<PAGE>
PEOPLES BENEFIT LIFE INSURANCE COMPANY
SEPARATE ACCOUNT IV
SUPPLEMENT DATED DECEMBER 29, 1998
TO THE
PROSPECTUS DATED APRIL 30, 1998
AS REVISED DECEMBER 29, 1998
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
PEOPLES BENEFIT LIFE INSURANCE COMPANY
(A MISSOURI STOCK COMPANY)
The Diversified Value, Mid-Cap Index, REIT Index, and Short-Term Corporate
Subaccounts of the Vanguard Variable Annuity Plan Contract (the "Contract")
are scheduled to commence operations on February 9, 1999. Until that date,
purchase requests will not be accepted for any of the Subaccounts except as
outlined below. The Subaccounts are currently not available for purchase in
California pending receipt of regulatory approval. California residents will
be notified when regulatory approval is obtained for their state.
You may submit a request to exchange accumulated value from an existing
Contract subaccount to the Diversified Value, Mid-Cap Index, REIT Index and/or
Short-Term Corporate Subaccounts. Your "pended exchange request" will be held
until February 9, 1999, when it will be processed at the Subaccounts' initial
unit values.
The Subaccounts are accepting pended exchange requests as a way of
accumulating a significant amount of assets, which will help minimize
transaction costs on the Subaccounts' first day of operations. The Subaccounts
will begin operation on February 9, regardless of the amount of assets
accumulated through pended exchanges.
You must submit your pended exchange request to the Vanguard Variable
Annuity Center in writing, using either a special exchange authorization form
or a letter of instruction. The amount of your exchange must meet the $1,000
minimum investment requirement for each Subaccount. If you wish to cancel a
pended exchange request, you must do so in writing; your written request must
be received by the Vanguard Variable Annuity Center BEFORE February 9, 1999.
To contact the Vanguard Variable Annuity Center, please call 1-800-522-5555
or write to P.O. Box 1103, Valley Forge, PA 19482-1103.
PS64SUB
<PAGE>
Vanguard
Variable Annuity
Plan
Prospectus
April 30, 1998; Revised
December 29, 1998
[GRAPHIC APPEARS HERE]
<PAGE>
Vanguard Variable Annuity Plan
Contents
<TABLE>
<CAPTION>
<S> <C>
2 Highlights 18 Accumulated Value
3 Fee Table 19 Dividends and Capital Gains Treatment
7 Glossary 19 Annuity Express(TM)
10 Condensed Financial Information 19 Exchanges Among the Portfolios
12 Financial Statements 20 Full and Partial Withdrawals
12 Yield and Total Return 21 Minimum Balance Requirements
12 The Company and the Separate Account 21 Designation of a Beneficiary
13 Vanguard Variable Insurance Fund 22 Death of Annuitant Prior to Annuity Date
14 Contract Features 22 Annuity Date
15 Free Look Period 22 Annuity Payment Options
15 Contract Application and Purchase Payments 24 Federal Tax Considerations
16 Allocation of Purchase Payments 27 General Information
17 Charges and Deductions
</TABLE>
The Contract is not available in all States.
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be 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.
<PAGE>
1
Peoples Benefit Life Insurance Company
Separate Account IV
Prospectus for the Vanguard Variable Annuity Plan Contract
Offered by Peoples Benefit Life Insurance Company (A Missouri Stock Company)
April 30, 1998; Revised December 29, 1998
The Vanguard Variable Annuity Plan Contract (the "Contract"), offered through
Peoples Benefit Life Insurance Company (the "Company"), provides a vehicle for
investing on a tax-deferred basis in thirteen Portfolios offered by The Vanguard
Group, Inc. The Contract is intended for retirement savings or other long-term
investment purposes.
The minimum Initial Purchase Payment for the Contract is $5,000; there are no
sales loads. The Contract is a flexible-premium deferred variable annuity that
provides a Free Look Period for a minimum of 10 days (30 days or more in some
instances), during which you may cancel your investment in the Contract.
Your Purchase Payments for the Contract may be allocated among thirteen
Subaccounts of Peoples Benefit Life Insurance Company Separate Account IV (the
"Separate Account"). Assets of each Subaccount are invested in corresponding
Portfolios of Vanguard Variable Insurance Fund (the "Fund"), an open-end,
diversified investment company offered by The Vanguard Group, Inc. The Fund
currently offers thirteen Portfolios: the Money Market Portfolio, the Short-Term
Corporate Portfolio, the High-Grade Bond Portfolio, the High Yield Bond
Portfolio, the Balanced Portfolio, the Equity Income Portfolio, the Diversified
Value Portfolio, the Equity Index Portfolio, the Mid-Cap Index Portfolio, the
Growth Portfolio, the Small Company Growth Portfolio, the International
Portfolio, and the REIT Index Portfolio. Depending on the state you live in, Net
Purchase Payments are either (i) immediately allocated to the Portfolios of the
Fund according to your instructions or (ii) allocated to the Money Market
Portfolio until the end of your Free Look Period and subsequently allocated
according to your instructions.
The Contract's Accumulated Value varies with the investment performance of the
Portfolios you select. You bear all investment risk and investment results for
the Portfolios are not guaranteed.
The Contract offers a number of ways of withdrawing monies at a future date,
including a lump-sum payment and several Annuity Payment Options. Full or
partial withdrawals from the Contract may be made at any time before the Annuity
Date, although in many instances withdrawals made prior to age 59 1/2 are
subject to a 10% penalty tax (and a portion may be subject to ordinary income
taxes). If you elect an Annuity Payment Option, Annuity Payments may be received
on a fixed or variable basis. You also have significant flexibility in choosing
the Annuity Date on which Annuity Payments begin.
This Prospectus sets forth the information you should know before investing in
the Contract; it must be accompanied by the current Prospectus for Vanguard
Variable Insurance Fund. Please read both Prospectuses carefully and retain them
for future reference. A Statement of Additional Information for the Contract
Prospectus, which has the same date as this Prospectus, has also been filed with
the Securities and Exchange Commission, is incorporated herein by reference and
is available free by calling 800-522-5555 or by writing to Vanguard Variable
Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of
Contents of the Statement of Additional Information is included at the end of
this Prospectus.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
2
Highlights
Refer to the Glossary (page 7) for a definition of all capitalized terms.
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
The Contract provides a vehicle for investing on a tax-deferred basis in
thirteen Portfolios offered by The Vanguard Group, Inc. Monies may be
subsequently withdrawn from the Contract either as a lump sum or as an annuity
income. Because Accumulated Values and, to the extent Variable Annuity Payments
are selected, Annuity Payments depend on the investment performance of the
selected Portfolios, you bear all investment risk for monies invested under the
Contract. The investment performance of the Portfolios is not guaranteed.
WHO SHOULD INVEST
The Contract is designed for investors seeking long-term, tax-deferred
accumulation of funds, generally for retirement but also for other long-term
investment purposes. The tax-deferred feature of the Contract is most attractive
to investors in high federal and state marginal tax brackets who have exhausted
other avenues of tax deferral, such as "pre-tax" contributions to
employer-sponsored retirement or savings plans. The Contract is intended for
long-term investors.
INVESTMENT CHOICES
Your investment in the Contract may be allocated among several Subaccounts of
the Separate Account. The Subaccounts in turn invest exclusively in the thirteen
Portfolios of Vanguard Variable Insurance Fund. The Fund, a member of The
Vanguard Group of Investment Companies, offers thirteen Portfolios: the Money
Market Portfolio, the Short-Term Corporate Portfolio, the High-Grade Bond
Portfolio, the High Yield Bond Portfolio, the Balanced Portfolio, the Equity
Income Portfolio, the Diversified Value Portfolio, the Equity Index Portfolio,
the Mid-Cap Index Portfolio, the Growth Portfolio, the Small Company Growth
Portfolio, the International Portfolio, and the REIT Index Portfolio. The assets
of each Portfolio are separate, and each Portfolio has distinct investment
objectives and policies as described in the accompanying Fund Prospectus. Page
13
FREE LOOK PERIOD
The Contract provides a Free Look Period for a minimum of 10 days (30 or more
days in some instances as specified in your Contract) during which you may
cancel your investment in the Contract. To cancel your investment, please return
your Contract to us. When we receive the Contract, you will receive the greater
of the Purchase Payments made under the Contract to date or the Accumulated
Value as of the day we receive the Contract (except in Pennsylvania, where you
will receive the Accumulated Value whether or not it exceeds Purchase Payments
made under the Contract). Page 15
HOW TO INVEST
To invest in the Contract, please complete the accompanying application form.
The minimum Initial Purchase Payment is $5,000; the minimum Portfolio balance is
$1,000; and subsequent Purchase Payments must be at least $250. You may make
subsequent Purchase Payments at any time before the Contract's Annuity Date, as
long as the Annuitant or Joint Annuitant specified in the Contract is living.
Please note that when purchasing a Contract, the Annuitant you name, and the
Joint Annuitant if applicable, must be 75 years of age or less. Page 15
ALLOCATION OF PURCHASE PAYMENTS
For Contract Owners in certain states only, the Initial Purchase Payment for the
Contract will be immediately allocated to the Portfolios of the Fund in the
whole-number percentages you specify on the Application. Please telephone the
Vanguard Variable Annuity Center at 1-800-522-5555 before purchasing to find out
if the immediate allocation feature applies to Contracts issued in your state.
If the immediate allocation feature does not apply to Contracts issued in your
state, your Initial Purchase Payment will be allocated to the Money Market
Portfolio when your Contract is issued. At the end of the Free Look Period, and
a 5-day grace period, the then-current Accumulated
<PAGE>
3
Value of your Contract is allocated among the Portfolios of the Fund in the
whole-number percentages you specify on the Application. Requests to change the
allocation of subsequent Net Purchase Payments may be made in writing, or by
telephone if you have signed the proper section of the Application. Page 16
CHARGES AND DEDUCTIONS UNDER THE CONTRACT
The Contract imposes no sales charges. The costs of the Contract include
mortality and expense risk charges, maintenance and administrative charges which
cover the cost of administering the Contract, and management, advisory and other
fees, which reflect the costs of Vanguard Variable Insurance Fund. There are no
charges under the Contract for withdrawals, although withdrawals made prior to
age 59 1/2 may be subject to a 10% penalty tax. Page 17
EXCHANGES
You may make exchanges among the Fund's Portfolios subject to certain
restrictions on excess exchange activity. These restrictions do not apply,
however, to non-substantive "round trips" or to the Money Market Portfolio. No
fee is imposed for exchanges. Exchanges must be for at least $250, or, if less,
for the entire value of the Portfolio from which the exchange is made. Page 19
FULL AND PARTIAL WITHDRAWALS
You may withdraw all or part of the Accumulated Value of the Contract before the
earlier of the Annuity Date or the Annuitant's death (or the Joint Annuitant's
death, if later). You may establish systematic withdrawals from your Contract,
and receive distributions at regular intervals. Withdrawals made prior to age 59
1/2 may be subject to a 10% penalty tax. Page 20
DEATH BENEFIT
If the Annuitant specified in your Contract dies prior to the Annuity Date, the
Annuitant's named Beneficiary will receive the Death Benefit under the Contract.
The Death Benefit is the greater of the then-current Accumulated Value of the
Contract or the sum of all Purchase Payments (less any partial withdrawals and
premium taxes). Your Beneficiary may elect to receive these proceeds as a lump
sum or as Annuity Payments. Page 22
ANNUITY PAYMENT OPTIONS
Beginning on the Annuity Date, you may withdraw monies from the Contract in the
form of an annuity income. As the Contract Owner you may elect one of several
Annuity Payment Options. The Options provide a wide range of flexibility in
choosing an annuity payment schedule that meets your particular needs. Annuity
Payments may be received for a designated period or for life (for either a
single or joint life), with or without a guaranteed number of payments. Annuity
Payments can be fixed, or can vary with the investment performance of a
Portfolio of the Fund. You may elect a lump-sum payment prior to the Annuity
Date in lieu of Annuity Payments. Page 22
CONTRACT AND POLICYHOLDER INFORMATION
If you have questions about your Contract, please telephone the Vanguard
Variable Annuity Center (1-800-462-2391). Please have ready the Contract number
and the Contract Owner's name when you call. As Contract Owner, you will receive
periodic statements confirming any transactions that take place, as well as
quarterly statements and an Annual Report.
Fee Table
The following table illustrates all expenses that you would incur as a Contract
Owner, except for Premium Taxes that may be assessed by your state (see "Charges
and Deductions"). The expenses and fees shown are for the Fund's and the
Separate Account's 1997 fiscal years. The expenses and fees for the Short-Term
Corporate Portfolio, the Diversified Value Portfolio, the Mid-Cap Index
Portfolio, and the REIT Index Portfolio are estimates because the Portfolios had
not commenced operations as of December 29, 1998. The purpose of this table is
to assist you in understanding
<PAGE>
4
Fee Table (continued)
the various costs and expenses that you would pay directly or indirectly as a
purchaser of the Contract. The fee table reflects ALL expenses for both the
Separate Account and the Fund. For a complete discussion of contract costs and
expenses, see "Charges and Deductions."
Owner Transaction Expenses Separate Account
Sales Load Imposed on Purchases None
Redemption Fees None
Exchange Fees None
Annual Contract Maintenance Fee* $25
* Applies to Contracts valued at less than $25,000 at the time of
initial purchase and on the last Business Day of each year.
Annual Separate Account Expenses Separate Account
Mortality and Expense Risk Charge(**) 0.28%
Administrative Expense Charge 0.10%
Total Annual Separate Account Expenses 0.38%
** This charge is 0.28% of all assets when net assets attributable to
the Separate Account (and Separate Account B of AUSA Life Insurance
Company, Inc.) exceed $2.5 billion. This charge is further reduced
to 0.27% of all assets when net assets attributable to the Separate
Account (and Separate Account B of AUSA Life Insurance Company,
Inc.) exceed $5 billion. See "Mortality and Expense Risk Charge."
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
---------------------------------------------------------------------------------
Money Short-Term High-Grade
Market Corporate Bond
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Management & Administrative Expenses 0.15% 0.25% 0.21%
Investment Advisory Fees 0.02 0.02 0.02
12b-1 Distribution Fees None None None
Other Expenses
Distribution Costs 0.03 0.02 0.02
Miscellaneous Expenses 0.01 0.02 0.04
-------------------------------------
Total Other Expenses 0.04% 0.04% 0.06%
-------------------------------------
Total Fund Operating Expenses 0.21% 0.31% 0.29%
Total Expenses
---------------------------------------------------------------------------------
Money Short-Term High-Grade
Market Corporate Bond
---------------------------------------------------------------------------------
Total Separate Account Expenses 0.38% 0.38% 0.38%
Total Fund Operating Expenses 0.21 0.31 0.29
-------------------------------------
Grand Total, Separate Account and
Fund Operating Expenses 0.59% 0.69% 0.67%
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
5
Annual Fund Operating Expenses
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
High Yield Equity
Bond Balanced Income
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management & Administrative Expenses 0.21% 0.19% 0.23%
Investment Advisory Fees 0.06 0.10 0.10
12b-1 Distribution Fees None None None
Other Expenses
Distribution Costs 0.02 0.02 0.02
Miscellaneous Expenses 0.02 0.01 0.02
------------------------------------------
Total Other Expenses 0.04% 0.03% 0.04%
------------------------------------------
Total Fund Operating Expenses 0.31% 0.32% 0.37%
Total Expenses
- ---------------------------------------------------------------------------------------
High Yield Equity
Bond Balanced Income
- ---------------------------------------------------------------------------------------
Total Separate Account Expenses 0.38% 0.38% 0.38%
Total Fund Operating Expenses 0.31 0.32 0.37
------------------------------------------
Grand Total, Separate Account and
Fund Operating Expenses 0.69% 0.70% 0.75%
- -------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
- ---------------------------------------------------------------------------------------
Diversified Equity Mid-Cap
Value Index Index
- ---------------------------------------------------------------------------------------
Management & Administrative Expenses 0.25% 0.20% 0.22%
Investment Advisory Fees 0.12 0.00 0.00
12b-1 Distribution Fees None None None
Other Expenses
Distribution Costs 0.02 0.02 0.02
Miscellaneous Expenses 0.01 0.01 0.01
------------------------------------------
Total Other Expenses 0.03% 0.03% 0.03%
------------------------------------------
Total Fund Operating Expenses 0.40% 0.23% 0.25%
Total Expenses
- ---------------------------------------------------------------------------------------
Diversified Equity Mid-Cap
Value Index Index
- ---------------------------------------------------------------------------------------
Total Separate Account Expenses 0.38% 0.38% 0.38%
Total Fund Operating Expenses 0.40 0.23 0.25
------------------------------------------
Grand Total, Separate Account and
Fund Operating Expenses 0.78% 0.61% 0.63%
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6
Fee Table (continued)
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
-----------------------------------------------------------------------------------
Small Company
Growth Growth International
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Management & Administrative Expenses 0.20% 0.23% 0.22%
Investment Advisory Fees 0.15 0.12 0.16
12b-1 Distribution Fees None None None
Other Expenses
Distribution Costs 0.02 0.01 0.02
Miscellaneous Expenses 0.01 0.03 0.06
--------------------------------------
Total Other Expenses 0.03% 0.04% 0.08%
--------------------------------------
Total Fund Operating Expenses 0.38% 0.39% 0.46%
Total Expenses
-----------------------------------------------------------------------------------
Small Company
Growth Growth International
-----------------------------------------------------------------------------------
Total Separate Account Expenses 0.38% 0.38% 0.38%
Total Fund Operating Expenses 0.38 0.39 0.46
--------------------------------------
Grand Total, Separate Account and
Fund Operating Expenses 0.76% 0.77% 0.84%
- ----------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
-----------------------------------------------------------------------------------
REIT
Index
-----------------------------------------------------------------------------------
Management & Administrative Expenses 0.26%
Investment Advisory Fees 0.01
12b-1 Distribution Fees None
Other Expenses
Distribution Costs 0.02
Miscellaneous Expenses 0.02
-------
Total Other Expenses 0.04%
-------
Total Fund Operating Expenses 0.31%
Total Expenses
-----------------------------------------------------------------------------------
REIT
Index
-----------------------------------------------------------------------------------
Total Separate Account Expenses 0.38%
Total Fund Operating Expenses 0.31
-------
Grand Total, Separate Account and
Fund Operating Expenses 0.69%
</TABLE>
The following example illustrates the expenses that you would incur on a
$1,000 purchase payment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period. As noted in the table
above, the Contract imposes no redemption fees of any kind. Your expenses are
identical whether you continue the Contract or withdraw the entire value of your
Contract at the end of the applicable period as a lump sum or under one of the
Contract's Annuity Payment Options.
<PAGE>
7
-----------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------
Money Market Portfolio $6 $19 $33 $75
Short-Term Corporate Portfolio 7 22 38 86
High-Grade Bond Portfolio 7 22 38 85
High Yield Bond Portfolio 7 22 38 86
Balanced Portfolio 7 23 40 89
Equity Income Portfolio 8 24 42 94
Diversified Value Portfolio 8 25 44 98
Equity Index Portfolio 6 20 35 78
Mid-Cap Index Portfolio 7 21 36 80
Growth Portfolio 8 25 43 96
Small Company Growth Portfolio 8 25 43 97
International Portfolio 9 27 47 105
REIT Index Portfolio 7 22 38 86
-----------------------------------------------------------------------
The Annual Contract Maintenance Fee is reflected in this example as a
percentage equal to the total amount of fees collected during a year divided by
the total average net assets of the Portfolios during the same year. The fee is
assumed to remain the same in each year of the above periods. The fee is
prorated to reflect only the remaining portion of the calendar year of purchase.
Thereafter, the fee is deducted on the last business day of the year for the
following year, on a pro rata basis, from each of the Portfolios you have
chosen. For a complete discussion of Contract costs and expenses, see "Charges
and Deductions."
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be higher or lower than those
shown, subject to the guarantees in the Contract.
Automated Quotes
The Vanguard Tele-Account Service provides access to Accumulation Unit Values
(to two decimal places) and total returns for all Portfolios, and yield
information for the Money Market, Short-Term Corporate, High-Grade Bond, and
High Yield Bond Portfolios of the Vanguard Variable Annuity Plan. Contract
Owners may utilize this service for 24-hour access to Plan Portfolio
information. To access the service you may call Tele-Account at 1-800-662-6273
(ON-BOARD) and follow the step-by-step instructions, or speak with a Vanguard
associate at 1-800-522-5555 to request a brochure that explains how to use the
service.
Vanguard's website also has Accumulation Unit Values (to two decimal places)
for all Portfolios. This service can be utilized from www.vanguard.com by
double-clicking on fund prices.
Glossary
Accumulation Unit
A measure of your ownership interest in the Contract prior to the Annuity Date.
Analogous, though not identical, to a share owned in a mutual fund account.
Accumulation Unit Value
The value of each Accumulation Unit which is calculated each Valuation Period.
Analogous, though not identical, to the share price (net asset value) of a
mutual fund.
Accumulated Value
The value of all amounts accumulated under the Contract prior to the Annuity
Date, equivalent to the Accumulation Units multiplied by the Accumulation Unit
Value. Analogous to the current market value of a mutual fund account.
<PAGE>
8
Glossary (continued)
Annuitant
The person or persons whose life is used to determine the duration of any
Annuity Payments and, subject to the provision dealing with Joint Annuitants,
upon whose death, prior to the Annuity Date, benefits under the Contract are
paid.
Annuity Date
The date on which Annuity Payments begin. The Annuity Date is always the first
day of the month you specify.
Annuity Payment
One of a series of payments made under an Annuity Payment Option.
Annuity Payment Option
One of several ways in which a series of payments are made after the Annuity
Date. Under a FIXED ANNUITY OPTION, the dollar amount of each Annuity Payment
does not change over time. Annuity Payments are based on the Contract's
Accumulated Value as of the Annuity Date. Under a VARIABLE ANNUITY OPTION, the
dollar amount of each Annuity Payment may change over time, depending upon the
investment experience of the Portfolio or Portfolios you choose.
Annuity Unit
Unit of measure used to calculate Variable Annuity Payments.
Beneficiary
The person to whom any benefits are due upon the Annuitant's death.
Business Day
A day when the New York Stock Exchange is open for trading.
Company ("We", "Us", "Our")
Peoples Benefit Life Insurance Company, a Missouri stock company.
Contract Anniversary
Any anniversary of the Contract Date.
Contract Date
The date of issue of this Contract.
Contract Owner ("You", "Your")
The person or persons designated as the Contract Owner in the Contract
application. The term shall also include any person named as Joint Owner. A
Joint Owner shares ownership in all respects with the Owner. The Owner has the
right to assign ownership to a person or party other than himself.
Contract Year
A period of 12 months starting with the Contract Date or any Contract
Anniversary.
Death Benefit
The greater of the then-current Accumulated Value or the sum of all Purchase
Payments (less any partial withdrawals and premium taxes).
Free Look Period
The period during which the Contract can be cancelled and treated as void from
the Contract Date.
<PAGE>
9
Fund
Vanguard Variable Insurance Fund, an open-end, diversified investment company,
offered by The Vanguard Group, Inc., in which the Separate Account invests.
Joint Annuitant
The person other than the Annuitant who may be designated by the Contract Owner
and on whose life Annuity Payments may also be based.
Net Purchase Payment
Any Purchase Payment less the applicable Premium Tax, if any.
Non-Qualified Contract
A Contract other than a Qualified Contract. Contributions to such a Contract are
made with after-tax dollars.
Owner's Designated Beneficiary
The person designated to receive the Contract Owner's interest in the Contract
if the Contract Owner dies before the entire interest in the Contract is
distributed, as explained in the "Distribution-at-Death Rules" section.
Payee
The Contract Owner, Annuitant, Beneficiary, or any other person, estate, or
legal entity to whom benefits are to be paid.
Portfolio
The separate investment Portfolios of Vanguard Variable Insurance Fund. The Fund
currently offers thirteen Portfolios: the Money Market Portfolio, the Short-Term
Corporate Portfolio, the High-Grade Bond Portfolio, the High Yield Bond
Portfolio, the Balanced Portfolio, the Equity Income Portfolio, the Diversified
Value Portfolio, the Equity Index Portfolio, the Mid-Cap Index Portfolio, the
Growth Portfolio, the Small Company Growth Portfolio, the International
Portfolio, and the REIT Index Portfolio. In this Prospectus, Portfolio will also
be used to refer to the Subaccount that invests in the corresponding Portfolio.
Premium Tax
A regulatory tax that may be assessed by your state on the Purchase Payments
made into your Contract. The amount which we must pay as Premium Tax will be
deducted from each Purchase Payment or from your Accumulated Value as it is
incurred by us.
Proof of Death
(a) A certified death certificate; (b) a certified decree of a court of
competent jurisdiction as to the finding of death; (c) a written statement by a
medical doctor who attended the deceased; or (d) any other proof satisfactory to
the Company.
Purchase Payment
Any premium payment--any amount you invest in the Contract. The minimum Initial
Purchase Payment is $5,000; each Additional Purchase Payment must be at least
$250. Purchase Payments may be made at any time prior to the Annuity Date as
long as the Annuitant is living.
Qualified Contract
A Contract that qualifies as an individual retirement annuity under Section
408(b) of the Internal Revenue Code of 1986, as amended.
Separate Account
Peoples Benefit Life Insurance Company Separate Account IV. The Separate Account
consists of assets that are segregated by Peoples Benefit Life Insurance Company
and invested in Vanguard Variable Insurance Fund. The Separate Account is
independent of the general assets of the Company.
<PAGE>
10
Glossary (continued)
Subaccount
That portion of the Separate Account that invests in shares of the Fund's
Portfolios. Each Subaccount will only invest in a single Portfolio. The
investment performance of each Subaccount is linked directly to the investment
performance of one of the thirteen Portfolios of the Fund.
Valuation Period
A period between two successive Business Days commencing at the close of
business of the first Business Day and ending at the close of business of the
following Business Day
Condensed Financial Information
The Accumulation Unit Values and the number of Accumulation Units outstanding
for each Subaccount in 1991 through 1997 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
For the period April 29, 1991 through December 31, 1997*
------------------------------------------------------------------------------------------------
Money Short-Term High-Grade High Yield
Market Corporate Bond Bond Balanced
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation unit value as of:
Start Date(*) 1.000 10.000 10.000 10.000 10.000
12/31/1991 1.032 -- 11.027 -- 10.802
12/31/1992 1.064 -- 11.656 -- 11.514
12/31/1993 1.091 -- 12.695 -- 12.961
12/31/1994 1.130 -- 12.290 -- 12.815
12/31/1995 1.191 -- 14.437 -- 16.885
12/31/1996 1.250 -- 14.882 10.871 19.532
12/31/1997 1.314 -- 16.219 12.135 23.946
Number of units outstanding as of:
12/31/1991 32,495 -- 2,122 -- 3,395
12/31/1992 75,564 -- 4,417 -- 8,682
12/31/1993 109,190 -- 6,592 -- 16,164
12/31/1994 154,415 -- 6,589 -- 16,429
12/31/1995 183,867 -- 8,684 -- 17,021
12/31/1996 246,219 -- 9,395 3,042 17,307
12/31/1997 282,813 -- 12,403 7,810 19,528
------------------------------------------------------------------------------------------------
(Units are shown in thousands)
</TABLE>
<PAGE>
11
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
For the period April 29, 1991 through December 31, 1997*
- --------------------------------------------------------------------------------------------
Equity Diversified Equity Mid-Cap
Income Value Index Index Growth
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accumulation unit value as of:
Start Date(*) 10.000 10.000 10.000 10.000 10.000
12/31/1991 -- -- 11.275 -- --
12/31/1992 -- -- 12.039 -- --
12/31/1993 10.488 -- 13.144 -- 10.569
12/31/1994 10.304 -- 13.224 -- 10.964
12/31/1995 14.239 -- 18.073 -- 15.089
12/31/1996 16.820 -- 22.098 -- 19.057
12/31/1997 22.503 -- 29.301 -- 24.034
Number of units outstanding as of:
12/31/1991 -- -- 2,311 -- --
12/31/1992 -- -- 9,645 -- --
12/31/1993 6,411 -- 12,971 -- 4,879
12/31/1994 6,089 -- 13,676 -- 8,004
12/31/1995 7,355 -- 16,292 -- 11,857
12/31/1996 9,260 -- 19,360 -- 15,744
12/31/1997 13,361 -- 24,886 -- 18,975
- --------------------------------------------------------------------------------------------
(Units are shown in thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------
For the period April 29, 1991 through December 31, 1997*
- --------------------------------------------------------------------------------------------
Small
Company REIT
Growth International Index
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulation unit value as of:
Start Date(*) 10.000 10.000 10.000
12/31/1991 -- -- --
12/31/1992 -- -- --
12/31/1993 -- -- --
12/31/1994 -- 10.128 --
12/31/1995 -- 11.678 --
12/31/1996 9.725 13.319 --
12/31/1997 10.970 13.708 --
Number of units outstanding as of:
12/31/1991 -- -- --
12/31/1992 -- -- --
12/31/1993 -- -- --
12/31/1994 -- 6,818 --
12/31/1995 -- 8,146 --
12/31/1996 5,362 12,435 --
12/31/1997 11,350 14,597 --
- --------------------------------------------------------------------------------------------
(Units are shown in thousands)
</TABLE>
* Date of commencement of operations for the High-Grade Bond and Equity Index
Subaccounts was 4/29/1991, for the Money Market Subaccount was 5/2/1991,
for the Balanced Subaccount was 5/23/1991, for the Equity Income and Growth
Subaccounts was 6/7/1993, for the International Subaccount was 6/3/1994,
and for the High Yield Bond and Small Company Growth Subaccounts was
6/3/1996. The Short-Term Corporate, Diversified Value, Mid-Cap Index and
REIT Index Subaccounts had not commenced operation as of December 29, 1998.
<PAGE>
12
Financial Statements
The audited statutory-basis financial statements of the Company and the
financial statements of the Separate Account (as well as the Independent
Auditors' Reports thereon) are contained in the Statement of Additional
Information.
Yield and Total Return
From time to time a Portfolio of the Fund may advertise its yield and total
return investment performance for various periods, including quarter-to-date,
year-to-date, one year, three year, five year and since inception. Advertised
yields and total returns will be calculated according to standardized methods
prescribed by the Securities and Exchange Commission ("SEC"), so all charges and
expenses attributable to the Contract will be included. Including these fees has
the effect of decreasing the advertised performance of a Portfolio, so that a
Portfolio's investment performance will not be directly comparable to that of an
ordinary mutual fund.
The Company may also advertise total return or other performance data in
non-standard formats which do not reflect the Annual Contract Maintenance Fee.
Please refer to the Statement of Additional Information for a description of
the method used to calculate a Portfolio's yield and total return, and a list of
the indexes and other benchmarks used in evaluating a Portfolio's performance.
The performance measures discussed above are not intended to indicate or
predict future performance.
The Company and the Separate Account
Peoples Benefit Life Insurance Company
The Company is a stock life insurance company incorporated under the laws of
Missouri on August 6, 1920, with administrative offices at 20 Moores Road,
Frazer, Pennsylvania 19355. The Company is principally engaged in offering life
insurance, annuity contracts, and accident and health insurance and is admitted
to do business in 49 states, the District of Columbia and Puerto Rico.
As of December 31, 1997, the Company had statutory assets of approximately $11
billion. The Company is a wholly owned indirect subsidiary of AEGON USA, Inc.,
which conducts substantially all of its operations through subsidiary companies
engaged in the insurance business or in providing non-insurance financial
services. All of the stock of AEGON USA, Inc. is indirectly owned by AEGON n.v.
of the Netherlands. AEGON n.v., a holding company, conducts its business through
subsidiary companies engaged primarily in the insurance business.
Peoples Benefit Life Insurance Company Separate Account IV
The Separate Account was established by the Company as a separate account under
the laws of the State of Missouri on July 16, 1990, pursuant to a resolution of
the Company's Board of Directors. The Separate Account is a unit investment
trust registered with the SEC under the Investment Company Act of 1940 (the
"1940 Act"). Such registration does not signify that the SEC supervises the
management or the investment practices or policies of the Separate Account.
The assets of the Separate Account are owned by the Company and the
obligations under the Contract are obligations of the Company. These assets are
held separately from the other assets of the Company and are not chargeable with
liabilities incurred in any other business operation of the Company (except to
the extent that assets in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will always keep assets in the
Separate Account with a value at least equal to the total Accumulated Value
under the Contracts. Income, gains and losses incurred on the assets in the
Separate Account, whether or not realized, are credited to or charged against
the Separate Account without regard to other income, gains or losses of the
Company. Therefore,
<PAGE>
13
the investment performance of the Separate Account is entirely independent of
the investment performance of the Company's general account assets or any other
separate account maintained by the Company.
The Separate Account has thirteen Subaccounts, each of which invests solely in
a corresponding Portfolio of the Fund. Additional Subaccounts may be established
at the discretion of the Company. The Separate Account meets the definition of a
"separate account" under Rule O-1(e)(1) of the 1940 Act.
Vanguard Variable Insurance Fund
Vanguard Variable Insurance Fund is an open-end diversified investment company
intended exclusively as an investment vehicle for variable annuity or variable
life insurance contracts offered by insurance companies.
The Fund is a member of The Vanguard Group of Investment Companies, a family
of more than 30 investment companies with more than 100 distinct portfolios and
assets in excess of $410 billion. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group
obtain at cost virtually all of their corporate management, administrative,
shareholder accounting and distribution services.
The Fund offers thirteen Portfolios--a money market portfolio, a short-term
corporate portfolio, a high-grade bond portfolio, a high yield bond portfolio, a
balanced portfolio, an equity income portfolio, a diversified value portfolio,
an equity index portfolio, a mid-cap index portfolio, a growth portfolio, a
small company growth portfolio, an international portfolio, and a REIT index
portfolio--each with distinct investment objectives and policies.
The Money Market Portfolio seeks to provide current income consistent with the
preservation of capital and liquidity. The Portfolio also seeks to maintain a
stable net asset value of $1.00 per share. The Portfolio invests primarily in
high-quality money market instruments issued by financial institutions,
non-financial corporations, the U.S. Government, state and municipal governments
and their agencies or instrumentalities, as well as repurchase agreements
collateralized by such securities. The Portfolio also invests in Eurodollar
obligations (dollar-denominated obligations issued outside the U.S. by foreign
banks or foreign branches of domestic banks) and Yankee obligations
(dollar-denominated obligations issued in the U.S. by foreign banks). An
investment in the Portfolio is not insured or guaranteed by the FDIC or any
other government agency. Although the Portfolio seeks to preserve the level of
your investment at $1.00 per share, it is possible to lose money by investing in
the Portfolio. Vanguard's Fixed Income Group serves as this Portfolio's
investment adviser.
The Short-Term Corporate Portfolio seeks to provide a high level of income by
investing primarily in high-quality, short-term bonds issued by corporations.
The average weighted maturity of the Portfolio's bonds is expected to range
between 1 and 3 years. Vanguard's Fixed Income Group serves as this Portfolio's
investment adviser.
The High-Grade Bond Portfolio seeks to parallel the investment results of the
Lehman Brothers Aggregate Bond Index. The Portfolio invests primarily in a
diversified portfolio of U.S. Government and corporate bonds, and
mortgage-backed securities. Vanguard's Fixed Income Group serves as this
Portfolio's investment adviser.
The High Yield Bond Portfolio seeks to provide a high level of current income
by investing in lower-rated debt securities, which may be regarded as having
speculative characteristics and are commonly referred to as "junk bonds." Under
normal circumstances, at least 80% of the Portfolio's assets will be invested in
high-yield corporate debt obligations rated at least B by Moody's Investors
Service, Inc. or Standard & Poor's Corporation or, if unrated, of comparable
quality as determined by the Portfolio's adviser, Wellington Management Company.
The Balanced Portfolio seeks the conservation of principal, a reasonable
income return and profits without undue risk. The Portfolio invests in a
diversified portfolio of common stocks and bonds, with common stocks expected to
represent 60% to 70% of the Portfolio's total assets and bonds to represent 30%
to 40%. Wellington Management Company serves as this Portfolio's investment
adviser.
The Equity Income Portfolio seeks to provide a high level of current income by
investing principally in dividend-paying equity securities. Newell Associates
serves as this Portfolio's investment adviser.
The Diversified Value Portfolio seeks to provide long-term growth of capital
and a moderate level of dividend income by investing primarily in common stocks
of large and medium-sized companies whose stocks are considered by the adviser
to be undervalued and out of favor with investors. Such "value" stocks typically
have above-average
<PAGE>
14
Vanguard Variable Insurance Fund (continued)
dividend yields and/or below-average prices in relation to such financial
measures as earnings, book value, and cash flow. Barrow, Hanley, Mewhinney &
Strauss, Inc. serves as this Portfolio's investment adviser
The Equity Index Portfolio seeks to provide long-term growth of capital by
matching the performance of the Standard & Poor's 500 Composite Stock Price
Index (S&P 500), which contains the stocks of 500 of the largest domestic
companies. Vanguard's Core Management Group serves as this Portfolio's
investment adviser.
The Mid-Cap Index Portfolio seeks to provide long-term growth of capital by
matching the performance of the Standard & Poor's MidCap 400 Index (S&P MidCap
400), which is made up of stocks of medium-sized companies. Vanguard's Core
Management Group serves as this Portfolio's investment adviser.
The Growth Portfolio seeks to provide long-term capital appreciation by
investing primarily in equity securities of seasoned U.S. companies with
above-average prospects for growth. Lincoln Capital Management Company serves as
this Portfolio's investment adviser.
The Small Company Growth Portfolio seeks to provide long-term growth in
capital by investing primarily in equity securities of small companies deemed to
have favorable prospects for growth. These securities are primarily common
stocks but may also include securities convertible into common stock. Granahan
Investment Management serves as this Portfolio's investment adviser.
The International Portfolio seeks to provide long-term capital
appreciation. The Portfolio invests primarily in equity securities of companies
based outside the United States. Schroder Capital Management International, Inc.
serves as this Portfolio's investment adviser.
The REIT Index Portfolio seeks to provide a high level of income and
moderate long-term growth of capital by investing in stocks of real estate
investment trusts (REITs), which own office buildings, hotels, shopping centers
and other properties. The Portfolio seeks to match the performance of the Morgan
Stanley REIT Index, a benchmark of U.S. property trusts. Vanguard's Core
Management Group serves as this Portfolio's investment adviser.
There is no assurance that a Portfolio will achieve its stated objective.
Additional information concerning the investment objectives and policies of
the Portfolios and the investment advisory services can be found in the current
prospectus for the Fund, which accompanies this Prospectus. The Fund Prospectus
should be read carefully before any decision is made concerning the allocation
of purchase payments to a Portfolio
The Portfolios may be made available to registered separate accounts
offering variable annuity and variable life products of the Company as well as
other insurance companies. Although we believe it is unlikely, a material
conflict could arise between the interests of the Separate Account and one or
more of the other participating separate accounts. In the event of a material
conflict, the affected insurance companies agree to take any necessary steps,
including removing their separate account from the Fund if required by law, to
resolve the matter. See the Fund's Prospectus for more information.
Administrative services are provided by The Vanguard Group, Inc., The
Vanguard Variable Annuity Center, 100 Vanguard Boulevard, Malvern, PA 19355. In
California, The Vanguard Group, Inc. provides administrative services under the
name Vanguard Administrators. In addition, The Continuum Company, Inc., 301 West
11th Street, Kansas City, MO 64105, provides some subadministrative services.
Contract Features
The rights and benefits under the Contract are described below and in the
Contract. The Company reserves the right to make any modification to conform the
Contract to, or give the Contract Owner the benefit of, any federal or state
statute or any rule or regulation of the United States Treasury Department.
<PAGE>
15
Free Look Period
A Free Look Period exists for a minimum of 10 days after the Contract Owner
receives the Contract (30 or more days in some instances as set forth in your
Contract) plus 5 days for mailing. The Contract permits the Contract Owner to
cancel the Contract during the Free Look Period by returning the Contract to
Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103.
Withdrawals are not permitted during the Free Look Period. Upon cancellation,
the Contract is treated as void from the Contract Date and the Contract Owner
will receive the greater of the Purchase Payments made under the Contract or the
Accumulated Value of the Contract as of the day the Contract is received by the
Company, except in Pennsylvania, where the Contract Owner will receive the
Accumulated Value whether or not it exceeds Purchase Payments made under the
Contract.
Contract Application and Purchase Payments
Individuals wishing to purchase a Non-Qualified Contract should send a completed
application and your Initial Purchase Payment to the Vanguard Variable Annuity
Center. Your Initial Purchase Payment must be equal to or greater than the
$5,000 minimum investment requirement. Furthermore, the named Annuitant and
Joint Annuitant must be 75 years of age or less.
The Contract will be issued and the Initial Net Purchase Payment will be
credited within two Business Days after acceptance of the application and the
Initial Purchase Payment. Acceptance is subject to the application being
received in good order, and the Company reserves the right to reject any
application or Initial Purchase Payment.
If the Initial Purchase Payment cannot be credited because the application is
incomplete, the Company will contact the applicant in writing, explain the
reason for the delay and will refund the Initial Purchase Payment within five
Business Days. As soon as the necessary requirements are fulfilled the Purchase
Payment will be credited.
Additional Purchase Payments may be made at any time prior to the Annuity
Date, as long as the Annuitant or Joint Annuitant, if applicable, is living.
Additional Purchase Payments must be for at least $250. Additional Purchase
Payments received prior to the close of the New York Stock Exchange (generally
4:00 p.m. Eastern time) are credited to the Accumulated Value of the Contract as
of the close of business that same day.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, we will only accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a U.S. correspondent bank.
The Contracts are available on a non-qualified basis and as individual
retirement annuities (IRAs) that qualify for special federal income tax
treatment. Generally, Qualified Contracts may be purchased only in connection
with a "rollover" of funds from another qualified plan or IRA and contain
certain other restrictive provisions limiting the timing and amount of payments
to and distributions from the Qualified Contract.
Total Purchase Payments may not exceed $1,000,000 without prior approval of
the Company.
Purchasing by Wire
Money should be wired to:
First Union National Bank
ABA 031201467
Deposit Account Number 2014126521732
Peoples Benefit Life Insurance Company and
The Vanguard Group, Inc.
[Your Contract Number]
[Your Contract Registration]
Please call:
1-800-462-2391 before wiring
<PAGE>
16
Contract Application and Purchase Payments (continued)
To assure proper receipt, please be sure your bank includes the contract
number Vanguard has assigned you. For an Initial Purchase Payment, please
complete the Vanguard Variable Annuity Plan Application and mail it to the
Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103
prior to completing wire arrangements. Note: Federal funds wire purchase orders
will be accepted only when the New York Stock Exchange and Custodian Bank are
open for business.
Section 1035 Exchanges
You may exchange your Accumulated Value under an existing annuity contract to
the Vanguard Variable Annuity Plan. Section 1035 of the Internal Revenue Code of
1986, as amended (the "Code"), provides, in general, that no gain or loss shall
be recognized on the exchange of one annuity contract for another. To complete a
"1035 Exchange" simply provide all the requested information on the 1035
Exchange Form and mail it, along with the application and your current contract,
to the Vanguard Variable Annuity Center. As an accommodation to owners of
Vanguard Variable Annuity Plan contracts, and in accordance with the Code, we
will accept, under certain conditions, the consolidation of two or more Vanguard
Variable Annuity Plan contracts into one. Such exchanges will be accepted on a
case by case basis in order to provide contract owners with consolidated account
reporting. In addition, if applicable, contract owners will be responsible for
only one Annual Contract Maintenance Fee. Under no circumstances will an
exchange of an existing Vanguard Variable Annuity Plan contract for an identical
new Vanguard Variable Annuity Plan contract be allowed. Special rules and
procedures apply to Code Section 1035 transactions, particularly if the Contract
being exchanged was issued prior to August 14, 1982. Prospective Contract Owners
wishing to take advantage of Code Section 1035 should consult their tax
advisers.
Please note that an outstanding loan on the contract that you wish to transfer
may create a tax consequence. Therefore, you are encouraged to settle any
outstanding loans with your current insurance company prior to initiating a 1035
Exchange into the Plan.
Allocation of Purchase Payments
The Contract Owner specifies on the Contract Application how Purchase Payments
will be allocated. The Contract Owner may allocate each Purchase Payment to one
or more of the Portfolios as long as such portions are whole number percentages
and any allocation made is at least 10% and at least $1,000.
Allocation instructions for future Purchase Payments may be changed by the
Contract Owner by sending a written notice to the Vanguard Variable Annuity
Center. You may sign the proper section of the Application to establish an
option that allows you to provide allocation instructions by telephone. This
option includes the ability to change your investment by eliminating a Contract
Portfolio from your allocations or by adding a new Contract Portfolio to your
list. Please note that you must maintain a minimum of $1,000 in each Portfolio
to which you have allocated assets.
For Contract Owners in certain states only, the Initial Purchase Payment for
the Contract will be immediately allocated to the Portfolios of the Fund in the
whole-number percentages you specify on the Application. Please telephone the
Vanguard Variable Annuity Center at 1-800-522-5555 before purchasing to find out
if the immediate allocation feature applies to Contracts issued in your state.
If the immediate allocation feature does not apply to Contracts issued in your
state, your Initial Purchase Payment and any additional Purchase Payments will
be allocated to the Money Market Portfolio during the Free Look Period for a
minimum of 10 days (30 or more in some instances as specified in your Contract)
during which you may cancel your Contract.
Upon expiration of the Free Look Period, the Accumulated Value will remain in
the Money Market Portfolio for an additional 5-day grace period to allow for
mail delivery. Upon the expiration of the Free Look Period and the 5-day grace
period (15 to 35 days), the Accumulated Value will then be allocated among the
Portfolios in accordance with your instructions.
<PAGE>
17
Charges and Deductions
The projected expenses for the Contract are substantially below the costs of
other variable annuity contracts. For example, based on a $25,000 contract the
average expense ratio of other variable annuity contracts was 2.09% as of
December 31, 1997, compared to 0.71% for the Vanguard Variable Annuity Plan
(source for competitors' data: Morningstar Performance Report January 1998).
No sales load is deducted from the Initial Purchase Payment or any Additional
Purchase Payments. In addition, there are no sales charges imposed upon
withdrawals.
Mortality and Expense Risk Charge
The Company imposes a charge as compensation for bearing certain mortality and
expense risks under the Contracts. The annual charge is assessed daily based on
the combined net assets of the Separate Account and Separate Account B of AUSA
Life Insurance Company, Inc. in the Fund according to the following schedule:
-------------------------------------------------------------
Rate For
Net Assets All Assets
-------------------------------------------------------------
Up to $2.5 Billion 0.30%
Over $2.5 Billion and Up To $5 Billion 0.28%
Over $5 Billion 0.27%
-------------------------------------------------------------
The Company guarantees that these mortality and expense risk breakpoints will
never increase. If this charge is insufficient to cover actual costs and assumed
risks, the loss will fall on the Company. Conversely, if the charge proves more
than sufficient, any excess will be added to the Company surplus.
The mortality risk borne by the Company under the Contracts, where one of the
life Annuity Payment Options was selected, is to make monthly annuity payments
(determined in accordance with the annuity tables and other provisions contained
in the Contract) regardless of how long all Annuitants may live. We also assume
mortality risk as a result of our guarantee of a minimum Death Benefit in the
event the Annuitant dies prior to the Annuity Date.
The expense risk borne by the Company under the Contracts is the risk that the
charges for administrative expenses which are guaranteed for the life of the
Contract may be insufficient to cover the actual costs of issuing and
administering the Contract.
Administrative Charge & Maintenance Fee
An annual administrative charge of 0.10% of the net asset value of the Separate
Account is assessed daily along with an annual maintenance fee of $25 for
Contracts valued at less than $25,000 at the time of initial purchase and on the
last Business Day of each year. It is important to note that fluctuation in
Accumulation Unit Values due to changes in the market values of securities may
cause an investor's Contract's value to fall below $25,000. The annual
maintenance fee is deducted proportionately from each Contract's Accumulated
Value; therefore, the $25 fee is assessed per Contract, not per Portfolio
chosen. Your Initial Purchase Payment of less than $25,000 is reduced by an
initial maintenance fee which is prorated to reflect only the remaining portion
of the calendar year of purchase. Thereafter, the fee is deducted on the last
Business Day of the year for the following year, on a pro rata basis from each
of the Portfolios you have chosen. These deductions represent reimbursement for
the costs expected to be incurred over the life of the Contract for issuing and
maintaining each Contract and the Separate Account. Please note that Contracts
valued at $25,000 or more as of the last Business Day of the year will not be
assessed the $25 maintenance fee for the following year.
Taxes
The Contract Owner will, where such taxes are imposed by state law, pay Premium
Taxes that currently range up to 3.5%. These taxes will be deducted from the
Accumulated Value or Purchase Payments as incurred by the Company.
<PAGE>
18
Charges and Deductions (continued)
As of the date of this Prospectus, the following state assesses a Premium Tax
on all Initial and subsequent Purchase Payments:
---------------------------------------------------------------
Qualified Non-Qualified
---------------------------------------------------------------
South Dakota 0% 1.25%
---------------------------------------------------------------
As of the date of this Prospectus, the following states assess a Premium Tax
against the Accumulated Value if the Owner chooses an Annuity Payment Option
instead of receiving a lump sum distribution:
---------------------------------------------------------------
Qualified Non-Qualified
---------------------------------------------------------------
California 0.50% 2.35%
District of Columbia 2.25 2.25
Kentucky 2.00 2.00
---------------------------------------------------------------
---------------------------------------------------------------
Qualified Non-Qualified
---------------------------------------------------------------
Maine 0% 2.00%
Nevada 0 3.50
West Virginia 1.00 1.00
Wyoming 0 1.00
---------------------------------------------------------------
Under present laws, the Company will incur state or local taxes (other than
Premium Taxes described above) in several states. At present, the Company does
not charge the Contract Owner for these other taxes. If there is a change in
state or local tax laws, charges for such taxes may be made. The Company does
not expect to incur any federal income tax liability attributable to investment
income or capital gains retained as part of the reserves under the Contracts.
(See "Federal Tax Considerations," page 24.) Based upon these expectations, no
charge is currently being made to the Separate Account for corporate federal
income taxes that may be attributable to the Separate Account.
The Company will periodically review the question of a charge to the Separate
Account for corporate federal income taxes related to the Separate Account. Such
a charge may be made in future years for any federal income taxes incurred by
the Company. This might become necessary if the tax treatment of the Company is
ultimately determined to be other than what the Company currently believes it to
be, if there are changes made in the federal income tax treatment of annuities
at the corporate level, or if there is a change in the Company's tax status. In
the event that the Company should incur federal income taxes attributable to
investment income or capital gains retained as part of the reserves under the
Contracts, the Accumulated Value of the Contract would be correspondingly
adjusted by any provision or charge for such taxes.
Vanguard Variable Insurance Fund Expenses
The value of the assets in the Separate Account will reflect the fees and
expenses paid by the Fund. A complete description of these expenses is found in
the "Fee Table" section of this Prospectus and in the "Management of the Fund"
Section of the Fund's Statement of Additional Information.
Accumulated Value
At the commencement of the Contract, the Accumulated Value equals the Initial
Net Purchase Payment. Thereafter, on any Business Day the Accumulated Value
equals the Accumulated Value from the previous Business Day
<PAGE>
19
increased by: i) any Additional Net Purchase Payments received by the Company
and ii) any increase in the Accumulated Value due to investment results of the
selected Portfolio(s) that occur during the Valuation Period; and reduced by: i)
any decrease in the Accumulated Value due to investment results of the selected
Portfolio(s), ii) a daily charge to cover the mortality and expense risks
assumed by the Company, iii) any charge to cover the cost of administering the
Contract, iv) any partial withdrawals, and v) Premium Taxes, if any, that occur
during the Valuation Period.
The Accumulated Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Portfolios of the
Fund as well as the daily deduction of charges. When your Net Purchase Payments
are allocated to a selected Portfolio, they result in a particular number of
Accumulation Units being credited to your Contract. The number of Accumulation
Units credited is determined by dividing the dollar amount allocated to each
Portfolio by the Accumulation Unit Value for that Portfolio as of the end of the
Valuation Period in which the payment is received. The Accumulation Unit Value
varies each Valuation Period (i.e., each day that there is trading on the New
York Stock Exchange) with the net rate of return of the Portfolio. The net rate
of return reflects the investment performance of the Portfolio for the Valuation
Period and is net of asset charges to the Portfolio.
Dividends and Capital Gains Treatment
All dividends and capital gains earned will be reinvested and reflected in the
Accumulation Unit Value. Only in this way can these earnings remain tax
deferred.
Annuity Express(TM)
The Annuity Express service allows you to transfer funds automatically from your
checking or statement savings account to one or more Portfolios in your
Contract. You may purchase into existing Portfolios (if the $1,000 minimum
balance requirement has been met) monthly, quarterly, semiannually, or annually.
The minimum automatic purchase is $50 and the maximum is $100,000.
Exchanges Among the Portfolios
Should your investment goals change, you may exchange the Accumulated Value
among the Portfolios of the Fund. Requests for exchanges received by mail or by
telephone prior to the close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed at the close of business that same day. Requests
received after the close of the Exchange are processed the next Business Day.
The Contract's exchange privilege is not intended to afford Contract Owners a
way to speculate on short-term movements in the market. Accordingly, in order to
prevent excessive use of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the Separate Account has
established a policy of limiting excessive exchange activity.
Because excessive exchanges can disrupt management of the Portfolios and
increase the Portfolios' costs for all Contract Owners, exchange activity is
limited to two substantive "round trips" through a Portfolio (except the Money
Market Portfolio) during any 12-month period. Your round trips through a
Portfolio must be at least 30 days apart. A "round trip" is a redemption from a
Portfolio followed by a purchase back into the Portfolio. Also, "round trip"
covers transactions accomplished by any combination of methods, including
transactions conducted by check, wire, or exchange to or from another Vanguard
fund. "Substantive" means either a dollar amount large enough to have a negative
impact on a Portfolio or a series of movements between Portfolios. All exchanges
must be for at least $250, or, if less, the Accumulated Value in the Portfolio.
However, the Company and the Fund reserve the right to revise or terminate the
exchange privilege, limit the amount of or reject any exchange, as deemed
necessary, at any time.
<PAGE>
20
Exchanges Among the Portfolios (continued)
Automatic Exchanges
The Automatic Exchange Service allows you to move money automatically among the
Portfolios of the Fund. You may exchange fixed amounts or percentages of your
Portfolio balance either monthly, quarterly, semiannually or annually into
existing (the $1,000 minimum balance requirement has been met) Portfolios.
Exchanges at regular intervals or "dollar-cost averaging" can be used, for
example, to move money from a money market portfolio into a stock or bond
portfolio. The minimum exchange amount is $250. The Automatic Exchange Service
may be established by completing a Vanguard Variable Annuity Plan Automatic
Exchange Service Application Form or writing a letter of instruction. You may
change the transfer amount or cancel this service in writing or by telephone, if
you have established telephone authorization on your Contract. Please note that
the Automatic Exchange Service cannot be used to establish a new Portfolio, and
will not be activated until the Free Look Period has expired.
Telephone Exchanges
To establish the telephone exchange privilege on your Contract, please complete
the appropriate section of the Plan Application. The Company, the Fund, and
Vanguard shall not be responsible for the authenticity of exchange instructions
received by telephone. Reasonable procedures will be undertaken to confirm that
instructions communicated by telephone are genuine. Prior to the acceptance of
any request, the caller will be asked by a customer service representative for
his or her contract number and social security number. All calls will be
recorded, and this information will be verified with the Contract Owner's
records prior to processing a transaction. Furthermore, all transactions
performed by a service representative will be verified with the Contract Owner
through a written confirmation statement. The Company, the Fund, and Vanguard
shall not be liable for any loss, cost or expense for action on telephone
instructions that are believed to be genuine in accordance with these
procedures. Every effort will be made to maintain the exchange privilege.
However, the Company and the Fund reserve the right to revise or terminate its
provisions, limit the amount of or reject any exchange, as deemed necessary, at
any time.
Full and Partial Withdrawals
At any time before the Annuity Date and while the Annuitant or Joint Annuitant
is living, the Contract Owner may make a partial or full withdrawal of the
Contract to receive all or part of the Accumulated Value by sending a written
request to the Vanguard Variable Annuity Center. Full or partial withdrawals may
only be made before the Annuity Date and all partial withdrawal requests must be
for at least $250. (See "Federal Tax Considerations," page 24.)
You can make a withdrawal by writing to the Vanguard Variable Annuity Center.
Your written request should include your Contract number, social security
number, withdrawal amount, the signature of all owners, and federal tax
withholding election (if no withholding election is chosen, we will be required
to withhold 10%). Your proceeds will normally be distributed within two Business
Days after the receipt of the request but in no event will it be later than
seven calendar days, subject to postponement in certain circumstances (see
"Deferment of Payment" page 24).
Systematic Withdrawals
You may establish an automatic withdrawal of a specific amount, a percentage of
the balance, or accumulated earnings from your Contract, and receive
distributions on a monthly, quarterly, semiannual, or annual schedule. Once
established, a check will be sent to your Contract address, bank account or as
you direct. Please note that each systematic withdrawal, like any other partial
withdrawal, is subject to federal income taxes on the earnings, and may be
subject to a 10% tax imposed by the IRS on withdrawals made prior to age 59 1/2.
A minimum Contract balance of $10,000, and Portfolio balance of $1,000 are
required to establish a systematic withdrawal program for your Contract. The
minimum automatic withdrawal amount is $250. Changes to the withdrawal amount,
percentage, or the frequency of distributions may be made by telephone. Any
other changes, including a change in the destination of the check, must be
requested in writing, and should include signatures of all Contract owners. To
cancel the systematic withdrawal program, the Contract owner(s) needs to submit
a letter of instruction with the appropriate signatures.
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21
To establish a systematic withdrawal program for your Contract, simply
complete the Vanguard Variable Annuity Plan Systematic Withdrawal Program
Application Form. Please note that the completed form must be signed by all
Contract owners, and must be signature guaranteed if you are directing the
withdrawal checks to an address other than the Contract address.
Payments under the Contract of any amounts derived from premiums paid by check
may be delayed until such time as the check has cleared your bank. If, at the
time the Contract Owner requests a full or partial withdrawal, he or she has not
provided the Company with a written election not to have federal income taxes
withheld, the Company must by law withhold such taxes from the taxable portion
of any full or partial withdrawal and remit that amount to the federal
government. Moreover, the Internal Revenue Code provides that a 10% penalty tax
will be imposed on certain early withdrawals. (See "Federal Tax Considerations,"
page 24.)
Since the Contract Owner assumes the investment risk with respect to amounts
allocated to the Separate Account, the total amount paid upon withdrawal of the
Contract (taking into account any prior withdrawals) may be more or less than
the total Purchase Payments made.
Minimum Balance Requirements
Due to the relatively high cost of maintaining smaller accounts, the Company
reserves the right to transfer the balance in any Portfolio account that falls
below $1,000, due to a partial withdrawal or exchange, to the remaining
Portfolios held under that Contract, on a pro rata basis. In the event that the
entire value of the Contract falls below $1,000, you may be notified that the
Accumulated Value of your account is below the Contract's minimum requirement.
You would then be allowed 60 days to make an additional investment before the
account is liquidated. Proceeds would be promptly paid to the Contract Owner.
The full proceeds would be taxable as a withdrawal. A full withdrawal will
result in an automatic termination of the Contract.
Designation of a Beneficiary
The Contract Owner may select one or more Beneficiaries, who would receive
benefits upon the death of the Annuitant, and name them in the application. The
Beneficiary(ies), as named on the application, will serve as the beneficiary
designation. Thereafter, while the Annuitant or Joint Annuitant is living, the
Contract Owner may change the Beneficiary by written notice. Such change will
take effect on the date the notice is signed by the Contract Owner but will not
affect any payment made or other action taken before the Company acknowledges
the notice. The Contract Owner may also make the designation of Beneficiary
irrevocable by sending written notice to, and obtaining approval from, the
Company. Changes in the Beneficiary may then be made only with the consent of
the designated irrevocable Beneficiary.
If the Annuitant dies prior to the Annuity Date, the following will apply
unless the Contract Owner has made other provisions:
(a) If there is more than one Beneficiary, each will share in the Death
Benefits equally;
(b) If one or two or more Beneficiaries has already died, that share of
the Death Benefit will be paid equally to the survivor(s);
(c) If no Beneficiary is living, the proceeds will be paid to the Contract
Owner;
(d) If a Beneficiary dies at the same time as the Annuitant, the proceeds
will be paid as though the Beneficiary had died first. If a
Beneficiary dies within 15 days after the Annuitant's death and before
the Company receives due proof of the Annuitant's death, proceeds will
be paid as though the Beneficiary had died first.
If a Beneficiary who is receiving Annuity Payments dies, any remaining
Payments Certain will be paid to that Beneficiary's named Beneficiary(ies) when
due. If no Beneficiary survives the Annuitant, the right to any amount payable
will pass to the Contract Owner. If the Contract Owner is the Annuitant, this
right will pass to his or her estate.
If a Life Annuity with Period Certain Option was elected, and if the
Annuitant dies on or after the Annuity Date, any unpaid Payments Certain will be
paid to the Beneficiary.
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22
Death of Annuitant Prior to Annuity Date
Subject to the provisions dealing with Joint Annuitants, if the Annuitant dies
prior to the Annuity Date, an amount will be paid as proceeds to the
Beneficiary. If the Annuitant or Joint Annuitant dies prior to the Annuity Date,
the survivor shall become the sole Annuitant. The Death Benefit is calculated
and is payable upon receipt of due Proof of Death of the Annuitant as well as
proof that the Annuitant died prior to the Annuity Date. Upon receipt of this
proof, the Death Benefit will be paid within seven days, or as soon thereafter
as the Company has sufficient information about the Beneficiary to make the
payment. The Beneficiary may receive the amount payable in a lump sum cash
benefit or under one of the Annuity Payment Options.
A lump sum cash benefit will equal the greater of: (a) the Accumulated Value
as of the date of due Proof of Death and proof that the Annuitant died prior to
the Annuity Date or (b) the sum of Purchase Payments less the sum of all partial
withdrawals and Premium Taxes. An Annuity Payment will be based on the greater
of: (a) the Accumulated Value ten Business Days prior to the Annuity Date
elected by the Beneficiary and approved by the Company or (b) the sum of
Purchase Payments less the sum of all partial withdrawals and Premium Taxes. The
Contract Owner may elect an Annuity Payment Option for the Beneficiary or, if no
such election was made by the Contract Owner and a cash benefit has not been
paid, the Beneficiary may make this election after the Annuitant's death.
For a discussion of the consequences of the death of the Contract Owner, if
different from the Annuitant, see "Distribution-at-Death Rules," page 26.
Annuity Date
The Contract Owner may specify an Annuity Date in the application, which can be
no later than the first day of the month after the Annuitant's 85th birthday,
without the Company's prior approval. If no Annuity Date is specified in the
application, the Annuitant will begin receiving Annuity Payments on the first
day of the month after ten full years from the date of this Contract, or the
first day of the month which follows the Annuitant's 65th birthday, whichever is
later. The Annuity Date is the date that Annuity Payments are scheduled to
commence under the Contract, unless the Contract has been surrendered or an
amount has been paid as proceeds to the designated Beneficiary prior to that
date.
The Contract Owner may advance or defer the Annuity Date. However, the Annuity
Date may not be advanced to a date prior to 30 days after the date of receipt of
a written request or, without the Company's prior approval, deferred to a date
beyond the Annuitant's 85th birthday. An Annuity Date may only be changed by
written request during the Annuitant's or Joint Annuitant's lifetime and must be
made at least 30 days before the then-scheduled Annuity Date. The Annuity Date
and Annuity Payment Options available for Qualified Contracts may also be
controlled by endorsements, the plan or applicable law.
Annuity Payment Options
All Annuity Payment Options (except the Designated Period Annuity Option) are
offered as "Variable Annuity Options." This means that Annuity Payments, after
the initial payment, will reflect the investment experience of the Portfolio or
Portfolios chosen by the Contract Owner. All Annuity Payment Options are offered
as "Fixed Annuity Options." This means that the amount of each payment will be
set on the Annuity Date and will not change. If you choose a Fixed Option, your
investment will be moved out of the underlying Vanguard Portfolios and into the
general account of Peoples Benefit Life Insurance Company. If you do not wish to
receive your payments on an annuity basis, you may take a lump sum payment at
any time before the annuity date. The lump sum value is equal to the Accumulated
Value. The following Annuity Payment Options are available under the Contract:
. Life Annuity--Available as either a Fixed or Variable Option. Monthly
Annuity Payments are paid for the life of an Annuitant, ceasing with the
last Annuity Payment due prior to the Annuitant's death.
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23
. Joint and Last Survivor Annuity--Available as either a Fixed or Variable
Option. Monthly Annuity Payments are paid for the life of two Annuitants
and thereafter for the life of the survivor, ceasing with the last Annuity
Payment due prior to the survivor's death.
. Life Annuity with Period Certain--Available as either a Fixed or Variable
Option. Monthly Annuity Payments are paid for the life of an Annuitant,
with a Period Certain of not less than 120, 180, or 240 months, as elected.
. Installment or Unit Refund Life Annuity--Available as either a Fixed
(Installment Refund) or Variable (Unit Refund) Option. Monthly Annuity
Payments are paid for the life of an Annuitant, with a Period Certain
determined by dividing the Accumulated Value by the First Annuity Payment.
. Designated Period Annuity--Only available as a Fixed Option. Monthly
Annuity Payments are paid for a Period Certain as elected, which may be
from 10 to 30 years.
In the event that an Annuity Payment Option is not selected, the Company
will make monthly Annuity Payments that will go on for as long as the Annuitant
lives (120 payments guaranteed) in accordance with the Life Annuity with Period
Certain Option and the annuity benefit sections of the Contract. That portion of
the Accumulated Value that has been held in a Portfolio prior to the Annuity
Date will be applied under a Variable Annuity Option based on the performance of
that Portfolio. Subject to approval by the Company, the Contract Owner may
select any other Annuity Payment Option then being offered by the Company.
Annuity Payments are guaranteed to be not less than as provided by the Annuity
Tables for the first payment under a Variable Option and each payment under a
Fixed Option. The minimum payment, however, is $100 ($20 for Massachusetts
Contract Owners). If the Accumulated Value is less than $5,000, or less than
$2,000 for Texas and Massachusetts Contract Owners, the Company has the right to
pay that amount in a lump sum. From time-to-time, the Company may require proof
that the Annuitant, Joint Annuitant, or Contract Owner is living. Annuity
Payment Options are not available to: (1) an assignee; or (2) any other than a
natural person, except with the consent of the Company.
The Company may, at the time of election of an Annuity Payment Option,
offer more favorable rates in lieu of the guaranteed rates specified in the
Annuity Tables found in the Contract.
The value of Variable Annuity Payments will reflect the investment
experience of the chosen Portfolio. On or after the Annuity Date, the Annuity
Payment Option is irrevocable. Only one Annuity Option may be chosen from among
those made available by the Company per each Portfolio. The annuity tables,
which are contained in the Contract and are used to calculate the value of
Variable Annuity Payments, are based on an assumed interest rate of 4%. If the
actual net investment experience exactly equals the assumed interest rate, then
the Variable Annuity Payments will remain the same (equal to the first Annuity
Payment). However, if actual investment experience exceeds the assumed interest
rate, the Variable Annuity Payments will increase; conversely, they will
decrease if the actual experience is lower.
If an Annuity Payment Option is chosen that depends on the continuation of
the life of the Annuitant or of a Joint Annuitant, proof of birth date may be
required before Annuity Payments begin. For Annuity Payment Options involving
life income, the actual age of the Annuitant or of a Joint Annuitant will affect
the amount of each payment. Since payments to older Annuitants are expected to
be fewer in number, the amount of each Annuity Payment shall be greater.
If at the time of any Annuity Payment the Contract Owner has not provided
the Company with a written election not to have federal income taxes withheld,
the Company must by law withhold such taxes from the taxable portion of such
Annuity Payment and remit that amount to the federal government.
The value of all payments, both fixed and variable, will be greater for
shorter guaranteed periods than for longer guaranteed periods, and greater for
life annuities than for joint and survivor annuities, because they are expected
to be made for a shorter period.
After the Annuity Date, the Contract Owner may change the Portfolio funding
the Variable Annuity Payments, either by written request or by calling the
Vanguard Variable Annuity Center (1-800-462-2391). Because excessive exchanges
can disrupt management of the Portfolios and increase the Portfolios'
transaction costs, exchange activity is limited to two substantive "round trips"
(at least 30 days apart) through the Portfolios (except the Money Market
Portfolio) during any 12-month period. A "round trip" is a redemption from a
Portfolio followed by a purchase back into the Portfolio. Also, "round trip"
covers transactions accomplished by any combination of methods, including
transactions conducted by check, wire, or exchange to or from another Vanguard
fund. "Substantive" means either a
<PAGE>
24
Annuity Payment Options (continued)
dollar amount large enough to have a negative impact on a Portfolio or a series
of movements between Portfolios. The method of computation of Variable Annuity
Payments is described in more detail in the Statement of Additional Information.
If you choose an Annuity Payment Option and the postal or other delivery
service is unable to deliver checks to the Payee's address of record, no
interest will accrue on amounts represented by uncashed Annuity Payment checks.
It is the Payee's responsibility to keep the Company informed of the Payee's
current address of record.
Deferment of Payment
Payment of any cash withdrawal or lump-sum death benefit due from the Separate
Account will occur within seven days from the date the election becomes
effective, except that the Company may be permitted to defer such payment if:
(1) the New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted; or (2) an
emergency exists as defined by the SEC, or the SEC requires that trading be
restricted; or (3) the SEC permits a delay for the protection of Contract
Owners.
Federal Tax Considerations
Introduction
The ultimate effect of federal income taxes on the amounts paid for the
Contract, on the investment returns on assets held under a Contract, on Annuity
Payments, and on the economic benefits to the Contract Owner, Annuitant or
Beneficiary, depends on the Company's tax status and upon the tax status of the
individuals concerned. The following discussion is general in nature and is not
intended as tax advice. You should consult a tax adviser regarding the tax
consequences of purchasing a Contract. No attempt is made to consider any
applicable state or other tax laws. Moreover, the discussion is based upon the
Company's understanding of the federal income tax laws as they are currently
interpreted. No representation is made regarding the likelihood of continuation
of the federal income tax laws, the Treasury Regulations, or the current
interpretations by the Internal Revenue Service. We reserve the right to make
uniform changes on the Contract to the extent necessary to continue to qualify
the Contract as an annuity. For a discussion of federal income taxes as they
relate to the Fund, please see the accompanying Prospectus for the Fund.
Taxation of Annuities in General
Section 72 of the Code governs taxation of annuities. In general, a Contract
Owner is not taxed on increases in value under a Contract until some form of
withdrawal or distribution is made under it. However, under certain
circumstances, the increase in value may be subject to current federal income
tax. (See "Contracts Owned by Non-Natural Persons" and "Diversification
Standards", pages 26 and 27.)
Section 72 provides that the proceeds of a full or partial withdrawal from a
Contract prior to the Annuity Date will be treated as taxable income to the
extent the amounts held under the Contract exceed the "investment in the
Contract," as that term is defined in the Code. The "investment in the Contract"
can generally be described as the cost of the Contract, and generally
constitutes all purchase payments paid for the Contract less any amounts
received under the Contract that are excluded from the individual's gross
income. The taxable portion is taxed at ordinary income tax rates. For purposes
of this rule, a pledge or assignment of a Contract is treated as a payment
received on account of a partial withdrawal of a Contract.
Upon receipt of a full or partial withdrawal or an Annuity Payment under the
Contract, you will be taxed if the value of the Contract exceeds the investment
in the Contract. Ordinarily, the taxable portion of such payments will be taxed
at ordinary income tax rates. Partial withdrawals are generally taken out of
earnings first and then your purchase payments in the Contract.
For Fixed Annuity Payments, in general, the taxable portion of each payment is
determined by using a formula known as the "exclusion ratio," which establishes
the ratio that the investment in the Contract bears to the total expected amount
of Annuity Payments for the term of the Contract. That ratio is then applied to
each payment to
<PAGE>
25
determine the non-taxable portion of the payment. The remaining portion of each
payment is taxed at ordinary income tax rates. For Variable Annuity Payments, in
general, the taxable portion is determined by a formula that establishes a
specific dollar amount of each payment that is not taxed. The dollar amount is
determined by dividing the investment in the Contract by the total number of
expected periodic payments. The remaining portion of each payment is taxed at
ordinary income tax rates. Once the excludible portion of Annuity Payments to
date equals the investment in the Contracts, the balance of the Annuity Payments
will be fully taxable.
Generally, the entire amount distributed from a Qualified Contract is
taxable to the Owner. In the case of Qualified Contracts with after tax
contributions, the Owner is entitled to exclude the portion of each withdrawal
or annuity payment constituting a return of after tax contributions. Once all of
your after tax contributions have been returned to you on a non-taxable basis,
subsequent withdrawals or annuity payments are fully taxable as ordinary income.
Since the Company has no knowledge of the amount of after tax contributions you
have made, you will need to make this computation in the preparation of your
federal income tax return.
Withholding of federal income taxes on all distributions is required unless
the recipient elects not to have any amounts withheld and properly notifies the
Company of that election. In certain situations, taxes will be withheld on
distributions to nonresident aliens at a 30% flat rate unless an exemption from
withholding applies under the applicable tax treaty.
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10% of the taxable portion
of amounts withdrawn or distributed. However, the penalty tax will not apply to
withdrawals: (i) made on or after the death of the Contract Owner (or where the
Contract Owner is not an individual, the death of the primary Annuitant, who is
defined as the individual the events in whose life are of primary importance in
affecting the timing and payment under the Contract); (ii) attributable to the
taxpayer's becoming disabled within the meaning of Code Section 72(m)(7); (iii)
that are part of a series of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the taxpayer, or joint lives (or
joint life expectancies) of the taxpayer and his Beneficiary; (iv) from a
qualified plan; (v) allocable to investment in the Contract before August 14,
1982; (vi) under a qualified funding asset (as defined in Code Section 130(d);
(vii) under an immediate annuity contract as defined in Section 72(u)(4); or
(viii) under Contracts that are purchased by an employer on termination of
certain types of qualified plans and that are held by the employer until the
employee separates from service. Other tax penalties may apply to certain
distributions as well as to certain contributions and other transactions under a
qualified contract.
If the penalty tax does not apply to a withdrawal as a result of the
application of item (iii) above, and the series of payments are subsequently
modified (other than by reason of death or disability), the tax for the year in
which the modification occurs will be increased by an amount (as determined
under Treasury Regulations) equal to the penalty tax that would have been
imposed but for item (iii) above, plus interest for the deferral period. The
foregoing rule applies if the modification takes place (a) before the close of
the period that is five years from the date of the first payment and after the
taxpayer attains age 59 1/2, or (b) before the taxpayer reaches age 59 1/2. The
tax penalty may also not apply to distributions from Qualified Contracts issued
under Section 408(b) of the Code used to pay qualified higher education expenses
or the acquisition costs (up to $10,000) involved in the purchase of a principal
residence by a first-time homebuyer.
The Company's Tax Status
The Company is taxed as a life insurance company under Part I of Subchapter L of
the Code. Since the Separate Account is not a separate entity from the Company
and its operations form a part of the Company, it will not be taxed separately
as a "regulated investment company" under Subchapter M of the Code. Investment
income and realized capital gains on the assets of the Separate Account are
reinvested and taken into account in determining the Accumulated Value. Under
existing federal income tax law, the Separate Account's investment income,
including realized net capital gains, is not taxed to the Company. The Company
reserves the right to make a deduction for taxes should they be imposed with
respect to such items in the future.
<PAGE>
26
Federal Tax Considerations (continued)
Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract must, generally,
provide the following two distribution rules: (a) if any Contract Owner dies on
or after the Annuity Date and before the entire interest in the Contract has
been distributed, the remaining portion of such interest must be distributed at
least as rapidly as under the method in effect on the Contract Owner's death;
and (b) if any Contract Owner dies before the Annuity Date, the entire interest
in the Contract must generally be distributed within five years after the date
of death. To the extent such interest is payable to a Designated Beneficiary,
however, such interest may be annuitized over the life of that Designated
Beneficiary or over a period not extending beyond the life expectancy of that
Beneficiary, so long as distributions commence within one year after the
Contract Owner's death. If the Designated Beneficiary is the spouse of the
Contract Owner, the Contract (together with the deferred tax on the accrued and
future income thereunder) may be continued unchanged in the name of the spouse
as Contract Owner. The term Designated Beneficiary means the natural person
named by the Contract Owner as a beneficiary and to whom ownership of the
Contract passes by reason of the Contract Owner's death.
If the Contract Owner is not an individual, death of the "primary Annuitant"
(as defined under the Code) is treated as the death of the Contract Owner. The
primary Annuitant is the individual who is of primary importance in affecting
the timing or the amount of payout under a Contract. In addition, when the
Contract Owner is not an individual, a change in the primary Annuitant is
treated as the death of the Contract Owner.
Finally, in the case of Joint Contract Owners, the distribution will be
required at the death of the first of the Contract Owners.
Transfers of Annuity Contracts
Any transfer of a Non-Qualified Contract prior to the Annuity Date for less than
full and adequate consideration will generally trigger tax on the gain in the
Contract to the Contract Owner at the time of such transfer. The investment in
the Contract of the transferee will be increased by any amount included in the
Contract Owner's income. This provision, however, does not apply to those
transfers between spouses or incident to a divorce which are governed by Code
Section 1041(a).
Contracts Owned by Non-Natural Persons
Where the Contract is held by a non-natural person (for example, a corporation),
the Contract is generally not treated as an annuity contract for federal income
tax purposes, and the income on that Contract (generally the increase in the net
Accumulated Value less the payments) is includible in taxable income each year.
The rule does not apply where the non-natural person is only a nominal owner
such as a trust or other entity acting as an agent for a natural person. The
rule also does not apply where the Contract is acquired by the estate of a
decedent, where the Contract is a qualified funding asset for structured
settlements, where the Contract is purchased by an employer on behalf of an
employee upon termination of a qualified plan, and in the case of an immediate
annuity as defined under the Code.
Assignments
A transfer of ownership of a Contract or the designation of an Annuitant or
other Beneficiary who is not also the Contract Owner may result in tax
consequences to the Contract Owner, Annuitant or Beneficiary that are not
discussed herein. A Contract Owner contemplating such a transfer or assignment
of a Contract should contact a tax adviser with respect to the potential tax
effects of such a transaction.
Multiple Contracts Rule
All non-qualified annuity contracts issued by the same company (or affiliate) to
the same Contract Owner during any calendar year are to be aggregated and
treated as one contract for purposes of determining the amount includible in the
taxpayer's gross income. Thus, any amount received under any Contract prior to
the Contract's Annuity Date, such as a partial withdrawal, will be taxable (and
possibly subject to the 10% penalty tax) to the extent of the combined
<PAGE>
27
income in all such contracts. The Treasury Department has specific authority to
issue regulations that prevent the avoidance of Code Section 72(e) through the
serial purchase of annuity Contracts or otherwise. In addition, there may be
other situations in which the Treasury Department may conclude that it would be
appropriate to aggregate two or more Contracts purchased by the same Contract
Owner. The aggregation rules do not apply to immediate annuities as defined
under Section 72(u)(4) of the Code. Accordingly, a Contract Owner should consult
a tax adviser before purchasing more than one Contract or other annuity
Department contracts.
Diversification Standards
To comply with certain diversification regulations (the "Regulations"), which
were issued in final form on March 2, 1989, under Code Section 817(h), after a
start up period, each Subaccount of the Separate Account will be required to
diversify its investments. The Regulations generally require that on the last
day of each quarter of a calendar year, no more than 55% of the value of each
Subaccount of the Separate Account is represented by any one investment, no more
than 70% is represented by any two investments, no more than 80% is represented
by any three investments, and no more than 90% is represented by any four
investments. A "look-through" rule applies that suggests that each Subaccount of
the Separate Account will be tested for compliance with the percentage
limitations by looking through to the assets of the Portfolio of the Fund in
which each such division invests. All securities of the same issuer are treated
as a single investment. As a result of the 1988 Act, each government agency or
instrumentality will be treated as a separate issuer for purposes of those
limitations.
In connection with the issuance of temporary diversification regulations in
1986, the Treasury Department announced that such regulations did not provide
guidance concerning the extent to which Contract Owners may direct their
investments to particular divisions of a separate account. It is possible that
regulations or revenue rulings may be issued in this area at some time in the
future. It is not clear, at this time, what these regulations or rulings would
provide. It is possible that when the regulations or rulings are issued, the
Contracts may need to be modified in order to remain in compliance. For these
reasons, the Company reserves the right to modify the Contracts, as necessary,
to prevent the Contract Owner from being considered the owner of assets of the
Separate Account.
We intend to comply with the Regulations to assure that the Contracts continue
to be treated as annuity contracts for federal income tax purposes.
Qualified Individual Retirement Annuities
Qualified Contracts to provide for retirement may generally be purchased only in
connection with a "rollover" of funds from another individual retirement annuity
(IRA) or qualified plan. IRA Contracts must contain special provisions and are
subject to limitations on contributions and the timing of when distributions can
be made. Tax penalties may apply to contributions in excess of specified limits,
loans or reassignments, distributions that do not meet specified requirements,
or in other circumstances. Anyone desiring to purchase a Qualified Contract
should consult a personal tax adviser.
General Information
Additions, Deletions, or Substitutions of Investments
The Company retains the right, subject to any applicable law, to make certain
changes. The Company reserves the right to eliminate the shares of any of the
Portfolios and to substitute shares of another Portfolio of the Fund, or of
another registered open-end management investment company, if the shares of the
Portfolios are no longer available for investment, or, if in the Company's
judgment, investment in any Portfolio would be inappropriate in view of the
purposes of the Separate Account. To the extent required by the 1940 Act,
substitutions of shares attributable to a Contract Owner's interest in a
Portfolio will not be made until SEC approval has been obtained and the Contract
Owner has been notified of the change.
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28
General Information (continued)
New Portfolios may be established when marketing, tax, investment, or other
conditions so warrant. Any new Portfolios will be made available to existing
Contract Owners on a basis to be determined by the Company. The Company may also
eliminate one or more Portfolios if marketing, tax, investment or other
conditions so warrant.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make such changes in the Contracts as may be necessary
or appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Contracts,
the Separate Account may be operated as a management company under the 1940 Act
or any other form permitted by law, may be deregistered under such Act in the
event such registration is no longer required, or may be combined with one or
more other separate accounts.
Distributor of the Contracts
The Vanguard Group, Inc., through its wholly-owned subsidiary, Vanguard
Marketing Corp., is the principal distributor of the Contract. For these
services, the Fund paid a fee of less than 0.02% of the Fund's average net
assets for the 1997 fiscal year. This fee is guaranteed not to exceed 0.20% of
the Fund's average month-end net assets. A complete description of these
services is found in the section of the Fund's Prospectus entitled "The
Portfolios and Vanguard" and in the Fund's Statement of Additional Information.
The principal business address for The Vanguard Group, Inc. is The Vanguard
Variable Annuity Center, 100 Vanguard Boulevard, Malvern, PA 19355.
Voting Rights
The Fund does not hold regular meetings of shareholders. The Trustees of the
Fund may call special meetings of shareholders as may be required by the 1940
Act or other applicable law. To the extent required by law, the Portfolio shares
held in the Separate Account will be voted by the Company at shareholder
meetings of the Fund in accordance with instructions received from persons
having voting interests in the corresponding Portfolio. Fund shares as to which
no timely instructions are received or shares held by the Company as to which
Contract Owners have no beneficial interest will be voted in proportion to the
voting instructions that are received with respect to all Contracts
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.
The number of votes that are available to a Contract Owner will be calculated
separately for each Portfolio of the Separate Account. That number will be
determined by applying his or her percentage interest, if any, in a particular
Portfolio to the total number of votes attributable to the Portfolio.
Prior to the Annuity Date, the Contract Owner holds a voting interest in each
Portfolio to which the Accumulated Value is allocated. The number of votes which
are available to a Contract Owner will be determined by dividing the Accumulated
Value attributable to a Portfolio by the net asset value per share of the
applicable Portfolio. After the Annuity Date, the person receiving Annuity
Payments under any variable annuity option has the voting interest. The number
of votes after the Annuity Date will be determined by dividing the reserve for
such Contract allocated to the Portfolio by the net asset value per share of the
corresponding Portfolio. After the Annuity Date, the votes attributable to a
Contract decrease as the reserves allocated to the Portfolio decrease. In
determining the number of votes, fractional shares will be recognized
The number of votes of the Portfolio that are available will be determined as
of the date coincident with the date established by that Portfolio for
determining shareholders eligible to vote at the meeting of the Fund. Voting
instructions will be solicited by written communication prior to such meeting in
accordance with procedures established by the Fund.
Year 2000 Matters
In March 1997, the Company adopted and currently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze existing
hardware and software systems, as well as voice and data communications systems,
to determine if they are Year 2000 compatible. The Plan provides for a
management process that ensures
<PAGE>
29
that when a particular system, or software application, is determined to be
"non-compliant" the proper steps are in place to either remedy the
"non-compliance" or cease using the particular system or software. The Plan also
provides that the Chief Information Officer report to the Board of Directors as
to the status of the efforts under the Plan on a regular and routine basis. The
Company has engaged the services of a third-party provider that is specialized
in Year 2000 issues to work on the project.
The Plan has four specific objectives: (1) to develop an inventory of all
applications; (2) to evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3) to
estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (4) to define testing and deployment
requirements to successfully manage validation and redeployment of any changed
code. It is anticipated that all mission-critical systems are Year 2000
compliant as of December 31, 1998, with validation testing to continue through
and including June 1999.
As of the date of this Prospectus, the Company has identified and made
available what it believes are the appropriate resources of hardware, people,
and dollars, including the engagement of outside third parties, to assure that
the Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well conceived response plan, including
testing procedures, there is no certainty that any company will achieve complete
success. Further, notwithstanding its efforts or results, the Company's ability
to function unaffected to and through the year 2000 may be adversely affected by
actions (or failures to act) of third parties beyond its knowledge or control.
Auditors
Ernst & Young LLP serves as independent auditors for the Separate Account and
the Company and will audit their financial statements annually.
Legal Matters
Jorden Burt Boros Cicchetti Berenson & Johnson LLP of Washington, DC, has
provided legal advice relating to the federal securities laws applicable to the
issue and sale of the Contracts. All matters of Missouri law pertaining to the
validity of the Contract and the Company's right to issue such Contracts have
been passed upon by Gregory E. Miller-Breetz, Esquire, on behalf of the Company.
<PAGE>
30
Table of Contents for the Vanguard Variable Annuity Plan Contract
Statement of Additional Information
<TABLE>
<S> <C>
B-2 The Contract B-7 Additional Performance Measures
B-2 Computation of Variable Annuity Income B-7 Non-Standardized Total Return and
Payments Non-Standardized Average Annual Total Return
B-3 Exchanges B-8 Non-Standardized Total Return Year-to-Date
B-3 Joint Annuitants B-8 Non-Standardized One Year Return
B-3 General Matters B-9 Safekeeping of Account Assets
B-3 Non-Participating B-9 The Company
B-3 Misstatement of Age or Sex B-9 State Regulation
B-3 Assignment B-9 Records and Reports
B-4 Annuity Data B-10 Legal Proceedings
B-4 Annual Report B-10 Other Information
B-4 Incontestability B-10 Financial Statements
B-4 Ownership B-10 Audited Financial Statements
B-4 Distribution of the Contract
B-4 Performance Information
B-4 Money Market Subaccount Yields
B-5 30-Day Yield for Non-Money Market
Subaccounts
B-5 Standardized Average Annual Total Return for
Non-Money Market Subaccounts
</TABLE>
