<PAGE>
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U N I T E D I N V E S T O R S
A D V A N T A G E I/SM/
FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
PROSPECTUS
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This Prospectus describes the Flexible Premium Variable
Life Insurance Policy ("Policy") issued by United
Investors Life Insurance Company ("United Investors").
While the Policy can be purchased with a single premium,
it provides some flexibility to pay additional premiums
if the Policyowner so desires. The Policy provides for
life insurance coverage on the named Insured up to age
95, for the accumulation of Policy Value, for loan
privileges while the Insured is living, and for other
features that usually are associated with conventional
life insurance policies. Generally, all policy loans,
surrenders, and maturity benefits are treated first as
distributions of taxable income and then as a return of
the basis or investment in the Policy. In addition, prior
to age 59 1/2, such distributions generally are subject
to a 10% penalty tax. However, unlike conventional
insurance, the Death Benefit may and the Policy Value
will vary based on the performance of the investments
made in one or more of the Investment Divisions of United
Investors Life Variable Account (the "Variable Account").
The amount of the Death Benefit will never be less than
the Minimum Death Benefit specified in the Policy while
the Policy is still in force. Additional premium payments
may be required to keep the Policy in force. No minimum
amount of Policy Value is guaranteed, so the Policyowner
bears the entire investment risk under this Policy.
It may not be advantageous to purchase a Policy as a
replacement for another type of life insurance or as a
means to obtain additional insurance protection if the
purchaser already owns a flexible premium variable life
insurance policy.
Because of the premium level contemplated under the
Policies, all Policies entered into after June 20, 1988,
will be treated as modified endowment contracts. (See
Federal Tax Matters.)
This Prospectus Must be Accompanied or Preceded by a
Current Prospectus For TMK/United Funds, Inc.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR
FUTURE REFERENCE.
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The Date of This Prospectus is April 4, 1997.
Issued By
United Investors Life Insurance Company
(a Missouri Stock Company)
2001 Third Avenue South
Birmingham, Alabama 35233
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U-1003 (4-97)
<PAGE>
SUPPLEMENT TO THE ADVANTAGE I PROSPECTUS
The following information supplements and supersedes any contrary
information contained in the Prospectus:
At a special meeting of shareholders on July 24, 1997 shareholders of each
series (each, a "Portfolio") of TMK/United Funds, Inc. (the "Fund") approved
proposals relating to the following, as applicable to one or more of the
Portfolios:
The Fund intends to change the goal of Income Portfolio to state that the
Income Portfolio "seeks, as a primary goal, to maintain current income,
subject to market conditions. As a secondary goal, the Portfolio seeks capital
growth."
The Fund also intends to change the Asset Strategy Portfolio's goal to state
that the Asset Strategy Portfolio "seeks high total return over the long term"
and then (a) eliminate the operating policy limiting the amount of a
reallocation among the Portfolio's asset classes and (b) revise the current
operating policy regarding the specified mix and ranges of its assets as
follows:
<TABLE>
<CAPTION>
MIX RANGE
--- ----- ---
<S> <C> <C>
STOCK CLASS 0-100%
70%
BOND CLASS 0-100%
25%
SHORT-TERM CLASS 0-100%
5%
</TABLE>
The Fund intends to implement the foregoing changes on October 1, 1997.
To be attached to the cover page of the Prospectus dated April 4, 1997.
This Supplement is dated September 22, 1997.
U-1166, Ed. 9/97
<PAGE>
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TABLE OF CONTENTS
<TABLE>
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<C> <S> <C>
Definitions Definitions............................... i
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Summary Summary................................... 1
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United Investors Life United Investors Life Insurance Company... 3
Insurance Company and United Investors Life Variable Account.... 4
United Investors Life Variable TMK/United Funds, Inc. ................... 4
Account
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Policy Rights and Benefits Death Benefit............................. 7
Changes in the Minimum Death Benefit...... 7
Policy Value.............................. 8
Policy Loans.............................. 9
Surrenders................................ 10
Transfers................................. 10
Dollar Cost Averaging..................... 11
Free Look Period.......................... 11
Right to Exchange for Fixed Life
Insurance................................. 11
Voting Rights............................. 11
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Premium Payment and Issuance of a Policy...................... 12
Allocation Premiums.................................. 12
Allocation of Premiums.................... 13
Termination, Grace Period, and
Reinstatement............................. 13
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Charges and Deductions Mortality and Expense Risk Charge......... 14
Annual Deduction.......................... 14
Additional Premium Charge................. 15
Federal Taxes............................. 15
Surrender Charge.......................... 15
Fund Expenses............................. 16
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Payment Options Payment Options........................... 16
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General Provisions General Provisions........................ 17
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Distribution of the Policies Distribution of the Policies.............. 18
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Federal Tax Matters Federal Tax Matters....................... 19
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Additional Information Additional Information.................... 22
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Financial Statements Financial Statements...................... F-1
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Appendix A Appendix A................................ A-1
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Appendix B Appendix B................................ B-1
</TABLE>
The Policy is not available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
THE PRIMARY PURPOSE OF THIS POLICY IS TO PROVIDE INSURANCE PROTECTION. NO
CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO AN
INVESTMENT IN A MUTUAL FUND.
<PAGE>
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DEFINITIONS
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Accumulation Unit....... means an accounting unit used to calculate the Policy
Value.
Attained Age............ means the age of the Insured on his/her birthday
nearest a Policy Anniversary date (or the Policy
Date).
Beneficiary............. means the person or persons to whom this Policy's
Death Benefit is paid when the Insured dies.
Death Benefit........... means the amount payable under your Policy when the
Insured dies.
Fund.................... means the mutual fund available for investment by the
Variable Account on the Policy Date or as later
changed by us. The Fund available as of the date of
this prospectus is TMK/United Funds, Inc.
Grace Period Premium.... means that portion of the payment described in the
grace period provision of the Policy which represents
accrued and unpaid annual deductions.
In Force................ means the Insured's life remains insured under the
terms of the Policy.
Insured................. means the person whose life is insured by the Policy.
Issue Age............... means the age of the Insured on his/her birthday
nearest the Policy Date.
Loan Balance............ means all existing loans on a Policy plus any added
or accrued loan interest.
Maturity Date........... means the date on which the Proceeds are payable if
the Insured is living.
Minimum Death Benefit... means the least amount of Death Benefit payable while
the Policy remains in force. It is determined by the
Insured's age, sex and the amount of initial and
subsequent premiums paid.
Net Investment Factor... means the index applied to measure the investment
performance of an Investment Division from one
Valuation Period to the next.
Net premium............. means the premium paid less any deduction for sales
expenses and premium taxes.
Payee................... means the Beneficiary, or any other person, estate or
legal entity to whom benefits are to be paid.
Policy Anniversary...... means the same day and month as the Policy Date each
year that the Policy remains in force.
Policy Date............. means the date the Policy becomes effective, and the
date from which Policy Anniversaries and Policy Years
are determined.
Policyowner or Owner.... means the person named as the owner in the
application, unless he or she has assigned ownership
to someone else.
Policy Value............
means the Variable Account Value plus any Loan
Balance.
Policy Year............. means a year that starts on the Policy Date or on a
Policy Anniversary.
i
<PAGE>
Proceeds................ means the amount payable under a Policy (a) upon the
death of the Insured, (b) on the Maturity Date, or
(c) upon the surrender of the Policy.
Surrender Value......... means the Policy Proceeds if the Policy is
surrendered in full prior to the Maturity Date. It is
the Policy Value, less any Loan Balance and any
applicable surrender charges.
Terminate............... means that the Policy is no longer in force. All
insurance coverage under a Policy is stopped.
Valuation Date.......... means a normal business day, Monday through Friday.
However, we will not value the Policy's Death
Benefits or Policy Value on any customary U.S.
business holiday that the New York Stock Exchange is
not open for trading. Those holidays currently are
New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Valuation Period........ means the interval of time commencing at the close of
business of the New York Stock Exchange on each
Valuation Date and ending at the close of business of
the New York Stock Exchange on the next Valuation
Date.
Variable Account Value.. means the sum of all values of the Investment
Divisions of the Variable Account under the Policy.
We...................... means United Investors Life Insurance Company. "Us"
and "our" also refer to United Investors.
Written Request......... means a request in writing signed by the Policyowner.
You..................... means the Owner of this Policy. "Your" and "yours"
also refer to the Owner.
ii
<PAGE>
SUMMARY
The following summary of Prospectus information should be read in
conjunction with the detailed information appearing elsewhere in this
Prospectus. Unless otherwise indicated the description of the Policy contained
in this Prospectus assumes that the Policy is in force and that there is no
outstanding Loan Balance.
THE POLICY. The Flexible Premium Variable Life Insurance Policy described in
this Prospectus is a life insurance contract that provides for life insurance
coverage on the named Insured up to age 95, cash values, surrender rights,
policy loan privileges, and other features associated with conventional life
insurance. The Policy is a "variable" policy because, unlike the fixed
benefits of a conventional life insurance policy, the Death Benefit may, and
the Policy Value will, increase or decrease depending upon the investment
experience of the Investment Divisions of the Variable Account to which the
Policyowner allocates the premium. However, so long as the Policy is in force,
the Death Benefit will be at least equal to the Minimum Death Benefit
specified in the Policy.
The Policy is issued in consideration of the application and payment of the
initial premium. The minimum initial premium is $5,000. The Policy can be
purchased for a single premium. However, additional premiums may be paid at
the Policyowner's option after the first Policy Year (within certain limits),
and additional premiums may be required in order to keep the Policy in force.
No Policy will be issued to an individual over age 75. The Policyowner
determines the allocation of the premium and Policy Value among the Investment
Divisions of the Variable Account.
THE VARIABLE ACCOUNT. The Variable Account currently has eleven Investment
Divisions. The Investment Divisions invest solely in shares of a corresponding
portfolio of TMK/United Funds, Inc. (the "Fund"), which currently has the
following eleven separate investment portfolios: the Money Market Portfolio,
the Bond Portfolio, the High Income Portfolio, the Growth Portfolio, the
Income Portfolio, the International Portfolio, the Small Cap Portfolio, the
Balanced Portfolio, the Limited-Term Bond Portfolio, the Asset Strategy
Portfolio and the Science and Technology Portfolio (collectively, the
"Portfolios"). Each of these Portfolios have a different investment objective.
(See TMK/United Funds, Inc.) The Policyowner may transfer the Policy Value
from one Investment Division to one or more other Investment Divisions up to
twelve times per Policy Year at no cost. (See Transfers.)
DEATH BENEFIT. So long as the Policy remains in force, the Death Benefit
payable will be the greater of the Minimum Death Benefit or the Policy Value
multiplied by the Death Benefit Factor. The Death Benefit proceeds will be
reduced by any outstanding Loan Balance. (See Death Benefit.)
Death Benefits under the Policy may be paid in a lump sum or under one of
the payment options set forth in the Policy. (See Payment Options.)
POLICY VALUE. On the Policy Date the Policy Value equals the amount of the
initial premium plus any accrued interest from the date of receipt of the
premium to the Policy Date. Thereafter, the Policy Value will increase or
decrease from day to day depending on the investment experience of the
selected Investment Divisions. There is no guaranteed minimum Policy Value.
You may surrender the Policy at any time for its Surrender Value, which is
equal to the Policy Value reduced by any Loan Balance and any applicable
surrender charges.
The Policy Value is equal to the Variable Account Value plus any Loan
Balance. The Variable Account Value is equal to the sum of the values of the
Investment Divisions under the Policy. The Policy's Variable Account Value
will reflect the investment performance of the selected Investment Divisions,
any Policy loan activity, the charges imposed in connection with the Policy,
and indirectly the expenses of the Fund. (See Policy Value.) Accordingly,
although the Policy offers the possibility that the Variable Account Value and
Policy Value will increase, there is no assurance that they will increase and
they may decrease.
1
<PAGE>
CHARGES AND DEDUCTIONS. United Investors does not impose any charge or
deduction against the initial premium prior to its allocation to the Variable
Account. Therefore the entire amount of the initial premium is invested in the
Variable Account for your benefit. However, there is a sales charge of a
maximum of 8.5% of the initial premium, which is deducted from the Policy
Value in ten equal annual installments, one on each of the first ten Policy
Anniversaries, of 0.85% of the initial premium. This charge does not apply
after the first ten Policy Years.
A sales charge in the form of a surrender charge of 8% of the initial
premium is assessed for surrenders that occur in the first Policy Year.
Thereafter the charge decreases by 1% per year, so there is no charge on
surrenders that occur after the eighth Policy Year. (See Surrender Charge.)
The combined total of this surrender charge and the 0.85% sales charge
deducted from Policy Value on each of the first ten Policy Anniversaries will
never exceed 8.5% of the initial premium.
For any additional premiums after the initial premium, excluding Grace
Period Premiums, a sales load of 6% of such premium, and a premium tax charge
of 2.5% of such premium, will be deducted prior to its allocation to the
Variable Account.
On each of the first ten Policy Anniversaries, there are annual deductions
of .10% of the initial premium for underwriting and issue expenses and .25% of
the initial premium for state and local premium taxes incurred in connection
with the Policy. These charges do not apply after the first ten Policy Years.
A daily charge, at an effective annual rate of .60% of the daily value of
the Investment Divisions, will be deducted from the Investment Divisions for
United Investors assumption of certain mortality and expense risks incurred in
connection with the Policy. (See Mortality and Expense Risk Charge.)
A mortality charge is deducted on each Policy Anniversary to cover the cost
of insurance. This charge is based on the Policy's net amount at risk (which
is equal to the difference between the Death Benefit and the Policy Value as
of the end of the prior Policy Year) and on the attained age, sex and risk
class of the Insured. Annual cost of insurance rates will be determined by
United Investors based upon its expectations as to future mortality
experience. The current cost of insurance rates are not guaranteed but will
not exceed the maximum cost of insurance rates specified in the Policy.
An additional deduction of $50 is made on each Policy Anniversary to
compensate United Investors for the cost of administering the Policy.
The value of the net assets of the Investment Divisions also will reflect
the investment management fee and other expenses incurred by the Fund because
the Variable Account purchases shares of the Fund.
POLICY LOANS. After the first Policy Year, the Policyowner may borrow up to
the loan value of the Policy from United Investors. It should be noted,
however, that a loan taken from, or secured by, a Policy may have Federal
income tax consequences. (See Federal Tax Matters.) The loan value is 90% of
the Policy Value, less any applicable surrender charges, interest to the next
Policy Anniversary and any existing Loan Balance. The minimum loan amount is
$200. Loan interest at 6% per year is accrued daily and is payable at the end
of the Policy Year. If loan interest is not paid when due, it is added to the
loan and is charged interest. Any outstanding Loan Balance will be deducted
from Proceeds payable on the Maturity Date, at the Insured's death, or upon
surrender. All or part of a loan may be repaid at any time while the Insured
is alive and the Policy is in force.
A portion of the Policy Value sufficient to secure the loan will be
transferred from the Variable Account to United Investors' general account.
This amount is credited with interest at an effective annual rate of 4%
(currently, 6% is credited on loaned amounts that do not exceed the Policy
Value less total premiums paid) and does not share in the investment
experience of the Variable Account. Therefore, a loan will have a permanent
impact on the Policy Value even if it is repaid. (See Policy Loans.)
2
<PAGE>
"FREE LOOK" PERIOD. You may cancel a Policy by returning it within 10 days
after you receive the Policy. When we receive the Policy we will cancel it and
refund the premium that was paid, or the amount required by your state if
greater.
During the Free Look period, your initial premium will be allocated to the
Money Market Investment Division. After the expiration of this period, the
Policy Value will be allocated to the Investment Divisions you have chosen, as
indicated in your application. (See Free Look Period.)
TAX CONSEQUENCES OF THE POLICY. With respect to a Policy entered into before
October 21, 1988, or entered into after October 20, 1988, that is issued on
the basis of either a standard or preferred rate class, United Investors
believes that such a Policy should meet the definition of a life insurance
contract for Federal income tax purposes. As for a Policy entered into after
October 20, 1988, that is issued on a substandard basis, it is not clear
whether or not such a Policy would qualify as a life insurance contract for
Federal tax purposes. Assuming that a Policy qualifies as a life insurance
contract for Federal income tax purposes, United Investors believes that the
Death Benefits paid under the Policy generally should be fully excludable from
the gross income of the beneficiary for Federal income tax purposes.
Similarly, the Owner should not be deemed in constructive receipt of cash
values under a Policy until there is a distribution from the Policy. A change
of Policyowners may have tax consequences depending on the particular
circumstances. Generally, all policy loans, surrenders, and maturity benefits
are treated first as distributions of taxable income and then as a return of
the basis or investment in the Policy. In addition, prior to age 59 1/2 such
distributions generally are subject to a 10% penalty tax. (Different rules may
apply to Policies entered into before June 21, 1988.) (See Federal Tax
Matters.)
ILLUSTRATIONS. Sample projections of hypothetical Death Benefits and Policy
Values are included starting at page A-1 of this Prospectus. These projections
of hypothetical values may be helpful in under-standing the long-term effects
of different levels of investment performance, the charges and deductions, and
generally in comparing this Policy to other life insurance policies. These
projections also show the value of the initial premium accumulated with
interest and indicate that if the Policy is surrendered in the early Policy
Years, the Policy Value payable may be low compared to the premium accumulated
at interest. This reflects the cost of insurance protection and other charges
prior to surrender, and demonstrates that the Policy should not be purchased
as a short-term investment.
CORRESPONDENCE. All correspondence regarding the Policy should be addressed
or directed to the sales agent who sold the Policy or to United Investors at
the following address:
United Investors Life Insurance Company
Variable Products Division
P. O. Box 156
Birmingham, Alabama 35201-0156
Phone: (205) 325-4300
All inquiries should include the Policy number and the Insured's name and
Owner's name, if different.
UNITED INVESTORS LIFE INSURANCE COMPANY AND
UNITED INVESTORS LIFE VARIABLE ACCOUNT
UNITED INVESTORS LIFE INSURANCE COMPANY
United Investors Life Insurance Company is a stock life insurance company
that was incorporated in the State of Missouri on August 17, 1981, as the
successor to a company of the same name established in Missouri on September
27, 1961. United Investors is a wholly-owned subsidiary of United Investors
Management Company (formerly TMK/United, Inc.), which in turn is indirectly
owned
3
<PAGE>
by Torchmark Corporation. United Investors is principally engaged in offering
life insurance and annuity contracts and is admitted to do business in the
District of Columbia and all states except New York.
UNITED INVESTORS LIFE VARIABLE ACCOUNT
United Investors Life Variable Account (the "Variable Account") is currently
divided into eleven Investment Divisions. Each Investment Division invests
exclusively in shares of a single portfolio of the Fund. Income and both
realized and unrealized gains or losses from the assets of each Investment
Division are credited to or charged against that Investment Division without
regard to income, gains or losses from any other Investment Division of the
Variable Account or arising out of any other business United Investors may
conduct.
Although the assets in the Variable Account are the property of United
Investors, the assets in the Variable Account attributable to the Policies are
not chargeable with liabilities arising out of any other business which United
Investors may conduct. The Variable Account was established by United
Investors as a segregated asset account on January 5, 1987. The Variable
Account will receive and invest the premiums allocated to it under the
Policies.
The Variable Account has been registered as a unit investment trust under
the Investment Company Act of 1940 and meets the definition of a separate
account under the Federal securities law. Registration with the Securities and
Exchange Commission does not involve supervision of the management or
investment practices or policies of the Variable Account or United Investors
by the Commission.
TMK/UNITED FUNDS, INC.
The Variable Account invests in shares of TMK/United Funds, Inc. (the
"Fund"), a mutual fund of the series type with eleven separate investment
portfolios. The Fund currently has a Money Market Portfolio, a Bond Portfolio,
a High Income Portfolio, a Growth Portfolio, an Income Portfolio, an
International Portfolio, a Small Cap Portfolio, a Balanced Portfolio, a
Limited-Term Bond Portfolio, an Asset Strategy Portfolio and a Science and
Technology Portfolio. The assets of each Portfolio of the Fund are held
separate from the assets of the other Portfolios. Thus, each Portfolio
operates as a separate investment Portfolio, and the income or losses of one
Portfolio have no effect on the investment performance of any other Portfolio.
The investment objectives and policies of each Portfolio are summarized
below. There is no assurance that any of the Portfolios will achieve their
stated objectives. More detailed information, including a description of
risks, is in the Fund's prospectus, which accompanies this Prospectus and
which should be read carefully in conjunction with this Prospectus and
retained.
The Fund is designed to provide investment vehicles for variable annuity or
variable life insurance contracts of various insurance companies. For more
information about the risks associated with the use of the same funding
vehicle for both variable annuity and variable life insurance contracts of
various insurance companies, see the Fund's prospectus.
The Fund currently offers the following eleven Portfolios:
The Money Market Portfolio seeks to maximize current income consistent with
stability of principal. It may invest in money market securities such as bank
obligations and instruments secured by bank obligations, commercial paper and
corporate debt obligations and obligations of the U.S. and Canadian
Governments or their respective agencies and instrumentalities. Investments in
the Money Market Portfolio are neither insured nor guaranteed by the U.S.
Government and there is no assurance that the portfolio will be able to
maintain a stable per share net asset value.
The Bond Portfolio seeks to provide current income with an emphasis on
preservation of capital. It will invest primarily in debt securities of
varying yields, quality and maturities.
4
<PAGE>
The High Income Portfolio primarily seeks high current income. As a
secondary goal it will seek capital growth when consistent with the primary
goal. It will invest primarily in high-yield, high risk fixed- income
securities, commonly known as "junk bonds", but may have up to 20% of its
assets in common stocks. High-yield fixed-income securities may have an
increased risk of default and greater market price volatility than higher
rated securities due to various circumstances. See "Debt Securities" in the
TMK/United Funds, Inc. prospectus for a further description of the risk
factors.
The Growth Portfolio primarily seeks capital growth. As a secondary goal it
will seek current income. It will invest primarily in common stocks or
securities convertible into common stocks.
The Income Portfolio seeks to maintain current income, subject to market
conditions. It will invest primarily in common stocks or securities
convertible into common stocks.
The International Portfolio primarily seeks long-term appreciation of
capital with a secondary goal of current income by investing primarily in
securities issued by companies or governments of any nation.
The Small Cap Portfolio seeks capital growth through a diversified holding
of securities, primarily in the common stocks of, or securities convertible
into the common stocks of, relatively new or unseasoned companies, companies
which are in their early stages of development or smaller companies positioned
in new and emerging industries where the opportunity for rapid growth is above
average.
The Balanced Portfolio primarily seeks current income with a secondary goal
of long-term appreciation of capital by investing in a variety of securities,
including debt securities, common stocks and preferred stocks.
The Limited-Term Bond Portfolio seeks a high level of current income
consistent with preservation of capital by investing primarily in debt
securities of investment grade, including debt securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. The Portfolio
will seek to maintain a dollar weighted average maturity of its portfolio of
two to five years.
The Asset Strategy Portfolio seeks high total return with reduced risk over
the long term. It diversifies among stocks, bonds, and short-term instruments,
both in the United States and abroad.
The Science and Technology Portfolio seeks long-term capital growth through
investments primarily in science and technology securities.
5
<PAGE>
FUND MANAGEMENT AND FEES
Waddell & Reed Investment Management Company (the "Manager") is the manager
of the Fund and provides investment advisory services to the Fund. The Manager
is a wholly-owned subsidiary of Waddell & Reed, Inc. which is a direct
subsidiary of Waddell & Reed Financial Services, Inc. and an indirect
subsidiary of United Investors Management Company and Torchmark Corporation.
The Manager provides investment advice to and supervises investments of a
number of mutual funds. The Manager maintains a large staff of experienced
investment personnel and a full complement of related support facilities. Each
Portfolio pays the Manager a fee for managing its investments consisting of
two elements: (i) a specific fee computed on each Portfolio's net asset value
at the close of business each day at the following annual rates:
<TABLE>
<CAPTION>
SPECIFIC FEE
ANNUAL RATE
PORTFOLIO (% OF NET ASSETS)
--------- -----------------
<S> <C>
Money Market........................................... None
Bond................................................... 0.03%
High Income............................................ 0.15%
Growth................................................. 0.20%
Income................................................. 0.20%
International.......................................... 0.30%
Small Cap.............................................. 0.35%
Balanced............................................... 0.10%
Limited-Term Bond...................................... 0.05%
Asset Strategy......................................... 0.30%
Science and Technology................................. 0.20%
</TABLE>
and (ii) a pro rata participation based on the relative net asset size of each
Portfolio in a "Group" fee computed each day on the combined net asset values
of all of the Portfolios at the following annual rates:
<TABLE>
<CAPTION>
GROUP FEE
GROUP NET ASSET ANNUAL RATE
LEVEL ($ MILLIONS) (% OF NET ASSETS)
------------------ -----------------
<S> <C>
$0-$750 million........................................ 0.51%
$750-$1,500............................................ 0.49%
$1,500-$2,250.......................................... 0.47%
over $2,250............................................ 0.45%
</TABLE>
Each of the Portfolios also pays its own operating expenses. The expenses
paid in 1996 are shown below. Expenses for the Science and Technology
Portfolio are estimates for its first year of operation.
<TABLE>
<CAPTION>
OTHER EXPENSES
PORTFOLIO (% OF NET ASSETS)
--------- -----------------
<S> <C>
Money Market........................................... .11%
Bond................................................... .06%
High Income............................................ .06%
Growth................................................. .03%
Income................................................. .03%
International.......................................... .20%
Small Cap.............................................. .06%
Balanced............................................... .10%
Limited-Term Bond...................................... .21%
Asset Strategy......................................... .13%
Science and Technology................................. .03%
</TABLE>
Actual expenses in future years may be higher or lower than these amounts.
6
<PAGE>
POLICY RIGHTS AND BENEFITS
DEATH BENEFIT
The Policy pays a Death Benefit to the named Beneficiary if the Insured dies
while the Policy is in force. The Death Benefit will never be less than the
Minimum Death Benefit of the Policy as long as the Policy remains in force
(the proceeds will, of course, be reduced by any outstanding Policy loans).
You will be able to select from a range of initial Minimum Death Benefits. The
Minimum Death Benefit, at your option, can be the amount determined by
treating the premium paid as equal to 100% of Guideline Single Premiums (as
defined for federal tax purposes); or the Minimum Death Benefit can be an
amount not in excess of 133% of that amount. (See Termination, Grace Period,
and Reinstatement.) The Death Benefit is the greater of (a) the Minimum Death
Benefit or (b) the Policy Value on the date of death multiplied by the Death
Benefit Factor for the Insured's age shown in the Table in Appendix B. The
Policy Value will begin to vary on the Policy Date to reflect the investment
performance of the amounts allocated to the Investment Divisions of the
Variable Account. There is no guarantee that the Policy Value will increase
(it may decrease) nor is there any guarantee that the Death Benefit will
increase above the Minimum Death Benefit.
The Minimum Death Benefit is shown in the Policy. Payment of additional
premiums may require an increase in the Minimum Death Benefit to continue the
Policy as a contract of life insurance for tax purposes. A new Policy Data
page will be sent to a Policyowner whenever the Minimum Death Benefit changes
due to the payment of additional premiums.
United Investors will compute the amount of the Death Benefit as of the end
of the Valuation Period during which the Insured dies, and will pay the Death
Benefit Proceeds upon proof of the Insured's death. The Proceeds may be paid
in a lump sum or under one of the payment options set forth in the Policy.
(See Payment Options.) The Death Benefit Proceeds are the Death Benefit
reduced by any outstanding Loan Balance.
Sample Death Benefits. The following table shows sample initial Minimum
Death Benefits for initial premiums of $10,000 and $25,000 at female age 35
and male age 55.
INITIAL MINIMUM DEATH BENEFIT
<TABLE>
<CAPTION>
Initial Premium: $10,000 $25,000
Least Greatest Least Greatest
Age Amount Amount Amount Amount
--- ------ -------- ------ --------
<S> <C> <C> <C> <C>
35 female.......................... $62,365 $82,945 $164,860 $219,264
55 male............................ $24,039 $31,972 $ 62,499 $ 83,124
</TABLE>
A higher Death Benefit provides more insurance and, of course, costs more.
Thus, a higher Death Benefit will result in a higher mortality charge. (See
Cost of Insurance.)
CHANGES IN THE MINIMUM DEATH BENEFIT
Once each Policy Year, beginning in the second Policy Year, a Policyowner
may request an increase or a decrease in the Minimum Death Benefit. The
Minimum Death Benefit may not be decreased if it would cause a Policy to fail
to qualify as a contract of life insurance for federal tax purposes.
At the request of the Policyowner, or to keep premiums from exceeding the
limit qualifying the Policy as a life insurance contract for federal tax
purposes, we will allow a Policyowner to increase the Minimum Death Benefit,
provided:
(1) the increased amount plus any other existing insurance does not, in our
opinion, exceed an appropriate maximum amount on the Insured's life;
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<PAGE>
(2) satisfactory evidence of insurability for the Insured's risk class is
furnished to us; and
(3) the request is accompanied by a minimum additional premium of $5,000.
We will notify the Policyowner as to the acceptable amount of any increase
in the Minimum Death Benefit and refund any excess premium. The accepted
premium must equal or exceed a minimum additional premium.
POLICY VALUE
On the Maturity Date, the Proceeds payable under a Policy are equal to the
Policy Value less any Loan Balance. The Policy may be surrendered at any time
for the Surrender Value, which is equal to the Policy Value less any Loan
Balance and less any applicable surrender charge. (See Surrender Charge.) The
Policy Value equals the Variable Account Value plus the value of any amount
transferred to the general account to cover the Loan Balance. The Policy Value
will begin to vary immediately to reflect the investment performance of the
Investment Divisions to which the Policy Value is allocated, any loan
activity, and the charges assessed in connection with the Policy. There is no
guaranteed minimum Policy Value.
Determination of the Variable Account Value
The Policy's Variable Account Value is equal to the sum of the values of the
Investment Divisions of the Variable Account (so the Variable Account Value
equals the Policy Value less any Loan Balance). The value of each Investment
Division is calculated first on the Policy Date and thereafter on each
Valuation Date (a normal business day). On the Policy Date, the value of the
Investment Divisions is equal to the amount of the initial premium plus any
accrued interest from the date of the receipt of the initial premium to the
Policy Date. On any Valuation Date thereafter, the value of each Investment
Division equals what it was on the previous Valuation Date, multiplied by the
appropriate Net Investment Factor for the current Valuation Period, increased
and/or decreased by the amounts specified below. The value of an Investment
Division is increased by:
(1) the amount of any net premium payments allocated to the Investment
Division during the current Valuation Period;
(2) the amount of any transfers from other Investment Divisions to the
Investment Division during the current Valuation Period; and
(3) the amount of any loan repayments allocated to the Investment Division
during the current Valuation Period.
The value of an Investment Division is decreased by:
(1) the amount of any transfers to other Investment Divisions from the
Investment Division during the current Valuation Period;
(2) the portion of any annual deduction allocated to the Investment
Division; and
(3) the amount of any loan or loan interest transferred from the Investment
Division during the current Valuation Period.
Determining Investment Results
The Policy Value will change due to the investment results of the Investment
Divisions. An index is used to measure these investment results. The index is
called a unit value. Each Investment Division has its own unit value.
For each Investment Division, the unit value was initially set at $1.00.
Thereafter, the unit value for a given Valuation Period is equal to the unit
value for the prior Valuation Period multiplied by the Net Investment Factor
for the given Valuation Period.
8
<PAGE>
The Net Investment Factor is an index applied to measure the investment
performance of an Investment Division from one Valuation Period to the next.
The Net Investment Factor may be greater or less than one, so the value of an
Investment Division may increase or decrease.
The Net Investment Factor of an Investment Division for any Valuation Period
is determined by dividing (1) by (2) and subtracting (3) from the result,
where:
1) is the result of:
a) the net asset value per share of the Portfolio shares held in the
Investment Division determined at the end of the current Valuation
Period; plus
b) the per share amount of any dividend or capital gain distributions on
the Portfolio shares held in the Investment Division, if the "ex-
dividend" date occurs during the current Valuation Period; plus or
minus
c) a charge or credit for any taxes reserved for the current Valuation
Period which we determine to have resulted from the investment
operations of the Investment Division;
2) is the result of:
a) the net asset value per share of the Portfolio shares held in the
Investment Division, determined at the end of the previous Valuation
Period; plus or minus
b) the charge or credit for any taxes reserved for the previous Valuation
Period; and
3) is a deduction for certain mortality and expense risks that we assume.
At the end of any Valuation Period, the value of an Investment Division is
equal to the number of units multiplied by the unit value.
POLICY LOANS
A loan taken from, or secured by, a Policy, may have Federal income tax
consequences. (See Federal Tax Matters.)
After the first Policy Year you may borrow from United Investors against
this Policy up to the loan value. The loan value is 90% of the Policy Value,
less surrender charges and interest to the next Policy Anniversary, and you
may borrow in one or more loans any amount up to the difference between the
loan value and any existing Loan Balance. The effective annual interest rate
charged on all loans will be 6%. Interest to pay for the loan until the next
Policy Anniversary will be included in determining the maximum loan value. The
Loan Balance equals the total of all Policy loans and accrued interest on
Policy loans. The loan value of the Policy is the sole security for the loan.
The minimum loan amount is $200, and you may request up to four loans per
Policy Year without a charge. If more than four loans are requested, there
will be a $25 transaction charge for each additional loan.
We will transfer an amount equal to the Policy loan from the Investment
Divisions to the general account as security for the Loan Balance. We will
allocate the amount transferred in the proportion that the value of each
Investment Division bears to the Variable Account Value unless you specify the
Investment Divisions from which the loan is to be made. The amounts
transferred to the general account equal to the Loan Balance will be credited
with interest earnings at an effective annual rate of 4.0%. Currently, an
additional 2.0% (or a total of 6.0%) is credited on loaned amounts that do not
exceed the Policy Value less the total premiums paid, excluding Grace Period
Premiums. This additional amount may change in the future. The Variable
Account Value is reduced by the amount transferred to the general account to
secure the Loan Balance, including loan interest charges that become part of
the loan because they are not paid when due.
Loan interest is charged daily on any amounts loaned and is due on each
Policy Anniversary (or when the loan is paid back). If loan interest is not
paid when due, it will be added to the principal of the loan and interest
shall be charged thereon. Interest will be taken from the Investment Divisions
in the proportion that the value of each Investment Division bears to the
Variable Account Value.
9
<PAGE>
If the Loan Balance exceeds the Policy Value, less surrender charges, the
Policy will terminate without value unless additional premium payments
sufficient to keep the Policy in force are made by the end of the grace
period. (See Termination, Grace Period, and Reinstatement.)
A Policy loan will permanently affect the Policy Value, even if the loan is
repaid. The effect could be favorable or unfavorable depending on whether the
investment return of the Investment Divisions selected by you is less than or
greater than the net interest rate credited to the amount transferred to the
general account securing the loan (currently 0% or -2%). In comparison to a
Policy under which no loan was made, the Policy Value will be lower if the net
interest rate credited to the amount in the general account securing a loan is
less than the investment return of the Investment Divisions and greater if the
general account net interest rate is higher than the investment return of the
Investment Divisions.
Repayment of the Loan Balance
You may repay all or part of the loan at any time while the Insured is alive
and the Policy is in force. Repayments must be in amounts of at least $200 or
the outstanding Loan Balance if less.
Upon repayment of the Loan Balance, the portion of the repayment allocated
to an Investment Division will be transferred from the general account and
increase the value in the Investment Division. The repayment will be allocated
among the Investment Divisions in the proportion that the value in each
Investment Division bears to the Variable Account Value unless you instruct us
otherwise. The repayment of the Loan Balance will be allocated when the
repayment is received.
Postponement of a Loan
A loan will usually be made within seven days after we receive your Written
Request. However, loans may be deferred under certain circumstances. (See
Delay or Suspension of Payments.)
SURRENDERS
You may surrender the Policy for its Surrender Value by sending a Written
Request to United Investors at its home office. Only full surrenders are
allowed; partial surrenders are not permitted. Surrenders will ordinarily be
paid within seven days of receipt of the Written Request. (See Delay or
Suspension of Payments.)
If a Policy is surrendered, United Investors will pay the Surrender Value,
which is the Policy Value less (1) any Loan Balance; and (2) the surrender
charge, if any (the surrender charge, described below, is only applicable if a
surrender occurs in the first eight Policy Years.). Coverage under the Policy
will terminate as of the date of receipt of a Written Request for surrender.
Surrenders may be taxable transactions. (See Federal Tax Matters.)
TRANSFERS
You may transfer all or part of the value of an Investment Division to one
or more of the other Investment Divisions. The total amount transferred each
time must be at least $1,000 or, if less, the entire value of the Investment
Division from which the transfer is being made. Transfers may be made by a
Written Request or by calling United Investors if a written authorization for
telephone transfers is on file. United Investors has the authority to honor
any telephone transfer request believed to be authentic. We employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
A personal identification number is required in order to initiate a transfer.
United Investors will not be liable for the consequences of a fraudulent
telephone transfer request we believe to be authentic when we have followed
those procedures. And as a result, you bear the risk of loss arising from such
a fraudulent request if you authorize telephone transfers.
Only twelve transfers may be made during each Policy Year. Each such
transfer will be made, without the imposition of any fee or charge, as of the
end of the Valuation Period during which United Investors receives a valid,
complete transfer request. United Investors may suspend or modify this
transfer privilege at any time.
10
<PAGE>
Transferring the value of one Investment Division into two or more
Investment Divisions counts as one transfer request. However, transferring the
values of two Investment Divisions into one Investment Division counts as two
transfer requests.
DOLLAR COST AVERAGING
Prior to the Maturity Date you may authorize automatic transfers of a fixed
dollar amount from the Money Market Investment Division to up to four of the
other Investment Divisions. Automatic transfers will be made on a monthly
basis on the day of the month selected in your application. If the day of the
month selected does not fall on a Valuation Date, transfers will be made on
the next following Valuation Date. Transfers will be made at the unit values
determined on the date of each transfer.
The minimum automatic transfer amount from the Money Market Investment
Division is $100. If the transfer is to be made to more than one Investment
Division, a minimum of $25 must be transferred to each Investment Division
selected.
Participation in the automatic transfer program does not guarantee a greater
profit nor does it protect against loss in declining markets. Automatic
transfers will not be counted as a transfer for purposes of the twelve
transfer limit specified in Transfers above.
FREE LOOK PERIOD
If for any reason you are not satisfied with the Policy, you may return it
to us within 10 days after you receive the Policy. If you cancel the Policy
within this 10 day "Free Look" period, we will refund the premium that was
paid (or the amount required by your state, if greater) and the Policy will be
void from the Policy Date. To cancel the Policy, you must mail or deliver it
to either United Investors' Home Office or the registered agent who sold it
within 10 days after you received it.
RIGHT TO EXCHANGE FOR FIXED LIFE INSURANCE
Once during the first two policy years, you have the right to exchange this
policy for a single premium life insurance policy that provides for benefits
that do not vary with the investment return of the Investment Divisions. We
will not require evidence of insurability. We will require that:
(1) this policy is in force;
(2) you file a Written Request; and
(3) you repay any existing Loan Balance.
The new Policy will have the same initial Death Benefit, Policy Date and
issue age as the original Policy. The premium for the new Policy will be based
on our rates in effect on its Policy Date for the same class of risk as under
the original Policy. Upon request, we will inform you of the single premium
for the new Policy, and any extra sum required or allowance to be made for a
premium or cash value adjustment that takes appropriate account of the premium
and values under both the original Policy and the new Policy. If required, a
detailed statement of the method of computing such an adjustment has been
filed with the insurance regulator of the states where the Policies are
delivered.
VOTING RIGHTS
To the extent required by law, United Investors will vote the Fund's shares
held in the Variable Account at regular and special shareholder meetings of
the Fund in accordance with instructions received from persons having a voting
interest in the corresponding Investment Divisions of the Variable Account. If
however, the 1940 Act or any regulation thereunder should be amended or if the
present interpretation thereof should change, and as a result United Investors
determines that it is allowed to vote the Fund's shares in its own right,
United Investors may elect to do so. The Fund does not hold regular annual
shareholder meetings.
The number of votes which a Policyowner has the right to instruct will be
calculated separately for each Investment Division. The number of votes which
each Policyowner has the right to instruct will be determined by applying the
Policyowner's percentage interest in the Investment Division to the total
11
<PAGE>
number of votes attributable to the Investment Division. Fractional votes will
be counted. The number of votes of a Portfolio which the Policyowner has the
right to instruct will be determined as of a date established by United
Investors, but not more than 90 days before the meeting of the Fund. Voting
instructions will be solicited by written communication prior to such meeting.
Each person having a voting interest in an Investment Division will receive
proxy material, reports and other materials relating to the appropriate
Portfolio.
United Investors will vote Fund shares attributable to the Policies as to
which no timely instructions are received and any Fund shares held by United
Investors as to which Policyowners have no beneficial interest, in proportion
to the voting instructions which are received with respect to all Policies
participating in that Portfolio. Voting instructions to abstain on any item to
be voted upon will be applied on a pro rata basis to reduce the votes eligible
to be cast.
Disregard of Voting Instructions
United Investors may, when required by state insurance regulatory
authorities, disregard voting instructions if the instructions require that
the shares be voted so as to cause a change in the sub-classification or
investment objective or policies of the Fund or one or more of its Portfolios
or to approve or disapprove an investment advisory contract for a Portfolio.
In addition, United Investors itself may disregard voting instructions in
favor of changes initiated by a Policyowner in the investment policy or the
investment advisor of a Portfolio of the Fund if United Investors reasonably
disapproves of such changes. A change would be disapproved only if the
proposed change is contrary to state law or prohibited by state regulatory
authorities or United Investors determined that the change would have an
adverse effect on its general account in that the proposed investment policy
for a Portfolio may result in overly speculative or unsound investments. In
the event United Investors does disregard voting instructions, a summary of
that action and the reasons for such action will be included in the next
annual report to Policyowners.
PREMIUM PAYMENT AND ALLOCATION
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy must complete an application and
send it with the initial premium to United Investors' Home Office. United
Investors' Underwriting Department will review the application, and any
medical information or other data which it requires, to determine if the
individual is insurable under its underwriting rules. No Policy will be issued
to individuals over the age of 75. Coverage will only become effective on the
Policy Date. Should an individual die before the Policy Date, United
Investors' sole liability will be to return the premium paid plus any interest
earned on it.
PREMIUMS
The minimum Initial Premium that can be paid is $5,000. The amount of the
Minimum Death Benefit depends on the amount of the premium and on the
Insured's attained age and sex.
Although the Policy can operate as a single premium policy, after the first
Policy Year there is some flexibility to pay additional premiums at the
Policyowner's discretion. One additional premium per Policy Year may be paid
(not counting Grace Period Premiums). If the premium does not cause the
Minimum Death Benefit to increase, the minimum payment is $500. If the premium
does cause the Minimum Death Benefit to increase (so that the policy will
continue to qualify as a life insurance contract under the Internal Revenue
Code), then the minimum payment is $5,000 and is subject to the "Changes in
the Minimum Death Benefit" conditions. In addition, one or more additional
premiums may be required to prevent the Policy from terminating without value
if the Loan Balance exceeds the Policy Value, less surrender charges (or if
the Surrender Value is insufficient to cover the annual deduction). If either
of these conditions exist, then during the grace period you may pay an
additional premium sufficient to keep the Policy in force. If you do not, the
Policy will terminate without value. (See Termination, Grace Period, and
Reinstatement.)
12
<PAGE>
ALLOCATION OF PREMIUMS
The Policyowner determines in the application how the initial premium will
be allocated among the Investment Divisions of the Variable Account. You may
allocate any whole percentage of the premium, from 0% to 100%.
Between the date that the initial premium was received and the Policy Date,
the initial premium is held in our general account and is credited with
interest as if it had been invested in the Money Market Investment Division.
Beginning on the Policy Date and ending on the seventeenth day after the
Policy Date or the first Valuation Date thereafter, the initial premium, plus
any accrued interest, will be allocated to the Money Market Investment
Division. Upon the expiration of this period, the Policy Value will be
transferred to the Investment Divisions of the Variable Account in accordance
with the allocation instructions you specify in the application. The seventeen
day period is intended to cover the 10-day Free Look Period (See Free Look
Period), plus 7 days for processing and policy delivery.
Additional premiums not requiring our approval will be allocated in
accordance with your instructions on the date of receipt. If approval is
required, the additional premium will be held in the general account and is
credited with interest as if it had been invested in the Money Market
Investment Division until the date of approval, at which time it will be
applied in accordance with your instructions. If no instructions are given,
then it will be invested in the proportions that the value of each Investment
Division bears to the Variable Account Value.
The Policy Value will vary with the investment performance of the Investment
Divisions you select and you bear the entire investment risk for the amounts
allocated to the Variable Account. This will affect not only the Policy Value,
but it may also affect the Death Benefit. You should periodically review your
allocations of Policy Value in light of all relevant factors, including market
conditions and your overall financial planning requirements.
TERMINATION, GRACE PERIOD, AND REINSTATEMENT
A Policy will terminate on the earliest of (a) the date the Policy is
surrendered, (b) the end of the grace period, (c) the date of the death of the
Insured, or (d) the Maturity Date.
If the Loan Balance on a Policy exceeds the Policy Value less surrender
charges, or if the Surrender Value is insufficient to cover the annual
deduction, a grace period of 61 days from the date notice is mailed shall be
allowed for the Policyowner to pay an additional premium sufficient to keep
the Policy in force. The additional premium required will not exceed the
amount by which the Loan Balance exceeds the Policy Value less surrender
charges, plus any accrued and unpaid annual deduction as of the date of the
notice. The payment will be sufficient to keep the Policy in force until the
next Policy Anniversary regardless of investment performance. If such
additional premium is not paid prior to the expiration of the grace period,
the Policy will terminate without value. If the Insured dies during the grace
period, any Loan Balance or overdue annual deduction will be deducted from the
Death Benefit to determine the Proceeds payable.
If the grace period has ended, the Policy may be reinstated if the
Policyowner:
1) submits a Written Request at any time within 3 years after the end of
the grace period and prior to the Maturity Date;
2) provides us with satisfactory evidence of insurability;
3) pays an additional premium sufficient to cover all previous annual
deductions that were due and unpaid; and
4) repays or reinstates any Loan Balance on the Policy which existed at the
end of the grace period.
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If we approve the reinstatement, then (1) the effective date of
reinstatement will be the date of your Written Request or the date the
required additional premium is paid, if later; (2) the Death Benefit will be
the same as it was when the grace period ended; and (3) we will resume making
charges and deductions as of the date of reinstatement.
CHARGES AND DEDUCTIONS
United Investors does not impose any charge or deduction against the initial
premium prior to its allocation to the Variable Account, although for any
additional premiums, excluding Grace Period Premiums, a sales load of 6.0% of
such premium, and a premium tax charge of 2.5% of such premium, will be
deducted prior to its allocation to the Variable Account. Thereafter,
deductions are made from the values in the Investment Divisions to pay for
various expenses and risks that we incur. The charges for sales expenses and
administrative expenses may be reduced or waived on Policies sold to employees
of United Investors or its affiliates, or to customers of United Investors who
are transferring existing policy values into a Policy.
MORTALITY AND EXPENSE RISK CHARGE
United Investors deducts a daily charge from the Investment Divisions at an
effective annual rate of .60% of the average daily net assets of each
Investment Division to compensate us for assuming certain mortality and
expense risks under the Policy. United Investors may realize a profit from
this charge. The level of this charge is guaranteed for the life of the Policy
and may not be increased. The mortality risk is the risk that the cost of
insurance charges specified in the Policy will be insufficient to meet actual
claims. United Investors also assumes the risk that other expense charges may
be insufficient to cover the actual expenses incurred in connection with the
Policy.
ANNUAL DEDUCTION
On each Policy Anniversary, a deduction will be made from the values of the
Investment Divisions to compensate United Investors for certain costs and
expenses.
Deductions on Each of the First Ten Policy Anniversaries
On each of the first ten Policy Anniversaries, there is an annual deduction
of 1.20% of the initial premium. This charge is composed of a .85% charge for
sales expenses, a .10% charge for underwriting and issue expenses, and a .25%
charge for premium taxes. Each of these charges is discussed below.
(1) Sales Expenses--The .85% charge compensates United Investors for
certain sales and other distribution expenses incurred at the time the
Policies are issued, including agent sales commissions, the cost of
printing prospectuses and sales literature, advertising, and other
marketing and sales promotional activities.
(2) Underwriting and Issue Expenses--The .10% charge compensates United
Investors for initial underwriting costs and for certain expenses
incurred in issuing the Policy, including the cost of processing
applications, conducting medical examinations, determining
insurability, and establishing records.
(3) State and Local Premium Taxes--The .25% charge compensates United
Investors for the average premium tax expense incurred when issuing the
Policy. (State premium tax rates incurred by United Investors currently
range from 1.75% to 3.50%. In some states localities charge additional
premium taxes.)
Cost of Insurance
A mortality charge will be deducted on each Policy Anniversary to compensate
United Investors for the cost of insurance for the preceding Policy Year. This
charge is designed to compensate United
14
<PAGE>
Investors for the anticipated cost of paying Death Benefits to the
Beneficiaries of Insureds who die while the Policy is in force. On the Policy
Date, the Death Benefit is substantially higher than the initial premium
payment. As the Insured grows older, and if investment results have been
sufficiently favorable, the difference between the Policy Value and the Death
Benefit will become smaller. But prior to the Maturity Date of the Policy the
Death Benefit will always be higher than the Policy Value. To enable United
Investors to pay this additional amount, the mortality charge must be
assessed.
The mortality charge is based on the Policy's net amount at risk (which is
the difference between the Death Benefit and the Policy Value as of the end of
the Policy Year) and on the attained age, sex and risk class of the Insured.
Annual cost of insurance rates will be determined by United Investors based
upon its expectation as to future mortality experience. The rates are
guaranteed not to exceed the maximum cost of insurance rates specified in the
Policy, which are contained in the 1980 Commissioners' Standard Ordinary
Mortality Table, or a multiple thereof for substandard classes, Age Nearest
Birthday.
Administrative Expenses
United Investors deducts a charge of $50 on each Policy Anniversary to
compensate it for expenses incurred in administering the Policy. These
expenses include costs of maintaining records, processing Death Benefit
claims, surrenders, transfers, Policy loans and Policy changes, providing
reports to Policy-owners, and overhead costs. There is not necessarily a
relationship between the amount of the charge imposed on a particular Policy
and the amount of administrative expenses that may be attributable to that
Policy. This charge is "cost-based" and United Investors does not expect a
profit from this charge.
ADDITIONAL PREMIUM CHARGE
As noted above, there is no deduction from the initial premium. For
additional premiums, however, there are deductions of 6% of each such premium
for sales expenses, and 2.5% of each premium for premium taxes. The charge for
sales expenses may be reduced or waived on Policies sold to employees of
United Investors or its affiliates, or to customers of United Investors who
are transferring existing policy values into a Policy.
FEDERAL TAXES
Currently no charge is made to the Variable Account for federal income taxes
(or the burden thereof) that may be attributable to the Variable Account.
United Investors may, however, make such a charge in the future. Charges for
other taxes, if any, attributable to the Variable Account may also be made.
(See Federal Tax Matters.)
SURRENDER CHARGE
If you surrender the Policy during the first eight Policy Years, then a
surrender charge is made against the amount of the initial premium as
specified in the following Table of surrender charges:
<TABLE>
<CAPTION>
POLICY YEAR: 1ST 2ND 3RD 4TH 5TH 6TH 7TH 8TH 9 OR MORE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender Charge %.................... 8% 7% 6% 5% 4% 3% 2% 1% none
</TABLE>
There is no surrender charge after the first eight Policy Years. Because the
surrender charge is based on the amount of the initial premium, the dollar
amount of the charge will decrease each Policy Year by a fixed amount
regardless of the investment experience of the Variable Account.
The surrender charge will be deducted from the proceeds payable upon
surrender to partially compensate United Investors for sales expenses incurred
in connection with the Policy. These expenses include agent sales commissions,
the cost of printing prospectuses and sales literature, advertising, and other
marketing and sales promotional activities.
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<PAGE>
United Investors may reduce or waive the surrender charge on Policies that
have been sold to employees of United Investors or its affiliates, or to
customers of United Investors who are transferring existing policy values into
a Policy.
The amounts derived by United Investors from the surrender charge, along
with the deduction on the first ten Policy Anniversaries for sales expenses,
and the sales load deducted from additional premiums may not be sufficient to
cover distribution expenses. United Investors expects to recover any
deficiency from United Investors' general assets (which include amounts
derived from the mortality and expense risk charge and mortality gains).
United Investors believes that this distribution financing arrangement will
benefit the Variable Account and Policyowners.
FUND EXPENSES
The value of the assets of the Variable Account will reflect the investment
management fee (See Fund Management and Fees) and other expenses incurred by
the Fund.
PAYMENT OPTIONS
Death Benefit Proceeds will be paid in one sum unless the Policyowner has
elected to apply all or part of this sum under a payment option. No option can
be elected if the payments under the option would be less than $25 each or
less that $120 in a year. Amounts payable under the payment options do not
vary with the investment performance of the Variable Account.
ELECTION OF PAYMENT OPTION
The Policyowner has the sole right to elect or change a payment option
during the lifetime of the Insured, either in the application or by Written
Request. If there is no option in effect when the Insured dies, the
Beneficiary may elect an option. The Payee may name a contingent payee to
receive any final payment in case the Payee dies; otherwise, the value of any
remaining guaranteed payments will be paid to the Payee's estate. We may
require the exchange of this Policy for a contract covering the option
selected. As far as permitted by law, the Proceeds under this Policy will not
be subject to any claims of the Beneficiary's creditors.
AVAILABLE OPTIONS
The options currently available are:
Option 1: Fixed Amount--This option provides an income payable monthly of a
fixed amount, until the Proceeds are fully paid. Under this
option at least 7% of the Proceeds must be paid each year.
Option 2: Fixed Period--This option provides an income payable monthly for
a fixed period, not exceeding 30 years.
Option 3: Life Income--This option provides an income payable during the
lifetime of the Payee. The payments are guaranteed for a fixed
period of 10, 15 or 20 years. Under this option, no payment will
become due after the death of the Payee, except payments for any
remaining fixed period.
Option 4: Proceeds Left at Interest--This option provides for the payment
of interest on any amount of Proceeds left with us, for any
period agreed upon. The interest may be paid at selected
intervals or allowed to accumulate.
Once a payment option is in effect, there will no longer be Policy Value in
the Variable Account. Any amount left with United Investors for payment under
a payment option will be transferred to the general account. The interest rate
on all amounts held under all options will be at least 2.5%, compounded
annually. United Investors may make other payment options available in the
future and other payment options can be arranged with our written consent.
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<PAGE>
Except as to Option 3, if the Payee selected the option, that Payee with our
consent may modify the terms of the option or select another option at any
time.
PAYMENT OPTION TABLES
The Payment Option Tables in the Policy show the guaranteed minimum amount
of the monthly payments. Under Option 3 the amount of each payment will depend
on the sex and age of the Payee at the time the first payment is due.
United Investors may, at the time of election of a Payment Option, offer
more favorable rates in lieu of the guaranteed rates specified in the Payment
Option Tables.
GENERAL PROVISIONS
THE CONTRACT
The entire contract is made up of the Policy and the written application.
All statements made in the application, in the absence of fraud, are
considered representations and not warranties. Only the statements made in the
written application can be used by us to defend a claim or avoid the Policy.
We reserve the right to make any modification to conform the Policy to, or
give you the benefit of, any Federal or State statute or any rule or
regulation of the United States Treasury Department or any state.
Changes to the Policy are not valid unless we made them in writing. They
must be signed by one of our Executive Officers. No agent has authority to
change the Policy or to waive any of its provisions.
INCONTESTABILITY
The Policy will be incontestable after it has been in force during the
lifetime of the Insured for two years from the Policy Date. A new two year
contestability period shall apply to each increase in insurance requiring
evidence of good health beginning on the effective date of each increase and
will apply only to statements made in the application for the increase. If the
Policy is reinstated, a new two year contestability period (apart from any
remaining contestability period) shall apply from the date of the application
for reinstatement and will apply only to statements made in the application
for reinstatement.
SUICIDE
If the Insured commits suicide, while sane or insane, within two years from
the Policy Date, our liability will be limited to the total premiums paid less
any Loan Balance. If the Insured dies by suicide, while sane or insane, within
two years from the effective date of any increase in insurance requiring
evidence of good health, the Proceeds under this Policy shall be reduced by
the excess, if any, of the net amount at risk (Death Benefit less Policy
Value) on the date of death over the corresponding amount in effect just prior
to the date of increase, and increased by the total annual cost of insurance
charges deducted for this excess.
MISSTATEMENT OF AGE OR SEX
If the Insured's age or sex is misstated, we will adjust each benefit and
any amount to be paid to reflect the correct age and sex.
ANNUAL REPORT
At least once each Policy Year we will send you a report on your Policy. It
will show the current Death Benefit, the current Policy Value, the current
Surrender Value, any payments since the last report, all charges since the
last report, and any Loan Balance. We will also include in the report any
17
<PAGE>
other information required by state law or regulation. Further, we will send
you the reports required by the Investment Company Act of 1940. You may
request additional reports during the year but we may charge a fee for any
additional reports.
NON-PARTICIPATION
The Policy is non-participating. This means that no dividends will be paid
on your Policy. It will not share in our profits or surplus earnings.
DELAY OR SUSPENSION OF PAYMENTS
We will normally pay the Surrender Value or the proceeds of any loan within
7 days after we receive your Written Request in our Home Office. However,
payment of any amount may be delayed or suspended whenever:
a) the New York Stock Exchange is closed other than customary weekend and
holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission;
b) the Securities and Exchange Commission by order permits postponement for
the protection of Policyowners; or
c) an emergency exists, as determined by the Commission, as a result of
which disposal of the securities held in the Investment Divisions is not
reasonably practicable or it is not reasonably practicable to determine
the value of the Variable Account's net assets.
Payments under the Policy of any amounts derived from premiums paid by check
may be delayed until such time as the check has cleared your bank.
OWNERSHIP
The original Owner of a Policy is as stated in the application. Unless you
provide otherwise, you may receive all benefits and exercise all rights of the
Policy while the Insured is living. If there is more than one Owner at a given
time, all must exercise the rights of ownership by joint action.
BENEFICIARY
The Beneficiary is named in the application. More than one Beneficiary may
be named. The rights of any Beneficiary who dies before the Insured will pass
to the surviving Beneficiary or Beneficiaries unless you provide otherwise. If
no Beneficiary is living at the Insured's death, we will pay the Death Benefit
Proceeds to the Policyowner, if living; otherwise it will be paid to the
Policyowner's estate.
CHANGE OF OWNERSHIP OR BENEFICIARY
Unless you provide otherwise in writing to us, you may change the Owner or
the Beneficiary during the lifetime of the Insured. Any changes must be made
by Written Request filed with us. The change takes effect on the date the
request was signed, but it will not apply to payments made by us before we
accept your request in writing. We may require you to submit the Policy to us
before making a change. A change of owner may be a taxable event. Prior to
making such a change a qualified tax advisor should be consulted.
ASSIGNMENT
You may assign the Policy, but we will not be responsible for the validity
of any assignment and no assignment will bind us until it is filed in writing
at our Home Office. When it is filed, your rights and the rights of any
beneficiary will be subject to it. An assignment may be a taxable event. Prior
to making an assignment a qualified tax advisor should be consulted.
DISTRIBUTION OF THE POLICIES
The Policies will be sold by individuals who, in addition to being licensed
as life insurance agents for United Investors, are also registered
representatives of Waddell & Reed, Inc., the principal underwriter of the
Policies, or of broker-dealers who have entered into written sales agreements
with
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<PAGE>
Waddell & Reed, Inc. Waddell & Reed, Inc. is registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 as a broker-
dealer and as a member of the National Association of Securities Dealers.
Waddell & Reed, Inc. is an affiliate of United Investors.
A commission of up to 5% of premium plus bonus compensation may be paid to
broker-dealers or agents in connection with sales of the Policies.
FEDERAL TAX MATTERS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations relating to the Policy. This summary is based upon United
Investors' understanding of the present Federal income tax laws as they are
currently interpreted by the Internal Revenue Service ("IRS"). Because of the
complexity of such laws and the fact that tax results will vary according to
the factual status of the specific policy involved, tax advice may be needed
by a person contemplating the purchase of a Policy or the exercise of
elections under the Policy. It should therefore be understood that these
comments concerning Federal income tax consequences are not an exhaustive
discussion of all tax questions that might arise under the Policy. Further,
these comments do not take into account any federal estate tax and gift,
state, or local tax considerations which may be involved in the purchase of a
Policy or the exercise of elections under the Policy. For complete information
on such Federal and state tax considerations, a qualified tax advisor should
be consulted. United Investors does not make any guarantee regarding the tax
status of any policy and the following summary is not intended as tax advice.
TAX STATUS OF THE POLICY
Section 7702 of the Code sets forth a definition of a life insurance
contract for Federal tax purposes. In addition, for Policies entered into
after October 20, 1988, the Technical and Miscellaneous Revenue Act of 1988
("TAMRA") established certain new requirements with respect to the mortality
(i.e., cost of insurance) and other expense charges that are to be used in
determining compliance with section 7702. The Secretary of the Treasury has
issued proposed regulations that would specify what will be considered
reasonable mortality charges for Policies subject to TAMRA. However, these
proposed regulations do not address other expense charges. If a Policy were
determined not to be a life insurance contract for purposes of section 7702,
such Policy would not provide most of the tax advantages normally provided by
a life insurance policy.
With respect to a Policy entered into before October 21, 1988, although
there are no regulations specifically interpreting the manner in which the
tests under section 7702 are to be applied to such a Policy, United Investors
believes that such a Policy should meet the definition of a life insurance
contract for Federal tax purposes. However, an exchange of a Policy or payment
of an additional premium for a Policy entered into before October 21, 1988, or
possibly other changes, may cause such a Policy (or in the case of an
exchange, the new policy received in such exchange) to be treated as entered
into after October 20, 1988, and, in such circumstances, the Policy (or the
new policy in the case of an exchange) would be subject to the mortality and
other expense charge requirements prescribed by TAMRA. Accordingly, the Owner
of a Policy entered into before October 21, 1988, should contact a competent
tax adviser before exchanging, or making any other change, to such Policy to
determine whether the exchange or change would cause the Policy (or the new
policy in the case of an exchange) to be treated as entered into after October
20, 1988.
With respect to a Policy entered into after October 20, 1988, that is issued
on the basis of a standard rate class or a rate class involving a lower
mortality risk (i.e., a preferred basis), while there is some uncertainty due
to the lack of guidance on other expense charges, United Investors nonetheless
believes that such a Policy should meet the section 7702 definition of a life
insurance
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<PAGE>
contract. However, with respect to a Policy entered into after October 20,
1988, that is issued on a substandard basis (i.e., a rate class involving
higher than standard mortality risk), it remains unclear whether or not such a
Policy would satisfy section 7702, particularly if the Owner pays the full
amount of premiums permitted under the Policy.
If it is subsequently determined that a Policy does not satisfy section
7702, United Investors will take all steps possible in order to attempt to
cause such a Policy to comply with section 7702, including possibly refunding
any premiums paid that exceed the limitations allowable under section 7702
(together with interest or other earnings on any such premiums refunded as
required by law). For these reasons, United Investors reserves the right to
modify the Policy as necessary to qualify it as a life insurance contract
under section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Variable Account to be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal tax purposes. The Variable Account, through the
Fund, intends to comply with the diversification requirements prescribed by
the Treasury in Treas. Reg. Section 1.817-5, which affect how the Fund's
assets may be invested. Although the Fund's investment adviser and United
Investors are both indirectly owned by Torchmark Corporation, United Investors
does not control the Fund or its investments. United Investors, however,
believes that the Fund will be operated in compliance with the requirements
prescribed by the Treasury.
In certain circumstances, owners of variable contracts may be considered the
owners, for federal income tax purposes, of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
the separate account assets would be includible in the variable contract
owner's gross income. The IRS has stated in published rulings that a variable
contract owner will be considered the owner of separate account assets if the
contract owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. The Treasury
Department also announced, in connection with the issuance of regulations
concerning diversifications, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Owner), rather than
the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way
of regulations or rulings on the "extent to which policyowners may direct
their investments to particular subaccounts without being treated as owners of
the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments
and Policy values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Variable Account. In
addition, United Investors does not know what standards will be set forth, if
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. United Investors therefore reserves the right to modify the
Policy as necessary to attempt to prevent an Owner from being considered the
owner of a pro rata share of the assets of the Variable Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. In general. United Investors believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a fixed-
benefit life insurance policy for Federal income tax purposes. Thus, the death
benefit under the Policy should be excludable from the gross income of the
Beneficiary under section 101 (a)(1) of the Code.
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<PAGE>
The exchange of the Policy, a change of the Policy's Minimum Death Benefit,
a Policy loan, an additional premium payment, a Policy lapse with an
outstanding loan, a change of Owners, or a surrender may have tax consequences
depending on the circumstances. In addition, Federal estate and state and
local estate, inheritance, and other tax consequences of ownership or receipt
of Policy proceeds depend upon the circumstances of each Owner or Beneficiary.
A competent tax adviser should be consulted for further information.
Generally, the Owner will not be deemed to be in constructive receipt of the
cash value, including increments thereof, under the Policy until there is a
distribution. The tax consequences of distributions from, and loans taken
from, or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract" under section 7702A. Whether a Policy is or is
not a Modified Endowment Contract, upon a complete surrender or lapse of a
Policy or when benefits are paid at the maturity date, if the amount received
plus the amount of any indebtedness exceeds the total investment in the
Policy, the excess will generally be treated as ordinary income subject to
tax.
2. Modified endowment contracts. Because of the premium level contemplated
under the Policies, all Policies entered into after June 20, 1988, will be
treated as modified endowment contracts. Moreover, a Policy entered into
before June 21, 1988, that is "materially changed" after June 20, 1988, may in
certain circumstances be treated as a modified endowment contract. With
respect to a Policy entered into before June 21, 1988, a change in such
Policy's Minimum Death Benefit, the payment of an additional premium, or the
exchange of such a Policy, among other things, may cause a material change to
such Policy, which could result in the treatment of the Policy (or the new
Policy in the case of an exchange) as a modified endowment contract. The
material change rules for determining when a Policy entered into before June
21, 1988, will be treated as a modified endowment contract are extremely
complex and, therefore, an Owner should contact a competent tax adviser before
paying any additional premium or effecting any other change in, including an
exchange of, a Policy entered into before June 21, 1988. In addition, a life
insurance contract received in exchange for a Policy classified as a modified
endowment contract will be treated as a modified endowment contract.
3. Distributions from Policies Classified as Modified Endowment Contracts.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any)
of the cash value immediately before the distribution over the investment in
the Policy (described below) at such time. Second, loans taken from, or
secured by, such a Policy (including unpaid loan interest that is added to the
principal of a loan) are treated as distributions from such a Policy and taxed
accordingly. Third, a 10 percent additional tax is imposed on the portion of
any distribution from, or loan taken from or secured by, such a Policy that is
included in income except where the distribution or loan is made on or after
the Owner attains age 59 1/2, is attributable to the Owner's becoming
disabled, or is part of a series of substantially equal periodic payments for
the life (or life expectancy) of the Owner or the joint lives (or joint life
expectancies) of the Owner and the Owner's Beneficiary.
4. Distributions from Policies not Classified as Modified Endowment
Contracts. Distributions from a Policy entered into before June 21, 1988, and
which is not materially changed (see discussion above) after June 20, 1988,
or, if materially changed, is not classified as a modified endowment contract
after such material change, are generally treated as first recovering the
investment in the Policy (described below) and then, only after the return of
all such investment in the Policy, as distributing taxable income. An
exception to this general rule occurs in the case of a decrease in the
Policy's death benefit or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and that results in a
cash distribution to the Owner in order for the Policy to continue complying
with the section 7702 definitional limits. Such a cash distribution will be
taxed in whole or in part as ordinary income (to the extent of any gain in the
Policy) under rules prescribed in section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract may be treated as indebtedness of the Owner, not as a distribution.
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Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified
endowment contract are subject to the 10% additional income tax.
5. Policy loan interest. Generally, interest paid on any loan under an
insurance policy is not deductible. The Owner should consult a competent tax
adviser if the deductibility of interest paid on a policy loan is an important
issue.
6. Investment in the Policy. Investment in the Policy means (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from the gross income of the Owner (except that the amount of any loan from,
or secured by, a Policy that is a modified endowment contract, to the extent
such amount is excluded from gross income, will be disregarded), plus (iii)
the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Owner.
7. Multiple Policies. All modified endowment contracts that are issued by
United Investors (or its affiliates) to the same Owner during any calendar
year are treated as one modified endowment contract for purposes of
determining the amount includable in gross income under section 72(e) of the
Code.
8. Other Tax Consequences. The Policy may be used in various arrangements,
including nonqualified deferred compensation or salary continuance plans,
split dollar insurance plans, executive bonus plans, retiree medical benefit
plans and others. The tax consequences of such plans may vary depending on the
particular facts and circumstances of each individual arrangement. Therefore,
if you are contemplating the use of a Policy in any arrangement the value of
which depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
TAXATION OF UNITED INVESTORS
United Investors incurs state and local premium taxes. The amount of the
charge for such taxes is discussed above under "Charges and Deductions--Annual
Deduction." At the present time, the Company makes no charge to the Variable
Account for any Federal, state or local taxes (other than state premium taxes)
that it incurs which may be attributable to such Account or to the Policies.
The Company, however, reserves the right in the future to make a charge for
any such tax or other economic burden resulting from the application of the
tax laws that it determines to be properly attributable to the Variable
Account or to the Policies.
EMPLOYMENT-RELATED BENEFIT PLANS
On July 6, 1983, the Supreme Court held in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women on the basis of sex. The Policies described in this
Prospectus contain guaranteed purchase rates for certain payment options that
generally distinguish between men and women. Accordingly, employers and
employee organizations should consider, in consultation with their legal
counsel, the impact of Norris, and Title VII generally, on any employment-
related insurance or benefit program for which a Policy may be purchased.
ADDITIONAL INFORMATION
SAFEKEEPING OF THE ACCOUNT'S ASSETS
United Investors holds the assets of the Variable Account. The assets are
kept physically segregated and held separate and apart from the general
account. United Investors maintains records of all purchases and redemptions
of Fund shares by each of the Investment Divisions.
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ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
United Investors reserves the right, subject to compliance with applicable
law, to make additions to, deletions from, or substitutions for the shares of
the Fund that are held by the Variable Account (or any Investment Division) or
that the Variable Account (or any Investment Division) may purchase. United
Investors reserves the right to eliminate the shares of any of the Portfolios
of the Fund and to substitute shares of another Portfolio of the Fund or any
other investment vehicle or of another open-end, registered investment company
if laws or regulations are changed, if the shares of the Fund or a Portfolio
are no longer available for investment, or if in our judgment further
investment in any Portfolio should become inappropriate in view of the
purposes of the Investment Division. United Investors will not substitute any
shares attributable to a Policyowner's interest in an Investment Division of
the Variable Account without notice and prior approval of the Securities and
Exchange Commission and the insurance regulator of the state where the Policy
was delivered, where required. Nothing contained herein shall prevent the
Variable Account from purchasing other securities for other series or classes
of policies, or from permitting a conversion between series or classes of
policies on the basis of requests made by Policyowners.
United Investors also reserves the right to establish additional Investment
Divisions of the Variable Account, each of which would invest in a new
Portfolio of the Fund, or in shares of another investment company or suitable
investment, with a specified investment objective. New Investment Divisions
may be established when, in the sole discretion of United Investors, marketing
needs or investment conditions warrant, and any new Investment Divisions will
be made available to existing Policyowners on a basis to be determined by
United Investors. United Investors may also eliminate one or more Investment
Divisions if, in its sole discretion, marketing, tax, or investment conditions
warrant.
In the event of any such substitution or change, United Investors may, by
appropriate endorsement, make such changes in this and other policies as may
be necessary or appropriate to reflect such substitution or change. If deemed
by United Investors to be in the best interests of persons having voting
rights under the Policies, the Variable Account may be operated as a
management company under the Investment Company Act of 1940, it may be
deregistered under that Act in the event such registration is no longer
required, or it may be combined with other United Investors separate accounts.
STATE REGULATION
United Investors is subject to regulation by the Missouri Department of
Insurance. An annual statement is filed with the Missouri Department of
Insurance on or before March 1st of each year covering the operations and
reporting on the financial condition of United Investors as of December 31 of
the preceding year. Periodically, the Missouri Department of Insurance or
other authorities examine the liabilities and reserves of United Investors and
the Variable Account and certifies their adequacy, and a full examination of
United Investors' operations is conducted periodically by the National
Association of Insurance Commissioners.
In addition, United Investors is subject to the insurance laws and
regulations of other states within which it is licensed or may become licensed
to operate. Generally, the Insurance Department of any other state applies the
laws of the state of domicile in determining permissible investments.
A Policy is governed by the law of the state in which it is delivered. The
values and benefits of each policy are at least equal to those required by
such state.
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SENIOR OFFICERS AND DIRECTORS OF UNITED INVESTORS LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION
WITH UNITED INVESTORS* LAST FIVE YEARS
<S> <C>
W. Thomas Aycock Vice President and Chief Actuary of United Investors
Vice President and since November, 1992. Senior Vice President and
Chief Actuary, Actuary of Associated Doctors Health & Life Insurance
Director Co., December, 1990--November, 1992. Senior Consulting
Actuary of Ernst & Young, August, 1989--December,
1990. Associate Actuary of Provident Life & Accident
Insurance Co., March, 1984--August, 1989.
Charles T. Clayton, Jr. Vice President--Agency Division since January, 1987.
Vice President Vice President--Brokerage and General Agency
Operations of Liberty National Life Insurance Company,
July, 1986--January, 1987.
Michael J. Klyce Vice President of Torchmark Corporation since January,
Vice President & Trea- 1984.
surer
John H. Livingston Secretary of United Investors since December, 1994.
Secretary and Associate Counsel of United Investors since July,
Associate Counsel, 1990. Associate Counsel of Liberty National Life
Director Insurance Company since October, 1986.
James L. Mayton, Jr.
Vice President & Con- Vice President & Controller of Liberty National Life
troller Insurance Company since January, 1985.
Carol A. McCoy Assistant Secretary of Torchmark Corporation since
Director April, 1987. Associate Counsel of Torchmark
Corporation since January, 1985.
Anthony L . McWhorter President of Liberty National Life Insurance Company
Director since December, 1994. Executive Vice President and
Chief Actuary of Liberty National, November, 1993--
December, 1994. Senior Vice President & Chief Actuary
of Liberty National, September, 1991--November, 1993.
Vice President and Chief Actuary of Liberty National,
May, 1987--September, 1991.
R. K. Richey Chairman of Torchmark Corporation since August, 1986
Chairman of the Board and Chief Executive Officer since December, 1984.
and Chief Executive Chairman of United Investors Management Company since
Officer October, 1986. (President, Torchmark, April, 1982--
August, 1986. President of United Investors Management
Company, July, 1985--August, 1986.)
James L. Sedgwick President of United Investors since September, 1991.
President General Counsel and Secretary of United Investors,
January, 1985--September, 1991.
Ross W. Stagner Vice President of United Investors since January, 1992.
Vice President and Di- Assistant Vice President of United Investors, March,
rector 1988--January 1992.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION
WITH UNITED INVESTORS* LAST FIVE YEARS
<S> <C>
William L. Surber Vice President of United Investors since April, 1992.
Vice President Assistant Vice President of United Investors, January,
and Director 1982--April, 1992.
Keith A. Tucker Vice Chairman of Torchmark Corporation since May, 1991.
Director Director of Torchmark Corporation, October, 1989--May,
1991.
</TABLE>
*The principal business address of each person listed, is United Investors
Life Insurance Company, P. O. Box 10207, Birmingham, Alabama 35202-0207.
LEGAL MATTERS
Legal advice regarding certain matters relating to federal securities laws
applicable to the issuance of the flexible premium variable life insurance
policy described in this Prospectus has been provided by Sutherland, Asbill &
Brennan L.L.P. of Washington, D. C. All matters of Missouri law pertaining to
the Policy, including the validity of the Policy and United Investors' right
to issue the Policy under Missouri Insurance Law and any other applicable
state insurance or securities laws, have been passed upon by James L.
Sedgwick, Esq., President of United Investors.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. United Investors is
not involved in any litigation that is of material importance in relation to
its total assets or that relates to the Variable Account.
EXPERTS
The balance sheets of United Investors Life Insurance Company as of December
31, 1996 and 1995, and the related statements of operations, shareholder's
equity, and cash flow for each of the years in the three-year period ended
December 31, 1996 and the balance sheet of United Investors Life Variable
Account as of December 31, 1996 and the related statements of operations and
changes in net assets for each of the years in the three-year period ended
December 31, 1996 have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
Actuarial matters included in this Prospectus have been examined by W.
Thomas Aycock, Vice President and Chief Actuary of United Investors, as stated
in the opinion filed as an exhibit to the Registration Statement.
FINANCIAL STATEMENTS
The financial statements of United Investors which are included in this
prospectus should be considered only as bearing on the ability of United
Investors to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Variable Account.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Investors Life Insurance Company
Birmingham, Alabama
We have audited the accompanying balance sheets of United Investors Life
Insurance Company as of December 31, 1996 and 1995 and the related statements
of operations, shareholder's equity and cash flow for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Investors Life
Insurance Company at December 31, 1996 and 1995 and the results of its
operations and its cash flow for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 31, 1997
F-1
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1996--$621,177; 1995--$612,375)................. $ 624,880 637,844
Policy loans............................................ 14,332 12,299
Other long-term invested assets......................... 21,411 19,848
Short-term investments.................................. 1,834 4,223
---------- ----------
Total investments..................................... 662,457 674,214
Cash..................................................... 2,404 6,042
Accrued investment income (includes amounts from
affiliates:
1996--$473; 1995--$473)................................. 10,781 9,963
Receivables (includes amounts from affiliates:
1996--$35,423; 1995--$35,322)........................... 38,058 37,858
Deferred acquisition costs............................... 169,986 144,716
Value of insurance purchased............................. 16,160 18,679
Goodwill................................................. 7,055 7,340
Property and equipment................................... 156 125
Other assets............................................. 1,534 2,242
Separate account assets.................................. 1,420,025 1,085,844
---------- ----------
Total assets.......................................... $2,328,616 $1,987,023
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................. $ 531,297 $ 517,177
Unearned and advance premiums........................... 2,804 2,521
Other policy liabilities................................ 8,135 6,264
---------- ----------
Total policy liabilities............................... 542,236 525,962
Accrued income taxes.................................... 43,063 50,313
Other liabilities....................................... 2,265 2,132
Due to affiliates....................................... 8,965 9,644
Separate account liabilities............................ 1,420,025 1,085,844
---------- ----------
Total liabilities..................................... 2,016,554 1,673,895
Shareholder's equity:
Common stock, par value $6 per share-authorized,
issued and outstanding:
500,000 shares......................................... 3,000 3,000
Additional paid-in capital.............................. 137,950 137,950
Unrealized investment gains, net of applicable taxes.... 4,460 12,292
Retained earnings....................................... 166,652 159,886
---------- ----------
Total shareholder's equity............................ 312,062 313,128
---------- ----------
Total liabilities and shareholder's equity............ $2,328,616 $1,987,023
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-2
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premium income.................................... $ 65,114 $ 61,792 $ 57,753
Policy charges and fees........................... 29,403 23,109 18,259
Net investment income (includes amounts from af-
filiates: 1996-- $2,847; 1995--$3,058; 1994--
$628)............................................ 51,128 49,356 46,258
Realized investment gains (losses)................ 925 1,441 (2,047)
Other income...................................... 0 4 2
-------- -------- --------
Total revenue................................... 146,570 135,702 120,225
Benefits and expenses:
Policy benefits:
Individual life.................................. 47,355 42,943 39,578
Annuity.......................................... 15,807 16,540 15,326
-------- -------- --------
Total policy benefits........................... 63,162 59,483 54,904
Amortization of deferred acquisition costs........ 19,850 16,602 15,790
Commissions and premium taxes (includes amounts to
affiliates: 1996--$4,723; 1995--$4,000; 1994--
$4,008).......................................... 5,248 4,691 4,205
Other operating expense (includes amounts to af-
filiates: 1996--$2,181; 1995--$1,862; 1994--
$1,774).......................................... 3,966 3,679 3,954
-------- -------- --------
Total benefits and expenses..................... 92,226 84,455 78,853
-------- -------- --------
Net operating income before income taxes........... 54,344 51,247 41,372
Income taxes....................................... 19,078 18,037 14,337
-------- -------- --------
Net income...................................... $ 35,266 $ 33,210 $ 27,035
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL INVESTMENT TOTAL
COMMON PAID-IN GAINS RETAINED SHAREHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1994
Balance at January 1,
1994................... $3,000 $137,915 $11,885 $117,141 $269,941
Net income.............. 27,035 27,035
Dividends............... (10,000) (10,000)
Net change in unrealized
investment gains (loss-
es).................... (24,263) (24,263)
------ -------- ------- -------- --------
Balance at December 31,
1994................... 3,000 137,915 (12,378) 134,176 262,713
YEAR ENDED DECEMBER 31,
1995
Net income.............. 33,210 33,210
Dividends............... (7,500) (7,500)
Exercise of stock op-
tions.................. 35 35
Net change in unrealized
investment gains (loss-
es).................... 24,670 24,670
------ -------- ------- -------- --------
Balance at December 31,
1995................... 3,000 137,950 12,292 159,886 313,128
YEAR ENDED DECEMBER 31,
1996
Net income.............. 35,266 35,266
Dividends............... (28,500) (28,500)
Net change in unrealized
investment gains (loss-
es).................... (7,832) (7,832)
------ -------- ------- -------- --------
Balance at December 31,
1996................... $3,000 $137,950 $ 4,460 $166,652 $312,062
====== ======== ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Net income.................................... $ 35,266 $ 33,210 $ 27,035
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits........... 20,692 22,011 19,302
Increase (decrease) in other policy benefits. 2,154 (614) (753)
Deferral of policy acquisition costs......... (33,744) (28,870) (28,116)
Amortization of deferred acquisition costs... 19,850 16,602 15,790
Change in accrued income taxes............... (3,033) 2,644 (1,557)
Depreciation................................. 44 52 71
Realized (gains) losses on sale of invest-
ments and properties........................ (925) (1,441) 2,047
Other accruals and adjustments............... (997) (3,525) (1,558)
-------- --------- ---------
Cash provided from operations................. 39,307 40,069 32,261
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--sold... 15,246 149,076 64,713
Fixed maturities available for sale--
matured, called and repaid................. 44,523 50,659 107,977
Equity securities........................... 0 3,341 0
Other long-term investments................. 482 9,316 1,830
-------- --------- ---------
Total investments sold or matured.......... 60,251 212,392 174,520
Acquisition of investments:
Fixed maturities--available for sale........ (68,214) (244,162) (180,473)
Equity securities........................... 0 0 (102)
Net increase in policy loans................ (2,033) (2,121) (1,524)
Other long-term investments................. (1,183) (1,587) (2,461)
-------- --------- ---------
Total acquisition of investments........... (71,430) (247,870) (184,560)
Net (increase) decrease in short-term invest-
ments....................................... 2,389 (1,901) 12,669
Funds loaned to affiliates................... (3,500) (21,000) (54,000)
Funds repaid from affiliates................. 3,500 21,000 27,000
Disposition of properties.................... 34 6 15
Additions to properties...................... (117) (33) (23)
-------- --------- ---------
Cash used for investment activities........... (8,873) (37,406) (24,379)
Cash used for financing activities:
Cash dividends paid to shareholder........... (27,500) (7,500) (10,000)
Net receipts from deposit product operations. (6,572) 3,343 (450)
-------- --------- ---------
Cash used for financing activities............ (34,072) (4,157) (10,450)
Decrease in cash.............................. (3,638) (1,494) (2,568)
Cash at beginning of year..................... 6,042 7,536 10,104
-------- --------- ---------
Cash at end of year........................... $ 2,404 $ 6,042 $ 7,536
======== ========= =========
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: United Investors Life Insurance Company (the "Company") is a
wholly-owned subsidiary of United Investors Management Company ("United
Management"), which is a wholly-owned subsidiary of Torchmark Corporation
("Torchmark"), the ultimate parent.
DESCRIPTION OF BUSINESS
The Company is a life insurer licensed in 49 states. The Company offers a
full range of life, annuity and variable products through its agents and is
subject to competition from other insurers throughout the United States. The
Company is subject to regulation by the insurance department of states in
which it is licensed, and undergoes periodic examinations by those
departments.
The following is a description of certain risks facing life insurers and how
the Company mitigates those risks:
Legal/Regulatory Risk is the risk that, changes in the legal or
regulatory environment in which an insurer operates, will create additional
expenses not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits or otherwise
affecting the industry in which the insurer operates, new legal theories or
insurance company insolvencies through guaranty fund assessments, may
create costs in the future for the insurer beyond those recorded in the
financial statements. The Company attempts to mitigate this risk by
offering a wide range of products and by operating in 49 states, thus
reducing its exposure to any single product or non-Federal jurisdiction,
and also by employing underwriting practices which identify and minimize
the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by the Company
will default or that other parties, including reinsurers that have
obligations to the Company, will not pay or perform. The Company attempts
to minimize the risk by adhering to a conservative investment strategy and
by maintaining sound reinsurance and credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and cause
a decrease in the value of an insurer's investments. This change in rates
may cause certain interest-sensitive products to become uncompetitive or
may cause disintermediation. The Company attempts to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an
insurer would have to sell assets prior to maturity and recognize a gain or
loss.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the reporting
period. Actual results could differ significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for policy reserves, losses and claims. Although
some variability is inherent in these estimates, management believes the
amounts provided are adequate.
Basis of Presentation: The accompanying financial statements include the
accounts of United Investors Life Insurance Company ("United Investors") which
is a wholly-owned subsidiary of United Investors Management Company ("United
Management"). The financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of
F-6
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Investments: United Investors classifies all of its fixed maturity
investments, which includes bonds and redeemable preferred stocks, as
available for sale. Investments classified as available for sale are carried
at fair value with unrealized gains and losses, net of deferred taxes,
reflected directly in shareholder's equity. Investments in equity securities,
which include common and nonredeemable preferred stocks, are reported at fair
value with unrealized gains and losses, net of deferred taxes, reflected
directly in shareholder's equity. Policy loans are carried at unpaid principal
balances. Short-term investments include investments in certificates of
deposit and other interest-bearing time deposits with original maturities
within three months. Other long-term investments consist of investments in
mutual funds which are carried at fair value. Other long-term investments also
include passive energy limited-partnership investments which are valued at
partnership equity. If an investment becomes permanently impaired, such
impairment is treated as a realized loss and the investment is adjusted to net
realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
United Investor's net income. Investment income attributable to policyholders
is included in United Investor's net investment income. Net investment income
for the years ended December 31, 1996, 1995 and 1994 included approximately
$37,600, $38,000, and $35,700, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are
not allocable to policyholders.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, receivables and payables approximates carrying value.
Fair values for investment securities are based on quoted market prices, where
available. Otherwise, fair values are based on quoted market prices of
comparable instruments. Fair value of future benefits for universal life and
current interest products and annuity products are based on the fund value.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions.
Recognition of Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to the
Financial Accounting Standards Board's Statement of Accounting Standards
(SFAS) 97 are recognized as revenue over the premium-paying period of the
policy. Premiums for limited-payment life insurance contracts as defined by
SFAS 97 are recognized over the contract period. Premiums for universal life-
type and annuity contracts are added to the policy account value, and revenues
from such products are recognized as charges to the policy account value for
mortality, administration, and surrenders (retrospective deposit method). The
related benefits and expenses are matched with revenues by means of the
provision for future policy benefits and the amortization of deferred
acquisition costs in a manner which recognizes profits as they are earned over
the same period.
F-7
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. Annuity Contracts are accounted for as deposit contracts. The
liability for future policy benefits for other products is provided on the net
level premium method based on estimated investment yields, mortality,
persistency and other assumptions which were appropriate at the time the
policies were issued. Assumptions used are based on United Investor's
experience as adjusted to provide for possible adverse deviation. These
estimates are periodically reviewed and compared with actual experience. If it
is determined that future expected experience differs significantly from that
assumed, the estimates are revised.
Deferred acquisition costs: The costs of acquiring new insurance business
are deferred. Such costs consist of sales commissions, underwriting expenses,
and certain other selling expenses. The costs of acquiring new business
through the purchase of other companies and blocks of insurance business are
also deferred.
Deferred acquisition costs, including the value of insurance purchased, for
policies other than universal life-type policies according to SFAS 97, are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For universal life-type policies, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, withdrawals and mortality are consistent with
those used in computing the liability for future policy benefits and expenses.
If it is determined that future experience differs significantly from that
previously assumed, the estimates are revised. Deferred acquisition costs are
adjusted to reflect the amounts associated with unrealized investment gains
and losses pertaining to universal life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Interest Expense: Interest expense includes interest on borrowed funds not
used in the production of investment income. Interest expense relating to the
production of investment income is deducted from investment income.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is provided on the straight-line
method over the estimated useful lives of these assets which range from three
to ten years.
Goodwill: Goodwill represents the excess cost over the fair value of the net
assets acquired when United Investors was purchased by Torchmark Corporation
(Torchmark) in 1981 and is being amortized on a straight-line basis over forty
years.
Reclassifications: Certain amounts in the financial statements presented
have been reclassified from amounts previously reported. These
reclassifications have no effect on previously reported shareholder's equity
or net income during the periods involved.
F-8
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 2--STATUTORY ACCOUNTING
United Investors is required to file statutory financial statements with
state insurance regulatory authorities. Accounting principles used to prepare
these statutory financial statements differ from GAAP. Net income and
shareholder's equity on a statutory basis for United Investors were as
follows:
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, AT DECEMBER 31,
------------------------- ---------------------
1996 1995 1994 1996 1995
-------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance............... $ 26,640 $ 29,636 $ 7,752 $ 154,222 $ 156,673
</TABLE>
The excess of shareholder's equity on a GAAP basis over that determined on a
statutory basis is not available for distribution to the shareholder without
regulatory approval.
A reconciliation of United Investors' statutory net income to GAAP net
income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Statutory net income............................ $26,640 $ 29,636 $ 7,752
Deferral of acquisition costs................... 33,744 28,870 28,116
Amortization of acquisition costs............... (19,850) (16,602) (15,790)
Differences in policy liabilities............... (4,361) (6,774) 13,515
Deferred income taxes........................... (773) (1,389) (4,271)
Other........................................... (134) (531) (2,287)
------- -------- --------
GAAP net income................................. $35,266 $ 33,210 $ 27,035
======= ======== ========
</TABLE>
A reconciliation of United Investors' statutory shareholder's equity to GAAP
shareholder's equity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Statutory shareholder's equity.................... $154,222 $ 156,673
Differences in policy liabilities................. 20,834 21,993
Deferred acquisition costs and value of insurance
purchased........................................ 186,146 163,396
Differences in income tax liability............... (44,679) (47,982)
Asset valuation reserve........................... 10,762 9,388
Nonadmitted assets................................ 1,856 1,778
Fair value adjustment on fixed maturities avail-
able for sale.................................... 3,703 25,469
Goodwill.......................................... 7,055 7,340
Due and deferred premiums......................... (29,324) (26,261)
Other............................................. 1,487 1,334
----------- -----------
GAAP shareholder's equity......................... $ 312,062 $ 313,128
=========== ===========
</TABLE>
The NAIC has adopted a model act that requires a risk based capital formula
to be applied to all life and health insurers. The risk based capital formula
is a threshold formula rather than a target capital formula. It is designed
only to identify companies that require regulatory attention and is not to be
used to rate or rank companies that are adequately capitalized. United
Investors is adequately capitalized under the risk based capital formula.
F-9
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 3--INVESTMENT OPERATIONS
Investment income is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Fixed maturities.................................. $46,366 $43,482 $ 43,532
Equity securities................................. 0 76 0
Policy loans...................................... 1,001 851 730
Other long-term investments....................... 1,211 1,681 1,314
Short-term investments............................ 287 717 493
Interest and dividends from affiliates............ 2,847 3,058 628
------- ------- --------
51,712 49,865 46,697
Less investment expense........................... (584) (509) (439)
------- ------- --------
Net investment income............................. $51,128 $49,356 $ 46,258
======= ======= ========
Analysis of gains (losses) from investments:
Realized investment gains (losses)
Fixed maturities................................ $ 925 $ 319 $ (2,189)
Equity securities............................... 0 1,276 0
Mutual funds.................................... 0 (154) 142
------- ------- --------
Net realized gains (losses)...................... $ 925 $ 1,441 $ (2,047)
======= ======= ========
Analysis of change in unrealized investment gains
(losses):
Net change in unrealized investment gains (losses)
on equity securities before tax.................. $ 0 $ (438) $ 437
Net change in unrealized investment gains on fixed
maturities available for sale before tax......... (21,767) 58,321 (58,904)
Other............................................. 861 3,602 (1,557)
Adjustment to deferred acquisition costs.......... 8,857 (23,532) 22,697
Applicable tax.................................... 4,217 (13,283) 13,064
------- ------- --------
Net change in unrealized gains (losses) on equity
and fixed maturity securities available for sale. $(7,832) $24,670 $(24,263)
======= ======= ========
</TABLE>
F-10
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities available for sale by amortized cost and
estimated market value at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
1996: COST GAINS LOSSES VALUE SHEET
- ----- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and agen-
cies................... $ 21,832 $ 79 $ (270) $ 21,641 $ 21,641
GNMA's.................. 150,505 6,297 (812) 155,990 155,990
Mortgage-backed
securities, GNMA
collateral............. 34,904 785 (6) 35,683 35,683
Other mortgage-backed
securities............. 4,060 -0- -0- 4,060 4,060
States, municipalities
and political
subdivisions........... 45,544 383 (894) 45,033 45,033
Foreign governments..... 3,272 158 0 3,430 3,430
Public utilities........ 22,543 483 (345) 22,681 22,681
Industrial and miscella-
neous.................. 338,517 3,737 (5,892) 336,362 336,362
-------- ------ ------- -------- --------
Total fixed maturities.. 621,177 11,922 (8,219) 624,880 624,880
======== ====== ======= ======== ========
<CAPTION>
1995:
- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and agen-
cies................... $ 21,790 $ 613 $ -0- $ 22,403 $ 22,403
GNMA's.................. 179,808 8,653 (87) 188,374 188,374
Mortgage-backed
securities, GNMA
collateral............. 42,505 2,195 -0- 44,700 44,700
Other mortgage-backed
securities............. -0- -0- -0- -0- -0-
States, municipalities
and political
subdivisions........... 37,305 946 (375) 37,876 37,876
Foreign governments..... 1,401 92 -0- 1,493 1,493
Public utilities........ 22,390 1,105 (18) 23,477 23,477
Industrial and miscella-
neous.................. 307,176 12,872 (527) 319,521 319,521
-------- ------ ------- -------- --------
Total fixed maturities.. 612,375 26,476 (1,007) 637,844 637,844
======== ====== ======= ======== ========
</TABLE>
F-11
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A schedule of fixed maturities by contractual maturity at December 31, 1996
is shown below on an amortized cost basis and on a market value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
<S> <C> <C>
Fixed maturities available for sale;
Due in one year or less................................. $ 10,361 $ 10,555
Due after one year through five years................... 87,414 89,132
Due after five years through ten years.................. 230,582 227,944
Due after ten years..................................... 103,351 101,516
-------- --------
431,708 429,147
Mortgage- and asset-backed securities.................... 189,469 195,733
-------- --------
$621,177 $624,880
======== ========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $15,246 in
1996, $149,076 in 1995, and $64,713 in 1994. Gross gains realized on these
sales were $749 in 1996, $3,157 in 1995, and $1,058 in 1994. Gross losses on
these sales were $0 in 1996, $2,126 in 1995, and $3,468 in 1994.
F-12
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 4--DEFERRED ACQUISITION COSTS
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF
ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE
COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year................... $144,716 $18,679 $153,677 $20,983 $116,406 $ 23,231
Additions:
Deferred during peri-
od:
Commissions.......... 28,492 0 24,258 0 23,533 0
Other expenses....... 5,252 0 4,611 0 4,583 0
-------- ------- -------- ------- -------- --------
Total deferred...... 33,744 0 28,869 0 28,116 0
Adjustment attributable
to unrealized
investment loss (1)... 8,857 0 0 0 22,697 0
-------- ------- -------- ------- -------- --------
Total additions..... 42,601 0 28,869 0 50,813 0
Deductions:
Amortized during peri-
od................... (16,894) (2,519) (14,062) (2,304) (12,109) (2,248)
Adjustment
attributable to
unrealized investment
gains (1)............ 0 0 (23,532) 0 0 0
Adjustment
attributable to
realized investment
gains (1)............ (437) 0 (236) 0 (1,433) 0
-------- ------- -------- ------- -------- --------
Total deductions.... (17,331) (2,519) (37,830) (2,304) (13,542) (2,248)
-------- ------- -------- ------- -------- --------
Balance at end of year.. 169,986 16,160 $144,716 $18,679 $153,677 $ 20,983
======== ======= ======== ======= ======== ========
</TABLE>
- --------
(1) Represents amounts pertaining to investments relating to universal life-
type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was approximately $1,100, $1,300, and $1,500 for the years
ended December 31, 1996, 1995 and 1994, respectively. The average interest
accrual rates used were 6.44%, 6.59% and 6.74%, respectively. The estimated
amount of the unamortized value of business purchased balance at December 31,
1996 to be amortized during each of the next five years is: 1997, $1,777;
1998, $1,582; 1999, $1,408; 2000, $1,253; 2001, $1,115.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
NOTE 5--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1996 1995
------------------- -------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Data processing equipment............... $ 192 $ 147 $ 155 $ 137
Transportation equipment................ 132 37 142 73
Furniture and office equipment ......... 919 903 919 881
------ ------ ------ ------
Total................................. $1,243 $1,087 $1,216 $1,091
====== ====== ====== ======
</TABLE>
Depreciation expense on property and equipment used in the business was $44,
$52 and $71 in each of the years 1996, 1995, and 1994, respectively.
F-13
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 6--FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1996 is as follows:
INDIVIDUAL LIFE INSURANCE
Interest Assumptions:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1962-1996 3% level to 6% level 8%
1986-1992 7.00% graded to 6.00% 20%
1962-1985 8.50% graded to 6.00% 5%
1981-1985 8.50% graded to 7.00% 6%
1984-1996 Interest sensitive 61%
----
100%
====
</TABLE>
Mortality assumptions:
The mortality tables used are various statutory mortality tables and
modifications of:
1965-70 Select and Ultimate Table
1975-80 Select and Ultimate Table
Withdrawal assumptions:
Withdrawal assumptions are based on United Investors' experience.
NOTE 7--INCOME TAXES
United Investors is included in the life-nonlife consolidated federal income
tax return filed by Torchmark. Under the tax allocation agreement with
Torchmark, a company with taxable income pays tax equal to the amount it would
pay if it filed a separate tax return. A company with a loss is paid a tax
benefit currently to the extent that affiliated companies with taxable income
utilize that loss.
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net operating income before income taxes........ $19,078 $18,037 $14,337
Shareholder's equity:
Unrealized gains (losses)...................... (4,217) 13,283 (13,064)
Tax basis compensation expense in excess of
amounts recognized for financial reporting
purposes from the exercise of stock options... 0 (35) 0
Other.......................................... (152) 1 (1)
------- ------- -------
$14,709 $31,286 $ 1,272
======= ======= =======
</TABLE>
F-14
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
Income tax expense before the adjustments to shareholder's equity is
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current income tax expense............................. $18,305 $16,648 $10,066
Deferred income tax expense............................ 773 1,389 4,271
------- ------- -------
$19,078 $18,037 $14,337
======= ======= =======
</TABLE>
In 1996, 1995, and 1994, deferred income tax expense was incurred because of
the difference between net operating income before income taxes as reported on
the statements of operations and taxable income as reported on United
Investor's income tax returns. As explained in Note 1, this difference caused
the financial statement book values of some assets and liabilities to be
different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate in 1996,
1995 and 1994 as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 % 1995 % 1994 %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes.................. $19,020 35% $17,936 35% $14,480 35%
Increase (reduction) in income taxes
resulting from:
Tax-exempt investment income.......... (38) 0 (102) 0 (243) 0
Purchase accounting differences....... 99 0 99 0 99 0
Other................................. (3) 0 104 0 1 0
------- --- ------- --- ------- ---
Income taxes........................... $19,078 35% $18,037 35% $14,337 35%
======= === ======= === ======= ===
</TABLE>
F-15
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 7--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits and unearned and advance
premiums.......................................... $ 5,936 $ 9,622
Present value of future surrender charges.......... 9,636 4,083
Other liabilities, principally due to the current
nondeductibilty for tax purposes of certain
accrued expenses.................................. 147 188
----------- -----------
Total gross deferred tax assets.................... 15,719 13,893
----------- -----------
Net deferred tax assets............................ 15,719 13,893
----------- -----------
Deferred tax liabilities:
Deferred acquisition costs......................... 53,625 50,806
Unrealized investment gains........................ 2,402 6,619
Other.............................................. 766 1,138
----------- -----------
Total gross deferred tax liabilities............... 56,793 58,563
----------- -----------
Net deferred tax liability......................... 41,074 44,670
=========== ===========
</TABLE>
In United Investor's opinion, all deferred tax assets will be recoverable.
United Investors has not recognized a deferred tax liability of
approximately $2,200 that arose prior to 1984 on temporary differences related
to its policyholders' surplus account. A current tax expense will be
recognized in the future if and when this tax becomes payable.
NOTE 8--POSTRETIREMENT BENEFITS
Pension Plans: The full-time employees of United Investors are covered under
a defined benefit pension plan and a defined contribution savings plan. These
plans cover primarily employees of other Torchmark and United Management
affiliates. The total costs of these retirement plans charged to operations
were as follows:
<TABLE>
<CAPTION>
DEFINED DEFINED
YEAR ENDED CONTRIBUTION BENEFIT
DECEMBER 31, PLANS PLAN
------------ ------------ -------
<S> <C> <C>
1996.................................................. $41 $115
1995.................................................. 39 75
1994.................................................. 38 66
</TABLE>
Net periodic pension cost for the defined benefit plan which covers United
Investors' employees has been calculated on the projected unit credit
actuarial cost method in accordance with SFAS 87,
F-16
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 8--POSTRETIREMENT BENEFITS (CONTINUED)
which was adopted effective January 1, 1986. Contributions are made to the
plan equal to pension expense subject to minimums required by regulation and
maximums allowed for tax purposes. United Investors records the difference
between the SFAS 87 expense and the actual cash contribution to the plan to a
liability account. The liability recorded was $55 at December 31, 1996, and
$55 at December 31, 1995. The plan is organized as a trust fund whose assets
consist primarily of investments in long-term fixed maturities and equity
securities. Such assets are valued at market.
United Investors accrues expense for the defined contribution plans based on
a percentage of the employees' contributions. The plans are funded by the
employee contributions and a company contribution.
Postretirement Benefit Plans Other Than Pensions: United Investors provides
certain health care benefits ("postretirement benefits") for its retired
employees. Substantially all employees may become eligible for these benefits
if they reach retirement age while working for the Company. Coverage under
this plan of health benefits ceases when the covered retiree and/or covered
spouse are eligible for Medicare benefits.
Postretirement benefit cost for the years ending December 31, 1996, 1995 and
1994 was $5, $3 and $16, respectively; this expense includes the expected cost
of post- retirement benefits for newly eligible or vested employees, the
interest cost, and gains and losses arising from differences between actuarial
assumptions and actual experience.
The unfunded postretirement benefit obligation for retirees and other fully
eligible or vested plan participants was $122 and $133 as of December 31, 1996
and 1995, respectively. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% and the health care cost trend
rate was 10%, graded to 4.5% over 10 years.
NOTE 9--RELATED PARTY TRANSACTIONS
The primary distributor of United Investors' Insurance products is Waddell &
Reed, Inc. ("W&R"), a United Management affiliate. W&R receives a commission
for marketing these products which was approximately $30,200, $25,700, and
$25,300 for the years ended December 31, 1996, 1995, and 1994, respectively.
United Investors was charged for space, equipment, and services provided by
an affiliate amounting to $1,797 in 1996, $1,706 in 1995 and $1,618 in 1994.
Torchmark performed certain administrative services for United Investors for
which it charged $384 in 1996, $156 in 1995 and $156 in 1994.
F-17
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
In January 1994, United Investors loaned United Management $15,000 at an
interest rate of 3.75%. This loan was paid in full in February 1994. Interest
income related to this loan totaling $41 at December 31, 1994 is included in
the accompanying financial statements. In June and July 1994, United Investors
loaned Torchmark $2,000 and $17,000, respectively. The notes bear interest at
5.3% and 5.05% respectively and were paid in full in July 1994. In November
1994, United Investors loaned Torchmark $35,000 at an interest rate of 8.11%.
Interest income related to the Torchmark loans totaling $2,838 and $3,058 at
December 31, 1996 and 1995, respectively, is included in the accompanying
financial statements. In January 1996, United Investors loaned Liberty
National $3,500 at an interest rate of 5.75%. This loan was paid in full in
February 1996. Interest income related to this loan totaling $9 at December
31, 1996 is included in the accompanying financial statements.
United Investors serves as sponsor to two separate accounts and depositor to
the underlying investment fund in connection with its variable product
business. During 1997 United Investors will serve as a sponsor and depositor
of a third separate account in connection with its variable Product business.
At December 31, 1996 and 1995 United Investors had investments of $14,000 and
$12,500, in the separate accounts which were included in other long-term
invested assets and carried at market.
Other long-term invested assets also includes investments, carried at
market, in the United Group of Mutual Funds and certain other funds for which
W&R is the sole advisor. These investments approximated $5,159 and $4,896 at
December 31, 1996 and 1995. Investment income derived from these investments
is included in net investment income.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Reinsurance: United Investors reinsures that portion of insurance risk which
is in excess of its retention limit. The maximum net retention limit for
ordinary life insurance is $525 per life. Life insurance ceded represented 2%
of total life insurance in force at December 31, 1996 and 3% of premium income
for 1996. United Investors would be liable for the reinsured risks ceded to
other companies to the extent that such reinsuring companies are unable to
meet their obligation.
United Investors did not assume insurance risks of other companies for the
year ended December 31, 1996.
Restrictions on the transfer of funds: Regulatory restrictions exist on the
transfer of funds from insurance companies. These restrictions generally limit
the payment of dividends to the statutory net gain from operations of the
prior year in the absence of special approval. Additionally, insurance
companies are not permitted to distribute the excess of shareholder's equity
as determined on a generally accepted accounting basis over that determined on
a statutory basis. Restricted net assets at December 31, 1996 in compliance
with all regulations were $160,840.
Litigation: United Investors is engaged in routine litigation arising from
the normal course of business. In management's opinion, this litigation will
not materially affect United Investors' financial position or results of
operations.
Concentrations of credit risk: United Investors maintains a highly
diversified investment portfolio with limited concentration in any given
region, industry, or economic characteristic. The investment portfolio
consists of securities of the U.S. government or U.S. government-backed
securities (32%); securities of state and municipal governments (7%);
investment-grade corporate bonds (48%); United
F-18
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Funds (3%); and policy loans (2%) which are secured by the underlying
insurance policy value. The balance of the portfolio is invested in short-term
investments, non investment grade corporate bonds, and various limited
partnerships. Investments in municipal governments and corporations are made
throughout the U.S. with no concentration in any given state. Corporate debt
investments are made in a wide range of industries. At December 31, 1996, 1%
or more of the portfolio was invested in the following industries: financial
services (22%); chemicals (6%); transportation (4%); foods and kindred
products (5%); regulated utilities (3%); manufacturing (3%); media and
communications (3%); electronics (2%); paper and allied products (2%); and
services (1%). At the end of 1996, 7% of the carrying value of securities was
rated below investment grade. Par value of these investments was $47,300,
amortized cost was $48,112, and market value was $49,034. While these
investments could be subject to additional credit risk, such risk should
generally be reflected in market value.
Collateral requirements: United Investors requires collateral for
investments in instruments where collateral is available and typically
required because of the nature of the investment. Since the majority of United
Investor's investments are in government, government-secured, or corporate
securities, the requirement for collateral is rare.
NOTE 11--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
There were no noncash investing or financing activities for the years 1996,
1995, and 1994.
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Taxes paid....................................... $22,111 $15,393 $14,187
</TABLE>
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
United Investors Life Insurance Company
And the Contract Owners of the
United Investors Life Variable Account
Birmingham, Alabama
We have audited the accompanying balance sheet of United Investors Life
Variable Account as of December 31, 1996 and the related statements of
operations and changes in net assets for each of the years in the three year
period ended December 31, 1996. These financial statements are the
responsibility of the United Investors Life Insurance Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Investors Life
Variable Account at December 31, 1996 and the results of its operations and
changes in its net assets for each of the years in the three year period ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
March 12, 1997
F-20
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH TERM ASSET
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED BOND STRATEGY
---------- ---------- ---------- ----------- ----------- ------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments in
Mutual Funds
(Note B)........ $1,685,375 $4,018,441 $4,328,507 $19,795,836 $12,794,704 $3,174,714 $3,266,936 $1,396,808 $ 658,027 $ 475,758
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total assets.... 1,685,375 4,018,441 4,328,507 19,795,836 12,794,704 3,174,714 3,266,936 1,396,808 658,027 475,758
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor (Note
D).............. 269 793 845 3,935 2,531 610 623 274 129 93
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total liabili-
ties........... 269 793 845 3,935 2,531 610 623 274 129 93
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Net assets (Note
C)............. $1,685,106 $4,017,648 $4,327,662 $19,791,901 $12,792,173 $3,174,104 $3,266,313 $1,396,534 $ 657,898 $ 475,665
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Equity:
Equity of Spon-
sor (Note E)... $ 0 $1,034,647 $1,143,345 $ 1,871,578 $ 2,166,580 $ 79,216 $ 111,078 $ 88,026 $ 585,260 $ 0
Equity of con-
tract owners... 1,685,106 2,983,001 3,184,317 17,920,323 10,625,593 3,094,888 3,155,235 1,308,508 72,638 475,665
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total equity.... $1,685,106 $4,017,648 $4,327,662 $19,791,901 $12,792,173 $3,174,104 $3,266,313 $1,396,534 $ 657,898 $ 475,665
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Accumulation
units outstand-
ing............ 1,072,364 1,941,555 1,892,547 5,287,503 5,904,323 2,604,497 1,911,387 1,031,224 562,056 446,332
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Net asset value
per unit....... $ 1.571394 $ 2.069294 $ 2.286686 $ 3.743147 $ 2.166577 $ 1.218701 $ 1.708870 $ 1.354249 $1.170521 $1.065719
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
<CAPTION>
TOTAL
-----------
<S> <C>
Assets:
Investments in
Mutual Funds
(Note B)........ $51,595,106
-----------
Total assets.... 51,595,106
-----------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor (Note
D).............. 10,102
-----------
Total liabili-
ties........... 10,102
-----------
Net assets (Note
C)............. $51,585,004
===========
Equity:
Equity of Spon-
sor (Note E)... $ 7,079,730
Equity of con-
tract owners... 44,505,274
-----------
Total equity.... $51,585,004
===========
Accumulation
units outstand-
ing............ 22,653,788
===========
Net asset value
per unit.......
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY HIGH
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP
---------- ---------- ---------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D)....... $ 67,625 $ 247,098 $ 365,207 $ 2,260,473 $ 310,270 $ 40,388 $128,874
Expenses paid to
Sponsor
(Note D):
Mortality and ex-
pense risk
charge........... 8,421 23,470 23,955 107,839 65,099 15,967 16,559
Contract maintenance charges:
Sales expense.... 3,990 14,800 14,613 70,974 49,893 14,277 13,709
Underwriting and
issue expense... 565 2,060 2,011 9,416 6,226 1,730 1,669
Premium taxes.... 1,412 5,149 5,028 23,540 15,563 4,324 4,173
Cost of insur-
ance............ 8,112 31,858 24,490 111,721 80,172 21,218 20,414
Administrative
expense......... 1,155 4,040 5,117 24,962 14,975 3,518 3,620
---------- ---------- ---------- ----------- ----------- ---------- ----------
Total........... 23,655 81,377 75,214 348,452 231,928 61,034 60,144
Net investment in-
come.............. 43,970 165,721 289,993 1,912,021 78,342 (20,646) 68,730
Realized investment
gains
distributed to ac-
counts............ 0 10,428 12,266 154,511 149,372 18,162 43,253
Unrealized invest-
ment gains
(losses).......... 0 (127,873) 94,807 (280,931) 1,493,351 319,036 (14,604)
---------- ---------- ---------- ----------- ----------- ---------- ----------
Net gain on invest-
ments............. 0 (117,445) 107,073 (126,420) 1,642,723 337,198 28,649
---------- ---------- ---------- ----------- ----------- ---------- ----------
Net increase in net
assets from
operations........ 43,970 48,276 397,066 1,785,601 1,721,065 316,552 97,379
Premium deposits
and net
transfers*........ 345,070 83,031 237,801 1,807,736 2,428,537 974,379 1,328,646
Transfer to Sponsor
for benefits and
terminations...... (33,896) (100,872) (260,183) (380,062) (190,414) (40,875) (23,937)
---------- ---------- ---------- ----------- ----------- ---------- ----------
Total increase..... 355,144 30,435 374,684 3,213,275 3,959,188 1,250,056 1,402,088
Net assets at be-
ginning of peri-
od................ $1,329,962 $3,987,213 $3,952,978 $16,578,626 $8,832,985 1,924,048 1,864,225
---------- ---------- ---------- ----------- ----------- ---------- ----------
Net assets at end
of period
(Note C).......... $1,685,106 $4,017,648 $4,327,622 $19,791,901 $12,792,173 $3,174,104 $3,266,313
========== ========== ========== =========== =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIMITED
TERM ASSET
BALANCED BOND STRATEGY TOTAL
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Dividend income
(Note B, D)....... $ 77,301 $ 34,473 $ 16,233 $ 3,547,942
Expenses paid to
Sponsor
(Note D):
Mortality and ex-
pense risk
charge........... 6,612 3,816 2,278 274,016
Contract maintenance charges:
Sales expense.... 5,350 321 513 188,440
Underwriting and
issue expense... 636 38 60 24,411
Premium taxes.... 1,591 95 151 61,026
Cost of insur-
ance............ 9,254 386 957 308,582
Administrative
expense......... 1,370 48 145 58,950
---------- -------- -------- -----------
Total........... 24,813 4,704 4,104 915,425
Net investment in-
come.............. 52,488 29,769 12,129 2,632,517
Realized investment
gains
distributed to ac-
counts............ 5,640 238 50 393,920
Unrealized invest-
ment gains
(losses).......... 38,817 (10,782) 7,307 1,519,128
---------- -------- -------- -----------
Net gain on invest-
ments............. 44,457 (10,544) 7,357 1,913,048
---------- -------- -------- -----------
Net increase in net
assets from
operations........ 96,945 19,225 19,486 4,545,565
Premium deposits
and net
transfers*........ 450,153 47,604 393,715 8,096,672
Transfer to Sponsor
for benefits and
terminations...... (9,567) 0 0 (1,039,806)
---------- -------- -------- -----------
Total increase..... 537,531 66,829 413,201 11,602,431
Net assets at be-
ginning of peri-
od................ 859,003 591,069 62,464 39,982,573
---------- -------- -------- -----------
Net assets at end
of period
(Note C).......... $1,396,534 $657,898 $475,665 $51,585,004
========== ======== ======== ===========
</TABLE>
*Includes transfer activity from (to) other portfolios.
See Notes to Financial Statements.
F-22
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY HIGH
MARKET BOND INCOME GROWTH
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Dividend income
(Note B, D)....... $ 56,929 $248,458 $338,410 $2,732,341
Expenses paid to
Sponsor
(Note D):
Mortality and ex-
pense risk
charge........... 6,342 21,939 22,070 82,847
Contract maintenance charges:
Sales expense.... 3,370 13,553 13,197 51,332
Underwriting and
issue expense... 507 1,882 1,810 7,018
Premium taxes.... 1,265 4,705 4,523 17,544
Cost of insur-
ance............ 7,215 31,044 25,032 84,952
Administrative
expense......... 1,211 3,730 4,468 19,913
---------- ---------- ---------- -----------
Total........... 19,910 76,853 71,100 263,606
Net investment in-
come (loss)....... 37,019 171,605 267,310 2,468,735
Realized investment
gains
distributed to ac-
counts............ 0 9,293 7,245 112,968
Unrealized invest-
ment gains
(losses).......... 0 421,180 263,621 1,651,730
---------- ---------- ---------- -----------
Net gain (loss) on
investments....... 0 430,473 270,866 1,764,698
---------- ---------- ---------- -----------
Net increase
(decrease) in net
assets from
operations........ 37,019 602,078 538,176 4,233,433
Premium deposits
and net
transfers*........ (730,542) 259,777 200,825 1,472,895
Transfer to Sponsor
for benefits and
terminations...... (13,225) (53,086) (82,898) (159,853)
---------- ---------- ---------- -----------
Total increase (de-
crease)........... (706,748) 808,769 656,103 5,546,475
Net assets at be-
ginning of period. $2,036,710 $3,178,444 $3,296,875 $11,032,151
---------- ---------- ---------- -----------
Net assets at end
of period
(Note C).......... $1,329,962 $3,987,213 $3,952,978 $16,578,626
========== ========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIMITED
TERM ASSET
INCOME INTERNATIONAL SMALL CAP BALANCED BOND STRATEGY TOTAL
---------- ------------- ---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D)....... 227,863 27,746 55,374 32,244 32,472 948 $3,752,785
Expenses paid to
Sponsor
(Note D):
Mortality and ex-
pense risk
charge........... 44,350 9,837 8,160 4,092 3,367 93 203,097
Contract maintenance charges:
Sales expense.... 31,549 6,812 5,394 3,419 182 85 128,893
Underwriting and
issue expense... 3,947 840 669 409 21 10 17,113
Premium taxes.... 9,869 2,098 1,673 1,024 53 25 42,779
Cost of insur-
ance............ 53,749 10,465 9,020 6,425 319 103 228,324
Administrative
expense......... 9,807 1,750 1,234 658 48 31 42,850
---------- ---------- ---------- -------- -------- ------- -----------
Total........... 153,271 31,802 26,150 16,027 3,990 347 663,056
Net investment in-
come (loss)....... 74,592 (4,056) 29,224 16,217 28,482 601 3,089,729
Realized investment
gains
distributed to ac-
counts............ 62,220 3,463 14,474 2,146 348 60 212,217
Unrealized invest-
ment gains
(losses).......... 1,631,957 77,537 295,990 112,105 41,691 (1,267) 4,494,544
---------- ---------- ---------- -------- -------- ------- -----------
Net gain (loss) on
investments....... 1,694,177 81,000 310,464 114,251 42,039 (1,207) 4,706,761
---------- ---------- ---------- -------- -------- ------- -----------
Net increase
(decrease) in net
assets from
operations........ 1,768,769 76,944 339,688 130,468 70,521 (606) 7,796,490
Premium deposits
and net
transfers*........ 1,704,095 908,880 962,209 269,063 5,039 63,070 5,115,311
Transfer to Sponsor
for benefits and
terminations...... (46,361) (2,793) (1,955) (1,442) (3,137) 0 (364,750)
---------- ---------- ---------- -------- -------- ------- -----------
Total increase (de-
crease)........... 3,426,503 983,031 1,299,942 398,089 72,423 62,464 12,547,051
Net assets at be-
ginning of period. 5,406,482 941,017 564,283 460,914 518,646 0 27,435,522
---------- ---------- ---------- -------- -------- ------- -----------
Net assets at end
of period
(Note C).......... $8,832,985 $1,924,048 $1,864,225 $859,003 $591,069 $62,464 $39,982,573
========== ========== ========== ======== ======== ======= ===========
</TABLE>
*Includes transfer activity from (to) other portfolios.
See Notes to Financial Statements.
F-23
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
MONEY HIGH
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL
---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D).... $ 44,471 $ 212,444 $ 300,737 $ 775,465 $ 55,585 $ 3,887
Expenses paid to
Sponsor
(Note D):
Mortality and
expense risk
charge........ 7,393 17,074 19,525 61,268 24,882 1,621
Contract maintenance charges:
Sales expense. 3,697 8,693 11,080 35,756 10,974 64
Underwriting
and issue
expense...... 556 1,295 1,530 5,105 1,465 7
Premium taxes. 1,390 3,238 3,828 12,766 3,663 19
Cost of insur-
ance......... 9,759 20,013 20,188 60,863 20,058 78
Administrative
expense...... 1,356 3,025 3,856 14,440 3,900 46
---------- ---------- ---------- ----------- ---------- --------
Total........ 24,151 53,338 60,007 190,198 64,942 1,835
Net investment
income (loss).. 20,320 159,106 240,730 585,267 (9,357) 2,052
Realized investment gains (losses)
distributed to
accounts....... 200,947 (322) (2,779) 82,332 34,324 467
Unrealized in-
vestment gains
(losses)....... 0 (384,034) (381,322) (630,085) (169,753) (27,193)
---------- ---------- ---------- ----------- ---------- --------
Net gain (loss)
on investments. 200,947 (384,356) (384,101) (547,753) (135,429) (26,726)
---------- ---------- ---------- ----------- ---------- --------
Net increase
(decrease) in
net assets from
operations..... 221,267 (225,250) (143,371) 37,514 (144,786) (24,674)
Premium deposits
and net
transfers*..... 1,045,101 648,848 422,155 1,961,711 2,580,834 900,691
Investment by
Sponsor (Note
E)............. (700,947) 0 0 0 0 65,000
Transfer to
Sponsor for
benefits and
terminations... (55,519) (40,963) (77,686) (300,977) (36,074) 0
---------- ---------- ---------- ----------- ---------- --------
Total increase.. 509,902 382,635 201,098 1,698,248 2,399,974 941,017
Net assets at
beginning of
period......... 1,526,808 2,795,809 3,095,777 9,333,903 3,006,508 0
---------- ---------- ---------- ----------- ---------- --------
Net assets at
end of period
(Note C)....... $2,036,710 $3,178,444 $3,296,875 $11,032,151 $5,406,482 $941,017
========== ========== ========== =========== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIMITED
TERM
SMALL CAP BALANCED BOND TOTAL
--------- -------- -------- -----------
<S> <C> <C> <C> <C>
Dividend income
(Note B, D).... $ 5,079 $ 4,255 $ 15,738 $ 1,417,661
Expenses paid to
Sponsor
(Note D):
Mortality and
expense risk
charge........ 972 772 2,002 135,509
Contract maintenance charges:
Sales expense. 24 16 0 70,304
Underwriting
and issue
expense...... 3 2 0 9,963
Premium taxes. 7 4 0 24,915
Cost of insur-
ance......... 24 15 0 130,998
Administrative
expense...... 19 9 0 26,651
-------- -------- -------- -----------
Total........ 1,049 818 2,002 398,340
Net investment
income (loss).. 4,030 3,437 13,736 1,019,321
Realized investment gains (losses)
distributed to
accounts....... 3,773 (1) 9 318,750
Unrealized in-
vestment gains
(losses)....... 43,941 (10,518) (14,388) (1,573,352)
-------- -------- -------- -----------
Net gain (loss)
on investments. 47,714 (10,519) (14,379) (1,254,602)
-------- -------- -------- -----------
Net increase
(decrease) in
net assets from
operations..... 51,744 (7,082) (643) (235,281)
Premium deposits
and net
transfers*..... 447,539 402,996 19,289 8,429,164
Investment by
Sponsor (Note
E)............. 65,000 65,000 500,000 (5,947)
Transfer to
Sponsor for
benefits and
terminations... 0 0 0 (511,219)
-------- -------- -------- -----------
Total increase.. 564,283 460,914 518,646 7,676,717
Net assets at
beginning of
period......... 0 0 0 19,758,805
-------- -------- -------- -----------
Net assets at
end of period
(Note C)....... $564,283 $460,914 $518,646 $27,435,522
======== ======== ======== ===========
</TABLE>
*Includes transfer activity from (to) other portfolios.
See Notes to Financial Statements.
F-24
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--The United Investors Life Variable Account ("the Life Variable
Account") was established on January 5, 1987 as a segregated account of United
Investors Life Insurance Company ("the Sponsor") and has been registered as a
unit investment trust under the Investment Company Act of 1940. The Life
Variable Account invests in shares of TMK/United Funds, Inc. ("the Fund"), a
mutual fund with ten separate investment portfolios including a money market
portfolio, a bond portfolio, a high income portfolio, a growth portfolio, an
income portfolio, an international portfolio, a small cap portfolio, a
balanced portfolio, a limited term bond portfolio, and asset strategy
portfolio. The assets of each portfolio of the Fund are held separate from the
assets of the other portfolios. Thus, each portfolio operates as a separate
investment portfolio, and the investment performance of one portfolio has no
effect on any other portfolio.
Basis of Presentation--The financial statements of the Life Variable Account
have been prepared on an accrual basis in accordance with generally accepted
accounting principles.
Federal Taxes --Currently no charge is made to the Life Variable Account for
federal income taxes because no federal income tax is imposed on the Sponsor
for the Life Variable Account investment income under current tax law.
NOTE B--INVESTMENTS
Stocks and convertible bonds of the Fund are valued at the latest sale price
on the last business day of the fiscal period as reported by the principal
securities exchange on which the issue is traded or, if no sale is reported
for a stock, the average of the latest bid and asked prices. Bonds, other than
convertible bonds, are valued using a matrix pricing system provided by a
major dealer in bonds. Convertible bonds are valued using this pricing system
only on days when there is no sale reported. Stocks which are traded over the
counter are priced using NASDAQ (National Association of Securities Dealers
Automated Quotations) which provides information on bid and asked prices
quoted by major dealers in such stocks. Short term debt securities are valued
at amortized cost which approximates market.
Security transactions are accounted for by the Fund on the trade date (date
the order to buy or sell is executed). Securities gains and losses are
calculated on the specific identification method. Dividend income is recorded
on the ex-dividend date. Interest income is recorded on the accrual basis.
Investments in shares of the separate investment portfolios are stated at
market value which is the net asset value per share as determined by the
respective portfolios (see Note C Net Assets). Dividends received by the
portfolios are reinvested daily in additional shares of the portfolios and are
recorded as dividend income on the record date.
F-25
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of reinvested dividends by portfolio:
<TABLE>
<CAPTION>
1996
----
INVESTMENT PORTFOLIO SHARES REINVESTED DIVIDEND INCOME
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market.................................. 67,625 $ 67,625
Bond.......................................... 47,515 247,098
High Income................................... 79,827 365,207
Growth........................................ 332,584 2,260,473
Income........................................ 30,607 310,270
International................................. 6,733 40,388
Small Cap..................................... 16,074 128,874
Balanced...................................... 12,474 77,301
Limited Term Bond............................. 6,676 34,473
Asset Strategy................................ 3,162 16,233
</TABLE>
<TABLE>
<CAPTION>
1995
----
INVESTMENT PORTFOLIO SHARES REINVESTED DIVIDEND INCOME
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market.................................. 56,929 $ 56,929
Bond.......................................... 46,377 248,458
High Income................................... 76,167 338,410
Growth........................................ 400,278 2,732,341
Income........................................ 26,265 227,863
International................................. 5,256 27,746
Small Cap..................................... 7,198 55,374
Balanced...................................... 5,465 32,244
Limited Term Bond............................. 6,185 32,472
Asset Strategy................................ 189 948
<CAPTION>
1994
----
INVESTMENT PORTFOLIO SHARES REINVESTED DIVIDEND INCOME
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market.................................. 44,471 $ 44,471
Bond.......................................... 43,659 212,444
High Income................................... 70,967 300,737
Growth........................................ 131,466 775,465
Income........................................ 8,212 55,585
International................................. 779 3,887
Small Cap..................................... 848 5,079
Balanced...................................... 862 4,255
Limited Term Bond............................. 3,238 15,738
</TABLE>
F-26
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE C--NET ASSETS
The following table illustrates by component parts the net asset value for
each portfolio.
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH TERM
1996 MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED BOND
- ---- ---------- ---------- ---------- ----------- ----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost to:
Contract Owners. $2,083,866 $2,679,219 $2,815,607 $10,696,715 $ 8,109,443 $2,783,949 $2,738,394 $1,122,212 $ 71,931
Sponsor......... 0 500,000 500,000 500,000 1,000,000 65,000 65,000 65,000 500,000
Adjustment for
market
appreciation and
reinvested
dividends ....... 704,933 1,772,726 2,294,769 11,776,739 4,496,028 463,494 576,154 261,989 99,800
Deductions:
Mortality and
expense risk
charge.......... (78,956) (131,265) (143,910) (449,074) (161,846) (27,425) (25,691) (11,476) (9,185)
Contract
maintenance
charges:
Sales expense... (34,886) (70,517) (81,625) (283,920) (100,115) (21,153) (19,127) (8,785) (503)
Underwriting and
issue expense... (5,447) (10,498) (12,258) (41,045) (12,646) (2,577) (2,341) (1,047) (59)
Premium taxes... (13,615) (26,244) (30,647) (102,618) (31,615) (6,441) (5,853) (2,619) (148)
Cost of
insurance....... (75,322) (159,093) (160,952) (492,660) (166,958) (31,761) (29,458) (15,694) (705)
Administrative
expense......... (13,768) (22,767) (31,305) (112,886) (30,978) (5,314) (4,873) (2,037) (96)
Loan interest... (7,397) (2,073) (2,307) (7,273) (1,170) (13) (16) (8) 0
Benefits &
terminations.... (874,302) (511,840) (819,710) (1,692,077) (307,970) (43,655) (25,876) (11,001) (3,137)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net assets....... $1,685,106 $4,017,648 $4,327,662 $19,791,901 $12,792,173 $3,174,104 $3,266,313 $1,396,534 $657,898
========== ========== ========== =========== =========== ========== ========== ========== ========
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost to:
Contract Owners. $1,738,796 $2,596,188 $2,577,806 $ 8,888,979 $ 5,680,906 $1,809,570 $1,409,748 $ 672,059 $ 24,327
Sponsor......... 0 500,000 500,000 500,000 1,000,000 65,000 65,000 65,000 500,000
Adjustment for
market
appreciation and
reinvested
dividends........ 637,308 1,643,073 1,822,489 9,642,686 2,543,035 85,908 418,631 140,231 75,871
Deductions:
Mortality and
expense risk
charge.......... (70,535) (107,795) (119,955) (341,235) (96,747) (11,458) (9,132) (4,864) (5,369)
Contract
maintenance
charges:
Sales expense... (30,896) (55,717) (67,012) (212,946) (50,222) (6,876) (5,418) (3,435) (182)
Underwriting &
issue expense... (4,882) (8,438) (10,247) (31,629) (6,420) (847) (672) (411) (21)
Premium taxes... (12,203) (21,095) (25,619) (79,078) (16,052) (2,117) (1,680) (1,028) (53)
Cost of
insurance....... (67,210) (127,235) (136,462) (380,939) (86,786) (10,543) (9,044) (6,440) (319)
Administrative
expense......... (12,613) (18,727) (26,188) (87,924) (16,003) (1,796) (1,253) (667) (48)
Loan interest... (6,004) (1,832) (1,884) (5,697) (717) (8) (16) (8) 0
Benefits &
terminations.... (841,799) (411,209) (559,950) (1,313,591) (118,009) (2,785) (1,939) (1,434) (3,137)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net assets....... $1,329,962 $3,987,213 $3,952,978 $16,578,626 $ 8,832,985 $1,924,048 $1,864,225 $ 859,003 $591,069
========== ========== ========== =========== =========== ========== ========== ========== ========
<CAPTION>
ASSET
1996 STRATEGY
- ---- ---------
<S> <C>
Cost to:
Contract Owners. $456,785
Sponsor......... 0
Adjustment for
market
appreciation and
reinvested
dividends ....... 23,331
Deductions:
Mortality and
expense risk
charge.......... (2,371)
Contract
maintenance
charges:
Sales expense... (598)
Underwriting and
issue expense... (70)
Premium taxes... (176)
Cost of
insurance....... (1,060)
Administrative
expense......... (176)
Loan interest... 0
Benefits &
terminations.... 0
---------
Net assets....... $475,665
=========
<CAPTION>
1995
- ----
<S> <C>
Cost to:
Contract Owners. $ 63,070
Sponsor......... 0
Adjustment for
market
appreciation and
reinvested
dividends........ (259)
Deductions:
Mortality and
expense risk
charge.......... (93)
Contract
maintenance
charges:
Sales expense... (85)
Underwriting &
issue expense... (10)
Premium taxes... (25)
Cost of
insurance....... (103)
Administrative
expense......... (31)
Loan interest... 0
Benefits &
terminations.... 0
---------
Net assets....... $ 62,464
=========
</TABLE>
F-27
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--CHARGES AND DEDUCTIONS
Fund Management and Fees
Waddell & Reed Investment Management Company ("the Manager"), is the manager
of the Fund and provides investment advisory services to the Fund. Each
portfolio will pay the manager a fee for managing its investments consisting
of two elements: (i) a specific fee computed on each portfolio's net asset
value at the close of business each day at the following annual rates: Money
Market Portfolio None; Bond Portfolio .03 of 1% of net assets; High Income
Portfolio .15 of 1% of net assets; Growth Portfolio .20 of 1% of net assets;
Income Portfolio .20 of 1% of net assets; International Portfolio .30 of 1% of
net assets; Small Cap Portfolio .35 of 1% of net assets; Balanced Portfolio
.10 of 1% of net assets; Limited Term Bond Portfolio .05 of 1% of net assets;
Asset Strategy Portfolio .30 of 1% of net assets; and (ii) a pro rata
participation based on the relative net asset size of each portfolio in a
"Group" fee computed each day on the combined net asset values of all of the
portfolios at the following annual rates: Group Net Asset Level from $0 to
$750 million--Annual Group Fee Rate--.51 of 1%; from $750 to $1,500 million--
.49 of 1%; from $1,500 to $2,250 million--.47 of 1%; over $2,250 million--.45
of 1%. Fees for these services are deducted from dividend income.
Prior to July 1995, fees for these services were deducted from dividend
income at the following annual rates: Money Market Portfolio .51 of 1% of net
assets; Bond Portfolio .54 of 1% of net assets; High Income Portfolio .66 of
1% of net assets; Growth Portfolio .71 of 1% of net assets; Income Portfolio
.71 of 1% of net assets; International Portfolio .81 of 1% of net assets;
Small Cap Portfolio .86 of 1% of net assets; Balanced Portfolio .61 of 1% of
net assets; and Limited Term Bond Portfolio .56 of 1% of net assets. These
fees are a result of the combination of two elements: (i) a specific fee
computed on each portfolio's net asset value at the close of each business day
at the following annual rates: Money Market Portfolio None; Bond Portfolio .03
of 1% of net assets; High Income Portfolio .15 of 1% of net assets; Growth
Portfolio .20 of 1% of net assets; Income Portfolio .20 of 1% of net assets;
International Portfolio .30 of 1% of net assets; Small Cap Portfolio .35 of 1%
of net assets; Balanced Portfolio .10 of 1% of net assets; and Limited Term
Bond Portfolio .05 of 1% of net assets; and (ii) a base fee computed each day
on the combined net asset values of all of the portfolios and allocated among
the portfolios based on their relative net asset size at the annual rate of
.51 of 1%. The amount of these fees have been:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Money Market...................................... $ 7,393 $ 7,332 $ 6,468
Bond.............................................. 20,785 19,427 15,545
High Income....................................... 26,544 24,027 21,528
Growth............................................ 126,418 96,300 72,621
Income............................................ 75,558 51,250 29,750
International..................................... 20,151 12,098 2,243
Small Cap......................................... 23,128 10,260 1,365
Balanced.......................................... 6,658 3,956 799
Limited Term Bond................................. 3,444 3,195 1,843
Asset Strategy.................................... 2,492 158 0
</TABLE>
Mortality and Expense Risk Charges
A daily charge is deducted at an effective annual rate of .60% of the
average daily net assets of each investment portfolio to compensate the
Sponsor for certain mortality and expense risks assumed. The mortality and
expense risk charge covers the possibility that the cost of insurance charges
will be insufficient to meet actual claims and that other expense charges may
be insufficient to cover actual expenses incurred in connection with policy
obligations.
F-28
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Premium Deposit Charges
The Sponsor does not impose an immediate charge against the initial premium
deposit prior to its allocation to the Life Variable Account. For additional
premium deposits there are deductions of 6% of the premium deposit for sales
expenses and 2.5% for premium taxes.
Contract Maintenance Charges
On each policy anniversary a deduction is made from the policy account value
to compensate the Sponsor for certain costs and expenses:
(a) Expenses relating to sales, underwriting and issue, and premium taxes
On each of the first ten policy anniversaries, there is an annual deduction
of 1.20% of the initial premium deposit which is composed of the following:
(1) Sales Expenses--An .85% charge for sales expenses compensates the
Sponsor for certain sales and other distribution expenses incurred at the time
the policies are issued, including agent sales commissions, the cost of
printing prospectuses and sales literature, advertising, and other marketing
and sales promotional activities.
(2) Underwriting and Issue Expenses--A .10% charge compensates the Sponsor
for initial underwriting costs and for certain expenses incurred in issuing
policies, including the cost of processing applications, conducting medical
examinations, determining insurability, and establishing records.
(3) State and Local Premium Taxes--A .25% charge compensates the Sponsor for
the average premium tax expense incurred when issuing policies.
(b) Cost of Insurance
A mortality charge will be deducted on each policy anniversary to compensate
the Sponsor for the cost of insurance for the preceding policy year. The
mortality charge is based on a policy's net amount at risk and on the attained
age, sex and risk class of the insured, and is determined by the Sponsor based
upon its expectation as to future mortality experience.
(c) Administrative Expenses
The Sponsor deducts a charge of $50 on each policy anniversary to compensate
it for administrative expenses. This charge is "cost based" and the Sponsor
does not expect a profit from the charge.
Surrender Charges
For policy surrenders occurring during the first eight policy years, a
surrender charge is made against the initial premium deposit based on a graded
table.
<TABLE>
<CAPTION>
9 OR
POLICY YEAR 1ST 2ND 3RD 4TH 5TH 6TH 7TH 8TH MORE
- ----------- --- --- --- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Surrender Charge %......................... 8% 7% 6% 5% 4% 3% 2% 1% None
</TABLE>
Surrender charges are included in transfers to Sponsor for benefits and
terminations.
NOTE E--EQUITY OF SPONSOR
The equity of the Sponsor may be withdrawn at the discretion of the Sponsor
without penalty.
F-29
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--SELECTED UNIT DATA
Selected data for a unit of the Life Variable Separate Account outstanding
throughout each period follows.
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH SMALL TERM ASSET
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL CAP BALANCED BOND STRATEGY
------ ----- ------ ------ ------ ------------- ----- -------- ------- --------
1996
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income......... $0.07 $0.13 $0.20 $0.44 $0.06 $0.02 $0.08 $0.09 $0.06 $0.05
Expenses................ 0.03 0.04 0.04 0.07 0.04 0.03 0.04 0.03 0.01 0.01
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment income
(loss)--net............ 0.04 0.09 0.16 0.37 0.02 (0.01) 0.04 0.06 0.05 0.04
Net realized and
unrealized investment
gains (losses)......... (0.29) (0.05) 0.13 (0.25) (0.06) (0.29) (0.80) (0.35) (0.08) (1.99)
Premium deposits and net
transfers.............. 0.38 0.04 0.13 0.35 0.45 0.42 0.85 0.53 0.09 1.13
Transfer to Sponsor for
benefits and
terminations........... (0.04) (0.05) (0.14) (0.07) (0.04) (0.02) (0.02) (0.01) 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Increase in net asset
value.................. 0.09 0.03 0.28 0.40 0.37 0.10 0.07 0.23 0.06 (0.82)
Net asset value,
beginning of the
period................. 1.74 2.03 2.05 3.47 1.99 1.27 2.01 1.41 1.12 2.19
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
the period............. $1.83 $2.06 $2.33 $3.87 $2.36 $1.37 $2.08 $1.64 $1.18 $1.37
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income......... $0.07 $0.13 $0.18 $0.57 $0.05 $0.02 $0.06 $0.05 $0.06 $0.03
Expenses................ 0.03 0.04 0.04 0.06 0.03 0.02 0.03 0.03 0.01 0.01
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment income--net.. 0.04 0.09 0.14 0.51 0.02 0.00 0.03 0.02 0.05 0.02
Net realized and
unrealized investment
gains (losses)......... 0.46 (0.07) 0.06 0.07 (0.26) (1.48) (1.51) (1.22) 0.04 (0.04)
Premium deposits and net
transfers.............. (0.96) 0.13 0.10 0.31 0.38 0.60 1.04 0.44 0.01 2.21
Transfer to Sponsor for
benefits and
terminations........... (0.02) (0.03) (0.04) (0.03) (0.01) 0.00 0.00 0.00 (0.01) 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Increase (decrease) in
net asset value........ (0.48) 0.12 0.26 0.86 0.13 (0.88) (0.44) (0.76) 0.09 2.19
Net asset value,
beginning of the
period................. 2.22 1.91 1.79 2.61 1.86 2.15 2.45 2.17 1.03 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
the period............. $1.74 $2.03 $2.05 $3.47 $1.99 $1.27 $2.01 $1.41 $1.12 $2.19
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
F-30
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--SELECTED UNIT DATA--(CONTINUED)
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH SMALL TERM
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL CAP BALANCED BOND
------ ----- ------ ------ ------ ------------- ----- -------- -------
1994
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income......... $0.05 $0.13 $0.16 $0.18 $0.02 $0.01 $0.02 $0.02 $0.03
Expenses................ 0.03 0.03 0.03 0.04 0.02 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Investment income--net.. 0.02 0.10 0.13 0.14 0.00 0.01 0.02 0.02 0.03
Net realized and
unrealized investment
gains (losses)......... 0.22 (0.23) (0.21) (0.13) (0.05) (0.06) 0.21 (0.05) (0.03)
Premium deposits and net
transfers.............. 1.14 0.39 0.23 0.46 0.89 2.05 1.94 1.89 0.04
Investment by Sponsor... (0.76) 0.00 0.00 0.00 0.00 0.15 0.28 0.31 0.99
Transfer to Sponsor for
benefits and
terminations........... (0.06) (0.02) (0.04) (0.07) (0.01) 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Increase in net asset
value.................. 0.56 0.24 0.11 0.40 0.83 2.15 2.45 2.17 1.03
Net asset value,
beginning of the
period................. 1.66 1.67 1.68 2.21 1.03 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
the period............. $2.22 $1.91 $1.79 $2.61 $1.86 $2.15 $2.45 $2.17 $1.03
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
F-31
<PAGE>
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND POLICY VALUES
The following tables illustrate how the Policy Values and Death Benefits of
a Policy may change with the investment experience of the Fund. The tables
show how the Policy Values and Death Benefits of a Policy issued to an Insured
of a given age who pays the given premium at issue would vary over time if the
investment return on the assets held in each Portfolio of the Fund were a
uniform, gross, after-tax annual rate of 0%, 4%, 8% or 12%. The table on page
A-2 illustrates a Policy issued to a female age 35 for $10,000 initial
premium, standard risk class with the minimum initial Death Benefit. The
tables on pages A-3 and A-4 illustrate a Policy issued to a male age 55 for
$50,000 initial premium, preferred risk class with the minimum initial Death
Benefit. The Policy Values and Death Benefits would be different from those
shown if the gross annual investment rates of return averaged 0%, 4%, 8% and
12% over a period of years, but fluctuated above and below those averages for
individual Policy Years.
The second column of the tables shows the value of the premium paid
accumulated at 5% interest. The following columns show the Death Benefits and
the Policy Values for uniform hypothetical rates of return shown in these
tables. The table on page A-3 is based on the current cost of insurance and
administrative charges. This reflects the basis on which United Investors
currently sells its Policies. The maximum cost of insurance rates allowable
under the Policy are contained in the 1980 Commissioners' Standard Ordinary
Mortality Tables. The Death Benefits and Policy Values shown in the tables on
pages A-2 and A-4 are based on the assumption that the maximum allowable cost
of insurance rates as described above ("guaranteed cost") and maximum
allowable expense deductions are made throughout the life of the Policy.
The values shown assume that a Policyowner maintains Policy Values in equal
proportion among the Money Market, Bond, High Income, Growth, Income,
International, Small Cap, Balanced, Limited-Term Bond and Asset Strategy
portfolios of the Fund, and they take into account an average of the daily
investment management fee currently paid by those ten portfolios in 1996
(which is equivalent to the annual rate of .67% of the aggregate average daily
net assets of those portfolios), an average of the actual annual expenses
incurred by those ten portfolios in 1996 (which is an annual rate of .10%),
the daily charge by United Investors to each Investment Division for assuming
mortality and expense risks (which is equivalent to an annual rate of .60%),
the annual deduction on each of the first ten Policy Anniversaries for state
and local premium taxes, underwriting and issue expenses, and sales expenses
(which is equivalent to an annual rate of 1.20% of the initial premium), the
annual deduction for cost of insurance and the $50 annual deduction for
administrative expenses. The values shown do not reflect the Science and
Technology Portfolio which began operations in 1997.
Taking into account the mortality and expense risk charge of .60% and the
charge for investment management fees from the Fund, the illustrated gross
annual investment rates of return of 0%, 4%, 8% and 12%, correspond to
approximate net annual rates of -1.37%, 2.63%, 6.63% and 10.63% respectively.
The hypothetical values shown in the tables do not reflect charges for any
federal income tax burden attributable to the Variable Account, since United
Investors is not currently making such charges. However, such charges may be
made in the future and, in that event, the gross annual investment rate of
return would have to exceed 0%, 4%, 8% or 12% by an amount sufficient to cover
the tax charges in order to produce the Death Benefits and Policy Values
illustrated. (See Federal Tax Matters.)
The tables illustrate the values that would result based upon the
hypothetical investment rates of return if only a single premium is paid as
indicated, and if no Policy loans have been made.
Illustrated values would be different if the proposed Insured were another
age.
Upon request, United Investors will provide a comparable illustration based
upon the Proposed Insured's age and the initial Death Benefit requested.
A-1
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
FEMALE ISSUE AGE 35 STANDARD RISK CLASS
$10,000 INITIAL PREMIUM PAYMENT
MAXIMUM COST OF INSURANCE AND ADMINISTRATIVE CHARGES(1)
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS
END OF PYMTS ANNUAL RATE OF RETURN OF:
POLICY PLUS --------------------------------
YEAR INT.@ 5% 0% 4% 8% 12%
- ------ -------- -- -- -- ---
DEATH BENEFITS(2)
<S> <C> <C> <C> <C> <C>
1..................................... $10,500 $62,365 $62,365 $62,365 $ 62,365
2..................................... 11,025 62,365 62,365 62,365 62,365
3..................................... 11,576 62,365 62,365 62,365 62,365
4..................................... 12,155 62,365 62,365 62,365 62,365
5..................................... 12,763 62,365 62,365 62,365 62,365
10.................................... 16,289 62,365 62,365 62,365 62,365
20.................................... 26,533 62,365 62,365 62,365 94,075
30.................................... 43,219 (3) 62,365 62,365 193,362
A 65.................................. 43,219 (3) 62,365 62,365 193,362
<CAPTION>
POLICY VALUES(2)
<S> <C> <C> <C> <C> <C>
1..................................... $ 9,863 $10,263 $10,663 $ 11,063
2..................................... 9,475 10,270 11,098 11,957
3..................................... 9,085 10,272 11,556 12,942
4..................................... 8,694 10,266 12,039 14,026
5..................................... 8,299 10,253 12,546 15,220
10.................................... 6,231 10,010 15,483 23,271
20.................................... 2,373 9,501 25,732 59,920
30.................................... (3) 6,229 44,525 158,493
A 65.................................. (3) 6,229 44,525 158,493
<CAPTION>
SURRENDER VALUES(2)
<S> <C> <C> <C> <C> <C>
1..................................... $ 9,063 $ 9,463 $ 9,863 $ 10,263
2..................................... 8,775 9,570 10,398 11,257
3..................................... 8,485 9,672 10,956 12,342
4..................................... 8,194 9,766 11,539 13,526
5..................................... 7,899 9,853 12,146 14,820
10.................................... 6,231 10,010 15,483 23,271
20.................................... 2,373 9,501 25,732 59,920
30.................................... (3) 6,229 44,525 158,493
A 65.................................. (3) 6,229 44,525 158,493
</TABLE>
(1) Current and maximum charges are the same for female standard risks.
(2) Assumes no Policy loans have been made.
(3) In the absence of an additional premium payment, the Policy would lapse.
It is emphasized that the hypothetical investment rates of return shown
above and elsewhere in this Prospectus are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by a Policyowner
and different rates of return of the Fund Portfolios. The Death Benefit and
Surrender Value for a Policy would be different from those shown if actual
rates of return averaged 0%, 4%, 8%, and 12% over a period of years, but also
fluctuated above or below those averages for individual Policy Years. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
A-2
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 55 PREFERRED RISK CLASS
$50,000 INITIAL PREMIUM PAYMENT
CURRENT COST OF INSURANCE AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS
END OF PYMTS ANNUAL RATE OF RETURN OF:
POLICY PLUS -----------------------------------
YEAR INT.@ 5% 0% 4% 8% 12%
- ------ -------- -- -- -- ---
DEATH BENEFITS(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 52,500 $126,599 $126,599 $126,599 $126,599
2.................................. 55,125 126,599 126,599 126,599 126,599
3.................................. 57,881 126,599 126,599 126,599 126,599
4.................................. 60,775 126,599 126,599 126,599 126,599
5.................................. 63,814 126,599 126,599 126,599 126,599
10................................. 81,445 126,599 126,599 126,599 147,379
20................................. 132,665 126,599 126,599 152,398 340,984
30................................. 216,097 (2) 126,599 275,675 892,910
A 65............................... 81,445 126,599 126,599 126,599 147,379
<CAPTION>
POLICY VALUES(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 49,315 $ 51,315 $ 53,315 $ 55,315
2.................................. 47,520 51,512 55,666 59,981
3.................................. 45,691 51,670 58,143 65,130
4.................................. 43,826 51,786 60,758 70,825
5.................................. 41,919 51,855 63,521 77,132
10................................. 31,446 51,240 79,975 120,802
20................................. 4,634 46,323 142,428 318,677
30................................. (2) 570 262,548 850,390
A 65............................... 31,446 51,240 79,975 120,802
<CAPTION>
SURRENDER VALUES(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 45,315 $ 47,315 $ 49,315 $ 51,315
2.................................. 44,020 48,012 52,166 56,481
3.................................. 42,691 48,670 55,143 62,130
4.................................. 41,326 49,286 58,258 68,325
5.................................. 39,919 49,855 61,521 75,132
10................................. 31,446 51,240 79,975 120,802
20................................. 4,634 46,323 142,428 318,677
30................................. (2) 570 262,548 850,390
A 65............................... 31,446 51,240 79,975 120,802
</TABLE>
(1) Assumes no Policy loans have been made.
(2) In the absence of an additional premium payment, the Policy would lapse.
It is emphasized that the hypothetical investment rates of return shown
above and elsewhere in this Prospectus are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by a Policyowner
and different rates of return of the Fund Portfolios. The Death Benefit and
Surrender Value for a Policy would be different from those shown if actual
rates of return averaged 0%, 4%, 8%, and 12% over a period of years, but also
fluctuated above or below those averages for individual Policy Years. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
A-3
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE ISSUE AGE 55 PREFERRED RISK CLASS
$50,000 INITIAL PREMIUM PAYMENT
MAXIMUM COST OF INSURANCE AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
ASSUMING HYPOTHETICAL GROSS
END OF PYMTS ANNUAL RATE OF RETURN OF:
POLICY PLUS -----------------------------------
YEAR INT.@ 5% 0% 4% 8% 12%
- ------ -------- -- -- -- ---
DEATH BENEFITS(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 52,500 $126,599 $126,599 $126,599 $126,599
2.................................. 55,125 126,599 126,599 126,599 126,599
3.................................. 57,881 126,599 126,599 126,599 126,599
4.................................. 60,775 126,599 126,599 126,599 126,599
5.................................. 63,814 126,599 126,599 126,599 126,599
10................................. 81,445 126,599 126,599 126,599 141,787
20................................. 132,665 (2) 126,599 133,769 320,905
30................................. 216,097 (2) (2) 237,451 824,888
A 65............................... 81,445 126,599 126,599 126,599 141,787
<CAPTION>
POLICY VALUES(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 49,315 $ 51,315 $ 53,315 $ 55,315
2.................................. 47,200 51,189 55,339 59,650
3.................................. 45,015 50,981 57,444 64,423
4.................................. 42,752 50,685 59,638 69,693
5.................................. 40,402 50,292 61,929 75,527
10................................. 26,754 46,335 75,059 116,219
20................................. (2) 22,473 125,018 299,911
30................................. (2) (2) 226,144 785,608
A 65............................... 26,754 46,335 75,059 116,219
<CAPTION>
SURRENDER VALUES(1)
<S> <C> <C> <C> <C> <C>
1.................................. $ 45,315 $ 47,315 $ 49,315 $ 51,315
2.................................. 43,700 47,689 51,839 56,150
3.................................. 42,015 47,981 54,444 61,423
4.................................. 40,252 48,185 57,138 67,193
5.................................. 38,402 48,292 59,929 73,527
10................................. 26,754 46,335 75,059 116,219
20................................. (2) 22,473 125,018 299,911
30................................. (2) (2) 226,144 785,608
A 65............................... 26,754 46,335 75,059 116,219
</TABLE>
(1) Assumes no Policy loans have been made.
(2) In the absence of an additional premium payment, the Policy would lapse.
It is emphasized that the hypothetical investment rates of return shown
above and elsewhere in this Prospectus are illustrative only and should not be
deemed a representation of past or future investment rates of return. Actual
rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by a Policyowner
and different rates of return of the Fund Portfolios. The Death Benefit and
Surrender Value for a Policy would be different from those shown if actual
rates of return averaged 0%, 4%, 8%, and 12% over a period of years, but also
fluctuated above or below those averages for individual Policy Years. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
A-4
<PAGE>
APPENDIX B
DEATH BENEFIT FACTORS
As noted in the Prospectus, after the Policy Date the Death Benefit is equal
to the greater of the Minimum Death Benefit or the Policy Value times the
applicable Death Benefit Factor. The Death Benefit Factors are listed below.
<TABLE>
<CAPTION>
Attained Attained
Age Factor Age Factor
-------- ------ -------- ------
<S> <C> <C> <C>
0-40 2.50 68 1.17
41 2.43 69 1.16
42 2.36 70 1.15
43 2.29 71 1.13
44 2.22 72 1.11
45 2.15 73 1.09
46 2.09 74 1.07
47 2.03 75 1.05
48 1.97 76 1.05
49 1.91 77 1.05
50 1.85 78 1.05
51 1.78 79 1.05
52 1.71 80 1.05
53 1.64 81 1.05
54 1.57 82 1.05
55 1.50 83 1.05
56 1.46 84 1.05
57 1.42 85 1.05
58 1.38 86 1.05
59 1.34 87 1.05
60 1.30 88 1.05
61 1.28 89 1.05
62 1.26 90 1.05
63 1.24 91 1.04
64 1.22 92 1.03
65 1.20 93 1.02
66 1.19 94 1.01
67 1.18 95 1.00
</TABLE>
B-1
