Opportunities Portfolio,
and .70% for VIP III Growth and Income Portfolio.
5. The investment adviser agreed to reimburse part of VIP II Index 500
Portfolio's and VIP III Mid Cap Portfolio's expenses during the period.
Without this reimbursement, management fees, other expenses and total
expenses would have been .28%, .11%, and .39%, respectively for VIP II
Index 500 Portfolio and .56%, 115.40% and 115.96%, respectively, for VIP
III Mid Cap Portfolio.
EXAMPLES
The examples below show the expenses that would be borne by the Annuitant per
$1,000 investment, assuming a $40,000 average contract value and a 5% annual
rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
APPLICABLE PERIOD:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market ........... $ 18.68 $ 57.72 $ 99.12 $ 213.94
VIP High Income ............ $ 24.01 $ 73.82 $ 126.12 $ 268.63
VIP Equity-Income .......... $ 22.58 $ 69.50 $ 118.91 $ 254.19
VIP Growth ................. $ 23.81 $ 73.20 $ 125.09 $ 266.58
VIP Overseas ............... $ 25.96 $ 79.66 $ 135.83 $ 287.91
VIP II Investment Grade Bond $ 21.45 $ 66.10 $ 113.21 $ 242.70
VIP II Asset Manager ....... $ 23.60 $ 72.59 $ 124.06 $ 264.53
VIP II Index 500 ........... $ 19.19 $ 59.28 $ 101.74 $ 219.33
VIP II Contrafund .......... $ 23.81 $ 73.20 $ 125.09 $ 266.58
VIP II Asset Manager: Growth $ 24.73 $ 75.97 $ 129.70 $ 275.78
VIP III Balanced ........... $ 22.78 $ 70.12 $ 119.94 $ 256.27
VIP III Growth Opportunities $ 23.81 $ 73.20 $ 125.09 $ 266.58
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
VIP III Growth & Income .... $ 22.88 $ 70.43 $ 120.46 $ 257.30
VIP III Mid Cap ............ $ 32.62 $ 99.45 $ 168.47 $ 351.09
</TABLE>
EXPENSES PER $1,000 INVESTMENT IF YOU ELECT THE NORMAL FORM OF ANNUITY OR DON'T
SURRENDER YOUR CONTRACT AT THE END OF THE APPLICABLE PERIOD:
Same expenses per $1,000 investment as shown in table immediately above.
These examples assume a continuation of the fixed charges that are borne by the
Separate Account and of the investment advisory fees and other expenses of the
Portfolios as they were for their most recent fiscal year or estimated expenses
(after reimbursement), if applicable. ACTUAL PORTFOLIO EXPENSES MAY BE GREATER
OR LESS THAN THOSE ON WHICH THESE EXAMPLES WERE BASED. The annual rate of return
assumed in the examples is not an estimate or guarantee of future investment
performance. The table also assumes an estimated $40,000 average contract value,
so that the administrative charge per $1,000 of net asset value in the Separate
Account is $0.75. Such per $1,000 charge would be higher for smaller Account
Values and lower for higher values.
The above table and examples are intended to assist your understanding of the
various costs and expenses that apply to your contract, directly or indirectly.
These tables reflect expenses of the Separate Account as well as those of the
Portfolios. Premium taxes upon annuitization also may be applicable.
CONSOLIDATED FINANCIAL INFORMATION IS FOUND IN APPENDIX A
6
<PAGE>
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
INTEGRITY LIFE INSURANCE COMPANY
Integrity is a stock life insurance company organized under the laws of Ohio.
Our principal executive office is in Louisville, Kentucky. We are authorized to
sell life insurance and annuities in 45 states and the District of Columbia. We
sell flexible premium annuity contracts with underlying investment options other
than the Portfolios, fixed single premium annuities, and flexible premium
annuities offering both traditional fixed guaranteed interest rates and fixed
equity indexed options. We also provide administrative and investment support
for products designed, underwritten and sold by other companies.
Integrity is a subsidiary of ARM Financial Group Inc., which specializes in
providing retail and institutional customers with products and services designed
for long-term savings and retirement planning. At December 31, 1998, ARM had
$9.9 billion of assets under management.
THE SEPARATE ACCOUNT AND THE VARIABLE ACCOUNT OPTIONS
The Separate Account is established and maintained under the insurance laws of
the State of Ohio. It is a unit investment trust registered with the Securities
and Exchange Commission (the SEC) under the Investment Company Act of 1940 (1940
ACT). A unit investment trust is a type of investment company. SEC registration
doesn't mean that the SEC is involved in any way in supervising the management
or investment policies of the Separate Account. Each Variable Account Option
invests in shares of a corresponding Portfolio. We may establish additional
Options from time to time. The Variable Account Options currently available to
you are listed in Part 3, "Your Investment Options." Prior to September 3, 1991,
the Portfolios then offered invested in shares of corresponding portfolios of
Prism Investment Trust.
ASSETS OF OUR SEPARATE ACCOUNT
Under Ohio law, we own the assets of our Separate Account and use them to
support the variable portion of yours and other variable annuity contracts.
Annuitants under other variable annuity contracts participate in the Separate
Account in proportion to the amounts in their contracts. We can't use the
Separate Account's assets supporting the variable portion of these variable
contracts to satisfy liabilities arising out of any of our other businesses.
Under certain unlikely circumstances, one Variable Account Option may be liable
for claims relating to the operations of another Option.
Income, gains and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains or losses. We may allow charges owed to us to
stay in the Separate Account, and in that way, we can participate
proportionately in the Separate Account. Amounts in the Separate Account in
excess of reserves and other liabilities belong to us, and we may transfer them
to our general account.
CHANGES IN HOW WE OPERATE
We can change how we or our Separate Account operate, subject to your approval
when required by the 1940 Act or other applicable law or regulation. We'll
notify you if any changes result in a material change in the underlying
investments of a Variable Account Option. WE MAY:
- - add Options to, or remove Options from, our Separate Account, combine two
or more Options within our Separate Account, or withdraw assets relating to
your contract from one Option and put them into another;
- - register or end the registration of the Separate Account under the 1940
Act;
- - operate our Separate Account under the direction of a committee or
discharge a committee at any time (the committee may be composed of a
majority of persons who are "interested persons" of Integrity under the
1940 Act);
- - restrict or eliminate any voting rights of Owners or others who have voting
rights that affect our Separate Account;
- - cause one or more Options to invest in a mutual fund other than or in
addition to the Portfolios;
- - operate our Separate Account or one or more of the Options in any other
form the law allows, including a form that allows us to make direct
investments. We may make any legal investments we wish. In choosing these
investments, we'll rely on our own or outside counsel for advice.
7
<PAGE>
PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described in
that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-433-1778.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios currently are
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with Fidelity Management or Integrity. The Board of
Trustees of each of the Portfolios is responsible for monitoring the Fund for
any material irreconcilable conflict between the interests of the policyowners
of all separate accounts investing in the Portfolio and determining what action,
if any, should be taken in response. If we believe that a Portfolio's response
to any of those events doesn't adequately protect our contract owners, we'll see
to it that appropriate and available action is taken. See "The Fund and the
Fidelity Organization" in the Portfolios' prospectus for a further discussion of
the risks associated with the offering of shares to our Separate Account and the
separate accounts of other insurance companies.
THE PORTFOLIOS' INVESTMENT ADVISER. Fidelity Management & Research Company
(FIDELITY MANAGEMENT) is a registered investment adviser under the Investment
Advisers Act of 1940. It serves as the investment adviser to each Portfolio.
Bankers Trust Company ("BT") is the VIP II Index 500 Portfolio's sub-adviser.
BT, a New York banking corporation, is a wholly owned subsidiary of Bankers
Trust New York Corporation.
INVESTMENT OBJECTIVES OF THE PORTFOLIOS. Below is a summary of the investment
objectives of the Portfolios of Fidelity's VIP Funds. There are no guarantees
that a Portfolio will be able to achieve its objective. YOU SHOULD READ
FIDELITY'S VIP FUNDS' PROSPECTUS CAREFULLY BEFORE INVESTING.
VIP MONEY MARKET PORTFOLIO
VIP Money Market Portfolio seeks to earn a high level of current income while
preserving capital and providing liquidity. It invests only in high-quality,
U.S. dollar denominated money market securities of domestic and foreign issuers,
such as certificates of deposit, obligations of governments and their agencies,
and commercial paper and notes.
VIP HIGH INCOME PORTFOLIO
VIP High Income Portfolio seeks a high current income by investing primarily in
high-yielding, lower rated, fixed-income securities, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities and preferred stocks, including convertible
securities, and up to 20% in common stocks and other equity securities. In view
of the types of securities in which this Portfolio invests, you should read the
complete risk disclosure for this Portfolio in its prospectus before investing
in it.
VIP EQUITY-INCOME PORTFOLIO
VIP Equity-Income Portfolio seeks reasonable income. The Portfolio will also
consider the potential for capital appreciation. The Portfolio seeks a yield
which exceeds the composite yield on the securities comprising the S&P 500. FMR
normally invests at least 65% of the Portfolio's total assets in
income-producing equity securities.
8
<PAGE>
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth may
be measured by factors such as earnings or revenue. Companies with high growth
potential tend to be companies with higher than average price/earnings (P/E)
ratios. Companies with strong growth potential often have new products,
technologies, distribution channels or other opportunities for have a strong
industry market position. The stocks of these companies are often called
"growth" stocks.
VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
while preserving capital by investing in a broad range of investment-grade
fixed-income securities.
VIP II ASSET MANAGER PORTFOLIO
VIP II Asset Manager Portfolio seeks high total return with reduced risk over
the long-term by allocating its assets among stocks, bonds and short-term money
market instruments.
VIP II INDEX 500 PORTFOLIO
VIP II Index 500 Portfolio seeks to provide investment results that correspond
to the total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States. In seeking this objective,
the Portfolio attempts to duplicate the composition and total return of the
Standard & Poor's 500 Composite Stock Price Index while keeping transaction
costs and other expenses low.
VIP II CONTRAFUND PORTFOLIO
VIP II Contrafund Portfolio seeks long-term capital appreciation. FMR normally
invests the Portfolio's assets primarily in common stocks. FMR invests the
Portfolio's assets in securities of companies whose value FMR believes is not
fully recognized by the public. The types of companies in which the Portfolio
may invest include companies experiencing positive fundamental change such as a
new management team or product launch, a significant cost-cutting initiative, a
merger or acquisition, or a reduction in industry capacity that should lead to
improved pricing; companies whose earning potential has increased or is expected
to increase more than generally perceived; companies that have enjoyed recent
market popularity but which appear to have temporarily fallen out of favor for
reasons that are considered non-recurring or short-term; and companies that are
undervalued in relation to securities of other companies in the same industry.
VIP II ASSET MANAGER: GROWTH PORTFOLIO
VIP II Asset Manager: Growth Portfolio is an asset allocation fund that seeks to
maximize total return over the long term through investments in stocks, bonds,
and short-term money market instruments. The fund has a neutral mix, which
represents the way the fund's investments will generally be allocated over the
long term. The range and approximate neutral mix for each asset class are shown
below:
<TABLE>
<CAPTION>
Range Neutral Mix
----- -----------
<S> <C> <C>
Stock Class ................ 50-100% 70%
Bond Class ................. 0-50% 25%
Short-Term/
Money Market Class ......... 0-50% 5%
</TABLE>
9
<PAGE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may also
invest the Portfolio's assets in other types of securities, including bonds,
which may be lower-quality debt securities.
VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by investing
in a diversified portfolio of equity and fixed-income securities. It uses a
balanced approach to provide the best possible total return from investments in
foreign and domestic equity securities, convertible securities, preferred and
common stocks paying any combination of dividends and capital gains, and fixed
income securities.
VIP III GROWTH & INCOME PORTFOLIO
VIP III Growth & Income Portfolio seeks high total return through a combination
of current income and capital appreciation. FMR normally invests a majority of
the Portfolio's assets in common stocks with a focus on those that pay current
dividends and show potential for capital appreciation. FMR may also invest the
Portfolio's assets in bonds, including lower-quality debt securities, as well as
stocks that are not currently paying dividends, but offer prospects for future
income or capital appreciation.
VIP III MID CAP PORTFOLIO
FMR normally invests the VIP III Mid Cap Portfolio's assets primarily in common
stocks. FMR normally invests at least 65% of the Portfolio's total assets in
securities of companies with medium market capitalizations. Medium market
capitalization companies are those whose market capitalization is similar to the
capitalization of companies in the S&P Mid Cap 400 at the time of the
investment. Companies whose capitalization no longer meets this definition after
purchase continue to be considered to have a medium market capitalization for
purposes of the 65% policy.
10
<PAGE>
FIXED ACCOUNTS
FOR VARIOUS LEGAL REASONS, INTERESTS IN CONTRACTS ATTRIBUTABLE TO FIXED ACCOUNTS
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), NOR
UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). THUS, NEITHER THESE
CONTRACTS NOR OUR GENERAL ACCOUNT, WHICH GUARANTEES THE VALUES AND BENEFITS
UNDER THOSE CONTRACTS, ARE GENERALLY SUBJECT TO REGULATION UNDER THE PROVISIONS
OF THE 1933 ACT OR THE 1940 ACT. ACCORDINGLY, WE HAVE BEEN ADVISED THAT THE
STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HASN'T REVIEWED THE DISCLOSURE
IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT.
DISCLOSURES REGARDING THE FIXED ACCOUNTS OR THE GENERAL ACCOUNT MAY, HOWEVER, BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN
PROSPECTUSES.
GUARANTEED RATE OPTIONS
We offer GROs with durations of three, five, seven and ten years. We can change
the durations available from time to time. When you put money in a GRO, that
locks in a fixed effective annual interest rate that we declare (GUARANTEED
INTEREST Rate) for the duration you select (your GRO ACCOUNT). The duration of
your GRO Account is the GUARANTEE PERIOD. Each contribution or transfer to a GRO
establishes a new GRO Account for the duration you choose at the then-current
Guaranteed Interest Rate we declare. We won't declare an interest rate less than
3%. Each GRO Account expires at the end of the duration you have selected. See
"Renewals of GRO Accounts" below. All contributions you make to a GRO are placed
in a non-unitized separate account. Values and benefits under your contract
attributable to GROs are guaranteed by the reserves in our GRO separate account
as well as by our General Account.
The value of each of your GRO Accounts is referred to as a GRO VALUE. The GRO
Value at the expiration of the GRO Account, assuming you haven't transferred or
withdrawn any amounts, will be the amount you put in plus interest at the
Guaranteed Interest Rate. We credit interest daily at an effective annual rate
equal to the Guaranteed Interest Rate. We allocate interest at the end of each
contract year and at the time of any transfer, full or partial withdrawal,
payment of a death benefit or purchase of any annuity benefit.
We may declare a higher rate of interest in the first year for any Contribution
allocated to a GRO that exceeds the Guaranteed Interest Rate credited during the
remaining years of the Guarantee Period (ENHANCED RATE). This Enhanced Rate will
be guaranteed for the Guaranteed Period's first year and declared at the time of
purchase. We can declare and credit additional interest based on Contribution,
Account Value, withdrawal dates, economic conditions or on any other lawful,
nondiscriminatory basis (ADDITIONAL INTEREST). Any Enhanced Rate and Additional
Interest credited to your GRO Account will be separate from the Guaranteed
Interest Rate and not used in the Market Value Adjustment formula. THE ENHANCED
RATE OR ADDITIONAL INTEREST MAY NOT BE MADE APPLICABLE UNDER CONTRACTS ISSUED IN
CERTAIN STATES.
Each group of GRO Accounts of the same duration is considered one GRO. For
example, all of your three-year GRO Accounts are one GRO while all of your
five-year GRO Accounts are another GRO.
You can get our current Guaranteed Interest Rates by calling our Administrative
Office.
The ten-year GRO isn't available in Oregon.
ALLOCATIONS TO GROS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date of
the old GRO Account. You will receive the Guaranteed Interest Rate that is in
effect on that date. If a GRO Account expires and it can't be renewed for the
same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10 years
and when it expires, we don't offer a 10-year GRO, but we do offer a seven-year
GRO,
11
<PAGE>
your new one will be for seven years. You can tell us if you want something
different within 30 days before the GRO Account expires. You can't choose, and
we won't renew a GRO Account that expires after your Retirement Date.
MARKET VALUE ADJUSTMENTS. A MARKET VALUE ADJUSTMENT is an adjustment, either up
or down, that we make in your GRO Value if you make an early withdrawal or
transfer from your GRO Account. A Market Value Adjustment will be made for each
transaction made from a GRO Account other than your free withdrawals or those
made within 30 days before the expiration of the Account. There will be no
Market Value Adjustment made for a death benefit. The market adjusted value may
be higher or lower than the GRO Value, but will never be less than the MINIMUM
VALUE. Minimum Value is an amount equal to your allocation to such GRO Account
plus 3% interest, compounded annually, less previous withdrawals from such GRO
Account. The Minimum Value for partial withdrawals or transfers will be
calculated on a pro-rata basis. The administrative expense charge could take
away part of your principal.
The Market Value Adjustment we make to your GRO Account is based on the changes
in our Guaranteed Interest Rate. If our Guaranteed Interest Rate has increased
since the time of your investment, the Market Value Adjustment will reduce your
GRO Value (but not below the Minimum Value). On the other hand, if our
Guaranteed Interest Rate has decreased since the time of your investment, the
Market Value Adjustment will increase your GRO Value.
The Market Value Adjustment (MVA) for a GRO Account is determined under the
following formula:
MVA = GRO Value x [(1 + A)(N/12) / (1 + B + .0025)(N/12) - 1], where
A is the Guaranteed Interest Rate being credited to the GRO Account subject
to the Market Value Adjustment,
B is the current Guaranteed Interest Rate, as of the effective date of the
application of the Market Value Adjustment, for current allocations to a
GRO Account, the length of which is equal to the number of whole months
remaining in your GRO Account. Subject to certain adjustments, if that
remaining period isn't equal to an exact period for which we have declared
a new Guaranteed Interest Rate, B will be determined by a formula that
finds a value between the Guaranteed Interest Rates for GRO Accounts of the
next highest and next lowest durations.
N is the number of whole months remaining in your GRO Account.
For contracts issued in certain states, the formula above will be adjusted to
comply with applicable state requirements.
If the remaining term of your GRO Account is 30 days or less, the Market Value
Adjustment for your GRO Account shall be zero. If for any reason we are no
longer declaring current Guaranteed Interest Rates, then for purposes of
determining B we will use the yield to maturity of United States Treasury Notes
with the same remaining term as your GRO Account, using a formula when
necessary, in place of the current Guaranteed Interest Rate or Rates.
For illustrations of the application of the Market Value Adjustment formula, see
Appendix B.
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate that
we declare in advance for each calendar quarter. This interest rate applies to
all contributions within the STO Account at the time the rate is declared. You
MUST transfer all STO contributions into other Investment Options within one
year of your most recent STO contribution. Transfers will be made automatically
in approximately equal quarterly or monthly installments of not less than $1,000
each. You can't transfer from other Investment Options into the STO. We
guarantee that the STO's effective annual yield will never be less than 3.0%.
See "Systematic Transfer Program" in Part 8 for details on this program. This
option may not be currently available in some states.
PART 4 - DEDUCTIONS AND CHARGES
SEPARATE ACCOUNT CHARGES
Integrity deducts from the unit value every calendar day an amount equal to an
effective annual rate of 1.45% of the Account Value in the Variable Account
Options. This daily expense rate can't be increased without your consent.
Various portions of this total charge, as described below, pay for certain
services to the Separate Account and the contracts.
12
<PAGE>
Of the 1.45% total charge, .15% of the value of each Variable Account Option is
used to reimburse us for administrative expenses not covered by the annual
administrative charge described below. The remaining 1.30% is deducted for
Integrity's assuming the expense risk (.95%) and the mortality risk (.35%) under
the contract. The expense risk is the risk that our actual expenses of
administering the contracts will exceed the annual administrative expense
charge. Mortality risk, as used here, refers to the risk Integrity takes that
annuitants, as a class of persons, will live longer than estimated and therefore
require Integrity to pay out more annuity benefits than anticipated. The
relative proportion of the mortality and expense risk charges may be modified,
but the total 1.30% effective annual risk charge can't be increased on your
Contract.
Integrity may realize a gain from these daily charges if they aren't needed to
meet the actual expenses incurred.
ANNUAL ADMINISTRATIVE CHARGE
If your Account Value is less than $50,000 on the last day of any contract year
before your Retirement Date, Integrity charges an annual administrative charge
of $30. This charge is deducted pro-rata from your Account Value in each
Investment Option. The part of the charge deducted from the Variable Account
Options will reduce the number of units credited to you. The part of the charge
deducted from the Fixed Accounts is withdrawn in dollars. The annual
administrative charge will be pro-rated in the event of the Annuitant's
retirement, death, or termination of a contract during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if it saves us expenses. We may do this
based on the size and type of the group and the amount of the contributions.
We won't unlawfully discriminate against any person or group if we reduce or
eliminate these charges.
PORTFOLIO CHARGES
The Separate Account buys shares of the Portfolios at net asset value. That
price reflects investment advisory fees and other direct expenses that have
already been deducted from the assets of the Portfolios. The amount charged for
investment management can't be increased without the approval of the
shareholders.
STATE PREMIUM TAX DEDUCTION
Integrity won't deduct state premium taxes from your contributions before
investing them in the Investment Options, unless required to by your state law.
If the Annuitant elects an annuity benefit, we'll deduct any applicable state
premium taxes from the amount otherwise available for an annuity benefit. State
premium taxes currently range up to 4%.
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) the Callan Asset
Allocation and Rebalancing Program, or (iv) under systematic transfers from the
STO, nor will such transfers count towards the twelve free transfers you may
make in a contract year.
TAX RESERVE
We can make a charge in the future for taxes or for reserves set aside for
taxes, which will reduce the investment experience of the Variable Account
Options.
13
<PAGE>
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
CONTRIBUTIONS UNDER YOUR CONTRACT
You can make contributions of at least $100 at any time up to the Annuitant's
Retirement Date. Your first contribution, however, cannot be less than $1,000
($3,000 in Pennsylvania and South Carolina ). We'll accept contributions of at
least $50 for salary allotment programs. We have special rules for minimum
contribution amounts for tax-favored retirement programs. See "Special Rules for
Tax-Favored Retirement Programs" in Part 7.
We may limit the total contributions under one contract to $1,000,000 if you are
under age 76 or to $250,000 if you are over age 76. Once you reach eight years
before your Retirement Date, we may refuse to accept any contribution.
Contributions may also be limited by various laws or prohibited by Integrity for
all Annuitants under the contract. If your contributions are made under a
tax-favored retirement program, we won't measure them against the maximum limits
set by law.
Contributions are applied to the various Investment Options you select and are
used to pay annuity and death benefits. Each contribution is credited as of the
date we have RECEIVED (as defined below) at our Administrative Office both the
contribution and instructions for allocation among the Investment Options,
PROVIDED THAT AT ANY TIME YOU MAY NOT HAVE AMOUNTS IN MORE THAN NINE INVESTMENT
OPTIONS. In determining the nine Investment Options, each of your GRO Accounts
counts as one Investment Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office. A BUSINESS DAY is defined as any day that the New
York Stock Exchange is open.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Market Value Adjustments, if applicable, are made as of the effective date of
the transaction. Charges against our Separate Account are reflected daily. Any
amount allocated to a Variable Account Option will go up or down in value
depending on the investment experience of that Option. The value of
contributions made to the Variable Account Options isn't guaranteed. The value
of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
YOUR PURCHASE OF UNITS IN OUR SEPARATE ACCOUNT
Allocations to the Variable Account Options are used to purchase units. On any
given day, the value you have in a Variable Account Option is the unit value
multiplied by the number of units credited to you in that Option. The units of
each Variable Account Option have different unit values.
The number of units purchased or redeemed (sold) in any Variable Account Option
is calculated by dividing the dollar amount of the transaction by the Option's
unit value, calculated after the close of business that day. The number of units
for a Variable Account Option at any time is the number of units purchased less
the number of units redeemed. The value of units fluctuates with the investment
performance of the corresponding Portfolios, which in turn reflects the
investment income and realized and unrealized capital gains and losses of the
Portfolios, as well as their expenses. The unit values also change because of
deductions and charges we make to our Separate Account. The number of units
credited to you, however, won't vary because of changes in unit values. Units of
a Variable Account Option are purchased when you make new contributions or
transfer contributions you made to a different Option into that Option. Units
are redeemed when you make withdrawals or transfer amounts out of a Variable
Account Option into a different Option. We also redeem units to pay the death
benefit when the Annuitant dies and to pay the annual administrative charge.
14
<PAGE>
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option on the Valuation Date.
The Valuation Date for purposes of determining unit values is 4 p.m. Eastern
Time on each day the New York Stock Exchange is open for business.
The unit value of each Variable Account Option for any day on which we determine
unit values is equal to the unit value for the last day on which a unit value
was determined multiplied by the net investment factor for that Option on the
current day. We determine a NET INVESTMENT FACTOR for each Option as follows:
- - First, we take the value of the shares belonging to the Option in the
corresponding Portfolio at the close of business that day (before giving
effect to any transactions for that day, such as contributions or
withdrawals). For this purpose, we use the share value reported to us by
the Portfolios.
- - Next, we add any dividends or capital gains distributions by the Portfolio
on that day.
- - Then, we charge or credit for any taxes or amounts set aside as a reserve
for taxes.
- - Then, we divide this amount by the value of the amounts in the Option at
the close of business on the last day on which a unit value was determined
(after giving effect to any transactions on that day).
- - Finally, we subtract a daily asset charge for each calendar day since the
last day on which a unit value was determined (for example, a Monday
calculation will include charges for Saturday and Sunday). The daily charge
is .00003721, which is an effective annual rate of 1.45%. This charge is
for the mortality risk, administrative expenses and expense risk assumed by
us under the contract.
Generally, this means that we adjust unit values to reflect what happens to the
Portfolio, and also for the mortality and expense risk charge and any charge for
administrative expenses or taxes.
TRANSFERS
You may transfer your Account Value among the Variable Account Options and the
GROs, subject to Integrity's then current transfer restrictions. You can't make
a transfer into the STO. Transfers to a GRO must be to a newly elected GRO (i.e.
to a GRO that you haven't already purchased) at the then-current Guaranteed
Interest Rate, unless we agree otherwise. Transfers you make from a GRO, except
within 30 days before your GRO Account expires, are subject to a Market Value
Adjustment. See "Guaranteed Rate Options" in Part 3. Transfers from GROs, will
be made according to the order in which money was originally allocated to the
GRO.
The amount transferred must be at least $250 or, if less, the entire amount in
the Investment Option. You have twelve free transfers during a contract year.
After those twelve transfers, a charge of up to $20 may apply to each additional
transfer during that contract year. No charge will be made for transfers under
our dollar cost averaging, Customized Asset Rebalancing, Callan Asset Allocation
and Rebalancing Program or systematic transfer programs, described in Part 8.
Once annuity payments begin, transfers aren't permitted.
You may request a transfer by writing to our Administrative Office. Each request
for a transfer must specify the contract number, the amounts to be transferred
and the Investment Options to and from which the amounts are to be transferred.
Transfers may also be arranged through our telephone transfer service provided
you have established a Personal Identification Number (PIN CODE). We'll honor
telephone transfer instructions from any person who provides correct identifying
information. We aren't responsible for any fraudulent telephone transfers that
are believed to be genuine in accordance with these procedures. You bear the
risk of loss if unauthorized persons make transfers on your behalf.
A transfer request will be effective as of the Business Day our Administrative
Office receives it. A transfer request doesn't change the allocation of current
or future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' unit values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m.
15
<PAGE>
Eastern Time (or the close of the New York Stock Exchange, if earlier) will
be processed using unit values as of the close of business on the next Business
Day after the day you call. All transfers will be confirmed in writing.
WITHDRAWALS
You may make any number of withdrawals as often as you wish. Each withdrawal
must be for at least $300. The money will be taken from your Accounts in the
same proportion as you contributed it to them. For example, if your
contributions are divided in equal 25% shares among four Investment Options,
when you make a withdrawal, 25% of the money withdrawn will come from each of
your Investment Options. You can tell us if you want your withdrawal handled
differently.
When you make a partial withdrawal, the total amount deducted from your Account
Value will include the withdrawal amount requested plus any Market Value
Adjustments. The total amount that you receive will be the total amount that you
requested. Most of the withdrawals you make before you are 59-1/2 years old are
subject to a 10% federal tax penalty. If your contract is part of a tax-favored
plan, the plan may limit your withdrawals. See Part 7, "Tax Aspects of the
Contracts." Residents of Pennsylvania and South Carolina are required to keep a
$3,000 minimum account balance after any withdrawals.
ASSIGNMENTS
If your contract isn't part of a tax-favored program, you may assign the
contract before the Annuitant's Retirement Date. You can't, however, make a
partial assignment. An assignment of the contract may have adverse tax
consequences. See Part 7, "Tax Aspects of the Contracts." We won't be bound by
an assignment unless it is in writing and our Administrative Office has received
it.
DEATH BENEFITS AND SIMILAR BENEFIT DISTRIBUTIONS
We'll pay a death benefit to the Annuitant's surviving beneficiary (or
beneficiaries, in equal shares) if the last Annuitant dies before annuity
payments have started. If the Annuitant dies at or over age 90 (or after the
Contract's 10th anniversary date, if later), the death benefit is the contract
account value at the end of the business day on which we receive proof of death.
Similarly, if the Contract was issued on or after the youngest Annuitant's 86th
birthday, the death benefit is the contract account value at the end of the
business day on which we receive proof of death.
For Contracts issued before the Annuitant's 86th birthday, if the Annuitant dies
before age 90 (or the Contract's 10th anniversary date, if later) before annuity
payments have started, the death benefit is the higher of:
a) the contract account value at the end of the business day on which we
receive proof of death; or
b) the total of all contributions;
each reduced on a pro rata basis for prior withdrawals (after being adjusted for
any applicable market value adjustments and/or charges). We'll determine the
amount of the reduction by dividing the amount of the withdrawal by the annuity
account value on the transaction date and multiplying this percentage by the
then current guaranteed minimum death benefit.
Death benefits and benefit distributions required because of a separate Owner's
death can be paid in a lump sum or as an annuity. If a benefit option hasn't
been selected for the beneficiary at the Annuitant's death, the beneficiary can
select an option.
The Owner selects the beneficiary of the death benefit. An Owner may change
beneficiaries by sending the appropriate form to the Administrative Office. If
an Annuitant's beneficiary doesn't survive the Annuitant, then the death benefit
is generally paid to the Annuitant's estate. No death benefit will be paid after
the Annuitant's death if there is a contingent Annuitant. In that case, the
contingent Annuitant becomes the new Annuitant under the contract.
The death benefit described above becomes retroactive to all contracts issued on
or after January 1, 1997.
ANNUITY BENEFITS
16
<PAGE>
All annuity benefits under your contract are calculated as of the Retirement
Date you select. You can change the Retirement Date by writing to the
Administrative Office any time before the Retirement Date. The Retirement Date
can't be later than your 98th birthday or earlier, if required by law. Contract
terms that apply to the various retirement programs, along with the federal tax
laws, establish certain minimum and maximum retirement ages.
Annuity benefits may be a lump sum payment or paid out over time as an annuity.
A lump sum payment will provide the Annuitant with the Cash Value under the
contract, shortly after the Retirement Date. The amount applied toward the
purchase of an annuity benefit will be the Adjusted Account Value, except that
the Cash Value will be the amount applied instead if the annuity benefit doesn't
have a life contingency and either the term is less than five years or the
annuity can be commuted to a lump sum payment.
ANNUITIES
Annuity benefits can provide for fixed or variable payments, which may be made
monthly, quarterly, semi-annually or annually. Variable payments will be funded
through one or more Separate Account Divisions. For any annuity, the minimum
amount applied to the annuity must be $2,000 and the minimum initial payment
must be at least $20.
If you haven't already selected a form of annuity, within six months prior to
your Retirement Date, we'll send you a notice form. You can tell us on the form
the type of annuity you want or confirm to us that we're to provide the normal
form of annuity, as defined below. However, if we don't receive a completed form
from you on or before your Retirement Date, we'll extend the Retirement Date
until we receive your written instructions at our Administrative Office. During
this extension, the values under your contract in the various Investment Options
will remain invested in those options and amounts remaining in Variable Account
Options will continue to be subject to the associated investment risks. However,
your Retirement Date can't be extended beyond your 98th birthday or earlier, if
required by law. You'll receive a lump sum benefit if you don't make an election
by then.
We currently offer the following types of annuities:
The NORMAL FORM OF ANNUITY is a fixed life income annuity with 10 years of
payments guaranteed, funded through our General Account.
A PERIOD CERTAIN ANNUITY provides for fixed or variable payments, or both, to
the Annuitant or the Annuitant's beneficiary (the PAYEE) for a fixed period. The
amount is determined by the period selected. The Annuitant, or if the payee dies
before the end of the period selected, the payee's beneficiary, may elect to
receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed or variable payments, or both,
for at least the period selected and thereafter for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. You can't change
or redeem the annuity once payments have begun. If the payee (or the payee and
the other annuitant under a joint and survivor annuity) dies before the period
selected ends, the remaining payments will go to another named payee. That payee
can redeem the annuity and receive the present value of future guaranteed
payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments for the life of the payee or the
payee and another annuitant under a joint and survivor annuity. Once a life
income annuity is selected, the form of annuity can't be changed or redeemed for
a lump sum payment by the Annuitant or any payee.
ANNUITY PAYMENTS
Fixed annuity payments won't change and are based upon annuity rates provided in
your contract. The size of payments will depend on the form of annuity that was
chosen and, in the case of a life income annuity, on the payee's age (or payee
and a joint annuitant in the case of a joint and survivor annuity) and sex
(except under most tax-favored retirement programs). If our annuity rates then
in effect would yield a larger payment, those rates will apply instead of the
tables.
Variable annuity payments are funded only in the Separate Account Divisions
through the purchase of annuity units. The Variable Account Option or Options
selected can't be changed after annuity payments begin. The Statement of
17
<PAGE>
Additional Information (SAI) has more information about the determination of
annuity payments. The number of units purchased is equal to the amount of the
first annuity payment divided by the new annuity unit value for the valuation
period that includes the due date of the first annuity payment. The amount of
the first annuity payment is determined in the same manner for a variable
annuity as it is for a fixed annuity. The number of annuity units stays the same
for the annuity payment period but the new annuity unit value changes to reflect
the investment income and the realized and unrealized capital gains and losses
of the Variable Account Option or Options selected, after charges made against
it. Annuity unit values assume a base rate of net investment return of 5%,
except in states which require a lower rate in which case 3.5% will be used. The
annuity unit value will rise or fall depending on whether the actual rate of net
investment return is higher or lower than the assumed base rate. In the SAI, see
"Determination of Annuity Unit Values."
If the age or sex of an annuitant has been misstated, any benefits will be those
which would have been purchased at the correct age and sex. Any overpayments or
underpayments made by us will be charged or credited with interest at the rate
of 6% per year. If we have made overpayments because of incorrect information
about age or sex, we will deduct the overpayment from the next payment or
payments due. We add underpayments to the next payment.
TIMING OF PAYMENT
We normally make payments from the Variable Account Options, or apply your
Adjusted Account Value to the purchase of an annuity within seven days after we
receive the required form at our Administrative Office. We can defer our action,
however, for any period during which
1. the New York Stock Exchange has been closed or trading on it is restricted;
2. an emergency exists so that disposal of securities isn't reasonably
practicable or it isn't reasonably practicable for a Separate Account
fairly to determine the value of its net assets; or
3. the SEC, by order, permits Integrity to defer action in order to protect
persons with interests in the Separate Account. Integrity can defer payment
of your Fixed Accounts for up to six months, and interest will be paid on
any such payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your request or instruction unless it is in
proper and complete form. Whenever possible, use one of our printed forms, which
you can get from our Administrative Office.
PART 6 - VOTING RIGHTS
PORTFOLIO VOTING RIGHTS
Integrity is the legal owner of the shares of the Portfolios held by the
Separate Account and, as such, has the right to vote on certain matters. Among
other things, we may vote to elect the Portfolios' Boards of Directors, to
ratify the selection of independent auditors for the Portfolios, and on any
other matters described in the Portfolios' current prospectus or requiring a
vote by shareholders under the 1940 Act.
Whenever a shareholder vote is taken, we give you the opportunity to tell us how
to vote the number of shares purchased as a result of contributions to your
contract. We'll send you Portfolio proxy materials and a form for giving us
voting instructions.
If we don't receive instructions in time from all Owners, we'll vote shares in a
Portfolio for which no instructions have been received in the same proportion as
we vote shares for which we have received instructions. Under eligible deferred
compensation plans and certain Qualified Plans, your voting instructions must be
communicated to us indirectly, through your employer, but we aren't responsible
for any failure by your employer to ask for your instructions or to tell us what
your instructions are. We'll vote any Portfolio shares that we're entitled to
vote directly, because of amounts we have accumulated in our Separate Account,
in the same proportions that other Owners vote. If the federal securities laws
or
18
<PAGE>
regulations or interpretations of them change so that we are permitted to
vote shares of the Portfolios in our own right or to restrict Owner voting, we
may do so.
HOW WE DETERMINE YOUR VOTING SHARES
You may participate in voting only on matters concerning the Portfolios in which
your contributions have been invested. We determine the number of Portfolio
shares in each Variable Account Option under your contract by dividing the
amount of your Account Value allocated to that Option by the net asset value of
one share of the corresponding Portfolio as of the record date set by the
Portfolios' Boards for the shareholders' meeting. We count fractional shares.
The record date for this purpose can't be more than 60 days before the meeting
of the shareholders. After annuity payments have begun, voting rights are
calculated in a similar manner based on the actuarially determined value of your
interest in each Variable Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by such companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by Integrity from its Owners.
SEPARATE ACCOUNT VOTING RIGHTS
Under the 1940 Act, certain actions (such as some of those described under
"Changes in How We Operate" in Part 2) may require Owner approval. In that case,
you'll be entitled to a number of votes based on the value you have in the
Variable Account Options, as described above under "How We Determine Your Voting
Shares." We'll cast votes attributable to amounts we have in the Variable
Account Options in the same proportions as votes cast by Owners.
PART 7 - TAX ASPECTS OF THE CONTRACTS
INTRODUCTION
The effect of federal income taxes on the amounts held under a contract, on
annuity payments, and on the economic benefits to the Owner, Annuitant, and the
beneficiary or other payee may depend on Integrity's tax status, on the type of
retirement plan, if any, for which the contract is purchased, and upon the tax
and employment status of the individuals concerned.
The following discussion of the federal income tax treatment of the contract
isn't designed to cover all situations and isn't intended to be tax advice. It's
based upon our understanding of the present federal income tax laws as currently
interpreted by the Internal Revenue Service (IRS) and various courts. We can't
guarantee that the tax code or the courts will or won't change their views on
the treatment of these contracts. Future legislation may affect annuity
contracts adversely. Moreover, we haven't attempted to consider any applicable
state or other tax laws. Because of the complexity of the tax laws and the fact
that tax results will vary according to the particular circumstances, any one
considering buying a contract, or selecting annuity payments under the contract,
or receiving annuity payments under a contract should consult a qualified tax
adviser. INTEGRITY DOESN'T MAKE ANY GUARANTEE REGARDING THE TAX STATUS, FEDERAL,
STATE, OR LOCAL, OF ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
YOUR CONTRACT IS AN ANNUITY
Under federal tax law, anyone can purchase an annuity with after-tax dollars and
your annuity earnings won't be taxed until you make a withdrawal. Or, an
individual (or employer) may buy the annuity to fund a tax-favored retirement
program (contributions are with pre-tax dollars), such as an IRA or qualified
plan. Finally, the individual (or employer) may buy the Annuity to fund a Roth
IRA (contributions are with after-tax dollars and earnings are excluded in
taxable income at distribution).
19
<PAGE>
This prospectus covers the basic tax rules that apply to an annuity purchased
directly with after-tax dollars, (NONQUALIFIED ANNUITY), and some of the special
tax rules which apply to an annuity purchased to fund a tax-favored retirement
program, (QUALIFIED ANNUITY). A qualified annuity may restrict your rights and
benefits to qualify for its special treatment under the federal tax law.
TAXATION OF ANNUITIES GENERALLY
Section 72 of the Code governs the taxation of annuities. In general,
contributions you put into the annuity (your "basis" or "investment" in the
contract) won't be taxed when you receive those amounts back in a distribution.
Also, an Owner isn't taxed on the annuity's earnings until some form of
withdrawal or distribution is made under the contract. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. For example, corporations, partnerships, and other non-natural persons
can't defer tax on the annuity's income unless an exception applies. In
addition, if an Owner transfers an annuity as a gift to someone other than a
spouse (or former spouse), all increases in its value will be taxed at the time
of transfer. The assignment or pledge of any portion of the value of a contract
will be treated as a distribution of that portion of the value of the contract.
You can take withdrawals from the contract or you can wait to annuitize it when
the annuitant reaches a certain age. The tax implications are different for each
type of distribution. Section 72 of the Code says that the proceeds of a full or
partial withdrawal from a contract before annuity payments begin are first
treated as taxable income, but only to the extent of the increase of the Account
Value. The rest of the withdrawal, representing your basis in the annuity, isn't
taxable. Generally, the investment or basis in the contract equals the
contributions made by or on your behalf, minus any amounts previously withdrawn
that were not treated as taxable income. Special rules may apply if the contract
includes contributions made prior to August 14, 1982 that were rolled over to
the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This
non-taxable portion of each payment is figured using a ratio of the Owner's
investment to his or her expected return under the contract (exclusion Ratio).
Once you get the tax-free part, the rest of each payment will be considered the
increase of your Account Value, and is ordinary income. That means that part of
your payment is tax-free and part is taxable. When all of these tax-free
portions add up to your investment in the annuity, future payments are all
counted as an increase in your Account Value, and are taxable income. If the
Annuitant dies before recovering the total investment, a deduction for the
remaining basis will generally be allowed on the Owner's final federal income
tax return.
We may be required to withhold federal income taxes on all distributions unless
the eligible recipient elects not to have any amounts withheld and properly
notifies us of that election.
The taxable portion of a distribution is treated as ordinary income and is taxed
at ordinary income tax rates. In addition, you may be subject to a tax penalty
of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59-1/2;
(2) as a result of the death of the Owner;
(3) part of a series of substantially equal periodic payments (paid at
least annually) for the life (or life expectancy) of the taxpayer or
joint lives (or joint life expectancies) of the taxpayer and
beneficiary; attributable to the taxpayer becoming disabled within the
meaning of Code Section 72(m)(7);
(4) from certain qualified plans (note, however, other penalties may
apply);
(5) under a qualified funding asset (as defined in Section 130(d) of the
Code);
(6) purchased by an employer on termination of certain types of qualified
plans and held by the employer until the employee separates from
service;
(7) under an immediate annuity as defined in Code Section 72(u)(4);
(8) purchase of a first home (distribution up to $10,000);
(9) for certain higher education expenses; or
(10) to cover certain deductible medical expenses.
Please note that items (9), (10) and (11) apply to IRAs only).
Any withdrawal provisions of your contract will also apply. See "Withdrawals" in
Part 5.
20
<PAGE>
All annuity contracts issued by Integrity or its affiliates to one Annuitant
during any calendar year are treated as a single contract in measuring the
taxable income that results from surrenders and withdrawals under any one of the
contracts.
DISTRIBUTION-AT-DEATH RULES
Under section 72(s) of the Code, to be treated as an annuity, a contract must
provide the following distribution rules: (a) if any Owner dies on or after the
Retirement Date and before the entire interest in the contract has been
distributed, then the rest of that annuity must be distributed at least as
quickly as the method in effect when the Owner died; and (b) if any Owner dies
before the Retirement Date, the entire interest in the contract must be
distributed within five years. However, any interest that is payable to a death
beneficiary may be annuitized over the life of that beneficiary or over a period
not extending beyond the life expectancy of that beneficiary, so long as
distributions begin within one year after the Owner's death. If the beneficiary
is the Owner's spouse, the contract (along with the deferred tax status) may be
continued in the spouse's name as the Owner.
DIVERSIFICATION STANDARDS
Integrity manages the investments in the annuities under Section 817(h) of the
Code to ensure that they will be taxed as described above.
TAX-FAVORED RETIREMENT PROGRAMS
An Owner can use this annuity with certain types of retirement plans that
receive favorable treatment under the Code. Numerous tax rules apply to the
participants in qualified plans and to the contracts used in connection with
those qualified plans. These tax rules vary according to the type of plan and
the terms and conditions of the plan itself. Owners, Annuitants, and
beneficiaries are cautioned that the rights of any person to any benefits under
qualified plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the contract. In addition,
loans from qualified contracts, where allowed, are subject to a variety of
limitations, including restrictions as to the amount that may be borrowed, the
duration of the loan, and the manner in which the loans must be repaid. (Owners
should always consult their tax advisors and retirement plan fiduciaries before
taking any loans from the plan.) Special rules also apply to the time at which
distributions must begin and the form in which the distributions must be paid.
THE STATEMENT OF ADDITIONAL INFORMATION CONTAINS GENERAL INFORMATION ABOUT THE
USE OF CONTRACTS WITH THE VARIOUS TYPES OF QUALIFIED PLANS.
FEDERAL AND STATE INCOME TAX WITHHOLDING
Certain states have indicated that pension and annuity withholding will apply to
payments made to residents. Generally, an election out of federal withholding
will also be considered an election out of state withholding. For more
information concerning a particular state, call our Administrative Office at the
toll-free number.
IMPACT OF TAXES TO INTEGRITY
The contracts provide that Integrity may charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
TRANSFERS AMONG INVESTMENT OPTIONS
There will not be any tax liability if you transfer any part of the Account
Value among the Investment Options of your contract.
21
<PAGE>
PART 8 - ADDITIONAL INFORMATION
SYSTEMATIC WITHDRAWALS
We offer a program for systematic withdrawals that allows you to pre-authorize
periodic withdrawals from your contract prior to your Retirement Date. You can
choose to have withdrawals made monthly, quarterly, semi-annually or annually
and may specify the day of the month (other than the 29th, 30th or 31st) on
which the withdrawal is to be made. You may specify a dollar amount for each
withdrawal or an annual percentage to be withdrawn. The minimum systematic
withdrawal currently is $100. Residents of Pennsylvania and South Carolina are
required to keep a $3,000 minimum account balance. You may also specify an
account for direct deposit of your systematic withdrawals. To enroll in our
systematic withdrawal program, send the appropriate form to our Administrative
Office. Withdrawals may begin as soon as one business day after we receive the
form. You may terminate your participation in the program upon one day's prior
written notice, and we may terminate or change the systematic withdrawal program
at any time. If on any withdrawal date you don't have enough money in your
Account to make all of the withdrawals you have specified, no withdrawal will be
made and your enrollment in the program will be ended.
Amounts you withdraw under the systematic withdrawal program may be within the
free withdrawal amount. If so, we won't make a Market Value Adjustment. AMOUNTS
WITHDRAWN FROM YOUR GRO ACCOUNT UNDER THE SYSTEMATIC WITHDRAWAL PROGRAM IN
EXCESS OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO AN ADMINISTRATIVE
EXPENSE CHARGE AND A MARKET VALUE ADJUSTMENT IF APPLICABLE. WITHDRAWALS ALSO MAY
BE SUBJECT TO THE 10% FEDERAL TAX PENALTY FOR EARLY WITHDRAWALS UNDER THE
CONTRACTS AND TO INCOME TAXATION. See Part 7, "Tax Aspects of the Contracts."
INCOME PLUS WITHDRAWAL PROGRAM
We offer the Income Plus Withdrawal Program that allows you to pre-authorize
substantially equal periodic withdrawals, based on your life expectancy, from
your contract prior to your reaching age 59-1/2. You won't have to pay any tax
penalty for these withdrawals, but they will be subject to ordinary income tax.
See "Taxation of Annuities Generally," in Part 7. Once you begin receiving
distributions, they shouldn't be changed or stopped until the later of:
- - the date your reach age 59-1/2; or
- - five years from the date of the first distribution.
If you change or stop the distribution or take an additional withdrawal, you may
have to pay a 10% penalty tax that would have otherwise been due on all prior
distributions before you reached age 59-1/2 made under the Income Plus Program
plus interest.
You can choose the Income Plus Withdrawal Program any time before you reach age
59-1/2. You can elect this option by sending the election form to our
Administrative Office. You may choose to have withdrawals made monthly,
quarterly, semi-annually or annually and may specify the day of the month (other
than the 29th, 30th or 31st) on which the withdrawal is to be made. We'll
calculate the amount of the distribution under a method you select, subject to a
minimum, which is currently $100. You must also specify an account for direct
deposit of your Income Plus Withdrawals.
To enroll in our Income Plus Withdrawal Program, send the appropriate form to
our Administrative Office. Withdrawals may begin as soon as one Business Day
after we receive the form. You may terminate your participation in the program
upon seven Business Days prior written notice, and we may terminate or change
the Income Plus Program at any time. If on any withdrawal date you do not have
enough money in your Accounts to make all of the withdrawals you have specified,
no withdrawal will be made and your enrollment in the program will be ended.
This program isn't available in connection with the Systematic Withdrawal
Program, Dollar Cost Averaging, Systematic Transfer Option or Asset Allocation
and Rebalancing Program.
AMOUNTS WITHDRAWN UNDER THE INCOME PLUS WITHDRAWAL PROGRAM IN EXCESS OF THE FREE
WITHDRAWAL AMOUNT WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT IF APPLICABLE.
22
<PAGE>
DOLLAR COST AVERAGING
We offer a dollar cost averaging program under which we transfer contributions
that you have made to the VIP Money Market Option on a monthly, quarterly,
semi-annual or annual basis to one or more other Variable Account Options. You
must tell us how much you want to be transferred into each Variable Account
Option. The current minimum transfer to each Option is $250. We won't charge a
transfer charge under our dollar cost averaging program and these transfers
won't count towards your twelve free transfers.
To enroll in our dollar cost averaging program, send the appropriate form to our
Administrative Office. You may terminate your participation in the program upon
one day's prior written notice, and we may terminate or change the dollar cost
averaging program at any time. If you do not have enough money in the VIP Money
Market Option to transfer to each Variable Account Option specified, no transfer
will be made and your enrollment in the program will be ended.
SYSTEMATIC TRANSFER PROGRAM
We also offer a systematic transfer program under which contributions to the STO
are automatically transferred on a monthly or quarterly basis to one or more
other Investment Options that you select. We'll transfer your STO contributions
in equal installments of not less than $1,000 over a one-year period. If you
don't have enough money in the STO to transfer to each Option specified, a final
transfer will be made on a pro rata basis and your enrollment in the program
will be ended. Any money remaining in the STO at the end of the one year period
during which transfers are required to be made will be transferred on a pro-rata
basis at the end of that year to the Options you have chosen for this program.
We won't charge a transfer charge for transfers under our systematic transfer
program, and these transfers will not count towards your twelve free transfers.
To enroll in our systematic transfer program, send the appropriate form to our
Administrative Office. We can terminate the systematic transfer program in whole
or in part, or restrict contributions to the program. This program may not be
currently available in some states.
CUSTOMIZED ASSET REBALANCING
We offer a Customized Asset Rebalancing program that allows you to determine how
often rebalancing occurs. You can choose to rebalance monthly, quarterly,
semi-annually or annually. The value in the Variable Account Options will
automatically be rebalanced by transfers among those Options, and you will
receive a confirmation notice after each rebalancing. Transfers will occur only
to and from those Variable Account Options where you have current contribution
allocations. We won't charge a transfer charge for transfers under our
Customized Asset Rebalancing program, and they won't count towards your twelve
free transfers.
Fixed Accounts aren't eligible for the Customized Asset Rebalancing program.
To enroll in our Customized Asset Rebalancing program, send the appropriate form
to our Administrative Office. You should be aware that other allocation
programs, such as dollar cost averaging, as well as transfers and withdrawals
that you make, may not work with the Customized Asset Rebalancing program. You
should, therefore, monitor your use of other programs, transfers, and
withdrawals while the Customized Asset Rebalancing program is in effect. You may
terminate your participation in the program upon one day's prior written notice,
and we may terminate or change the Customized Asset Rebalancing program at any
time.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
We offer an Asset Allocation and Rebalancing Program developed in consultation
with Callan Associates. Callan Associates is an independent research and
consulting firm, specializing in the strategic asset allocation decision.
You may select one of five proposed Asset Allocation Rebalancing Models:
Conservative, Moderately Conservative, Moderate, Moderately Aggressive, or
Aggressive. The contribution you are making will initially be allocated among
the Options currently established for each Model. If we change the Model, your
account values will be automatically reallocated accordingly unless you have
terminated your participation. You and your financial representative also have
the option to design a program that is tailored to your specific retirement
needs.
23
<PAGE>
When you select this program, your account values will be allocated and your
variable portfolios will be rebalanced automatically at least annually. The
program automatically applies to all contributions made to your annuity contract
while you are still participating. You will receive a confirmation notice after
each rebalancing. We won't charge a transfer charge for transfers made under the
Asset Allocation and Rebalancing Program. These transfers won't count toward
your twelve free transfers.
In each Asset Allocation Rebalancing Model, a part of each contribution is
allocated to a five-year Guaranteed Rate Option (GRO). The amount allocated to
the GRO won't be reallocated or rebalanced while you are participating in a
specific Model. You may cancel or change the Model you have selected at any
time. If you withdraw or transfer your GRO funds, they may be subject to a
Market Value Adjustment that may increase or decrease your account value.
To enroll in the Asset Allocation and Rebalancing Program, complete the
appropriate form and send it to our Administrative Office. You should be aware
that other allocation programs, such as dollar cost averaging, as well as
transfers and withdrawals that you make, may not work with the Customized Asset
Rebalancing program. If, after selecting one of the five models, you request a
transaction that results in a reallocation outside one of the Models, your
participation in the Model program automatically ends. You should, therefore,
monitor your use of such other programs, transfers, and withdrawals while the
Customized Asset Rebalancing program is in effect. This program isn't available
with the Customized Asset Rebalancing program. We can terminate or change this
program in whole or in part, or restrict contributions to the program. This
program may not be available in all states.
You may terminate participation in this program upon one day's prior written
notice.
PERFORMANCE INFORMATION
Performance data for the Variable Account Options, including the yield and
effective yield of the VIP Money Market Option, the yield of the other Options,
and the total return of all of the Options may appear in advertisements or sales
literature. This performance data is based only the performance of a
hypothetical investment in that Option during the particular time period on
which the calculations are based. Performance information should be considered
in light of the investment objectives and policies of the Portfolio in which the
Option invests and the market conditions during the given time frame. It
shouldn't be considered as a representation of performance to be achieved in the
future.
TOTAL RETURNS are based on the overall dollar or percentage change in value of a
hypothetical investment in an Option. Total return information reflects changes
in Portfolio share price, the automatic reinvestment of all distributions and
the deduction of contract charges and expenses that may apply.
CUMULATIVE TOTAL RETURNS show an Investment Option's performance over a specific
period of time, usually seven years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would have produced the same cumulative total
return if the Investment Option experienced exactly the same return each year
for the entire period shown. Because performance will fluctuate on a
year-by-year basis, the average annual total returns tend to show a smooth
result that won't mirror actual performance, even though the end result will be
the same.
Some Investment Options may also advertise YIELD, which shows the income
generated by an investment in that particular Option over a specified period of
time. This income is annualized and shown as a percentage. Yields don't take
into account capital gains or losses.
The VIP Money Market Option may advertise its CURRENT and EFFECTIVE YIELD.
Current yield reflects the income generated by an investment in that Option over
a specified seven-day period. Effective yield is calculated in a similar manner
except that it assumes that the income earned is reinvested, and the income on
the reinvested amount is included. The VIP II Investment Grade Bond and VIP High
Income Option may advertise a 30-day yield which reflects the income generated
by an investment in that Option over a specified 30-day period.
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
24
<PAGE>
PART 9 - PRIOR CONTRACTS
INVESTMENT OPTIONS FOR CONTRACTS ISSUED PRIOR TO MAY 1, 1999
For contracts issued prior to May 1, 1999, the VIP III Mid Cap Portfolio is not
available as a Variable Account Option.
SEPARATE ACCOUNT ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the Mortality and Expense Risk Fees
are 1.20%, Administrative Expenses are .15% and Total Separate Account Annual
Expenses are 1.35%.
FUND ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the 0.10% charge imposed by certain
of the Portfolios pursuant to a Rule 12b-1 Plan doesn't apply. (This charge is
reflected in the "Other Expenses" column of the underlying mutual funds in the
Table of Annual Fees and Expenses).
25
<PAGE>
APPENDIX A
FINANCIAL INFORMATION
For contracts issued before May 1, 1999, the table below shows the unit value
for each Variable Account Option at inception, the number of units outstanding
at December 31 of each year since inception, and the unit value at the end of
each period. The unit value at the beginning of each period is the unit value as
of the end of the previous period.
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
MONEY High Equity- Investment
Market Income Income Growth Overseas Grade Bond
Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C>
Date of Inception* $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
December 31, 1987 $ 10.18 -- $ 7.74 $ 7.51 $ 8.13 $ 10.21
Number of Units 1,952 -- 25,560 50 7,250 26,988
December 31, 1988 $ 10.75 -- $ 8.49 $ 7.48 $ 8.93 $ 10.69
Number of Units 2,062 -- 8,962 2,043 2,019 45,789
December 31, 1989 $ 11.57 -- $ 10.41 $ 10.45 $ 11.02 $ 12.20
Number of Units 43,299 -- 8,517 2,284 1,937 4,372
December 31, 1990 $ 12.34 -- $ 9.04 $ 11.04 $ 10.16 $ 12.82
Number of Units 2,427 -- 29,446 2,060 1,779 3,350
December 31, 1991 $ 12.90 -- $ 12.92 $ 17.96 $ 12.44 $ 14.38
Number of Units 1,422 -- 7,198 1,777 945 1,160
December 31, 1992 $ 13.22 -- $ 14.90 $ 19.36 $ 10.95 $ 15.13
Number of Units 68,139 -- 124,911 129,511 35,346 80,734
December 31, 1993 $ 13.46 $ 11.45 $ 17.38 $ 22.80 $ 14.83 $ 16.57
Number of Units 346,644 615,289 748,436 444,077 480,406 330,360
December 31, 1994 $ 13.84 $ 11.12 $ 18.35 $ 22.49 $ 14.88 $ 15.73
Number of Units 1,363,372 989,407 1,206,683 988,674 1,272,218 454,358
December 31, 1995 $ 14.46 $ 13.23 $ 24.46 $ 30.03 $ 16.10 $ 18.20
Number of Units 1,823,146 2,238,450 2,264,897 1,665,857 1,308,440 627,020
December 31, 1996 $ 15.03 $ 14.88 $ 27.57 $ 33.98 $ 17.98 $ 18.53
Number of Units 1,839,938 2,871,483 2,977,144 2,311,771 1,792,964 807,207
December 31, 1997 $ 15.64 $ 17.27 $ 34.85 $ 41.39 $ 19.79 $ 19.93
Number of Units 2,298,303 3,057,834 3,512,365 2,026,809 2,066,717 834,294
December 31, 1998 $ 16.28 $ 16.30 $ 38.37 $ 56.96 $ 22.01 $ 21.40
Number of Units 3,190,762 3,293,280 3,398,759 1,942,238 1,813,403 1,235,812
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP III Balanced Option, VIP III Growth Opportunities Option, and VIP III
Growth & Income Option was December 31, 1996. The inception date for the VIP II
Contrafund Option and the VIP II Asset Manager: Growth Option was February 6,
1995. Inception dates for the remaining Options all were in the third quarter of
1987. Prior to September 3, 1991, the Variable Account Options invested in
shares of corresponding portfolios of Prism Investment Trust, and the VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade
Bond and VIP II Asset Manager Options were known as the Money Market, Common
Stock, Aggressive Stock, Global, Bond and Balanced Options, respectively. The
inception date for the VIP III Mid Cap Option was May 1, 1999.
26
<PAGE>
UNIT VALUES AND UNITS OUTSTANDING
<TABLE>
<CAPTION>
Asset
Asset Index Contra- Manager Growth Growth
Manager 500 Fund Growth Balanced Income Opportunities
Division Division Division Division Division Division Division
<S> <C> <C> <C> <C> <C> <C> <C>
Date of Inception* $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
December 31, 1987 $ 8.00 -- -- -- -- -- --
Number of Units 29,166 -- -- -- -- -- --
December 31, 1988 $ 8.98 -- -- -- -- -- --
Number of Units 11,300 -- -- -- -- -- --
December 31, 1989 $ 11.16 -- -- -- -- -- --
Number of Units 10,635 -- -- -- -- -- --
December 31, 1990 $ 11.02 -- -- -- -- -- --
Number of Units 12,194 -- -- -- -- -- --
December 31, 1991 $ 13.60 -- -- -- -- -- --
Number of Units 5,272 -- -- -- -- -- --
December 31, 1992 $ 15.01 -- -- -- -- -- --
Number of Units 309,292 -- -- -- -- -- --
December 31, 1993 $ 17.92 $ 10.52 -- -- -- -- --
Number of Units 1,748,246 98,288 -- -- -- -- --
December 31, 1994 $ 16.60 $ 10.49 -- -- -- -- --
Number of Units 3,509,145 218,119 -- -- -- -- --
December 31, 1995 $ 19.15 $ 14.20 $ 13.50 $ 12.03 -- -- --
Number of Units 2,973,440 474,834 1,068,907 175,138 -- -- --
December 31, 1996 $ 21.65 $ 17.20 $ 16.15 $ 14.23 -- -- --
Number of Units 2,708,795 1,207,882 2,382,588 479,960 -- -- --
December 31, 1997 $ 25.77 $ 22.51 $ 19.78 $ 17.56 $ 11.33 $ 12.11 $ 11.90
Number of Units 2,687,060 2,028,663 2,782,642 695,464 124,495 412,889 458,320
December 31, 1998 $ 29.25 $ 28.50 $ 25.36 $ 20.37 $ 13.15 $ 15.48 $ 14.62
Number of Units 2,454,761 2,724,340 3,185,222 745,989 300,468 1,438,416 1,094,151
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500 Option
were February 19, 1993 and March 4, 1993, respectively. The inception date for
the VIP II Contrafund Option and the VIP II Asset Manager: Growth Option was
February 6, 1995. The inception date for the VIP III Balanced Option, VIP III
Growth Opportunities Option, and VIP III Growth & Income Option was December 31,
1996. The Inception date for the VIP III Mid Cap Option was May 1, 1999.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond and Balanced Options, respectively.
For contracts issued on or after May 1, 1999, condensed financial information
isn't provided for any of the Variable Account Options because as of the date of
this prospectus the Options hadn't started operations. The unit value for each
Investment Option at inception will be $10.00. The inception date for the
Variable Account Options is May 1, 1999.
27
<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment may affect the
values of a contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate
is the same rate used in the Example under "Table of Annual Fees and Expenses"
in this Prospectus. In these examples, the withdrawal occurs three years after
the initial contribution. The Market Value Adjustment operates in a similar
manner for transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next higher
number of complete months. If we do not declare a rate for the exact time
remaining, we will interpolate between the Guaranteed Interest Rates for GRO
Accounts of durations closest to (next higher and next lower) the remaining
period described above.
Three years after the initial contribution, there would have been four years
remaining in your GRO Account.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT:
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased three years after the initial contribution and we are then crediting
6.25% for a four-year GRO Account. Upon a full withdrawal, the Market Value
Adjustment, applying the above formula would be:
-0.0551589 = [(1 + .05)(48/12) / (1 + .0625 + .0025)(48/12)] - 1
The Market Value Adjustment is a reduction of $3,192.67 from the GRO Value:
-$3,192.67 = -0.0551589 X $57,881.25
Thus, the amount payable on a full withdrawal (the Market Adjusted Value) would
be:
$54,688.58 = $57,881.25 - $3,192.67
If instead of a full withdrawal, $20,000 were requested, we would first
determine the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment would be:
28
<PAGE>
$20,783.91 = $20,000.00 + $783.91
The ending Account Value would be:
$37,097.34 = $57,881.25 - $20,783.91
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
.0290890 = [(1 + .05)(48/12) / (1 + .04 + .0025)(48/12)] - 1
The Market Value Adjustment is an increase of $1,683.71 to the GRO Value:
$1,683.71 = .0290890 X $57,881.25
The Market Adjusted Value would be:
$59,564.96 = $57,881.25 + $1,683.71
Thus, the amount payable on a full withdrawal would be:
$59,564.96 = $57,881.25 + $1,683.71
If instead of a full withdrawal, $20,000 were requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
$413.41 = .0290890 X $14,211.87
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment would be:
$19,586.59 = $20,000.00 - $413.41
The ending Account Value would be:
$38,294.66 = $57,881.25 - $19,586.59
Actual Market Value Adjustments may have a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
29
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part 1 - Integrity and Custodian
Part 2 - Distribution of the Contracts
Part 3 - Performance Information
Part 4 - Determination of Annuity Unit Values
Part 5 - Tax-Favored Retirement Programs...............................
Traditional Individual Retirement Annuities.................
Roth Individual Retirement Annuities........................
SIMPLE Individual Retirement Annuities......................
Simplified Employee Pensions................................
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans..................................
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations..............................
Distributions Under Tax-Favored Retirement Programs...........
Part 6 - Financial Statements
</TABLE>
If you would like to receive a copy of the Statement of Additional Information,
please complete the form below and send it to:
Administrative Office
Integrity Life Insurance Company
P.O. Box 740074
Louisville, KY 40201-0074
ATTN: Request for SAI of Separate Account I (IQ)
Name:
-----------------------------
Address:
--------------------------
City: State: Zip:
----------------------------- --- ----------
30
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part 1 - Integrity and Custodian.......................................
Part 2 - Distribution of the Contracts.................................
Part 3 - Performance Information.......................................
Part 4 - Determination of Annuity Unit Values..........................
Part 5 - Tax Favored Retirement Programs...............................
Traditional Individual Retirement Annuities.......................
Roth Individual Retirement Annuities..............................
SIMPLE Individual Retirement Annuities............................
Tax Sheltered Annuities...........................................
Simplified Employee Pensions......................................
Corporate and Self-Employed (H.R.10 and Keogh) Pension
and Profit Sharing Plans ........................................
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations ....................................
Distributions Under Tax Favored Retirement Programs...............
Part 6 - Financial Statements..........................................
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the contracts, dated May 1, 1999.
For definitions of special terms used in the SAI, please refer to the
prospectus.
A copy of the prospectus to which this SAI relates is available at no charge by
writing the Administrative Office at Integrity Life Insurance Company
("Integrity"), P.O. Box 740074, Louisville, Kentucky 40201-0074, or by calling
1-800-325-8583.
<PAGE>
PART 1 - INTEGRITY AND CUSTODIAN
Integrity Life Insurance Company is an Ohio stock life insurance company that
sells life insurance and annuities. Its principal executive offices are located
at 515 West Market Street, Louisville, Kentucky, 40202. Integrity, the depositor
of Separate Account I, is a wholly owned subsidiary of Integrity Holdings, Inc.,
a Delaware corporation that's a holding company engaged in no active business.
Integrity owns 100% of the stock of National Integrity Life Insurance Company, a
New York stock life insurance corporation. All outstanding shares of Integrity
Holdings, Inc. are owned by ARM Financial Group, Inc. (ARM), a Delaware
corporation that's a financial services company focusing on the long-term
savings and retirement marketplace by providing retail and institutional
products and services throughout the United States. ARM owns 100% of the stock
of (i) ARM Securities Corporation (ARM SECURITIES), a Minnesota corporation,
registered with the SEC as a broker-dealer and a member of the National
Association of Securities Dealers, Inc., (ii) Integrity Capital Advisors, Inc.,
a Delaware corporation registered with the SEC as an investment adviser, (iii)
SBM Certificate Company, a Minnesota corporation registered with the SEC as an
issuer of face-amount certificates, and (iv) ARM Transfer Agency, Inc., a
Delaware corporation registered with the SEC as a transfer and dividend
disbursing agency
ARM is 100% publicly owned, trading on the New York Stock Exchange (NYSE). No
one has the direct or indirect power to control ARM, except power he or she may
have by virtue of his or her capacity as a director or executive officer of ARM;
no individual beneficially owns more than 5% of the common shares.
Since 1994, ARM has provided substantially all of the services required to be
performed on behalf of the Separate Account. Total fees paid to ARM by Integrity
for management services in 1997 were $19,307,552 and in 1998 were $27,158,002
including services applicable to the Registrant.
Integrity is the custodian for the shares of the Funds owned by the Separate
Account. The Funds' shares are held in book-entry form.
Reports and marketing materials, from time to time, may include information
concerning the rating of Integrity, as determined by A.M. Best Company, Moody's
Investor Service, Standard & Poor's Corporation, Duff & Phelps Corporation, or
other recognized rating services. Integrity is currently rated "A" (Excellent)
by A.M. Best Company, and has received claims paying ability ratings of "A"
(Good) from Standard & Poor's Corporation, "Baa1" from Moody's Investors
Service, Inc., and "A+" (High) from Duff and Phelps Credit Rating Company.
However, Integrity doesn't guarantee the investment performance of the
portfolios, and these ratings don't reflect protection against investment risk.
Under prior management, Integrity was subject to a consent order in the State of
Florida that precluded it from writing new business in Florida from May, 1992 to
November, 1994. The consent order was entered into on May 6, 1992 as a result of
noncompliance with certain investment restrictions under Florida law. Due to the
substantial asset restructuring and capital infusions involved with Integrity's
acquisition by ARM in November, 1993, Integrity was able to comply with the
investment limitations of the State of Florida. On November 4, 1994, the Florida
Department of Insurance granted the request for full relief from the consent
order.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal underwriter
of the contracts. ARM Securities is registered with the SEC as a broker-dealer
and is a member in good standing of the National Association of Securities
Dealers, Inc. ARM Securities' address is 515 West Market Street, Louisville,
Kentucky 40202. The contracts are offered through ARM Securities on a continuous
basis.
Depending upon the distribution channel, we generally pay a maximum distribution
allowance of 6% of initial and additional contributions, plus .30% trail
commission paid on Account Value after the 2nd Contract Year or 2.25% of initial
and additional contributions, plus 1% trail commission paid on Account Value
after the 2nd Contract Year. . The amount of distribution allowances paid was
$7,795,349 for the year ended December 31, 1998, $6,750,503 for the year ended
December 31, 1997 and $7,813,058 for the year ended December 31, 1996.
Distribution allowances weren't retained by ARM Securities during these years.
Integrity may from time to time pay or allow additional promotional incentives,
in the form of cash or other compensation, to broker-dealers that sell
contracts. In some instances, those types of incentives may be offered only to
certain broker-dealers that sell or are expected to sell certain minimum amounts
of the contracts during specified time periods.
<PAGE>
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money Market
Option may also from time to time include the Yield and Effective Yield of its
shares in information furnished to shareholders. Performance information is
computed separately for each Option in accordance with the formulas described
below. At any time in the future, total return and yields may be higher or lower
than in the past and we can't guarantee that any historical results will
continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the automatic
reinvestment by the Option of all distributions and the deduction of all charges
that apply to the Option on an annual basis, including mortality risk and
expense charges, the annual administrative charge and other charges against
contract values. For purposes of charges not based upon a percentage of contract
values, an average account value of $40,000 has been used. Quotations also will
assume a termination (surrender) at the end of the particular period and reflect
the deductions of the contingent withdrawal charge, if they would apply. Any
total return calculation will be based upon the assumption that the Option
corresponding to the investment portfolio was in existence throughout the stated
period and that the applicable contractual charges and expenses of the Option
during the stated period were equal to those that currently apply under the
contract. Total returns may be shown at the same time that do not take into
account deduction of the contingent withdrawal charge, and/or the annual
administrative charge.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Option over certain
periods, including 1, 3, 5, and 10 years (up to the life of the Option), and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. Investors should realize that the Option's performance
is not constant over time, but changes from year to year, and that the average
annual returns represent the averages of historical figures as opposed to the
actual historical performance of an Option during any portion of the period
shown. Average annual returns are calculated pursuant to the following formula:
P(1+T)(n) = ERV, where P is a hypothetical initial payment of $1,000, T is the
average annual total return, n is the number of years, and ERV is the withdrawal
value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage change
in the value of a hypothetical investment in the Option over a stated period of
time. In addition to the period since inception, cumulative total returns may be
calculated on a year-to-date basis at the end of each calendar month in the
current calendar year. The last day of the period for year-to-date returns is
the last day of the most recent calendar month at the time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated period
of time, not taking into account capital gains or losses or any contingent
withdrawal charge. Yields are annualized and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period, less a
hypothetical charge reflecting deductions from contract values 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 one percent. Effective yield assumes that all
dividends received during an annual period have been reinvested. This
compounding effect causes effective yield to be higher than current yield.
Calculation of effective yield begins with the same base period return used in
the calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula: Effective Yield = {(Base Period
Return) + 1)(365/7)} - 1
<PAGE>
For the period ending: 12/31/98
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
SEC Standardized
Variable Average Annual Return (1)
Account ----------------------------------------
Inception
Variable Options Date (2) 1 Year 5 Year 10 Year Life of Account
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Manager 9/3/91 13.42% 10.22% n/a 11.47%
Asset Manager: Growth 2/8/95 15.91% n/a n/a 19.98%
Balanced 2/19/97 15.98% n/a n/a 15.76%
Contrafund 2/8/95 28.15% n/a n/a 26.93%
Equity-Income 9/3/91 10.05% 17.09% n/a 16.61%
Growth 9/3/91 37.54% 20.02% n/a 18.77%
Growth & Income 2/14/97 27.77% n/a n/a 26.17%
Growth Opportunities 2/19/97 22.86% n/a n/a 22.58%
High Income 2/19/93 -5.69% 7.25% n/a 8.62%
Index 500 3/4/93 26.52 21.98% n/a 19.62%
Investment Grade Bond 9/3/91 7.30% 5.18% n/a 6.43%
Overseas 9/3/91 11.16% 8.14% n/a 8.50%
---------------------------------------------------------------------
</TABLE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the indicated. The performance
figures reflect the deduction of mortality and expenses and administrative
charges totaling 1.35%. They also reflect any withdrawal charges that
would apply if an owner terminated the policy at the end of the period,
but exclude deductions for the applicable premium tax charges. Surrender
charges are 8% in year one, declining 1% annually in years one through
seven, 0% thereafter.
(2) Inception date of the variable account option represents first trade date.
Returns for accounts in operation for less than one year are not
annualized.
(3) Non-standard returns reflect all historical investment results, less
mortality and expense and administrative charges totaling 1.35%. The
calculation assumes the policy is still in force and therefore does not
take withdrawal charges into consideration.
(4) Italicized returns are calculated from the inception date through
year-end.
(5) Represents the inception date of the underlying funds. Performance data
for periods prior to the actual inception of the variable account options
is hypothetical and based on the performance of the underlying funds. This
performance data has been adjusted to include all insurance company
contract charges and management fees of the underlying funds.
<PAGE>
For the period ending: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES (3)
All figures are unaudited.
<TABLE>
<CAPTION>
Cumulative Total Return Average Annual Return
Fund -------------------------------------------------------------------------------------
Inception Life of Life of
Variable Options Date(5) 3 Year 5 Year 10 Year Fund 1 Year 3 Year 5 Year 10 Year Fund
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager 9/6/89 52.71% 63.23% n/a 174.86% 13.50% 15.16% 8.84% n/a 11.46%
Asset Manager: Growth 1/3/95 69.30 n/a n/a 105.67 15.98 19.18 n/a n/a 19.80
Balanced 1/3/95 51.75 n/a n/a 70.57 16.05 14.92 n/a n/a 14.31
Contrafund 1/3/95 87.90 n/a n/a 158.85 28.23 23.40 n/a n/a 26.90
Equity-Income 10/9/86 56.88 120.84 272.76 339.63 10.12 16.20 17.17 14.06 12.87
Growth 10/9/86 89.66 149.81 414.42 499.79 37.61 23.78 20.09 17.80 15.78
Growth & Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a 28.11
Growth Opportunities 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a 24.58
High Income 9/19/85 23.23 42.40 95.04 82.63 -5.62 7.21 7.33 6.91 4.64
Index 500 8/27/92 100.78 170.86 n/a 210.26 26.60 26.16 22.05 n/a 19.54
Investment Grade Bond 12/5/88 17.58 29.21 n/a 65.10 7.38 5.55 5.26 n/a 5.10
Overseas 1/28/87 36.70 48.43 128.03 127.29 11.23 10.98 8.22 8.59 7.13
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Calendar Year Return(4)
------------------------------------------------
Variable Options 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Asset Manager 19.50% -7.42% 15.38% 13.04% 19.02%
Asset Manager: Growth n/a n/a 21.49 18.30 23.38
Balanced n/a n/a 12.40 8.48 20.54
Contrafund n/a n/a 37.76 19.66 22.47
Equity-Income 16.76 5.48 33.27 12.73 26.38
Growth 17.51 -1.16 33.54 13.14 21.82
Growth & Income n/a n/a n/a n/a 28.34
Growth Opportunities n/a n/a 30.76 16.67 28.20
High Income 18.68 -2.80 18.98 12.48 16.08
Index 500 8.77 -.79 35.34 21.15 30.91
Investment Grade Bond 9.56 -5.14 15.74 1.78 7.59
Overseas 35.21 .48 8.20 11.67 10.05
- ------------------------------------------------------------------------
</TABLE>
PERFORMANCE COMPARISONS
Performance information for an Option may be compared, in reports and
advertising, to: (1) Standard & Poor's Stock Index (S&P 500), Dow Jones
Industrial Averages, (DJIA), Donoghue Money Market Institutional Averages, or
other unmanaged indices generally regarded as representative of the securities
markets; (2) other variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, Inc. or the Variable Annuity
Research and Data Service, which are widely used independent research firms that
rank mutual funds and other investment companies by overall performance,
investment objectives, and assets; and (3) the Consumer Price Index (measure of
inflation) to assess the real rate of return from an investment in a contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for annuity charges, investment management costs, brokerage
costs and other transaction costs that are normally paid when directly investing
in securities.
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Option may also from time to time compare its performance to average mutual
fund performance figures compiled by Lipper in LIPPER PERFORMANCE ANALYSIS.
Advertisements or information furnished to present shareholders or prospective
investors may also include evaluations of an Option published by nationally
recognized ranking services and by financial publications that are nationally
recognized such as BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING
TIMES, CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING,
FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S
FINANCIAL DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR
MUTUAL FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT
ADVISER, VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY
SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards or
indices for stock and bond market performance. The following are the indices
against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 Index is
composed almost entirely of common stocks of companies listed on the NYSE,
although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
<PAGE>
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly. The Lehman Brothers Government Bond Index (the LEHMAN
GOVERNMENT INDEX) is a measure of the market value of all public obligations of
the U.S. Treasury; all publicly issued debt of all agencies of the U.S.
Government and all quasi-federal corporations; and all corporate debt guaranteed
by the U.S. Government. Mortgage-backed securities, flower bonds and foreign
targeted issues are not included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/ CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between one
and 9.99 years. Total return comprises price appreciation/depreciation and
income as a percentage of the original investment. Indexes are rebalanced
monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
<PAGE>
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollars, UK
pounds sterling, Canadian dollars, Japanese yen, Swiss francs, French francs,
German deutsche mark and Netherlands guilder.
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or grater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index;
35% S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; and 65% S&P
Index and 35% Salomon Brothers High Grade Bond Index. The SEI Median Balanced
Fund Universe measures a group of funds with an average annual equity commitment
and an average annual bond - plus - private - placement commitment greater than
5% each year. SEI must have at least two years of data for a fund to be
considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index, which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
<PAGE>
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Options and may compare the
performance of the Options with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by Integrity or any
of the Sub-Advisers derived from such indices or averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
Integrity may from time to time use computer-based software available through
Morningstar, CDA/Wiesenberger and/or other firms to provide registered
representatives and existing and/or potential owners of the contracts with
individualized hypothetical performance illustrations for some or all of the
Variable Account Options. Such illustrations may include, without limitation,
graphs, bar charts and other types of formats presenting the following
information: (i) the historical results of a hypothetical investment in a single
Option; (ii) the historical fluctuation of the value of a single Option (actual
and hypothetical); (iii) the historical results of a hypothetical investment in
more than one Option; (iv) the historical performance of two or more market
indices in relation to one another and/or one or more Options; (v) the
historical performance of two or more market indices in comparison to a single
Option or a group of Options; (vi) a market risk/reward scatter chart showing
the historical risk/reward relationship of one or more mutual funds or Options
to one or more indices and a broad category of similar anonymous variable
annuity subaccounts; and (vii) Option data sheets showing various information
about one or more Options (such as information concerning total return for
various periods, fees and expenses, standard deviation, alpha and beta,
investment objective, inception date and net assets). We reserve the right to
republish figures independently provided by Morningstar or any similar agency or
service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
The annuity unit value was initially fixed at $1.00 for contracts with assumed
base rates of net investment return of 5% and 3.5% a year, respectively. For
each valuation period thereafter, it is the annuity value for the preceding
valuation period multiplied by the adjusted net investment factor under the
contracts. For each valuation period, the adjusted net investment factor is
equal to the net investment factor reduced for each day in the valuation period
by:
* .00013366 for a contract with an assumed base rate of net investment
return of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment
return of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending on
whether the actual rate of net investment return (after charges) is higher or
lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that rate
is not permitted. Annuity payments under contracts with an assumed base rate of
3.5% will at first be smaller than those under contracts with a 5% assumed base
rate. Payments under the 3.5% contracts, however, will rise more rapidly when
unit values are rising, and payments will fall more slowly when unit values are
falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same and will be based on the amount taken from the
tables in the contract or on our current rates, whichever is more favorable to
the participant. Where the Company's current annuity rates are used,
contributions in the current and five prior participation years will qualify for
the Company's current individual annuity rates applicable to funds derived from
sources outside the Company. The balance of the proceeds will qualify for the
Company's current individual annuity rates for payment of proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If the
annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
<PAGE>
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that, each
payment will be calculated by multiplying the number of annuity units credited
by the average annuity unit value for the second calendar month before the due
date of the payment. The number of annuity units credited equals the initial
periodic payment divided by the annuity unit value for the valuation period that
includes the due date of the first annuity payment. The average annuity unit
value is the average of the annuity unit values for the valuation periods ending
in that month. Each business day is considered a valuation period. Days that
aren't considered business days are added to the next business day and
constitute one valuation period. For example, Saturday, Sunday and Monday are
considered to be one valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value on
a retirement date is enough to fund an annuity with a monthly payment of $363
and that the annuity unit value for the valuation period that includes the due
date of the first annuity payment is $1.05. The number of annuity units credited
under your contract would be 345.71 (363 divided by 1.05 = 345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the number
of units (345.71) times the average annuity unit value ($1.10), or $380.28. If
the average annuity unit value was $1.00 in February, the annuity payment for
April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant may
not surrender or redeem once annuity payments begin. For period certain life
annuities only, if the payee (or the payee and the other annuitant under a joint
and survivor annuity) dies before the period selected ends, the remaining
payments will go to another named payee who may have the right to redeem the
annuity and get the cash value of future guaranteed payments in a lump sum. The
present value of future guaranteed payments for a period certain is based on the
number of payments left, the assumed base rate of net return, the number of
annuity units and the annuity unit value for the date the Company receives a
written request for lump sum payment of remaining values. Assets held in the
Account at least equal to all statutory reserves required for such Separate
Account.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with certain
tax-favored retirement programs, for groups and individuals. Following are brief
descriptions of various types of qualified plans in connection with which
Integrity may issue a contract. Integrity reserves the right to change its
administrative rules, such as minimum contribution amounts, as needed to comply
with the Code as to tax-favored retirement programs.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES
Code Section 408(b) permits eligible individuals to contribute to an individual
retirement program known as a Traditional IRA. An individual who receives
compensation and who has not reached age 70-1/2 by the end of the tax year may
establish a Traditional IRA and make contributions up to the deadline for filing
his or her federal income tax return for that year (without extensions).
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when distributions
may begin. An individual may also rollover amounts distributed from another
Traditional IRA, Roth IRA or another tax-favored retirement program to a
Traditional IRA contract. Your Traditional IRA contract will be issued with a
rider outlining the special terms of your contract that apply to Traditional
IRAs. The Owner will be deemed to have consented to any other amendment unless
the Owner notifies us that he or she does not consent within 30 days from the
date we mail the amendment to the Owner.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408(A) of the Code permits eligible individuals to contribute to an
individual retirement program known as a Roth IRA. An individual who receives
compensation may establish a Roth IRA and make contributions up to the deadline
for filing his or her federal income tax return for that year (without
extensions). Roth IRAs are subject to limitations on the amount that may be
contributed, the persons who are eligible to contribute, and on the time when a
tax-favored distribution may begin. An individual may also rollover amounts
distributed from another Roth IRA or Traditional IRA to a Roth IRA contract.
Your Roth IRA contract will be issued with a rider outlining the special terms
of your contract which apply to Roth IRAs. Any amendment made for the purpose of
complying
<PAGE>
with provisions of the Code and related regulations may be made
without the consent of the Owner. The Owner will be deemed to have consented to
any other amendment unless the Owner notifies us that he or she does not consent
within 30 days from the date we mail the amendment to the Owner.
SIMPLE INDIVIDUAL RETIREMENT ANNUITIES
Currently, we do not issue Individual Retirement Annuities known as a "SIMPLE
IRA" as defined in Section 408(p) of the Code.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits the purchase of tax-sheltered annuities (TSA)
by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. The contract is not
intended to accept other than employee contributions. Such contributions are
excluded from the gross income of the employee until the employee receives
distributions from the contract. The amount of contributions to the TSA is
limited to certain maximums imposed by Code sections 403(b), 415 and 402(g).
Furthermore, the Code sets forth additional restrictions governing such items as
transferability, distributions and withdrawals. Any employee should obtain
competent tax advice as to the tax treatment and suitability of such an
investment. Your contract will be issued with a rider outlining the special
terms that apply to a TSA.
SIMPLIFIED EMPLOYEE PENSIONS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans (SEP-IRAS) for their employees, using the employees' IRAs for such
purposes, if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to IRAs. Employers intending to use the contract in connection with
such plans should seek competent advice. The SEP-IRA will be issued with a rider
outlining the special terms of the contract.
CORPORATE AND SELF-EMPLOYED (H.R. 10 AND KEOGH) PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax-favored retirement plans for employees. The Self-Employed
Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as
"H.R. 10" or "Keogh," permits self-employed individuals also to establish such
tax-favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of the contract in order to provide benefits under
the plans. Employers intending to use the contract in connection with these
plans should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as Owner of the contract has the sole right to the proceeds of the
contract. However, Section 457(g), as added by the Small Business and Jobs
Protection Act (SBJPA) of 1996, provides that on and after August 20, 1996, a
plan maintained by an eligible governmental employer must hold all assets and
income of the plan in a trust, custodial account, or annuity contract for the
exclusive benefit of participants and their beneficiaries. Plans in existence on
August 20, 1996, should have established a trust, custodial account, or annuity
contract by January 1, 1999. Loans to employees may be permitted under such
plans; however, a Section 457 plan is not required to allow loans. Contributions
to a contract in connection with an eligible government plan are subject to
limitations. Those who intend to use the contracts in connection with such plans
should seek competent advice. The Company can request documentation to
substantiate that a qualified plan exists and is being properly administered.
Integrity does not administer such plans.
<PAGE>
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions. Prior
to the enactment of the 1996 SBJPA, distributions of minimum amounts specified
by the Code must have commenced by April 1 of the calendar year following the
calendar year in which the participant reaches age 70-1/2. The SBJPA provides
participants in qualified plans, with the exception of five-percent owners and
Traditional IRA holders, to begin receiving distributions by April 1 of the
calendar year following the later of either (i) the calendar year in which the
employee reaches age 70-1/2, or (ii) the calendar year in which the employee
retires. Additional distribution rules apply after the participant's death.
Failure to make mandatory distributions may result in the imposition of a 50%
penalty tax on any difference between the required distribution amount and the
amount distributed. Distributions to a participant from all plans (other than
457 plans) in a calendar year that exceed a specific limit under the Code are
generally subject to a 15% penalty tax (in addition to any ordinary income tax)
on the excess portion of the distributions. However, the SBJPA of 1996 has
suspended the excise tax on excess distributions. The provision relating to the
excise tax on excess distributions is effective with respect to distributions
received in 1997, 1998 and 1999.
The Taxpayer Relief Act of 1997 creating Roth IRAs eliminates mandatory
distribution at age 70 1/2 for Roth IRAs.
Distributions from a tax-favored plan (not including a Traditional IRA subject
to Code Section 408(a) Roth IRA) to an employee, surviving spouse, or former
spouse who is an alternate payee under a qualified domestic relations order, in
the form of a lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory income tax withholding of
20% of the taxable amount of the distribution, unless (1) the distributee
directs the transfer of such amounts in cash to another plan or Traditional IRA;
or (2) the payment is a minimum distribution required under the Code. The
taxable amount is the amount of the distribution less the amount allocable to
after-tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
We are not permitted to make distributions from a contract unless a request has
been made. It is therefore your responsibility to comply with the minimum
distribution rules. You should consult your tax adviser regarding these rules
and their proper application.
The above description of the federal income tax consequences of the different
types of tax-favored retirement plans which may be funded by the contract is
only a brief summary and is not intended as tax advice. The rules governing the
provisions of plans are extremely complex and often difficult to comprehend.
Anything less than full compliance with all applicable rules, all of which are
subject to change, may have adverse tax consequences. A prospective Owner
considering adoption of a 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 plan.
PART 6 - FINANCIAL STATEMENTS
Ernst & Young LLP, Suite 2100, 400 West Market Street, Louisville, Kentucky
40202, is our independent auditor and serves as independent auditor of the
Separate Account. Ernst & Young LLP on an annual basis will audit certain
financial statements prepared by management and express an opinion on such
financial statements based on their audits.
The financial statements of the Separate Account as of December 31, 1998, and
for the periods indicated in the financial statements and the statutory-basis
financial statements of Integrity as of and for the years ended December 31,
1998 and 1997 included in this SAI have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports included herein.
The financial statements of Integrity should be distinguished from the financial
statements of the Separate Account and should be considered only as they relate
to the ability of Integrity to meet its obligations under the contract. They
should not be considered as relating to the investment performance of the assets
held in the Separate Account.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS INCLUDED IN PART A:
Part 1 - Financial Information*
FINANCIAL STATEMENTS INCLUDED IN PART B:
SEPARATE ACCOUNT I:
Report of Independent Auditors*
Statement of Assets and Liabilities as of December 31, 1998*
Statement of Income for the Year Ended December 31, 1998*
Statements of Changes in Net Assets for the Years Ended December 31,
1998 and 1997* Notes to Financial Statements*
INTEGRITY LIFE INSURANCE COMPANY:
Report of Independent Auditors*
Balance Sheets (Statutory Basis) as of December 31, 1998 and 1997*
Statements of Income (Statutory Basis) for the Years Ended
December 31, 1998 and 1997*
Statements of Changes in Capital and Surplus (Statutory Basis) for
the Years Ended December 31, 1998 and 1997*
Statements of Cash Flows (Statutory Basis) for the Years Ended
December 31, 1998 and 1997*
Notes to Financial Statements (Statutory Basis)*
*To be filed by amendment
(b) EXHIBITS:
The following exhibits are filed herewith:
1. Resolutions of the Board of Directors of Integrity Life
Insurance Company (INTEGRITY) authorizing the
establishment of Separate Account I, the Registrant.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-8903), filed on
September 19, 1986.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement between
Integrity and broker dealers. Incorporated by reference
from post-effective amendment no. 5 to Registrant's Form
N-4 registration statement (File No. 33-8903), filed on
February 28, 1992.
3.(b) Form of Variable Contract Principal Underwriter
Agreement with ARM Securities Corporation. Incorporated
by reference from Registrant's Form N-4 registration
statement (File No. 33-56654), filed on May 1, 1996.
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement (File No.
33-51268), filed on August 24, 1992.
1
<PAGE>
4.(b) Form of group variable annuity contract. Incorporated by
reference from pre-effective amendment no. 1 to
Registrant's Form N-4 registration statement (File No.
33-51268), filed on November 9, 1992.
4.(c) Form of variable annuity certificate. Incorporated by
reference from Registrant's Form S-1 registration
statement (File No. 33-51270), filed on August 24, 1992.
4.(d) Forms of riders to certificate for qualified plans.
Incorporated by reference from pre-effective amendment
no. 1 to Registrant's Form N-4 registration statement
(File No. 33-51268), filed on November 9, 1992.
4.(e) Form of individual variable annuity contract.
Incorporated by reference to pre-effective amendment no.
1 to Registrant's Form S-1 registration statement (File
No. 33-51270), filed on November 10, 1992.
4.(f) Form of rider for use in certain states eliminating the
Guarantee Period Options. Incorporated by reference to
Registrant's Form N-4 registration statement filed on
December 31, 1992.
4.(g) Alternate form of variable annuity contract for use in
certain states. Incorporated by reference from
Registrant's Form N-4 registration statement (File No.
33-56654), filed on May 1, 1996.
5. Form of application. Incorporated by reference to Form
N-4 registration statement (File No. 33-56658), filed on
December 31, 1992.
6.(a) Certificate of Incorporation of Integrity. Incorporated
by reference to post-effective amendment no. 4 to
Registrant's Form N-4 registration statement (File No.
33-56654), filed on April 28, 1995.
6.(b) By-Laws of Integrity. Incorporated by reference to
post-effective amendment no. 4 to Registrant's Form N-4
registration statement (File No. 33-56654), filed on
April 28, 1995.
7. Reinsurance Agreement between Integrity and Connecticut
General Life Insurance Company (CIGNA) effective January
1, 1995. Incorporated by reference from Registrant's
Form N-4 registration statement (File No. 33-56654),
filed on May 1, 1996.
8.(a) Participation Agreement Among Variable Insurance
Products Fund, Fidelity Distributors Corporation ("FDC")
and Integrity, dated November 20, 1990. Incorporated by
reference from post-effective amendment no. 5 to
Registrant's Form N-4 registration statement (File No.
33-8903), filed on February 28, 1992.
8.(b) Participation Agreement Among Variable Insurance
Products Fund II, FDC and Integrity, dated November 20,
1990. Incorporated by reference from post-effective
amendment no. 5 to Registrant's Form N-4 registration
statement (File No. 33-8903), filed on February 28,
1992.
8.(c) Amendment No. 1 to Participation Agreements Among
Variable Insurance Products Fund, Variable Insurance
Products Fund II, FDC, and Integrity. Incorporated by
reference from Registrant's Form N-4 registration
statement (File No. 33-56654), filed on May 1, 1996.
8.(d) Participation Agreement Among Variable Insurance
Products Fund III, FDC and Integrity, dated February 1,
1997. Incorporated by reference from Registrant's Form
N-4 registration statement (File No. 33-56658), filed on
May 1, 1997.
9. Opinion and Consent of Kevin L. Howard. Incorporated by
reference from Registrant's Form N-4 registration
statement (File No. 33-56654), filed on May 1, 1997.
10. Consents of Ernst & Young LLP. (To be filed by
amendment.)
2
<PAGE>
11. Not applicable.
12. Not applicable.
13. Schedule for computation of performance quotations.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-56654), filed on May
1, 1996.
14. Not applicable.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is information regarding the directors and principal
officers of Integrity, the Depositor:
DIRECTORS:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
- ----------------------------------- -----------------------------------
<S> <C>
Mark A. Adkins Director and Operations Control Officer
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
John R. Lindholm Director and President
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
William H. Guth Director and Product Administration Officer
Integrity Life Insurance Company
515 West Market Street
Louisville, KY 40202
Susan M. McEntire Director
Integrity Life Insurance Company
200 East Wilson Bridge Road
Worthington, OH 43085
John R. McGeeney Director, Executive Vice President
Integrity Life Insurance Company and General Counsel
515 West Market Street
Louisville, KY 40202
Martin H. Ruby Director, Chairman of the Board and Chief
Integrity Life Insurance Compan y Executive Officer
515 West Market Street
Louisville, KY 40202
</TABLE>
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville,
Kentucky 40202.)
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
- ----------------------------------- -----------------------------------
<S> <C>
Dennis L. Carr Executive Vice President and Chief Actuary
David E. Ferguson Executive Vice President and Chief Technology
Officer
Edward L. Zeman Executive Vice President and Chief Financial
Officer
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Michael A. Cochran Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH INTEGRITY OR
REGISTRANT
Integrity, the depositor of Separate Account I, is a wholly owned
subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a
holding company engaged in no active business. Integrity owns 100% of stock of
National Integrity Life Insurance Company, a New York stock life insurance
corporation. All outstanding shares of Integrity Holdings, Inc. are owned by ARM
Financial Group, Inc. (ARM), a Delaware corporation which is a financial
services company focusing on the long-term savings and retirement marketplace by
providing retail and institutional products and services throughout the United
States. ARM owns 100% of the stock of (i) ARM Securities Corporation (ARM
SECURITIES), a Minnesota corporation, registered with the SEC as a broker-dealer
and a member of the National Association of Securities Dealers, Inc., (ii)
Integrity Capital Advisors, Inc., a Delaware corporation registered with the SEC
as an investment adviser, (iii) SBM Certificate Company, a Minnesota corporation
registered with the SEC as an issuer of face-amount certificates, and (iv) ARM
Transfer Agency, Inc., a Delaware corporation registered with the SEC as a
transfer and dividend disbursing agency.
ARM Financial Group, Inc. is 100% publicly owned, trading on the New York Stock
Exchange as "ARM."
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1998 there were 10,186 contract owners of Separate
Account I of Integrity.
ITEM 28. INDEMNIFICATION
BY-LAWS OF INTEGRITY. Integrity's By-Laws provide, in Article V, as follows:
Section 5.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the laws of the State of Ohio, subject
to all applicable requirements thereof:
(a) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, r proceeding,
whether civil, criminal, administrative, or investigative, other
than an action by or in the right of the Corporation, by reason of
the fact that he is or was a Director, officer, employee, or agent
of the Corporation or is or was serving at the request of the
Corporation as a Director, trustee, officer, employee, or agent of
another corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees ,judgements, fines, and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, or conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect to any criminal
action or proceeding, he had reasonable cause to believe that his
conduct was unlawful.
(b) The Corporation shall indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of
the fact that he is or was a Director, officer, employee, or agent
of the Corporation, or is or was serving at the request of the
Corporation as a Director, trustee, officer, employee, or agent of
another corporation, domestic or foreign, non-profit or for profit,
partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made in
respect to any of the following:
4
<PAGE>
(1) Any claim, issue, or matter as to which such person is adjudged to
be liable for negligence or misconduct in the performance of his duty
to the Corporation unless, and only to the extent the court of common
pleas or the court in which such action or suit was brought determines
upon application that, despite the adjudication of liability, but in
view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper;
(2) Any action of suit in which the only liability asserted against a
Director is pursuant to Section 1701.95 of the Ohio Revised Code.
(c) To the extent that a Director, trustee, officer, employee, or agent has been
successful in the merits or otherwise in defense of any action, suit, or
proceeding referred to in division (a) and (b) of this Article, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the action, suit, or proceeding.
(d) Any indemnification under divisions (a) and (b) of this Article, unless
ordered by a court, shall be made by the Corporation only as authorized in the
specific case upon the determination that indemnification of the Director,
officer, employee, or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in divisions (a) and (b) of this
Article. Such determination shall be made as follows:
(1) By a majority vote of a quorum consisting of Directors of the
Corporation who were not and are not parties to or threatened with any such
action, suit, or proceeding;
(2) If the quorum described in division (d)(1) of this Article is not
obtainable or if a majority vote of a quorum of disinterested Directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been retained
by or who has performed services for the Corporation or any person to be
indemnified within the past five years;
(3) By the Shareholders; or
(4) By the court of common pleas or the court in which such action,
suit or proceeding was brought.
Any determination made by the disinterested Directors under Article
(d)(1) or by independent legal counsel under Article (d)(2) shall be promptly
communicated to the person who threatened or brought the action or suit by in
the right of the Corporation under (b) of this Article, and within ten days
after receipt of such notification, such person shall have the right to petition
the court of common pleas or the court in which such action or suit was brought
to review the reasonableness of such determination.
(e)(1) Expenses, including attorney's fees, incurred by a Director in defending
the action, suit, or proceeding shall be paid by the Corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the Director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or
failure to act involved an act or omission undertaken with
deliberate intent to cause injury to the Corporation or
undertaken with reckless disregard for the best interests of the
Corporation;
(ii) Reasonably cooperate with the Corporation concerning the
action, suit or proceeding.
(2) Expenses, including attorney's fees, incurred by a Director, officer,
employee, or agent in defending any action, suit, or proceeding referred to in
divisions (a) and (b) of this Article, may be paid by the Corporation as they
are incurred, in advance of the final disposition of the action, suit, or
proceeding as authorized by the Directors in the specific case upon receipt of
an undertaking by or on behalf of the Director, officer, employee, or agent to
repay such amount, if it ultimately is determined that he is not entitled to be
indemnified by the
5
<PAGE>
Corporation.
(f) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to
those seeking indemnification under the Articles or the Regulations for
any agreement, vote of Shareholders or disinterested Directors, or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as to
a person who has ceased to be a Director, officer, employee, or agent
and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
(g) The Corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters
of credit, or self insurance, on behalf of or for any person who is or
was a Director, officer, employee, or agent of the Corporation, or is
or was serving at the request of the Corporation as a Director,
officer, employee, or agent of another corporation, domestic or
foreign, non-profit or for profit, partnership, joint venture, trust,
or other enterprise, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify
him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the Corporation has
a financial interest.
BY-LAWS OF ARM SECURITIES. ARM Securities' By-Laws provide, in Sections 4.01 and
4.02, as follows:
SECTION 4.01 INDEMNIFICATION. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
SECTION 4.02 INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
INSURANCE. The directors and officers of Integrity and ARM Securities are
insured under a policy issued by National Union. The total annual limit on such
policy is $10 million, and the policy insures the officers and directors against
certain liabilities arising out of their conduct in such capacities.
AGREEMENTS. Integrity and ARM Securities, including each director, officer and
controlling person of Integrity and ARM Securities, are entitled to
indemnification against certain liabilities as described in Sections 5.2, 5.3
and 5.5 of the Selling/General Agent Agreement and Section 9 of the Form of
Variable Contract Principal Underwriter Agreement incorporated as Exhibit 3 to
this Registration Statement. Those sections are incorporated by reference into
this response. In addition, Integrity and ARM Securities, including each
director, officer and controlling person of Integrity and ARM Securities, are
entitled to indemnification against certain liabilities as described in Article
VIII of the Participation Agreements incorporated as Exhibits 8(a), 8(b) and
8(c) to this Registration Statement. That article is incorporated by reference
into this response. Certain officers and directors of Integrity are officers and
directors of ARM Securities (see Item 25 and Item 29 of this Part C).
UNDERTAKING. Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) ARM Securities is the principal underwriter for Separate Account I.
ARM Securities also serves as an underwriter for Separate Account II of
Integrity, Separate Accounts I and II of National Integrity Life Insurance
Company, and The Legends Fund, Inc. Integrity is the Depositor of Separate
Accounts I, II, Ten and VUL.
6
<PAGE>
(b) The names and business addresses of the officers and directors of,
and their positions with, ARM Securities are as follows:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH ARM SECURITIES
- ----------------------------------- ----------------------------------------
<S> <C>
Edward J. Haines Director and President
515 West Market Street
Louisville, Kentucky 40202
John R. McGeeney Director, Secretary, General Counsel and
Compliance Officer
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, CA 93710
Ronald Geiger Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Barry G. Ward Controller
515 West Market Street
Louisville, Kentucky 40202
Michael A. Cochran Tax Officer
515 West Market Street
Louisville, Kentucky 40202
William H. Guth Operations Officer
515 West Market Street
Louisville, Kentucky 40202
David L. Anders Marketing Officer
515 West Market Street
Louisville, Kentucky 40202
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
are maintained by Integrity at 515 West Market Street, Louisville, Kentucky
40202.
7
<PAGE>
ITEM 31. MANAGEMENT SERVICES
The contract under which management-related services are provided to Integrity
is discussed under Part 1 of Part B.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16
months old for so long as payments under the variable annuity
contracts may be accepted;
(b) to include either (1) as part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in
the prospectus that the applicant can remove to send for a Statement
of Additional Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly
upon written or oral request.
Integrity represents that the aggregate charges under variable annuity
contracts described in this Registration Statement are reasonable in relation to
the services rendered, the expenses expected to be incurred, and the risks
assumed by Integrity.
8
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant and the Depositor certify that they meet all of the
requirements for effectiveness of this post-effective amendment to their
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and have duly caused this amendment to the Registration Statement to be signed
on their behalf, in the City of Louisville and State of Kentucky on this 1st day
of March, 1999.
SEPARATE ACCOUNT I OF
INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: Integrity Life Insurance Company
(Depositor)
By: /S/ JOHN R. LINDHLOM
----------------------------------
John R. Lindholm
President
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /S/ JOHN R. LINDHOLM
----------------------------------
John R. Lindholm
President
9
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Depositor has duly caused this amendment to the Registration Statement
to be signed on its behalf, in the City of Louisville and State of Kentucky on
this 1st day of March, 1999.
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /S/ JOHN R. LINDHOLM
-------------------------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
PRINCIPAL EXECUTIVE OFFICER: /S/ JOHN R. LINDHOLM
------------------------------------------
John R. Lindholm, President
Date: 03/01/99
PRINCIPAL FINANCIAL OFFICER: /S/ EDWARD L. ZEMAN
------------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 03/01/99
PRINCIPAL ACCOUNTING OFFICER: /S/ BARRY G. WARD
------------------------------------------
Barry G. Ward, Controller
Date: 03/01/99
DIRECTORS:
/S/ MARK A. ADKINS /S/ SUSAN M. MCENTIRE
- ----------------------------- -----------------------------
Mark A. Adkins Susan M. McEntire
Date: 03/01/99 Date: 03/01/99
/S/ MARTIN H. RUBY
- -----------------------------
Martin H. Ruby
Date: 03/01/99
/S/ JOHN R. LINDHOLM /S/ JOHN R. MCGEENEY
- ----------------------------- -----------------------------
John R. Lindholm John R. McGeeney
Date: 03/01/99 Date: 03/01/99
/S/ WILLIAM H. GUTH
- -----------------------------
William H. Guth
Date: 03/01/99
10
