<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. 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").
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.
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 bought 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 Target/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.
- -------------------------------------------------------------------------------
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR
FUTURE REFERENCE.
- -------------------------------------------------------------------------------
The Date of This Prospectus is May 1, 1998 Revised and
Reprinted as of August 31, 1998.
Issued By
United Investors Life Insurance Company
(a Missouri Stock Company)
2001 Third Avenue South
Birmingham, Alabama 35233
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U-1003 (8-98)
<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 Target/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.................... 23
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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
- -------------------------------------------------------------------------------
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 Target/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, Martin Luther King, Jr. 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 Target/United Funds, Inc. (the "Fund"), which currently has the
following eleven separate investment portfolios (collectively, the
"Portfolios").
<TABLE>
<S> <C> <C>
MONEY MARKET PORTFOLIO INCOME PORTFOLIO LIMITED-TERM BOND PORTFOLIO
BOND PORTFOLIO INTERNATIONAL PORTFOLIO ASSET STRATEGY PORTFOLIO
HIGH INCOME PORTFOLIO SMALL CAP PORTFOLIO SCIENCE AND TECHNOLOGY PORTFOLIO
GROWTH PORTFOLIO BALANCED PORTFOLIO
</TABLE>
Each of these Portfolios have a different investment objective. (See
Target/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.)
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 understanding 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 indirectly owned 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.
3
<PAGE>
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.
TARGET/UNITED FUNDS, INC.
The Variable Account invests in shares of Target/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 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 net asset value of $1.00 per share.
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.
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
4
<PAGE>
price volatility than higher rated securities due to various circumstances.
See "Debt Securities" in the Target/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 primarily seeks to maintain current income, subject to
market conditions, with a secondary goal of capital growth. It will invest
primarily in common stocks or securities convertible into common stocks that
have a record of paying regular dividends on common stock or have the
potential for capital growth or that may be expected to resist market decline.
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 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.
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 Waddell & Reed
Financial, Inc. and an indirect subsidiary of 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>
5
<PAGE>
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 1997 are shown below, except for the Science and Technology Portfolio,
where the expenses are estimates for 1998.
<TABLE>
<CAPTION>
OTHER EXPENSES
PORTFOLIO (% OF NET ASSETS)
--------- -----------------
<S> <C>
Money Market........................................... 0.08%
Bond................................................... 0.05%
High Income............................................ 0.05%
Growth................................................. 0.02%
Income................................................. 0.02%
International.......................................... 0.18%
Small Cap.............................................. 0.05%
Balanced............................................... 0.07%
Limited-Term Bond...................................... 0.18%
Asset Strategy......................................... 0.13%
Science and Technology................................. 0.25%
</TABLE>
Effective August 31, 1998, Target/United Funds has adopted a Service Plan
(the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Under the Plan, each Portfolio may pay monthly a service fee to Waddell &
Reed, Inc., the principal underwriter of the Fund and the Policy, in an amount
not to exceed 0.25% of the Portfolio's average annual net assets. The fee is
to be paid to reimburse Waddell & Reed, Inc. to finance the provision of
personal services to Policyowners and maintenance of Policyowner accounts.
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;
7
<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.
13
<PAGE>
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 partially 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.
15
<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 may recover any deficiency from
United Investors' general assets (which include amounts derived from the
mortality and expense risk charge and mortality gains).
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.
16
<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
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<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
19
<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.
20
<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.
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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. A
competent tax advisor should be consulted for more information.
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.
In recent years, moreover, Congress has adopted new rules relating to life
insurance owned by businesses. Any business contemplating the purchase of a
new Policy or a change in an existing Policy should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always
the possibility that the tax treatment of the Policy could change by
legislation or otherwise. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Policy.
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
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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.
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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DIRECTORS AND OFFICERS OF UNITED INVESTORS. United Investors is managed by a
board of directors. The following table sets forth the name and principal
occupations during the past five years of each of United Investors's directors
and senior officers. Unless otherwise noted, the address for each person is
United Investors Life Insurance Company, 2001 Third Avenue South, Birmingham,
Alabama 35233.
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
NAME AND POSITION WITH PRINCIPAL OCCUPATION
UNITED INVESTORS LAST FIVE YEARS
- -------------------------------------------------------------------------------
<S> <C>
W. Thomas Aycock Vice President and Chief Actuary of United
Vice President and Chief Investors since November, 1992.
Actuary, Director
- -------------------------------------------------------------------------------
Tony G. Brill* Senior Vice President of United Investors and
Senior Vice President and Torchmark Corporation since January, 1997.
Director Managing Partner of KPMG Peat Marwick LLP,
Birmingham, Alabama Office, 1984--January,
1997.
- -------------------------------------------------------------------------------
C.B. Hudson* Chairman of United Investors and Torchmark
Chairman of the Board and Corporation since March, 1998. Chairman of
Chief Executive Officer Insurance Operations of Torchmark Corporation,
January, 1993--March, 1998. Chairman of
Liberty National Life Insurance Company,
United American Life Insurance Company, and
Globe Life Insurance Company, since 1991.
- -------------------------------------------------------------------------------
Larry M. Hutchison* Vice President and General Counsel of
Director Torchmark since February, 1997. Vice President
and General Counsel of United American
Insurance Company since 1992.
- -------------------------------------------------------------------------------
Michael J. Klyce Vice President of Torchmark Corporation since
Vice President and Treasurer January, 1984.
- -------------------------------------------------------------------------------
John H. Livingston Secretary and Counsel of United Investors
Director, Secretary and Counsel since May, 1995. Secretary and Associate
Counsel of United Investors, December 1994--
May, 1995. Associate Counsel of United
Investors, July, 1990--December, 1994.
- -------------------------------------------------------------------------------
James L. Mayton, Jr. Vice President & Controller of Liberty
Vice President and Controller National Life Insurance Company since January,
1985.
- -------------------------------------------------------------------------------
Carol A. McCoy Secretary of Torchmark Corporation since
Director February, 1994. Associate Counsel of Torchmark
Corporation since January, 1985.
- -------------------------------------------------------------------------------
Anthony L. McWhorter President of Liberty National Life Insurance
Director Company 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.
- -------------------------------------------------------------------------------
James L. Sedgwick President of United Investors since September
President and Director 1991. General Counsel, Vice President and
Secretary of United Investors, July 1979-
September, 1991.
- -------------------------------------------------------------------------------
Ross W. Stagner Vice President of United Investors since
Vice President and Director January, 1992.
- -------------------------------------------------------------------------------
William L. Surber Vice President of United Investors since
Vice President and Director April, 1992.
- -------------------------------------------------------------------------------
</TABLE>
* Principal business address: Torchmark Corporation, 3700 South Stonebridge,
McKinney, Texas 75050.
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PREPARING FOR YEAR 2000
Existing computer programs of many businesses were developed with a two-
digit identification without consideration of the upcoming change in century
or millennium in the year 2000. Without addressing this issue, many computer
programs could fail or produce erroneous results, creating considerable
uncertainty and potentially adversely affecting the operations or business.
United Investors has been in the process of modifying its computer system
and applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. United Investors is utilizing primarily internal staff for this
conversion but is also using outside consultants where necessary. The cost of
this project, which is immaterial to United Investors is expensed as incurred.
As a part of its activities, United Investors is engaged electronically with
third-party financial institutions and other various organizations which may
have computer systems which are not year 2000 compliant. To the degree
possible, United Investors is verifying that these third party business
systems are currently compliant or are in the process of becoming compliant.
To the extent these systems are not compliant there is no assurance that the
potential interruptions or cost to United Investors may not be significant.
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 LLP 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, 1997 and 1996, and the related statements of operations, shareholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997 and the balance sheet of United Investors Life Variable
Account as of December 31, 1997 and the related statements of operations and
changes in net assets for each of the years in the three-year period ended
December 31, 1997 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, 1997 and 1996 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, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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, 1997 and 1996 and the results of its
operations and its cash flow for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
February 2, 1998 except
for Note 1 which is as of
March 3, 1998
F-1
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1997--$612,600; 1996--$621,177)................. $ 635,643 $ 624,880
Policy loans............................................ 15,817 14,332
Other long-term invested assets......................... 22,488 21,411
Short-term investments.................................. 13,423 1,834
---------- ----------
Total investments..................................... 687,371 662,457
Cash..................................................... 5,288 2,404
Accrued investment income (includes amounts from
affiliates:
1997--$473; 1996--$473)................................. 11,270 10,781
Receivables ............................................. 2,826 2,635
Due from affiliates (includes funds withheld on reinsur-
ance: 1997--$190,235; 1996--$0)......................... 225,235 35,423
Deferred acquisition costs............................... 176,897 169,986
Value of insurance purchased............................. 33,754 16,160
Goodwill................................................. 6,771 7,055
Property and equipment................................... 141 156
Other assets............................................. 1,149 1,534
Separate account assets.................................. 1,876,439 1,420,025
---------- ----------
Total assets.......................................... $3,027,141 $2,328,616
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits.................................. $ 736,975 $ 531,297
Unearned and advance premiums........................... 2,975 2,804
Other policy liabilities................................ 8,713 8,135
---------- ----------
Total policy liabilities............................... 748,663 542,236
Accrued income taxes.................................... 58,270 43,063
Other liabilities....................................... 2,825 2,265
Due to affiliates....................................... 9,374 8,965
Separate account liabilities............................ 1,876,439 1,420,025
---------- ----------
Total liabilities..................................... 2,695,571 2,016,554
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.............................. 138,469 137,950
Unrealized investment gains, net of applicable taxes.... 14,700 4,460
Retained earnings....................................... 175,401 166,652
---------- ----------
Total shareholder's equity............................ 331,570 312,062
---------- ----------
Total liabilities and shareholder's equity............ $3,027,141 $2,328,616
========== ==========
</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,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premium income.................................... $ 68,723 $ 65,114 $ 61,792
Policy charges and fees........................... 36,582 29,403 23,109
Net investment income (includes amounts from af-
filiates: 1997--$2,863; 1996--$2,847; 1995--
$3,058; ......................................... 51,514 51,128 49,356
Realized investment gains (losses)................ (5,365) 925 1,441
Other income (includes amounts from affiliates:
1997--$11,876; 1996--$0; 1995--$0) .............. 11,876 0 4
-------- -------- --------
Total revenue................................... 163,330 146,570 135,702
Benefits and expenses:
Policy benefits:
Individual life.................................. 57,954 47,355 42,943
Annuity.......................................... 15,165 15,807 16,540
-------- -------- --------
Total policy benefits........................... 73,119 63,162 59,483
Amortization of deferred acquisition costs........ 24,898 19,850 16,602
Commissions and premium taxes (includes amounts to
affiliates: 1997--$4,928; 1996--$4,723; 1995--
$4,000; ......................................... 6,251 5,248 4,691
Other operating expense (includes amounts to af-
filiates: 1997--$3,217; 1996--$2,181; 1995--
$1,862;.......................................... 5,470 3,966 3,679
-------- -------- --------
Total benefits and expenses..................... 109,738 92,226 84,455
-------- -------- --------
Net operating income before income taxes........... 53,592 54,344 51,247
Income taxes....................................... 18,843 19,078 18,037
-------- -------- --------
Net income...................................... $ 34,749 $ 35,266 $ 33,210
======== ======== ========
</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,
1995
Balance at January 1,
1995................... $3,000 $137,915 $(12,378) $134,176 $262,713
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
YEAR ENDED DECEMBER 31,
1997
Net Income.............. 34,749 34,749
Dividends............... (26,000) (26,000)
Exercise of stock op-
tions.................. 519 519
Net Change in unrealized
investment gains (loss-
es).................... 10,240 10,240
------ -------- -------- -------- --------
Balance at December 31,
1997................... $3,000 $138,469 $ 14,700 $175,401 $331,570
====== ======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Net income.................................... $ 34,749 $ 35,266 $ 33,210
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits........... 17,878 20,692 22,011
Increase (decrease) in other policy benefits. 749 2,154 (614)
Deferral of policy acquisition costs......... (33,485) (33,744) (28,870)
Value of business acquired................... (10,000) 0 0
Amortization of deferred acquisition costs... 24,898 19,850 16,602
Change in accrued income taxes............... 10,212 (3,033) 2,644
Depreciation................................. 42 44 52
Realized (gains) losses on sale of
investments and properties.................. 5,365 (925) (1,441)
Other accruals and adjustments............... 1,817 (997) (3,525)
--------- -------- ---------
Cash provided from operations................. 52,225 39,307 40,069
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--sold... 113,035 15,246 149,076
Fixed maturities available for sale--
matured, called and repaid................. 66,469 44,523 50,659
Equity securities........................... 0 0 3,341
Other long-term investments................. 2,199 482 9,316
--------- -------- ---------
Total investments sold or matured.......... 181,703 60,251 212,392
Acquisition of investments:
Fixed maturities--available for sale........ (176,905) (68,214) (244,162)
Net increase in policy loans................ (1,485) (2,033) (2,121)
Other long-term investments................. (1,517) (1,183) (1,587)
--------- -------- ---------
Total acquisition of investments........... (179,907) (71,430) (247,870)
Net (increase) decrease in short-term invest-
ments....................................... (11,589) 2,389 (1,901)
Funds loaned to affiliates................... (24,080) (3,500) (21,000)
Funds repaid from affiliates................. 24,080 3,500 21,000
Disposition of properties.................... 0 34 6
Additions to properties...................... (27) (117) (33)
--------- -------- ---------
Cash used for investment activities........... (9,820) (8,873) (37,406)
Cash used for financing activities:
Cash dividends paid to shareholder........... (27,000) (27,500) (7,500)
Net receipts from deposit product operations. (12,521) (6,572) 3,343
--------- -------- ---------
Cash used for financing activities............ (39,521) (34,072) (4,157)
Increase (decrease) in cash................... 2,884 (3,638) (1,494)
Cash at beginning of year..................... 2,404 6,042 7,536
--------- -------- ---------
Cash at end of year........................... $ 5,288 $ 2,404 $ 6,042
========= ======== =========
</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. On March 3, 1998, United Management
distributed the Company to Torchmark and Liberty National Life Insurance
Company, a wholly owned subsidiary of Torchmark.
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.
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.
Existing computer programs of many businesses were developed with a two-
digit identification without consideration of the upcoming change in century
or millennium in the year 2000. Without addressing this issue, many computer
programs could fail or produce erroneous results, creating considerable
uncertainty and potentially adversely affecting the operations or business.
UILIC has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. UILIC is utilizing primarily internal staff for this conversion but
is also using outside consultants where necessary. The cost of this project,
which is immaterial to UILIC is expensed as incurred.
As a part of its activities, UILIC is engaged electronically with third-
party financial institutions and other various organizations which may have
computer systems which are not year 2000 compliant. To the degree possible,
UILIC is verifying that these third party business systems are currently
compliant or are in the process of becoming compliant. To the extent these
systems are not compliant there is no assurance that the potential
interruptions or cost to UILIC may not be significant.
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").
F-6
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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, 1997, 1996 and 1995 included approximately
$37,800, $37,600, and $38,000, 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.
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.
F-7
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
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 limited-payment contracts, acquisition costs
are amortized over the contract period. 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.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' 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)
Reporting Comprehensive Income (FASB Statement No. 130) is effective for
fiscal years beginning after December 15, 1997. Reclassification of prior
periods for comparative financial statements is required.
This document establishes standards for presentation of comprehensive
income, a concept of income which, in addition to net income, includes all
changes in the equity of a company other than contributions from or
distributions to shareholders. Comprehensive income is to be categorized into
certain components, each of which is to be displayed prominently in United
Investors basic financial statements.
The most significant aspect of this Statement on United Investors is the
separate disclosure of the change in unrealized gain or loss on its fixed
investments as a component of comprehensive income, rather than as a direct
adjustment of shareholders' equity.
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,
----------------------- ---------------------
1997 1996 1995 1997 1996
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance................. $34,537 $26,640 $29,636 $156,676 $ 154,222
</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,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Statutory net income............................. $34,537 $26,640 $ 29,636
Deferral of acquisition costs.................... 33,485 33,744 28,870
Amortization of acquisition costs................ (24,898) (19,850) (16,602)
Differences in policy liabilities................ (2,113) (4,361) (6,774)
Deferred income taxes............................ (6,053) (773) (1,389)
Other............................................ (209) (134) (531)
------- ------- --------
GAAP net income.................................. $34,749 $35,266 $ 33,210
======= ======= ========
</TABLE>
A reconciliation of United Investors' statutory shareholder's equity to GAAP
shareholder's equity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Statutory shareholder's equity.................... $156,676 $154,222
Differences in policy liabilities................. 9,540 20,834
Deferred acquisition costs and value of insurance
purchased........................................ 210,651 186,146
Deferred income taxes ............................ (52,639) (41,074)
Asset valuation reserve........................... 9,513 10,762
Nonadmitted assets................................ 1,850 1,856
Fair value adjustment on fixed maturities
available for sale............................... 23,043 3,703
Goodwill.......................................... 6,771 7,055
Due and deferred premiums......................... (30,334) (29,324)
Other............................................. (3,501) (2,118)
----------- -----------
GAAP shareholder's equity......................... $331,570 $ 312,062
=========== ===========
</TABLE>
F-9
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
The NAIC requires that a risk based capital formula 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.
NOTE 3--INVESTMENT OPERATIONS
Investment income is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fixed maturities................................... $46,000 $46,366 $43,482
Equity securities.................................. 0 0 76
Policy loans....................................... 1,107 1,001 851
Other long-term investments........................ 1,614 1,211 1,681
Short-term investments............................. 436 287 717
Interest and dividends from affiliates............. 2,863 2,847 3,058
------- ------- -------
52,020 51,712 49,865
Less investment expense............................ (506) (584) (509)
------- ------- -------
Net investment income.............................. $51,514 $51,128 $49,356
======= ======= =======
Analysis of gains (losses) from investments:
Realized investment gains (losses)
Fixed maturities................................. $(5,235) $ 925 $ 319
Equity securities................................ 0 0 1,276
Mutual funds..................................... (130) 0 (154)
------- ------- -------
Net realized gains (losses)....................... $(5,365) $ 925 $ 1,441
======= ======= =======
Analysis of change in unrealized investment gains
(losses):
Net change in unrealized investment gains (losses)
on equity securities before tax................... $ 0 $ 0 $ (438)
Net change in unrealized investment gains on fixed
maturities available for sale before tax.......... 19,340 (21,767) 58,321
Other.............................................. 1,799 861 3,602
Adjustment to deferred acquisition costs........... (5,387) 8,857 (23,532)
Applicable tax..................................... (5,512) 4,217 (13,283)
------- ------- -------
Net change in unrealized gains (losses) on equity
and fixed maturity securities available for sale.. $10,240 $(7,832) $24,670
======= ======= =======
</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
1997: COST GAINS LOSSES VALUE SHEET
- ----- --------- ---------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Fixed maturities available
for sale:
Bonds:
U.S. Government direct
obligations and agen-
cies.................... $22,035 $ 857 $ 0 $22,892 $22,892
GNMA's................... 124,549 5,992 (146) 130,395 130,395
Mortgage-backed
securities, GNMA
collateral.............. 23,125 591 (3) 23,713 23,713
Other mortgage-backed se-
curities................ 20,980 916 0 21,896 21,896
States, municipalities
and political
subdivisions............ 28,603 517 0 29,120 29,120
Foreign governments...... 3,298 135 0 3,433 3,433
Public utilities......... 37,189 1,504 (39) 38,654 38,654
Industrial and miscella-
neous................... 352,821 12,986 (267) 365,540 365,540
------- ------ ------ ------- -------
Total fixed maturities... 612,600 23,498 (455) 635,643 635,643
======= ====== ====== ======= =======
<CAPTION>
1996:
- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities available
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 se-
curities................ 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
======= ====== ====== ======= =======
</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, 1997
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................................. $ 4,751 $ 4,824
Due after one year through five years................... 99,621 102,200
Due after five years through ten years.................. 202,692 209,387
Due after ten years..................................... 131,058 137,232
-------- --------
438,122 453,643
Mortgage- and asset-backed securities.................... 174,478 182,000
-------- --------
$612,600 $635,643
======== ========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $113,035 in
1997, $15,246 in 1996, and $149,076 in 1995. Gross gains realized on these
sales were $112 in 1997, $749 in 1996, and $3,157 in 1995. Gross losses on
these sales were $5,716 in 1997, $0 in 1996, and $2,126 in 1995.
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>
1997 1996 1995
--------------------- --------------------- ---------------------
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................... $169,986 $16,160 $144,716 $18,679 $153,677 $20,983
Additions:
Deferred during peri-
od:
Commissions........... 27,664 0 28,492 0 24,258 0
Other expenses........ 5,821 0 5,252 0 4,611 0
-------- ------- -------- ------- -------- -------
Total deferred....... 33,485 0 33,744 0 28,869 0
Value of insurance
purchased............ 0 21,305 0 0 0 0
Adjustment attributable
to unrealized invest-
ment loss (1)......... 0 0 8,857 0 0 0
-------- ------- -------- ------- -------- -------
Total additions...... 33,485 21,305 42,601 0 28,869 0
Deductions:
Amortized during peri-
od................... (21,019) (3,711) (16,894) (2,519) (14,062) (2,304)
Adjustment attribut-
able to unrealized
investment gains (1). (5,387) 0 0 0 (23,532) 0
Adjustment attribut-
able to realized
investment gains (1). (168) 0 (437) 0 (236) 0
-------- ------- -------- ------- -------- -------
Total deductions..... (26,574) (3,711) (17,331) (2,519) (37,830) (2,304)
-------- ------- -------- ------- -------- -------
Balance at end of year.. $176,897 $33,754 $169,986 $16,160 $144,716 $18,679
======== ======= ======== ======= ======== =======
</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 $938, $1,100, and $1,300 for the years
ended December 31, 1997, 1996 and 1995, respectively. The average interest
accrual rates used were 6.29%, 6.44% and 6.59%, respectively. The estimated
amount of the unamortized value of business purchased balance at December 31,
1997 to be amortized during each of the next five years is: 1998, $1,640;
1999, $1,443; 2000, $1,270; 2001, $1,118; 2002, $984.
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,
1997 1996
------------------- -------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Data processing equipment............... $ 216 $ 161 $ 192 $ 147
Transportation equipment................ 132 55 132 37
Furniture and office equipment ......... 922 913 919 903
------ ------ ------ ------
Total................................. $1,270 $1,129 $1,243 $1,087
====== ====== ====== ======
</TABLE>
Depreciation expense on property and equipment used in the business was $42,
$44 and $52 in each of the years 1997, 1996, and 1995, 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, 1997 is as follows:
INDIVIDUAL LIFE INSURANCE
Interest Assumptions:
<TABLE>
<CAPTION>
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
<S> <C> <C>
1962-1997 3% level to 6% level 10%
1986-1992 7.00% graded to 6.00% 21%
1962-1985 8.50% graded to 6.00% 5%
1981-1985 8.50% graded to 7.00% 4%
1984-1997 Interest sensitive 60%
----
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,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net operating income before income taxes......... $18,843 $19,078 $18,037
Shareholder's equity:
Unrealized gains (losses)....................... 5,512 (4,217) 13,283
Tax basis compensation expense in excess of
amounts recognized for financial reporting
purposes from the exercise of stock options.... (519) 0 (35)
Other........................................... 1 (152) 1
------- ------- -------
$23,837 $14,709 $31,286
======= ======= =======
</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,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current income tax expense............................. $12,790 $18,305 $16,648
Deferred income tax expense............................ 6,053 773 1,389
------- ------- -------
$18,843 $19,078 $18,037
======= ======= =======
</TABLE>
In 1997, 1996, and 1995, 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 1997,
1996 and 1995 as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes.................. $18,757 35% $19,020 35% $17,936 35%
Increase (reduction) in income taxes
resulting from:
Tax-exempt investment income.......... (18) 0 (38) 0 (102) 0
Purchase accounting differences....... 99 0 99 0 99 0
Other................................. 5 0 (3) 0 104 0
------- --- ------- --- ------- ---
Income taxes........................... $18,843 35% $19,078 35% $18,037 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,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits and unearned and advance
premiums.......................................... $ 4,777 $ 5,936
Present value of future policy surrender charges... 13,925 9,636
Other liabilities, principally due to the current
nondeductibilty for tax purposes of certain
accrued expenses.................................. 203 147
----------- -----------
Total gross deferred tax assets.................... 18,905 15,719
----------- -----------
Net deferred tax assets............................ 18,905 15,719
----------- -----------
Deferred tax liabilities:
Deferred acquisition costs......................... 62,863 53,625
Unrealized investment gains........................ 7,914 2,402
Other.............................................. 767 766
----------- -----------
Total gross deferred tax liabilities............... 71,544 56,793
----------- -----------
Net deferred tax liability......................... 52,639 41,074
=========== ===========
</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 exempt 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>
1997.................................................. $44 $118
1996.................................................. 41 115
1995.................................................. 39 75
</TABLE>
Net periodic pension cost for the defined benefit plan which covers United
Investors' full-time exempt employees has been calculated on the projected
unit credit actuarial cost method in accordance with SFAS 87,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
F-16
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 8--POSTRETIREMENT BENEFITS (CONTINUED)
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, 1997, and $55 at December 31,
1996. United Investors is one of several sponsors of the defined benefit plan.
The total unfunded plan liability recorded at December 31, 1997 was $459. 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, 1997, 1996 and
1995 was $1, $5 and $3, 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 $109 and $122 as of December 31, 1997
and 1996, respectively. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% and the health care cost trend
rate was 9%, 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 $29,600, $30,200, and
$25,700 for the years ended December 31, 1997, 1996, and 1995, respectively.
United Investors was charged for space, equipment, and services provided by
an affiliate amounting to $1,852 in 1997, $1,797 in 1996 and $1,706 in 1995.
Torchmark performed certain administrative services for United Investors for
which it charged $468 in 1997, $384 in 1996 and $156 in 1995.
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 $2,838 at December 31, 1997 and 1996, 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. In
1997, United Investors loaned Torchmark, Liberty National and United American
$8,060, $10,520 and $5,500 respectively at an interest rate of 5.5% all of
which were repaid prior to December 31, 1997. Interest income related to these
loans totaling $1, $2, and $22 respectively are included in the accompanying
financial statements.
F-17
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
Effective January 1, 1997 United Investors assumed a block of annuity
products totaling $200,321 from United American Insurance Company (United
American), an affiliated company, on a 100% funds withheld coinsurance basis.
In connection with this transaction United Investors paid a ceding fee to
United American totaling $21,305, $10,000 of which was paid in cash, and
recorded a due from affiliates totaling $189,016. As of December 31, 1997, the
funds withheld balance totaled $190,235 and is included in due from
affiliates. Interest income on funds withheld at December 31, 1997 totaled
$11,876 and is included in other income. The reserve for annuity balances
assumed in connection with this transaction totaled $210,276 as of December
31, 1997.
United Investors serves as sponsor to four separate accounts and depositor
to two separate accounts of the underlying investment fund in connection with
its variable product business. At December 31, 1997 and 1996 United Investors
had investments of $16,542 and $14,000, 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 $5,946 and $5,159 at
December 31, 1997 and 1996. 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 $500 per life. Life insurance ceded represented 2%
of total life insurance in force at December 31, 1997 and 4% of premium income
for 1997. 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. Except as disclosed in Note 9, United Investors does
not assume insurance risks of other companies.
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 GAAP basis over that determined on a statutory basis.
Restricted net assets at December 31, 1997 in compliance with all regulations
were $177,894.
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 (26%); securities of state and municipal governments (4%)
investment-grade corporate bonds (53%), non government guaranteed mortgaged
backed securities (3%), United Funds (3%); and policy loans (3%) which are
secured by the underlying insurance policy value. The balance of the portfolio
is invested in short-term investments (2%), and non investment grade
securities (6%).
F-18
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1997, 1% or more of the
portfolio was invested in the following industries: financial services (21%);
public utilities (6%); chemicals and allied products (5%); transportation
(5%); manufacturing (4%); consumer goods (4%); media and communications (3%);
services (3%); machinery and equipment (2%); petroleum (2%); paper and allied
products (1%); and assets-backed securities (1%). At the end of 1997, 6% of
the carrying value of securities was rated below investment grade. Par value
of these investments was $42,275, amortized cost was $43,075, and market value
was $44,076. 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
The following table summarizes United Investors' noncash transactions, which
are not reflected on the statement of cash flow as required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Due from affiliates.............................. 189,016 0 0
Value of business acquired....................... 11,305 0 0
Future policy benefits........................... 200,321 0 0
The following table summarizes certain amounts paid during the period:
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Taxes paid....................................... $8,631 $22,111 $15,393
</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, 1997 and the related statements of
operations and changes in net assets for each of the years in the three year
period ended December 31, 1997. 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, 1997 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, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
April 9, 1998
F-20
<PAGE>
UNITED INVESTORS LIFE VARIABLE ACCOUNT
BALANCE SHEET
AS OF DECEMBER 31, 1997
<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)........ $1,179,053 $3,658,783 $4,748,450 $23,454,135 $17,308,607 $4,398,337 $4,852,721 $1,935,111 $ 698,570 $ 542,967
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total assets.... 1,179,053 3,658,783 4,748,450 23,454,135 17,308,607 4,398,337 4,852,721 1,935,111 698,570 542,967
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor
(Note D)........ 197 663 864 4,108 3,040 788 852 343 126 97
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total
liabilities.... 197 663 864 4,108 3,040 788 852 343 126 97
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Net assets
(Note C)....... $1,178,856 $3,658,120 $4,747,586 $23,450,027 $17,305,567 $4,397,549 $4,851,869 $1,934,768 $ 698,444 $ 542,870
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Equity:
Equity of
Sponsor........ $ 0 $ 578,729 $1,296,077 $ 2,259,525 $ 2,717,121 $ 91,897 $ 145,238 $ 103,682 $ 621,618 $ 0
Equity of
contract
owners......... 1,178,856 3,079,391 3,451,509 21,190,502 14,588,446 4,305,652 4,706,631 1,831,086 76,826 542,870
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------- ---------
Total equity.... $1,178,856 $3,658,120 $4,747,586 $23,450,027 $17,305,567 $4,397,549 $4,851,869 $1,934,768 $ 698,444 $ 542,870
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Accumulation
units
outstanding.... 717,690 1,620,079 1,831,522 5,189,157 6,369,083 3,110,446 2,171,399 1,212,945 561,795 449,482
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
Net asset value
per unit....... $ 1.642570 $ 2.257989 $ 2.592154 $ 4.519044 $ 2.717121 $ 1.413800 $ 2.234444 $ 1.595099 $1.243237 $1.207770
========== ========== ========== =========== =========== ========== ========== ========== ========= =========
<CAPTION>
SCIENCE AND
TECHNOLOGY TOTAL
----------- -----------
<S> <C> <C>
Assets:
Investments in
Mutual Funds
(Note B)........ $ 707,495 $63,484,229
----------- -----------
Total assets.... 707,495 63,484,229
----------- -----------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor
(Note D)........ 122 11,200
----------- -----------
Total
liabilities.... 122 11,200
----------- -----------
Net assets
(Note C)....... $ 707,373 $63,473,029
=========== ===========
Equity:
Equity of
Sponsor........ $ 578,637 $ 8,392,524
Equity of
contract
owners......... 128,736 55,080,505
----------- -----------
Total equity.... $ 707,373 $63,473,029
=========== ===========
Accumulation
units
outstanding.... 611,241 23,844,839
=========== ===========
Net asset value
per unit....... $1.157274
===========
</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, 1997
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH TERM
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED BOND
---------- ---------- ---------- ----------- ----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D). $ 65,646 $ 219,536 $ 439,614 $ 1,952,411 $ 1,121,249 $ 389,188 $1,023,553 $151,208 $ 41,702
Expenses paid to
Sponsor (Note D):
Mortality and ex-
pense risk
charge........... 7,862 21,800 27,223 133,690 94,055 23,451 24,261 10,070 4,023
Contract maintenance charges:
Sales expense.... 5,217 13,724 15,099 78,456 68,489 21,057 22,126 8,883 346
Underwriting and
issue expense... 714 1,911 2,087 10,312 8,463 2,575 2,748 1,060 41
Premium taxes.... 1,788 4,778 5,218 25,780 21,157 6,439 6,869 2,647 102
Cost of insur-
ance............ 10,189 29,251 23,853 120,492 101,444 29,451 33,011 14,030 469
Administrative
expense......... 1,301 3,868 5,256 28,471 20,875 5,352 6,543 2,467 77
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Total........... 27,071 75,332 78,736 397,201 314,483 88,325 95,558 39,157 5,058
Net investment in-
come.............. 38,575 144,204 360,878 1,555,210 806,766 300,863 927,995 112,051 36,644
Realized investment
gains
distributed to ac-
counts............ 0 20,434 36,774 336,615 317,410 48,195 56,090 12,067 580
Unrealized invest-
ment gains........ 0 83,897 122,364 1,918,342 2,038,193 143,422 48,676 117,939 2,333
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net gain on invest-
ments............. 0 104,331 159,138 2,254,957 2,355,603 191,617 104,766 130,006 2,913
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net increase in net
assets from opera-
tions............. 38,575 248,535 520,016 3,810,167 3,162,369 492,480 1,032,761 242,057 39,557
Premium deposits &
net
transfers*........ (401,330) 66,799 125,520 1,044,490 1,738,685 872,193 663,286 314,837 5,231
Investment by
sponsor
(Note E).......... 0 (500,000) 0 0 0 0 0 0 0
Transfer to sponsor
for benefits and
terminations...... (143,495) (174,862) (225,612) (1,196,531) (387,660) (141,228) (110,491) (18,660) (4,242)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Total increase (de-
crease)... (506,250) (359,528) 419,924 3,658,126 4,513,394 1,223,445 1,585,556 538,234 40,546
Net assets at
beginning of
period............ 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
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net assets at end
of period
(Note C).......... $1,178,856 $3,658,120 $4,747,586 $23,450,027 $17,305,567 $4,397,549 $4,851,869 $1,934,768 $698,444
========== ========== ========== =========== =========== ========== ========== ========== ========
<CAPTION>
ASSET SCIENCE AND
STRATEGY TECHNOLOGY TOTAL
-------- ----------- ------------
<S> <C> <C> <C>
Dividend income
(Note B, D). $ 60,922 $ 4,763 $ 5,469,792
Expenses paid to
Sponsor (Note D):
Mortality and ex-
pense risk
charge........... 3,016 2,811 352,262
Contract maintenance charges:
Sales expense.... 3,622 170 237,189
Underwriting and
issue expense... 428 20 30,359
Premium taxes.... 1,071 50 75,899
Cost of insur-
ance............ 7,246 151 369,587
Administrative
expense......... 413 27 74,650
-------- ----------- ------------
Total........... 15,796 3,229 1,139,946
Net investment in-
come.............. 45,126 1,534 4,329,846
Realized investment
gains
distributed to ac-
counts............ 1,582 3,802 833,549
Unrealized invest-
ment gains........ 4,673 78,192 4,558,031
-------- ----------- ------------
Net gain on invest-
ments............. 6,255 81,994 5,391,580
-------- ----------- ------------
Net increase in net
assets from opera-
tions............. 51,381 83,528 9,721,426
Premium deposits &
net
transfers*........ 15,824 123,845 4,569,380
Investment by
sponsor
(Note E).......... 0 500,000 0
Transfer to sponsor
for benefits and
terminations...... 0 0 (2,402,781)
-------- ----------- ------------
Total increase (de-
crease)... 67,205 707,373 11,888,025
Net assets at
beginning of
period............ 475,665 0 51,585,004
-------- ----------- ------------
Net assets at end
of period
(Note C).......... $542,870 $707,373 $63,473,029
======== =========== ============
</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, 1996
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH TERM
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED BOND
---------- ---------- ---------- ----------- ----------- ------------- ---------- ---------- --------
<S> <C> <C> <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 $ 77,301 $ 34,473
Expenses paid to
Sponsor (Note D):
Mortality and
expense risk
charge........... 8,421 23,470 23,955 107,839 65,099 15,967 16,559 6,612 3,816
Contract
maintenance
charges:
Sales expense.... 3,990 14,800 14,613 70,974 49,893 14,277 13,709 5,350 321
Underwriting and
issue expense.... 565 2,060 2,011 9,416 6,226 1,730 1,669 636 38
Premium taxes.... 1,412 5,149 5,028 23,540 15,563 4,324 4,173 1,591 95
Cost of
insurance........ 8,112 31,858 24,490 111,721 80,172 21,218 20,414 9,254 386
Administrative
expense.......... 1,155 4,040 5,117 24,962 14,975 3,518 3,620 1,370 48
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Total........... 23,655 81,377 75,214 348,452 231,928 61,034 60,144 24,813 4,704
Net investment in-
come (loss)...... 43,970 165,721 289,993 1,912,021 78,342 (20,646) 68,730 52,488 29,769
Realized
investment gains
distributed to
accounts.......... 0 10,428 12,266 154,511 149,372 18,162 43,253 5,640 238
Unrealized
investment gains
(losses).......... 0 (127,873) 94,807 (280,931) 1,493,351 319,036 (14,604) 38,817 (10,782)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net gain (loss) on
investments....... 0 (117,445) 107,073 (126,420) 1,642,723 337,198 28,649 44,457 (10,544)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net increase in
net assets from
operations........ 43,970 48,276 397,066 1,785,601 1,721,065 316,552 97,379 96,945 19,225
Premium deposits
and net
transfers*........ 345,070 83,031 237,801 1,807,736 2,428,537 974,379 1,328,646 450,153 47,604
Transfer to
Sponsor for
benefits and
terminations...... (33,896) (100,872) (260,183) (380,062) (190,414) (40,875) (23,937) (9,567) 0
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Total increase ... 355,144 30,435 374,684 3,213,275 3,959,188 1,250,056 1,402,088 537,531 66,829
Net assets at
beginning of
period............ 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
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net assets at end
of period
(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
========== ========== ========== =========== =========== ========== ========== ========== ========
<CAPTION>
ASSET
STRATEGY TOTAL
-------- ------------
<S> <C> <C>
Dividend income
(Note B, D)....... $ 16,233 $ 3,547,942
Expenses paid to
Sponsor (Note D):
Mortality and
expense risk
charge........... 2,278 274,016
Contract
maintenance
charges:
Sales expense.... 513 188,440
Underwriting and
issue expense.... 60 24,411
Premium taxes.... 151 61,026
Cost of
insurance........ 957 308,582
Administrative
expense.......... 145 58,950
-------- ------------
Total........... 4,104 915,425
Net investment in-
come (loss)...... 12,129 2,632,517
Realized
investment gains
distributed to
accounts.......... 50 393,920
Unrealized
investment gains
(losses).......... 7,307 1,519,128
-------- ------------
Net gain (loss) on
investments....... 7,357 1,913,048
-------- ------------
Net increase in
net assets from
operations........ 19,486 4,545,565
Premium deposits
and net
transfers*........ 393,715 8,096,672
Transfer to
Sponsor for
benefits and
terminations...... 0 (1,039,806)
-------- ------------
Total increase ... 413,201 11,602,431
Net assets at
beginning of
period............ 62,464 39,982,573
-------- ------------
Net assets at end
of period
(Note C).......... $475,665 $51,585,004
======== ============
</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, 1995
<TABLE>
<CAPTION>
MONEY HIGH
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED
---------- ---------- ---------- ------------ ----------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D).... $ 56,929 $ 248,458 $ 338,410 $ 2,732,341 $ 227,863 $ 27,746 $ 55,374 $ 32,244
Expenses paid to
Sponsor
(Note D):
Mortality and
expense risk
charge......... 6,342 21,939 22,070 82,847 44,350 9,837 8,160 4,092
Contract maintenance charges:
Sales expense.. 3,370 13,553 13,197 51,332 31,549 6,812 5,394 3,419
Underwriting
and issue
expense........ 507 1,882 1,810 7,018 3,947 840 669 409
Premium taxes.. 1,265 4,705 4,523 17,544 9,869 2,098 1,673 1,024
Cost of insur-
ance........... 7,215 31,044 25,032 84,952 53,749 10,465 9,020 6,425
Administrative
expense........ 1,211 3,730 4,468 19,913 9,807 1,750 1,234 658
---------- ---------- ---------- ------------ ----------- ---------- ---------- --------
Total......... 19,910 76,853 71,100 263,606 153,271 31,802 26,150 16,027
Net investment
income (loss).. 37,019 171,605 267,310 2,468,735 74,592 (4,056) 29,224 16,217
Realized investment gains
distributed to
accounts........ 0 9,293 7,245 112,968 62,220 3,463 14,474 2,146
Unrealized
investment gains
(losses)........ 0 421,180 263,621 1,651,730 1,631,957 77,537 295,990 112,105
---------- ---------- ---------- ------------ ----------- ---------- ---------- --------
Net gain (loss)
on investments.. 0 430,473 270,866 1,764,698 1,694,177 81,000 310,464 114,251
---------- ---------- ---------- ------------ ----------- ---------- ---------- --------
Net increase
(decrease) in
net assets from
operations...... 37,019 602,078 538,176 4,233,433 1,768,769 76,944 339,688 130,468
Premium deposits
and net
transfers*...... (730,542) 259,777 200,825 1,472,895 1,704,095 908,880 962,209 269,063
Transfer to
Sponsor for
benefits and
terminations.... (13,225) (53,086) (82,898) (159,853) (46,361) (2,793) (1,955) (1,442)
---------- ---------- ---------- ------------ ----------- ---------- ---------- --------
Total increase
(decrease)...... (706,748) 808,769 656,103 5,546,475 3,426,503 983,031 1,299,942 398,089
Net assets at
beginning of
period.......... 2,036,710 3,178,444 3,296,875 11,032,151 5,406,482 941,017 564,283 460,914
---------- ---------- ---------- ------------ ----------- ---------- ---------- --------
Net assets at
end of period
(Note C)........ $1,329,962 $3,987,213 $3,952,978 $ 16,578,626 $ 8,832,985 $1,924,048 $1,864,225 $859,003
========== ========== ========== ============ =========== ========== ========== ========
<CAPTION>
LIMITED
TERM ASSET
BOND STRATEGY TOTAL
--------- --------- ------------
<S> <C> <C> <C>
Dividend income
(Note B, D).... $ 32,472 $ 948 $ 3,752,785
Expenses paid to
Sponsor
(Note D):
Mortality and
expense risk
charge......... 3,367 93 203,097
Contract maintenance charges:
Sales expense.. 182 85 128,893
Underwriting
and issue
expense........ 21 10 17,113
Premium taxes.. 53 25 42,779
Cost of insur-
ance........... 319 103 228,324
Administrative
expense........ 48 31 42,850
--------- --------- ------------
Total......... 3,990 347 663,056
Net investment
income (loss).. 28,482 601 3,089,729
Realized investment gains
distributed to
accounts........ 348 60 212,217
Unrealized
investment gains
(losses)........ 41,691 (1,267) 4,494,544
--------- --------- ------------
Net gain (loss)
on investments.. 42,039 (1,207) 4,706,761
--------- --------- ------------
Net increase
(decrease) in
net assets from
operations...... 70,521 (606) 7,796,490
Premium deposits
and net
transfers*...... 5,039 63,070 5,115,311
Transfer to
Sponsor for
benefits and
terminations.... (3,137) 0 (364,750)
--------- --------- ------------
Total increase
(decrease)...... 72,423 62,464 12,547,051
Net assets at
beginning of
period.......... 518,646 0 27,435,522
--------- --------- ------------
Net assets at
end of period
(Note C)........ $591,069 $62,464 $39,982,573
========= ========= ============
</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 eleven 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, an asset
strategy portfolio and a science and technology portfolio (established during
1997). 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>
1997
----
INVESTMENT PORTFOLIO SHARES REINVESTED DIVIDEND INCOME
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market.................................. 65,646 $ 65,646
Bond.......................................... 40,893 219,536
High Income................................... 92,742 439,614
Growth........................................ 257,986 1,952,411
Income........................................ 93,738 1,121,249
International................................. 60,961 389,188
Small Cap..................................... 122,852 1,023,553
Balanced...................................... 22,340 151,208
Limited Term Bond............................. 8,038 41,702
Asset Strategy................................ 11,723 60,922
Science and Technology........................ 825 4,763
</TABLE>
<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
<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
</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
1997 MARKET BOND INCOME GROWTH INCOME INTERNATIONAL SMALL CAP BALANCED BOND
- ---- ---------- ---------- ---------- ----------- ----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost to:
Contract owners. $1,682,536 $2,746,018 $2,941,127 $11,741,205 $ 9,848,127 $3,656,142 $3,401,680 $1,437,049 $ 77,162
Sponsor......... 0 0 500,000 500,000 1,000,000 65,000 65,000 65,000 500,000
Adjustment for
market
appreciation and
reinvested
dividends........ 770,579 2,096,593 2,893,521 15,984,107 7,972,881 1,044,299 1,704,473 543,203 144,415
Deductions:
Morality & ex-
pense risk
charge.......... (86,818) (153,065) (171,133) (582,764) (255,901) (50,876) (49,952) (21,546) (13,208)
Contract mainte-
nance charges:
Sales expense... (40,103) (84,241) (96,724) (362,376) (168,604) (42,210) (41,253) (17,668) (849)
Underwriting and
issue expense... (6,161) (12,409) (14,345) (51,357) (21,109) (5,152) (5,089) (2,107) (100)
Premium taxes... (15,403) (31,022) (35,865) (128,398) (52,772) (12,880) (12,722) (5,266) (250)
Cost of insur-
ance............ (85,511) (188,344) (184,805) (613,152) (268,402) (61,212) (62,469) (29,724) (1,174)
Administrative
expense......... (15,069) (26,635) (36,561) (141,357) (51,853) (10,666) (11,416) (4,504) (173)
Loan interest... (8,915) (2,310) (2,937) (9,063) (2,053) (195) (122) (10) 0
Benefits & ter-
minations....... (1,016,279) (686,465) (1,044,692) (2,886,818) (694,747) (184,701) (136,261) (29,659) (7,379)
---------- ---------- ---------- ----------- ----------- ---------- ---------- ---------- --------
Net assets....... $1,178,856 $3,658,120 $4,747,586 $23,450,027 $17,305,567 $4,397,549 $4,851,869 $1,934,768 $698,444
========== ========== ========== =========== =========== ========== ========== ========== ========
<CAPTION>
1996
- ----
<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>
ASSET SCIENCE AND
1997 STRATEGY TECHNOLOGY
- ---- --------- -----------
<S> <C> <C> <C>
Cost to:
Contract owners. $472,609 $123,845
Sponsor......... 0 500,000
Adjustment for
market
appreciation and
reinvested
dividends........ 90,508 86,757
Deductions:
Morality & ex-
pense risk
charge.......... (5,387) (2,811)
Contract mainte-
nance charges:
Sales expense... (4,220) (170)
Underwriting and
issue expense... (498) (20)
Premium taxes... (1,247) (50)
Cost of insur-
ance............ (8,306) (151)
Administrative
expense......... (589) (27)
Loan interest... 0 0
Benefits & ter-
minations....... 0 0
--------- ----------- ---
Net assets....... $542,870 $707,373
========= =========== ===
<CAPTION>
1996
- ----
<S> <C> <C> <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
=========
</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 net assets; High Income Portfolio
.15% of net assets; Growth Portfolio .20% of net assets; Income Portfolio .20%
of net assets; International Portfolio .30% of net assets; Small Cap Portfolio
.35% of net assets; Balanced Portfolio .10% of net assets; Limited Term Bond
Portfolio .05% of net assets; Asset Strategy Portfolio .30% of net assets;
Science and Technology .20% 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%; from $750 to $1,500 million--.49%; from $1,500 to
$2,250 million--.47%; over $2,250 million--.45%. 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 net
assets; Bond Portfolio .54% of net assets; High Income Portfolio .66% of net
assets; Growth Portfolio .71% of net assets; Income Portfolio .71% of net
assets; International Portfolio .81% of net assets; Small Cap Portfolio .86%
of net assets; Balanced Portfolio .61% of net assets; and Limited Term Bond
Portfolio .56% 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 net assets; High Income Portfolio .15%
of net assets; Growth Portfolio .20% of net assets; Income Portfolio .20% of
net assets; International Portfolio .30% of net assets; Small Cap Portfolio
.35% of net assets; Balanced Portfolio .10% of net assets; and Limited Term
Bond Portfolio .05% 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%.
The amount of these fees have been:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Money Market....................................... 6,838 $ 7,393 $ 7,332
Bond............................................... 19,669 20,785 19,427
High Income........................................ 28,908 26,544 24,027
Growth............................................. 155,740 126,418 96,300
Income............................................. 108,327 75,558 51,250
International...................................... 31,148 20,151 12,098
Small Cap.......................................... 33,685 23,128 10,260
Balanced........................................... 9,823 6,658 3,956
Limited Term Bond.................................. 3,732 3,444 3,195
Asset Strategy..................................... 4,006 2,492 158
Science and Technology............................. 1,931 0 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 weighted average unit of the Life Variable Separate
Account outstanding throughout each period follows.
<TABLE>
<CAPTION>
LIMITED
MONEY HIGH SMALL TERM ASSET SCIENCE AND
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL CAP BALANCED BOND STRATEGY TECHNOLOGY*
------ ------ ------ ------ ------ ------------- ------ -------- ------- -------- -----------
1997
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income.. $ 0.08 $ 0.13 $ 0.24 $ 0.37 $ 0.18 $ 0.13 $ 0.49 $ 0.13 $0.07 $ 0.14 $0.01
Expenses......... 0.03 0.04 0.04 0.08 0.05 0.03 0.05 0.03 0.01 0.04 0.01
------ ------ ------ ------ ------ ------ ------ ------ ----- ------ -----
Investment in-
come--net........ 0.05 0.09 0.20 0.29 0.13 0.10 0.44 0.10 0.06 0.10 0.00
Net realized and
unrealized in-
vestment gains... 0.00 0.06 0.09 0.43 0.38 0.07 0.05 0.11 0.01 0.01 0.14
Premium deposits
and net
transfers....... (0.49) 0.04 0.07 0.20 0.28 0.30 0.32 0.28 0.01 0.04 0.22
Transfer to spon-
sor for benefits
and terminations. (0.17) (0.10) (0.12) (0.23) (0.06) (0.05) (0.05) (0.02) (0.01) 0.00 0.00
------ ------ ------ ------ ------ ------ ------ ------ ----- ------ -----
Increase (de-
crease) in net
asset value...... (0.61) 0.09 0.24 0.69 0.73 0.42 0.76 0.47 0.07 0.15 0.36
Net asset value,
beginning of the
period........... 1.83 2.06 2.33 3.87 2.36 1.37 2.08 1.64 1.18 1.37 0.00
------ ------ ------ ------ ------ ------ ------ ------ ----- ------ -----
Net asset value,
end of the peri-
od............... $ 1.22 $ 2.15 $ 2.57 $ 4.56 $ 3.09 $ 1.79 $ 2.84 $ 2.11 $1.25 $ 1.52 $0.36
====== ====== ====== ====== ====== ====== ====== ====== ===== ====== =====
<CAPTION>
1996
- ----
<S> <C> <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 in-
vestment
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 (de-
crease) in
net asset value.. 0.9 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 peri-
od............... $ 1.83 $ 2.06 $ 2.33 $ 3.87 $ 2.36 $ 1.37 $ 2.08 $ 1.64 $1.18 $ 1.37
====== ====== ====== ====== ====== ====== ====== ====== ===== ======
</TABLE>
- ----
* Established in 1997
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 ASSET
MARKET BOND INCOME GROWTH INCOME INTERNATIONAL CAP BALANCED BOND STRATEGY
------ ----- ------ ------ ------ ------------- ----- -------- ------- --------
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-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, Asset Strategy and
Science and Technology portfolios of the Fund, and they take into account an
average of the daily investment management fee currently paid by those eleven
portfolios in 1997 (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 eleven portfolios in 1997 (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
also take into account the Service Fee (at an annual rate of 0.25%) under the
Service Plan adopted August 31, 1998 pursuant to Rule 12b-1 under the
Investment Company Act of 1940.
Taking into account the mortality and expense risk charge of .60% and the
charge for investment management fees, expenses and "12b-1" service 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 -1.62%, 2.38%,
6.38%, 10.38% 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 SINGLE PREMIUM PAYMENT___$62,365 MINIMUM DEATH BENEFIT
MAXIMUM COST OF INSURANCE AND ADMINISTRATIVE CHARGES(1)
<TABLE>
<CAPTION>
PREMIUM ASSUMING HYPOTHETICAL GROSS
END OF PAYMENTS PLUS ANNUAL RATE OF RETURN OF:
POLICY INTEREST --------------------------------
YEAR AT 5% PER YEAR 0% 4% 8% 12%
- ------ -------------- -- -- -- ---
DEATH BENEFITS(2)
<S> <C> <C> <C> <C> <C>
1............................... $62,365 $62,365 $62,365 $ 62,365
2............................... 62,365 62,365 62,365 62,365
3............................... 62,365 62,365 62,365 62,365
4............................... 62,365 62,365 62,365 62,365
5............................... 62,365 62,365 62,365 62,365
10.............................. 62,365 62,365 62,365 62,365
20.............................. 62,365 62,365 62,365 89,575
30.............................. (3) 62,365 62,365 179,934
Age 65.......................... (3) 62,365 62,365 179,934
<CAPTION>
POLICY VALUES(2)
<S> <C> <C> <C> <C> <C>
1............................... $10,500 $ 9,838 $10,238 $10,638 $ 11,038
2............................... 11,025 9,426 10,220 11,045 11,903
3............................... 11,576 9,015 10,195 11,473 12,852
4............................... 12,155 8,602 10,162 11,922 13,896
5............................... 12,763 8,188 10,121 12,392 15,041
10.............................. 16,289 6,039 9,730 15,081 22,702
20.............................. 26,533 2,103 8,857 24,304 57,054
30.............................. 43,219 (3) 5,106 40,505 147,487
Age 65.......................... 43,219 (3) 5,106 40,505 147,487
<CAPTION>
SURRENDER VALUES(2)
<S> <C> <C> <C> <C> <C>
1............................... $ 9,038 $ 9,438 $ 9,838 $ 10,238
2............................... 8,726 9,520 10,345 11,203
3............................... 8,415 9,595 10,873 12,252
4............................... 8,102 9,662 11,422 13,396
5............................... 7,788 9,721 11,992 14,641
10.............................. 6,039 9,730 15,081 22,702
20.............................. 2,103 8,857 24,304 57,054
30.............................. (3) 5,106 40,505 147,487
Age 65.......................... (3) 5,106 40,505 147,487
</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 have
lapsed.
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 SINGLE PREMIUM PAYMENT $126,599 MINIMUM DEATH BENEFIT
CURRENT COST OF INSURANCE AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
PREMIUM ASSUMING HYPOTHETICAL GROSS
END OF PAYMENTS PLUS ANNUAL RATE OF RETURN OF:
POLICY INTEREST -----------------------------------
YEAR AT 5% PER YEAR 0% 4% 8% 12%
- ------ -------------- -- -- -- ---
DEATH BENEFITS(1)
<S> <C> <C> <C> <C> <C>
1............................ $126,599 $126,599 $126,599 $126,599
2............................ 126,599 126,599 126,599 126,599
3............................ 126,599 126,599 126,599 126,599
4............................ 126,599 126,599 126,599 126,599
5............................ 126,599 126,599 126,599 126,599
10........................... 126,599 126,599 126,599 143,779
20........................... 126,599 126,599 143,988 325,142
30........................... (2) 126,599 254,371 832,329
Age 65....................... 126,599 126,599 126,599 143,779
<CAPTION>
POLICY VALUES(1)
<S> <C> <C> <C> <C> <C>
1............................ $ 52,500 $ 49,190 $ 51,190 $ 53,190 $ 55,190
2............................ 55,125 47,275 51,258 55,402 59,706
3............................ 57,881 45,333 51,282 57,724 64,678
4............................ 60,775 43,360 51,259 60,166 70,163
5............................ 63,814 41,351 51,185 62,737 76,220
10........................... 81,445 30,446 49,771 77,859 117,851
20........................... 132,665 3,097 42,501 134,568 303,871
30........................... 216,097 (2) (2) 242,258 792,694
Age 65....................... 81,445 30,446 49,771 77,859 117,851
<CAPTION>
SURRENDER VALUES(1)
<S> <C> <C> <C> <C> <C>
1............................ $ 45,190 $ 47,190 $ 49,190 $ 51,190
2............................ 43,775 47,758 51,902 56,206
3............................ 42,333 48,282 54,724 61,678
4............................ 40,860 48,759 57,666 67,663
5............................ 39,351 49,185 60,737 74,220
10........................... 30,446 49,771 77,859 117,851
20........................... 3,097 42,501 134,568 303,871
30........................... (2) (2) 242,258 792,694
Age 65....................... 30,446 49,771 77,859 117,851
</TABLE>
(1) Assumes no Policy loans have been made.
(2) In the absence of an additional premium payment, the Policy would have
lapsed.
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 SINGLE PREMIUM PAYMENT $129,599 MINIMUM DEATH BENEFIT
MAXIMUM COST OF INSURANCE AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
PREMIUM ASSUMING HYPOTHETICAL GROSS
END OF PAYMENTS PLUS ANNUAL RATE OF RETURN OF:
POLICY INTEREST -----------------------------------
YEAR AT 5% PER YEAR 0% 4% 8% 12%
- ------ -------------- -- -- -- ---
DEATH BENEFITS(1)
<S> <C> <C> <C> <C> <C>
1............................ $126,599 $126,599 $126,599 $126,599
2............................ 126,599 126,599 126,599 126,599
3............................ 126,599 126,599 126,599 126,599
4............................ 126,599 126,599 126,599 126,599
5............................ 126,599 126,599 126,599 126,599
10........................... 126,599 126,599 126,599 138,181
20........................... (2) 126,599 126,599 305,676
30........................... (2) (2) 214,562 768,115
Age 65....................... 126,599 126,599 126,599 138,181
<CAPTION>
POLICY VALUES(1)
<S> <C> <C> <C> <C> <C>
1............................ $ 52,500 $ 49,190 $ 51,190 $ 53,190 $ 55,190
2............................ 55,125 46,956 50,935 55,074 59,376
3............................ 57,881 44,658 50,594 57,025 63,971
4............................ 60,775 42,288 50,160 59,047 69,031
5............................ 63,814 39,837 49,625 61,146 74,615
10........................... 81,445 25,771 44,873 72,936 113,264
20........................... 132,665 (2) 18,600 115,837 285,679
30........................... 216,097 (2) (2) 204,345 731,538
Age 65....................... 81,445 25,771 44,873 72,936 113,264
<CAPTION>
SURRENDER VALUES(1)
<S> <C> <C> <C> <C> <C>
1............................ $ 45,190 $ 47,190 $ 49,190 $ 51,190
2............................ 43,456 47,435 51,574 55,876
3............................ 41,658 47,594 54,025 60,971
4............................ 39,788 47,660 56,547 66,531
5............................ 37,837 47,625 59,146 72,615
10........................... 25,771 44,873 72,936 113,264
20........................... (2) 18,600 115,837 285,679
30........................... (2) (2) 204,345 731,538
Age 65....................... 25,771 44,873 72,936 113,264
</TABLE>
(1) Assumes no Policy loans have been made.
(2) In the absence of an additional premium payment, the Policy would have
lapsed.
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
