<PAGE>
As filed with the Securities and Exchange Commission
on April 28, 1999
Registration No. 33-56658
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. 12 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21 [X]
(Check appropriate box or boxes)
Separate Account I of National Integrity Life Insurance Company
(Exact Name of Registrant)
National 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
National 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
/ / (date)pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Prospectus
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
issued by NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by National 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
National Integrity Life Insurance Company, 15 Matthews Street, Suite 200,
Goshen, New York, 10924. You may also call the following toll-free number:
1-800-433-1778.
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
<PAGE>
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.
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
<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..............................................................
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 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National 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.........................................................8
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..............................................12
Portfolio Charges.....................................................12
State Premium Tax Deduction...........................................12
Contingent Withdrawal Charge..........................................12
Reduction or Elimination of the Contingent Withdrawal Charge..........13
Transfer Charge.......................................................13
Disability Waiver.....................................................13
Tax Reserve...........................................................13
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Contributions Under Your Contract.....................................13
Your Account Value....................................................14
Units in Our Separate Account.........................................14
How We Determine Unit Value...........................................14
Transfers.............................................................15
Withdrawals...........................................................16
Assignments...........................................................16
Death Benefits and Similar Benefit Distributions......................16
Annuity Benefits......................................................17
Annuities.............................................................17
Annuity Payments......................................................18
Timing of Payment.....................................................18
How You Make Requests and Give Instructions...........................18
PART 6 - VOTING RIGHTS
Voting Rights.........................................................18
How We Determine Your Voting Shares...................................19
How Portfolio Shares Are Voted........................................19
Separate Account Voting Rights........................................19
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction..........................................................19
Your Contract is an Annuity...........................................19
Taxation of Annuities Generally.......................................20
Distribution-at-Death Rules...........................................21
Diversification Standards.............................................21
Tax-Favored Retirement Programs.......................................21
Federal and State Income Tax Withholding..............................21
Impact of Taxes to National Integrity.................................21
Transfers Among Investment Options....................................21
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals................................................22
Income Plus Withdrawal Program........................................22
Dollar Cost Averaging.................................................23
Systematic Transfer Program...........................................23
Customized Asset Rebalancing..........................................23
Callan Asset Allocation and Rebalancing Program.......................23
Systematic Contributions..............................................24
Performance Information...............................................24
PART 9 - PRIOR CONTRACTS
Prior Contracts.......................................................26
GLOSSARY..............................................................30
Appendix A - Financial Information..................................32
</TABLE>
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<TABLE>
<S> <C>
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>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "we," "our" and "us" mean National Integrity Life Insurance
Company (NATIONAL INTEGRITY), a subsidiary of Integrity Life Insurance Company
and an indirect 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 90th 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. 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
1
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oriented 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. National
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>
<S> <C>
Sales Load on Purchases............................................. $0
Deferred Sales Load (as a percentage of contributions) (1)....7% Maximum
Exchange Fee (2)..................................................... $0
</TABLE>
ANNUAL ADMINISTRATIVE CHARGE
<TABLE>
<S> <C>
Annual Administrative Charge* ...................................... $30
* This charge applies only if the Account Value is less than
$50,000 at the end of any contract year prior to your Retirement
Date. See "Annual Administrative Charge" in Part 4.
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value) (3)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees................................. 1.20%
Administrative Expenses......................................... .15%
-----
Total Separate Account Annual Expenses.......................... 1.35%
-----
-----
</TABLE>
5
<PAGE>
PORTFOLIO ANNUAL EXPENSES AFTER REIMBURSEMENT
(as a percentage of average net assets)
<TABLE>
Management Other Total Annual
Portfolio Fees Expenses Expenses
- ------------- ---------- -------- -------------
<S> <C> <C> <C>
VIP Money Market: 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% .07% .66% (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% .13% .72% (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: Service Class..................... .56% .54% 1.10% (4)(6)
</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.
6
<PAGE>
5) The "Other Expenses" reflect the payment of 0.10% pursuant to a Rule
12b-1 Plan adopted by the underlying Mutual Funds.
7
<PAGE>
EXAMPLES
The examples below show the expenses that the Annuitant would be charged for
each $1,000 investment, assuming a $40,000 average contract value and a 5%
annual rate of return on assets.
EXPENSES PER $1,000 INVESTMENT IF YOU SURRENDER YOUR CONTRACT AT THE END OF THE
PERIOD SHOWN:
<TABLE>
<CAPTION>
Portfolio 1 Year 3 Years 5 Years 10 Years
- --------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market: Initial Class............................. $ 87.66 $104.61 $123.86 $203.09
VIP High Income: Initial Class.............................. $ 91.76 $117.03 $144.77 $245.84
VIP Equity-Income: Initial Class............................ $ 90.53 $113.32 $138.53 $233.20
VIP Growth: Initial Class................................... $ 91.55 $116.41 $143.73 $243.75
VIP Overseas: Initial Class................................. $ 93.91 $123.51 $155.60 $267.61
VIP II Investment Grade Bond: Initial Class................. $ 90.42 $113.01 $138.01 $232.14
VIP II Asset Manager: Initial Class......................... $ 91.14 $115.17 $141.66 $239.54
VIP II Index 500: Initial Class............................. $ 88.17 $106.17 $126.49 $208.53
VIP II Contrafund: Initial Class............................ $ 91.76 $117.03 $144.77 $245.84
VIP II Asset Manager: Growth: Initial Class................. $ 92.06 $117.96 $146.32 $248.98
VIP III Balanced: Initial Class............................. $ 90.63 $113.63 $139.06 $234.26
VIP III Growth Opportunities: Initial Class................. $ 91.86 $117.34 $145.29 $246.89
VIP III Growth & Income: Initial Class...................... $ 90.83 $114.25 $140.10 $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>
<CAPTION>
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
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>
8
<PAGE>
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.
9
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
National Integrity is a stock life insurance company organized under the laws
of New York. Our home office is located in Goshen, New York. We are
authorized to sell life insurance and annuities in nine states and the
District of Columbia. We sell flexible premium annuities with underlying
investment options other than the Portfolios, and fixed single premium
annuities. We also provide administrative and investment support for
products designed, underwritten and sold by other companies.
National 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 New York. 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 New York 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 National 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
1-800-433-1778.
Each of the Portfolios is an open-end diversified management investment
company registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and variable
life contracts of insurance companies. Shares of the Portfolios are currently
available to the separate accounts of a number of insurance companies, both
affiliated and unaffiliated with FMR or National 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:
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<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.
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.
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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.
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,
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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 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
National 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 National 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
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exceed the annual administrative expense charge. Mortality risk, as used
here, refers to the risk National 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.
National 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, National 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
National 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
7%. 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 7% would apply if the
entire amount of the withdrawal consisted of contributions made during your
current contribution year. We don't deduct withdrawal charges when you withdraw
contributions made more than six 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.
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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.............................................. 7%
First Prior.......................................... 6
Second Prior......................................... 5
Third Prior.......................................... 4
Fourth Prior......................................... 3
Fifth Prior.......................................... 2
Sixth Prior ............................. 1
Seventh Prior and earlier............................ 0
</TABLE>
We won't deduct a contingent withdrawal charge if you use the withdrawal to buy
from National 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.
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 National Integrity. Examples of these
relationships would include being an employee of National Integrity or an
affiliate, receiving distributions or making internal transfers from other
contracts issued by National Integrity, or making transfers of amounts held
under qualified plans sponsored by National 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.
DISABILITY 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. A hardship
circumstance includes the Owner becoming disabled before attaining
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age 65. We can require reasonable notice and documentation including, but not
limited to, a physician's certification and claim for Social Security
benefits. Different hardship circumstances may 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.
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 National
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 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.
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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 National 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 GRO s 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 six years of your contract,
there is a contingent withdrawal charge for any withdrawals other than your free
withdrawals. The charge starts at 7% 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 59-1/2years 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.
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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.
The maximum issue age for the Annuitant is 85 years old.
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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 90th 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 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 90th 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
National 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.
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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 National 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 National 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
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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. NATIONAL 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
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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);
(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 National 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
National 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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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 NATIONAL INTEGRITY
The contracts allow National Integrity to charge the Separate Account for taxes.
National 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.
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.
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
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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.
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
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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 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
30
<PAGE>
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 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.
31
<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 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 on or after January 1, 1995, 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) the following rules apply even if they are different from other
provisions in this prospectus:
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<PAGE>
CONTINGENT WITHDRAWAL CHARGE
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
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
<S> <C>
Sales Load on Purchases.......................................... $0
Deferred Sales Load (1)...................................7% Maximum
Exchange Fee (2)................................................. $0
Annual Administrative Charge (3)................................. $30
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A
PERCENTAGE OF AVERAGE ACCOUNT VALUE) (4)
Mortality and Expense Risk Fees................................ 1.20%
Administrative Expenses........................................ .15%
-----
Total Separate Account Annual Expenses..........................1.35%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES AFTER REIMBURSEMENT
(AS A PERCENTAGE OF AVERAGE NET ASSETS) (5)
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) See "Deductions and Charges-Contingent Withdrawal Charge" in Part 4. 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. See "Deductions and Charges - Transfer Charge" in
Part 4.
(3) 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. See "Deductions and Charges - Annual Administrative
Charge" in Part 4.
(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 Contrafund 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
For contracts issued before February 15, 1997, the Callan Asset Allocation and
Rebalancing Program uses the
33
<PAGE>
4-year Guaranteed Rate Option for the Fixed Income Investment Sector of the
Model.
HARDSHIP WAIVERS
For contracts issued before February 15, 1997, Hardship Waivers aren't
available.
FOR CONTRACTS ISSUED BEFORE MAY 1, 1999
HARDSHIP WAIVER
We can waive withdrawal charges on full or partial withdrawal requests of
$1,000 or more under a hardship circumstance. We can also waive the Market
Value Adjustment on any amounts withdrawn from the GRO Accounts. Hardship
circumstances include the Owner's (1) confinement to a nursing home, hospital
or long term care facility, (2) diagnosis of terminal illness with any
medical condition which would result in death or total disability, and (3)
unemployment. We can require reasonable notice and documentation including,
but not limited to, a physician's certification and Determination Letter from
a State Department of Labor. Some of the hardship circumstances listed above
may not apply in some states, and, in other states, may not be available at
all.
INVESTMENT OPTIONS
For contracts issued before May 1, 1999, Fidelity Investments VIP III Mid Cap
Fund is not yet available.
FIXED ACCOUNTS
SYSTEMATIC TRANSFER OPTION
STO is not available for contracts issued before July 7, 1998.
ANNUITY PAYMENTS
For contracts issued before May 1, 1999, additional annuitization options may
have been available.
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.
34
<PAGE>
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 90th
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.
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 - National Integrity Life Insurance Company, a subsidiary of ARM
Financial Group, Inc.
35
<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 - - - - - -
Number of Units - - - - - -
December 31, 1988 - - - - $9.79 $10.05
Number of Units - - - - 1,646 1,287
December 31, 1989 - - $10.99 $11.13 $12.08 $11.48
Number of Units - - 12,808 91 1,646 1,286
December 31, 1990 $10.17 - $9.54 $11.76 $11.13 $12.06
Number of Units 2,001 - 10,281 90 1,697 1,283
December 31, 1991 $10.64 - $13.63 $19.12 $13.63 $12.25
Number of Units 3,961 - 12,059 927 2,789 -
December 31, 1992 $10.90 - $15.72 $20.62 $12.01 $13.44
Number of Units 2,744 - 32,842 30,140 3,816 5,995
December 31, 1993 $11.10 $11.22 $18.33 $24.29 $16.25 $14.72
Number of Units 109,685 120,243 192,745 136,418 97,667 52,787
December 31, 1994 $11.42 $10.90 $19.37 $23.95 $16.31 $13.98
Number of Units 782,370 512,098 503,403 372,307 432,518 97,548
December 31, 1995 $11.93 $12.97 $25.81 $31.99 $17.65 $16.18
Number of Units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608
December 31, 1996 $12.40 $14.58 $29.09 $36.19 $19.71 $16.47
Number of Units 1,453,359 1,605,055 1,895,597 942,118 596,757 340,273
December 31, 1997 $12.90 $16.93 $36.77 $44.09 $21.69 $17.72
Number of Units 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402
December 31, 1998 $13.42 $15.98 $40.49 $60.67 $24.12 $19.02
Number of Units 2,302,396 2,101,650 2,160,698 1,016,514 682,756 487,242
</TABLE>
*The Inception date for the VIP High Income Option was February 19, 1993 and for
the VIP II Index 500 Option was March 4, 1993. The inception date for the VIP
III Balanced Option, VIP III Growth Opportunities Option, and VIP III Growth &
Income Option was December 31, 1996. The inception date for the VIP II
Contrafund Option and the Asset Manager: Growth Option was February 6, 1995.
Inception dates for the remaining Options all were in the third quarter of 1987.
Prior to September 3, 1991, the Variable Account Options invested in shares of
corresponding portfolios of Prism Investment Trust, and the VIP Money Market,
VIP Equity-Income, VIP Growth, VIP Overseas, VIP II Investment Grade Bond and
VIP II Asset Manager Options were known as the Money Market, Common Stock,
Aggressive Stock, Global, Bond and Balanced Options, respectively. The Inception
date for the VIP III Mid Cap Option was May 1, 1999.
36
<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 $7.92 - - - - - -
Number of Units 15,626 - - - - - -
December 31, 1988 $8.89 - - - - - -
Number of Units 23,806 - - - - - -
December 31, 1989 $11.05 - - - - - -
Number of Units 26,296 - - - - - -
December 31, 1990 $10.90 - - - - - -
Number of Units 33,770 - - - - - -
December 31, 1991 $13.45 - - - - - -
Number of Units 28,066 - - - - - -
December 31, 1992 $14.85 - - - - - -
Number of Units 57,934 - - - - - -
December 31, 1993 $17.73 $10.65 - - - - -
Number of Units 744,402 16,821 - - - - -
December 31, 1994 $16.43 $10.62 - - - - -
Number of Units 1,706,592 99,982 - - - - -
December 31, 1995 $18.95 $14.37 $13.31 $12.02 - - -
Number of Units 1,460,833 293,436 954,037 85,146 - - -
December 31, 1996 $21.42 $17.41 $15.92 $14.22 - - -
Number of Units 1,351,936 738,488 1,865,749 282,677 - - -
December 31, 1997 $25.50 $22.79 $19.50 $17.55 $11.36 $12.19 $11.99
Number of Units 1,277,528 1,458,280 2,463,777 447,420 175,229 321,915 320,952
December 31, 1998 $28.94 $28.85 $25.00 $20.35 $13.18 $15.58 $14.74
Number of Units 1,201,119 1,609,895 2,547,399 625,642 407,009 812,252 739,632
</TABLE>
*The Inception date for the VIP High Income Option was February 19, 1993 and
for the VIP II Index 500 Option was March 4, 1993. The Inception date for the
VIP II Contrafund Option and the VIP II Asset Manager: VIP Growth Option was
February 6, 1995. The inception date for the VIP III Balanced Option, VIP III
Growth Opportunities Option, and VIP III Growth & Income Option was December
31, 1996. The Inception date for 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.
37
<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
that 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 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$52,188.58 = $57,881.25 - $3,192.67 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, we would first determine
the free withdrawal amount:
$5,788.13 = $57,881.25 X .10
38
<PAGE>
The non-free amount would be:
$14,211.87 = $20,000.00 - $5,788.13
The Market Value Adjustment, which is only applicable to the non-free amount,
would be
- $783.91 = -0.0551589 X $14,211.87
The withdrawal charge would be:
$789.25 = [($14,211.87+ $783.91)/(1 - .05)] - ($14,211.87+ 783.91)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$21,573.16 = $20,000.00 + $783.91 + $789.25
The ending Account Value would be:
$36,308.09 = $57,881.25 - $21,573.16
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT:
An upward Market Value Adjustment results from a full or partial withdrawal that
occurs when interest rates have decreased. Assume interest rates have decreased
three years after the initial contribution and we are then crediting 4% for a
four-year GRO Account. Upon a full withdrawal, the Market Value Adjustment,
applying the formula set forth in the prospectus, would be:
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 5% would be assessed against the $50,000 original
contribution:
$2,500.00 = $50,000.00 X .05
Thus, the amount payable on a full withdrawal would be:
$57,064.96 = $57,881.25 + $1,683.71 - $2,500.00
If instead of a full withdrawal, $20,000 was requested, the free withdrawal
amount and non-free amount would first be determined as above:
Free Amount = $ 5,788.13
Non-Free Amount = $14,211.87
The Market Value Adjustment would be:
39
<PAGE>
$413.41 = .0290890 X $14,211.87
The withdrawal charge would be:
$726.23 = [($14,211.87 - $413.41)/(1 - .05)] - ($14,211.87 - $413.41)
Thus, the total amount needed to provide $20,000 after the Market Value
Adjustment and withdrawal charge would be:
$20,312.82 = $20,000.00 - $413.41 + $726.23
The ending Account Value would be:
$37,568.43 = $57,881.25 - $20,312.82
Actual Market Value Adjustments may have more or less impact than shown in the
examples, depending on the actual change in interest crediting rate and the
timing of the withdrawal or transfer in relation to the time remaining in the
GRO Account. Also, the Market Value Adjustment can never decrease the Account
Value below premium plus 3% interest, before any applicable charges. Account
values less than $50,000 will be subject to a $30 annual charge.
40
<PAGE>
APPENDIX C
SAI TABLE OF CONTENTS
Part 1 - National 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..........................................9
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
National Integrity Life Insurance Company
15 Matthews Street, Suite 200
Goshen, NY 10924
ATTN: Request for SAI of Separate Account I (Grandmaster III)
Name: ____________________________________________
Address: _________________________________________
City: ______________________ State:_____ Zip: ____
41
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
GRANDMASTER III
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National 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.............9
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 National Integrity Life Insurance
Company ("National Integrity"), 15 Matthews Street, Suite 200, Goshen, NY
10924, or by calling 1-800-433-1778.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity Life Insurance Company is a New York stock life insurance
company organized in 1968 that sells life insurance and annuities. Its
principal executive offices are located at 15 Matthews Street, Suite 200,
Goshen, NY 10924. National Integrity, the depositor of Separate Account I, is
a wholly owned subsidiary of Integrity Life Insurance Company, an Ohio
corporation. All outstanding shares of Integrity Life Insurance Company 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
National Integrity for management services in 1996 were $6,007,766, in 1997
were $5,855,216 and in 1998 were $8,766,003 including services applicable to
the Registrant.
National 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 National Integrity, as determined by A.M. Best
Company, Moody's Investor Service, Standard & Poor's Corporation, Duff &
Phelps Corporation, or other recognized rating services. National 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, National Integrity
doesn't guarantee the investment performance of the portfolios, and these
ratings don't reflect protection against investment risk.
TAX STATUS OF NATIONAL INTEGRITY
National Integrity is taxed as a life insurance company under Part I of
Subchapter L of the Internal Revenue Code of 1986, as amended (the CODE).
Since the Separate Accounts aren't separate entities from National Integrity
and their operations form a part of National Integrity, they aren't taxed
separately as "regulated investment companies" under Subchapter M of the
Code. Investment income and realized capital gains on the assets of the
Separate Accounts are reinvested and taken into account in determining the
accumulation value. Under existing federal income tax law, the Separate
Accounts' investment income, including realized net capital gains, isn't
taxed to National Integrity. National 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.
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 $1,753,582 for the year ended December 31, 1998,
$2,647,756 for the year ended December 31, 1997 and $2,229,269 for the year
ended December 31, 1996. Distribution allowances weren't retained by ARM
Securities during these years. National 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
1
<PAGE>
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)n = ERV, where P is a hypothetical initial
payment of $1,000, T is the average annual total return, n is the number of
years, and ERV is the withdrawal value at the end of the period.
CUMULATIVE TOTAL RETURNS are UNAVERAGED and reflect the simple percentage
change in the value of a hypothetical investment in the Option over a stated
period of time. In addition to the period since inception, cumulative total
returns may be calculated on a year-to-date basis at the end of each calendar
month in the current calendar year. The last day of the period for
year-to-date returns is the last day of the most recent calendar month at the
time of publication.
YIELDS
Some Options may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the Option over a stated
period of time, not taking into account capital gains or losses or any
contingent withdrawal charge. Yields are annualized and stated as a
percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period,
less a hypothetical charge reflecting deductions from contract values during
the period (the BASE PERIOD), and stated as a percentage of the investment at
the start of the base period (the BASE PERIOD RETURN). The base period return
is then annualized by multiplying by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. Effective yield
assumes that all dividends received during an annual period have been
reinvested. This compounding effect causes effective yield to be higher than
current yield. Calculation of effective yield begins with the same base
period return used in the calculation of current yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)365/7} - 1
2
<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 7.42% 8.47% n/a 11.47%
VIP II Asset Manager: Growth 2/8/95 9.91% n/a n/a 19.37%
VIP III Balanced 3/12/97 9.98% n/a N/a 14.48%
VIP II Contrafund 2/16/95 22.15% n/a N/a 26.11%
VIP Equity-Income 9/3/91 4.05% 16.88% n/a 16.61%
VIP Growth 9/3/91 31.54% 19.83% n/a 18.77%
VIP III Growth & Income 3/6/97 21.77% n/a n/a 25.24
VIP III Growth Opportunities 3/12/97 16.86% n/a n/a 22.03
VIP High Income 3/12/93 -11.69% 6.95% n/a 8.33%
VIP II Index 500 4/6/93 20.52% 21.80% n/a 20.14%
VIP II Investment Grade Bond 4/2/92 1.30% 4.89% n/a 6.12%
-------------------------------------------------------------------------------------
VIP Overseas 9/3/91 5.16% 7.85% n/a 8.50%
-----------------------------------------------------------------------------------------
</TABLE>
3
<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.
4
<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> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <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 12.4 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 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
5
<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.
6
<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.
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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 National Integrity or any of the Sub-Advisers derived from such indices or
averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
National 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
9
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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 National Integrity may issue a contract. National
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. National Integrity does not
administer such plans.
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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. National 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 National 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 National Integrity should be distinguished from
the financial statements of the Separate Account and should be considered
only as they relate to the ability of National 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 NATIONAL INTEGRITY LIFE INSURANCE COMPANY
This prospectus describes a flexible premium variable annuity contract offered
by National 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. There is no sales load on the contracts.
Contributions you make to the Variable Account Options are invested in shares
of corresponding Portfolios of the Variable Insurance Products Fund (VIP),
Variable Insurance Products Fund II (VIP II), and Variable Insurance Products
Fund III (VIP III) (the PORTFOLIOS or PORTFOLIO). The Portfolios are 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:
- - VIP Money Market Portfolio: Initial Class
- - VIP High Income Portfolio: Service Class
- - VIP Equity-Income Portfolio: Service Class
- - VIP Growth Portfolio: Service Class
- - VIP Overseas Portfolio: Service Class
- - VIP III Balanced Portfolio: Service Class
- - VIP III Growth & Income Portfolio: Service Class
- - VIP II Investment Grade Bond Portfolio: Initial Class
- - VIP II Asset Manager Portfolio: Service Class
- - VIP II Index 500 Portfolio: Initial Class
- - VIP II Contrafund Portfolio: Service Class
- - VIP II Asset Manager: Growth Portfolio: Service Class
- - VIP III Growth Opportunities Portfolio: Service Class
- - VIP III Mid Cap Portfolio: Service Class
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). An
annual administration charge may apply, which may invade principal. The money
you contribute to the STO grows at a fixed interest rate that we declare each
calendar quarter, guaranteed never to be less than an effective annual yield
of 3%. YOU MUST TRANSFER ALL CONTRIBUTIONS YOU MAKE TO THE STO INTO OTHER
INVESTMENT OPTIONS WITHIN ONE YEAR OF CONTRIBUTION ON A MONTHLY OR QUARTERLY
BASIS.
This prospectus contains information about the contracts that you should know
before you invest. Read this prospectus and any supplements, and retain them for
future reference. This prospectus isn't valid unless provided with the current
prospectus for the Portfolios, which you should also read.
For further information and assistance, contact our Administrative Office at
National Integrity Life Insurance Company, 15 Matthews Street, Suite 200,
Goshen, NY 10924. You may also call the following toll-free number:
1-800-433-1778.
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
<PAGE>
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.
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 IQ the SMARTAnnuity 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
<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 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
National 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..............................................................................11
State Premium Tax Deduction....................................................................11
Transfer Charge................................................................................12
Tax Reserve....................................................................................12
PART 5 - TERMS OF YOUR VARIABLE ANNUITY
Contributions Under Your Contract..............................................................12
</TABLE>
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<TABLE>
<S> <C>
Your Account Value.............................................................................12
Units in Our Separate Account..................................................................12
How We Determine Unit Value....................................................................13
Transfers......................................................................................13
Withdrawals....................................................................................14
Assignments....................................................................................14
Death Benefits and Similar Benefit Distributions...............................................14
Annuity Benefits...............................................................................15
Annuities......................................................................................15
Annuity Payments...............................................................................16
Timing of Payment..............................................................................16
How You Make Requests and Give Instructions....................................................16
PART 6 - VOTING RIGHTS
Voting Rights..................................................................................16
How We Determine Your Voting Shares............................................................17
How Portfolio Shares Are Voted.................................................................17
Separate Account Voting Rights.................................................................17
PART 7 - TAX ASPECTS OF THE CONTRACTS
Introduction...................................................................................17
Your Contract is an Annuity....................................................................17
Taxation of Annuities Generally................................................................18
Distribution-at-Death Rules....................................................................19
Diversification Standards......................................................................19
Tax-Favored Retirement Programs................................................................19
Federal and State Income Tax Withholding.......................................................19
Impact of Taxes to National Integrity..........................................................19
Transfers Among Investment Options.............................................................19
PART 8 - ADDITIONAL INFORMATION
Systematic Withdrawals.........................................................................20
Income Plus Withdrawal Program.................................................................20
Dollar Cost Averaging..........................................................................21
Systematic Transfer Program....................................................................21
Customized Asset Rebalancing...................................................................21
Callan Asset Allocation and Rebalancing Program................................................21
Performance Information........................................................................22
PART 9 - PRIOR CONTRACTS
Prior Contracts................................................................................23
GLOSSARY.......................................................................................26
</TABLE>
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<TABLE>
<S> <C>
Appendix A - Financial Information...........................................................28
Appendix B - Illustration of a Market Value Adjustment.......................................30
Appendix C - SAI Table of Contents...........................................................32
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
<PAGE>
PART 1 - SUMMARY
YOUR VARIABLE ANNUITY CONTRACT
In this prospectus, "we," "our" and "us" mean National Integrity Life Insurance
Company (NATIONAL INTEGRITY), a subsidiary of Integrity Life Insurance Company
and an indirect 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
distributions.
You can invest for retirement by buying an IQ Smart Annuity if you properly
complete a Customer Profile form (an application or enrollment form may be
required in some states) and make a minimum initial contribution. Because the
premium is flexible, your future contributions can be any amount you choose, as
long as they are above the minimum required contribution, discussed below.
The latest your endowment or "retirement" date can be is your 90th 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. 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
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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 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 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 1.45% is deducted from the
Account Value of each of your Variable Account Options to cover mortality and
expense risks (1.30%) and certain administrative expenses (.15%). The charge
will never be greater than this. For more information, see Part 4,
"Deductions and Charges."
Investment advisory fees and other expenses are deducted from amounts the
Separate Account invests in the Portfolios. Fidelity Management and Research
Company 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.
YOUR INITIAL RIGHT TO REVOKE
You can cancel your contract within ten days after you receive it by
returning it to our Administrative Office. We will extend the ten-day period
as required by law in some states. If you cancel your contract, we'll return
your entire contribution, with adjustments made for any investment gain or
loss experienced by the Variable Account Option from the date you purchased
it until the date we receive your cancelled contract, including any charges
deducted. If your state requires, we'll return all of your contributions
without any adjustment. We'll return the amount of any contribution to the
Guaranteed Rate Option upon cancellation.
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RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
VARIABLE ANNUITY INVESTMENT GOALS
The investment goals of the IQ SMARTAnnuity are protecting your investment,
building for retirement and providing future income. We strive to achieve
these goals through extensive portfolio diversification and superior
portfolio management.
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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. National 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
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load on Purchases.......................................... $0
Exchange Fee (1)................................................. $0
ANNUAL ADMINISTRATIVE CHARGE
Annual Administrative Charge* .................................. $30
</TABLE>
* This charge applies only if the Account Value is less than $50,000 at the
end of any contract year prior to your Retirement Date. See "Annual
Administrative Charge" in Part 4.
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) (2)
<TABLE>
<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(5) 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%(5) .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, 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.
(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
6
<PAGE>
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.
7
<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 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.
8
<PAGE>
CONSOLIDATED FINANCIAL INFORMATION IS FOUND IN APPENDIX A
9
<PAGE>
PART 2 - NATIONAL INTEGRITY AND THE SEPARATE ACCOUNT
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
National Integrity is a stock life insurance company organized under the laws of
New York. Our principal executive office is in Goshen, NY. We are authorized to
sell life insurance and annuities in nine states and the District of Columbia.
We sell flexible premium annuity contracts with underlying investment options
other than the Funds, and fixed single premium annuities. We also provide
administrative and investment support for products designed, underwritten and
sold by other companies.
National 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 New York. 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 New York 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 National 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;
- - 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.
10
<PAGE>
11
<PAGE>
PART 3 - YOUR INVESTMENT OPTIONS
THE PORTFOLIOS
Management fees and other expenses deducted from each Portfolio are described
in that Portfolio's prospectus. FOR A PROSPECTUS CONTAINING MORE COMPLETE
INFORMATION ON ANY PORTFOLIO, CALL OUR ADMINISTRATIVE OFFICE TOLL-FREE AT
1-800-433-1778.
Each of the Portfolios is an open-end diversified management investment company
registered with the SEC.
The Portfolios serve as investment vehicles for variable annuity and
variable life contracts of insurance companies. Shares of the Portfolios are
currently available to the separate accounts of a number of insurance
companies, both affiliated and unaffiliated with FMR or National 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.
12
<PAGE>
VIP GROWTH PORTFOLIO
VIP Growth Portfolio seeks capital appreciation. FMR invests the Portfolio's
assets in companies FMR believes have above-average growth potential. Growth
may be measured by factors such as earnings or revenue. Companies with high
growth potential tend to be companies with higher than average price/earnings
(P/E) ratios. Companies with strong growth potential often have new
products, technologies, distribution channels or other opportunities for have
a strong industry market position. The stocks of these companies are often
called "growth" stocks.
VIP OVERSEAS PORTFOLIO
VIP Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. It normally invests at least 65% of its
assets in foreign securities.
VIP II INVESTMENT GRADE BOND PORTFOLIO
VIP II Investment Grade Bond Portfolio seeks as high a level of current income
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>
13
<PAGE>
VIP III GROWTH OPPORTUNITIES PORTFOLIO
VIP III Growth Opportunities Portfolio seeks to provide capital growth. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR may
also invest the Portfolio's assets in other types of securities, including
bonds, which may be lower-quality debt securities.
VIP III BALANCED PORTFOLIO
VIP III Balanced Portfolio seeks both income and growth of capital by
investing 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.
VPI 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.
VPI 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.
14
<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.
ALLOCATIONS TO GROS MAY NOT BE MADE UNDER CONTRACTS ISSUED IN CERTAIN STATES.
RENEWALS OF GRO ACCOUNTS. When a GRO Account expires, we'll set up a new GRO
Account for the same duration as your old one, at the then-current Guaranteed
Interest Rate, unless you withdraw your GRO Value or transfer it to another
Investment Option. We'll notify you in writing before your GRO Account expires.
You must tell us before the expiration of your GRO Accounts if you want to make
any changes.
The effective date of a renewal of a GRO Account will be the expiration date
of the old GRO Account. You will receive the Guaranteed Interest Rate that is
in effect on that date. If a GRO Account expires and it can't be renewed for
the same duration, the new GRO Account will be set up for the next shortest
available duration. For example, if your expiring GRO Account was for 10
years and when it expires, we don't offer a 10-year GRO, but we do offer a
seven-year GRO, your new one will be for seven years. If you want something
different, you can tell us within 30 days
15
<PAGE>
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 contributions to the GRO Account, less previous
withdrawals from the GRO Account and administrative charges, plus 3% interest,
compounded annually. 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 shall 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.
16
<PAGE>
SYSTEMATIC TRANSFER OPTION
We also offer a Systematic Transfer Option that guarantees an interest rate
that we declare in advance for each calendar quarter. This interest rate
applies to all contributions 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. 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
National 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 National 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 National Integrity
takes that annuitants, as a class of persons, will live longer than estimated
and National Integrity will be required to pay out more annuity benefits than
anticipated. The relative proportion of the mortality and expense risk charges
may be changed, but the total 1.30% effective annual risk charge can't be
increased.
National 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, National 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 prorated in the event of the Annuitant's retirement,
death, annuitization, or termination of a contract during a contract year.
REDUCTION OR ELIMINATION OF SEPARATE ACCOUNT OR ADMINISTRATIVE CHARGES
We can reduce or eliminate the separate account or administrative charges for
individuals or groups of individuals if 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.
17
<PAGE>
STATE PREMIUM TAX DEDUCTION
National 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%.
18
<PAGE>
TRANSFER CHARGE
If you make more than twelve transfers among your Investment Options during one
contract year, we may charge your account up to $20 for each additional transfer
during that year. Transfer charges don't apply to transfers under (i) Dollar
Cost Averaging, (ii) Customized Asset Rebalancing, (iii) 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.
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 National
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 Option. Wire transfers of federal funds are deemed
received on the day of transmittal if credited to our account by 3 p.m. Eastern
Time, otherwise they are deemed received on the next Business Day. Contributions
by check or mail are deemed received when they are delivered in good order to
our Administrative Office. A BUSINESS DAY is defined as any day that the New
York Stock Exchange is open.
You can change your choice of Investment Options at any time by writing to the
Administrative Office. The request should indicate your contract number and the
specific change you want to make, and you should sign the request. When the
Administrative Office receives it, the change will be effective for any
contribution that accompanies it and for all future contributions. We can also
accept changes by telephone transfer. See "Transfers" in Part 5.
YOUR ACCOUNT VALUE
Your Account Value reflects various charges. See Part 4, "Deductions and
Charges." Annual deductions are made as of the last day of each contract year.
Market Value Adjustments, if applicable, are made as of the effective date of
the transaction. Charges against our Separate Account are reflected daily. Any
amount allocated to a Variable Account Option will go up or down in value
depending on the investment experience of that Option. The value of
contributions made to the Variable Account Options isn't guaranteed. The value
of your contributions made to Fixed Accounts is guaranteed, subject to any
applicable Market Value Adjustments. See "Guaranteed Rate Options" in Part 3.
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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 1.45%. 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 National 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.
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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 will be effective as of the Business Day our Administrative
Office receives it. A transfer request doesn't change the allocation of current
or future contributions among the Investment Options. Telephone transfers may be
requested from 9:00 a.m. - 5:00 p.m., Eastern Time, on any day we're open for
business. You'll receive the Variable Account Options' unit values as of the
close of business on the day you call. Transfer requests received after 4:00
p.m. 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.
When you make a partial withdrawal, the total amount deducted from your
Account Value will include the withdrawal amount requested plus any Market
Value Adjustments. The total amount that you receive will be the total
amount that you requested. Most of the withdrawals you make before you are
59 1/2 years old are subject to a 10% federal tax penalty. If your contract is
part of a tax-favored plan, the plan may limit your withdrawals. See Part 7,
"Tax Aspects of the Contracts."
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.
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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 90th 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
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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 90th 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.
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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.
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 National Integrity to defer action in order to
protect persons with interests in the Separate Account. National Integrity
can defer payment of your Fixed Accounts for up to six months, and interest
will be paid on any such payment delayed for 30 days or more.
HOW YOU MAKE REQUESTS AND GIVE INSTRUCTIONS
When you write to our Administrative Office, use the address on the first page
of this prospectus. We can't honor your 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
National 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
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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
meeting of the shareholders. After annuity payments have begun, voting rights
are calculated in a similar manner based on the actuarially determined value
of your interest in each Variable Account Option.
HOW PORTFOLIO SHARES ARE VOTED
All Portfolio shares are entitled to one vote; fractional shares have fractional
votes. Voting is on a Portfolio-by-Portfolio basis, except for certain matters
(for example, election of Directors) that require collective approval. On
matters where the interests of the individual Portfolios differ, the approval of
the shareholders in one Portfolio isn't needed to make a decision in another
Portfolio. If shares of the Portfolios are sold to separate accounts of other
insurance companies, the shares voted by those companies in accordance with
instructions received from their contract holders will dilute the effect of
voting instructions received by National 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 National 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
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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. NATIONAL 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 first treated as taxable income, but only to the extent of the increase
of the Account Value. The rest of the withdrawal, representing your basis in
the annuity, isn't taxable. Generally, the investment or basis in the
contract equals the contributions made by or on your behalf, minus any
amounts previously withdrawn that were not treated as taxable income. Special
rules may apply if the contract includes contributions made prior to August
14, 1982 that were rolled over to the contract in a tax-free exchange.
If you take annuity payments over the lifetime of the annuitant, part of each
payment is considered to be a tax-free return of your investment. This
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
notifies us of that election.
The taxable portion of a distribution is treated as ordinary income and is
taxed at ordinary income tax rates. In addition, you may be subject to a tax
penalty of 10% on the taxable portion of a distribution unless it is:
(1) on or after the date on which the taxpayer attains age 59 1/2;
(2) as a result of the 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;
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(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); or
(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 National 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
National 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.
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IMPACT OF TAXES ON NATIONAL INTEGRITY
The contracts allow National Integrity to charge the Separate Account for taxes.
National 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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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.
You may also specify an account for direct deposit of your systematic
withdrawals. To enroll in our systematic withdrawal program, send the
appropriate form to our Administrative Office. Withdrawals may begin as soon as
one business day after we receive the form. You may terminate your participation
in the program upon one day's prior written notice, and we may terminate or
change the systematic withdrawal program at any time. If on any withdrawal date
you don't have enough money in your Account to make all of the withdrawals you
have specified, no withdrawal will be made and your enrollment in the program
will be ended.
Amounts you withdraw under the systematic withdrawal program may be within
the free withdrawal amount. If so, we won't make a Market Value Adjustment.
AMOUNTS WITHDRAWN FROM YOUR GRO ACCOUNT UNDER THE SYSTEMATIC WITHDRAWAL
PROGRAM IN EXCESS OF THE FREE WITHDRAWAL AMOUNT WILL BE SUBJECT TO 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 the form. You may end your participation in the program upon
seven Business Days prior written notice, and we may terminate or change the
Income Plus Program at any time. If on any withdrawal date you 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 MARKET VALUE ADJUSTMENT IF APPLICABLE.
29
<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 contribution 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
30
<PAGE>
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. Total returns
also may be shown that don't take into account 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.
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.
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<PAGE>
For a detailed description of the methods used to determine yield and total
return for the Variable Account Options, see the Statement of Additional
Information.
PART 9 - PRIOR CONTRACTS
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
yet available.
SEPARATE ACCOUNT ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the Mortality and Expense Risk Fees
are 1.20%, Administrative Expenses are .15% and Total Separate Account Annual
Expenses are 1.35%.
FUND ANNUAL EXPENSES
For contracts issued prior to May 1, 1999, the 0.10% charge imposed by
certain of the Portfolios pursuant to a Rule 12b-1 Plan doesn't apply. (This
charge is reflected in the "Other Expenses" column of the underlying mutual
funds in the Table of Annual Fees and Expenses).
TABLE OF ANNUAL FEES AND EXPENSES
<TABLE>
<S> <C>
CONTRACT OWNER 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%
</TABLE>
32
<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................................ .20% .10% .30%
VIP High Income................................. .58% .24% .82%
VIP Equity-Income............................... .49% .08%(3) .57%
VIP Growth...................................... .59% .07%(3) .66%
VIP Overseas.................................... .74% .15%(3) .89%
VIP II Investment Grade Bond .43% .14% .57%
VIP II Asset Manager............................ .54% .09%(3) .63%
VIP II Index 500................................ .24% .04% .28%(4)
VIP II Contrafund............................... .59% .07%(3) .66%
VIP II Asset Manager............................ .59% .13%(3) .72%
VIP III Balanced................................ .44% .14%(3) .58%
VIP III Growth Opportunities .59% .11%(3) .70%
VIP III Growth & Income......................... .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
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.
34
<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 90th
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.
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<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 - National 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 - - - - - -
Number of Units - - - - - -
December 31, 1988 - - - - $9.79 $10.05
Number of Units - - - - 1,646 1,287
December 31, 1989 - - $10.99 $11.13 $12.08 $11.48
Number of Units - - 12,808 91 1,646 1,286
December 31, 1990 $10.17 - $9.54 $11.76 $11.13 $12.06
Number of Units 2,001 - 10,281 90 1,697 1,283
December 31, 1991 $10.64 - $13.63 $19.12 $13.63 $12.25
Number of Units 3,961 - 12,059 927 2,789 -
December 31, 1992 $10.90 - $15.72 $20.62 $12.01 $13.44
Number of Units 2,744 - 32,842 30,140 3,816 5,995
December 31, 1993 $11.10 $11.22 $18.33 $24.29 $16.25 $14.72
Number of Units 109,685 120,243 192,745 136,418 97,667 52,787
December 31, 1994 $11.42 $10.90 $19.37 $23.95 $16.31 $13.98
Number of Units 782,370 512,098 503,403 372,307 432,518 97,548
December 31, 1995 $11.93 $12.97 $25.81 $31.99 $17.65 $16.18
Number of Units 1,692,564 1,131,907 1,316,163 657,586 426,045 264,608
December 31, 1996 $12.40 $14.58 $29.09 $36.19 $19.71 $16.47
Number of Units 1,453,359 1,605,055 1,895,597 942,118 596,757 340,273
December 31, 1997 $12.90 $16.93 $36.77 $44.09 $21.69 $17.72
Number of Units 1,407,666 2,108,548 2,245,172 1,026,856 703,364 403,402
December 31, 1998 $13.42 $15.98 $40.49 $60.67 $24.12 $19.02
Number of Units 2,302,396 2,101,650 2,160,698 1,016,514 682,756 487,242
</TABLE>
*Inception dates for the VIP High Income Option and the VIP II Index 500
Option were February 19, 1993 and March 4, 1993, respectively. The inception
date for the VIP III Balanced Option, VIP III Growth Opportunities Option,
and VIP III Growth & Income Option was December 31, 1996. The Inception date
for the VIP II Contrafund Option and the VIP II Asset Manager: Growth Option
was February 6, 1995. Inception dates for the remaining Options all were in
the third quarter of 1987. Prior to September 3, 1991, the Variable Account
Options invested in shares of corresponding portfolios of Prism Investment
Trust, and the VIP Money Market, VIP Equity-Income, VIP Growth, VIP Overseas,
VIP II Investment Grade Bond and VIP II Asset Manager Options were known as
the Money Market, Common Stock, Aggressive Stock, Global, Bond and Balanced
Options, respectively. The inception Date for the VIP III Mid Cap Option was
May 1, 1999.
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<PAGE>
<TABLE>
<CAPTION>
UNIT VALUES AND UNITS OUTSTANDING
---------------------------------
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 $7.92 - - - - - -
Number of Units 15,626 - - - - - -
December 31, 1988 $8.89 - - - - - -
Number of Units 23,806 - - - - - -
December 31, 1989 $11.05 - - - - - -
Number of Units 26,296 - - - - - -
December 31, 1990 $10.90 - - - - - -
Number of Units 33,770 - - - - - -
December 31, 1991 $13.45 - - - - - -
Number of Units 28,066 - - - - - -
December 31, 1992 $14.85 - - - - - -
Number of Units 57,934 - - - - - -
December 31, 1993 $17.73 $10.65 - - - - -
Number of Units 744,402 16,821 - - - - -
December 31, 1994 $16.43 $10.62 - - - - -
Number of Units 1,706,592 99,982 - - - - -
December 31, 1995 $18.95 $14.37 $13.31 $12.02 - - -
Number of Units 1,460,833 293,436 954,037 85,146 - - -
December 31, 1996 $21.42 $17.41 $15.92 $14.22 - - -
Number of Units 1,351,936 738,488 1,865,749 282,677 - - -
December 31, 1997 $25.50 $22.79 $19.50 $17.55 $11.36 $12.19 $11.99
Number of Units 1,277,528 1,458,28038 2,463,777 447,420 175,229 321,915 320,952
December 31, 1998 $28.94 $28.85 $25.00 $20.35 $13.18 $15.58 $14.74
Number of Units 1,201,119 1,609,895 2,547,399 625,642 407,009 812,252 739,632
</TABLE>
* Inception dates for the VIP High Income Option and the VIP II Index 500
Option were February 19, 1993 and March 4, 1993, respectively. The Inception
date for the VIP II Contrafund Option and the VIP II Asset Manager: Growth
Option was February 6, 1995. The inception date for the VIP III Balanced
Option, VIP III Growth Opportunities Option, and VIP III Growth & Income
Option was December 31, 1996. The Inception Date for the VIP III Mid Cap
Option was May 1, 1999. Inception dates for the remaining Options all were
in the third quarter of 1987. Prior to September 3, 1991, the Variable
Account Options invested in shares of corresponding portfolios of Prism
Investment Trust, and the VIP Money Market, VIP Equity-Income, VIP Growth,
VIP Overseas, VIP II Investment Grade Bond and VIP II Asset Manager Options
were known as the Money Market, Common Stock, Aggressive Stock, Global,
Bond and Balanced Options, respectively.
For contracts issued on or after May 1, 1999, condensed financial information
isn't provided for any of the Variable Account Options because as of the date
of this prospectus the Options hadn't started operations. The unit value for
each Investment Option at inception will be $10.00. The inception date for
the Variable Account Options is May 1, 1999.
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<PAGE>
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Contribution: $50,000.00
GRO Account duration: 7 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
</TABLE>
The following examples illustrate how the Market Value Adjustment may affect the
values of a contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate
is the same rate used in the Example under "Table of Annual Fees and Expenses"
in this Prospectus. In these examples, the withdrawal occurs at the end of the
three year period after the initial contribution. The Market Value Adjustment
operates in a similar manner for transfers.
The GRO Value for this $50,000 contribution is $70,355.02 at the expiration of
the GRO Account. After three years, the GRO Value is $57,881.25. It is also
assumed, for the purposes of these examples, that no prior partial withdrawals
or transfers have occurred.
The Market Value Adjustment will be based on the rate we are then crediting (at
the time of the withdrawal) on new contributions to GRO Accounts of the same
duration as the time remaining in your GRO Account, rounded to the next lower
number of complete months. If we do not 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.
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
Thus, the amount payable on a full withdrawal (the Market Adjusted Value) would
be:
$54,688.58 = $57,881.25 - $3,192.67
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<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 a greater or lesser impact than shown
in the examples, depending on the actual change in interest crediting rate and
the timing of the withdrawal or transfer in relation to the time remaining in
the GRO Account. Also, the Market Value Adjustment can never decrease the
Account Value below premium plus 3% interest, before any applicable charges.
Account values less than $50,000 will be subject to a $30 annual charge.
40
<PAGE>
APPENDIX C
<TABLE>
SAI TABLE OF CONTENTS
<S> <C>
Part 1 - National 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......................................... 8
Traditional Individual Retirement Annuities................................ 9
Roth Individual Retirement Annuities....................................... 9
SIMPLE Individual Retirement Annuities..................................... 9
Simplified Employee Pensions............................................... 9
Corporate and Self-Employed (H.R. 10 and Keogh) Pension
and Profit Sharing Plans................................................. 9
Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations................................................ 10
Distributions Under Tax Favored Retirement Programs....................... 10
Part 6 - Financial Statements................................................... 11
</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
National Integrity Life Insurance Company
15 Matthews Street, Suite 200
Goshen, NY 10924
ATTN: Request for SAI of Separate Account I (IQ)
Name:
--------------------------------------------------------------
Address:
------------------------------------------------------------
City: State: Zip:
---------------------------- --------- -------------
41
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
FOR
IQ THE SMARTANNUITY
FLEXIBLE PREMIUM VARIABLE ANNUITY
ISSUED BY
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
AND
FUNDED THROUGH ITS SEPARATE ACCOUNT I
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part 1 - National Integrity and Custodian................................................................1
Part 2 - Distribution of the Contracts...................................................................1
Part 3 - Performance Information.........................................................................2
Part 4 - Determination of Annuity Unit Values............................................................7
Part 5 - Tax Favored Retirement Programs.................................................................8
Traditional Individual Retirement Annuities.........................................................9
Roth Individual Retirement Annuities................................................................9
SIMPLE Individual Retirement Annuities..............................................................9
Tax Sheltered Annuities.............................................................................9
Simplified Employee Pensions........................................................................9
Corporate and Self-Employed (H.R.10 and Keogh) Pension and Profit Sharing Plans.....................9
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations............10
Distributions Under Tax Favored Retirement Programs................................................10
Part 6 - Financial Statements...........................................................................11
</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 National Integrity Life Insurance
Company ("National Integrity"), 15 Matthews Street, Suite 200, Goshen, NY
10924, or by calling 1-800-433-1778.
<PAGE>
PART 1 - NATIONAL INTEGRITY AND CUSTODIAN
National Integrity Life Insurance Company is a New York stock life insurance
company organized in 1968 that sells life insurance and annuities. Its
principal executive offices are located at 15 Matthews Street, Suite 200,
Goshen, NY 10924. National Integrity, the depositor of Separate Account I, is
a wholly owned subsidiary of Integrity Life Insurance Company, an Ohio
corporation. All outstanding shares of Integrity Life Insurance Company 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
National Integrity for management services in 1996 were $6,007,766, in 1997
were $5,855,216 and in 1998 were $8,766,003 including services applicable to
the Registrant.
National 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 National Integrity, as determined by A.M. Best
Company, Moody's Investor Service, Standard & Poor's Corporation, Duff &
Phelps Corporation, or other recognized rating services. National 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, National Integrity
doesn't guarantee the investment performance of the portfolios, and these
ratings don't reflect protection against investment risk.
PART 2 - DISTRIBUTION OF THE CONTRACTS
ARM Securities, a wholly owned subsidiary of ARM, is the principal
underwriter of the contracts. ARM Securities is registered with the SEC as a
broker-dealer and is a member in good standing of the National Association of
Securities Dealers, Inc. ARM Securities' address is 515 West Market Street,
Louisville, Kentucky 40202. The contracts are offered through ARM Securities
on a continuous basis.
We generally pay a maximum distribution allowance of 6% of initial and
additional contributions, plus .30% trail commission paid on Account Value
after the 2nd Contract Year or 2.25% of initial and additional contributions
plus 1% trail commission paid on Account Value after the 2nd Contract Year.
The amount of distribution allowances paid was $1,753,582 for the year ended
December 31, 1998, $2,647,756 for the year ended December 31, 1997 and
$2,229,269 for the year ended December 31, 1996. Distribution allowances
weren't retained by ARM Securities during these years. National 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.
1
<PAGE>
PART 3 - PERFORMANCE INFORMATION
Each Variable Account Option may from time to time include the Average Annual
Total Return, the Cumulative Total Return, and Yield of its shares in
advertisements or in information furnished to shareholders. The VIP Money
Market Option may also from time to time include the Yield and Effective
Yield of its shares in information furnished to shareholders. Performance
information is computed separately for each Option in accordance with the
formulas described below. At any time in the future, total return and yields
may be higher or lower than in the past and we can't guarantee that any
historical results will continue.
TOTAL RETURNS
Total returns reflect all aspects of an Option's return, including the
automatic reinvestment by the Option of all distributions and the deduction
of all charges that apply to the Option on an annual basis, including
mortality risk and expense charges, the annual administrative charge and
other charges against contract values. For purposes of charges not based upon
a percentage of contract values, an average account value of $40,000 has been
used. Quotations also will assume a termination (surrender) at the end of the
particular period. 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 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. Yields are annualized
and stated as a percentage.
CURRENT YIELD and EFFECTIVE YIELD are calculated for the VIP Money Market
Option. Current Yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular 7-day period,
less a hypothetical charge reflecting deductions from contract values during
the period (the BASE PERIOD), and stated as a percentage of the investment at
the start of the base period (the BASE PERIOD RETURN). The base period return
is then annualized by multiplying by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. Effective yield
assumes that all dividends received during an annual period have been
reinvested. This compounding effect causes effective yield to be higher than
current yield. Calculation of effective yield begins with the same base
period return used in the calculation of current yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = {(Base Period Return) + 1)(365/)7} - 1
2
<PAGE>
For the period ending: 12/31/98
RETURNS WITH SURRENDER CHARGES
<TABLE>
<CAPTION>
SEC STANDARDIZED
VARIABLE AVERAGE ANNUAL RETURN (1)
ACCOUNT ---------------------------------------------------
INCEPTION
VARIABLE OPTIONS DATE (2) 1 YEAR 5 YEAR 10 YEAR LIFE OF ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 3/12/97 15.98% n/a N/a 16.45%
VIP II Contrafund 2/16/95 28.15% n/a n/a 26.63%
VIP Equity-Income 9/3/91 10.05% 17.09% n/a 16.61%
VIP Growth 9/3/91 37.54% 30.02% n/a 18.77%
VIP III Growth & Income 3/6/97 27.77% n/a n/a 27.51%
VIP III Growth Opportunities 3/12/97 22.86% n/a n/a 23.90%
VIP High Income 3/12/93 -6.69% 7.25% n/a 8.33%
VIP II Index 500 4/6/93 26.52% 21.98% n/a 20.22%
VIP II Investment Grade Bond 4/2/93 7.30% 5.18% n/a 6.12%
---------------------------------------------------------------------------------------------------
VIP Overseas 9/3/91 11.16% 8.14% n/a 8.50%
---------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
(1) Standard average annual return reflects past fund performance based on a
$1,000 hypothetical investment period over the 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.
4
<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> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <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 12.4 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 1.45%. 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.
5
<PAGE>
Each Option may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (LIPPER) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual
funds. Each Option may also from time to time compare its performance to
average mutual fund performance figures compiled by Lipper in LIPPER
PERFORMANCE ANALYSIS. Advertisements or information furnished to present
shareholders or prospective investors may also include evaluations of an
Option published by nationally recognized ranking services and by financial
publications that are nationally recognized such as BARRON'S, BUSINESS WEEK,
CDA TECHNOLOGIES, INC., CHANGING TIMES, CONSUMER'S DIGEST, DOW JONES
INDUSTRIAL AVERAGE, FINANCIAL PLANNING, FINANCIAL TIMES, FINANCIAL WORLD,
FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S FINANCIAL DIGEST, INSTITUTIONAL
INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUNDS, THE NEW YORK
TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT ADVISER, VALUE LINE, THE WALL
STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY SERVICE AND USA TODAY.
The performance figures described above may also be used to compare the
performance of an Option's shares against certain widely recognized standards
or indices for stock and bond market performance. The following are the
indices against which the Options may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate
market value of 500 stocks relative to the base period 1941-43. The S&P 500
Index is composed almost entirely of common stocks of companies listed on the
NYSE, although the common stocks of a few companies listed on the American
Stock Exchange or traded OTC are included. The 500 companies represented
include 400 industrial, 60 transportation and 50 financial services concerns.
The S&P 500 Index represents about 80% of the market value of all issues
traded on the NYSE.
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
6
<PAGE>
Bond Index with maturities between one and 9.99 years. Total return comprises
price appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of
$1 million, that are rated investment grade or higher by a nationally
recognized statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of
10 years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100
of the largest NASDAQ stocks. It is a value-weighted index calculated on
price change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
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.
7
<PAGE>
The SEI Median Balanced Fund Universe measures a group of funds with an
average annual equity commitment and an average annual bond - plus - private
- - placement commitment greater than 5% each year. SEI must have at least two
years of data for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest
U.S. companies by market capitalization. The smallest company has a market
value of roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell
1000 Index, which represents the universe of stocks from which most active
money managers typically select; and all the stocks in the Russell 2000
Index. The largest security in the index has a market capitalization of
approximately 1.3 billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over
time, in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents
an historical measure of yield, price and total return for common and small
company stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
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 National Integrity or any of the Sub-Advisers derived from such indices or
averages.
INDIVIDUALIZED COMPUTER GENERATED ILLUSTRATIONS
National Integrity may from time to time use computer-based software
available through Morningstar, CDA/Wiesenberger and/or other firms to provide
registered representatives and existing and/or potential owners of the
contracts with individualized hypothetical performance illustrations for some
or all of the Variable Account Options. Such illustrations may include,
without limitation, graphs, bar charts and other types of formats presenting
the following information: (i) the historical results of a hypothetical
investment in a single Option; (ii) the historical fluctuation of the value
of a single Option (actual and hypothetical); (iii) the historical results of
a hypothetical investment in more than one Option; (iv) the historical
performance of two or more market indices in relation to one another and/or
one or more Options; (v) the historical performance of two or more market
indices in comparison to a single Option or a group of Options; (vi) a market
risk/reward scatter chart showing the historical risk/reward relationship of
one or more mutual funds or Options to one or more indices and a broad
category of similar anonymous variable annuity subaccounts; and (vii) Option
data sheets showing various information about one or more Options (such as
information concerning total return for various periods, fees and expenses,
standard deviation, alpha and beta, investment objective, inception date and
net assets). We reserve the right to republish figures independently provided
by Morningstar or any similar agency or service.
PART 4 - DETERMINATION OF ANNUITY UNIT VALUES
8
<PAGE>
The annuity unit value was initially fixed at $1.00 for contracts with
assumed base rates of net investment return of 5% and 3.5% a year,
respectively. For each valuation period thereafter, it is the annuity value
for the preceding valuation period multiplied by the adjusted net investment
factor under the contracts. For each valuation period, the adjusted net
investment factor is equal to the net investment factor reduced for each day
in the valuation period by:
* .00013366 for a contract with an assumed base rate of net investment
return of 5% a year; or
* .00009425 for a contract with an assumed base rate of net investment
return of 3.5% a year.
Because of this adjustment, the annuity unit value rises and falls depending
on whether the actual rate of net investment return (after charges) is higher
or lower than the assumed base rate.
All certificates have a 5% assumed base rate, except in states where that
rate is not permitted. Annuity payments under contracts with an assumed base
rate of 3.5% will at first be smaller than those under contracts with a 5%
assumed base rate. Payments under the 3.5% contracts, however, will rise
more rapidly when unit values are rising, and payments will fall more slowly
when unit values are falling, than those under 5% contracts.
The amounts of variable annuity payments are determined as follows:
Payments normally start on the Annuitant's retirement date. The first three
monthly payments are the same and will be based on the amount taken from the
tables in the contract or on our current rates, whichever is more favorable
to the participant. Where the Company's current annuity rates are used,
contributions in the current and five prior participation years will qualify
for the Company's current individual annuity rates applicable to funds
derived from sources outside the Company. The balance of the proceeds will
qualify for the Company's current individual annuity rates for payment of
proceeds.
The first three monthly payments depend on the assumed base rate of net
investment return and the forms of annuity chosen (and any fixed period). If
the annuity involves a life contingency, the risk class and the age of the
annuitants will affect payments.
Payments after the first three months will vary according to the investment
performance of the Variable Account Option or Options selected. After that,
each payment will be calculated by multiplying the number of annuity units
credited by the average annuity unit value for the second calendar month
before the due date of the payment. The number of annuity units credited
equals the initial periodic payment divided by the annuity unit value for the
valuation period that includes the due date of the first annuity payment. The
average annuity unit value is the average of the annuity unit values for the
valuation periods ending in that month. Each business day is considered a
valuation period. Days that aren't considered business days are added to the
next business day and constitute one valuation period. For example, Saturday,
Sunday and Monday are considered to be one valuation period.
ILLUSTRATION OF CHANGES IN ANNUITY UNIT VALUES. To show how we determine
variable annuity payments from month to month, assume that the contract value
on a retirement date is enough to fund an annuity with a monthly payment of
$363 and that the annuity unit value for the valuation period that includes
the due date of the first annuity payment is $1.05. The number of annuity
units credited under your contract would be 345.71 (363 divided by 1.05 =
345.71).
If the fourth monthly payment is due in March, and the average annuity unit
value for January was $1.10, the annuity payment for March would be the
number of units (345.71) times the average annuity unit value ($1.10), or
$380.28. If the average annuity unit value was $1.00 in February, the annuity
payment for April would be 345.71 times $1.00, or $345.71.
For period certain life annuities and life income annuities, the participant
may not surrender or redeem once annuity payments begin. For period certain
life annuities only, if the payee (or the payee and the other annuitant under
a joint and survivor annuity) dies before the period selected ends, the
remaining payments will go to another named payee who may have the right to
redeem the annuity and get the cash value of future guaranteed payments in a
lump sum. The present value of future guaranteed payments for a period
certain is based on the number of payments left, the assumed base rate of net
return, the number of annuity units and the annuity unit value for the date
the Company
9
<PAGE>
receives a written request for lump sum payment of remaining values. Assets
held in the Account at least equal to all statutory reserves required for
such Separate Account.
PART 5 - TAX FAVORED RETIREMENT PROGRAMS
The contracts described in the prospectus may be used in connection with
certain tax-favored retirement programs, for groups and individuals.
Following are brief descriptions of various types of qualified plans in
connection with which National Integrity may issue a contract. National
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.
10
<PAGE>
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.
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
11
<PAGE>
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. National
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. National 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 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.
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 National 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 National Integrity should be distinguished from
the financial statements of the Separate Account and should be considered
only as they relate to the ability of National Integrity to meet its
obligations
13
<PAGE>
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
National Integrity Life Insurance Company
DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Financial Statements
December 31, 1998
CONTENTS
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
<PAGE>
Report of Independent Auditors
Contract Holders
Separate Account I of National Integrity Life Insurance Company
We have audited the accompanying statement of assets and liabilities of Separate
Account I of National 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 mutual fund shares 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 National 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 National Integrity Life Insurance Company
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $352,005,941) $ 30,931,580 $ 33,577,715 $ 87,460,837 $ 61,697,970 $ 16,470,225
LIABILITIES
Payable to (receivable from) the general
account of National Integrity 33,426 (6,652) (25,825) 26,066 2,150
---------------------------------------------------------------------------
NET ASSETS $ 30,898,154 $ 33,584,367 $ 87,486,662 $ 61,671,904 $ 16,468,075
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNIT VALUE $ 13.42 $ 15.98 $ 40.49 $ 60.67 $ 24.12
---------------------------------------------------------------------------
---------------------------------------------------------------------------
UNITS OUTSTANDING 2,302,396 2,101,650 2,160,698 1,016,514 682,756
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<CAPTION>
INVESTMENT ASSET
GRADE BOND MANAGER
DIVISION DIVISION
---------------------------
<S> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $352,005,941) $ 9,269,694 $ 34,762,439
LIABILITIES
Payable to (receivable from) the general
account of National Integrity 2,351 2,055
---------------------------
NET ASSETS $ 9,267,343 $ 34,760,384
---------------------------
---------------------------
UNIT VALUE $ 19.02 $ 28.94
---------------------------
---------------------------
UNITS OUTSTANDING 487,242 1,201,119
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Assets and Liabilities (continued)
December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES BALANCED
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $352,005,941) $ 46,449,703 $ 12,735,101 $ 63,688,794 $ 10,900,190 $ 5,363,796
LIABILITIES
Payable to (receivable from) the general
account of National Integrity 4,232 3,286 3,819 (1,986) (583)
----------------------------------------------------------------------------
NET ASSETS $ 46,445,471 $ 12,731,815 $ 63,684,975 $ 10,902,176 $ 5,364,379
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unit value $ 28.85 $ 20.35 $ 25.00 $ 14.74 $ 13.18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Units outstanding 1,609,895 625,642 2,547,399 739,632 407,009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
<CAPTION>
GROWTH &
INCOME
DIVISION TOTAL
---------------------------
<S> <C> <C>
ASSETS
Investments in Fidelity VIP Funds at value
(aggregate cost of $352,005,941) $ 12,657,629 $425,965,673
LIABILITIES
Payable to (receivable from) the general
account of National Integrity 2,743 45,082
---------------------------
NET ASSETS $ 12,654,886 $425,920,591
---------------------------
---------------------------
Unit value $ 15.58
------------
------------
Units outstanding 812,252
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,193,948 $ 4,234,336 $ 5,255,931 $ 6,460,577
EXPENSES
Mortality and expense risk and
administrative charges 305,166 506,292 1,186,859 714,878
-------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 888,782 3,728,044 4,069,072 5,745,699
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments - (801,344) 4,379,481 3,135,995
Net unrealized appreciation (depreciation)
of investments
Beginning of period - 3,206,551 17,861,921 8,568,899
End of period 11,413 (1,665,786) 17,270,036 16,538,280
-------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 11,413 (4,872,337) (591,885) 7,969,381
-------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 11,413 (5,673,681) 3,787,596 11,105,376
-------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 900,195 $ (1,945,637) $ 7,856,668 $ 16,851,075
-------------------------------------------------------------
-------------------------------------------------------------
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,153,635 $ 383,744 $ 4,133,771
EXPENSES
Mortality and expense risk and
administrative charges 222,885 110,681 458,238
------------------------------------------
NET INVESTMENT INCOME (LOSS) 930,750 273,063 3,675,533
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 978,292 259,705 1,045,088
Net unrealized appreciation (depreciation)
of investments
Beginning of period 1,076,735 349,438 5,692,094
End of period 771,733 386,531 5,285,685
------------------------------------------
Change in net unrealized appreciation/
depreciation during the period (305,002) 37,093 (406,409)
-------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 673,290 296,798 638,679
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,604,040 $ 569,861 $ 4,314,212
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Operations (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 1,319,117 $ 940,385 $ 2,822,307 $ 189,749
EXPENSES
Mortality and expense risk and
administrative charges 537,288 137,806 749,475 92,880
-------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 781,829 802,579 2,072,832 96,869
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 3,619,609 352,411 2,624,759 225,476
Net unrealized appreciation (depreciation)
of investments
Beginning of period 5,720,773 1,122,816 10,859,280 228,284
End of period 10,550,064 1,293,807 19,846,348 1,513,343
-------------------------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 4,829,291 170,991 8,987,068 1,285,059
-------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 8,448,900 523,402 11,611,827 1,510,535
-------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 9,230,729 $ 1,325,981 $ 13,684,659 $ 1,607,404
=============================================================
<CAPTION>
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Reinvested dividends from Fidelity VIP Funds $ 143,740 $ 24,141 $ 28,255,381
EXPENSES
Mortality and expense risk and
administrative charges 48,124 118,563 5,189,135
------------------------------------------
NET INVESTMENT INCOME (LOSS) 95,616 (94,422) 23,066,246
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on sales of investments 138,125 536,772 16,494,369
Net unrealized appreciation (depreciation)
of investments
Beginning of period 92,292 115,438 54,894,521
End of period 375,864 1,782,414 73,959,732
------------------------------------------
Change in net unrealized appreciation/
depreciation during the period 283,572 1,666,976 19,065,211
------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 421,697 2,203,748 35,559,580
------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 517,313 $ 2,109,326 $ 58,625,826
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 888,782 $ 3,728,044 $ 4,069,072 $ 5,745,699
Net realized gain (loss) on sales of investments - (801,344) 4,379,481 3,135,995
Change in net unrealized appreciation/
depreciation during the period 11,413 (4,872,337) (591,885) 7,969,381
--------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 900,195 (1,945,637) 7,856,668 16,851,075
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 7,683,172 8,856,054 7,648,252 3,421,968
Contract terminations and benefits (2,691,835) (2,997,649) (5,623,280) (2,755,249)
Net transfers among investment options 6,847,731 (6,026,119) (4,949,952) (1,119,971)
--------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 11,839,068 (167,714) (2,924,980) (453,252)
--------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 12,739,263 (2,113,351) 4,931,688 16,397,823
Net assets, beginning of year 18,158,891 35,697,718 82,554,974 45,274,081
--------------------------------------------------------------
NET ASSETS, END OF YEAR $ 30,898,154 $ 33,584,367 $ 87,486,662 $ 61,671,904
--------------------------------------------------------------
--------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 584,624 525,737 201,453 69,040
Terminations and benefits (202,925) (181,235) (149,003) (55,771)
Net transfers 513,031 (351,400) (136,924) (23,611)
--------------------------------------------------------------
Net increase (decrease) in units 894,730 (6,898) (84,474) (10,342)
--------------------------------------------------------------
--------------------------------------------------------------
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 930,750 $ 273,063 $ 3,675,533
Net realized gain (loss) on sales of investments 978,292 259,705 1,045,088
Change in net unrealized appreciation/
depreciation during the period (305,002) 37,093 (406,409)
------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,604,040 569,861 4,314,212
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,093,541 1,092,650 1,930,458
Contract terminations and benefits (1,055,210) (743,383) (3,832,539)
Net transfers among investment options (430,261) 1,199,932 (228,711)
------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (391,930) 1,549,199 (2,130,792)
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 1,212,110 2,119,060 2,183,420
Net assets, beginning of year 15,255,965 7,148,283 32,576,964
------------------------------------------
NET ASSETS, END OF YEAR $ 16,468,075 $ 9,267,343 $ 34,760,384
------------------------------------------
------------------------------------------
UNIT TRANSACTIONS
Contributions 46,142 66,699 71,404
Terminations and benefits (45,504) (40,466) (141,174)
Net transfers (21,246) 57,607 (6,639)
------------------------------------------
Net increase (decrease) in units (20,608) 83,840 (76,409)
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 781,829 $ 802,579 $ 2,072,832 $ 96,869
Net realized gain (loss) on sales of investments 3,619,609 352,411 2,624,759 225,476
Change in net unrealized appreciation/
depreciation during the period 4,829,291 170,991 8,987,068 1,285,059
----------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 9,230,729 1,325,981 13,684,659 1,607,404
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 5,157,740 2,886,782 6,518,733 3,346,797
Contract terminations and benefits (1,781,004) (281,616) (2,443,405) (233,462)
Net transfers among investment options 603,805 948,447 (2,118,664) 2,333,223
----------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 3,980,541 3,553,613 1,956,664 5,446,558
----------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 13,211,270 4,879,594 15,641,323 7,053,962
Net assets, beginning of year 33,234,201 7,852,221 48,043,652 3,848,214
----------------------------------------------------------
NET ASSETS, END OF YEAR $ 46,445,471 $ 12,731,815 $ 63,684,975 $ 10,902,176
----------------------------------------------------------
----------------------------------------------------------
UNIT TRANSACTIONS
Contributions 204,765 162,656 305,274 257,477
Terminations and benefits (71,117) (15,048) (114,077) (17,672)
Net transfers 17,967 30,614 (107,575) 178,875
----------------------------------------------------------
Net increase (decrease) in units 151,615 178,222 83,622 418,680
----------------------------------------------------------
----------------------------------------------------------
<CAPTION>
BALANCED GROWTH &
DIVISION INCOME TOTAL
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 95,616 $ (94,422) $ 23,066,246
Net realized gain (loss) on sales of investments 138,125 536,772 16,494,369
Change in net unrealized appreciation/
depreciation during the period 283,572 1,666,976 19,065,211
------------------------------------------
Net increase (decrease) in net assets resulting
from operations 517,313 2,109,326 58,625,826
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,434,916 3,045,089 54,116,152
Contract terminations and benefits (145,600) (309,544) (24,893,776)
Net transfers among investment options 1,567,149 3,885,871 2,512,480
------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,856,465 6,621,416 31,734,856
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 3,373,778 8,730,742 90,360,682
Net assets, beginning of year 1,990,601 3,924,144 335,559,909
------------------------------------------
NET ASSETS, END OF YEAR $ 5,364,379 $ 12,654,886 $425,920,591
------------------------------------------
------------------------------------------
UNIT TRANSACTIONS
Contributions 125,126 228,119
Terminations and benefits (18,419) (22,336)
Net transfers 125,073 284,554
---------------------------
Net increase (decrease) in units 231,780 490,337
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets
Year Ended December 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET HIGH INCOME INCOME GROWTH
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 734,504 $ 1,518,645 $ 4,824,184 $ 721,529
Net realized gain on sales of investments - 760,264 1,220,503 2,802,454
Change in net unrealized appreciation
during the period - 1,670,529 9,525,676 4,262,548
--------------------------------------------------------------
Net increase in net assets resulting from operations 734,504 3,949,438 15,570,363 7,786,531
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 14,076,961 8,893,416 13,965,376 5,919,207
Contract terminations and benefits (2,421,910) (4,148,133) (3,205,355) (2,392,011)
Net transfers among investment options (12,252,316) 3,601,295 1,081,673 (134,896)
--------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (597,265) 8,346,578 11,841,694 3,392,300
--------------------------------------------------------------
INCREASE IN NET ASSETS 137,239 12,296,016 27,412,057 11,178,831
Net assets, beginning of year 18,021,652 23,401,702 55,142,917 34,095,250
--------------------------------------------------------------
NET ASSETS, END OF YEAR $ 18,158,891 $ 35,697,718 $ 82,554,974 $ 45,274,081
--------------------------------------------------------------
--------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 1,114,197 558,880 422,804 144,679
Terminations and benefits (191,440) (271,245) (91,232) (58,086)
Net transfers (968,450) 215,858 18,003 (1,855)
--------------------------------------------------------------
Net increase (decrease) in units (45,693) 503,493 349,575 84,738
--------------------------------------------------------------
--------------------------------------------------------------
<CAPTION>
INVESTMENT ASSET
OVERSEAS GRADE BOND MANAGER
DIVISION DIVISION DIVISION
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 865,099 $ 249,347 $ 3,118,731
Net realized gain on sales of investments 603,432 34,624 929,804
Change in net unrealized appreciation
during the period (294,024) 137,523 1,313,957
------------------------------------------
Net increase in net assets resulting from operations 1,174,507 421,494 5,362,492
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 2,914,588 903,638 2,746,016
Contract terminations and benefits (1,275,749) (295,183) (3,098,725)
Net transfers among investment options 680,539 514,038 (1,391,288)
------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 2,319,378 1,122,493 (1,743,997)
------------------------------------------
INCREASE IN NET ASSETS 3,493,885 1,543,987 3,618,495
Net assets, beginning of year 11,762,080 5,604,296 28,958,469
------------------------------------------
NET ASSETS, END OF YEAR $ 15,255,965 $ 7,148,283 $ 32,576,964
------------------------------------------
------------------------------------------
UNIT TRANSACTIONS
Contributions 132,358 53,477 116,674
Terminations and benefits (57,026) (17,510) (132,593)
Net transfers 31,275 27,162 (58,489)
------------------------------------------
Net increase (decrease) in units 106,607 63,129 (74,408)
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Separate Account I of National Integrity Life Insurance Company
Statement of Changes in Net Assets (continued)
Year Ended December 31, 1997
<TABLE>
<CAPTION>
ASSET
MANAGER: GROWTH
INDEX 500 GROWTH CONTRAFUND OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ 182,158 $ (80,700) $ 410,353 $ (19,432)
Net realized gain on sales of investments 1,071,877 474,836 960,967 86,693
Change in net unrealized appreciation
during the period 4,188,231 952,751 6,284,192 228,284
---------------------------------------------------------------
Net increase in net assets resulting from operations 5,442,266 1,346,887 7,655,512 295,545
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 9,004,723 2,970,634 10,325,955 2,953,975
Contract terminations and benefits (657,828) (406,304) (1,976,049) (36,079)
Net transfers among investment options 6,587,964 (78,663) 2,335,510 634,773
---------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 14,934,859 2,485,667 10,685,416 3,552,669
---------------------------------------------------------------
INCREASE IN NET ASSETS 20,377,125 3,832,554 18,340,928 3,848,214
Net assets, beginning of year 12,857,076 4,019,667 29,702,724 -
----------------------------------------------------------------
NET ASSETS, END OF YEAR $ 33,234,201 $ 7,852,221 $ 48,043,652 $ 3,848,214
----------------------------------------------------------------
----------------------------------------------------------------
UNIT TRANSACTIONS
Contributions 430,320 183,734 571,556 266,949
Terminations and benefits (30,797) (24,412) (101,248) (3,103)
Net transfers 320,269 5,421 127,720 57,106
---------------------------------------------------------------
Net increase (decrease) in units 719,792 164,743 598,028 320,952
----------------------------------------------------------------
----------------------------------------------------------------
<CAPTION>
GROWTH &
BALANCED INCOME
DIVISION DIVISION TOTAL
------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income (loss) $ (10,036) $ 81,578 $ 12,595,960
Net realized gain on sales of investments 13,552 86,669 9,045,675
Change in net unrealized appreciation
during the period 92,292 115,438 28,477,397
------------------------------------------
Net increase in net assets resulting from operations 95,808 283,685 50,119,032
INCREASE (DECREASE) IN NET ASSETS FROM CONTRACT
RELATED TRANSACTIONS
Contributions from contract holders 1,711,873 2,726,972 79,113,334
Contract terminations and benefits (22,531) (40,093) (19,975,950)
Net transfers among investment options 205,451 953,580 2,737,660
------------------------------------------
Net increase (decrease) in net assets
from contract related transactions 1,894,793 3,640,459 61,875,044
------------------------------------------
INCREASE IN NET ASSETS 1,990,601 3,924,144 111,994,076
Net assets, beginning of year - - 223,565,833
------------------------------------------
NET ASSETS, END OF YEAR $ 1,990,601 $ 3,924,144 $335,559,909
------------------------------------------
------------------------------------------
UNIT TRANSACTIONS
Contributions 156,357 241,192
Terminations and benefits (2,031) (3,381)
Net transfers 20,903 84,104
---------------------------
Net increase (decrease) in units 175,229 321,915
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Integrity Life Insurance Company ("National Integrity") established
Separate Account I (the "Separate Account") on May 19, 1986, under the insurance
laws of the State of New York, 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 National Integrity.
National Integrity is a wholly owned subsidiary of Integrity Life Insurance
Company and their ultimate parent is 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 National Integrity, or both. Certain
contract holders may also allocate or transfer a portion or all of their account
values to one or more fixed rate guaranteed rate options of National Integrity's
Separate Account GPO.
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 Fidelity VIP Funds at December 31, 1998 for this Separate
Account.
10
<PAGE>
Separate Account I
of
National Integrity Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
National 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
investments 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
National 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 National 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 National 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
National 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
National 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, National 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, National Integrity pays no tax on investment income and capital
gains reflected in variable life insurance policy reserves. However, National
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
National 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 $ 57,164,756 $ 44,405,551 $ 30,920,167
High Income 28,669,669 25,112,865 35,243,501
Equity-Income 14,189,602 13,068,281 70,190,801
Growth 17,057,691 11,735,913 45,159,690
Overseas 7,807,526 7,263,694 15,698,492
Investment Grade Bond 5,978,086 4,151,531 8,883,163
Asset Manager 7,745,093 6,197,570 29,476,754
Index 500 15,031,271 10,266,715 35,899,639
Asset Manager: Growth 7,334,692 2,973,879 11,441,294
Contrafund 11,533,203 7,497,076 43,842,446
Growth Opportunities 7,345,397 1,803,250 9,386,847
Balanced 4,432,410 1,480,131 4,987,932
Growth & Income 9,945,357 3,416,078 10,875,215
-------------
$ 352,005,941
-------------
-------------
</TABLE>
3. EXPENSES
National 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
National 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 National Integrity
Life Insurance Company (NATIONAL INTEGRITY) authorizing the
establishment of Separate Account I, the Registrant.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-8905), filed on
September 19, 1986.
2. Not applicable.
3.(a) Form of Selling/General Agent Agreement among National
Integrity, Integrity Financial Services, Inc. ("IFS") (the
previous principal underwriter) and broker dealers.
Incorporated by reference from post-effective amendment
no. 5 to Registrant's Form N-4 registration statement
(File No. 33-8905) filed on March 2, 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. 33-56658), filed on May 1, 1996.
4.(a) Form of trust agreement. Incorporated by reference from
Registrant's Form N-4 registration statement
(File No. 33-51126), filed on August 20, 1992.
1
<PAGE>
4.(b) Form of group variable annuity contract. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658), filed on December 31, 1992.
4.(c) Form of variable annuity certificate. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658), filed on December 31, 1992.
4.(d) Form of riders to certificate for qualified plans.
Incorporated by reference from amendment no. 1 to
Registrant's Form S-1 registration statement
(File No. 33-51122), filed on November 10, 1992.
5. Form of application. Incorporated by reference from
Registrant's Form N-4 registration statement
(File No. 33-56658), filed on December 31, 1992.
6.(a) Certificate of Incorporation of National Integrity.
Incorporated by reference from Registrant's Form N-4
registration statement (File No. 33-33119), filed on
January 19, 1990.
6.(b) By-Laws of National Integrity. Incorporated by reference
from Registrant's Form N-4 registration statement
(File No. 33-33119), filed on January 19, 1990.
7. Reinsurance Agreement between National Integrity and
Connecticut General Life Insurance Company (CIGNA)
effective January 1, 1995 (filed herewith). Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658), filed on April 28, 1995.
8.(a) Participation Agreement Among Variable Insurance Products
Fund, Fidelity Distributors Corporation ("FDC") and National
Integrity, dated November 20, 1990. Incorporated by
reference from post-effective amendment no. 5 to Registrant's
Form N-4 registration statement (File No. 33-8905), filed
on March 2, 1992.
8.(b) Participation Agreement Among Variable Insurance Products
Fund II, FDC and National Integrity, dated November 20, 1990.
Incorporated by reference from post-effective amendment
no. 5 to Registrant's Form N-4 registration statement
(File No. 33-8905), filed on March 2, 1992.
8.(c) Amendment No. 1 to Participation Agreements Among Variable
Insurance Products Fund, Variable Insurance Products Fund II,
FDC, and National Integrity. Incorporated by reference from
Registrant's Form N-4 registration statement
(File No. 33-56658), filed on May 1, 1996.
8.(d) Participation Agreement Among Variable Insurance Products
Fund III, FDC and National Integrity. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658) filed on May 6, 1998.
9. Opinion and Consent of Kevin L. Howard. Incorporated by
reference from Registrant's Form N-4 registration statement
(File No. 33-56658) filed on May 6, 1998.
10. Consents of Ernst & Young LLP.
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.33-56658), filed on
May 1, 1996.
14. Not applicable.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
---------------------------------------
2
<PAGE>
Set forth below is information regarding the directors and principal
officers of National Integrity, the Depositor.
<TABLE>
<CAPTION>
DIRECTORS:
- ----------
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
Dennis L. Carr Director, Executive Vice President and
ARM Financial Group Inc. Chief Actuary
515 West Market Street
Louisville, KY 40202
Daniel J. Downing Director
National Integrity Life Insurance Company
15 Matthews Street, Suite 200
Goshen, NY 10924
Dudley J. Godfrey, Jr. Director
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
Donald B. Henderson, Jr. Director
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019-4513
Michael F. Holland Director
Holland & Company, L.L.C.
375 Park Avenue
New York, NY 10152
Mark V. Kaminski Director
Commonwealth Industries
500 West Jefferson Street
Citizens Plaza
Louisville, KY 40202
Edward D. Powers Director
6064 Shipyard Lane
Easton, Maryland 21601
Colin F. Raymond Director
Morgan Stanley & Company, Inc.
1221 Avenue of the Americas
New York, New York 10020
Martin H. Ruby Director, Chairman of the Board
ARM Financial Group Inc. and Chief Executive Officer
515 West Market Street
Louisville, Kentucky 40202
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Irwin T. Vanderhoof Director
18 Two Bridges Road
Towaco, New Jersey
John R. Lindholm Director and President
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202
Edward L. Zeman Director, Executive Vice President
ARM Financial Group, Inc. and Chief Financial Officer
515 West Market Street
Louisville, Kentucky 40202
</TABLE>
SELECTED OFFICERS: (The business address for each of the principal officers
listed below is 515 West Market Street, Louisville,
Kentucky 40202.)
<TABLE>
<CAPTION>
Name and Principal Business Address Position and Offices with National Integrity
- ----------------------------------- --------------------------------------------
<S> <C>
John R. McGeeney Executive Vice President, General Counsel
David E. Ferguson Executive Vice President and Chief Technology Officer
Michael A. Cochran Tax Officer
Peter S. Resnik Treasurer
Barry G. Ward Controller
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON
CONTROL WITH NATIONAL INTEGRITY OR REGISTRANT
----------------------------------------------
National Integrity, the depositor of Separate Account I, is a wholly
owned subsidiary of Integrity Life Insurance Company, an Ohio stock life
insurance corporation. Integrity Life Insurance Company is a wholly owned
subsidiary of Integrity Holdings, Inc., a Delaware corporation which is a
holding company engaged in no active business. 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 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 6,167 contract owners of Separate
Account I of National Integrity.
4
<PAGE>
ITEM 28. INDEMNIFICATION
---------------
BY-LAWS OF NATIONAL INTEGRITY. National Integrity's By-Laws provide, in
Article VII, as follows:
7.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS. To the extent permitted by the law of the State of New York
and subject to all applicable requirements thereof:
(a) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate, is or was a director, officer, employee or
incorporator of the Company shall be indemnified by the Company;
(b) any person made or threatened to be made a party to any action or
proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate serves or served any other organization in
any capacity at the request of the Company may be indemnified by the
Company; and
(c) the related expenses of any such person in any other of said
categories may be advanced by the Company.
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.
AGREEMENTS. National Integrity and ARM Securities, including each director,
officer, and controlling person of National 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 Agreement and Section 9 of the Form
of Variable Contract Selling Agreement incorporated as Exhibit 3(a) to this
Registration Statement. Those sections are incorporated by reference into
this response. In addition, National Integrity and ARM Securities, including
each director, officer and controlling person of National 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) and 8(b) to this Registration Statement. That article is
incorporated by reference into this response. Certain officers and directors
of National Integrity are officers and directors of ARM Securities (see Item
25 and Item 29 of this Part C).
INSURANCE. The directors and officers of National 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.
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.
5
<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 National Integrity, Separate Accounts I, II and III of Integrity, and
The Legends Fund, Inc. National 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 Officer
515 West Market Street
Louisville, Kentucky 40202
Peter S. Resnik Treasurer
515 West Market Street
Louisville, Kentucky 40202
Dale C. Bauman Vice President
100 North Minnesota Street
New Ulm, Minnesota 56073
Robert Bryant Vice President
1550 East Shaw #120
Fresno, California 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.
6
<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 National Integrity at 515 West Market Street,
Louisville, Kentucky 40202 or 15 Matthews Street, Suite 200, Goshen, New York
10924.
ITEM 31. MANAGEMENT SERVICES
-------------------
The contract under which management-related services are provided to
National 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.
National Integrity represents that 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 National Integrity.
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
the 23rd day of April, 1999.
SEPARATE ACCOUNT I OF
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Registrant)
By: National Integrity Life Insurance Company
(Depositor)
By: /s/ John R. Lindholm
---------------------
John R. Lindholm
President
7
<PAGE>
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------
John R. Lindholm
President
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Depositor has duly caused this amendment to the Registration
Statement to be signed on its behalf, in the City of Louisville and State of
Kentucky on this 1st day of March, 1999
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John R. Lindholm
--------------------
John R. Lindholm
President
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER: /s/ John R. Lindholm
---------------------
John R. Lindholm
President
Date: 04/23/99
PRINCIPAL FINANCIAL OFFICER: /s/ Edward L. Zeman
-----------------------------------------
Edward L. Zeman, Executive Vice President-
Chief Financial Officer
Date: 04/23/99
PRINCIPAL ACCOUNTING OFFICER: /s/ Barry G. Ward
--------------------------------
Barry G. Ward, Controller
Date: 04/23/99
DIRECTORS:
/s/ John R. Lindholm /s/ Edward L. Zeman
- -------------------- --------------------------------
John R. Lindholm Edward L. Zeman
Date: 04/23/99 Date: 04/23/99
/s/ Martin H. Ruby /s/ Donald B. Henderson, Jr.
- --------------------- ----------------------------------
Martin H. Ruby Donald B. Henderson, Jr.
Date: 04/23/99 Date: 04/23/99
/s/Edward D. Powers
- --------------------- ----------------------------------
Irwin T. Vanderhoof Edward D. Powers
Date: 04/23/99 Date: 04/23/99
/s/ Dudley J. Godfrey, Jr.
- -------------------------- -----------------------------------
8
<PAGE>
Dudley J. Godfrey, Jr. David F. Babbel
- ---------------------- ----------------------------------
Date: 04/23/99 Date: 04/23/99
/s/ Dennis L. Carr /s/ Daniel J. Downing
- ------------------ -----------------------------------
Dennis L. Carr Daniel J. Downing
Date: 04/23/99 Date: 04/23/99
/s/ Michael F. Holland /s/ Mark V. Kaminski
- ---------------------- -----------------------------------
Michael F. Holland Mark V. Kaminski
Date: 04/23/99 Date: 04/23/99
- --------------------------
Colin F. Raymond
Date: 04/23/99
9
<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. 11 to the Registration Statement
(Form N-4 No. 33-56658) and Amendment No. 20 to the Registration Statement
(Form N-4 No. 811-4846) and related Prospectuses of Separate Account I of
National 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 National Integrity Life Insurance Company, and (b) dated April
9, 1999, with respect to the financial statements of Separate Account I of
National 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
