<PAGE>
As filed with the Securities and Exchange Commission
on April 28, 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. 11 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 /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
/X/ on May 1, 1999 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / On (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
<PAGE>
/ / 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 contract
offered by Integrity Life Insurance Company, a subsidiary of ARM Financial
Group, Inc. The contracts 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, referred to as Variable Account Options and Fixed
Accounts. Together, the Variable Account Options and Fixed Account Options
are referred to as INVESTMENT OPTIONS.
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 managed by
Fidelity Management & Research Company. 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:
<TABLE>
<S> <C>
- - VIP Money Market Portfolio: Initial Class - VIP II Investment Grade Bond Portfolio: Initial Class
- - VIP High Income Portfolio: Initial Class - VIP II Asset Manager Portfolio: Initial Class
- - VIP Equity-Income Portfolio: Initial Class - VIP II Index 500 Portfolio: Initial Class
- - VIP Growth Portfolio: Initial Class - VIP II Contrafund Portfolio: Initial Class
- - VIP Overseas Portfolio: Initial Class - VIP II Asset Manager: Growth Portfolio: Initial Class
- - VIP III Balanced Portfolio: Initial Class - VIP III Growth Opportunities Portfolio: Initial Class
- - VIP III Growth & Income Portfolio: Initial Class - VIP III Mid Cap Portfolio: Service Class
</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, less prior withdrawals, 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, Kentucky
40201-0074. The express mail address is Integrity Life Insurance Company,
<PAGE>
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 Appendix C.
* 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.
You can review and copy information about GrandMaster III at the SEC's
Public Reference Room in Washington, D.C. For hours of operation of the
Public Reference Room, please call 1-800-SEC-0330. You may also obtain
information about GrandMaster III on the SEC's Internet site at
http://www.sec.gov, or, upon payment of a duplicating fee, by writing the
SEC's Public Reference Section, Washington, D.C. 20459-6009.
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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Your Variable Annuity Contract............................................................... 1
Your Benefits................................................................................ 1
How Your Contract is Taxed................................................................... 1
Your Contributions........................................................................... 1
Your Investment Options...................................................................... 1
Account Value, Adjusted Account Value and Cash Value ........................................ 2
Transfers.................................................................................... 2
Charges and Fees............................................................................. 2
Withdrawals.................................................................................. 2
Your Initial Right to Revoke................................................................. 2
Risk/Return Summary: Investments and Risks................................................... 2
Year 2000.................................................................................... 3
Table of Annual Fees and Expenses............................................................ 3
Examples..................................................................................... 5
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company............................................................. 6
The Separate Account and the Variable Account Options........................................ 6
Assets of Our Separate Account............................................................... 6
Changes In How We Operate.................................................................... 6
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios .............................................................................. 7
The Portfolios' Investment Adviser..................................................... 7
Investment Objectives of the Portfolios................................................ 7
Fixed Accounts............................................................................... 9
Guaranteed Rate Options................................................................ 9
Renewals of GRO Accounts............................................................ 10
Market Value Adjustments............................................................ 10
Systematic Transfer Option............................................................. 11
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges..................................................................... 11
Annual Administrative Charge................................................................. 11
Reduction or Elimination of Separate Account or Administrative Charges....................... 11
Portfolio Charges............................................................................ 12
State Premium Tax Deduction.................................................................. 12
Contingent Withdrawal Charge................................................................. 12
Reduction or Elimination of the Contingent Withdrawal Charge................................. 12
Transfer Charge..............................................................................
Hardship Waiver.............................................................................. 13
Tax Reserve.................................................................................. 13
</TABLE>
<PAGE>
<TABLE>
<S> <C>
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract............................................................ 13
Your Account Value........................................................................... 14
Units in Our Separate Account................................................................ 14
How We Determine Unit Value.................................................................. 14
Transfers.................................................................................... 15
Withdrawals.................................................................................. 15
Assignments.................................................................................. 15
Death Benefits and Similar Benefit Distributions............................................. 16
Annuity Benefits............................................................................. 16
Annuities.................................................................................... 16
Annuity Payments............................................................................. 17
Timing of Payment............................................................................ 17
How You Make Requests and Give Instructions.................................................. 18
PART 6 - VOTING RIGHTS
Voting Rights................................................................................ 18
How We Determine Your Voting Shares.......................................................... 18
How Portfolio Shares Are Voted............................................................... 18
Separate Account Voting Rights............................................................... 18
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction................................................................................. 19
Your Contract is an Annuity.................................................................. 19
Taxation of Annuities Generally.............................................................. 19
Distribution-at-Death Rules.................................................................. 20
Diversification Standards.................................................................... 20
Tax-Favored Retirement Programs.............................................................. 21
Federal and State Income Tax Withholding..................................................... 21
Impact of Taxes to Integrity................................................................. 21
Transfers Among Investment Options........................................................... 21
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals....................................................................... 21
Income Plus Withdrawal Program............................................................... 21
Dollar Cost Averaging........................................................................ 22
Systematic Transfer Program.................................................................. 22
Customized Asset Rebalancing................................................................. 23
Callan Asset Allocation and Rebalancing Program.............................................. 23
Systematic Contributions..................................................................... 24
Performance Information...................................................................... 24
PART 9 - PRIOR CONTRACTS
Prior Contracts.............................................................................. 25
</TABLE>
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<TABLE>
<S> <C>
GLOSSARY.................................................................................... 30
Appendix A - Financial Information........................................................ 32
Appendix B - Illustration of a Market Value Adjustment.................................... 34
Appendix C - SAI Table of Contents........................................................ 37
</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>
1
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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, the Owner has all of the rights under the
contract until annuity payments begin. If there are Joint Owners, they share
contract rights and they must both sign for any changes or transactions. The
death of the first Joint Owner to die will determine the timing of distribution.
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 they are 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 the 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. You should read Part 7, "Tax Aspects of
the Contracts" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under certain tax-favored retirement
programs, which may be subject to special eligibility and contribution rules.
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. However, most of the withdrawals you make before you are
59 1/2 years old are subject to a 10% federal tax penalty on the taxable
portion of the amounts withdrawn.
YOUR CONTRIBUTIONS
The 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 different 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 a
GROWTH Portfolio. Your value in a Variable Account Option will vary
2
<PAGE>
with the performance of the corresponding Portfolio. For a full
description of each Portfolio, see that Portfolio's prospectus and Statement
of Additional Information.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Accounts added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased by any Market Value Adjustments. Your
Account Value in the GROs can never be decreased below the Minimum Value. 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 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 effective 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 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 as often as you wish. Each
withdrawal must be at least $300. You may withdraw up to 10% of your Account
Value each year without paying withdrawal charges. After the first 10%, there
may be a charge for 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.
3
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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.
4
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5
<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.
6
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TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<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
ANNUAL ADMINISTRATIVE CHARGE
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.
Separate Account Annual Expenses
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (3)
Mortality and Expense Risk Fees.......................................................... 1.20%
Administrative Expenses.................................................................. .15%
------
Total Separate Account Annual Expenses................................................... 1.35%
------
------
</TABLE>
7
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Portfolio Annual Expenses After Reimbursement
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
PORTFOLIO FEES EXPENSES EXPENSES
- --------- ---------- -------- -------------
<S> <C> <C> <C>
VIP Money Market: Initial Class..................... .20% .10% .30%
VIP High Income: Initial Class...................... .58% .12% .70%
VIP Equity-Income: Initial Class.................... .49% .08% .57%(4)
VIP Growth: Initial Class........................... .59% .08% .67%(4)
VIP Overseas: Initial Class......................... .74% .15% .89%(4)
VIP II Investment Grade Bond: Initial Class......... .43% .14% .57%
VIP II Asset Manager: Initial Class................. .54% .09% .63%(4)
VIP II Index 500: Initial Class..................... .24% .04% .28%
VIP II Contrafund: Initial Class.................... .59% .07% .66%(4)
VIP II Asset Manager: Growth: Initial Class......... .59% .14% .73%(4)
VIP III Balanced: Initial Class..................... .44% .14% .58%(4)
VIP III Growth Opportunities: Initial Class......... .59% .11% .70%(4)
VIP III Growth & Income: Initial Class.............. .49% .11% .60%(4)
VIP III Mid Cap Portfolio: Service Class............ .56% .54% 1.10%(4)(5)
</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) Part of the brokerage commissions that certain Portfolios pay was used to
reduce the Portfolios' expenses. In addition, certain Portfolios, or FMR on
behalf of 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,
.35% for VIP II Index 500 Portfolio, .70% for VIP II Contrafund Portfolio,
.73% for VIP II Asset Manager: Growth Portfolio, .59% for VIP III Balanced
Portfolio, .71% for VIP III Growth Opportunities Portfolio, .61% for VIP III
Growth & Income Portfolio, and 115.85% for VIP III Mid Cap Portfolio.
8
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5) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule
12b-1 Plan adopted by the underlying Mutual Funds.
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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: Initial Class......................... $ 97.66 $114.61 $133.86 $203.09
VIP High Income: Initial Class.......................... $101.76 $127.03 $154.77 $245.84
VIP Equity-Income: Initial Class........................ $100.53 $123.32 $148.53 $233.20
VIP Growth: Initial Class............................... $101.55 $126.41 $153.73 $243.75
VIP Overseas: Initial Class............................. $103.91 $133.51 $165.60 $267.61
VIP II Investment Grade Bond: Initial Class............. $100.42 $123.01 $148.01 $232.14
VIP II Asset Manager: Initial Class..................... $101.14 $125.17 $151.66 $239.54
VIP II Index 500: Initial Class......................... $ 98.17 $116.17 $136.49 $208.53
VIP II Contrafund: Initial Class........................ $101.76 $127.03 $154.77 $245.84
VIP II Asset Manager: Growth: Initial Class............. $102.06 $127.96 $156.32 $248.98
VIP III Balanced: Initial Class......................... $100.63 $123.63 $149.06 $234.26
VIP III Growth Opportunities: Initial Class............. $101.86 $127.34 $155.29 $246.89
VIP III Growth & Income: Initial Class.................. $100.83 $124.25 $150.10 $236.37
VIP III Mid Cap: Service Class.......................... $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>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class.......................... $17.66 $54.61 $ 93.86 $203.09
VIP High Income: Initial Class........................... $21.76 $67.03 $114.77 $245.84
VIP Equity-Income: Initial Class......................... $20.53 $63.32 $108.53 $233.20
VIP Growth: Initial Class................................ $21.55 $66.41 $113.73 $243.75
VIP Overseas: Initial Class.............................. $23.91 $73.51 $125.60 $267.61
VIP II Investment Grade Bond: Initial Class.............. $20.42 $63.01 $108.01 $232.14
VIP II Asset Manager: Initial Class...................... $21.14 $65.17 $111.66 $239.54
VIP II Index 500: Initial Class.......................... $18.17 $56.17 $ 96.49 $208.53
VIP II Contrafund: Initial Class......................... $21.76 $67.03 $114.77 $245.84
VIP II Asset Manager: Growth: Initial Class.............. $22.06 $67.96 $116.32 $248.98
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
VIP III Balanced: Initial Class.......................... $20.63 $63.63 $109.06 $234.26
VIP III Growth Opportunities: Initial Class.............. $21.86 $67.34 $115.29 $246.89
VIP III Growth & Income: Initial Class................... $20.83 $64.25 $110.10 $236.37
VIP III Mid Cap: Service Class........................... $30.57 $93.39 $158.52 $332.09
</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. This 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.
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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 47 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 in
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 was established in 1986, and is maintained under the
insurance laws of the State of Ohio. It is a unit investment trust, which is a
type of investment company, registered with the Securities and Exchange
Commission (the SEC). 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 Investment Company Act of 1940 ("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 Option(s) to invest in a mutual fund other than or in
addition to the Portfolios;
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- - 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 are currently
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with FMR 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 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
(FMR) 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, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks, and convertible securities,
with an emphasis on lower-quality debt securities.
---------- 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 that 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.
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---------- 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
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
---------- 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>
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---------- 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 approximately 65% of assets in stocks and other equity securities,
and the remainder in bonds and other debt securities, including lower-quality
debt securities, when its outlook is neutral.
---------- 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 two, 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. 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
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interest at the Guaranteed Interest Rate. We credit interest daily at an
effective annual rate equal to the Guaranteed Interest Rate.
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 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, even though they may have different
maturity dates.
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. If you want
something different, you can tell us 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. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Guarantee Period. In addition, we won't make a Market
Value Adjustment 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, less previous
withdrawals from the GRO Account and less any applicable contingent withdrawal
and administrative charges, plus 3% interest compounded annually. Withdrawal
charges and the administrative expense charge can invade the Minimum Value.
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
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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 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 made to the STO Account during the calendar quarter for which
the rate has been 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%. See "Systematic Transfer Program" in Part 8 for
details on this program. 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 equal to an
effective annual rate of 1.35% of the Account Value in the Variable Account
Options. We can't increase this daily expense rate without your consent.
Of the 1.35% total charge, .15% of the Account Value of the Variable Account
Options 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 we 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, annuitization, or termination of a contract during a contract year.
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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 we anticipate expense savings.
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 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 of 8% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contribution year. We do 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 in the withdrawal charge
calculation. 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 charges 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 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. See "Death Benefits and Similar Benefit
Distributions" in Part 5.
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REDUCTION OR ELIMINATION OF THE CONTINGENT WITHDRAWAL CHARGE
We can reduce or eliminate the contingent withdrawal charge for individuals
or a group of individuals if we anticipate expense savings. 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 do 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 that 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 "Tax-Favored Retirement Programs" in the SAI.
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 nine
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) both the contribution and instructions
for allocation among the Investment Options
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at our Administrative Office, 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.
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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.
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.
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 as of 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.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option at 4 p.m. Eastern Time
on each Business Day.
The unit value of each Variable Account Option for any Business Day is equal to
the unit value for the previous Business Day 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 equal to 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.
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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.
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 believe 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 Investment Options,
pro-rata, in the same proportion that their value bears to your total Account
Value. For example, if your Account Value is 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
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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 in a form acceptable to us.
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) Your highest Account Value on any contract anniversary before age 81,
plus subsequent contributions and minus subsequent withdrawals (after
being adjusted for associated charges and adjustments);
(b) Total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); and
(c) Your current Account Value.
The reductions in the death benefit described in (a) and (b) above for
subsequent withdrawals will be calculated on a pro-rata basis with respect to
Account Value at the time of withdrawal.
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. A death
benefit won't 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 maximum issue age for the Annuitant is 85 years old.
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.
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Annuity benefits may be a lump sum payment or paid out over time. 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, less any pro-rata annual
administrative charge, 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 payments, which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must be
at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200 annually.
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, which is the LIFE AND TEN YEARS CERTAIN ANNUITY. 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:
A LIFE AND TEN YEARS CERTAIN 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 payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period you select when you select the type of annuity you want. If the Annuitant
dies before the end of the period selected, the Annuitant's beneficiary can
choose to receive the total present value of future payments in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant or the lives of the
Annuitant and another annuitant under a joint and survivor annuity. If the
Annuitant (or the Annuitant and the other annuitant under a joint and survivor
annuity) dies before the period selected ends, the remaining payments will go to
the Annuitant's beneficiary. The Annuitant's beneficiary can redeem the annuity
and receive the present value of future guaranteed payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life of
the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
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 Annuitant's age (or
Annuitant 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 contract rates.
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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.
TIMING OF PAYMENT
We normally 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 we have not received instructions 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 proportion 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.
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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.
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 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.
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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 from
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 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) a result of the taxpayer becoming disabled within the meaning of Code
Section 72(m)(7);
(5) from certain qualified plans (note, however, other penalties may
apply);
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(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) for the 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.
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 ON INTEGRITY
The contracts allow Integrity to charge the Separate Account for taxes.
Integrity can also set up reserves for taxes.
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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.
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
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. 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 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.
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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.
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 your Investment 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.
30
<PAGE>
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.
When you select this program, your account values will be allocated and your
variable portfolios will automatically be rebalanced 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 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, quarterly, or semi-annual withdrawals from your checking account to
make your contributions. 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 several years. An AVERAGE ANNUAL TOTAL RETURN shows the
hypothetical yearly return that would produce the same cumulative total return
if the Investment Option experienced exactly the same return
31
<PAGE>
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.
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.
32
<PAGE>
PART 9 - PRIOR CONTRACTS
DEATH BENEFIT INFORMATION FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997
(IDENTIFIED UNDER GRANDMASTER II MARKETING NAME)
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 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 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.
FOR CONTRACTS ISSUED BEFORE FEBRUARY 15, 1997 (IDENTIFIED UNDER GRANDMASTER II
MARKETING NAME) (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:
CONTINGENT WITHDRAWAL CHARGE
33
<PAGE>
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 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 us 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.
TABLE OF ANNUAL FEES AND EXPENSES FOR CONTRACTS ISSUED BEFORE JANUARY 1, 1997.
Contract Owner Transaction Expenses
- ------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Sales Load on Purchases . . . . . . . . . . . . . . . . . . . . . . . . $0
Deferred Sales Load (1) . . . . . . . . . . . . . . . . . . . . 7% Maximum
Exchange Fee (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . $0
Annual Administrative Charge (3) . . . . . . . . . . . . . . . . . . . $30
</TABLE>
Separate Account Annual Expenses (as a
percentage of average account value) (4)
- ----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Mortality and Expense Risk Fees . . . . . . . . . . . . . . . . . . .1.20%
Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . .15%
-----
Total Separate Account Annual Expenses. . . . . . . . . . . . . . . .1.35%
-----
-----
</TABLE>
Fund Annual Expenses After Reimbursement
(as a percentage of average net assets) (5)
- -------------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees (6) Expenses Expenses
- --------- ---------- -------- ------------
<S> <C> <C> <C>
VIP Money Market. . . . . . . . . . . . . . . . . . .21% .10% .31%
VIP High Income . . . . . . . . . . . . . . . . . . .59% .12% .71%(6)
VIP Equity-Income . . . . . . . . . . . . . . . . . .50% .08% .58%
VIP Growth. . . . . . . . . . . . . . . . . . . . . .60% .09% .69%
VIP Overseas. . . . . . . . . . . . . . . . . . . . .75% .17% .92%
VIP II Investment Grade Bond. . . . . . . . . . . . .44% .14% .58%
VIP II Asset Manager. . . . . . . . . . . . . . . . .55% .10% .65%(6)(7)
VIP II Index 500. . . . . . . . . . . . . . . . . . .24% . 4% .28%(7)
VIP II Contrafund . . . . . . . . . . . . . . . . . .60% .11% .71%(6)
VIP II Asset Manager: Growth . . . . . . . . . . . .60% .17% .77%(6)(7)
VIP III Balanced. . . . . . . . . . . . . . . . . . .45% .16% .61%(6)
VIP III Growth Opportunities. . . . . . . . . . . . .60% .14% .74%(6)
VIP III Growth & Income . . . . . . . . . . . . . . .49% .21% .70%(6)(8)
</TABLE>
- --------------------
(1) You may make a partial 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, less withdrawals during the current
contract year, without assessment of any withdrawal charge.
(2) After the first twelve transfers during a contract year, Integrity has the
right to impose a transfer charge of $20 per transfer. This charge would not
apply to transfers made for dollar cost averaging, asset rebalancing, or
systematic transfers.
(4) The annual administrative charge is $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.
(4) See "Deductions and Charges - Separate Account Charges" in Part 4.
(5) In the Funds' prospectus, see "Management, Distribution and Service Fees."
(6) A portion of the brokerage commissions that certain funds pay was used to
reduce funds' expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would have
been .57% for VIP Equity-Income Portfolio, .67% for VIP Growth Portfolio, .90%
for VIP Overseas Portfolio, .64% for VIP II Asset Manager Portfolio, .68% for
VIP II Contrafound Portfolio, .76% for VIP II Asset Manager: Growth Portfolio,
and .73% for VIP III Growth Opportunities Portfolio, and .60% for VIP III
Balanced Portfolio.
(7) The investment adviser agreed to reimburse a portion of VIP II Index 500
Portfolio's expenses during the period. Without this reimbursement, the fund's
management fee, other expenses and total expenses would have been .27%, .13%,
and .40%, respectively.
(8) Annualized
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. . . . . . . . . . . . . $87.66 $104.61 $123.86 $203.09
VIP High Income . . . . . . . . . . . . . $91.86 $117.34 $145.29 $246.89
VIP Equity-Income . . . . . . . . . . . . $90.53 $113.32 $138.53 $233.20
VIP Growth. . . . . . . . . . . . . . . . $91.65 $116.72 $144.25 $244.80
VIP Overseas. . . . . . . . . . . . . . . $94.11 $124.13 $156.63 $269.66
VIP II Investment Grade Bond. . . . . . . $90.53 $113.32 $138.53 $233.20
VIP II Asset Manager. . . . . . . . . . . $92.17 $118.27 $146.84 $250.03
VIP II Index 500. . . . . . . . . . . . . $87.45 $103.98 $122.81 $200.91
VIP II Contrafund . . . . . . . . . . . . $92.17 $118.27 $146.84 $250.03
VIP II Asset Manager: Growth. . . . . . . $93.50 $122.28 $153.55 $263.50
VIP III Balanced. . . . . . . . . . . . . $91.96 $117.65 $145.81 $247.94
VIP III Growth Opportunities. . . . . . . $92.47 $119.19 $148.39 $253.15
VIP III Growth & Income . . . . . . . . . $91.76 $117.03 $144.77 $245.84
</TABLE>
Expenses per $1,000 investment if you do not 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. . . . . . . . . . . . . $17.66 $54.61 $ 93.86 $203.09
VIP High Income . . . . . . . . . . . . . $21.86 $67.34 $115.29 $246.89
VIP Equity-Income . . . . . . . . . . . . $20.53 $63.32 $108.53 $233.20
VIP Growth. . . . . . . . . . . . . . . . $21.65 $66.72 $114.25 $244.80
VIP Overseas. . . . . . . . . . . . . . . $24.11 $74.13 $126.63 $269.66
VIP II Investment Grade Bond. . . . . . . $20.53 $63.32 $108.53 $233.20
VIP II Asset Manager. . . . . . . . . . . $22.17 $68.27 $116.84 $250.03
VIP II Index 500. . . . . . . . . . . . . $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund . . . . . . . . . . . . $22.17 $68.27 $116.84 $250.03
VIP II Asset Manager: Growth. . . . . . . $23.50 $72.28 $123.55 $263.50
VIP III Balanced. . . . . . . . . . . . . $21.96 $67.65 $115.81 $247.94
VIP III Growth Opportunities. . . . . . . $22.47 $69.19 $118.39 $253.15
VIP III Growth & Income . . . . . . . . . $21.76 $67.03 $114.77 $245.84
</TABLE>
Expenses per $1,000 investment if you elect the normal form of annuity 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
Funds as they were for the year ended December 31, 1996, except for VIP III
Growth & Income Portfolio, which were based on estimated current expenses.
ACTUAL FUND 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.
RETIREMENT DATE
The Retirement Date will be the date you specify, but no later than your 85th
birthday or the 10th Contract Anniversary, whichever is later.
CALLAN ASSET ALLOCATION AND REBALANCING PROGRAM
The Callan Asset Allocation and Rebalancing Program uses the 4-year Guaranteed
Rate Option for the Fixed Income Investment Sector of the Model.
34
<PAGE>
HARDSHIP WAIVERS
Hardship Waivers aren't available.
CONTRACTS ISSUED TO OREGON RESIDENTS
If you are a resident of Oregon and your Contract was issued before 10/16/97
(Contract Form No. 11960CNQ-I-OR), additional contributions into Investment
Options are accepted, including the 10-Year GRO Account, and the prospectus
provisions relating to these items apply.
FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
ANNUITY PAYMENTS
For contracts issued before May 1, 1999, additional annuitization options may
have been available.
INVESTMENT OPTIONS
For contracts issued before May 1, 1999, Fidelity Investments VIP III Mid Cap
Fund is not yet available.
35
<PAGE>
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 ("You," "Your") - 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.
BUSINESS DAY - any day that the New York Stock Exchange is open.
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 Options, which offer durations of two, 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 for withdrawals,
surrenders, transfers and certain other transactions made before the GRO Account
expires.
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 any administrative charges.
OWNER - 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 the Separate
Account 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 a variable account option.
36
<PAGE>
UNIT VALUE - the value of each unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you
under the contract, other than the GROs and STO. 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.
37
<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.
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
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>
*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 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.
38
<PAGE>
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
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: 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.
39
<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 at the end of the three year period 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 lower
number of complete months. If we don't declare a rate for the exact time
remaining, we will use a formula to find a rate using 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:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 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 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$51,688.58 = $57,881.25 - $3,192.67 - $3,000.00
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:
40
<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:
$957.18 = [($14,211.87+ $783.91)/(1 - .06)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,741.09 = $20,000.00 + $783.91 + $957.18
The ending Account Value would be:
$36,140.16 = $57,881.25 - $21,741.09
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:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 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 6% would be assessed against the $50,000 original
contribution:
$3,000.00 = $50,000.00 X .06
Thus, the amount payable on a full withdrawal would be:
$56,564.96 = $57,881.25 + $1,683.71 - $3,000.00
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:
41
<PAGE>
$880.75 = [($14,211.87 - $413.41)/(1 - .06)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,467.34 = $20,000.00 - $413.41 + $880.75
The ending Account Value would be:
$37,413.91 = $57,881.25 - $20,467.34
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.
42
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
<TABLE>
<S> <C>
Part 1 - Integrity and Custodian............................................................. 1
Part 2 - Distribution of the Contracts....................................................... 1
Part 3 - Performance Information............................................................. 2
Part 4 - Determination of Accumulation Values................................................ 7
Part 5 - Tax-Favored Retirement Programs..................................................... 7
Traditional Individual Retirement Annuities............................................ 7
Roth Individual Retirement Annuities................................................... 7
SIMPLE Individual Retirement Annuities................................................. 8
Tax Sheltered Annuities................................................................ 8
Simplified Employee Pensions........................................................... 8
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans............................................................. 8
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations........................................................ 8
Distributions Under Tax-Favored Retirement Programs................................... 9
Part 6 - Financial Statements................................................................ 10
</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 (GrandMaster III)
Name:
Address:
City: _________________________________ State: _____________ Zip: __________
43
<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..................................................................................1
Part 2 - Distribution of the Contracts............................................................................1
Part 3 - Performance Information..................................................................................2
Part 4 - Determination of Accumulation Values.....................................................................7
Part 5 - Tax Favored Retirement Programs..........................................................................7
Traditional Individual Retirement Annuities..................................................................7
Roth Individual Retirement Annuities.........................................................................8
SIMPLE Individual Retirement Annuities.......................................................................8
Tax Sheltered Annuities......................................................................................8
Simplified Employee Pensions.................................................................................8
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit Sharing Plans..............................8
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations......................8
Distributions Under Tax Favored Retirement Programs..........................................................9
Part 6 - Financial Statements....................................................................................10
</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
organized in 1966 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 1996 were $13,823,048, 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.
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 Account isn't a separate entity from Integrity and its operations
form a part of Integrity, it isn't taxed separately as a "regulated
investment company" under Subchapter M of the Code. Investment income and
realized capital gains on the assets of the Separate Account are reinvested
and taken into account in determining the accumulation value. Under existing
federal income tax law, the Separate Account's 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.
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.
1
<PAGE>
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 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
2
<PAGE>
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
3
<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>
--------------------------------------------------------------- -----------------
VIP II Asset Manager 9/3/91 6.42% 8.33% n/a 11.47%
VIP II Asset Manager: Growth 2/8/95 8.91% n/a n/a 19.21%
VIP III Balanced 2/19/97 8.98% n/a n/a 13.37%
VIP II Contrafund 2/8/95 21.15% n/a n/a 26.28%
VIP Equity-Income 9/3/91 3.05% 16.77% n/a 16.61%
VIP Growth 9/3/91 30.54% 19.73% n/a 18.77%
VIP III Growth & Income 2/14/97 20.77% n/a n/a 23.53%
VIP III Growth Opportunities 2/19/97 15.86% n/a n/a 20.31%
VIP High Income 2/19/93 -12.69% 6.79% n/a 8.62%
VIP II Index 500 3/4/93 19.52 21.71% n/a 19.48%
VIP II Investment Grade Bond 9/3/91 .30% 4.69% n/a 6.43%
---------------------------------------------------------------------------------------------------
VIP Overseas 9/3/91 4.16% 7.70% n/a 8.50%
---------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
(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.
5
<PAGE>
For the period ending: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES (1) All figures are unaudited.
<TABLE>
<CAPTION>
FUND CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN
----- ---------------------------------------------------------------------
INCEPTION LIFE OF LIFE OF
VARIABLE OPTIONS DATE (3) 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>
VIP II Asset Manager 9/6/89 52.71% 63.23% n/a 174.86% 13.50% 15.16% 8.84% n/a 11.46%
VIP II Asset Manager 1/3/95 69.30 n/a n/a 105.67 15.98 19.18 n/a n/a 19.80
Growth
VIP III Balanced 1/3/95 51.75 n/a n/a 70.57 16.05 14.92 n/a n/a 14.31
VIP II Contrafund 1/3/95 87.90 n/a n/a 158.85 28.23 23.40 n/a n/a 26.90
VIP Equity-Income 10/9/86 56.88 120.84 272.76 339.63 10.12 16.20 17.17 14.06 12.87
VIP Growth 10/9/86 89.66 149.81 414.42 499.79 37.61 23.78 20.09 17.80 15.78
VIP III Growth
& Income 12/31/96 n/a n/a n/a 64.07 27.84 n/a n/a n/a 28.11
VIP III Growth 1/3/95 83.87 n/a n/a 140.42 22.93 22.51 n/a n/a 24.58
Opportunities
VIP High Income 9/19/85 23.23 42.40 95.04 82.63 -5.62 7.21 7.33 6.91 4.64
VIP II Index 500 8/27/92 100.78 170.86 n/a 210.26 26.60 26.16 22.05 n/a 19.54
VIP II Investment
Grade Bond 12/5/88 17.58 29.21 n/a 65.10 7.38 5.55 5.26 n/a 5.10
- --------------------------------------------------------------------------------------------------------
VIP 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(2)
---------------------------------------
VARIABLE OPTIONS 1993 1994 1995 1996 1997
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VIP II Asset Manager 19.50% -7.42% 15.38% 13.04% 19.02%
VIP II Asset Manager n/a n/a 21.49 18.30 23.38
Growth
VIP III Balanced n/a n/a 12.40 8.48 20.54
VIP II Contrafund n/a n/a 37.76 19.66 22.47
VIP Equity-Income 16.76 5.48 33.27 12.73 26.38
VIP Growth 17.51 -1.16 33.54 13.14 21.82
VIP III Growth
& Income n/a n/a n/a n/a 28.34
VIP III Growth n/a n/a 30.76 16.67 28.20
Opportunities
VIP High Income 18.68 -2.80 18.98 12.48 16.08
VIP II Index 500 8.77 -.79 35.34 21.15 30.91
VIP II Investment
Grade Bond 9.56 -5.14 15.74 1.78 7.59
- -------------------------------------------------------------
VIP Overseas 35.21 .48 8.20 11.67 10.05
- -------------------------------------------------------------
</TABLE>
1) 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. Non-standard
performance is since the Portfolio's inception date, which may predate
the separate account.
2) Italicized returns are calculated from the inception date through
year-end.
3) 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.
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
6
<PAGE>
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.
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.
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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.
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.
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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.
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.
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PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the New
York Stock Exchange is open for trading. The accumulation units are valued as of
the close of business on the New York Stock Exchange, which currently is 4:00
p.m., Eastern time. Each Option's accumulation unit value is calculated
separately. For all Options, the accumulation unit value is computed by dividing
the value of the securities held by the Option plus any cash or other assets,
less its liabilities, by the number of outstanding units. Securities are valued
using the amortized cost method of valuation, which approximates market value.
Under this method of valuation, the difference between the acquisition
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cost and value at maturity is amortized by assuming a constant
(straight-line) accretion of a discount or amortization of a premium to
maturity. Cash, receivables and current payables are generally carried at
their face value.
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 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.
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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.
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DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions.
Participants in qualified plans, with the exception of five-percent owners,
must begin receiving distributions by April 1 of the calendar year following
the later of either (i) the year in which the employee reaches age 70-1/2 or
(ii) the calendar year in which the employee retires. Participants in
Traditional IRAs must begin receiving distributions by April 1 of the
calendar year following the year in which the employee reaches age 70-1/2.
Additional distribution rules apply after the participant's death. If you
don't take mandatory distributions you may owe a 50% penalty tax on any
difference between the required distribution amount and the amount
distributed. Owners of traditional IRAs and five percent owners must begin
distributions by age 70-1/2.
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.
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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.
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Prospectus
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by Integrity Life Insurance Company, a subsidiary of ARM Financial Group, Inc.
The contracts 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, referred to as Variable Account Options and Fixed Accounts. Together, the
Variable Account Options and Fixed Account Options are referred to as INVESTMENT
OPTIONS.
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 managed by
Fidelity Management & Research Company. 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:
<TABLE>
<CAPTION>
<S> <C>
o VIP Money Market Portfolio: Initial Class o VIP II Investment Grade Bond Portfolio: Initial Class
o VIP High Income Portfolio: Service Class o VIP II Asset Manager Portfolio: Service Class
o VIP Equity-Income Portfolio: Service Class o VIP II Index 500 Portfolio: Initial Class
o VIP Growth Portofolio: Service Class o VIP II Contrafund Portfolio: Service Class
o VIP Overseas Portfolio: Service Class o VIP II Asset Manager: Growth Portfolio Service Class
o VIP III Balanced Portfolio: Service Class o VIP III Growth Opportunities Portfolio Service Class
o VIP III Growth & Income Portfolio: Service Class o VIP III Mid Cap Portfolio: Service Class
</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, less prior withdrawals, 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, Kentucky
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
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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 Appendix C.
* 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.
You can review and copy information about IQ the SMARTAnnuity at the SEC's
Public Reference Room in Washington, D.C. For hours of operation of the
Public Reference Room, please call 1-800-SEC-0330. You may also obtain
information about GrandMaster III on the SEC's Internet site at
http://www.sec.gov, or, upon payment of a duplicating fee, by writing the
SEC's Public Reference Section, Washington, D.C. 20459-6009.
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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART 1 - SUMMARY PAGE
<S> <C>
Your Variable Annuity Contract..................................................................1
Your Benefits...................................................................................1
How Your Contract is Taxed......................................................................1
Your Contributions..............................................................................1
Your Investment Options.........................................................................1
Account Value, Adjusted Account Value and Cash Value ...........................................2
Transfers.......................................................................................2
Charges and Fees................................................................................2
Withdrawals.....................................................................................2
Your Initial Right to Revoke....................................................................2
Risk/Return Summary: Investments and Risks......................................................2
Year 2000.......................................................................................3
Table of Annual Fees and Expenses...............................................................3
Examples........................................................................................5
PART 2 - INTEGRITY AND THE SEPARATE ACCOUNT
Integrity Life Insurance Company................................................................6
The Separate Account and the Variable Account Options...........................................6
Assets of Our Separate Account..................................................................6
Changes In How We Operate.......................................................................6
PART 3 - YOUR INVESTMENT OPTIONS
The Portfolios .................................................................................7
The Portfolios' Investment Adviser........................................................7
Investment Objectives of the Portfolios...................................................7
Fixed Accounts..................................................................................9
Guaranteed Rate Options...................................................................9
Renewals of GRO Accounts..............................................................10
Market Value Adjustments..............................................................10
Systematic Transfer Option...............................................................11
PART 4 - DEDUCTIONS AND CHARGES
Separate Account Charges.......................................................................11
Annual Administrative Charge...................................................................11
Reduction or Elimination of Separate Account or Administrative Charges.........................11
Portfolio Charges..............................................................................12
State Premium Tax Deduction....................................................................12
Contingent Withdrawal Charge...................................................................12
Reduction or Elimination of the Contingent Withdrawal Charge...................................12
Transfer Charge................................................................................12
Hardship Waiver................................................................................12
Tax Reserve....................................................................................12
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract..............................................................12
Your Account Value.............................................................................13
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Units in Our Separate Account..................................................................13
How We Determine Unit Value....................................................................13
Transfers......................................................................................14
Withdrawls.....................................................................................14
Assignments....................................................................................14
Death Benefits and Similar Benefit Distributions...............................................14
Annuity Benefits...............................................................................15
Annuities......................................................................................16
Annuity Payments...............................................................................16
Timing of Payment..............................................................................17
How You Make Requests and Give Instructions....................................................17
PART 6 - VOTING RIGHTS
Voting Rights..................................................................................17
How We Determine Your Voting Shares............................................................17
How Portfolio Shares Are Voted.................................................................18
Separate Account Voting Rights.................................................................18
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction...................................................................................18
Your Contract is an Annuity....................................................................18
Taxation of Annuities Generally................................................................18
Distribution-at-Death Rules....................................................................19
Diversification Standards......................................................................20
Tax-Favored Retirement Programs................................................................20
Federal and State Income Tax Withholding.......................................................20
Impact of Taxes to Integrity...................................................................20
Transfers Among Investment Options.............................................................20
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals.........................................................................21
Income Plus Withdrawal Program.................................................................21
Dollar Cost Averaging..........................................................................22
Systematic Transfer Program....................................................................22
Customized Asset Rebalancing...................................................................22
Callan Asset Allocation and Rebalancing Program................................................22
Systematic Contributions.......................................................................22
Performance Information........................................................................23
PART 9 - PRIOR CONTRACTS
Prior Contracts................................................................................24
GLOSSARY.......................................................................................28
Appendix A - Financial Information...........................................................30
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Appendix B - Illustration of a Market Value Adjustment.......................................32
Appendix C - SAI Table of Contents...........................................................34
</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
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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, the Owner has all of the rights under the
contract until annuity payments begin. If there are Joint Owners, they share
contract rights and they must both sign for any changes or transactions. The
death of the first Joint Owner to die will determine the timing of distribution.
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 they are 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 the 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. You should read Part 7, "Tax Aspects of
the Contracts" for more information, and possibly consult a tax adviser. The
contract can also provide your benefits under certain tax-favored retirement
programs, which may be subject to special eligibility and contribution rules.
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.
However, most of the withdrawals you make before you are 591/2years old are
subject to a 10% federal tax penalty on the taxable portion of the amounts
withdrawn.
YOUR CONTRIBUTIONS
The 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 different 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
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Variable Account Option, which invests in a GROWTH Portfolio. Your value in a
Variable Account Option will vary with the performance of the corresponding
Portfolio. For a full description of each Portfolio, see that Portfolio's
prospectus and Statement of Additional Information.
ACCOUNT VALUE, ADJUSTED ACCOUNT VALUE AND CASH VALUE
Your ACCOUNT VALUE consists of the value of your Fixed Accounts added to the
value of your Variable Account Options. Your ADJUSTED ACCOUNT VALUE is your
Account Value, as increased or decreased by any Market Value Adjustments. Your
Account Value in the GROs can never be decreased below the Minimum Value. 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 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 effective 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 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 as often as you wish. Each withdrawal
must be at least $300. You may withdraw up to 10% of your Account Value each
year without paying withdrawal charges. After the first 10%, there may be a
charge for 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.
2
<PAGE>
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.
4
<PAGE>
TABLE OF ANNUAL FEES AND EXPENSES
Contract Owner Transaction Expenses
<TABLE>
<CAPTION>
<S> <C>
Sales Load on Purchases........................................................................... $0
Exchange Fee (1).................................................................................. $0
</TABLE>
Annual Administrative Charge
<TABLE>
<CAPTION>
<S> <C>
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.
Separate Account Annual Expenses
(as a percentage of average account value) (2)
- ----------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Mortality and Expense Risk Fees.............................................................. 1.30%
Administrative Expenses...................................................................... .15%
-----
Total Separate Account Annual Expenses....................................................... 1.45%
-----
-----
</TABLE>
5
<PAGE>
Portfolio Annual Expenses After Reimbursement
(as a percentage of average net assets)(3)
- ------------------------------------------
<TABLE>
<CAPTION>
Management Other Total Annual
PORTFOLIO Fees Expenses Expenses
- --------- ---------- -------- ------------
<S> <C> <C> <C>
VIP Money Market: Initial Class..................... .20% .10% .30%
VIP High Income: Service Class...................... .58% .24% (3) .82%
VIP Equity-Income: Service Class.................... .49% .18% (3)(4) .67% (4)
VIP Growth: Service Class........................... .59% .16% (3)(4) .75% (4)
VIP Overseas: Service Class......................... .74% .23% (3)(4) .97% (4)
VIP II Investment Grade Bond: Initial Class......... .43% .14% .57%
VIP II Asset Manager: Service Class................. .54% .23% (3)(4) .77% (4)
VIP II Index 500: Initial Class..................... .24% .11% .35% (5)
VIP II Contrafund: Service Class.................... .59% .16% (3)(4) .75% (4)
VIP II Asset Manager: Growth: Service Class......... .59% .29% (3)(4) .88% (4)
VIP III Balanced: Service Class..................... .44% .25% (3)(4) .69% (4)
VIP III Growth Opportunities: Service Class......... .59% .20% (3)(4) .79% (4)
VIP III Growth & Income: Service Class.............. .49% .21% (3)(4) .70% (4)
VIP III Mid Cap Portfolio: Service Class............ .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, on FMR on
behalf of 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 reduction, the total operating expenses presented in the
table would have been .68% for VIP Equity-Income Portfolio, 80% for VIP
Growth Portfolio, 1.01% for VIP Overseas Portfolio, 78% for VIP II Asset
Manager Portfolio, .80% for VIP II Contrafund, .89% for VIP II Asset
Manager: Growth Portfolio, 70% for VIP III Balanced Portfolio, 80% for
VIP III Growth Opportunities Portfolio, and .71% for VIP III Growth and
Income Portfolio.
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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 ahve been .28%, .11%, and .39%, respectively VIP II Index
500 Portfolio and .56%, 115.40% and 115.96%, respectively, for VIP III
Mid Cap Portfolio.
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<PAGE>
EXAMPLES
The examples below show the expenses that the Annuitant would be charged 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
period shown:
<TABLE>
<CAPTION>
PORTFOLIO 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class............................ $18.68 $57.72 $ 99.12 $213.94
VIP High Income: Service Class............................. $24.01 $73.82 $126.12 $268.63
VIP Equity-Income: Service Class........................... $22.58 $69.50 $118.91 $254.19
VIP Growth: Service Class.................................. $23.81 $73.20 $125.09 $266.58
VIP Overseas: Service Class................................ $25.96 $79.66 $135.83 $287.91
VIP II Investment Grade Bond: Initial Class................ $21.45 $66.10 $113.21 $242.70
VIP II Asset Manager: Service Class........................ $23.60 $72.59 $124.06 $264.53
VIP II Index 500: Initial Class............................ $19.19 $59.28 $101.74 $219.33
VIP II Contrafund: Service Class........................... $23.81 $73.20 $125.09 $266.58
VIP II Asset Manager: Growth: Service Class................ $24.73 $75.97 $129.70 $275.78
VIP III Balanced: Service Class............................ $22.78 $70.12 $119.94 $256.27
VIP III Growth Opportunities: Service Class................ $23.81 $73.20 $125.09 $266.58
VIP III Growth & Income: Service Class..................... $22.88 $70.43 $120.46 $257.30
VIP III Mid Cap: Service Class............................. $32.62 $99.45 $168.47 $351.09
</TABLE>
Expenses per $1,000 investmentif you elect the normal form of annuity or
don't surrender your contract at the end of the applicable period:
Same expenses per $1000 investment as shown in table immediately above.
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. This 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>
CONSOLIDATED FINANCIAL INFORMATION IS FOUND IN APPENDIX A
9
<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 47 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 in
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 was established in 1986, and is maintained under the
insurance laws of the State of Ohio. It is a unit investment trust, which is a
type of investment company, registered with the Securities and Exchange
Commission (the SEC). 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 Investment Company Act of 1940 ("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;
10
<PAGE>
- - cause one or more Option(s) 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 are currently
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with FMR 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 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
(FMR) 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, while also considering
growth of capital. It normally invests at least 65% of its total assets in
income-producing debt securities, preferred stocks, and convertible securities,
with an emphasis on lower-quality debt securities.
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<PAGE>
----------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
that 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.
----------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
as is consistent with the preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
----------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:
12
<PAGE>
<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>
----------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 approximately 65% of assets in stocks and other equity securities,
and the remainder in bonds and other debt securities, including lower quality
debt securities, when its outlook is neutral.
----------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.
13
<PAGE>
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 two, 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. 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 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 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, even though they may have different
maturity dates.
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.
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<PAGE>
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. If you want something
different, you can tell us 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. No Market Value Adjustment is made for free
withdrawal amounts or for withdrawals or transfers made within 30 days of the
expiration of the GRO Guarantee Period. In addition, we won't make a Market
Value Adjustment 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,
less previous withdrawals from the GRO Account and less any applicable
contingent withdrawal and administrative charges, plus 3% interest compounded
annually. Withdrawal charges and the administrative expense charge can invade
the Minimum Value.
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 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 made to the STO Account during the calendar quarter for which
the rate has been declared. You MUST transfer all STO contributions into other
Investment Options within one year of your most recent STO contribution.
Transfers will be made
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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%. See "Systematic Transfer Program" in Part 8 for details on this
program. 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 equal to an
effective annual rate of 1.45% of the Account Value in the Variable Account
Options. We can't increase this daily expense rate without your consent.
Of the 1.45% total charge, .15% of the Account Value of the Variable Account
Options 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 we 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 1.30% 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, annuitization, or termination of a contract during a
contract year.
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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 we anticipate expense savings. 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 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.
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 "Tax-Favored
Retirement Programs" in the SAI.
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 nine
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) both the contribution and
instructions for allocation among the Investment Options at our
Administrative Office, 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
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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. 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.
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 as of 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.
HOW WE DETERMINE UNIT VALUE
We determine unit values for each Variable Account Option at 4 p.m. Eastern
Time on each Business Day.
The unit value of each Variable Account Option for any Business Day is equal
to the unit value for the previous Business Day 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.
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- 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 equal to 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 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.
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 believe 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
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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 Investment
Options, pro-rata, in the same proportion that their value bears to your
total Account Value. For example, if your Account Value is 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.
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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 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 in a form acceptable to us.
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) Your highest Account Value on any contract anniversary before age 81,
plus subsequent contributions and minus subsequent withdrawals (after
being adjusted for associated charges and adjustments);
(b) Total contributions, minus subsequent withdrawals (after being
adjusted for associated charges and adjustments); and
(c) Your current Account Value.
The reductions in the death benefit described in (a) and (b) above for
subsequent withdrawals will be calculated on a pro-rata basis with respect to
Account Value at the time of withdrawal.
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. A death benefit won't 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.
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The maximum issue age for the Annuitant is 85 years old.
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. 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, less any pro-rata
annual administrative charge, 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 payments, which may be made monthly,
quarterly, semi-annually or annually. You can't change or redeem the annuity
once payments have begun. For any annuity, the minimum initial payment must
be at least $100 monthly, $300 quarterly, $600 semi-annually or $1,200
annually.
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, which is the LIFE AND TEN YEARS CERTAIN ANNUITY.
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:
A LIFE AND TEN YEARS CERTAIN 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 payments to the Annuitant or the
Annuitant's beneficiary for a fixed period. The amount is determined by the
period you select when you select the type of annuity you want. If the
Annuitant dies before the end of the period selected, the Annuitant's
beneficiary can choose to receive the total present value of future payments
in cash.
A PERIOD CERTAIN LIFE ANNUITY provides for fixed payments for at least the
period selected and after that for the life of the Annuitant or the lives of
the Annuitant and another annuitant under a joint and survivor annuity. If
the Annuitant (or the Annuitant and the other annuitant under a joint and
survivor annuity) dies before the period selected ends, the remaining
payments will go to the Annuitant's beneficiary. The Annuitant's beneficiary
can redeem the annuity and receive the present value of future guaranteed
payments in a lump sum.
A LIFE INCOME ANNUITY provides fixed payments to the Annuitant for the life
of the Annuitant, or until the last annuitant dies under a joint and survivor
annuity.
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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 Annuitant's
age (or Annuitant 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 contract rates.
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.
TIMING OF PAYMENT
We normally 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
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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 we have not received instructions 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 proportion 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.
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.
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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
from 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
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.
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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) a result of 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) for the 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.
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.
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<PAGE>
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 ON 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.
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<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 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. 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 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 CONTINGENT WITHDRAWAL CHARGE AND
A MARKET VALUE ADJUSTMENT IF APPLICABLE.
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<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 your Investment 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
29
<PAGE>
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.
When you select this program, your account values will be allocated and your
variable portfolios will automatically be rebalanced 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 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, 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 several years. An AVERAGE ANNUAL TOTAL
RETURN shows the hypothetical yearly return that would produce 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.
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 priod. Effective yield is calculated in a
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<PAGE>
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.
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<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 purusuant 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).
GUARANTEED RATE OPTION
For contracts issued prior to May 1, 1999, the two-year GRO was not available.
TABLE OF ANNUAL FEES AND EXPENSES FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
Contract Onwer Transaction Expenses
Sales Load on Purchases............................................. $0
Exchange Fee(1)..................................................... $0
Annual Administrative Charge
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.
Separate Account Annual Expenses
(as a percentage of average account value)(2)
Mortality and Expense Risk Fees..................................... 1.20%
Administrative Expenses............................................. .15%
Total Separate Account Annual Expenses.............................. 1.35%
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<PAGE>
Portfolio Annual Expenses After Reimbursement
(as a percentage of average net assets)(3)
<TABLE>
<CAPTION>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- --------- ---------- -------- ------------
<S> <C> <C> <C>
VIP Money Market: Initial Class............... .20% .10% .30%
VIP High Income: Service Class................ .58% .24% .82%
VIP Equity-Income: Service Class.............. .49% .08%(3) .57%
VIP Growth: Service Class..................... .59% .07%(3) .66%
VIP Overseas: Service Class................... .74% .15%(3) .89%
VIP II Investment Grade Bond: Initial Class... .43% .14% .57%
VIP II Asset Manager: Service Class........... .54% .09%(3) .63%
VIP II Index 500: Initial Class............... .24% .04% .28%(4)
VIP II Contrafund: Service Class.............. .59% .07%(3) .66%
VIP II Asset Manager: Growth: Service Class... .59% .13%(3) .72%
VIP III Balanced: Service Class............... .44% .14%(3) .58%
VIP III Growth Opportunities: Service Class... .59% .11%(3) .70%
VIP III Growth & Income: Service Class........ .49% .11%(3) .60%
</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. Part of the brokerage commissions that certain Portfolios, or FMR on
behalf of 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 .68% for VIP Equity-Income Portfolio, .80% for VIP
Growth Portfolio, 1.01% for VIP Overseas Portfolio, .78% for VIP II Asset
Manager Portfolio, .80% for VIP II Contrafund Portfolio, .89% for VIP
II Asset Manager; Growth Portfolio, .70% for VIP III Balanced Portfolio,
.80% for VIP III Growth Opportunities Portfolio, and .71% for VIP III
Growth and Income Portfolio.
4. 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.
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<PAGE>
EXAMPLES FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
The examples below show the expenses that the Annuitant would be charged 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 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..................... $21.86 $67.34 $115.29 $246.89
VIP Equity-Income................... $20.53 $63.32 $108.53 $233.20
VIP Growth.......................... $21.65 $66.72 $114.25 $244.80
VIP Overseas........................ $24.11 $74.13 $126.63 $269.66
VIP II Investment Grade Bond........ $20.53 $63.32 $108.53 $233.20
VIP II Asset Manager................ $22.17 $68.27 $116.84 $250.03
VIP II Index 500.................... $17.45 $53.98 $ 92.81 $200.91
VIP II Contrafund................... $22.17 $68.27 $116.84 $250.03
VIP II Asset Manager: Growth........ $23.50 $72.28 $123.55 $263.50
VIP III Balanced.................... $21.96 $67.65 $115.81 $247.94
VIP III Growth Opportunities........ $22.47 $69.19 $118.39 $253.15
VIP III Growth & Income............. $21.76 $67.03 $114.77 $245.84
</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 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 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. This 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, directly or indirectly. 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.
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<PAGE>
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 ("You," "Your") - 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.
BUSINESS DAY - any day that the New York Stock Exchange is open.
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 Options, which offer durations of two, 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 for
withdrawals, surrenders, transfers and certain other transactions made before
the GRO Account expires.
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 any administrative charges.
OWNER - 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 the Separate
Account 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.
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<PAGE>
UNIT - a measure of your ownership interest in a variable account option.
UNIT VALUE - the value of each unit calculated on any Business Day.
VARIABLE ACCOUNT OPTIONS - the various investment options available to you
under the contract, other than the GROs and STO. 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.
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<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.
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
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>
* 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 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.
37
<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: 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.
38
<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 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 at the end of the three year period
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
lower number of complete months. If we don't declare a rate for the exact
time remaining, we will use a formula to find a rate using 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:
48/12 48/12
-0.0551589 = [(1 + .05) / (1 + .0625 + .0025) ] - 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
39
<PAGE>
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:
48/12 48/12
.0290890 = [(1 + .05) / (1 + .04 + .0025) ] - 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
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.
40
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
Part 1 - Integrity and Custodian............................................1
Part 2 - Distribution of the Contracts......................................1
Part 3 - Performance Information............................................2
Part 4 - Determination of Accumulation Values...............................7
Part 5 - Tax-Favored Retirement Programs....................................7
Traditional Individual Retirement Annuities...........................7
Roth Individual Retirement Annuities..................................7
SIMPLE Individual Retirement Annuities................................8
Tax Sheltered Annuities...............................................8
Simplified Employee Pensions..........................................8
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans............................................8
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations.......................................8
Distributions Under Tax-Favored Retirement Programs..................9
Part 6 - Financial Statements..............................................10
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: ________
41
<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 OF CONTENTS
Page
Part 1 - Integrity and Custodian...........................................1
Part 2 - Distribution of the Contracts.....................................1
Part 3 - Performance Information...........................................2
Part 4 - Determination of Accumulation Values..............................7
Part 5 - Tax Favored Retirement Programs...................................7
Traditional Individual Retirement Annuities.......................7
Roth Individual Retirement Annuities..............................8
SIMPLE Individual Retirement Annuities............................8
Tax Sheltered Annuities...........................................8
Simplified Employee Pensions......................................8
Corporate and Self-Employed (H.R.10 and Keogh)
Pension and Profit Sharing Plans...............................8
Deferred Compensation Plans of State and Local Governments
and Tax-Exempt Organizations...................................8
Distributions Under Tax Favored Retirement Programs...............9
Part 6 - Financial Statements.............................................10
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
organized in 1966 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 1996 were $13,823,048, 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.
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 Account isn't a separate entity from Integrity and its operations
form a part of Integrity, it isn't taxed separately as a "regulated
investment company" under Subchapter M of the Code. Investment income and
realized capital gains on the assets of the Separate Account are reinvested
and taken into account in determining the accumulation value. Under existing
federal income tax law, the Separate Account's 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.
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.
1
<PAGE>
Depending upon the distribution channel, we generally pay a maximum
distribution allowance of 6% of initial contribution 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.
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
2
<PAGE>
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:
365/7
Effective Yield = {(Base Period Return) + 1) } - 1
3
<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>
VIP II Asset Manager 9/3/91 13.42% 10.22% n/a 11.47%
VIP II Asset Manager: Growth 2/8/95 15.91% n/a n/a 19.98%
VIP III Balanced 2/19/97 15.98% n/a n/a 15.76%
VIP II Contrafund 2/8/95 28.15% n/a n/a 26.93%
VIP Equity-Income 9/3/91 10.05% 17.09% n/a 16.61%
VIP Growth 9/3/91 37.54% 20.02% n/a 18.77%
VIP III Growth & Income 2/14/97 27.77% n/a n/a 26.17%
VIP III Growth Opportunities 2/1/97 22.86% n/a n/a 22.58%
VIP High Income 2/19/93 -5.69% 7.25% n/a 8.62%
VIP II Index 500 3/4/93 26.52% 21.98% n/a 19.62%
VIP II Investment Grade Bond 9/3/91 7.30% 5.18% n/a 6.43%
-------------------------------------------------------------------------------------
VIP Overseas 9/3/91 11.16% 8.14% n/a 8.50%
-----------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
(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 7% in year one, declining 1% annually in
years one through six, 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.
5
<PAGE>
For the period ending: 12/31/98
RETURNS WITHOUT SURRENDER CHARGES (1) All figures are unaudited.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL RETURN CALENDAR YEAR RETURN(2)
---------------------------------------------------------------------------------------------------
FUND LIFE LIFE
VARIABLE INCEPTION 3 5 10 OF 1 3 5 10 OF
OPTIONS DATE (3) YEAR YEAR YEAR FUND YEAR YEAR YEAR YEAR FUND 1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
VIP II 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% 19.02%
Asset
Manager
VIP II Asset 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 23.38
Manager:
Growth
VIP III 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 20.54
Balanced
VIP II 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 22.47
Contrafund
VIP Equity- 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 26.38
Income
VIP 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 21.82
VIP III 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 28.34
Growth &
Income
VIP III 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 28.20
Growth
Opportuities
VIP High 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 16.08
Income
VIP II 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 30.91
Index 500
VIP II 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 7.59
Investment
Grade Bond
- ------------------------------------------------------------------------------------------------------------------------------------
VIP 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 10.05
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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. Non-standard performance is
since the Portfolio's inception date, which may predate the separate
account.
(2) Italicized returns are calculated from the inception date through
year-end.
(3) 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.
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
6
<PAGE>
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.
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 $1million, 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.
7
<PAGE>
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.
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.
8
<PAGE>
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.
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 Morningstgar or any similar agency or service.
9
<PAGE>
PART 4 - DETERMINATION OF ACCUMULATION UNIT VALUES
The accumulation unit value of an Option will be determined on each day the
New York Stock Exchange is open for trading. The accumulation units are
valued as of the close of business on the New York Stock Exchange, which
currently is 4:00 p.m., Eastern time. Each Option's accumulation unit value
is calculated separately. For all Options, the accumulation unit value is
computed by dividing the value of the securities held by the Option plus any
cash or other assets, less its liabilities, by the number of outstanding
units. Securities are valued using the amortized cost method of valuation,
which approximates market value. Under this method of valuation, the
difference between the acquisition
10
<PAGE>
cost and value at maturity is amortized by assuming a constant
(straight-line) accretion of a discount or amortization of a premium to
maturity. Cash, receivables and current payables are generally carried at
their face value.
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 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.
11
<PAGE>
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.
12
<PAGE>
DISTRIBUTIONS UNDER TAX FAVORED RETIREMENT PROGRAMS
Distributions from tax-favored plans are subject to certain restrictions.
participants in qualified plans, with the exception of five-percent owners,
must begin receiving distributions by April 1 of the calendar year following
the later of either (i) the year in which the employee reaches age 70-1/2, or
(ii) the calendar year in which the employee retires. Participants in
Traditional IRAs must begin receiving distributions by April 1 of the
calendar year following the year in which the employee reaches age 70-1/2.
Additional distribution rules apply after the participant's death. If you
don't take mandatory distributions you may owe a 50% penalty tax on any
difference between the required distribution amount and the amount
distributed. Owners of traditional IRA's and five percent owners must begin
distributions by age 70-1/2.
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.
13
<PAGE>
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.
14
<PAGE>
Financial Statements
Separate Account I
of
Integrity Life Insurance Company
DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Financial Statements
December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors...............................................1
Audited Financial Statements
Statement of Assets and Liabilities .........................................2
Statement of Operations......................................................4
Statements of Changes in Net Assets..........................................6
Notes to Financial Statements...............................................10
</TABLE>
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of Integrity Life Insurance Company (comprising, respectively, the
Money Market, High Income, Equity-Income, Growth, Overseas, Investment Grade
Bond, Asset Manager, Index 500, Asset Manager: Growth, Contrafund, Growth
Opportunities, Balanced, and Growth & Income Divisions) as of December 31, 1998,
the related statement of operations for the year then ended and statements of
changes in net assets for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned in Variable Insurance Products Fund, Variable
Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds") as of December 31, 1998, by
correspondence with the transfer agent of the Fidelity VIP Funds. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting Separate Account I of Integrity Life Insurance Company at
December 31, 1998, and the results of their operations for the year then ended,
and changes in their net assets for the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 9, 1999
1
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP
Funds at value (aggregate
cost of $601,037,418) $ 51,911,285 $ 53,656,662 $130,419,677 $110,606,455 $ 39,919,786 $ 26,448,540 $ 71,775,684
Receivable from (payable
to) the general account of
Integrity 34,320 23,802 (9,294) 23,421 (6,786) (2,163) 26,075
--------------------------------------------------------------------------------------------------
NET ASSETS $ 51,945,605 $ 53,680,464 $130,410,383 $110,629,876 $ 39,913,000 $ 26,446,377 $ 71,801,759
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Unit value $ 16.28 $ 16.30 $ 38.37 $ 56.96 $ 22.01 $ 21.40 $ 29.25
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
Units outstanding 3,190,762 3,293,280 3,398,759 1,942,238 1,813,403 1,235,812 2,454,761
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity
VIP Funds at value
(aggregate cost of
$601,037,418) $ 77,636,796 $ 15,201,565 $ 80,895,067 $ 15,997,955 $ 3,901,753 $ 22,205,187 $ 700,576,412
Receivable from (payable to)
the general account of
Integrity 6,923 (5,769) (117,837) (1,467) 49,401 61,493 82,119
-----------------------------------------------------------------------------------------------------
NET ASSETS $ 77,643,719 $ 15,195,796 $ 80,777,230 $ 15,996,488 $ 3,951,154 $ 22,266,680 $ 700,658,531
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Unit value $ 28.50 $ 20.37 $ 25.36 $ 14.62 $ 13.15 $ 15.48
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Units outstanding 2,724,341 745,989 3,185,222 1,094,151 300,468 1,438,416
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY HIGH EQUITY- INVESTMENT ASSET
MARKET INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
Fidelity VIP Funds $ 2,293,777 $ 6,835,050 $ 7,821,750 $ 11,821,361 $ 3,011,715 $ 950,445 $ 8,670,977
EXPENSES
Mortality and expense
risk and administrative
charges 584,994 757,681 1,716,810 1,290,770 559,230 301,207 950,981
--------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 1,708,783 6,077,369 6,104,940 10,530,591 2,452,485 649,238 7,719,996
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on
sales of investments - (2,935,271) 7,734,921 9,584,088 2,306,106 991,906 2,690,737
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 16 4,126,739 24,563,090 12,066,420 1,841,988 871,925 12,268,987
End of period 18 (12,812) 22,145,621 22,738,024 1,188,625 746,542 10,891,110
--------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
during the period 2 (4,139,551) (2,417,469) 10,671,604 (653,363) (125,383) (1,377,877)
--------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 2 (7,074,822) 5,317,452 20,255,692 1,652,743 866,523 1,312,860
--------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 1,708,785 $ (997,453) $ 11,422,392 $ 30,786,283 $ 4,105,228 $ 1,515,761 $ 9,032,856
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from
Fidelity VIP Funds $ 1,931,547 $ 1,424,179 $ 3,187,485 $ 325,213 $ 107,475 $ 37,695 $ 48,418,669
EXPENSES
Mortality and expense risk and
administrative charges 828,004 183,006 876,153 141,160 35,699 176,666 8,402,361
---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 1,103,543 1,241,173 2,311,332 184,053 71,776 (138,971) 40,016,308
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on
sales of investments 4,749,457 742,938 4,541,199 404,631 69,364 544,038 31,424,114
Net unrealized appreciation
(depreciation) of investments:
Beginning of period 7,846,564 1,816,984 8,335,528 315,390 46,975 195,727 74,296,333
End of period 16,445,939 1,819,433 18,005,189 2,083,100 312,289 3,175,916 99,538,994
---------------------------------------------------------------------------------------------
Change in net unrealized
appreciation/depreciation
during the period 8,599,375 2,449 9,669,661 1,767,710 265,314 2,980,189 25,242,661
---------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 13,348,832 745,387 14,210,860 2,172,341 334,678 3,524,227 56,666,775
---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 14,452,375 $ 1,986,560 $ 16,522,192 $ 2,356,394 $ 406,454 $ 3,385,256 $ 96,683,083
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,708,783 $ 6,077,369 $ 6,104,940 $ 10,530,591 $ 2,452,485 $ 649,238 $ 7,719,996
Net realized gain (loss) on
sales of investments - (2,935,271) 7,734,921 9,584,088 2,306,106 991,906 2,690,737
Change in net unrealized
appreciation/depreciation
during the period 2 (4,139,551) (2,417,469) 10,671,604 (653,363) (125,383) (1,377,877)
----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting
from operations 1,708,785 (997,453) 11,422,392 30,786,283 4,105,228 1,515,761 9,032,856
INCREASE (DECREASE) IN NET
ASSETS FROM CONTRACT RELATED
TRANSACTIONS
Contributions from
contract holders 6,820,438 7,712,118 13,317,643 5,126,080 2,478,365 1,816,248 3,645,976
Contract terminations
and benefits (7,202,303) (5,434,572) (10,388,872) (7,372,947) (3,671,420) (2,241,407) (7,847,820)
Net transfers among
investment options 14,673,226 (408,422) (6,346,700) (1,799,165) (3,899,502) 8,728,296 (2,274,789)
----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from contract
related transactions 14,291,361 1,869,124 (3,417,929) (4,046,032) (5,092,557) 8,303,137 (6,476,633)
----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 16,000,146 871,671 8,004,463 26,740,251 (987,329) 9,818,898 2,556,223
Net assets, beginning of year 35,945,459 52,808,793 122,405,920 83,889,625 40,900,329 16,627,479 69,245,536
----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $51,945,605 $53,680,464 $130,410,383 $110,629,876 $ 39,913,000 $ 26,446,377 $ 71,801,759
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 428,066 442,610 361,197 108,613 113,240 88,240 135,739
Terminations and benefits (463,989) (315,672) (284,764) (156,864) (169,692) (109,343) (287,885)
Net transfers 928,382 108,508 (190,039) (36,320) (196,862) 422,621 (80,153)
----------------------------------------------------------------------------------------------
Net increase (decrease) in units 892,459 235,446 (113,606) (84,571) (253,314) 401,518 (232,299)
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,103,543 $ 1,241,173 $ 2,311,332 $ 184,053 $ 71,776 $ (138,971) $ 40,016,308
Net realized gain (loss) on
sales of investments 4,749,457 742,938 4,541,199 404,631 69,364 $ 544,038 31,424,114
Change in net unrealized
appreciation/depreciation
during the period 8,599,375 2,449 9,669,661 1,767,710 265,314 2,980,189 25,242,661
-----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations 14,452,375 1,986,560 16,522,192 2,356,394 406,454 3,385,256 96,683,083
INCREASE (DECREASE) IN NET
ASSETS FROM CONTRACT RELATED
TRANSACTIONS
Contributions from contract
holders 17,005,436 1,633,701 10,028,589 5,240,215 1,348,464 7,724,587 83,897,860
Contract terminations and
benefits (3,561,323) (655,361) (4,498,873) (450,989) (264,441) (689,902) (54,280,230)
Net transfers among
investment options 4,082,027 18,548 3,684,663 3,396,860 1,050,149 6,846,653 27,751,844
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from contract related
transactions 17,526,140 996,888 9,214,379 8,186,086 2,134,172 13,881,338 57,369,474
-----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 31,978,515 2,983,448 25,736,571 10,542,480 2,540,626 17,266,594 154,052,557
Net assets, beginning of year 45,665,204 12,212,348 55,040,659 5,454,008 1,410,528 5,000,086 546,605,974
-----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 77,643,719 $ 15,195,796 $ 80,777,230 $ 15,996,488 $ 3,951,154 $22,266,680 $700,658,531
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 678,848 88,384 460,454 404,468 111,678 574,277
Terminations and benefits (144,074) (35,109) (205,879) (35,136) (20,972) (51,837)
Net transfers 160,904 (2,750) 148,005 266,499 85,267 503,087
---------------------------------------------------------------------------------
Net increase (decrease) in units 695,678 50,525 402,580 635,831 175,973 1,025,527
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- INVESTMENT ASSET
MARKET HIGH INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income (loss) $ 1,454,945 $ 2,892,926 $ 7,167,846 $ 1,725,942 $ 2,293,717 $ 680,741 $ 6,310,406
Net realized gain on
sales of investments - 1,691,218 4,145,273 5,788,660 2,409,862 51,412 662,101
Change in net unrealized
appreciation during the
period (1) 2,414,256 11,348,484 6,911,215 (1,334,331) 363,739 4,191,936
----------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 1,454,944 6,998,400 22,661,603 14,425,817 3,369,248 1,095,892 11,164,443
INCREASE (DECREASE) IN NET
ASSETS FROM CONTRACT RELATED
TRANSACTIONS
Contributions from contract
holders 11,057,023 6,741,301 14,891,664 7,068,648 4,376,362 965,314 4,360,106
Contract terminations and
benefits (8,351,199) (3,069,645) (6,444,099) (4,802,527) (2,408,802) (965,234) (5,722,314)
Net transfers among investment
options 4,130,423 (588,930) 9,216,892 (11,356,292) 3,326,028 573,961 797,889
----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from contract related
transactions 6,836,247 3,082,726 17,664,457 (9,090,171) 5,293,588 574,041 (564,319)
----------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 8,291,191 10,081,126 40,326,060 5,335,646 8,662,836 1,669,933 10,600,124
Net assets, beginning of year 27,654,268 42,727,667 82,079,860 78,553,979 32,237,493 14,957,546 58,645,412
----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $35,945,459 $52,808,793 $122,405,920 $ 83,889,625 $ 40,900,329 $ 16,627,479 $ 69,245,536
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 723,539 413,667 466,478 188,034 224,633 54,469 183,207
Terminations and benefits (539,400) (190,452) (199,438) (126,309) (118,732) (49,015) (236,423)
Net transfers 274,226 (36,864) 268,181 (346,687) 167,852 21,633 31,481
----------------------------------------------------------------------------------------------
Net increase (decrease) in units 458,365 186,351 535,221 (284,962) 273,753 27,087 (21,735)
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account I of Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH GROWTH &
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION TOTAL
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income (loss) $ 318,622 $ (120,845) $ 544,503 $ (22,694) $ (8,357) $ 103,644 $ 23,341,396
Net realized gain on sales of
investments 2,386,946 667,205 3,809,108 63,035 49,319 69,636 21,793,775
Change in net unrealized
appreciation during the
period 5,317,980 1,451,444 4,387,371 315,390 46,975 195,727 35,610,185
-----------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 8,023,548 1,997,804 8,740,982 355,731 87,937 369,007 80,745,356
INCREASE (DECREASE) IN NET
ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract
holders 12,059,120 2,609,194 8,027,882 2,595,415 809,025 2,364,838 77,925,892
Contract terminations and
benefits (1,844,379) (747,137) (1,978,670) (29,084) (29,152) (35,814) (36,428,056)
Net transfers among
investment options 6,651,345 1,522,656 1,771,669 2,531,946 542,718 2,302,055 21,422,360
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from contract related
transactions 16,866,086 3,384,713 7,820,881 5,098,277 1,322,591 4,631,079 62,920,196
-----------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 24,889,634 5,382,517 16,561,863 5,454,008 1,410,528 5,000,086 143,665,552
Net assets, beginning of year 20,775,570 6,829,831 38,478,796 - - - 402,940,422
-----------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $45,665,204 $12,212,348 $ 55,040,659 $ 5,454,008 $ 1,410,528 $ 5,000,086 $546,605,974
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 585,256 165,930 437,319 234,220 77,291 213,654
Terminations and benefits (86,580) (44,561) (106,969) (2,528) (3,092) (3,959)
Net transfers 322,105 94,135 69,704 226,628 50,296 203,194
---------------------------------------------------------------------------------
Net increase (decrease) in units 820,781 215,504 400,054 458,320 124,495 412,889
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Integrity Life Insurance Company ("Integrity") established Separate Account I
(the "Separate Account") on May 19, 1986, for the purpose of issuing flexible
premium variable annuity contracts ("contracts"). The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended. The operations of the Separate
Account are part of Integrity.
Integrity is an indirect wholly owned subsidiary of ARM Financial Group, Inc.
("ARM"). ARM specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products.
Contract holders may allocate or transfer their account values to one or more of
the Separate Account's investment divisions, or for certain contract holders, to
a guaranteed interest division provided by Integrity, or both. Certain contract
holders may also allocate or transfer a portion or all of their account values
to one or more fixed guaranteed rate options of Integrity's Separate Account
GPO. Certain contract holders may also allocate new contributions to a
Systematic Transfer Option ("STO") which accumulates interest at a fixed rate.
All STO contributions must be transferred to other investment divisions or to a
guaranteed rate option within one year of the contribution.
The Separate Account investment divisions are invested in shares of
corresponding investment portfolios of the Variable Insurance Products Fund,
Variable Insurance Products Fund II and Variable Insurance Products Fund III
(collectively the "Fidelity VIP Funds"). The Fidelity VIP Funds are "series"
type mutual funds managed by Fidelity Management and Research Company ("Fidelity
Management"). The contract holder's account value in a Separate Account division
will vary depending on the performance of the corresponding portfolio. The
Separate Account currently has thirteen investment divisions available. The
investment objective of each division and its corresponding portfolio are the
same. Set forth below is a summary of the investment objectives of the operative
portfolios of the
10
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fidelity VIP Funds at December 31, 1998 for this Separate Account.
MONEY MARKET PORTFOLIO seeks to earn as high a level of current income as
is consistent with 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.
HIGH INCOME PORTFOLIO seeks to earn a high level of 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.
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income producing equity securities, with the potential for capital
appreciation as a consideration. The portfolio seeks a yield which exceeds
the composite yield on the securities compromising S&P 500. It normally
invests at least 65% of its assets in income-producing equity securities.
GROWTH PORTFOLIO seeks capital appreciation through investing its assets in
the stock of companies that are believed to have above-average growth
potential. These companies tend to have higher than average price/earnings
(P/E) ratios. Companies with strong growth potential often have new
products, technologies, distribution channels or other opportunities for a
strong industry market position. The stock of these companies are often
called "growth" stocks.
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.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital by investing in a broad
range of investment-grade fixed-income securities.
11
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
ASSET MANAGER: GROWTH PORTFOLIO is an asset allocation fund which seeks to
maximize total return over the long term through investments in stocks,
bonds and short-term money market instruments. The portfolio has a
"neutral" mix of assets which represents the general allocation of the
fund's investments over the long term. The approximate "neutral" mix for
stocks, bonds and short-term instruments is 70%, 25% and 5%, respectively.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation by investing
assets primarily in common stocks. The Portfolio invests assets in
securities of companies whose value may not fully be 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.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth by investing
primarily in common stocks. The portfolio has the ability to purchase other
types of securities, including bonds which may be lower-quality debt
securities.
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
12
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
GROWTH & INCOME PORTFOLIO seeks a high total return through a combination
of current income and capital appreciation by investing mainly in equity
securities. It invests primarily in stocks of companies that offer
potential for growth in earnings while paying current dividends, but offer
the potential for capital appreciation on future income. Investments may
also include bonds, lower quality debt securities, as well as stocks that
are not currently paying dividends, but offer prospects for future income
or capital appreciation.
The assets of the Separate Account are owned by Integrity. The portion of the
Separate Account's assets supporting the contracts may not be used to satisfy
liabilities arising out of any other business of Integrity.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
Investments in shares of the Fidelity VIP Funds are valued at the net asset
values of the respective portfolios, which approximates fair value. The
difference between cost and fair value is reflected as unrealized appreciation
and depreciation of investments.
Share transactions are recorded on the trade date. Realized gains and losses on
sales of shares of the Fidelity VIP Funds are determined based on the identified
cost basis.
Dividends from income and capital gain distributions are recorded on the
ex-dividend date. Dividends and distributions from the Fidelity VIP Fund
portfolios are reinvested in the respective portfolios and are reflected in the
unit value of the divisions of the Separate Account.
13
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNIT VALUE
Unit values for the Separate Account divisions are computed at the end of each
business day. The unit value is equal to the unit value for the preceding
business day multiplied by a net investment factor. This net investment factor
is determined based on the value of the underlying mutual fund portfolios of the
Separate Account, reinvested dividends and capital gains, new premium deposits
or withdrawals, and the daily asset charge for the mortality and expense risk
and administrative charges. Unit values are adjusted daily for all activity in
the Separate Account.
TAXES
Operations of the Separate Account are included in the income tax return of
Integrity which is taxed as a life insurance company under the Internal Revenue
Code. The Separate Account will not be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code. Under the provisions of the
policies, Integrity has the right to charge the Separate Account for federal
income tax attributable to the Separate Account. No charge is currently being
made against the Separate Account for such tax since, under current tax law,
Integrity pays no tax on investment income and capital gains reflected in
variable life insurance policy reserves. However, Integrity retains the right to
charge for any federal income tax incurred which is attributable to the Separate
Account if the law is changed. Charges for state and local taxes, if any,
attributable to the Separate Account may also be made.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
14
<PAGE>
Separate Account I
of
Integrity Life Insurance Company
Notes to Financial Statements (continued)
2. INVESTMENTS
The aggregate cost of portfolio shares purchased and proceeds from portfolio
shares sold during the year ended December 31, 1998 and the cost of shares held
at December 31, 1998 for each division were as follows:
<TABLE>
<CAPTION>
DIVISION PURCHASES SALES COST
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $ 142,591,479 $ 126,639,766 $ 51,911,267
High Income 84,858,586 76,949,936 53,669,474
Equity-Income 27,374,445 24,686,095 108,274,056
Growth 56,130,282 49,683,174 87,868,431
Overseas 30,100,463 32,715,860 38,731,161
Investment Grade Bond 24,096,700 15,145,489 25,701,998
Asset Manager 19,755,617 18,522,106 60,884,574
Index 500 31,559,360 12,996,879 61,190,857
Asset Manager: Growth 5,649,546 3,398,601 13,382,132
Contrafund 27,357,355 15,720,559 62,889,878
Growth Opportunities 11,438,940 3,063,349 13,914,855
Balanced 3,475,928 1,317,062 3,589,464
Growth & Income 17,530,444 3,850,431 19,029,271
-----------------
$ 601,037,418
-----------------
-----------------
</TABLE>
3. EXPENSES
Integrity assumes mortality and expense risks and incurs certain administrative
expenses related to the operations of the Separate Account and deducts a charge
from the assets of the Separate Account at an annual rate of 1.20% and 0.15% of
net assets, respectively, to cover these risks and expenses. In addition, an
annual charge of $30 per contract is assessed if the participant's account value
is less than $50,000 at the end of any participation year prior to the
participant's retirement date (as defined by the participant's contract).
15
<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 Operations 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)
(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.
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 Company Executive Officer
515 West Market Street
Louisville, KY 40202
SELECTED OFFICERS: (The business address for each of the principal officers listed below is 515 West Market Street,
- ----------------- Louisville, Kentucky 40202.)
</TABLE>
<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>
<CAPTION>
<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.
In June 1997, ARM Financial completed an initial public offering
(the "IPO") of 9.2 million shares of common stock, of which 5.75 million
shares were sold by ARM Financial and 3.45 million shares were sold by
investment funds sponsored by Morgan Stanley, Dean Witter, Discover & Co.
(the "MSDW Funds"). Following the IPO, the MSDW Funds owned in the aggregate
approximately 53% of the outstanding shares of common stock of ARM Financial.
On May 8, 1998, the MSDW Funds sold their entire remaining interest in ARM
Financial pursuant to a secondary public offering of shares of common stock.
As a result, ARM Financial is 100% publicly owned.
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
4
<PAGE>
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:
(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.
5
<PAGE>
(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
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.
6
<PAGE>
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, II and III of National Integrity Life
Insurance Company, and The Legends Fund, Inc. Integrity is the Depositor of
Separate Accounts I, II, III, Ten and VUL.
(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
515 West Market Street Officer
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.
7
<PAGE>
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.
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 22nd
day of April, 1999.
SEPARATE ACCOUNT I OF
INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: Integrity Life Insurance Company
(Depositor)
By:___________________________
John R. Lindholm
President
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By:___________________________
John R. Lindholm
President
8
<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 22nd day of April, 1999.
INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By:___________________________
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:
-------------------------------------------------
John R. Lindholm, President
Date: 04/22/99
PRINCIPAL FINANCIAL OFFICER:
-------------------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 04/22/99
PRINCIPAL ACCOUNTING OFFICER:
-------------------------------------------------
Barry G. Ward, Controller
Date: 04/22/99
DIRECTORS:
- ------------------------ -------------------------------------------------
Mark A. Adkins Susan M. McEntire
Date: 04/22/99 Date: 04/22/99
- ------------------------
Martin H. Ruby
Date: 04/22/99
- ------------------------ -------------------------------------------------
John R. Lindholm John R. McGeeney
Date: 04/22/99 Date: 04/22/99
10
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- ------------------------
William H. Guth
Date: 04/22/99
11
<PAGE>
Exhibit 99.10
EXHIBIT 10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
in Post Effective Amendment No. 10 to the Registration Statement (Form N-4 No.
33-56654) and Amendment No. 19 to the Registration Statement (Form N-4 No.
811-4844) and related Prospectuses of Separate Account I of Integrity Life
Insurance Company and to the use of our reports (a) dated February 9, 1999, with
respect to the statutory basis financial statements of Integrity Life Insurance
Company, and (b) dated April 9, 1999, with respect to the financial statements
of Separate Account I of Integrity Life Insurance Company, both included in the
Registration Statement (Form N-4) for 1998 filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 21, 1999
