SECURITY ELITE BENEFIT
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ISSUED BY SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
1-800-888-2461
This Prospectus describes Security Elite Benefit, a Flexible Premium Variable
Life Insurance Policy (individually, the "Policy," and collectively, the
"Policies") offered by Security Benefit Life Insurance Company ("Security
Benefit"). The Policy, for so long as it remains in force, provides lifetime
insurance protection on the Insured named in the Policy through the Maturity
Date. The Policy is designed to provide maximum flexibility in connection with
premium payments and death benefits by permitting the Policyowner, subject to
certain restrictions, to vary the frequency and amount of premium payments and
to increase or decrease the death benefit payable under the Policy. This
flexibility allows a Policyowner to provide for changing insurance needs under a
single insurance policy. A Policy may also be surrendered for its Net Cash
Surrender Value.
Net premium payments may be allocated at the Policyowner's discretion to one
or more of the Variable Accounts that comprise a separate account of Security
Benefit called the Security Varilife Separate Account (the "Separate Account"),
or to the Fixed Account of Security Benefit. Any portion of a net premium
allocated to one or more of the Variable Accounts is invested in the
corresponding portfolios of the SBL Fund (the "Fund"), which currently consists
of eleven portfolios or "Series." The Variable Accounts and the corresponding
Series of the Fund are: the Growth Variable Account (Series A); the
Growth-Income Variable Account (Series B); the Money Market Variable Account
(Series C); the Worldwide Equity Variable Account (Series D); the High Grade
Income Variable Account (Series E); the Social Awareness Variable Account
(Series S); the Emerging Growth Variable Account (Series J); the Global
Aggressive Bond Variable Account (Series K); the Specialized Asset Allocation
Variable Account (Series M); the Managed Asset Allocation Variable Account
(Series N); and the Equity Income Variable Account (Series O). The Accumulated
Value in the Fixed Account will accrue interest at an interest rate that is
declared from time to time by Security Benefit.
To the extent that all or a portion of net premium payments are allocated to
the Separate Account, THE ACCUMULATED VALUE UNDER THE POLICY WILL VARY BASED
UPON THE INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNTS TO WHICH THE
ACCUMULATED VALUE IS ALLOCATED. No minimum amount of Accumulated Value is
guaranteed.
The Policy also permits the Policyowner to choose from two death benefit
options; under one option, the death benefit remains fixed at the Specified
Amount chosen by the Policyowner (or, if greater, it equals Accumulated Value
multiplied by a certain percentage) (Option A); under the other option, the
death benefit equals the Specified Amount plus Accumulated Value (or, if
greater, Accumulated Value multiplied by a certain percentage) (Option B). Under
the latter option, the death benefit will vary daily with the investment
performance of the Variable Accounts for any Policyowner who has allocated
Accumulated Value to the Variable Accounts. Under either option, for so long as
the Policy remains in force, the death benefit will never be less than the
current Specified Amount.
A Policy may be returned according to the terms of its Free-Look Right (see
"Right to Examine a Policy -- Free-Look Right," page 19), during which time net
premium payments allocated to the Separate Account will be invested in the Money
Market Variable Account.
It may not be advantageous to replace existing insurance with the Policy.
This Prospectus generally describes only the portion of the Policy involving
the Separate Account. For a brief summary of the Fixed Account, see "The Fixed
Account," page 26.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE SBL FUND. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THE POLICY INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL AND IS NOT A DEPOSIT OR
OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE POLICY IS NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY.
PROSPECTUS DATED MAY 1, 1997, AS SUPPLEMENTED FEBRUARY 9, 1998.
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TABLE OF CONTENTS
Page
IMPORTANT TERMS........................................................... 5
SUMMARY OF THE POLICY..................................................... 6
Purpose of the Policy.................................................. 7
Policy Values.......................................................... 7
The Death Benefit...................................................... 7
Premium Features....................................................... 7
Allocation Options..................................................... 7
Transfer of Accumulated Value.......................................... 8
Policy Loans........................................................... 8
Free-Look Right........................................................ 8
Surrender Right........................................................ 8
Partial Withdrawal Benefits............................................ 8
Charges and Deductions................................................. 8
Premium Tax......................................................... 8
Deductions from Accumulated Value................................... 8
Deductions from the Variable Accounts............................... 9
Tax Treatment of Policy............................................. 9
The Fixed Account...................................................... 9
Contacting Security Benefit............................................ 9
INFORMATION ABOUT SECURITY BENEFIT AND THE SEPARATE ACCOUNT............... 9
Security Benefit Life Insurance Company................................ 9
Security Varilife Separate Account..................................... 9
SBL Fund............................................................... 10
Series A............................................................... 10
Series B............................................................... 10
Series C............................................................... 10
Series D............................................................... 10
Series E............................................................... 10
Series S............................................................... 11
Series J............................................................... 11
Series K............................................................... 11
Series M............................................................... 11
Series N............................................................... 11
Series O............................................................... 11
The Investment Adviser................................................. 11
THE POLICY................................................................ 11
Application for a Policy............................................... 11
Premiums............................................................... 12
Guaranteed Death Benefit Premium....................................... 12
Allocation of Net Premiums............................................. 13
Dollar Cost Averaging Option........................................... 13
Asset Reallocation Option.............................................. 14
Transfer of Accumulated Value.......................................... 14
Death Benefit.......................................................... 14
Option A............................................................ 15
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Page
Option B............................................................ 15
Examples of Options A and B......................................... 15
Changes in Death Benefit Option........................................ 15
Changes in Specified Amount............................................ 16
Increases........................................................... 16
Decreases........................................................... 16
Policy Values.......................................................... 16
Accumulated Value................................................... 16
Net Cash Surrender Value............................................ 17
Determination of Accumulated Value..................................... 17
Policy Loans........................................................... 17
Benefits at Maturity................................................... 18
Surrender.............................................................. 18
Partial Withdrawal Benefits............................................ 18
Right to Examine a Policy--Free-Look Right............................. 19
Lapse.................................................................. 19
Reinstatement.......................................................... 19
CHARGES AND DEDUCTIONS.................................................... 19
Premium Tax............................................................ 19
State and Local Premium Tax Charge.................................. 20
Deductions from Accumulated Value...................................... 20
Cost of Insurance................................................... 20
Optional Insurance Benefits Charges................................. 20
Deductions from the Variable Accounts.................................. 20
Administrative Charge............................................... 20
Mortality and Expense Risk Charge................................... 20
Other Charges.......................................................... 20
Guarantee of Certain Charges........................................... 21
OTHER INFORMATION......................................................... 21
Federal Income Tax Considerations...................................... 21
Diversification Requirements........................................ 21
Tax Treatment of Policies........................................... 22
Conventional Life Insurance Policies................................ 22
Modified Endowment Contracts........................................ 22
Reasonableness Requirement for Charges.............................. 23
Accelerated Benefit for Terminal Illness............................ 23
Other............................................................... 23
Charge for Security Benefit Income Taxes............................... 24
Voting of Fund Shares.................................................. 24
Disregard of Voting Instructions....................................... 24
Report to Owners....................................................... 24
Substitution of Investments............................................ 25
Changes to Comply With Law............................................. 25
PERFORMANCE INFORMATION................................................... 25
THE FIXED ACCOUNT......................................................... 26
General Description.................................................... 26
Death Benefit.......................................................... 26
Policy Charges......................................................... 26
Transfers, Surrenders, Withdrawals, and Policy Loans................... 26
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Page
MORE ABOUT THE POLICY..................................................... 27
Ownership.............................................................. 27
Joint Owners........................................................ 27
Beneficiary............................................................ 27
Exchange of Insured.................................................... 27
Exchange of Policy During First 24 Months.............................. 27
The Contract........................................................... 27
Payments............................................................... 28
Assignment............................................................. 28
Errors on the Application.............................................. 28
Incontestability....................................................... 28
Payment in Case of Suicide............................................. 28
Participating.......................................................... 28
Policy Illustrations................................................... 28
Payment Plan........................................................... 28
Optional Insurance Benefits............................................ 29
Waiver of Monthly Deduction Rider................................... 29
Accelerated Benefit Rider for Terminal Illness...................... 29
Level Term Insurance Rider.......................................... 29
Extended Guaranteed Death Benefit Rider............................. 29
Distribution of the Policy............................................. 29
MORE ABOUT SECURITY BENEFIT............................................... 30
Management............................................................. 30
State Regulation....................................................... 31
Telephone Transfer Privileges.......................................... 31
Legal Proceedings...................................................... 32
Legal Matters.......................................................... 32
Registration Statement................................................. 32
Experts................................................................ 32
Financial Statements................................................... 32
APPENDIX.................................................................. 68
ILLUSTRATIONS............................................................. 69
THIS IS A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. ITS PURPOSE IS TO
PROVIDE INSURANCE PROTECTION FOR THE BENEFICIARY NAMED IN THE POLICY. THIS
POLICY IS NOT IN ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN
OF A MUTUAL FUND.
THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN AS CONTAINED IN THIS PROSPECTUS, THE FUND'S PROSPECTUS OR
THE STATEMENT OF ADDITIONAL INFORMATION OF THE FUND OR ANY SUPPLEMENT THERETO.
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IMPORTANT TERMS
ACCUMULATED VALUE -- The total value of the amounts in the Variable Accounts of
the Separate Account and the Fixed Account for the Policy as well as any amount
set aside in the Loan Account to secure Policy Debt as of any Valuation Date.
AGE -- The Insured's age as of his or her last birthday as of the Policy Date,
increased by the number of complete Policy Years elapsed.
BENEFICIARY -- The person or persons named by the Policyowner in the application
or by proper later designation to receive the death benefit proceeds upon the
death of the Insured.
EXTENDED GUARANTEED DEATH BENEFIT RIDER -- A Planned Periodic Premium in an
amount specified by Security Benefit which if paid in advance on at least a
monthly basis will keep the Policy in force beyond the first five Policy Years
even if Net Cash Surrender Value is insufficient to cover the monthly deduction
on any Monthly Payment Date, provided that at all times during the Extended
Guaranteed Death Benefit Period, the amount of premiums paid on the Policy less
any outstanding Policy Debt and any Partial Withdrawals is greater than or equal
to the monthly pro rata share of the Extended Guaranteed Death Benefit Premium
multiplied by the number of Policy Months the Policy has been in force. The
length of the Extended Guaranteed Death Benefit Period will vary according to
the Age of the Insured on the Policy Date. The Extended Guaranteed Death Benefit
Rider is an optional insurance benefit which a Policyowner may elect to add to
the Policy by rider. See "Optional Insurance Benefits," page 29. This premium is
not applied to purchase the Rider, but is applied to the Policy and may be the
same as the Planned Periodic Premium.
FIXED ACCOUNT -- An account that is part of Security Benefit's General Account
to which all or a portion of net premium payments may be allocated for
accumulation at a fixed rate of interest (which may not be less than 4.0
percent) declared by Security Benefit.
GENERAL ACCOUNT -- All assets of Security Benefit other than those allocated to
the Separate Account or to any other segregated separate account of Security
Benefit.
GUARANTEED DEATH BENEFIT PREMIUM -- A Planned Periodic Premium in an amount
specified by Security Benefit which if paid in advance on at least a monthly
basis will keep the Policy in force during the first five Policy Years even if
during that period Net Cash Surrender Value is insufficient to cover the monthly
deduction on any Monthly Payment Date, provided that at all times during the
first five Policy Years, the amount of premiums paid on the Policy, less any
outstanding Policy Debt and any Partial Withdrawals is greater than or equal to
the monthly pro rata share of the Guaranteed Death Benefit Premium multiplied by
the number of Policy months the Policy has been in force.
HOME OFFICE -- The Life Administration Department at Security Benefit's office,
700 SW Harrison Street, Topeka, Kansas 66636-0001.
INSURED -- The person upon whose life the Policy is issued and whose death is
the contingency upon which the death benefit proceeds are payable.
LOAN ACCOUNT -- An account to which amounts are transferred from the Variable
Accounts and the Fixed Account as collateral for Policy loans.
MATURITY DATE -- The Policy Anniversary on which the Insured is Age 95.
MONTHLY PAYMENT DATE -- The day each month on which the monthly deduction is due
against the Accumulated Value. The first Monthly Payment Date is the Policy
Date.
NET CASH SURRENDER VALUE -- Accumulated Value less Policy Debt.
PLANNED PERIODIC PREMIUM -- The premium determined by the Policyowner as a level
amount planned to be paid at fixed intervals over a specified period of time.
POLICY DATE -- The date used to determine the Monthly Payment Date, Policy
Months, Policy Years, and Policy Monthly, Quarterly, Semiannual, and Annual
Anniversaries. It is usually the date the initial premium is received at
Security Benefit's Home Office.
POLICY DEBT -- The unpaid loan balance including accrued loan interest.
POLICYOWNER OR OWNER -- The person who owns the Policy. The Policyowner will be
the Insured unless otherwise stated in the application. If the Policy has been
absolutely assigned, the assignee becomes the Owner. A collateral assignee is
not the Owner.
SPECIFIED AMOUNT -- The amount chosen by the Owner on which the initial death
benefit is based. The Specified Amount may be increased or decreased under
certain circumstances.
VALUATION DATE -- Each date on which the Separate Account is valued, which
currently includes each day that the New York Stock Exchange is open for
trading. The New York Stock Exchange is closed on weekends and on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and Christmas
Day.
VALUATION PERIOD -- The period that starts at the close of a Valuation Date and
ends at the close of the next succeeding Valuation Date.
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SUMMARY OF THE POLICY
This summary is intended to provide a brief overview of the more significant
aspects of the Policy. Further detail is provided in this Prospectus and in the
Policy. Unless the context indicates otherwise, the discussion in this summary
and the remainder of the Prospectus relates to the portion of the Policy
involving the Separate Account. The Fixed Account is briefly described under
"The Fixed Account," on page 26 and in the Policy.
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DIAGRAM OF POLICY
______________________________________
| PREMIUM PAYMENTS |
|o You can vary amount and frequency.|
|------------------------------------|
|
|
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| DEDUCTIONS FROM PREMIUMS |
| |
|o Premium Tax based upon the actual rate in the state of residence.|
|--------------------------------------------------------------------
|
|
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| NET PREMIUM |
|o You direct how net premium payments are to be allocated among the |
| Fixed AccouNT and the Variable Accounts. Each of the Variable Accounts |
| invests exclusively in a Series of SBL Fund, which Series offer |
| investments in diversified portfolios of stocks, bonds, money market |
| instruments, a combination of these securities or in securities of foreign|
| issuers. (See page 10.) |
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|
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| DEDUCTIONS FROM ASSETS |
|o The monthly deduction for cost of insurance and cost of any riders is |
| deducted from A Policy's Accumulated Value. |
| |
|o A daily charge at an annual rate of 0.90% is deducted from the Variable |
| Accounts fOR mortality and expense risks. A daily charge at the annual rate of|
| 0.35% is deducted from the Variable Accounts for administration and |
| maintenance of the Policies. These charges are not deducted from Fixed Account|
| assets. (See page 19.) |
| |
|o Investment advisory fees and other fund expenses are deducted from the |
| Series of SBL Fund. (See page 20.) |
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|
|
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| | |
| | |
|----------------------------------------| |----------------------------------------| |-------------------------------------|
| LIVING BENEFITS | | RETIREMENT BENEFITS | | DEATH BENEFITS |
| | | | | |
| o Within the first 24 months after | |o For loans outstanding during Policy | |o Level Term Insurance Rider |
| the Policy Date, subject to certain | | Years one through ten, the net loan | | providing additional death benefit |
| restrictions, the policyowner may | | interest rate is 2 percent. For | | coverage for familY members and/or |
| exchange the policy for a fixed | | loans outstanding after the first | | business associates is available. |
| benefit life policy issued and made | | ten Policy Years, the net loan | | (See page 29.) |
| available for exchange by Security | | interest rate is currently 0 | | |
| Benefit. (See page 27.) | | percent. (See page 17.) | |o Available as lump sum or under the |
| | | | | five payment methods available as |
| o The policy may be surrendered at | |o Payments may be taken under one or | | retirement benefits. (See page 28.)|
| any time for its Net Cash Surrender | | more of five different payment | |-------------------------------------|
| Value with no surrender charge. | | options. (See page 28.) |
| (See page 18.) | |----------------------------------------|
| |
| o Partial withdrawals are available |
| on and after the first Policy |
| Anniversary (subject to certain |
| restrictions). The death benefit |
| will be reduced by at least the |
| amount of the partial withdrawal. |
| (See page 18.) |
| |
| o Up to six free transfers may be |
| made each year among the Variable |
| Accounts. (See page 14.) |
| |
| o Accelerated payment of up to 50% of |
| the Specified Amount (subject to a |
| maximum benefit of the lesser of |
| $250,000 or 50% of the Specified |
| Amount less any policy debt) is |
| available under certain conditions |
| to insureds suffering from terminal |
| illness. (See page 29.) |
|----------------------------------------|
</TABLE>
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PURPOSE OF THE POLICY
The Policy offers a Policyowner insurance protection on the life of the
Insured through the Maturity Date for so long as the Policy is in force. Like
traditional fixed life insurance, the Policy provides for a death benefit equal
to its Specified Amount, accumulation of cash value, and surrender and loan
privileges. Unlike traditional fixed life insurance, the Policy offers a choice
of allocation alternatives and an opportunity for the Policy's Accumulated Value
and, if elected by the Policyowner and under certain circumstances, its death
benefit to grow based on investment results. The Policy is a flexible premium
policy, so that, unlike many other insurance policies and subject to certain
limitations, a Policyowner may choose the amount and frequency of premium
payments.
POLICY VALUES
A Policyowner may allocate net premium payments among the various Variable
Accounts that comprise the Separate Account and that invest in corresponding
portfolios, known as "Series," of the SBL Fund. A Policyowner may also allocate
net premium payments to the Fixed Account.
Depending on the investment experience of the selected Variable Accounts, the
Accumulated Value may increase or decrease on any day. The death benefit may or
may not increase or decrease depending upon several factors, including the death
benefit option selected by the Policyowner, although the death benefit will
never decrease below the Specified Amount provided the Policy is in force. There
is no guarantee that the Policy's Accumulated Value and death benefit will
increase. The Policyowner bears the investment risk on that portion of the net
premiums and Accumulated Value allocated to the Separate Account.
The Policy will remain in force until the earliest of the Maturity Date, the
death of the Insured, or a full surrender of the Policy, unless, before any of
these events, Net Cash Surrender Value is insufficient to pay the current
monthly deduction on a Monthly Payment Date and a Grace Period expires without
sufficient additional premium payment or loan repayment by the Policyowner. A
Policy will not lapse, however, during the first five Policy Years if the
Guaranteed Death Benefit Premium is in effect, or for a period of 10 to 30
Policy Years (depending on the Age of the Insured on the Policy Date) after the
first five Policy Years if the Extended Guaranteed Death Benefit Rider is in
force.
THE DEATH BENEFIT
A Policyowner may elect one of two Options to calculate the amount of death
benefit payable under the Policy. Under Option A, the death benefit will be
equal to the Specified Amount of the Policy or, if greater, Accumulated Value
multiplied by a death benefit percentage. Under Option B, the death benefit will
be equal to the Specified Amount of the Policy plus the Accumulated Value
(determined as of the date of the Insured's death) or, if greater, Accumulated
Value multiplied by a death benefit percentage. Policyowners seeking to have
favorable investment performance reflected in increasing Accumulated Value
should choose Option A; policyowners seeking to have favorable investment
performance reflected in increasing insurance coverage should choose Option B. A
Policyowner may change the death benefit option subject to certain conditions.
See "Death Benefit" and "Changes in Death Benefit Option," pages 14 and 15.
PREMIUM FEATURES
Security Benefit requires a Policyowner to pay an initial premium equal to at
least 1/12 of Guaranteed Death Benefit Premium for the first Policy Year.
Thereafter, subject to certain limitations, a Policyowner may choose the amount
and frequency of premium payments. The Policy, therefore, provides the
Policyowner with the flexibility to vary premium payments to reflect varying
financial conditions.
When applying for a Policy, a Policyowner will determine a Planned Periodic
Premium that provides for the payment of level premiums over a specified period
of time. Additional premiums may be paid monthly under the Secur-O-Matic plan
where the Owner authorizes Security Benefit to withdraw premiums from the
Owner's checking account each month. The minimum initial premium required must
be paid before the Secur-O-Matic plan will be accepted by Security Benefit. The
Policyowner may elect to have premiums paid under the Secur-O-Matic plan,
pursuant to which premiums are deducted from the Owner's checking account on the
7th, 14th, 21st or 28th day of each month.
The amount, frequency, and period of time over which a Policyowner pays
premiums may affect whether or not the Policy will be classified as a Modified
Endowment Contract, which is a type of life insurance contract subject to
different tax treatment for certain pre-death distributions. For more
information on the tax treatment of life insurance contracts, including those
classified as Modified Endowment Contracts, see "Federal Income Tax
Considerations," page 21.
Payment of the Planned Periodic Premiums will not guarantee that a Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Accumulated Value. Even if Planned Periodic Premiums are paid, the
Policy will lapse any time Accumulated Value less Policy Debt is insufficient to
pay the current monthly deduction and a Grace Period expires without sufficient
payment, unless the Guaranteed Death Benefit Premium or Extended Guaranteed
Death Benefit Rider is in effect. Any premium payment must be for at least $50.
Security Benefit also may reject or limit any premium payment that would result
in an immediate increase in the net amount at risk under the Policy, although
such a premium may be accepted with satisfactory evidence of insurability.
ALLOCATION OPTIONS
The Variable Accounts invest in portfolios of a mutual fund which offers the
Policyowner the opportunity to direct Security Benefit to invest in diversified
portfolios of stocks, bonds, money market instruments, or a combination of these
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securities, or in securities of foreign issuers. Each of the Variable Accounts
invests exclusively in shares of a designated portfolio ("Series") of the SBL
Fund (the "Fund"). Each Series of the Fund has a different investment objective.
The Variable Accounts and the corresponding Series of the Fund are: the Growth
Variable Account (Series A); the Growth-Income Variable Account (Series B); the
Money Market Variable Account (Series C); the Worldwide Equity Variable Account
(Series D); the High Grade Income Variable Account (Series E); the Social
Awareness Variable Account (Series S); the Emerging Growth Variable Account
(Series J); the Global Aggressive Bond Variable Account (Series K); the
Specialized Asset Allocation Variable Account (Series M); the Managed Asset
Allocation Variable Account (Series N); and the Equity Income Variable Account
(Series O). See "SBL Fund," page 10. Security Management Company, LLC, is the
Investment Adviser of each of the Series, subject to the direction and control
of the Fund's Board of Directors. Security Management Company, LLC is a limited
liability company which is ultimately controlled by Security Benefit. The
Adviser has engaged Lexington Management Corporation to serve as Sub-Adviser of
Series D and K and T. Rowe Price Associates, Inc. to serve as Sub-Adviser of
Series N and O. The Investment Manager has also engaged Meridian Investment
Management Corporation to provide investment advisory and analytical services to
Series M.
The Policyowner may choose to allocate net premium payments among the eleven
Variable Accounts constituting the Separate Account, and to the Fixed Account.
TRANSFER OF ACCUMULATED VALUE
The Policyowner may transfer Accumulated Value among the Variable Accounts
and, subject to certain other limitations, between the Variable Accounts and the
Fixed Account. Transfers may be made by telephone if the Telephone Transfer
section of the application or an Authorization for Telephone Requests form has
been properly completed, and signed and filed at Security Benefit's Home Office.
See "Transfer of Accumulated Value," page 14.
POLICY LOANS
The Policyowner may borrow from Security Benefit an amount up to 80 percent
of the Policy's Accumulated Value, subject to a minimum loan of $1,000. The
Policyowner may borrow an amount in excess of 80 percent of Accumulated Value on
Policies issued in certain states, as required by applicable state law. The
Policy will be the only security required for a loan. See "Policy Loans," page
17.
The amount of any Policy Debt is subtracted from the death benefit or from
the Accumulated Value upon surrender. See "Policy Loans," page 17. The Policy
will lapse when Net Cash Surrender Value is insufficient to cover the current
monthly deduction on a Monthly Payment Date, and a Grace Period expires without
a sufficient premium or repayment of Policy Debt.
FREE-LOOK RIGHT
A Policyowner may obtain a full refund of the premium paid if the Policy is
returned within 20 days after the Owner receives it or 45 days after the
application for the Policy is completed, whichever is later. During the
Free-Look Period, net premiums will be allocated to the Money Market Variable
Account. See "Allocation of Net Premiums," page 13.
SURRENDER RIGHT
The Owner can surrender the Policy during the life of the Insured and receive
its Net Cash Surrender Value, which is equal to the Accumulated Value less any
outstanding Policy Debt.
PARTIAL WITHDRAWAL BENEFITS
A Partial Withdrawal Benefit is available on and after the last day of the
first Policy Year. Under this Benefit, a Policyowner may make up to four
"Partial Withdrawals" of Net Cash Surrender Value each Policy Year after the
first Policy Year. A Partial Withdrawal may decrease the Specified Amount on a
Policy on which the Owner has elected death benefit Option A, and will decrease
the death benefit if the death benefit is greater than the Specified Amount
under either Option A or B. See "Partial Withdrawal Benefits," page 18.
Among other restrictions, a Partial Withdrawal must be for at least $500, and
the Policy's Net Cash Surrender Value after the withdrawal must be at least
$1,000, plus an amount equal to the sum of the monthly deductions scheduled to
be deducted from the Policy's Accumulated Value in the 36-month period
immediately following a Partial Withdrawal.
CHARGES AND DEDUCTIONS
PREMIUM TAX
A premium tax is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policyowner's Accumulated Value. The
premium tax consists of the following item:
o A state and local premium tax charge is assessed against each premium to
pay applicable state and local premium taxes, currently ranging from .75 percent
to 5 percent.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value on each Monthly Payment Date. The monthly deduction consists of the
following items:
o COST OF INSURANCE: This monthly charge compensates Security Benefit for
providing life insurance coverage for the Insured. The amount of the charge is
equal to a current cost of insurance rate multiplied by the net amount at risk
under a Policy at the beginning of the Policy Month.
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o OPTIONAL INSURANCE BENEFITS CHARGES: The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider.
DEDUCTIONS FROM THE VARIABLE ACCOUNTS
o ADMINISTRATIVE CHARGE: Security Benefit deducts a daily administrative
charge from the average daily net assets of each Variable Account. The daily
administrative charge is equal to an annual rate of .35 percent in the first ten
Policy Years and .25 percent thereafter. Security Benefit, however, reserves the
right to charge up to an annual rate of .35 percent in all Policy Years. The
administrative charge is assessed to reimburse Security Benefit for the expenses
associated with administration and maintenance of the Policies.
o MORTALITY AND EXPENSE RISK CHARGE: Security Benefit deducts a daily charge
from the assets of each Variable Account for mortality and expense risks assumed
by Security Benefit. This charge is equal to an annual rate of .90 percent of
the average daily net assets of each Variable Account in the first ten Policy
Years and .70 percent thereafter. Security Benefit, however, reserves the right
to charge up to .90 percent in all Policy Years.
The operating expenses of the Separate Account are paid by Security Benefit.
Investment advisory fees and operating expenses of the Fund are paid by the
Fund. For a description of these charges, see "Charges and Deductions," page 19.
TAX TREATMENT OF POLICY
The Policy is intended to produce benefits normally associated with life
insurance. See "Federal Income Tax Considerations," page 21, for details.
THE FIXED ACCOUNT
The Policyowner may allocate all or a portion of net premium payments and
transfer Accumulated Value to the Fixed Account. Amounts allocated to the Fixed
Account are held in Security Benefit's General Account. Security Benefit
guarantees that the Accumulated Value allocated to the Fixed Account will be
credited interest monthly at a rate equivalent to an effective annual rate of 4
percent. In addition, Security Benefit may in its sole discretion pay interest
in excess of the guaranteed amount. See "The Fixed Account," page 26.
CONTACTING SECURITY BENEFIT
All written requests, notices, and forms required by the Policies, and any
questions or inquiries should be directed to Security Benefit's SEB
Administration Department at 700 SW Harrison Street, Topeka, Kansas 66636-0001.
INFORMATION ABOUT SECURITY BENEFIT AND
THE SEPARATE ACCOUNT
SECURITY BENEFIT LIFE INSURANCE COMPANY
Security Benefit is a mutual life insurance company organized under the laws
of the State of Kansas. It was organized originally as a fraternal benefit
society and commenced business February 22, 1892. It became a mutual life
insurance company under its present name on January 2, 1950.
Security Benefit offers variable life insurance policies and variable annuity
contracts, as well as financial and retirement services. It is admitted to do
business in the District of Columbia, and in all states except New York. As of
the end of 1996, Security Benefit had over $15.5 billion of life insurance in
force and total assets of approximately $5.5 billion. Together with its
subsidiaries, Security Benefit has total funds under management of approximately
$6.6 billion.
In December of 1997, the Board of Directors of Security Benefit approved a
Plan of Conversion ("Plan") under which Security Benefit would convert from a
mutual life insurance company to a stock life insurance company ultimately
controlled by a newly-formed mutual holding company to be named Security Benefit
Mutual Holding Company. Under the Plan, membership interests of current Security
Benefit policyholders would become membership interests in Security Benefit
Mutual Holding Company upon conversion. After the conversion, persons who
acquire policies from Security Benefit would automatically be members in the
mutual holding company. The conversion will not increase premiums or reduce
policy benefits, values, guarantees or other policy obligations to
policyholders. The Plan is subject to approval by the Insurance Commissioner of
the State of Kansas and Security Benefit policyholders, among other approvals
and conditions. If the necessary approvals are obtained and conditions met, the
conversion could occur in the second quarter of 1998.
The Principal Underwriter for the Policies is Security Distributors, Inc.
("SDI"), 700 SW Harrison Street, Topeka, Kansas 66636-0001. SDI is registered as
a broker/dealer with the SEC and is a wholly-owned subsidiary of Security
Benefit Group, Inc., a financial services holding company wholly-owned by
Security Benefit.
SECURITY VARILIFE SEPARATE ACCOUNT
The Security Varilife Separate Account ("Separate Account") is a separate
investment account of Security Benefit used only to support the variable death
benefits and policy values of variable life insurance policies. The assets in
the Separate Account are kept separate from the General Account assets and other
separate accounts of Security Benefit.
Security Benefit owns the assets in the Separate Account and is required to
maintain sufficient assets in the Separate Account to meet anticipated
obligations of the Policies funded by the Account. The Separate Account is
divided
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into subaccounts called Variable Accounts. The income, gains, or losses of the
Separate Account are credited to or charged against the assets of the Separate
Account without regard to the other income, gains, or losses of Security
Benefit. Assets in the Separate Account attributable to the reserves and other
liabilities under the Policies are not chargeable with liabilities arising from
any other business that Security Benefit conducts. Security Benefit may transfer
to its General Account any assets which exceed anticipated obligations of the
Separate Account. All obligations arising under the Policy are general corporate
obligations of Security Benefit. Security Benefit may invest its own assets in
the Separate Account for other purposes, but not to support Policies other than
variable life insurance policies, and may accumulate in the Separate Account
proceeds from various Policy charges and investment results applicable to those
assets.
The Separate Account was established on September 13, 1993, under Kansas law
under the authority of the Board of Directors of Security Benefit. The Separate
Account is registered as a unit investment trust with the SEC. Such registration
does not involve any supervision by the SEC of the administration or investment
practices or policies of the Account.
Each Variable Account invests exclusively in shares of a designated Series of
the Fund. Security Benefit may in the future establish additional Variable
Accounts within the Separate Account, which may invest in other Series of the
Fund or in other securities or other investment vehicles.
SBL FUND
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. Such registration does not involve supervision by the SEC of the
investments or investment policy of the Fund. Each Series of the Fund pursues
different investment objectives and policies. The shares of each Series are
purchased by Security Benefit for the corresponding Variable Account at net
asset value (i.e., without sales load). All dividends and capital gains
distributions received from a Series are automatically reinvested in such Series
at net asset value, unless Security Benefit, on behalf of the Separate Account,
elects otherwise. Fund shares will be redeemed by Security Benefit at their net
asset value to the extent necessary to make payments under the Policies.
Shares of the Fund currently are offered only for purchase by separate
accounts of Security Benefit to serve as an investment medium for variable life
insurance policies and for variable annuity contracts issued by Security
Benefit. Thus, the Fund serves as an investment medium for both variable life
insurance policies and variable annuity contracts. This is called "mixed
funding." Shares of the Fund may also be sold in the future to separate accounts
of other insurance companies, both affiliated and not affiliated with Security
Benefit. This is called "shared funding." Security Benefit currently does not
foresee any disadvantages to Policyowners arising from either mixed or shared
funding; however, due to differences in tax treatment or other considerations,
it is theoretically possible that the interests of owners of various contracts
for which the Fund serves as an investment medium might at some time be in
conflict. However, Security Benefit, the Fund's Board of Directors, and any
other insurance companies that participate in the Fund in the future are
required to monitor events in order to identify any material conflicts that
arise from the use of the Fund for mixed and/or shared funding. The Fund's Board
of Directors are required to determine what action, if any, should be taken in
the event of such a conflict. If such a conflict were to occur, Security Benefit
might be required to withdraw the investment of one or more of its separate
accounts from the Fund. This might force the Fund to sell securities at
disadvantageous prices.
A summary of the investment objective of each Series of the Fund is described
below. There can be no assurance that any Series will achieve its objective.
More detailed information is contained in the accompanying Prospectus of the
Fund, including information on the risks associated with the investments and
investment techniques of each of the Series.
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ CAREFULLY
BEFORE INVESTING.
SERIES A -- Amounts allocated to the Growth Variable Account are invested in
Series A. The investment objective of Series A is to seek long-term capital
growth by investing in a broadly diversified portfolio of common stocks,
securities convertible into common stocks, preferred stocks, bonds and other
debt securities.
SERIES B -- Amounts allocated to the Growth-Income Variable Account are
invested in Series B. Series B seeks long-term growth of capital with secondary
emphasis on income, by investing in various types of securities, including
common stocks, convertible securities, preferred stocks and debt securities.
Series B's investments in debt securities may include securities rated below
investment grade (commonly known as "junk bonds").
SERIES C -- Amounts allocated to the Money Market Variable Account are
invested in Series C. The investment objective of Series C is to provide as high
a level of current income as is consistent with preserving capital. It invests
in high quality money market instruments with maturities of not longer than
thirteen months.
SERIES D -- Amounts allocated to the Worldwide Equity Variable Account are
invested in Series D. The investment objective of Series D is to seek long-term
growth of capital primarily through investment in common stocks and equivalents
of companies domiciled in foreign countries and the United States.
SERIES E -- Amounts allocated to the High Grade Income Variable Account are
invested in Series E. The investment objective of Series E is to provide current
income with security of principal. Series E seeks to achieve this investment
objective by investing in a broad range of debt securities, including U.S. and
foreign corporate debt securities and securities issued by the U.S. and
foreign governments.
SERIES S -- Amounts allocated to the Social Awareness Variable Account are
invested in Series S. The investment objective of Series S is to seek capital
appreciation by investing in various types of securities which meet certain
social criteria established for the Series. Series S will invest in a
diversified portfolio of common stocks, convertible securities, preferred stocks
and debt securities.
SERIES J -- Amounts allocated to the Emerging Growth Variable Account are
invested in Series J. The investment objective of Series J is to seek capital
appreciation through investment in a broadly diversified portfolio of securities
which may include common stocks, preferred stocks, debt securities and
securities convertible into common stocks.
SERIES K -- Amounts allocated to the Global Aggressive Bond Variable Account
are invested in Series K. The investment objective of Series K is to seek high
current income and, as a secondary objective, capital appreciation by investing
in a combination of foreign and domestic high-yield, lower rated debt securities
(commonly known as "junk bonds").
SERIES M -- Amounts allocated to the Specialized Asset Allocation Variable
Account are invested in Series M. The investment objective of Series M is to
seek high total return consisting of capital appreciation and current income.
Series M seeks this objective by following an asset allocation strategy that
contemplates shifts among a wide range of investment categories and market
sectors, including equity and debt securities of domestic and foreign issuers.
SERIES N -- Amounts allocated to the Managed Asset Allocation Variable
Account are invested in Series N. The investment objective of Series N is to
seek a high level of total return by investing primarily in a diversified
portfolio of debt and equity securities.
SERIES O -- Amounts allocated to the Equity Income Variable Account are
invested in Series O. The investment objective of Series O is to seek to provide
substantial dividend income and also capital appreciation by investing primarily
in dividend-paying common stocks of established companies.
THE INVESTMENT ADVISER
Security Management Company, LLC, located at 700 SW Harrison Street, Topeka,
Kansas 66636, serves as Investment Adviser to each Series of the Fund. Security
Management Company, LLC is registered with the SEC as an investment adviser.
Security Management Company, LLC formulates and implements continuing programs
for the purchase and sale of securities in compliance with the investment
objective, policies, and restrictions of each Series and is responsible for the
day-to-day decisions to buy and sell securities for the Series, except Series D,
K, N and O. The Investment Adviser has engaged Lexington Management Corporation,
Park 80 West, Plaza Two, Saddle Brook, New Jersey 07663, to provide investment
advisory services to Series D and K of the Fund. Lexington has entered into an
agreement with MFR Advisors, Inc., One Liberty Plaza, 46th Floor, New York, New
York 10006 to provide investment advisory services to Series K of the Fund. The
Investment Adviser has engaged T. Rowe Price Associates, Inc., 100 East Pratt
Street, Baltimore, Maryland 21202 to provide investment advisory services to
Series N and O. The Investment Adviser has also engaged Meridian Investment
Management Corporation, 12835 East Arapahoe Road, Tower II, 7th Floor,
Englewood, Colorado 80112, to provide investment advisory and analytical
services to Series M.
THE POLICY
The variable life insurance benefits provided by the Policies are funded
through the Policyowner's Accumulated Value in the Separate Account and the
Fixed Account. The information included below describes the benefits, features,
charges, and other major provisions of the Policies.
APPLICATION FOR A POLICY
The Policy is designed to meet the needs of individuals and for corporations
who wish to provide coverage and benefits for key employees. Anyone wishing to
purchase the Policy may submit an application to Security Benefit. A Policy can
be issued on the life of an Insured for Ages 18 up to and including Age 85 with
evidence of insurability satisfactory to Security Benefit. The Insured's Age is
calculated as of the Insured's last birthday as of the Policy Date. Acceptance
is subject to Security Benefit's underwriting rules, and Security Benefit
reserves the right to request additional information and to reject an
application.
Each Policy is issued with a Policy Date, which is the date used to determine
the Monthly Payment Date, Policy Months, Policy Years, and Policy Monthly,
Quarterly, Semiannual and Annual Anniversaries. If the application is
accompanied by all or a portion of the initial premium and is accepted by
Security Benefit, the Policy Date is usually the date the application and
premium payment were received at Security Benefit's Home Office. If an
application is not accompanied by all or a portion of the initial premium
payment, the Policy Date is usually the date the application is accepted by
Security Benefit. Security Benefit first becomes obligated under the Policy on
the date the total initial premium is received or on the date the application is
accepted, whichever is later. Any monthly deductions due will be taken on the
Monthly Payment Date on or next following the date Security Benefit becomes
obligated. The initial premium must be received within 20 days after the Policy
is issued, although Security Benefit may waive the 20-day requirement at its
discretion. If the initial premium is not received or the application is
rejected by Security Benefit, the Policy will be canceled and any partial
premium received will be refunded.
Subject to Security Benefit's approval, a Policy may be backdated, but the
Policy Date may not be more than six
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months prior to the date of the application. Backdating can be advantageous if
the Insured's lower issue Age results in lower cost of insurance rates. If the
Policy is backdated, the minimum initial premium required will include
sufficient premium to cover the backdating period. Monthly deductions will be
made for the period the Policy Date is backdated.
Insured's are assigned to underwriting (risk) classes which are used in
calculating the cost of insurance charges. In assigning Insureds to underwriting
classes, Security Benefit will normally use the medical or paramedical
underwriting method, which may require a medical examination of a proposed
Insured, although other forms of underwriting may be used when deemed
appropriate by Security Benefit.
PREMIUMS
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at the
Policyowner's discretion. Security Benefit usually requires a Policyowner to pay
a minimum initial premium equal to at least 1/12 of the Guaranteed Death Benefit
Premium for the first Policy Year, which will be based upon the Policy's
Specified Amount and Death Benefit Option, any Riders added to the Policy, and
the Age, gender (unless unisex cost of insurance rates apply, see "Cost of
Insurance," page 20), rating class, and underwriting class of the Insured.
Thereafter, subject to the limitations described below, a Policyowner may choose
the amount and frequency of premium payments. The Policy, therefore, provides
the Policyowner with the flexibility to vary premium payments to reflect varying
financial conditions. Security Benefit may reduce the minimum initial premium
required under certain circumstances, such as for a group or sponsored
arrangements.
When applying for a Policy, a Policyowner will determine a Planned Periodic
Premium that provides for the payment of level premiums over a specified period
of time. Additional premiums may be paid monthly under the Secur-O-Matic plan
where the Owner authorizes Security Benefit to withdraw premiums from the
Owner's checking account each month on the 7th, 14th, 21st, or 28th day of each
month. The minimum initial premium required must be paid before the
Secur-O-Matic plan will be accepted by Security Benefit.
The amount, frequency and period of time over which a Policyowner pays
premiums may affect whether the Policy will be classified as a modified
endowment contract, which is a type of life insurance contract subject to
different tax treatment for certain pre-death distributions than conventional
life insurance contracts. Accordingly, variations from the Planned Periodic
Premiums on a Policy that is not otherwise a modified endowment contract may
result in the Policy becoming a modified endowment contract for tax purposes.
Payment of the Planned Periodic Premium will not guarantee that a Policy will
remain in force. Instead, the duration of the Policy depends upon the Policy's
Accumulated Value. Even if Planned Periodic Premiums are paid, the Policy will
lapse any time Accumulated Value less Policy Debt is insufficient to pay the
current monthly deduction and a Grace Period expires without sufficient payment,
unless the Guaranteed Death Benefit Premium provision or Extended Guaranteed
Death Benefit Rider is in effect. See "Guaranteed Death Benefit Premium" below,
"Lapse," page 19 and "Optional Insurance Benefits," page 29.
Any premium payment must be for at least $50. Security Benefit also may
reject or limit any premium payment that would result in an immediate increase
in the net amount at risk under the Policy, although such a premium may be
accepted with satisfactory evidence of insurability. See "Cost of Insurance,"
page 20. A premium payment would result in an immediate increase in the net
amount at risk if the death benefit under a Policy is, or upon acceptance of the
premium would be, equal to a Policyowner's Accumulated Value multiplied by a
death benefit percentage. See "Death Benefit," page 14. If satisfactory evidence
of insurability is not received, the payment, or portion thereof may be
returned. All or a portion of a premium payment will be rejected and returned to
the Policyowner if it would exceed the maximum premium limitations prescribed by
federal tax law, as determined by Security Benefit.
A premium tax will be deducted from each premium payment. See "Charges and
Deductions," page 19. The remainder of the premium, known as the net premium,
will be allocated as described below under "Allocation of Net Premiums."
Additional payments will first be treated as additional premium payments unless
a Policyowner indicates that the payment is a repayment of Policy Debt.
GUARANTEED DEATH BENEFIT PREMIUM
A Policyowner may determine to pay the Guaranteed Death Benefit Premium which
if paid in advance on at least a monthly basis will keep the Policy in force
during the first five Policy Years even if during that period Net Cash Surrender
Value is insufficient to cover the monthly deduction on any Monthly Payment
Date. The Guaranteed Death Benefit Premium is a Planned Periodic Premium in an
amount determined by Security Benefit based upon the Policy's Specified Amount
and Death Benefit Option, any Riders added to the Policy, and the Age, gender
(unless unisex cost of insurance rates apply), rating class, and underwriting
class of the Insured. Security Benefit will send a reminder notice if the amount
of premiums paid on a Policy, less outstanding Policy Debt and any Partial
Withdrawals, is less than an amount equal to the monthly Guaranteed Death
Benefit Premium times the number of Policy Months the Policy has been in force.
If the required payment is not made within 61 days, measured from the date of
the notice, the Guaranteed Death Benefit will no longer be in effect and may not
be reinstated. A Policy Loan taken in the first five Policy Years may cause the
Guaranteed Death Benefit to terminate. As a result, the Policy will not have the
protection from lapse provided by the Guaranteed Death Benefit Premium during
the first five Policy Years. See
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"Lapse," page 19 and, for a discussion of the Extended Guaranteed Death Benefit
Premium Rider, see "Optional Insurance Benefits," page 29.
ALLOCATION OF NET PREMIUMS
In the application for the Policy, the Policyowner selects the Variable
Accounts or the Fixed Account to which net premium payments will be allocated.
During the Free-Look Period, net premiums will be allocated to the Money Market
Variable Account, which invests in Series C of the Fund (except for amounts
allocated to the Loan Account to secure a Policy loan). The Accumulated Value
will be automatically allocated according to the Policyowner's instructions
contained in the application the later of 20 days after the Policy is issued or
45 days after the application is completed, or, if longer, upon receipt of the
minimum initial premium (the "Free-Look Period"). Net premiums received after
the Free-Look Period will be allocated upon receipt among the Variable Accounts
and the Fixed Account according to the Policyowner's most recent instructions.
Available allocation alternatives include the eleven Variable Accounts and the
Fixed Account.
A Policyowner may change the allocation of net premiums by submitting a
proper written request to Security Benefit's Home Office. The minimum amount
that may be allocated to a Variable Account or the Fixed Account is the greater
of $25 or 10 percent of the net premium. Security Benefit allows allocation of
only a whole percentage of net premium. Changes in net premium allocation
instructions may be made by telephone if the Telephone Transfer Section of the
application or an Authorization for Telephone Requests form has been properly
completed, signed and filed at Security Benefit's Home Office. Security Benefit
reserves the right to discontinue telephone net premium allocation instructions.
DOLLAR COST AVERAGING OPTION
Security Benefit currently offers an option under which Policyowners may
dollar cost average their allocations in the Variable Accounts under the Policy
by authorizing Security Benefit to make periodic allocations of Accumulated
Value from any one Variable Account to one or more of the other Variable
Accounts. Dollar cost averaging is a systematic method of investing in which
securities are purchased at regular intervals in fixed dollar amounts so that
the cost of the securities gets averaged over time and possibly over various
market values. The option will result in the allocation of Accumulated Value to
one or more Variable Accounts, and these amounts will be credited at the
Accumulation Unit values as of the end of the Valuation Dates on which the
transfers are effected. Since the value of Accumulation Units will vary, the
amounts allocated to a Variable Account will result in the crediting of a
greater number of units when the Accumulation Unit value is low and a lesser
number of units when the Accumulation Unit value is high. Similarly, the amounts
transferred from a Variable Account will result in a debiting of a greater
number of units when the Accumulation Unit value is low and a lesser number of
units when the Accumulation Unit value is high. Dollar cost averaging does not
guarantee profits, nor does it assure that a Policyowner will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the form,
the Policyowner must designate whether Accumulated Value is to be transferred on
the basis of a specific dollar amount, a fixed period or earnings only, the
Variable Account or Accounts to which the transfers will be made, the desired
frequency of the transfers, which may be on a monthly or quarterly basis, and
the length of time during which the transfers shall continue or the total amount
to be transferred over time.
To elect the Dollar Cost Averaging Option, the Policy's Accumulated Value
must be at least $10,000 and a Dollar Cost Averaging Request in proper form must
be received by Security Benefit at its Home Office. A Policyowner may not have
in effect at the same time Dollar Cost Averaging and Asset Reallocation Options.
After Security Benefit has received a Dollar Cost Averaging Request in proper
form at its Home Office, Security Benefit will transfer Accumulated Value in
amounts designated by the Policyowner from the Variable Account from which
transfers are to be made to the Variable Account or Accounts chosen by the
Policyowner. The minimum amount that may be transferred from any Variable
Account is $100. After the Free-Look Period, the first transfer will be effected
on the monthly or quarterly anniversary, whichever corresponds to the period
selected by the Policyowner, of the date of receipt at Security Benefit's Home
Office of a Dollar Cost Averaging Request in proper form, until the total amount
elected has been transferred, until Accumulated Value in the Variable Account
from which transfers are made has been depleted, or until the Policy enters the
Grace Period. Amounts periodically transferred under this option are not
currently subject to any transfer charges that may be imposed by Security
Benefit.
A Policyowner may instruct Security Benefit at any time to terminate the
option by written request to Security Benefit's Home Office. In that event, the
Accumulated Value in the Variable Account from which transfers were being made
that has not been transferred will remain in that Variable Account, subject to
monthly deductions, unless the Policyowner instructs otherwise. If a Policyowner
wishes to continue transferring on a Dollar Cost Averaging basis after the
expiration of the applicable period, the total amount elected has been
transferred, or the Variable Account has been depleted, or after the Dollar Cost
Averaging Option has been canceled, a new Dollar Cost Averaging Request must be
completed and sent to Security Benefit's Home Office and the Accumulated Value
at the time the request is made must be at least $10,000. Security Benefit may
discontinue, modify, or suspend the Dollar Cost Averaging Option at any time.
Accumulated Value may also be dollar cost averaged to or from the Fixed
Account, provided that transfers from the
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Fixed Account do not violate the restrictions on transfers from the Fixed
Account as described in "The Fixed Account," on page 26.
ASSET REALLOCATION OPTION
Security Benefit currently offers an option under which Policyowners
authorize Security Benefit to automatically transfer their Accumulated Value
each quarter to maintain a particular percentage allocation among the Variable
Accounts as selected by the Policyowner. The Accumulated Value allocated to each
Variable Account will grow or decline in value at different rates during the
quarter and Asset Reallocation automatically reallocates the Accumulated Value
in the Variable Accounts each quarter to the allocation selected by the
Policyowner. Asset Reallocation is intended to transfer Accumulated Value from
those Variable Accounts that have increased in value to those Variable Accounts
that have declined in value. Over time, this method of investing may help a
Policyowner maintain an allocation of Accumulated Value at levels that the
Policyowner has selected consistent with his or her personal goals and
objectives. This reallocation method does not guarantee profits, nor does it
assure that a Policyowner will not have losses. It is possible that Accumulated
Value of an Owner who chooses this Option may, at any time, be less than the
Accumulated Value that the Owner would have experienced had the Option not been
selected.
To elect the Asset Reallocation Option, the Accumulated Value in the Policy
must be at least $10,000 and an Asset Reallocation Request in proper form must
be received by Security Benefit at its Home Office. An Asset Reallocation
Request form is available upon request. On the form, the Policyowner must
indicate the applicable Variable Accounts and the percentage of Accumulated
Value to be reallocated on a quarterly basis to each Variable Account ("Asset
Reallocation Program"). If the Asset Reallocation Option is elected, all
Accumulated Value that is invested in the Variable Accounts must be included in
the Asset Reallocation Program, and a Policyowner may not have in effect at the
same time Dollar Cost Averaging and Asset Reallocation Options.
The Asset Reallocation Option will result in the transfer of Accumulated
Value to one or more of the Variable Accounts on the date of Security Benefit's
receipt of the Asset Reallocation Request in proper form and on each quarterly
anniversary of that date thereafter. The amounts transferred will be credited at
the Accumulation Unit Value as of the end of the Valuation Dates on which the
transfers are effected. Amounts periodically transferred under this option are
not currently subject to any transfer charges that may be imposed by Security
Benefit.
A Policyowner may instruct Security Benefit at any time to terminate this
option by written request to Security Benefit's Home Office. In that event, the
Accumulated Value in the Variable Accounts that has not been transferred will
remain in those Variable Accounts, subject to monthly deductions, regardless of
the percentage allocation unless the Contractowner instructs otherwise. If a
Contractowner wishes to continue Asset Reallocation after it has been canceled,
a new Asset Reallocation Request form must be completed and sent to Security
Benefit's Home Office and the Accumulated Value at the time the request is made
must be at least $10,000. Security Benefit may discontinue, modify, or suspend,
and reserves the right to charge a fee for the Asset Reallocation Option at any
time.
Accumulated Value invested in the Fixed Account may be included in the Asset
Reallocation Program, provided that transfers from the Fixed Account do not
violate the restrictions on transfers from the Fixed Account as described in
"The Fixed Account" on page 26.
TRANSFER OF ACCUMULATED VALUE
Accumulated Value may be transferred after the Free-
Look Period among the Variable Accounts by the Policyowner upon proper written
request to Security Benefit's Home Office. Transfers (other than transfers in
connection with the Dollar Cost Averaging or Asset Reallocation Options) may be
made by telephone if the Telephone Transfer section of the application or an
Authorization for Telephone Requests form has been properly completed and signed
and filed at Security Benefit's Home Office. The minimum amount that may be
transferred is $500, except that this minimum amount does not apply to transfers
under the Dollar Cost Averaging and Asset Reallocation Options. Currently, there
are no limitations on the number of transfers between Variable Accounts, nor any
minimum amount required to be remaining in a given Variable Account after a
transfer (except as required under the Dollar Cost Averaging and Asset
Reallocation Options). However, no transfer may be made if a Policy is in the
Grace Period and a payment required to avoid lapse is not paid. See "Lapse,"
page 19. No charges are currently imposed upon such transfers; however, Security
Benefit reserves the right to allow six free transfers in any Policy Year and to
charge $25 for each additional transfer. Security Benefit further reserves the
right at a future date to limit the size of transfers and remaining balances, to
limit the number and frequency of transfers, and to discontinue telephone
transfers.
Accumulated Value may also be transferred after the Free-Look Period from the
Variable Accounts to the Fixed Account; however, transfers from the Fixed
Account to the Variable Accounts are restricted as described in "The Fixed
Account," page 26.
DEATH BENEFIT
When the Policy is issued, Security Benefit will determine the initial amount
of insurance based on the instructions provided in the application. That amount
will be shown on the specifications page of the Policy and is called the
"Specified Amount." The minimum Specified Amount at issuance of a Policy is
$100,000. Security Benefit may reduce the minimum Specified Amount required at
issuance
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under certain circumstances, such as for group or sponsored arrangements.
For so long as the Policy remains in force, Security Benefit will, upon proof
of the death of an Insured, pay death benefit proceeds to a named Beneficiary.
Death benefit proceeds will consist of the death benefit under the Policy, plus
any insurance proceeds provided by Rider, reduced by any outstanding Policy Debt
(and, if in the Grace Period, any overdue charges).
Each Policyowner may select one of two death benefit options: Option A or
Option B. Generally, an applicant designates the death benefit option in the
application. If no option is designated, Option A will be assumed by Security
Benefit to have been selected. Subject to certain restrictions, the Policyowner
can change the death benefit option selected. So long as the Policy remains in
force, the death benefit under either option will never be less than the
Specified Amount of the Policy.
OPTION A. Under Option A, the death benefit will be equal to the Specified
Amount of the Policy or, if greater, Accumulated Value (determined as of the end
of the Valuation Period during which the Insured dies) multiplied by a death
benefit percentage. The death benefit percentages vary according to the Age of
the Insured and will be at least equal to the cash value corridor in Section
7702 of the Internal Revenue Code, which addresses the definition of a life
insurance policy for tax purposes. The death benefit percentage is 250 percent
for an Insured at Age 40 or under, and it declines for older Insureds. A table
showing the death benefit percentages is in the Appendix to this Prospectus and
in the Policy. Policyowners who are seeking to have favorable investment
performance reflected in increasing Accumulated Value, and not in increasing
insurance coverage, should choose Option A.
OPTION B. Under Option B, the death benefit will be equal to the Specified
Amount of the Policy plus the Accumulated Value (determined as of the end of the
Valuation Period during which the Insured dies) or, if greater, Accumulated
Value multiplied by a death benefit percentage. The specified percentage is the
same as that used in connection with Option A and as stated in the Appendix. The
death benefit under Option B will always vary as Accumulated Value varies.
Therefore, Policyowners who seek to have favorable investment performance
reflected in increased insurance coverage should choose Option B.
EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies -- Policies I, II, and III -- with the same Specified Amount, but
Accumulated Values that vary as shown, and which assume an Insured is Age 40 at
the time of death and that there is no outstanding Policy Debt.
POLICY I POLICY II POLICY III
-------- --------- ----------
Specified Amount .................. $100,000 $100,000 $100,000
Accumulated Value
on Date of Death ............... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage .......... 250% 250% 250%
Death Benefit Under Option A ...... $100,000 $125,000 $187,500
Death Benefit Under Option B ...... $125,000 $150,000 $187,500
Under Option A, the death benefit for Policy I is equal to $100,000, since
the death benefit is the greater of the Specified Amount ($100,000) or the
Accumulated Value at the date of death multiplied by the death benefit
percentage ($25,000 x 250% = $62,500). In contrast, for both Policies II and III
under Option A, the Accumulated Value multiplied by the death benefit percentage
($50,000 x 250% = $125,000 for Policy II; $75,000 x 250% = $187,500 for Policy
III) is greater than the Specified Amount ($100,000), so the death benefit is
equal to the higher value. Under Option B, the death benefit for Policy I is
equal to $125,000 since the death benefit is the greater of Specified Amount
plus Accumulated Value ($100,000 + $25,000 = $125,000) or the Accumulated Value
multiplied by the death benefit percentage ($25,000 x 250% = $62,500).
Similarly, in Policy II, Specified Amount plus Accumulated Value ($100,000 +
$50,000 = $150,000) is greater than Accumulated Value multiplied by the death
benefit percentage ($50,000 x 250% = $125,000). In contrast, in Policy III, the
Accumulated Value multiplied by the death benefit percentage ($75,000 x 250% =
$187,500) is greater than the Specified Amount plus Accumulated Value ($100,000
+ $75,000 = $175,000), so the death benefit is equal to the higher value.
All calculations of death benefit will be made as of the end of the Valuation
Period during which the Insured dies. Death benefit proceeds may be paid to a
Beneficiary in a lump sum or under a payment plan offered under the Policy. The
Policy should be consulted for details.
CHANGES IN DEATH BENEFIT OPTION
A Policyowner may request that the death benefit option under the Policy be
changed from Option A to Option B, or from Option B to Option A. Changes in the
death benefit option may be made only once per Policy Year, and requests should
be made in writing to Security Benefit's Home Office. A change from Option B to
Option A may be made without evidence of insurability; a change from Option A to
Option B will require evidence of insurability satisfactory to Security Benefit.
The effective date of any such change shall be the Monthly Payment Date on or
next following Security Benefit's acceptance of the request.
A change in the death benefit from Option A to Option B will result in a
reduction in the Specified Amount of the Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option B
at the time of the change will equal that which would have been payable under
Option A immediately prior to the change. The change in option will affect the
determination of the death benefit from that point on since Accumulated
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Value will then be added to the new Specified Amount, and the death benefit will
then vary with Accumulated Value. This change will not be permitted if it would
result in a Specified Amount of less than $100,000 although Security Benefit
reserves the right to waive this minimum under certain circumstances, such as
for group or sponsored arrangements. No charge is currently made on a change
from Option A to Option B.
A change in the death benefit option from Option B to Option A will result in
an increase in the Specified Amount of the Policy by the amount of the Policy's
Accumulated Value, with the result that the death benefit payable under Option A
at the time of the change will equal that which would have been payable under
Option B immediately prior to the change. However, the change in option will
affect the determination of the death benefit from that point on since the
Accumulated Value will no longer be added to the Specified Amount in determining
the death benefit. From that point on, the death benefit will equal the new
Specified Amount (or, if higher, the Accumulated Value times the applicable
specified percentage). No charge is currently made on a change from Option B to
Option A.
A change in death benefit option may affect the monthly cost of insurance
charge since this charge varies with the net amount at risk, which generally is
the amount by which the death benefit exceeds Accumulated Value. See "Cost of
Insurance," page 20. Assuming that the Policy's death benefit would not be equal
to Accumulated Value times a death benefit percentage under either Option A or
B, changing from Option B to Option A will generally decrease the net amount at
risk, and therefore decrease the cost of insurance charges. Changing from Option
A to Option B will generally result in a net amount at risk that remains level.
Such a change, however, will result in an increase in the cost of insurance
charges over time, since the cost of insurance rates increase with the Insured's
Age.
CHANGES IN SPECIFIED AMOUNT
A Policyowner may request an increase or decrease in the Specified Amount
under a Policy after the first Policy Year subject to approval from Security
Benefit. A change in Specified Amount may only be made once per Policy Year.
Increasing the Specified Amount could increase the death benefit under a Policy,
and decreasing the Specified Amount could decrease the death benefit. The amount
of change in the death benefit will depend, among other things, upon the death
benefit option chosen by the Policyowner and the degree to which the death
benefit under a Policy exceeds the Specified Amount prior to the change.
Changing the Specified Amount could affect the subsequent level of the death
benefit while the Policy is in force and the subsequent level of Policy values.
An increase in Specified Amount may increase the net amount at risk under a
Policy, which will increase a Policyowner's cost of insurance charge.
Conversely, a decrease in Specified Amount may decrease the net amount at risk,
which will decrease a Policyowner's cost of insurance charge. An increase in
Specified Amount made while the Guaranteed Death Benefit Premium or Extended
Guaranteed Death Benefit Rider is in effect will increase the respective premium
requirements for these benefits.
Any request for an increase or decrease in Specified Amount must be made by
written application to Security Benefit's Home Office. It will become effective
on the Monthly Payment Date on or next following Security Benefit's acceptance
of the request. If the Policyowner is not the Insured, Security Benefit will
also require the consent of the Insured before accepting a request.
INCREASES. Additional evidence of insurability satisfactory to Security
Benefit will be required for an increase in Specified Amount. No charge is
currently made in connection with an increase in Specified Amount.
DECREASES. Any decrease in Specified Amount will first be applied to the most
recent increases, then the next most recent increases successively, and finally
to the original Specified Amount. A decrease will not be permitted if the
Specified Amount would fall below $100,000, although Security Benefit reserves
the right to waive the minimum Specified Amount under certain circumstances,
such as for group or sponsored arrangements. No charge is currently made in
connection with a decrease. If a decrease in the Specified Amount would result
in total premiums paid exceeding the premium limitations prescribed under tax
law to qualify the Policy as a life insurance contract, Security Benefit will
refund the Policyowner the amount of such excess above the premium limitations,
as determined by Security Benefit.
Security Benefit reserves the right to disallow a requested decrease, and
will not permit a requested decrease, among other reasons, (1) if compliance
with the guideline premium limitations under tax law resulting from the
requested decrease would result in immediate termination of the Policy, or (2)
if, to effect the requested decrease, payments to the Policyowner would have to
be made from Accumulated Value for compliance with the guideline premium
limitations, and the amount of such payments would exceed the Net Cash Surrender
Value under the Policy.
POLICY VALUES
ACCUMULATED VALUE. The Accumulated Value is the sum of the amounts under the
Policy held in each Variable Account of the Separate Account and the Fixed
Account, as well as the amount set aside in Security Benefit's Loan Account to
secure any Policy Debt.
On each Valuation Date, the portion of the Accumulated Value allocated to any
particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account and deduction of the administrative and
mortality and expense risk charges from that Variable Account. On each Monthly
Payment Date, the portion of the Accumulated Value allocated to a particular
Variable Account also will be adjusted to reflect the assessment of the monthly
deduction. See "Determination of
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Accumulated Value," below. No minimum amount of Accumulated Value is guaranteed.
A Policyowner bears the risk for the investment experience of Accumulated Value
allocated to the Variable Accounts.
NET CASH SURRENDER VALUE. The Net Cash Surrender Value of the Policy equals
the Accumulated Value less any outstanding Policy Debt. The Owner can surrender
a Policy at any time while the Insured is living and receive its Net Cash
Surrender Value. See "Surrender," page 18.
DETERMINATION OF ACCUMULATED VALUE
Although the death benefit under a Policy can never be less than the Policy's
Specified Amount, the Accumulated Value will vary to a degree that depends upon
several factors, including investment performance of the Variable Accounts to
which Accumulated Value has been allocated, payment of premiums, the amount of
any outstanding Policy Debt, Partial Withdrawals, and the charges assessed in
connection with the Policy. There is no guaranteed minimum Accumulated Value and
the Policyowner bears the entire investment risk relating to the investment
performance of Accumulated Value allocated to the Variable Accounts.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Series of the Fund. The investment performance of the Variable
Accounts will reflect increases or decreases in the net asset value per share of
the corresponding Series and any dividends or distributions declared by a
Series. Any dividends or distributions from any Series of the Fund will be
automatically reinvested in shares of the same Series, unless Security Benefit,
on behalf of the Separate Account, elects otherwise.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When a Policyowner
allocates net premiums to a Variable Account, the Policy is credited with
accumulation units. In addition, other transactions including loans, a
surrender, Partial Withdrawals, transfers, and assessment of charges against the
Policy affect the number of accumulation units credited to a Policy. The number
of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transactions by the unit value
of the affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date. The number of units credited will not change
because of subsequent changes in unit value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated by
adjusting the unit value from the previous Valuation Date for (1) the investment
performance of the Variable Account, which is based upon the investment
performance of the corresponding Series of the Fund, (2) any dividends or
distributions paid by the corresponding Series, (3) the charges, if any, that
may be assessed by Security Benefit for income taxes attributable to the
operation of the Variable Account, (4) the mortality and expense risk charge
deducted from the average daily net assets of the Variable Account and (5) the
administrative charge deducted from the average daily net assets of the Variable
Account.
POLICY LOANS
The Policyowner may borrow money from Security Benefit using the Policy as
the only security for the loan by submitting a proper written request to
Security Benefit's Home Office. A loan may be taken any time a Policy is in
force. The minimum loan that can be taken at any time is $1,000. The maximum
amount that can be borrowed at any time is 80 percent of Accumulated Value. The
Policyowner may borrow an amount in excess of 80 percent of Accumulated Value,
and the minimum loan amount may be less, on Policies issued in certain states as
required by applicable state law.
When a Policyowner takes a loan, an amount equal to the loan is transferred
out of the Policyowner's Accumulated Value in the Variable Accounts and the
Fixed Account into the Loan Account to secure the loan. Unless otherwise
requested by the Policyowner, loan amounts will be deducted from the Variable
Accounts and the Fixed Account in the proportion that each bears to the Net Cash
Surrender Value.
For Policy Debt outstanding in the first ten Policy Years, the Policy loan
interest rate is 8.0 percent per year and for Policy Debt outstanding
thereafter, is currently 6.0 percent per year (Security Benefit reserves the
right to charge up to 6.50 percent per year), which is equivalent to an annual
effective rate of 8.0 percent and 6.0 percent, respectively. Security Benefit
will credit interest monthly on amounts held in the Loan Account to secure the
loan at an annual rate of 6.0 percent.
The Owner may repay all or part of the loan at any time while the Policy is
in force. Interest on a loan is accrued daily, and is due for the prior year on
each Policy Anniversary. If interest is not paid when due, it will be added to
the amount of the loan principal and interest will begin accruing thereon from
that date. An amount equal to the loan interest charged will be transferred to
the Loan Account from the Variable Accounts and Fixed Account on a proportional
basis.
Upon receipt of any loan repayment, an amount equal to the repayment will be
transferred from the Loan Account into the Variable Accounts and Fixed Account
in accordance with the most recent premium allocation instructions unless
otherwise requested. In addition, any interest earned on the loan balance held
in the Loan Account will be transferred on each Policy Anniversary to each of
the Variable Accounts and Fixed Account in accordance with the Policyowner's
most recent premium allocation instructions.
While the amount to secure the loan is held in the Loan Account, the
Policyowner forgoes the investment experience of the Variable Accounts and the
current interest rate of the
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Fixed Account on the loaned amount. Thus a loan, whether or not repaid, will
have a permanent effect on the Policy's values and may have an effect on the
amount and duration of the death benefit. If not repaid, the Policy Debt will be
deducted from the amount of death benefit paid upon the death of the Insured,
the Accumulated Value paid upon surrender or maturity, or the refund of premium
upon exercise of the Free-Look Right.
A loan may affect the length of time the Policy remains in force. The Policy
will lapse when Net Cash Surrender Value is insufficient to cover the monthly
deduction against the Policy's Accumulated Value on any Monthly Payment Date,
and the minimum payment required is not made during the Grace Period. Moreover,
the Policy may enter the Grace Period more quickly when a loan is outstanding,
because the loaned amount is not available to cover the monthly deduction.
Additional payments or repayment of a portion of Policy Debt may be required to
keep the Policy in force. See "Lapse," page 19.
A loan will not be treated as a distribution from the Policy, and will not
result in taxable income to the Policyowner unless the Policy is a Modified
Endowment Contract, in which case a loan will be treated as a distribution that
may give rise to taxable income.
For information on the tax treatment of loans, see "Federal Income Tax
Considerations," page 21.
BENEFITS AT MATURITY
If the Insured is living on the Policy Anniversary next following the
Insured's Age 95, Security Benefit will pay to the Policyowner, as an endowment
benefit, the Net Cash Surrender Value. Payment ordinarily will be made within
seven days of the Policy Anniversary, although payments may be postponed in
certain circumstances. See "Payments," page 28.
SURRENDER
A Policyowner may fully surrender a Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is the Policy's
Net Cash Surrender Value, which is equal to its Accumulated Value less any
outstanding Policy Debt.
A Policyowner may surrender a Policy by sending a written request together
with the Policy to Security Benefit's Home Office. The proceeds will be
determined as of the end of the Valuation Period during which the request for a
surrender is received. At various times, requests may be made to surrender a
policy for which good payment has not yet been received. Accordingly, payment of
surrender proceeds may be delayed until such time as good payment has been
collected, which may take up to 15 days. A Policyowner may elect to have the
proceeds paid in cash or applied under a payment plan offered under the Policy.
See "Payment Plan," page 28. For information on the tax effects of a surrender
of a Policy, see "Federal Income Tax Considerations," page 21.
PARTIAL WITHDRAWAL BENEFITS
Security Benefit offers a partial surrender benefit by which the Policyowner
can obtain a portion of the Net Cash Surrender Value: the Partial Withdrawal
Benefit. The Partial Withdrawal Benefit is available on and after the last day
of the first Policy Year. Under this Benefit, a Policyowner may make up to four
"Partial Withdrawals" of Net Cash Surrender Value each Policy Year after the
first Policy Year.
A Partial Withdrawal must be for at least $500, and the Policy's Net Cash
Surrender Value after the withdrawal must be at least $1,000, plus an amount
equal to the sum of the monthly deductions scheduled to be deducted from the
Policy's Accumulated Value in the 36-month period immediately following a
Partial Withdrawal. In addition, the amount of a Partial Withdrawal is further
limited on Policies on which the Owner has chosen death benefit Option A so that
the withdrawal will not cause the Specified Amount to be less than $100,000,
although Security Benefit reserves the right to waive the minimum Specified
Amount under certain circumstances, such as for group or sponsored arrangements.
The Policyowner may make a Partial Withdrawal by submitting a proper written
request to Security Benefit's Home Office. At various times, requests may be
made to withdraw Accumulated Value for which good payment has not yet been
received. Accordingly, payment of a Partial Withdrawal may be delayed until such
time as good payment has been collected, which may take up to 15 days. As of the
effective date of any withdrawal, the Policyowner's Accumulated Value and Net
Cash Surrender Value will be reduced by the amount of the withdrawal. The amount
of the withdrawal will be allocated proportionately to the Policyowner's Value
in the Variable Accounts and the Fixed Account unless otherwise requested by the
Policyowner. If the Insured dies after the request for a withdrawal is sent to
Security Benefit and prior to the withdrawal being effected, the amount of the
withdrawal will be deducted from the death benefit proceeds, which will be
determined without taking into account the withdrawal. No fee is currently
charged for a Partial Withdrawal.
When a Partial Withdrawal is made on a Policy on which the Owner has selected
death benefit Option A, the Specified Amount under the Policy is decreased by
the lesser of (1) the amount of the Partial Withdrawal or (2) if the death
benefit prior to the withdrawal is greater than the Specified Amount, the
amount, if any, by which the Specified Amount exceeds the difference between the
death benefit and the amount of the Partial Withdrawal. A Partial Withdrawal
will not change the Specified Amount of a Policy on which the Owner has selected
death benefit Option B. However, assuming that the death benefit is not equal to
Accumulated Value times a death benefit percentage, the Partial Withdrawal will
reduce the death benefit by the amount of the Partial Withdrawal. To the extent
the death benefit is based upon the Accumulated Value times the death benefit
percentage applicable to the Insured, a Partial Withdrawal may cause the death
benefit to
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decrease by an amount greater than the amount of the Partial Withdrawal. See
"Death Benefit," page 14.
For information on the tax treatment of Partial Withdrawals, see "Federal
Income Tax Considerations," page 21.
RIGHT TO EXAMINE A POLICY -- FREE-LOOK RIGHT
The Policyowner has a Free-Look Right, under which the Policy may be returned
within 20 days after the Policyowner receives it, or within 45 days after the
Owner completes the application for insurance, whichever is later. To exercise
the Free-Look Right, the Policy can be mailed or delivered to Security Benefit
or its agent. The returned Policy will be treated as if Security Benefit never
issued it, and Security Benefit will promptly refund the full amount of the
premium paid. If the Owner has taken a loan during a Free-Look Period, the
Policy Debt will be deducted from the amount refunded. During the Free-Look
Period, net premiums will be allocated to the Money Market Variable Account,
which invests in Series C of the Fund (except for amounts allocated to the Loan
Account to secure a Policy loan). See "Allocation of Net Premiums," page 13.
LAPSE
The Policy will lapse only when the Net Cash Surrender Value is insufficient
to cover the current monthly deduction against the Policy's Accumulated Value on
any Monthly Payment Date, and a Grace Period expires without the Policyowner
making a sufficient payment. If Net Cash Surrender Value is insufficient to
cover the current monthly deduction on a Monthly Payment Date, the Owner must
pay during the Grace Period a minimum of three times the full monthly deduction
due on the Monthly Payment Date when the insufficiency occurred to avoid
termination of the Policy. Security Benefit will not accept any payment if it
would cause the Policyowner's total premium payments to exceed the maximum
permissible premium for the Policy's Specified Amount under the Internal Revenue
Code. This is unlikely to occur unless the Policyowner has outstanding Policy
Debt, in which case he or she could repay a sufficient portion of the Policy
Debt to avoid termination. In this instance, the Policyowner may wish to repay a
portion of Policy Debt to avoid recurrence of the potential lapse. If premium
payments have not exceeded the maximum permissible premiums for the Policy's
Specified Amount, the Policyowner may wish to make larger or more frequent
premium payments to avoid recurrence of the potential lapse.
If Net Cash Surrender Value is insufficient to cover the monthly deduction on
a Monthly Payment Date, Security Benefit will deduct the amount that is
available. Security Benefit will notify the Policyowner (and any assignee of
record) of the payment required to keep the Policy in force. The Policyowner
will then have a "Grace Period" of 61 days, measured from the date the notice is
sent, to make the required payment. The Policy will remain in force through the
Grace Period. Failure to make the required payment within the Grace Period will
result in termination of coverage under the Policy, and the Policy will lapse
with no value. If the required payment is made during the Grace Period, any
premium paid will be allocated among the Variable Accounts of the Separate
Account and the Fixed Account in accordance with the Policyowner's current
premium allocation instructions. Any monthly deduction due will be charged to
the Variable Accounts and the Fixed Account on a proportionate basis. If the
Insured dies during the Grace Period, the death benefit proceeds will equal the
amount of the death benefit immediately prior to the commencement of the Grace
Period, reduced by any unpaid monthly deductions and any Policy Debt, unless the
Guaranteed Death Benefit Premium or Extended Guaranteed Death Benefit Rider is
in effect, in which case, the death benefit will not be reduced by any unpaid
monthly deductions.
REINSTATEMENT
Security Benefit will reinstate a lapsed Policy (but not a Policy which has
been surrendered for its Net Cash Surrender Value) at any time within three
years after the end of the Grace Period, but before the Maturity Date provided
Security Benefit receives the following: (1) a written application from the
Policyowner; (2) evidence of insurability satisfactory to Security Benefit; and
(3) payment of all monthly deductions that were due and unpaid during the Grace
Period, and payment of a premium at least sufficient to keep the Policy in force
for three months after the date of reinstatement.
When the Policy is reinstated, the Accumulated Value will be equal to the
Accumulated Value on the date of the lapse subject to the following: If the
Policy is reinstated after the first Monthly Payment Date following lapse, the
Accumulated Value will be reduced by the amount of Policy Debt on the date of
lapse and no Policy Debt will exist on the date of the reinstatement. If the
Policy is reinstated on the Monthly Payment Date next following lapse, any
Policy Debt on the date of lapse will also be reinstated. No interest on amounts
held in Security Benefit's Loan Account to secure Policy Debt will be paid or
credited between lapse and reinstatement. Reinstatement will be effective as of
the Monthly Payment Date on or next following the date of approval by Security
Benefit, and Accumulated Value minus, if applicable, Policy Debt will be
allocated among the Variable Accounts and the Fixed Account in accordance with
the Policyowner's most recent premium allocation instructions.
CHARGES AND DEDUCTIONS
PREMIUM TAX
A premium tax is deducted from each premium payment under a Policy prior to
allocation of the net premium to the Policyowner's Accumulated Value. The
premium tax consists of the following item:
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STATE AND LOCAL PREMIUM TAX CHARGE. A charge is assessed against each premium
to pay applicable state and local premium taxes. Premium taxes vary from state
to state, and in some instances, among municipalities. Premium tax rates
currently range from .75 percent to 5 percent, but are subject to change by a
governmental entity.
DEDUCTIONS FROM ACCUMULATED VALUE
A charge called the monthly deduction is deducted from a Policy's Accumulated
Value in the Variable Accounts and Fixed Account beginning on the Monthly
Payment Date on or next following the date Security Benefit first becomes
obligated under the Policy, and on each Monthly Payment Date thereafter. The
monthly deduction consists of the following items:
COST OF INSURANCE. This monthly charge compensates Security Benefit for the
anticipated cost of paying death benefits in excess of Accumulated Value to
Beneficiaries of Insureds who die. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk under a
Policy at the beginning of the Policy Month. The net amount at risk for these
purposes is equal to the amount of death benefit payable at the beginning of the
Policy Month divided by 1.0032737 (a discount factor to account for return
deemed to be earned during the month) less the Accumulated Value at the
beginning of the Policy Month.
The Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are no greater than certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B). These
rates are based on the Age, rating class (determined by tobacco use), and
underwriting class of the Insured. They are also based on the gender of the
Insured, except that unisex rates are used where appropriate under applicable
law, including in the State of Montana and in Policies purchased by employers
and employee organizations in connection with employment-related insurance or
benefit programs. As of the date of this Prospectus, Security Benefit charges
"current rates" that are lower (i.e., less expensive) than the guaranteed rates,
and Security Benefit may also charge current rates in the future. Like the
guaranteed rates, the current rates also vary with the Age, gender, rating
class, and underwriting class of the Insured. In addition, they also vary with
the size of the Specified Amount, and the policy duration. Policies with
Specified Amounts in excess of $250,000 receive more favorable rates than
Policies with smaller Specified Amounts. The cost of insurance rate generally
increases with the Age of the Insured.
If there have been increases in the Specified Amount, then for purposes of
calculating the cost of insurance charge, the Accumulated Value will first be
applied to the initial Specified Amount. If the Accumulated Value exceeds the
initial Specified Amount divided by 1.0032737, the excess will then be applied
to any increase in Specified Amount in the order of the increases. If the death
benefit equals Accumulated Value multiplied by the applicable death benefit
percentage, any increase in Accumulated Value will cause an automatic increase
in the death benefit. The underwriting class and duration for such increase will
be the same as that used for the most recent increase in Specified Amount (that
has not been eliminated through a subsequent decrease in Specified Amount).
OPTIONAL INSURANCE BENEFITS CHARGES. The monthly deduction will include
charges for any optional insurance benefits added to the Policy by Rider. See
"Optional Insurance Benefits," page 29.
DEDUCTIONS FROM THE VARIABLE ACCOUNTS
ADMINISTRATIVE CHARGE. Security Benefit deducts a daily administrative charge
from the average daily net assets of each Variable Account. The daily
administrative charge is equal to an annual rate of .35 percent in the first ten
Policy Years and .25 percent thereafter. Security Benefit, however, reserves the
right to charge up to an annual rate of .35 percent in all Policy Years. The
administrative charge is assessed to reimburse Security Benefit for the expenses
associated with administration and maintenance of the Policies. Security Benefit
does not expect to profit from this charge.
MORTALITY AND EXPENSE RISK CHARGE. Security Benefit deducts a daily charge
from the assets of each Variable Account for mortality and expense risks assumed
by Security Benefit. This charge is equal to an annual rate of .90 percent of
the average daily net assets of each Variable Account in the first ten Policy
Years and .70 percent thereafter. Security Benefit, however, reserves the right
to charge up to .90 percent in all Policy Years.
The mortality and expense risk charge is assessed to compensate Security
Benefit for assuming certain mortality and expense risks under the Policies. The
mortality risk assumed is that Insureds, as a group, may live for a shorter
period of time than estimated and, therefore, the cost of insurance charges
specified in the Policy will be insufficient to meet actual claims. The expense
risk assumed is that other expenses incurred in issuing and administering the
Policies and operating the Separate Account will be greater than the charges
assessed for such expenses. Security Benefit will realize a gain from this
charge to the extent it is not needed to provide the mortality benefits and
expenses under the Policies, and will realize a loss to the extent the charge is
not sufficient. Security Benefit may use any profit derived from this charge for
any lawful purpose, including promotional expenses.
OTHER CHARGES
Security Benefit may charge the Variable Accounts for federal income taxes
incurred by Security Benefit that are attributable to the Separate Account and
its Variable Accounts. No such charge is currently assessed. See "Charge for
Security Benefit Income Taxes," page 24.
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Security Benefit will bear the operating expenses of the Separate Account.
Each Variable Account purchases shares of the corresponding Series of the
underlying Fund. Each Series incurs certain charges including the investment
advisory fee and certain operating expenses. The Fund is a corporation that is
governed by its Board of Directors. The Fund's advisory fees and its expenses
are not fixed or specified under the terms of the Policy. The advisory fees and
other expenses are more fully described in the prospectus of the Fund.
GUARANTEE OF CERTAIN CHARGES
Security Benefit guarantees that certain charges will not increase. This
includes the charge for mortality and expense risks, the administrative charge,
and the guaranteed cost of insurance rates.
OTHER INFORMATION
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a general description of the federal income
tax considerations relating to the Policy. This discussion is based upon
Security Benefit's understanding of the present federal income tax laws as they
are currently interpreted by the Internal Revenue Service ("IRS"). This
discussion is not intended as tax advice. Because of the inherent complexity of
such laws, and the fact that tax results will vary according to the particular
circumstances of the individual involved, tax advice may be needed by a person
contemplating the purchase of the Policy. It should, therefore, be understood
that these comments concerning federal income tax consequences are not an
exhaustive discussion of all tax questions that might arise under the Policy,
and that special rules which are not discussed herein may apply in certain
situations. Moreover, no representation is made as to the likelihood of
continuation of federal income tax or estate or gift tax laws, or of the current
interpretations by the IRS or the courts. Future legislation may adversely
affect the tax treatment of life insurance policies or other tax rules described
in this discussion or that relate directly or indirectly to life insurance
policies. Finally, these comments do not take into account any state or local
income tax considerations which may be involved in the purchase of the Policy.
While Security Benefit believes that the Policy meets the statutory
definition of life insurance, and hence will receive federal income tax
treatment consistent with that of fixed life insurance, the area of the tax law
relating to the definition of life insurance does not explicitly address all
relevant issues (including, for example, the treatment of the Guaranteed Death
Benefit Premium and Extended Guaranteed Death Benefit Rider). Security Benefit
reserves the right to make changes to the Policy if changes are deemed
appropriate by Security Benefit to attempt to assure qualification of the Policy
as a life insurance contract. If a Policy were determined not to qualify as life
insurance, the Policy would not provide the tax advantages normally provided by
life insurance. The discussion below summarizes the tax treatment of life
insurance contracts. The death benefit under a Policy should be excludable from
the gross income of the Beneficiary (whether the Beneficiary is a corporation,
individual or other entity) under Section 101(a)(1) of the Internal Revenue Code
("IRC") for purposes of the regular federal income tax and the owner generally
should not be deemed to be in constructive receipt of the cash values, including
increments thereof, under the Policy until a full surrender thereof, maturity of
the Policy, or Partial Withdrawal. In addition, certain Policy loans may be
taxable in the case of Policies that are Modified Endowment Contracts.
Prospective Policyowners that intend to use Policies to fund deferred
compensation arrangements for their employees are urged to consult their tax
advisors with respect to the tax consequences of such arrangements. Prospective
corporate owners should consult their tax advisors about the treatment of life
insurance in their particular circumstances for purposes of the alternative
minimum tax applicable to corporations and the environmental tax under IRC
Section 59A.
DIVERSIFICATION REQUIREMENTS. To comply with regulations under Section 817(h)
of the IRC, each Series of the Fund is required to diversify its investments.
Generally, a Series is required to diversify its investments so that on the last
day of each quarter of a calendar year, no more than 55 percent of the value of
its assets is represented by any one investment, no more than 70 percent is
represented by any two investments, no more than 80 percent is represented by
any three investments, and no more than 90 percent is represented by any four
investments. Securities of a single issuer generally are treated for purposes of
Section 817(h) as a single investment. However, for this purpose, each U.S.
Government agency or instrumentality is treated as a separate issuer, and any
security issued, guaranteed, or insured (to the extent so guaranteed or insured)
by the U.S. or by an agency or instrumentality of the U.S. is treated as a
security issued by the U.S. Government or its agency or instrumentality,
whichever is applicable.
In certain circumstances, owners of variable life insurance contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includible in the variable
contract owner's gross income. The IRS has stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the contract owner possesses incidents of ownership in those assets, such as
the ability to exercise investment control over the assets. The Treasury
Department also announced, in connection with the issuance of regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Policyowner), rather
than the insurance company, to be
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treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of the
date of this Prospectus, no such guidance has been issued.
Security Benefit does not know what standards will be set forth, if any, in
the regulations or rulings which the Treasury Department has stated it expects
to issue. Security Benefit therefore reserves the right to modify the Policy, as
deemed appropriate by Security Benefit, to attempt to prevent a Policyowner from
being considered the owner of a pro rata share of the assets of the Separate
Account. Moreover, in the event that regulations or rulings are adopted, there
can be no assurance that the Series will be able to operate as currently
described in the Prospectus, or that the Fund will not have to change any
Series` investment objective or investment policies.
TAX TREATMENT OF POLICIES. The Technical and Miscellaneous Revenue Act of
1988 established a new class of life insurance contracts referred to as Modified
Endowment Contracts. With the enactment of this legislation, the Policies will
be treated for tax purposes in one of two ways. Policies that are not classified
as Modified Endowment Contracts will be taxed as conventional life insurance
contracts, as described below. Taxation of pre-death distributions from Policies
that are classified as Modified Endowment Contracts is somewhat different, as
described below.
A life insurance contract becomes a "Modified Endowment Contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a
contract. For example, if the "seven-pay premiums" were $1,000, the maximum
premiums that could be paid during the first seven years to avoid "Modified
Endowment" treatment would be $1,000 in the first year, $2,000 through the first
two years, and $3,000 through the first three years, etc. Under this test, a
Policy may or may not be a Modified Endowment Contract, depending on the amount
of premium paid during each of the Policy's first seven contract years. Changes
in death benefits under, or in other terms of, a Policy may require "retesting"
of a Policy to determine if it is to be classified as a Modified Endowment
Contract.
CONVENTIONAL LIFE INSURANCE POLICIES. If a Policy is not a Modified Endowment
Contract, upon full surrender or maturity of a Policy for its Net Cash Surrender
Value, the excess, if any, of the Net Cash Surrender Value plus any outstanding
Policy Debt over the cost basis under a Policy will be treated as ordinary
income for federal income tax purposes. Such a Policy's cost basis will usually
equal the premiums paid less any premiums previously recovered in Partial
Withdrawals. Under Section 7702 of the IRC, if a Partial Withdrawal occurring
within 15 years of the Policy Date is accompanied by a reduction in benefits
under the Policy, special rules apply to determine whether part or all of the
cash received is paid out of the income of the Policy and is taxable. Cash
distributed to a Policyowner on Partial Withdrawals occurring more than 15 years
after the Policy Date will be taxable as ordinary income to the Policyowner to
the extent that it exceeds the cost basis under a Policy. It is believed that
the Guaranteed Death Benefit Premium and Extended Guaranteed Death Benefit Rider
features of the Policy should not result in a deemed distribution under the
Policy, but, to date, the IRS has not issued guidance regarding the tax
treatment of features similar to these features; accordingly, the law on this
point cannot be regarded as fully settled. If a Rider providing level term
insurance for a business associate is added to a Policy, the Policyowner may be
deemed to receive distributions under the Policy equal to the cost of the level
term insurance deducted from Accumulated Value, which may give rise to taxable
income.
Security Benefit also believes that loans received under Policies that are
not Modified Endowment Contracts will be treated as indebtedness of the owner,
and that no part of any loan under the Policy will constitute income to the
Owner unless the Policy is surrendered or upon maturity of the Policy. Interest
paid (or accrued by an accrual basis taxpayer) on a loan under a Policy that is
not a Modified Endowment Contract may be deductible, subject to several
limitations, depending on the use to which the proceeds are put and the tax
rules applicable to the Policyowner. If, for example, the loan proceeds are used
by an individual for business or investment purposes, all or part of the
interest expense may be deductible. Generally, if the Policy loan is used for
personal purposes by an individual, the interest expense is not deductible. The
deductibility of loan interest (whether incurred under a Policy loan or on other
indebtedness) also may be subject to other limitations. For example, where the
interest is paid (or accrued by an accrual basis taxpayer) on a loan under a
Policy covering the life of an officer, employee, or person financially
interested in the trade or business of the Policyowners, the interest may be
deductible to the extent that the interest is attributable to the first $50,000
of the Policy Debt. Other tax law provisions may limit the deduction of interest
payable on loan proceeds that are used to purchase or carry certain life
insurance policies.
MODIFIED ENDOWMENT CONTRACTS. Pre-death distributions from Modified Endowment
Contracts may give rise to taxable income. Upon full surrender or maturity of
the Policy, the Policyowner would recognize ordinary income for federal income
tax purposes equal to the amount by which the Net Cash Surrender Value plus
Policy Debt exceeds the investment in the Policy (usually the premiums paid plus
certain pre-death distributions that were taxable less any premiums previously
recovered that were excludable from gross income). Upon Partial Withdrawals and
Policy loans, the Policyowner would recognize ordinary
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income to the extent allocable to income (which includes all previously
non-taxed gains) on the Policy. The amount allocated to income is the amount by
which the Accumulated Value of the Policy exceeds investment in the Policy
immediately before the distribution. Under a tax law provision, if two or more
policies which are classified as Modified Endowment Contracts are purchased from
any one insurance company, including Security Benefit, during any calendar year,
all such policies will be aggregated for purposes of determining the portion of
the pre-death distribution allocable to income on the policies and the portion
allocable to investment in the policies.
Amounts received under a Modified Endowment Contract that are included in
gross income are subject to an additional tax equal to 10 percent of the amount
included in gross income, unless an exception applies. The 10 percent additional
tax does not apply to any amount received: (i) when the taxpayer is at least 59
1/2 years old; (ii) which is attributable to the taxpayer becoming disabled; or
(iii) which is part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his
or her beneficiary.
If a Policy was not originally a Modified Endowment Contract but becomes one,
under Treasury Department regulations which are yet to be prescribed, pre-death
distributions received in anticipation of a failure of a Policy to meet the
seven-pay premium test are to be treated as pre-death distributions from a
Modified Endowment Contract (and, therefore, are to be taxable as described
above) even though, at the time of the distribution(s) the Policy was not yet a
Modified Endowment Contract. For this purpose, pursuant to the IRC, any
distribution made within two years before the Policy is classified as a Modified
Endowment Contract shall be treated as being made in anticipation of the
Policy's failing to meet the seven-pay premium test.
It is unclear whether interest paid (or accrued by an accrual basis taxpayer)
on Policy Debt with respect to a Modified Endowment Contract constitutes
interest for federal income tax purposes. If it does constitute interest, it may
be deductible, subject to several limitations, depending on the use to which the
proceeds are put and the tax rules applicable to the Policyowner. If, for
example, the loan proceeds are used by an individual for business or investment
purposes, all or part of the interest expense may be deductible. Generally, if
the Policy loan is used for personal purposes by an individual, the interest
expense is not deductible. The deductibility of loan interest (whether incurred
under a Policy loan or on other indebtedness) also may be subject to other
limitations. For example, where the interest is paid (or accrued by an accrual
basis taxpayer) on a loan under a Policy covering the life of an officer,
employee, or person financially interested in the trade or business of the
Policyowners, the interest may be deductible to the extent that the interest is
attributable to the first $50,000 of the Policy Debt. Other tax law provisions
may limit the deduction of interest payable on loan proceeds that are used to
purchase or carry certain life insurance policies.
REASONABLENESS REQUIREMENT FOR CHARGES. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. These calculations must be based upon
(i) mortality charges that meet the reasonable mortality charge requirements set
forth in the IRC and (ii) other charges reasonably expected to be actually paid.
The Treasury Department is expected to promulgate regulations governing
reasonableness standards for mortality and other charges. The area of the law
relating to reasonableness standards for mortality and other charges is
currently based on statutory language and IRS pronouncements which do not
explicitly address all relevant issues. Accordingly, while Security Benefit
believes that the mortality costs and other expenses used in making calculations
to determine whether the Policy qualifies as life insurance meet the current
standards, it cannot offer complete assurance since the law in this area is not
fully developed. It is possible that future regulations will contain standards
that would require Security Benefit to modify its mortality and other charges
used for the purposes of the calculations in order to retain the qualification
of the Policy as life insurance for federal income tax purposes, and Security
Benefit reserves the right to make any such modifications.
ACCELERATED BENEFIT FOR TERMINAL ILLNESS. An Accelerated Benefit for Terminal
Illness Rider (the "Accelerated Benefit Rider") is available in connection with
the Policy. Benefits under the Accelerated Benefit Rider may be taxable. In
addition, there may be a question as to whether a life insurance policy that has
an accelerated living benefits rider can meet certain technical aspects of the
definition of "life insurance contract" under the IRC. The IRS has issued
proposed regulations, and legislation has been introduced, providing (i) that
accelerated living benefits which meet certain requirements can be received
without incurring a federal income tax and (ii) for the treatment of accelerated
living benefits riders under the definitional requirements of a life insurance
contract. The precise rules which will be incorporated in any final regulations
or legislation are not known. Security Benefit reserves the right to (but is not
obligated to) modify the Accelerated Benefit Rider to conform with the rules
under any final regulations or legislation. Policyowners considering adding an
Accelerated Benefit Rider or exercising rights under that rider should first
consult a qualified tax advisor.
OTHER. Federal estate and gift and state and local estate, inheritance, and
other tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each owner or Beneficiary.
For complete information on federal, state, local and other tax
considerations, a qualified tax adviser should be consulted.
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SECURITY BENEFIT DOES NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY
POLICY.
CHARGE FOR SECURITY BENEFIT INCOME TAXES
For federal income tax purposes, variable life insurance generally is treated
in a manner consistent with fixed life insurance. Security Benefit will review
the question of a charge to the Separate Account for Security Benefit's federal
income taxes periodically. A charge may be made for any federal income taxes
incurred by Security Benefit that are attributable to the Separate Account. This
might become necessary if the tax treatment of Security Benefit is ultimately
determined to be other than what Security Benefit currently believes it to be,
if there are changes made in the federal income tax treatment of variable life
insurance at the insurance company level, or if there is a change in Security
Benefit's tax status.
Under current laws, Security Benefit may incur state and local taxes (in
addition to premium taxes) in several states. At present, these taxes are not
significant. If there is a material change in applicable state or local tax
laws, Security Benefit reserves the right to charge the Account for such taxes,
if any, attributable to the Account.
VOTING OF FUND SHARES
In accordance with its view of present applicable law, Security Benefit will
exercise voting rights attributable to the shares of each Series of the Fund
held in the Variable Accounts at any regular and special meetings of the
shareholders of the Fund on matters requiring shareholder voting under the
Investment Company Act of 1940. Security Benefit will exercise these voting
rights based on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended,
or if the present interpretation thereof should change, and as a result Security
Benefit determines that it is permitted to vote the shares of the Fund in its
own right, it may elect to do so.
The person having the voting interest under a Policy is the Policyowner.
Unless otherwise required by applicable law, the number of votes as to which a
Policyowner will have the right to instruct will be determined by dividing a
Policyowner's Accumulated Value in a Variable Account by the net asset value per
share of the corresponding Series of the Fund. Fractional votes will be counted.
The number of votes as to which a Policyowner will have the right to instruct
will be determined as of the date coincident with the date established by the
Fund for determining shareholders eligible to vote at the meeting of the Fund.
If required by the Securities and Exchange Commission, Security Benefit reserves
the right to determine in a different fashion the voting rights attributable to
the shares of the Fund based upon the instructions received from Policyowners.
Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Policyowner's Accumulated Value held in
each Variable Account for which no timely voting instructions are received will
be voted by Security Benefit in the same proportion as the voting instructions
which are received in a timely manner for all Policies participating in that
Variable Account. Security Benefit will also exercise the voting rights from
assets in each Variable Account which are not otherwise attributable to
Policyowners, if any, in the same proportion as the voting instructions which
are received in a timely manner for all Policies participating in that Variable
Account and generally will exercise voting rights attributable to shares of
Series of the Fund held in its General Account, if any, in the same proportion
as votes cast with respect to shares of Series of the Fund held by the Separate
Account and other separate accounts of Security Benefit, in the aggregate.
DISREGARD OF VOTING INSTRUCTIONS
Security Benefit may, when required by state insurance regulatory
authorities, disregard voting instructions if the instructions require that
voting rights be exercised so as to cause a change in the subclassification or
investment objective of a Series or to approve or disapprove an investment
advisory contract. In addition, Security Benefit itself may disregard voting
instructions of changes initiated by Policyowners in the investment policy or
the investment adviser (or portfolio manager) of a Series, provided that
Security Benefit's disapproval of the change is reasonable and is based on a
good faith determination that the change would be contrary to state law or
otherwise inappropriate, considering the Series' objectives and purpose, and
considering the effect the change would have on Security Benefit. In the event
Security Benefit does disregard voting instructions, a summary of that action
and the reasons for such action will be included in the next report to
Policyowners.
REPORT TO OWNERS
A statement will be sent at least annually to each Policyowner, setting forth
a summary of the transactions which occurred during the year and indicating the
death benefit, Specified Amount, Accumulated Value, Net Cash Surrender Value,
and any Policy Debt. In addition, the statement will indicate the allocation of
Accumulated Value among the Fixed Account and the Variable Accounts and any
other information required by law. Confirmations will be sent out upon premium
payments, transfers, loans, loan repayments, withdrawals, and surrenders.
Each Policyowner will also receive an annual and a semiannual report
containing financial statements for the Fund, which will include a list of the
portfolio securities of the Fund, as required by the Investment Company Act of
1940, and/or such other reports as may be required by federal securities law.
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SUBSTITUTION OF INVESTMENTS
Security Benefit reserves the right, subject to compliance with the law as
then in effect, to make additions to, deletions from, or substitutions for the
securities that are held by the Separate Account or any Variable Account or that
the Separate Account or any Variable Account may purchase. If shares of any or
all of the Series of the Fund should no longer be available for investment, or
if, in the judgment of Security Benefit's management, further investment in
shares of any or all Series of the Fund should become inappropriate in view of
the purposes of the Policies, Security Benefit may substitute shares of another
Series of the Fund or of a different fund for shares already purchased, or to be
purchased in the future under the Policies.
Where required, Security Benefit will not substitute any shares attributable
to a Policyowner's interest in a Variable Account or the Separate Account
without notice, Policyowner approval, or prior approval of the Securities and
Exchange Commission and without following the filing or other procedures
established by applicable state insurance regulators.
Security Benefit also reserves the right to establish additional Variable
Accounts of the Separate Account, each of which would invest in a new Series of
the Fund, or in shares of another investment company, a series thereof, or
suitable investment vehicle, with a specified investment objective. New Variable
Accounts may be established when, in the sole discretion of Security Benefit,
marketing needs or investment conditions warrant, and any new Variable Accounts
will be made available to existing Policyowners on a basis to be determined by
Security Benefit. Security Benefit may also eliminate one or more Variable
Accounts if, in its sole discretion, marketing, tax, or investment conditions so
warrant.
In the event of any such substitution or change, Security Benefit may, by
appropriate endorsement, make such changes in this and other policies as may be
necessary or appropriate to reflect such substitution or change. If deemed by
Security Benefit to be in the best interests of persons having voting rights
under the Policies, the Separate Account may be operated as a management
investment company under the Investment Company Act of 1940 or any other form
permitted by law, it may be deregistered under that Act in the event such
registration is no longer required, or it may be combined with other separate
accounts of Security Benefit or an affiliate thereof. Subject to compliance with
applicable law, Security Benefit also may combine one or more Variable Accounts
and may establish a committee, board, or other group to manage one or more
aspects of the operation of the Separate Account.
CHANGES TO COMPLY WITH LAW
Security Benefit reserves the right to make any change without consent of
Policyowners to the provisions of the Policy to comply with, or give
Policyowners the benefit of, any Federal or State statute, rule, or regulation,
including but not limited to, requirements for life insurance contracts under
the Internal Revenue Code, under regulations of the United States Treasury
Department or any state.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account may
appear in advertisements, sales literature, or reports to Policyowners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law, which
may include presentation of a change in a Policyowner's Accumulated Value
attributable to the performance of one or more Variable Accounts, or as a change
in Policyowner's death benefit. Performance quotations may be expressed as a
change in a Policyowner's Accumulated Value over time or in terms of the average
annual compounded rate of return on the Policyowner's Accumulated Value, based
upon a hypothetical Policy in which premiums have been allocated to a particular
Variable Account over certain periods of time that will include one, five and
ten years, or from the commencement of operation of the Variable Account if less
than one, five, or ten years. Performance information based upon a hypothetical
Policy may also be quoted for periods beginning prior to the availability of the
Policies based upon performance of the Fund and the charges under the Policy.
Any such quotation may reflect the deduction of all applicable charges to the
Policy including premium tax, the cost of insurance, the administrative charge,
and the mortality and expense risk charge. Performance information for the Fund
may be simultaneously shown.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policyowners to, among other
things: (i) other variable life separate accounts or investment, savings, or
insurance products tracked by research firms, rating services, companies,
publications, or persons who rank separate accounts or investment products on
overall performance or other criteria; and (ii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from the purchase of a
Policy. Reports and promotional literature may also contain Security Benefit's
rating or a rating of Security Benefit's claim-paying ability as determined by
firms that analyze and rate insurance companies and by nationally recognized
statistical rating organizations, and may show the effects of tax-deferred
compounding on a Policyowner's rate of return, on Accumulated Value or returns
in general, and may include a comparison at various points in time of the return
on the Policy or tax-deferred returns in general with the return on a taxable
basis.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives
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and policies, characteristics and quality of the Series of the Fund in which the
Variable Account invests, and the market condition during the given period of
time, and should not be considered as representative of what may be achieved in
the future.
THE FIXED ACCOUNT
Policyowners may allocate all or a portion of their net premium payments and
transfer Accumulated Value to the Fixed Account of Security Benefit. Amounts
allocated to the Fixed Account become part of the "General Account" of Security
Benefit, which supports insurance and annuity obligations. Because of exemptive
and exclusionary provisions, interests in the Fixed Account have not been
registered under the Securities Act of 1933, and the Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the Fixed Account nor any interest therein is generally
subject to the provisions of these Acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosure in this
Prospectus relating to the Fixed Account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in the Prospectus. For more details regarding the Fixed Account,
see the Policy itself.
GENERAL DESCRIPTION
Amounts allocated to the Fixed Account become part of the General Account of
Security Benefit, which consists of all assets owned by Security Benefit, other
than those in the Separate Account and other separate accounts of Security
Benefit. Subject to applicable law, Security Benefit has sole discretion over
the investment of the assets of its General Account.
The Policyowner may elect to allocate net premium payments to the Fixed
Account, the Separate Account, or both. The Policyowner may also transfer
Accumulated Value from the Variable Accounts of the Separate Account to the
Fixed Account, or from the Fixed Account to the Variable Accounts, subject to
the limitations described below. Security Benefit guarantees that the
Accumulated Value in the Fixed Account will be credited with a minimum interest
rate of .32737 percent per month, compounded monthly, for a minimum effective
annual rate of 4 percent. Such interest will be paid regardless of the actual
investment experience of the Fixed Account. In addition, Security Benefit may in
its sole discretion pay interest at a rate ("Current Rate") that exceeds 4
percent. (The portion of a Policyowner's Accumulated Value that has been used to
secure Policy Debt will be credited with an interest rate of .48676 percent per
month, compounded monthly, for an effective annual rate of 6 percent.)
Accumulated Value that is allocated or transferred to the Fixed Account
during one month may be credited with a different Current Rate than amounts
allocated or transferred to the Fixed Account in another month. Therefore, at
any given time, various portions of a Policyowner's Accumulated Value allocated
to the Fixed Account may be earning interest at different Current Rates,
depending upon the month during which such portions were originally allocated or
transferred to the Fixed Account. Security Benefit bears the full investment
risk for the Accumulated Value allocated to the Fixed Account.
DEATH BENEFIT
The death benefit under the Policy will be determined in the same fashion for
a Policyowner who has Accumulated Value in the Fixed Account as for a
Policyowner who has Accumulated Value in the Variable Accounts. The death
benefit under Option A will be equal to the Specified Amount of the Policy or,
if greater, Accumulated Value multiplied by a death benefit percentage. Under
Option B, the death benefit will be equal to the Specified Amount of the Policy
plus the Accumulated Value or, if greater, Accumulated Value multiplied by a
death benefit percentage. See "Death Benefit," page 14.
POLICY CHARGES
The mortality and expense risk and administrative charges are not assessed
against Accumulated Value allocated to the Fixed Account. Other policy charges
will be the same for Policyowners who allocate net premiums or transfer
Accumulated Value to the Fixed Account as for Policyowners who allocate net
premiums to the Variable Accounts. These charges consist of the premium tax,
consisting of the state and local premium tax charge, and the deductions from
Accumulated Value, including the charges for the cost of insurance, and the
charge for any optional insurance benefits added by rider. Any amounts that
Security Benefit pays for income taxes allocable to the Variable Accounts will
not be charged against the Fixed Account. In addition, the operating expenses of
the Variable Accounts, as well as the investment advisory fee charged by the
Fund, will not be paid directly or indirectly by Policyowners to the extent the
Accumulated Value is allocated to the Fixed Account; however, such Policyowners
will not participate in the investment experience of the Variable Accounts.
TRANSFERS, SURRENDERS, WITHDRAWALS, AND POLICY LOANS
Amounts may be transferred after the Free-Look Period from the Variable
Accounts to the Fixed Account and from the Fixed Account to the Variable
Accounts, subject to the following limitations. The Policyowner may transfer
from the Fixed Account to the Variable Accounts in any Policy Year not more than
the greater of one third of the Accumulated Value in the Fixed Account at the
time of the transfer, $5,000 or 120 percent of the Accumulated Value transferred
from the Fixed Account during the previous Policy Year. Accumulated Value in the
Fixed Account may be transferred pursuant to the Dollar Cost Averaging or Asset
Reallocation
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Options subject to this limitation. The minimum amount that may be transferred
is $500, except that this minimum does not apply to transfers under the Dollar
Cost Averaging or Asset Reallocation Options. Currently, there is no charge
imposed upon transfers; however, Security Benefit reserves the right to assess a
charge of $25 per transfer in the future to the extent transfers exceed six in
any Policy Year and to impose otherlimitations on the number of transfers the
amount of transfers, and the amount remaining in the Fixed Account or Variable
Accounts after a transfer.
The Policyowner may also make full surrenders and Partial Withdrawals to the
same extent as a Policyowner who has invested in the Variable Accounts. See
"Surrender" and "Partial Withdrawal Benefits," page 18. Policyowners allocating
Accumulated Value in the Fixed Account may borrow up to 80 percent of Net Cash
Surrender Value. See "Policy Loans," page 17. Transfers, surrenders, and
withdrawals payable from the Fixed Account, and Policy loans made from Contract
Value allocated to the Fixed Account, may be delayed for up to six months.
MORE ABOUT THE POLICY
OWNERSHIP
The Policyowner is the individual named as such in the application or in any
later change shown in Security Benefit's records. While the Insured is living,
the Policyowner alone has the right to receive all benefits and exercise all
rights that the Policy grants or Security Benefit allows.
JOINT OWNERS. If more than one person is named as Policyowner, they are joint
owners. Any Policy transaction requires the signature of all persons named
jointly. Unless otherwise provided, if a joint owner dies, ownership passes to
the surviving joint owner(s). When the last joint owner dies, ownership passes
through that person's estate, unless otherwise provided.
BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in Security Benefit's records. The Policyowner may change the
Beneficiary at any time during the life of the Insured by written request, which
must be received by Security Benefit at its Home Office. The change will be
effective as of the date this form is signed. Contingent and/or concurrent
Beneficiaries may be designated. The Policyowner may designate a permanent
Beneficiary, whose rights under the Policy cannot be changed without his or her
consent. Unless otherwise provided, if no designated Beneficiary is living upon
the death of the Insured, the Policyowner or the Policyowner's estate is the
Beneficiary.
Security Benefit will pay the death benefit proceeds to the Beneficiary.
Unless otherwise provided, in order to receive proceeds at the Insured's death,
the Beneficiary must be living at the time of the Insured's death.
EXCHANGE OF INSURED
After the first Policy Year and subject to approval from Security Benefit,
the Policyowner may exchange the named Insured on the Policy upon written
application, evidence of insurability satisfactory to Security Benefit, and
payment of a charge of $100. The exchange is effective the first Monthly Payment
Date on or after the exchange is approved. Coverage on the new Insured will
become effective on the exchange date. Coverage on the current Insured will
terminate on the day preceding the exchange date. The Policy Date will not be
changed unless the new Insured was born after the Policy Date. In such case, the
Policy Date will be changed to the Policy anniversary on or next following the
birth date of the new Insured. The cost of insurance charge will be based on the
new Insured's Age, gender, risk class and underwriting class.
Security Benefit reserves the right to disallow a requested exchange of the
named Insured, and will not permit a requested exchange, among other reasons,
(1) if compliance with the guideline premium limitations under tax law resulting
from the exchange of Insured would result in the immediate termination of the
Policy, or (2) if, to effect the requested exchange of Insured, payments to the
Policyowner would have to be made from Accumulated Value for compliance with the
guideline premium limitations, and the amount of such payments would exceed the
Net Cash Surrender Value under the Policy.
A fee of $100 will be charged to cover the costs of processing the exchange
of Insured. This amount will not be credited to or deducted from Accumulated
Value, but must be paid directly to Security Benefit by the Policyowner before
the request for an exchange of Insured will be processed.
EXCHANGE OF POLICY DURING FIRST 24 MONTHS
During the first 24 months following the Policy Date, if the Policy has not
lapsed, the Policyowner may exchange the Policy for a fixed-benefit life
insurance policy issued and made available for exchange by Security Benefit. The
exchange will be made without evidence of insurability, and the new policy will
have the same Specified Amount, Policy Date, Age, rating class and underwriting
class for the Insured as the exchanged Policy.
An exchange will be effective on the Monthly Payment Date following Security
Benefit's receipt of written notice of the Policyowner's request to exchange in
proper form and payment of any fee. Security Benefit reserves the right to
charge a fee of up to $200 to effect an exchange. This fee will not be deducted
from Accumulated Value, but must be paid directly to Security Benefit. Any
outstanding Policy Debt must be repaid on or before the effective date of the
exchange.
THE CONTRACT
This Policy is a contract between the Owner and Security Benefit. The entire
contract consists of the Policy, a copy of the initial application, all
subsequent applications to
27
<PAGE>
change the Policy, and endorsements, all Riders, and all additional Policy
information sections (Specifications Pages) added to the Policy.
PAYMENTS
Security Benefit will pay death benefit proceeds, Net Cash Surrender Value on
surrender, Partial Withdrawals, and loan proceeds based on allocations made to
the Variable Accounts, and will effect a transfer between Variable Accounts or
from a Variable Account to the Fixed Account within seven days after Security
Benefit receives all the information needed to process a payment.
However, Security Benefit can postpone the calculation or payment of such a
payment or transfer of amounts based on investment performance of the Variable
Accounts if:
o The New York Stock Exchange is closed on other than customary weekend and
holiday closing or trading on the New York Stock Exchange is restricted as
determined by the SEC; or
o An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not reasonably
practicable to determine the value of the Account's net assets; or
o The SEC by order permits postponement for the protection of Policyowners.
ASSIGNMENT
The Policyowner may assign a Policy as collateral security for a loan or
other obligation. No assignment will bind Security Benefit unless the original,
or a copy, is received at Security Benefit's Home Office, and will be effective
only when recorded by Security Benefit. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any
Policyowner or Beneficiary will be subject to the assignment. The entire Policy,
including any attached payment option or Rider, will be subject to the
assignment. Security Benefit will rely solely on the assignee's statement as to
the amount of the assignee's interest. Security Benefit will not be responsible
for the validity of any assignment. Unless otherwise provided, the assignee may
exercise all rights this Policy grants except (a) the right to change the
Policyowner or Beneficiary; and (b) the right to elect a payment option.
Assignment of a Policy that is a Modified Endowment Contract may generate
taxable income. (See "Federal Income Tax Considerations," page 21.)
ERRORS ON THE APPLICATION
If the Age or gender of the Insured has been misstated, the death benefit
under this Policy will be the greater of that which would be purchased by the
most recent cost of insurance charge at the correct Age and gender, or the death
benefit derived by multiplying Accumulated Value by the death benefit percentage
for the correct Age and gender. If the Insured's Age, or gender is misstated in
the application, the Accumulated Value will be modified by recalculating all
prior cost of insurance charges and other monthly deductions based on the
correct Age and gender. If unisex cost of insurance rates apply, no adjustment
will be made for a misstatement of gender. See "Cost of Insurance," page 20.
INCONTESTABILITY
Security Benefit may contest the validity of this Policy if any material
misstatements are made in the application. However, this Policy will be
incontestable after the expiration of the following: the initial Specified
Amount cannot be contested after the Policy has been in force during the
Insured's lifetime for two years from the date the Policy was issued; if the
Insured is changed, the Policy cannot be contested after it has been in force
during the new Insured's lifetime for two years from the effective date of the
exchange; and an increase in the Specified Amount cannot be contested after the
increase has been in force during an Insured's lifetime for two years from its
effective date.
PAYMENT IN CASE OF SUICIDE
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, Security Benefit will limit the death benefit proceeds to the
premium payments less any withdrawal amounts and less any Policy Debt. If the
Insured has been changed and the new Insured dies by suicide, while sane or
insane, within two years of the exchange date, the death benefit proceeds will
be limited to the Net Cash Surrender Value as of the exchange date, plus the
premiums paid since the exchange date, less the sum of any increases in Debt,
withdrawal amounts, and any dividends paid in cash since the exchange date. If
an Insured dies by suicide, while sane or insane, within two years of the
effective date of any increase in the Specified Amount, Security Benefit will
refund the cost of insurance charges made with respect to such increase.
PARTICIPATING
The Policy is participating and will share in the surplus earnings of
Security Benefit. However, the current dividend scale is zero, and Security
Benefit does not anticipate that dividends will be paid. Any dividends that do
become payable will be paid in cash.
POLICY ILLUSTRATIONS
Upon request, Security Benefit will send the Policyowner an illustration of
future benefits under the Policy based on both guaranteed and current cost
factor assumptions. However, Security Benefit reserves the right to charge a fee
for requests for illustrations in excess of one per Policy year.
PAYMENT PLAN
Maturity, surrender, or withdrawal benefits may be used to purchase a payment
plan providing monthly income for the lifetime of the Insured, and death benefit
proceeds may be used to purchase a payment plan providing monthly income for the
lifetime of the Beneficiary. The monthly
28
<PAGE>
payments consisting of proceeds plus interest will be paid in equal installments
for a period not to exceed 20 years. The purchase rates for the payment plan are
guaranteed not to exceed those shown in the Policy, but current rates that are
lower (i.e., providing greater income) may be established by Security Benefit
from time to time. This benefit is not available if the income would be less
than $25 a month. Maturity, surrender, or withdrawal benefits or death benefit
proceeds may be used to purchase any other payment plan that Security Benefit
makes available at that time.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, a Policyowner may elect to add one or more
of the following optional insurance benefits to the Policy by a Rider at the
time of application for a Policy. These optional benefits are described briefly
below. The cost of any additional insurance benefits will be deducted as part of
the monthly deduction against Accumulated Value. See "Charges and Deductions,"
page 19. The amounts of these benefits are fully guaranteed at issue. Certain
restrictions may apply and are described in the applicable Rider. An insurance
agent authorized to sell the Policy can describe these extra benefits further.
Samples of the provisions are available from Security Benefit upon written
request. Certain Riders are not available in all states. For information
relating to the federal income tax aspects of purchasing a Policy Rider, see
"Federal Income Tax Considerations," page 21.
WAIVER OF MONTHLY DEDUCTION RIDER. This Rider provides for the waiver of the
monthly deduction in the event the Insured is disabled for a period of six
months or longer prior to age 65.
ACCELERATED BENEFIT RIDER FOR TERMINAL ILLNESS. This Rider provides for
payment of up to the lesser of (i) 50 percent of the Specified Amount less any
Policy Debt or (ii) $250,000, upon receipt of satisfactory proof of terminal
illness. Such terminal illness must first be diagnosed while the Policy is in
force. The payment amount requested will be reduced by an actuarial discount
which compensates Security Benefit for interest not earned as a result of early
payment of a portion of the death benefit under the Policy. Premium payments
made after the payment of the Accelerated Benefit must be allocated to the Fixed
Account. Accelerated Benefit payments will not be made for less than $25,000
and, for any one Insured, will not be made for more than $500,000 under all
policies issued by Security Benefit. Security Benefit may charge a fee of up to
$200 to cover the costs of administration at the time of payment of an
Accelerated Benefit.
LEVEL TERM INSURANCE RIDER. This Rider provides level term insurance for a
family member and may not be issued on the Insured. The maximum amount of
insurance that may be provided under the Rider is an amount equal to the
Specified Amount under the Policy. Up to five Level Term Insurance Riders may be
added to a Policy.
EXTENDED GUARANTEED DEATH BENEFIT RIDER. A Policyowner may elect to extend
the Guaranteed Death Benefit beyond the first five Policy Years by adding this
Rider to the Policy at the time of application. This Rider provides an Extended
Guaranteed Death Benefit Premium which, if paid in advance on at least a monthly
basis, will keep the Policy in force beyond the first five Policy Years even if
Net Cash Surrender Value is insufficient to cover the monthly deduction on any
Monthly Payment Date. The length of the Extended Guaranteed Death Benefit period
is 10 to 30 Policy Years (depending on the Age of the Insured on the Policy
Date). The amount of the Extended Guaranteed Death Benefit Premium is determined
by Security Benefit based upon the Policy's Specified Amount and Death Benefit
Option, any Riders added to the Policy, and the Age, gender (unless unisex cost
of insurance rates apply), rating class, and underwriting class of the Insured.
Security Benefit will send a reminder notice if the amount of premiums paid on a
Policy to which this Rider has been added, less outstanding Policy Debt and any
Partial Withdrawals, is less than an amount equal to the monthly Extended
Guaranteed Death Benefit Premium times the number of Policy Months the Policy
has been in force. If the required payment is not made within 61 days, measured
from the date of the notice, the Extended Guaranteed Death Benefit will no
longer be in effect and may not be reinstated. A Policy Loan taken while the
Extended Guaranteed Death Benefit Rider is in effect may cause this benefit to
terminate. As a result, the Policy will not have the protection from lapse
provided by the Extended Guaranteed Death Benefit Rider. The Extended Guaranteed
Death Benefit Premium is not applied to purchase the Rider, but is applied to
the Policy and may be the same as the Planned Periodic Premium.
DISTRIBUTION OF THE POLICY
Security Distributors, Inc. ("SDI") is principal underwriter (distributor) of
the Policies. SDI is registered as a broker/ dealer with the SEC and is a member
of the National Association of Securities Dealers ("NASD"). SDI acts as
principal underwriter under a Distribution Agreement with Security Benefit.
Security Benefit and SDI have Sales Agreements with various broker/dealers
under which the Policy will be sold by registered representatives of the
broker/dealers. The registered representatives are required to be authorized
under applicable state regulations to sell Variable Life Insurance. The
broker/dealers are required to be registered with the SEC and members of the
NASD. The compensation payable to a broker/dealer for sales of the Policy may
vary with the Sales Agreement, but is not expected to exceed 2 percent of
premium and 3 percent of the monthly cost of insurance charge. Broker/dealers
may also receive annual compensation of up to .20 percent of Accumulated Value
less Policy Debt, depending upon the circumstances. This annual compensation
will be computed and payable monthly. In addition, Security Benefit may also pay
override payments, expense allowances, bonuses, wholesaler fees, and training
allowances. Registered representatives earn
29
<PAGE>
commissions from the broker/dealers with whom they are affiliated for selling
Security Benefit's Policies. Compensation arrangements vary among
broker/dealers. In addition, registered representatives who meet specified
production levels may qualify, under sales incentive programs adopted by
Security Benefit, to receive non-cash compensation such as expense-paid trips,
expense-paid educational seminars and merchandise. Security Benefit makes no
separate deductions, other than previously described, from premiums to pay sales
commissions or sales expenses.
MORE ABOUT SECURITY BENEFIT
MANAGEMENT
The directors and officers of Security Benefit are listed below, together
with information as to their principal occupations during the past five years
and certain other current affiliations. Unless otherwise indicated, the business
address of each director and officer is c/o Security Benefit Life Insurance
Company, 700 SW Harrison Street, Topeka, Kansas 66636.
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
- -----------------------------------------------------------------------------------------
<S> <C>
Howard R. Fricke Chairman of the Board, President, Chief Executive
President, Chief Executive Officer Officer and Director, Security Benefit Life
and Director Insurance Company from February 1988 to the present.
Thomas R. Clevenger Consultant, Investments, Wichita, Kansas since
Director 1990; President, Fourth Financial Corporation,
P.O. Box 8514 Topeka, Kansas prior to 1990.
Wichita, KS 67208
Sister Loretto Marie Colwell President and Chief Executive Officer, St. Francis
Director Hospital and Medical Center, Topeka, Kansas since
1700 SW 7th Street 1991; various senior management and marketing
Topeka, KS 66606 positions, St. James Community Hospital, Butte,
Montana prior to 1991.
John C. Dicus Chairman of the Board, Capitol Federal Savings and
Director Loan Association, Topeka, Kansas.
700 Kansas Avenue
Topeka, KS 66603
Steven J. Douglass President and Chief Executive Officer, Payless
3231 E. 6th Street ShoeSource, Inc., Topeka, Kansas, since April 1996;
Topeka, KS 66607 various senior management positions, May Department
Stores, Inc., St. Louis, Missouri prior to 1996.
William W. Hanna Director, Chief Operating Officer and President,
Director Koch Industries, Inc., Wichita, Kansas.
P.O. Box 2256
Wichita, Kansas 67201
John E. Hayes Chairman of the Board, President and Chief
Director Executive Officer, Western Resources, Inc., Topeka,
818 Kansas Avenue Kansas since 1989; Chairman, President and Chief
Topeka, KS 66612 Executive Officer, Southwestern Bell Telephone
Company, Topeka, Kansas prior to 1989.
Laird G. Noller President, Noller Automotive Group, Topeka, Kansas.
Director
2245 Topeka Boulevard
Topeka, KS 66611
Frank C. Sabatini Chairman of the Board, Capital City Bank, Topeka,
Director Kansas.
120 SW 6th Street
Topeka, KS 66603
30
<PAGE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION LAST FIVE YEARS
- -----------------------------------------------------------------------------------------
Robert C. Wheeler President, Hill's Pet Nutrition, Inc., Topeka,
Director Kansas.
P.O. Box 148
Topeka, KS 66601
Kris A. Robbins Executive Vice President and Chief Operating
Officer, Security Benefit Life Insurance Company
since July 1997; various senior management
positions, Providian Corp., Louisville, Kentucky
from 1985 to 1997.
T. Gerald Lee Senior Vice President, Administration, Security
Senior Vice President, Administration Benefit Life Insurance Company since July 1989;
Executive Vice President and Chief Operating
Officer, Anchor National Life and Anchor National
Financial Services, Phoenix, Arizona prior to July
1989.
Malcolm E. Robinson Senior Vice President and Assistant to the President,
Senior Vice President and Assistant Security Benefit Life Insurance Company.
to the President
Richard K Ryan Senior Vice President, Security Benefit Life
Senior Vice President, Sales Insurance Company.
Donald J. Schepker Senior Vice President, Chief Financial Officer and
Senior Vice President, Chief Treasurer, Security Benefit Life Insurance Company.
Financial Officer, and Treasurer
Roger K. Viola Senior Vice President, General Counsel and Secretary,
Senior Vice President, General Security Benefit Life Insurance Company.
Counsel and Secretary
Donald E. Caum Senior Vice President and Chief Marketing Officer,
Senior Vice President and Chief Security Benefit Life Insurance Company since May
Marketing Officer 1994; Senior Vice President, Sales and Marketing,
Kemper Life Insurance Companies, Chicago,
Illinois, from 1990 to 1994; President and
Chief Operating Officer, American Founders
Life Insurance Company, Phoenix, Arizona,
from 1989 to 1990.
James R. Schmank Senior Vice President, Security Benefit Life
Insurance Company.
OFFICERS AND DIRECTORS OF SBL WHO ARE ALSO CONNECTED WITH THE FUND OR ITS AFFILIATED PERSONS:
John D. Cleland Senior Vice President and Managing Member Representative,
Security Management Company, LLC
James R. Schmank President and Managing Member Representative, Security
Management Company, LLC
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by Security
Benefit or any of its affiliates to any person listed for services rendered to
the Account.
STATE REGULATION
Security Benefit is subject to the laws of the State of Kansas governing
insurance companies, and to regulation by the Commissioner of Insurance of the
State of Kansas. In addition, it is subject to the insurance laws and
regulations of the other states and jurisdictions in which it is licensed or may
become licensed to operate. An Annual Statement in a prescribed form must be
filed with the Kansas Commissioner of Insurance and with regulatory authorities
of other states on or before March 1 in each year. This statement covers the
operations of Security Benefit for the preceding year and its financial
condition as of December 31 of that year. Security Benefit's affairs are subject
to review and examination at any time by the Commissioner of Insurance or his or
her agents, and subject to full examination of Security Benefit's operations at
periodic intervals.
TELEPHONE TRANSFER PRIVILEGES
A Policyowner may request a transfer of Accumulated Value and may request
changes to an existing Dollar Cost
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<PAGE>
Averaging or Asset Reallocation Option by telephone if the Telephone Transfer
Section of the application or an Authorization for Telephone Requests form
("Telephone Authorization") has been completed, signed, and filed at Security
Benefit's Home Office. Security Benefit has established procedures to confirm
that instructions communicated by telephone are genuine and may be liable for
any losses due to fraudulent or unauthorized instructions if it fails to comply
with its procedures. Security Benefit's procedures require that any person
requesting a transfer by telephone provide the Policy Account Number and the
Owner's Tax Identification Number, and such instructions must be received on a
recorded line.
Telephone instructions received by Security Benefit by 3:00 p.m. Central time
on any Valuation Date will be effected as of the end of that Valuation Date in
accordance with the Policyowner's instructions (presuming that the Free-Look
Period has expired). Security Benefit reserves the right to deny any telephone
transfer or request. If all telephone lines are busy (which might occur, for
example, during periods of substantial market fluctuations), Policyowners might
not be able to request transfers and loans by telephone, and would have to
submit written requests.
By authorizing telephone transfers, a Policyowner authorizes Security Benefit
to accept and act upon telephonic instructions for transfers involving the
Policyowner's Policy, and agrees that neither Security Benefit, nor any of its
affiliates will be liable for any loss, damages, cost, or expense (including
attorney's fees) arising out of any requests effected, provided that Security
Benefit complied with its procedures. As a result of this policy on telephone
requests, the Policyowner may bear the risk of loss arising from the telephone
transfer privileges. Security Benefit may discontinue, modify, or suspend the
telephone transfer privilege at any time.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Policies described
in this Prospectus and the organization of Security Benefit, its authority to
issue the Policies under Kansas law, and the validity of the forms of the
Policies under Kansas law have been passed on by Amy J. Lee, Associate General
Counsel of Security Benefit.
REGISTRATION STATEMENT
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all of the information set forth in the Registration Statement,
as portions have been omitted pursuant to the rules and regulations of the SEC.
The omitted information may be obtained at the SEC's principal office in
Washington, D.C., upon payment of the SEC's prescribed fees.
EXPERTS
The Financial Statements for Security Benefit at December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 and
Security Varilife Account for the year ended December 31, 1996 and 1995
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon,
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
FINANCIAL STATEMENTS
Financial Statements for the Separate Account for the year ended December 31,
1996 and 1995 and the Financial Statements of Security Benefit at December 31,
1996, and 1995 and for each of the three years in the period ended December 31,
1996, are set forth herewith starting on page 33. The most current financial
statements of Security Benefit are those as of the end of the most recent fiscal
year. Security Benefit does not prepare financial statements on a basis
consistent with and comparable to its annual statements on an interim basis and
believes that any incremental benefit to prospective policy holders that may
result from preparing and delivering more current financial statements, though
unaudited, does not justify the additional cost that would be incurred. In
addition, Security Benefit represents that there have been no adverse changes in
the financial condition or operations of Security Benefit between the end of the
most current fiscal year and the date of this Prospectus.
The following disclosure should be read in conjunction with the financial
statements of Security Benefit Life Insurance Company. On September 4, 1997,
Security Benefit Life Insurance Company entered into a 100% coinsurance
agreement with a third party relating to all of Security Benefit Life Insurance
Company's traditional and interest sensitive life insurance business. This life
insurance business comprised approximately 5% of total assets and total
liabilities of Security Benefit Life Insurance Company as of December 31, 1996.
The Financial Statements of Security Benefit should be distinguished from the
Financial Statements of the Separate Account, and should be considered only as
bearing upon the ability of Security Benefit to meet its obligations under the
Policies.
32
<PAGE>
Report of Independent Auditors
The Contract Owners of Security Varilife Separate Account and
The Board of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of Security Varilife Separate
Account (the Company) as of December 31, 1996, and the related statements of
operations and changes in net assets for each of the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of investments owned as of December 31, 1996, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Security Varilife Separate
Account at December 31, 1996, and the results of its operations and changes in
its net assets for each of the two years in the period then ended in conformity
with generally accepted accounting principles.
Ernst & Young LLP
February 7, 1997
33
<PAGE>
Security Varilife Separate Account
Balance Sheet
December 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
SBL Fund:
Series A (Growth Series)
20,658 shares at net asset value of $24.31 per share (cost, $458)..... $ 502
Series B (Growth-Income Series)
3,201 shares at net asset value of $35.40 per share (cost, $107)...... 113
Series C (Money Market Series)
2,441 shares at net asset value of $12.56 per share (cost, $32)....... 31
Series D (Worldwide Equity Series)
24,407 shares at net asset value of $6.14 per share (cost, $147)...... 150
Series E (High Grade Income Series)
5,728 shares at net asset value of $12.00 per share (cost, $70)....... 69
Series J (Emerging Growth Series)
8,579 shares at net asset value of $18.25 per share (cost, $149)...... 157
Series K (Global Aggressive Bond Series)
1,207 shares at net asset value of $10.72 per share (cost, $12)....... 13
Series M (Specialized Asset Allocation Series)
3,029 shares at net asset value of $12.05 per share (cost, $34)....... 36
Series N (Managed Asset Allocation Series)
1,878 shares at net asset value of $12.02 per share (cost, $21)....... 23
Series O (Equity Income Series)
10,047 shares at net asset value of $14.01 per share (cost, $127)..... 141
Series S (Social Awareness Series)
636 shares at net asset value of $19.08 per share (cost, $12)......... 12
-----
Total assets............................................................. $1,247
=====
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<PAGE>
SECURITY VARILIFE SEPARATE ACCOUNT
BALANCE SHEET
December 31, 1996
(DOLLARS IN THOUSANDS)
NET ASSETS
Net assets are represented by (NOTE 3):
NUMBER
OF UNITS UNIT VALUE
Growth Series:
Accumulation units.................. 31,819 $15.78 $ 502
Growth-Income Series:
Accumulation units.................. 7,821 14.49 113
Money Market Series:
Accumulation units.................. 2,809 10.91 31
Worldwide Equity Series:
Accumulation units.................. 12,449 12.04 150
High Grade Income Series:
Accumulation units.................. 5,982 11.49 69
Emerging Growth Series:
Accumulation units.................. 11,450 13.67 157
Global Aggressive Bond Series:
Accumulation units.................. 1,079 11.99 13
Specialized Asset Allocation Series:
Accumulation units.................. 3,044 11.99 36
Managed Asset Allocation Series:
Accumulation units.................. 1,903 11.86 23
Equity Income Series:
Accumulation units................... 10,226 13.77 141
Social Awareness Series:
Accumulation units................... 830 14.62 12
-----
Total net assets.......................... $1,247
=====
SEE ACCOMPANYING NOTES.
35
<PAGE>
Security Varilife Separate Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH SPECIALIZED MANAGED
GROWTH- MONEYE WORLDWIDE GRADE EMERGING GLOBAL ASSET ASSET EQUITY SOCIAL
GROWTH INCOME MARKET EQUITY INCOME GROWTH AGGRESSIVE ALLOCATION ALLOCATION INCOME AWARENESS
SERIES SERIES SERIES SERIES SERIES SERIES BOND SERIES SERIES SERIES SERIES SERIES
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions....... $ 3 $ 2 $ 1 $ 3 $ 3 $ - $ 1 $ - $ - $ - $ -
Expenses (NOTE 2):
Mortality and expense
risk fee................... (3) (1) (1) (1) - (1) - - - (1)
Administrative fee and
insurance costs........... (31) (10) (7) (9) (4) (15) (1) (1) - (2) -
-------------------------------------------------------------------------------------------------------
Net investment loss.......... (31) (9) (7) (7) (1) (16) - (1) - (3) -
Capital gains distributions.. 19 9 - 3 - 4 - - - - -
Realized gain on investments. 14 5 3 2 - 2 - - - - 1
Unrealized appreciation
(depreciation) on
investments............... 32 (3) (1) 3 (3) 8 1 3 2 14
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 65 11 2 8 (3) 14 1 3 2 14 1
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations................ 34 2 (5) 1 (4) (2) 1 2 2 11
Net assets at beginning of
year...................... 201 61 143 17 39 53 - 1 - -
Variable account deposits
(NOTES 2 AND 3)............ 278 57 401 133 34 112 12 34 21 130 13
Terminations and withdrawals
(NOTES 2 AND 3)............ (11) (7) (508) (1) - (6) - (1) - - (5)
-----------------------------------------------------------------------------------------------------
Net assets at end of year... $502 $113 $ 31 $150 $69 $157 $13 $36 $23 $141 $12
=====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
36
<PAGE>
Security Varilife Separate Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HIGH SPECIALIZED
GROWTH- MONEY WORLDWIDE GRADE EMERGING ASSET SOCIAL
GROWTH INCOME MARKET EQUITY INCOME GROWTH ALLOCATION AWARENESS
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend distributions................. $ 1 $ 1 $ 1 $ - $ - $ - $ - $ -
Expenses (NOTE 2):
Mortality and expense risk fee...... (2) (1) (2) (1) (1) (2) - -
Administrative fee and insurance (2) (1) (3) - - (1) - -
costs...............................
-------------------------------------------------------------------------------------------
Net investment loss.................... (3) (1) (4) (1) (1) (3) - -
Capital gains distributions............ 2 - - - - - - -
Realized gain on investments........... 5 1 1 2 - 7 - -
Unrealized appreciation on investments. 12 9 - - 2 - - -
-------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments......................... 19 10 1 2 2 7 - -
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations........... 16 9 (3) 1 1 4 - -
Net assets at beginning of year........ 1 - 99 1 1 1 - -
Variable account deposits (NOTES 2 AND 204 54 596 45 37 92 1 4
3)..................................
Terminations and withdrawals
(NOTES 2 AND 3)..................... (20) (2) (549) (30) - (44) - (1)
-------------------------------------------------------------------------------------------
Net assets at end of year.............. $201 $61 $143 $17 $39 $53 $ 1 $ 3
===========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
37
<PAGE>
Security Varilife Separate Account
Notes to Financial Statements
December 31, 1996 and 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Security Varilife Separate Account (the Account) is a separate account of
Security Benefit Life Insurance Company (SBL). The Account is registered as a
unit investment trust under the Investment Company Act of 1940, as amended. All
activity in the account relates to Security Elite Benefit, a variable life
product sold by SBL. Deposits received by the Account are invested in the SBL
Fund, a mutual fund not otherwise available to the public. As directed by the
owners, amounts deposited may be invested in shares of Series A (Growth Series
emphasis on capital appreciation), Series B (Growth-Income Series - emphasis on
capital appreciation with secondary emphasis on income), Series C (Money Market
Series - emphasis on capital preservation while generating interest income),
Series D (Worldwide Equity Series - emphasis on long-term capital growth through
investment in foreign and domestic common stocks and equivalents), Series E
(High Grade Income Series - emphasis on current income with security of
principal), Series J (Emerging Growth Series - emphasis on capital
appreciation), Series K (Global Aggressive Bond Series - emphasis on high
current income with secondary emphasis on capital appreciation), Series M
(Specialized Asset Allocation Series - emphasis on high total return consisting
of capitol appreciation and current income), Series N (Managed Asset Allocation
Series - emphasis on high level of total return), Series O (Equity Income Series
- - emphasis on substantial dividend income and capital appreciation) and Series S
(Social Awareness Series - emphasis on high total return).
Under the terms of the investment advisory contracts, portfolio investments of
the underlying mutual fund are made by Security Management Company, LLC (SMC),
which is 50% owned by SBL and 50% owned by Security Benefit Group, Inc., a
wholly-owned subsidiary of SBL. SMC has engaged Lexington Management Corporation
to provide sub-advisory services for the Worldwide Equity Series and Global
Aggressive Bond Series and has engaged T. Rowe Price Associates, Inc. to provide
sub-advisory services for the Managed Asset Allocation Series and the Equity
Income Series. SMC has also entered into agreements with Templeton Quantitative
Advisors, Inc. and Meridian Investment Management Corporation to provide certain
quantitative research services with respect to the Specialized Asset Allocation
Series.
INVESTMENT VALUATION
Investments in mutual fund shares are carried in the balance sheet at market
value (net asset value of the underlying mutual fund). The first-in, first-out
cost method is used to determine gains and losses. Security transactions are
accounted for on the trade date.
38
<PAGE>
Security Varilife Separate Account
Notes to Financial Statements (Continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of investments purchased and proceeds from investments sold were as
follows:
1996 1995
-------------------------------------------
COST OF PR0CEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
-------------------------------------------
(IN THOUSANDS)
Growth Series........................ $312 $ 56 $206 $ 24
Growth-Income Series................. 70 20 55 4
Money Market Series.................. 426 543 601 554
Worldwide Equity Series.............. 144 15 45 31
High Grade Income Series............. 38 5 37 1
Emerging Growth Series............... 124 30 93 47
Global Aggressive Bond Series........ 13 1 - -
Specialized Asset Allocation Series.. 35 2 1 -
Managed Asset Allocation Series...... 22 1 - -
Equity Income Series................. 131 4 - -
Social Awareness Series.............. 14 6 4 1
REINVESTMENT OF DIVIDENDS
Dividend and capital gains distributions paid by the mutual fund to the Account
are reinvested in additional shares of each respective Series. Dividend income
and capital gains distributions are recorded as income on the ex-dividend date.
FEDERAL INCOME TAXES
Under current law, no federal income taxes are payable with respect to the
Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
39
<PAGE>
Security Varilife Separate Account
Notes to Financial Statements (continued)
2. SECURITY VARILIFE SEPARATE ACCOUNT CONTRACT CHARGES
SBL deducts a daily administrative charge equal to an annual rate of .35% of the
average daily net assets of each account. Mortality and expense risks assumed by
SBL are compensated for by a fee equivalent to an annual rate of .90% of the
average daily net assets of each account.
A deduction for cost of insurance and cost of any riders also is made monthly
and is equal to a current cost of insurance rate multiplied by the net amount at
risk under a policy at the beginning of the policy month. The net amount at risk
for these purposes is equal to the amount of death benefit payable at the
beginning of the policy month divided by 1.0032737 less the accumulated value at
the beginning of the month. These charges amounted to $78,000 during 1996 and
were insignificant during 1995.
When applicable, an amount for state and local premium taxes is deducted from
each premium payment, as provided by pertinent state law.
3. SUMMARY OF UNIT TRANSACTIONS
UNITS
----------------------
1996 1995
----------------------
Growth Series:
Account deposits..................................... 19,119 16,861
Terminations and withdrawals......................... 2,710 1,583
Growth-Income Series:
Account deposits..................................... 4,216 5,030
Terminations and withdrawals......................... 1,269 156
Money Market Series:
Account deposits..................................... 37,476 40,855
Terminations and withdrawals......................... 48,276 35,093
Worldwide Equity Series:
Account deposits..................................... 11,684 4,059
Terminations and withdrawals......................... 865 2,522
High Grade Income Series:
Account deposits..................................... 2,973 3,285
Terminations and withdrawals......................... 315 38
Emerging Growth Series:
Account deposits..................................... 8,517 5,148
Terminations and withdrawals......................... 1,585 711
Global Aggressive Bond Series:
Account deposits..................................... 1,114 -
Terminations and withdrawals......................... 35 -
40
<PAGE>
Security Varilife Separate Account
Notes to Financial Statements (continued)
UNITS
----------------------
1996 1995
----------------------
Specialized Asset Allocation Series:
Account deposits..................................... 3,118 126
Terminations and withdrawals......................... 196 4
Managed Asset Allocation Series:
Account deposits..................................... 1,960 -
Terminations and withdrawals......................... 57 -
Equity Income Series:
Account deposits..................................... 10,444 -
Terminations and withdrawals......................... 218 -
Social Awareness Series:
Account deposits..................................... 877 299
Terminations and withdrawals......................... 303 43
41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Security Benefit Life Insurance Company
We have audited the accompanying consolidated balance sheets of Security Benefit
Life Insurance Company and Subsidiaries (the Company) as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Security Benefit
Life Insurance Company and Subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in NOTE 1 to the consolidated financial statements, in 1996, the
Company adopted certain accounting changes to conform with generally accepted
accounting principles for mutual life insurance enterprises and retroactively
restated the 1994 and 1995 financial statements for the change. Also, as
discussed in NOTE 1 to the consolidated financial statements, the Company
changed its method of accounting for debt securities as of January 1, 1994.
Ernst & Young LLP
February 7, 1997
42
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1996 1995*
----------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available-for-sale, at
fair value (NOTES 2 AND 9):
Fixed maturities.............................. $1,805,066 $1,778,370
Equity securities ............................ 89,188 21,880
Fixed maturities held-to-maturity, at
amortized cost (NOTE 2)......................... 528,045 536,137
Mortgage loans.................................. 66,611 74,342
Real estate..................................... 4,000 5,864
Policy loans.................................... 106,822 100,452
Short-term investments.......................... - 992
Cash and cash equivalents....................... 8,310 16,788
Other invested assets........................... 40,531 37,769
---------------------------
Total investments.................................. 2,648,573 2,572,594
Premiums deferred and uncollected.................. 149 574
Accrued investment income.......................... 32,161 30,623
Accounts receivable................................ 4,256 3,064
Reinsurance recoverable (NOTE 4)................... 92,197 78,877
Notes receivable................................... 110 147
Property and equipment, net........................ 18,592 18,884
Deferred policy acquisition costs (NOTE 1)......... 216,918 186,940
Other assets....................................... 24,680 36,221
Separate account assets (NOTE 10).................. 2,802,927 2,065,306
---------------------------
$5,840,563 $4,993,230
===========================
43
<PAGE>
DECEMBER 31
1996 1995*
-------------------------
(IN THOUSANDS)
LIABILITIES AND EQUITY
Liabilities:
Policy reserves and annuity account values........ $2,497,998 $2,495,113
Policy and contract claims........................ 10,607 10,571
Other policyholder funds.......................... 24,073 21,305
Accounts payable and accrued expenses............. 18,003 13,609
Income taxes payable (NOTE 5):
Current......................................... 6,686 10,371
Deferred........................................ 54,847 53,659
Long-term debt (NOTE 8)........................... 65,000 -
Other liabilities................................. 11,990 11,619
Separate account liabilities...................... 2,793,911 2,051,292
-------------------------
Total liabilities.................................... 5,483,115 4,667,539
Equity:
Retained earnings................................. 357,927 314,084
Unrealized appreciation (depreciation)
of securities available-for-sale, net........... (479) 11,607
---------------------------
Total equity......................................... 357,448 325,691
===========================
$5,840,563 $4,993,230
===========================
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
44
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Insurance premiums and other considerations........... $28,848 $49,608 $55,148
Net investment income................................. 192,636 179,940 166,857
Asset based fees...................................... 55,977 40,652 33,809
Other product charges................................. 10,470 10,412 7,335
Realized gains (losses) on investments................ (244) 3,876 134
Other revenues........................................ 20,033 22,164 27,241
------------------------------------------------------
Total revenues........................................... 307,720 306,652 290,524
Benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances............... 108,705 113,700 103,087
Benefit claims in excess of account balances........ 7,541 6,808 7,145
Traditional life insurance benefits................... 6,474 7,460 6,203
Supplementary contract payments....................... 11,121 11,508 11,286
Increase in traditional life reserves................. 8,580 13,212 12,977
Dividends to policyholders............................ 2,374 2,499 2,669
Other benefits........................................ 20,790 22,379 29,924
------------------------------------------------------
Total benefits........................................... 165,585 177,566 173,291
Commissions and other operating expenses................. 45,539 46,233 39,998
Amortization of deferred policy acquisition costs........ 25,930 26,628 24,674
Other expenses........................................... 1,667 1,099 785
Interest expense......................................... 4,285 7 630
------------------------------------------------------
Total benefits and expenses.............................. 243,006 251,533 239,378
------------------------------------------------------
Income before income taxes............................... 64,714 55,119 51,146
Income taxes (NOTE 5).................................... 20,871 17,927 17,129
------------------------------------------------------
Net income............................................... $43,843 $37,192 $34,017
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
45
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Retained earnings:
Beginning of year, as previously reported............. $207,669 $150,726 $128,785
Cumulative effect of change in accounting principle... 106,415 126,166 114,090
------------------------------------------------------
Beginning of year, as restated........................ 314,084 276,892 242,875
Net income............................................ 43,843 37,192 34,017
------------------------------------------------------
End of year........................................... 357,927 314,084 276,892
Unrealized appreciation (depreciation)
of securities available-for-sale, net:
Beginning of year................................... 11,607 (48,466) (10,034)
Cumulative effect of change in accounting principle
(NOTE 1).......................................... - - 10,733
Change in unrealized appreciation (depreciation) of
securities available-for-sale, net................ (12,086) 60,073 (49,165)
------------------------------------------------------
End of year......................................... (479) 11,607 (48,466)
------------------------------------------------------
Total equity............................................. $357,448 $325,691 $228,426
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
46
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $43,843 $37,192 $34,017
Adjustments to reconcile net income to net cash provided
by operating activities:
Annuity and interest sensitive life products:
Interest credited to account balances............. 108,705 113,700 103,087
Charges for mortality and administration.......... (13,115) (16,585) (17,000)
Decrease (increase) in traditional life policy
reserves.......................................... 10,697 2,142 (5,950)
Increase in accrued investment income............... (1,538) (4,573) (567)
Policy acquisition costs deferred................... (36,865) (33,021) (38,737)
Policy acquisition costs amortized.................. 25,930 26,628 24,674
Accrual of discounts on investments................. (3,905) (3,421) (3,588)
Amortization of premiums on investments............. 11,284 9,782 15,726
Provision for depreciation and amortization......... 3,748 3,750 3,201
Other............................................... (3,379) (4,225) 2,511
------------------------------------------------------
Net cash provided by operating activities................ 145,405 131,369 117,374
INVESTING ACTIVITIES
Sale, maturity or repayment of investments:
Fixed maturities available-for-sale................... 870,240 517,480 318,252
Fixed maturities held-to-maturity..................... 58,874 59,873 147,043
Equity securities available-for-sale.................. 8,857 10,242 3,830
Mortgage loans........................................ 12,545 23,248 21,096
Real estate........................................... 2,935 3,173 2,782
Short-term investments................................ 20,069 229,871 834,082
Other invested assets................................. 6,224 22,839 6,748
------------------------------------------------------
979,744 866,726 1,333,833
Acquisition of investments:
Fixed maturities available-for-sale................... (936,376) (591,121) (552,433)
Fixed maturities held-to-maturity..................... (52,422) (125,276) (56,398)
Equity securities available-for-sale.................. (68,222) (19,500) (4,627)
Mortgage loans........................................ (4,538) (4,179) (34,260)
Real estate........................................... (2,637) (1,511) (554)
Short-term investments................................ (19,070) (180,259) (854,833)
Other invested assets................................. (3,712) (31,861) (18,581)
------------------------------------------------------
(1,086,977) (953,707) (1,521,686)
</TABLE>
47
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995* 1994*
------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES (CONTINUED)
Other investing activities:
Purchase of property and equipment.................... $(1,879) $(2,036) $(2,932)
Net increase in policy loans.......................... (6,370) (8,058) (5,569)
Net cash transferred per coinsurance agreement........ - (16,295) -
------------------------------------------------------
Net cash used in investing activities.................... (115,482) (113,370) (196,354)
FINANCING ACTIVITIES
Issuance of long-term debt............................... 65,000 - -
Annuity and interest sensitive life products:
Deposits credited to account balances................. 705,118 509,183 553,542
Withdrawals from account balances..................... (808,519) (526,509) (466,760)
------------------------------------------------------
Net cash provided by (used in) financing activities...... (38,401) (17,326) 86,782
------------------------------------------------------
Increase (decrease) in cash and cash equivalents......... (8,478) 673 7,802
Cash and cash equivalents at beginning of year........... 16,788 16,115 8,313
------------------------------------------------------
Cash and cash equivalents at end of year................. $8,310 $16,788 $16,115
======================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.............................................. $2,966 $120 $157
======================================================
Income taxes.......................................... $16,213 $11,551 $14,634
======================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of mortgage loans to real estate owned........ $844 $- $2,350
======================================================
</TABLE>
*As restated
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
48
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Security Benefit Life Insurance Company (SBL or the Company) is a
Kansas-domiciled mutual life insurance company whose insurance operations are
licensed to sell insurance products in 50 states. The Company offers a
diversified portfolio of individual and group annuities, ordinary life and
mutual fund products through multiple distribution channels. In recent years,
the Company's new business activities have increasingly been concentrated in the
individual flexible premium variable annuity markets.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles (GAAP). Prior to 1996, the
Company prepared its financial statements in conformity with accounting
practices prescribed or permitted by the Kansas Insurance Department, which
practices were considered GAAP for mutual life insurance companies and their
stock life insurance subsidiaries. Financial Accounting Standards Board (FASB)
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises," as amended, which is
effective for 1996 annual financial statements and thereafter, no longer permits
statutory-basis financial statements to be described as being prepared in
conformity with GAAP. Accordingly, the Company has adopted GAAP, including
Statement of Financial Accounting Standards (SFAS) No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," and Statement of Position 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises," which address the accounting for long-duration and short-duration
insurance and reinsurance contracts, including all participating business.
Pursuant to the requirements of FASB Interpretation No. 40 and SFAS No. 120, the
effect of the changes in accounting have been applied retroactively, and the
previously issued 1995 and 1994 financial statements have been restated for the
change. The effect of the changes applicable to years prior to January 1, 1994
has been presented as a restatement of retained earnings as of that date. The
adoption had the effect of increasing net income for 1996, 1995 and 1994 by
approximately $5,897,000, $8,436,000 and $6,663,000, respectively.
The consolidated financial statements include the operations and accounts of
Security Benefit Life Insurance Company and the following wholly-owned
subsidiaries: Security Benefit Group, Inc., First Security Benefit Life
Insurance and Annuity Company of New York, Security Management Company, LLC,
Security Distributors, Inc., Security Benefit Academy, Inc., First Advantage
Insurance Agency, Inc. and Creative Impressions, Inc. Significant intercompany
transactions have been eliminated in consolidation.
49
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING CHANGE
Prior to January 1, 1994, fixed maturities were reported at cost, adjusted for
amortization of premiums and accrual of discounts. Effective January 1, 1994,
the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." SFAS No. 115 requires that fixed maturities are to be
classified as either held-to-maturity, trading or available-for-sale. Equity
securities are to be classified as either available-for-sale or trading. The
adoption had no effect on net income and resulted in an increase in equity at
January 1, 1994 of $10,733,000, net of the related effect of deferred policy
acquisition costs and deferred income taxes.
INVESTMENTS
Fixed maturities have been classified as either held-to-maturity or
available-for-sale. Fixed maturities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accrual of discounts. Such amortization and accrual
on these securities are included in investment income. Fixed maturities not
classified as held-to-maturity are classified as available-for-sale.
Available-for-sale fixed maturities are stated at fair value with the unrealized
appreciation or depreciation, net of adjustment of deferred policy acquisition
costs and deferred income taxes, reported in a separate component of equity and,
accordingly, have no effect on net income. The DPAC offsets to the unrealized
appreciation or depreciation represent valuation adjustments or restatements of
DPAC that would have been required as a charge or credit to operations had such
unrealized amounts been realized. The amortized cost of fixed maturities
classified as available-for-sale is adjusted for amortization of premiums and
accrual of discounts. Premiums and discounts are recognized over the estimated
lives of the assets adjusted for prepayment activity.
Equity securities consisting of common stocks, mutual funds and nonredeemable
preferred stock are carried at fair value and are reported in accordance with
SFAS No. 115. Mortgage loans and short-term investments are reported at cost,
adjusted for amortization of premiums and accrual of discounts. Real estate
investments are carried at the lower of depreciated cost or estimated realizable
value. Policy loans are reported at unpaid principal. Investments accounted for
by the equity method include investments in, and advances to, various joint
ventures and partnerships.
50
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on sales of investments are recognized in revenues on
the specific identification method.
The carrying amounts of all the Company's investments are reviewed on an ongoing
basis. If this review indicates a decline in value that is other than temporary
for any investment, the amortized cost of the investment is reduced to its fair
value. Such reductions in carrying amount are recognized as realized losses in
the determination of net income.
The Company's principal objective in holding derivatives for purposes other than
trading is asset-liability management. The operations of the Company are subject
to risk of interest rate fluctuations to the extent that there is a difference
between the amount of the Company's interest-earning assets and interest-bearing
liabilities that reprice or mature in specified periods. The principal objective
of the Company's asset-liability management activities is to provide maximum
levels of net interest income while maintaining acceptable levels of interest
rate and liquidity risk and facilitating the funding needs of the Company. To
achieve that objective, the Company uses financial futures instruments and
interest rate exchange agreements. Financial futures contracts are commitments
to either purchase or sell a financial instrument at a specific future date for
a specified price and may be settled in cash or through delivery of the
financial instrument. Interest rate exchange agreements generally involve the
exchange of fixed and floating rate interest payments without an exchange of the
underlying principal.
Interest rate exchange agreements are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those of the
related insurance liabilities that the investments are supporting. The net
interest effect of such swap transactions is reported as an adjustment of
interest income as incurred.
Gains and losses on those instruments are included in the carrying amount of the
underlying hedged investments, or anticipated investment transactions, and are
amortized over the remaining lives of the hedged investments as adjustments to
investment income. Any unamortized gains or losses are recognized when the
underlying investments are sold.
DEFERRED POLICY ACQUISITION COSTS
To the extent recoverable from future policy revenues and gross profits,
commissions and other policy-issue, underwriting and marketing costs incurred to
acquire or renew traditional life insurance, interest sensitive life and
deferred annuity business that vary with and are primarily related to the
production of new and renewal business have been deferred.
51
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Traditional life insurance deferred policy acquisition costs are being amortized
in proportion to premium revenues over the premium-paying period of the related
policies using assumptions consistent with those used in computing policy
benefit reserves.
For interest sensitive life and deferred annuity business, deferred policy
acquisition costs are amortized in proportion to the present value (discounted
at the crediting rate) of expected gross profits from investment, mortality and
expense margins. That amortization is adjusted retrospectively when estimates of
current or future gross profits to be realized from a group of products are
revised.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers certificates
of deposits with original maturities of 90 days or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment, including real estate, furniture and fixtures, and data
processing hardware and related systems, are recorded at cost, less accumulated
depreciation. The provision for depreciation of property and equipment is
computed using the straight-line method over the estimated lives of the related
assets.
SEPARATE ACCOUNTS
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for the benefit of
contractholders who bear the investment risk. The separate account assets and
liabilities are carried at fair value. Revenues and expenses related to separate
account assets and liabilities, to the extent of benefits paid or provided to
the separate account contractholders, are excluded from the amounts reported in
the consolidated statements of income. Investment income and gains or losses
arising from separate accounts accrue directly to the contractholders and are,
therefore, not included in investment earnings in the accompanying statements of
income. Revenues to the Company from separate accounts consist principally of
contract maintenance charges, administrative fees, and mortality and expense
risk charges.
POLICY RESERVES AND ANNUITY ACCOUNT VALUES
The liabilities for future policy benefits for traditional life and reinsurance
products are computed using a net level premium method, including assumptions as
to investment yields, mortality, withdrawals, and other assumptions that
approximate expected experience.
52
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liabilities for future policy benefits for interest sensitive life and deferred
annuity products represent accumulated contract values without reduction for
potential surrender charges and deferred front-end contract charges that are
amortized over the life of the policy. Interest on accumulated contract values
is credited to contracts as earned. Crediting rates ranged from 3.5% to 7.25%
during 1996, 4.0% to 7.75% during 1995, and 4.5% to 7.75% during 1994.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under that method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities and are measured using
the enacted tax rates and laws. Deferred income tax expenses or credits
reflected in the Company's statements of income are based on the changes in
deferred tax assets or liabilities from period to period (excluding the SFAS No.
115 adjustment, which is charged or credited directly to equity).
RECOGNITION OF REVENUES
Traditional life insurance products include whole life insurance, term life
insurance and certain annuities. Premiums for these traditional products are
recognized as revenues when due. Revenues from interest sensitive life insurance
products and deferred annuities consist of policy charges for the cost of
insurance, policy administration charges and surrender charges assessed against
contractholder account balances during the period.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash, certificates of deposits and short-term investments: The carrying
amounts reported in the balance sheet for these instruments approximate
their fair values.
Investment securities: Fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services or estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality and maturity of
the investments. The fair values for equity securities are based on quoted
market prices.
53
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Mortgage loans and policy loans: Fair values for mortgage loans and policy
loans are estimated using discounted cash flow analyses based on interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
Investment-type contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using the assumption
reinsurance method, whereby the amount of statutory profit the assuming
company would realize from the business is calculated. Those amounts are
then discounted at a rate of return commensurate with the rate presently
offered by the Company on similar contracts.
Long-term debt: Fair values for long-term debt are estimated using
discounted cash flow analyses based on current borrowing rates available
for similar types of borrowing arrangements.
2. INVESTMENTS
Information as to the amortized cost, gross unrealized gains and losses, and
fair values of the Company's portfolio of fixed maturities and equity securities
at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $173,884 $414 $1,431 $172,867
Obligations of states and political subdivisions. 23,244 361 705 22,900
Special revenue and assessment................... 330 - - 330
Corporate securities............................. 863,124 13,758 18,651 858,231
Mortgage-backed securities....................... 627,875 9,091 9,308 627,658
Asset-backed securities.......................... 122,523 832 275 123,080
=================================================================
Total fixed maturities........................... $1,810,980 $24,456 $30,370 $1,805,066
=================================================================
Equity securities................................ $86,991 $2,422 $225 $89,188
=================================================================
</TABLE>
54
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Obligations of states and political subdivisions. $81,791 $463 $1,036 $81,218
Special revenue and assessment................... 420 - - 420
Corporate securities............................. 128,487 2,003 1,830 128,660
Mortgage-backed securities....................... 264,155 2,121 1,347 264,929
Asset-backed securities.......................... 53,192 382 97 53,477
-----------------------------------------------------------------
Total fixed maturities........................... $528,045 $4,969 $4,310 $528,704
=================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $5,746 $522 $- $6,268
Obligations of states and political subdivisions. 23,304 510 139 23,675
Special revenue and assessment................... 330 2 - 332
Corporate securities............................. 857,926 29,671 13,146 874,451
Mortgage-backed securities....................... 857,685 17,838 1,879 873,644
-----------------------------------------------------------------
Total fixed securities........................... $1,744,991 $48,543 $15,164 $1,778,370
=================================================================
Equity securities................................ $21,278 $687 $85 $21,880
=================================================================
HELD-TO-MATURITY
Obligations of states and political subdivisions. $67,160 $1,221 $- $68,381
Special revenue and assessment................... 870 - - 870
Corporate securities............................. 163,032 6,426 43 169,415
Mortgage-backed securities....................... 305,075 5,539 4 310,610
-----------------------------------------------------------------
Totals........................................... $536,137 $13,186 $47 $549,276
=================================================================
</TABLE>
55
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The change in the Company's unrealized appreciation (depreciation) on fixed
maturities was $(51,773,000), $220,048,000 and $(219,496,000) during 1996, 1995
and 1994, respectively; the corresponding amounts for equity securities were
$1,595,000, $1,034,000 and $(1,702,000) during 1996, 1995 and 1994,
respectively.
The amortized cost and fair value of fixed maturities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------------------------------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
-------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less........................ $17,711 $17,764 $320 $320
Due after one year through five years.......... 197,414 197,267 12,184 12,240
Due after five years through 10 years.......... 469,394 471,099 47,804 48,193
Due after 10 years............................. 376,063 368,198 150,390 149,545
Mortgage-backed securities..................... 627,875 627,658 264,155 264,929
Asset-backed securities........................ 122,523 123,080 53,192 53,477
-------------------------------------------------------------------
$1,810,980 $1,805,066 $528,045 $528,704
===================================================================
</TABLE>
Late in 1995, the FASB issued a special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." This report provided companies with an opportunity for a one-time
reassessment and reclassification of securities as of a single measurement date
without tainting the held-to-maturity debt securities classification. On
December 8, 1995, the Company reclassified securities with an amortized cost of
$202,417,000 from held-to-maturity to available-for-sale. The transfer resulted
in an increase to unrealized gains on securities of approximately $2,162,000 net
of related adjustments for deferred policy acquisition costs and deferred income
taxes.
The Company did not hold any investments that individually exceeded 10% of
equity at December 31, 1996 except for securities guaranteed by the U.S.
government or an agency of the U.S. government.
56
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
Major categories of net investment income are summarized as follows:
1996 1995 1994
--------------------------------
(IN THOUSANDS)
Interest on fixed maturities............. $174,592 $165,684 $154,739
Dividends on equity securities........... 5,817 1,309 712
Interest on mortgage loans............... 6,680 7,876 7,746
Real estate income....................... 781 1,287 1,326
Interest on policy loans................. 6,372 5,927 5,462
Interest on short-term investments....... 1,487 2,625 2,272
Other.................................... 3,418 1,453 525
--------------------------------
Total investment income.................. 199,147 186,161 172,782
Investment expenses...................... 6,511 6,221 5,925
================================
Net investment income.................... $192,636 $179,940 $166,857
================================
Proceeds from sales of fixed maturities and equity securities and related
realized gains and losses, including valuation adjustments, are as follows:
1996 1995 1994
-------------------------------------------
(IN THOUSANDS)
Proceeds from sales............... $393,189 $310,590 $128,533
Gross realized gains.............. 9,407 5,901 5,814
Gross realized losses............. 9,723 3,361 4,889
The composition of the Company's portfolio of fixed maturities by quality rating
at December 31, 1996 is as follows:
QUALITY RATING CARRYING AMOUNT %
- -------------------------- ------------------------- --------------------
(IN THOUSANDS)
AAA...................... $1,199,762 51.4%
AA....................... 158,785 6.8
A........................ 361,008 15.5
BBB...................... 416,589 17.9
Noninvestment grade...... 196,967 8.4
========================= ====================
$2,333,111 100.0%
========================= ====================
57
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
The Company has a diversified portfolio of commercial and residential mortgage
loans outstanding in 14 states. The loans are somewhat geographically
concentrated in the midwestern and southwestern United States with the largest
outstanding balances at December 31, 1996 being in the states of Kansas (34%),
Iowa (15%) and Texas (14%).
Net realized gains (losses) consist of the following:
1996 1995 1994
--------------------------------------
(IN THOUSANDS)
Fixed maturities...................... $(1,329) $1,805 $397
Equity securities..................... 1,013 735 528
Other................................. 72 1,336 (791)
======================================
Total realized gains (losses)......... $(244) $3,876 $134
======================================
Deferred losses totaling $2.2 million and $3.9 million at December 31, 1996 and
1995, respectively, resulting from terminated and expired futures contracts are
included in fixed maturities and will be amortized as an adjustment to net
investment income. The notional amount of outstanding agreements to sell
securities was $79 million at December 31, 1995. There were no outstanding
agreements at December 31, 1996.
For interest rate exchange agreements, one agreement was terminated during 1996
resulting in a deferred gain of $1.1 million. The notional amount of the
remaining outstanding agreements was $30 million at December 31, 1996. Also, as
of December 31, 1996, these agreements have maturities ranging from March 1997
to May 2005. Under these agreements, the Company receives variable rates based
on the one- and three-month LIBOR and pays fixed rates ranging from 6.875% to
7.215%.
3. EMPLOYEE BENEFIT PLANS
Substantially all Company employees are covered by a qualified, noncontributory
defined benefit pension plan sponsored by the Company and certain of its
affiliates. Benefits are based on years of service and an employee's highest
average compensation over a period of five consecutive years during the last 10
years of service. The Company's policy has been to contribute funds to the plan
in amounts required to maintain sufficient plan assets to provide for accrued
benefits. In applying this general policy, the Company considers, among other
factors, the recommendations of its independent consulting actuaries, the
requirements of federal pension law and the limitations on deductibility imposed
by federal income tax law. The Company records pension cost in accordance with
the provisions of SFAS No. 87, "Employers' Accounting for Pensions."
58
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Pension cost for the plan for 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Service cost................................ $670 $528 $679
Interest cost............................... 587 508 535
Actual return on plan assets................ (1,064) (1,568) 310
Net amortization and deferral............... 284 900 (949)
----------------------------------
Net pension cost............................ $477 $368 $575
==================================
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
-------------------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefit obligation......................... $(6,059) $(5,243)
Non-vested benefit obligation..................... (202) (165)
-------------------------
Accumulated benefit obligation.................... (6,261) (5,408)
Excess of projected benefit obligation over
accumulated benefit obligation.................. (2,961) (2,865)
-------------------------
Projected benefit obligation...................... (9,222) (8,273)
Plan assets, at fair market value.................... 10,085 8,342
-------------------------
Plan assets greater than projected
benefit obligation................................ 863 69
Unrecognized net loss................................ 1,007 1,560
Unrecognized prior service cost...................... 700 758
Unrecognized net asset established
at the date of initial application................. (1,841) (2,025)
-------------------------
Net prepaid pension cost............................. $729 $362
=========================
59
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions were as follows:
1996 1995 1994
-----------------------
Weighted average discount rate........................ 7.75% 7.5% 8.5%
Weighted average rate of increase in compensation
for participants age 45 and older.................. 4.5 4.5 4.5
Weighted average expected long-term
return on plan assets.............................. 9.0 9.0 9.0
Compensation rates that vary by age for participants under age 45 were used in
determining the actuarial present value of the projected benefit obligation in
1996. Plan assets are invested in a diversified portfolio of affiliated mutual
funds that invest in equity and debt securities.
In addition to the Company's defined benefit pension plan, the Company provides
certain medical and life insurance benefits to full-time employees who have
retired after the age of 55 with five years of service. The plan is
contributory, with retiree contributions adjusted annually and contains other
cost-sharing features such as deductibles and coinsurance. Contributions vary
based on the employee's years of service earned after age 40. The Company's
portion of the costs is frozen after 1996 with all future cost increases passed
on to the retirees. Retirees in the plan prior to July 1, 1993 are covered 100%
by the Company.
Retiree medical care and life insurance cost for the total plan for 1996, 1995
and 1994 is summarized as follows:
1996 1995 1994
------------------------
(IN THOUSANDS)
Service cost........................................ $157 $151 $116
Interest cost....................................... 280 305 275
------------------------
$437 $456 $391
========================
60
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the plan as of December 31, 1996 and 1995 was as follows:
DECEMBER 31
1996 1995
----------------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.......................................... $(2,498) $(2,514)
Active participants:
Retirement eligible............................... (568) (632)
Others............................................ (1,023) (1,035)
----------------------
(4,089) (4,181)
Unrecognized net (gain) loss......................... (348) 67
----------------------
Accrued postretirement benefit cost.................. $(4,437) $(4,114)
======================
The annual assumed rate of increase in the per capita cost of covered benefits
is 10% for 1996 and is assumed to decrease gradually to 5% for 2001 and remain
at that level thereafter. The health care cost trend rate has a significant
effect on the amount reported. For example, increasing the assumed health care
cost trend rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
$191,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for 1996 by $54,000.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.75%, 7.5% and 8.5% at December 31, 1996, 1995 and 1994,
respectively.
The Company has a profit-sharing and savings plan for which substantially all
employees are eligible after one year of employment with the Company.
Contributions for profit sharing are based on a formula established by the Board
of Directors with pro rata allocation among employees based on salaries. The
savings plan is a tax-deferred, 401(k) retirement plan. Employees may contribute
up to 10% of their eligible compensation. The Company matches 50% of the first
6% of the employee contributions. Employee contributions are fully vested, and
Company contributions are vested over a five-year period. Company contributions
to the profit-sharing and savings plan charged to operations were $1,783,000,
$1,567,000 and $1,075,000 for 1996, 1995 and 1994, respectively.
61
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE
The Company assumes and cedes reinsurance with other companies to provide for
greater diversification of business, allow management to control exposure to
potential losses arising from large risks, and provide additional capacity for
growth. The Company's maximum retention on any one life is $500,000. The Company
does not use financial or surplus relief reinsurance. Life insurance in force
ceded at December 31, 1996 and 1995 was $4.0 and $3.9 billion, respectively.
Principal reinsurance transactions are summarized as follows:
1996 1995 1994
-----------------------------------
(IN THOUSANDS)
Reinsurance ceded:
Premiums paid...................... $25,442 $5,305 $3,980
===================================
Commissions received............... $4,669 $230 $1,443
===================================
Claim recoveries................... $5,235 $3,089 $2,485
===================================
In the accompanying financial statements, premiums, benefits, settlement
expenses and deferred policy acquisition costs are reported net of reinsurance
ceded; policy liabilities and accruals are reported gross of reinsurance ceded.
The Company remains liable to policyholders if the reinsurers are unable to meet
their contractual obligations under the applicable reinsurance agreements. To
minimize its exposure to significant losses from reinsurance insolvencies, the
Company evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of reinsurers. At December 31, 1996 and
1995, the Company had established a receivable totaling $92,197,000 and
$78,877,000 for reserve credits, reinsurance claims and other receivables from
its reinsurers. The amount of reinsurance assumed is not significant.
In 1995, the Company transferred, through a 100% coinsurance agreement, $66.9
million in policy reserves and claim liabilities. The agreement related to a
block of whole life and decreasing term life insurance business.
In prior years, the Company was involved in litigation arising out of its
participation from 1986 to 1990 in a reinsurance pool. The litigation related to
the pool manager and a reinsurance intermediary placing major medical business
in the pool without authorization. During 1993, the Company settled the major
medical portion of the pool's activity with no significantly adverse effect on
the Company. The nonmajor medical business placed in the pool has experienced
significant losses. At December 31, 1996, the Company believes adequate
provision has been made for such losses.
62
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The Company files a life/nonlife consolidated federal income tax return. The
provision for income taxes includes current federal income tax expense or
benefit and deferred income tax expense or benefit due to temporary differences
between the financial reporting and income tax bases of assets and liabilities.
Such differences relate principally to liabilities for future policy benefits
and accumulated contract values, deferred compensation, deferred policy
acquisition costs, postretirement benefits, deferred selling commissions,
depreciation expense and unrealized appreciation (depreciation) on securities
available-for-sale.
Income tax expense consists of the following for 1996, 1995 and 1994:
1996 1995 1994
---------------------------------
(IN THOUSANDS)
Current...................................... $12,528 $15,200 $11,361
Deferred..................................... 8,343 2,727 5,768
---------------------------------
$20,871 $17,927 $17,129
=================================
The provision for income taxes differs from the amount computed at the statutory
federal income tax rate due primarily to dividends received deductions and tax
credits.
Income taxes paid by the Company were $16,213,000, $11,551,000, and $14,634,000
during 1996, 1995, and 1994, respectively.
63
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net deferred tax assets or liabilities consist of the following:
1996 1995
-------------------------
(IN THOUSANDS)
Deferred tax assets:
Future policy benefits.......................... $20,487 $17,780
Net unrealized depreciation on
securities available-for-sale................. 1,409 -
Guaranty fund assessments....................... 1,400 1,260
Employee benefits............................... 4,852 3,836
Other........................................... 4,620 3,662
-------------------------
Total deferred tax assets.......................... 32,768 26,538
Deferred tax liabilities:
Deferred policy acquisition costs............... 69,647 50,580
Net unrealized appreciation on
securities available-for-sale................. - 12,539
Deferred gain on investments.................... 10,446 8,681
Depreciation.................................... 2,061 988
Other........................................... 5,461 7,409
-------------------------
Tax deferred tax liabilities....................... 87,615 80,197
-------------------------
Net deferred tax liabilities....................... $54,847 $53,659
=========================
6. CONDENSED FAIR VALUE INFORMATION
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of fair value information about financial instruments, whether
recognized or not recognized in a company's balance sheet, for which it is
practicable to estimate that value. The methods and assumptions used by the
Company to estimate the following fair value disclosures for financial
instruments are set forth in NOTE 1.
SFAS No. 107 excludes certain insurance liabilities and other nonfinancial
instruments from its disclosure requirements. However, the liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk that minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance contracts. The fair value amounts presented herein do not include an
amount for the value associated with customer or agent relationships, the
expected interest margin (interest earnings in excess of interest credited) to
be earned in the future on investment-type products or other intangible items.
Accordingly, the aggregate fair value amounts presented herein do not
necessarily represent the underlying value of the Company; likewise, care should
be exercised in deriving conclusions about the Company's business or financial
condition based on the fair value information presented herein.
64
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONDENSED FAIR VALUE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------- ----------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (NOTE 2)................. $2,333,111 $2,333,770 $2,314,507 $2,327,646
Equity securities (NOTE 2)................ 89,188 89,188 21,880 21,880
Mortgage loans............................ 66,611 69,004 74,342 80,175
Policy loans.............................. 106,822 108,685 100,452 104,077
Short-term investments.................... - - 992 992
Cash and cash equivalents................. 8,310 8,310 16,788 16,788
Accrued investment income................. 32,161 32,161 30,623 30,623
Futures contracts......................... - - - (737)
Interest rate exchange agreements ........ - (282) - (2,291)
Liabilities:
Supplementary contracts without life
contingencies........................... 33,225 33,803 34,363 35,387
Individual and group annuities............ 1,942,697 1,767,692 1,922,901 1,774,642
Long-term debt............................ 65,000 67,683 - -
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under several operating lease agreements.
Total expense for all operating leases amounted to $1,904,000, $1,302,000 and
$1,450,000 for 1996, 1995 and 1994, respectively. The Company has aggregate
future lease commitments at December 31, 1996 of $4,337,000 for noncancelable
operating leases consisting of $992,000 in 1997, $941,000 in 1998, $829,000 in
1999, $818,000 in 2000 and $757,000 in 2001 and thereafter.
In addition, in 2001, under the terms of an operating lease for an airplane, the
Company has the option to renew the lease for another five years, purchase the
airplane for approximately $4.7 million, or return the airplane to the lessor
and pay a termination charge of approximately $3.7 million. If the option to
renew the lease for five years is selected, at the end of the five-year period
(2006), the Company has the option to purchase the airplane for approximately
$3.4 million or return the airplane to the lessor and pay a termination charge
of approximately $2.7 million.
The economy and other factors have caused an increase in the number of insurance
companies that have required regulatory supervision. Guaranty fund assessments
are levied on the Company by life and health guaranty associations in most
states in which it is licensed to cover losses of
65
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
policyholders of insolvent or rehabilitated insurers. In some states, these
assessments can be partially recovered through a reduction in future premium
taxes. The Company cannot predict whether and to what extent legislative
initiatives may affect the right to offset. Based on information from the
National Organization of Life and Health Guaranty Association and information
from the various state guaranty associations, the Company believes that it is
probable that these insolvencies will result in future assessments. The Company
regularly evaluates its reserve for these insolvencies and updates its reserve
based on the Company's interpretation of information recently received. The
associated costs for a particular insurance company can vary significantly based
on its premium volume by line of business in a particular state and its
potential for premium tax offset. The Company accrued and charged to expense
$1,574,000, $2,302,000 and $237,000 for 1996, 1995 and 1994, respectively. At
December 31, 1996, the Company has reserved $4,000,000 to cover current and
estimated future assessments net of related premium tax credits.
8. LONG-TERM DEBT
The Company has a $75.5 million line of credit facility from the Federal Home
Loan Bank of Topeka. Any borrowings in connection with this facility bear
interest at .1% over the Federal Funds rate. No amounts were outstanding at
December 31, 1996.
In February 1996, the Company negotiated three separate $5,000,000 advances with
the Federal Home Loan Bank of Topeka. The advances are due February 27, 1998,
February 26, 1999 and February 28, 2001 and carry interest rates of 5.59%, 5.76%
and 6.04%, respectively.
In May 1996, the Company issued $50 million of 8.75% surplus notes maturing on
May 15, 2016. The surplus notes were issued pursuant to Rule 144A under the
Securities Act of 1933. The surplus notes have repayment conditions and
restrictions whereby each payment of interest on or principal of the surplus
notes may be made only with the prior approval of the Kansas Insurance
Commissioner and only out of surplus funds that the Kansas Insurance
Commissioner determines to be available for such payment under the Kansas
Insurance Code.
9. RELATED-PARTY TRANSACTIONS
The Company owns shares of mutual funds managed by Security Management Company,
LLC with a net asset value totaling $60,559,000 and $5,364,000 at December 31,
1996 and 1995, respectively.
66
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets were as follows:
1996 1995
--------------------------
(IN THOUSANDS)
Premium and annuity considerations for the
variable annuity products and variable
universal life product for which the
contractholder, rather than the Company,
bears the investment risk...................... $2,793,911 $2,051,292
Assets of the separate accounts owned by
the Company, at fair value..................... 9,016 14,014
--------------------------
$2,802,927 $2,065,306
==========================
11. STATUTORY INFORMATION
The Company and its insurance subsidiary prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Kansas and New York Insurance regulatory authorities, respectively.
Accounting practices used to prepare statutory-basis financial statements for
regulatory filings of life insurance companies differ in certain instances from
GAAP. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. Statutory
capital and surplus of the insurance operations are $286,689,000 and
$207,669,000 at December 31, 1996 and 1995, respectively.
67
<PAGE>
APPENDIX
DEATH BENEFIT PERCENTAGES
AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE AGE PERCENTAGE
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
- --------------------------------------------------------------------------------
68
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET, TOPEKA, KANSAS 66636
SECURITY ELITE BENEFIT
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
IMPORTANT INFORMATION ABOUT THIS ILLUSTRATION
Security Elite Benefit is a flexible premium variable life insurance policy
offered by Security Benefit. Under the policy, net premiums and Accumulated
Value may be allocated among eleven underlying investment accounts ("Variable
Accounts") and the Fixed Account of Security Benefit.
THE PURPOSE OF THIS ILLUSTRATION IS TO SHOW HOW THE PERFORMANCE OF THE
VARIABLE ACCOUNTS COULD AFFECT THE DEATH BENEFITS, ACCUMULATED VALUES AND NET
CASH SURRENDER VALUES OF A HYPOTHETICAL POLICY OVER AN EXTENDED PERIOD OF TIME
ASSUMING HYPOTHETICAL RATES OF RETURN EQUIVALENT TO CONSTANT GROSS ANNUAL RATES
OF 0%, 6% AND 12% (AFTER ANY DEDUCTION FOR EXPENSES AND CHARGES SHOWN BELOW).
The rates of return shown on these tables are hypothetical and should not
be deemed a representation of past rates of return, or a projection or
prediction of future rates of return. Actual rates of return may be more or less
than those shown and will depend on a number of factors, including the premium
allocation chosen by the Policyowner. The policies illustrated include the
following:
1. Male, age 40, Preferred Rating Class (based on tobacco use), Option A,
$10,000 annual premium, Current Cost of Insurance Rates and Current
Mortality and Expense Risk and Administrative Charges (page 71).
2. Male, age 40, Preferred Rating Class (based on tobacco use), Option A,
$10,000 annual premium, Guaranteed Cost of Insurance Rates and Guaranteed
Mortality and Expense Risk and Administrative Charges (page 72).
3. Male, age 40, Preferred Rating Class (based on tobacco use), Option B,
$25,000 annual premium, Current Cost of Insurance Rates and Current
Mortality and Expense Risk and Administrative Charges (page 73).
4. Male, age 40, Preferred Rating Class (based on tobacco use), Option B,
$25,000 annual premium, Guaranteed Cost of Insurance Rates and Guaranteed
Mortality and Expense Risk and Administrative Charges (page 74).
The values would be different from those shown if the gross annual
investment rates of return averaged 0%, 6% or 12% over a period of years, but
also fluctuated above or below those averages for individual policy years.
The fourth column of each table, labeled "Total Premiums Paid Plus Interest
at 5%," shows the amount that would accumulate if an amount equal to the annual
premium (after taxes) were invested to earn interest at 5% compounded annually.
These illustrations assume that no policy loans have been made. No
representation can be made by Security Benefit that the assumed rates of return
can be achieved for any one year or sustained over any period of time. These
illustrations assume that all premiums are paid when due and that no policy
loans have been made. A POLICY MAY LAPSE DUE TO INSUFFICIENT PREMIUMS, EXCESSIVE
LOANS OR WITHDRAWALS, OR POOR FUND PERFORMANCE.
The amounts shown for the Death Benefits and Net Cash Surrender Values
reflect the fact that the net investment return on the Variable Accounts is
lower than the gross investment return on the assets as a result of charges
levied against the Accounts, including "Current" or "Guaranteed" daily mortality
and expense risk charges. (The "Current" mortality and expense charge is equal
to an annual rate of .90% of the average daily net assets of each Account in the
first ten Policy Years and .70% thereafter, and the "Guaranteed" rate is .90%
for all Policy Years. The "Current" administrative charge is equal to an annual
rate of .35% in the first ten Policy Years and .25% thereafter, and the
"Guaranteed" rate is .35% in all Policy Years.) These values also take into
account the following: (i) a premium load of 2.5%, although the premium load may
be more or less than this amount depending on the state in which the policy is
issued; and, (ii) a "Current" or "Guaranteed" monthly charge for cost of
insurance. (The illustrations based on "CURRENT COST OF INSURANCE RATE AND
CURRENT MORTALITY AND EXPENSE RISK AND ADMINISTRATIVE CHARGES" assume that the
charges currently assessed by Security Benefit are charged throughout the life
of the policy. The illustrations based on "GUARANTEED COST OF INSURANCE RATES
AND GUARANTEED MORTALITY AND EXPENSE RISK AND ADMINISTRATIVE CHARGES" assume
that the maximum monthly charges permitted under the policy are assessed
throughout the life of the policy). In addition, the values reflect other
charges that are paid by the underlying Fund in which the Accounts invest,
including investment advisory fees, which are indirectly borne by the Accounts.
The expenses of the Fund are not fixed or specified under the terms of the
policy and are described in the Fund Prospectus. The expenses of the Fund are
assumed to be equal to an annual rate of .90% of the aggregate average daily net
assets of the Fund. The amounts shown would differ if unisex rates were used or
if the insured were female and female rates were used. The
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
PAGE 1 OF 6
69
<PAGE>
amounts would also differ if the insured were a tobacco user and standard rates
were used.
The assumed total Fund expense of .90% is a dollar weighted average of each
Series' expenses. For the year ended December 31, 1996, the total expenses of
each Series of the Fund were the following percentages of the average daily net
assets of the Series: 0.83% for Series A, 0.84% for Series B; 0.58% for Series
C; 1.30% for Series D; 0.83% for Series E; 0.84% for Series S; 0.84% for Series
J; .84% for Series K; 1.34% for Series M; 1.45% for Series N; and 1.15% for
Series O. The assumed total Fund expense of .90% was determined based on the
average daily net assets of each Series during 1996. Accordingly, existing
Series, which have lower expenses, were given more weight in determining the
amount of the Fund's assumed expenses than were the new Series which have higher
expenses. The assumed Fund expense of .90% may be more or less than the Fund
expenses incurred depending on the actual expenses of the Series underlying the
Variable Account to which Accumulated Value is allocated.
After deductions of the charges and Fund expenses described above, the
illustrated gross annual investment rates of return of 0%, 6%, and 12%
correspond to approximate net annual rates of -2.14%, 3.73%, and 9.60% in the
tables based on guaranteed charges. In the tables based on current charges, the
illustrated gross annual investment rates of return of 0%, 6% and 12% correspond
to approximate net annual rates of -2.14%, 3.73%, and 9.60% in the first ten
Policy Years and -1.84%, 4.05% and 9.94% thereafter. The hypothetical values
shown in the tables do not reflect any charges against the Variable Accounts for
income taxes that may be attributable to the Variable Accounts in the future,
since Security Benefit is not currently making these charges. In the event that
these charges are to be made, the gross annual investment rate would have to
exceed 0%, 6% or 12% by an amount sufficient to cover the tax charges in order
to produce the death benefits and Net Cash Surrender Values illustrated.
This illustration reflects Security Benefit's current interpretation of
Internal Revenue Code Section 7702 and 7702A and may not reflect a Policyowner's
actual tax consequences. Based upon comparison of annual premium and future
benefits under our current interpretation, this policy will not be subject to
tax treatment as a modified endowment contract if the premiums as illustrated
are paid when scheduled. The tests were done based on the values under the
illustration bases. Tests done under other bases may produce different results.
It is suggested that a Policyowner consult his or her professional tax advisor
regarding the interpretation of the current and proposed tax laws. Additional
information about the policy, including a description of death benefits,
transfers, partial withdrawal benefits, and policy loans, is contained under
"Summary of the Policy" and "The Policy" in this prospectus.
We will furnish upon request a comparable illustration reflecting the
proposed Insured's Age, gender (unless unisex rates apply), Underwriting Class,
Rating Class, Specified Amount, Death Benefit Option and premium amounts
requested. In addition, upon request, illustrations will be furnished reflecting
allocation of premiums to specified Variable Accounts. Such illustrations will
reflect the expenses of the Series of the Fund in which the Variable Account
invests.
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
PAGE 2 OF 6
70
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option A
Initial Annual Premium: $10,000
BASED ON CURRENT COST OF INSURANCE RATES AND CURRENT MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
TOTAL ------------------------ ------------------------ ------------------------
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $10,000 $10,500 $9,016 $750,000 $9,572 $750,000 $10,128 $750,000
2 42 $10,000 $21,525 $16,720 $750,000 $18,349 $750,000 $20,043 $750,000
3 43 $10,000 $33,101 $24,277 $750,000 $27,473 $750,000 $30,936 $750,000
4 44 $10,000 $45,256 $31,689 $750,000 $36,961 $750,000 $42,901 $750,000
5 45 $10,000 $58,019 $38,959 $750,000 $46,824 $750,000 $56,046 $750,000
6 46 $10,000 $71,420 $46,089 $750,000 $57,080 $750,000 $70,487 $750,000
7 47 $10,000 $85,491 $53,084 $750,000 $67,742 $750,000 $86,350 $750,000
8 48 $10,000 $100,266 $59,944 $750,000 $78,828 $750,000 $103,777 $750,000
9 49 $10,000 $115,779 $66,672 $750,000 $90,353 $750,000 $122,921 $750,000
10 50 $10,000 $132,068 $73,272 $750,000 $102,337 $750,000 $143,951 $750,000
11 51 $10,000 $149,171 $79,990 $750,000 $115,147 $750,000 $167,564 $750,000
12 52 $10,000 $167,130 $86,600 $750,000 $128,506 $750,000 $193,583 $750,000
13 53 $10,000 $185,986 $93,102 $750,000 $142,437 $750,000 $222,253 $750,000
14 54 $10,000 $205,786 $99,500 $750,000 $156,966 $750,000 $253,844 $750,000
15 55 $10,000 $226,575 $105,793 $750,000 $172,117 $750,000 $288,653 $750,000
16 56 $10,000 $248,404 $111,985 $750,000 $187,918 $750,000 $327,010 $750,000
17 57 $10,000 $271,324 $118,077 $750,000 $204,395 $750,000 $369,273 $750,000
18 58 $10,000 $295,390 $124,071 $750,000 $221,579 $750,000 $415,843 $750,000
19 59 $10,000 $320,660 $129,967 $750,000 $239,500 $750,000 $467,158 $750,000
20 60 $10,000 $347,193 $135,768 $750,000 $258,188 $750,000 $523,701 $750,000
20 60 $10,000 $347,193 $135,768 $750,000 $258,188 $750,000 $523,701 $750,000
25 65 $10,000 $501,135 $162,493 $750,000 $363,676 $750,000 $903,372 $1,102,114
30 70 $10,000 $697,609 $182,990 $750,000 $491,363 $750,000 $1,510,659 $1,752,365
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
Page 3 of 6
- --------------------------------------------------------------------------------
71
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option A
Initial Annual Premium: $10,000
BASED ON GUARANTEED COST OF INSURANCE RATES AND GUARANTEED MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
TOTAL ------------------------ ------------------------ ------------------------
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $10,000 $10,500 $7,804 $750,000 $8,321 $750,000 $8,840 $750,000
2 42 $10,000 $21,525 $15,329 $750,000 $16,840 $750,000 $18,413 $750,000
3 43 $10,000 $33,101 $22,576 $750,000 $25,558 $750,000 $28,789 $750,000
4 44 $10,000 $45,256 $29,538 $750,000 $34,474 $750,000 $40,036 $750,000
5 45 $10,000 $58,019 $36,210 $750,000 $43,586 $750,000 $52,232 $750,000
6 46 $10,000 $71,420 $42,580 $750,000 $52,883 $750,000 $65,454 $750,000
7 47 $10,000 $85,491 $48,641 $750,000 $62,365 $750,000 $79,799 $750,000
8 48 $10,000 $100,266 $54,390 $750,000 $72,030 $750,000 $95,373 $750,000
9 49 $10,000 $115,779 $59,815 $750,000 $81,872 $750,000 $112,290 $750,000
10 50 $10,000 $132,068 $64,905 $750,000 $91,885 $750,000 $130,676 $750,000
11 51 $10,000 $149,171 $69,634 $750,000 $102,050 $750,000 $150,664 $750,000
12 52 $10,000 $167,130 $73,974 $750,000 $112,342 $750,000 $172,395 $750,000
13 53 $10,000 $185,986 $77,888 $750,000 $122,734 $750,000 $196,029 $750,000
14 54 $10,000 $205,786 $81,336 $750,000 $133,190 $750,000 $221,744 $750,000
15 55 $10,000 $226,575 $84,281 $750,000 $143,684 $750,000 $249,750 $750,000
16 56 $10,000 $248,404 $86,683 $750,000 $154,183 $750,000 $280,286 $750,000
17 57 $10,000 $271,324 $88,507 $750,000 $164,661 $750,000 $313,634 $750,000
18 58 $10,000 $295,390 $89,731 $750,000 $175,107 $750,000 $350,130 $750,000
19 59 $10,000 $320,660 $90,300 $750,000 $185,481 $750,000 $390,140 $750,000
20 60 $10,000 $347,193 $90,144 $750,000 $195,732 $750,000 $434,086 $750,000
20 60 $10,000 $347,193 $90,144 $75,000 $195,732 $750,000 $434,086 $750,000
25 65 $10,000 $501,135 $75,073 $75,000 $242,750 $750,000 $730,712 $891,469
30 70 $10,000 $697,609 $23,051 $75,000 $274,104 $750,000 $1,191,698 $1,382,370
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
PAGE 4 OF 6
- --------------------------------------------------------------------------------
72
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option B
Initial Annual Premium: $25,000
BASED ON CURRENT COST OF INSURANCE RATES AND CURRENT MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
TOTAL ------------------------ ------------------------ ------------------------
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $25,000 $26,250 $23,322 $773,322 $24,736 $774,736 $26,150 $776,150
2 42 $25,000 $53,813 $44,992 $794,992 $49,206 $799,206 $53,587 $803,587
3 43 $25,000 $82,753 $66,200 $816,200 $74,589 $824,589 $83,658 $833,658
4 44 $25,000 $113,141 $86,954 $836,954 $100,921 $850,921 $116,619 $866,619
5 45 $25,000 $145,048 $107,264 $857,264 $128,235 $878,235 $152,745 $902,745
6 46 $25,000 $178,550 $127,140 $877,140 $156,570 $906,570 $192,341 $942,341
7 47 $25,000 $213,728 $146,591 $896,591 $185,962 $935,962 $235,741 $985,741
8 48 $25,000 $250,664 $165,626 $915,626 $216,451 $966,451 $283,309 $1,033,309
9 49 $25,000 $289,447 $184,254 $934,254 $248,079 $998,079 $335,446 $1,085,446
10 50 $25,000 $330,170 $202,484 $952,484 $280,888 $1,030,888 $392,591 $1,142,591
11 51 $25,000 $372,928 $220,995 $970,996 $315,881 $1,065,881 $456,611 $1,206,611
12 52 $25,000 $417,825 $239,166 $989,166 $352,291 $1,102,291 $526,994 $1,276,994
13 53 $25,000 $464,966 $257,003 $1,007,003 $390,175 $1,140,175 $604,371 $1,354,371
14 54 $25,000 $514,464 $274,511 $1,024,511 $429,593 $1,179,593 $689,438 $1,439,439
15 55 $25,000 $566,437 $291,697 $1,041,697 $470,607 $1,220,607 $782,960 $1,532,960
16 56 $25,000 $621,009 $308,567 $1,058,567 $513,281 $1,263,281 $885,777 $1,635,777
17 57 $25,000 $678,310 $325,126 $1,075,126 $557,683 $1,307,683 $998,811 $1,748,811
18 58 $25,000 $738,475 $341,380 $1,091,380 $603,883 $1,353,883 $1,123,080 $1,873,080
19 59 $25,000 $801,649 $357,335 $1,107,335 $651,954 $1,401,954 $1,259,699 $2,009,699
20 60 $25,000 $867,981 $372,996 $1,122,996 $701,970 $1,451,970 $1,409,895 $2,159,895
20 60 $25,000 $867,981 $372,996 $1,122,996 $701,970 $1,451,970 $1,409,895 $2,159,895
25 65 $25,000 $1,257,836 $445,938 $1,195,938 $982,891 $1,732,891 $2,415,439 $3,165,439
30 70 $25,000 $1,750,401 $506,957 $1,256,958 $1,319,266 $2,069,266 $4,023,324 $4,773,324
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
PAGE 5 OF 6
- --------------------------------------------------------------------------------
73
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 HARRISON, TOPEKA, KS 66636
SECURITY ELITE BENEFIT
A Flexible Premium Variable Life Insurance Policy
Illustration for: Male, Age 40, Preferred
Initial Specified Amount: $750,000, Option B
Initial Annual Premium: $25,000
BASED ON GUARANTEED COST OF INSURANCE RATES AND GUARANTEED MORTALITY
AND EXPENSE RISK AND ADMINISTRATIVE CHARGES
<TABLE>
<CAPTION>
0% HYPOTHETICAL GROSS 6% HYPOTHETICAL GROSS 12% HYPOTHETICAL GROSS
ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
TOTAL ------------------------ ------------------------ ------------------------
PREMIUMS
END OF PAID PLUS NET CASH NET CASH NET CASH
POLICY ANNUAL INTEREST SURRENDER DEATH SURRENDER DEATH SURRENDER DEATH
YEAR AGE PREMIUMS AT 5% VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
---- --- -------- ----- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 41 $25,000 $26,250 $22,096 $772,096 $23,470 $773,470 $24,846 $774,846
2 42 $25,000 $53,813 $43,586 $793,586 $47,680 $797,680 $51,938 $801,938
3 43 $25,000 $82,753 $64,476 $814,476 $72,648 $822,648 $81,481 $831,481
4 44 $25,000 $113,141 $84,764 $834,764 $98,388 $848,388 $113,698 $863,698
5 45 $25,000 $145,048 $104,449 $854,449 $124,915 $874,915 $148,829 $898,829
6 46 $25,000 $178,550 $123,521 $873,521 $152,234 $902,234 $187,130 $937,130
7 47 $25,000 $213,728 $141,979 $891,979 $180,359 $930,359 $228,891 $978,891
8 48 $25,000 $250,664 $159,821 $909,821 $209,307 $959,307 $274,428 $1,024,428
9 49 $25,000 $289,447 $177,038 $927,038 $239,084 $989,084 $324,081 $1,074,081
10 50 $25,000 $330,170 $193,621 $943,621 $269,699 $1,019,699 $378,220 $1,128,220
11 51 $25,000 $372,928 $209,547 $959,547 $301,144 $1,051,145 $437,238 $1,187,238
12 52 $25,000 $417,825 $224,785 $974,785 $333,406 $1,083,406 $501,557 $1,251,557
13 53 $25,000 $464,966 $239,299 $989,299 $366,462 $1,116,462 $571,632 $1,321,632
14 54 $25,000 $514,464 $253,046 $1,003,046 $400,281 $1,150,281 $647,953 $1,397,953
15 55 $25,000 $566,437 $265,990 $1,015,990 $434,837 $1,184,837 $731,065 $1,481,065
16 56 $25,000 $621,009 $278,089 $1,028,089 $470,098 $1,220,099 $821,559 $1,571,559
17 57 $25,000 $678,310 $289,309 $1,039,309 $506,038 $1,256,038 $920,090 $1,670,090
18 58 $25,000 $738,475 $299,633 $1,049,633 $542,642 $1,292,642 $1,027,391 $1,777,391
19 59 $25,000 $801,649 $309,006 $1,059,006 $579,861 $1,329,861 $1,144,227 $1,894,227
20 60 $25,000 $867,981 $317,360 $1,067,360 $617,627 $1,367,627 $1,271,421 $2,021,421
20 60 $25,000 $867,981 $317,360 $1,067,360 $617,627 $1,367,627 $1,271,421 $2,021,421
25 65 $25,000 $1,257,836 $340,656 $1,090,656 $811,126 $1,561,127 $2,096,555 $2,846,555
30 70 $25,000 $1,750,401 $322,829 $1,072,829 $999,216 $1,749,216 $3,351,554 $4,101,554
</TABLE>
All Premiums illustrated are assumed to be paid at the beginning of the policy
year.
This illustration assumes that no policy loans or withdrawals have been made.
- --------------------------------------------------------------------------------
THE HYPOTHETICAL INVESTMENT RATES SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS
ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE INTERPRETED AS A REPRESENTATION OF PAST
OR FUTURE INVESTMENT RESULTS. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN
THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT
ALLOCATIONS MADE TO VARIABLE ACCOUNTS BY THE OWNER AND THE EXPERIENCE OF THE
ACCOUNTS. NO REPRESENTATION CAN BE MADE BY SECURITY BENEFIT LIFE, THE SEPARATE
ACCOUNT OR THE FUND THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR
ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
- --------------------------------------------------------------------------------
THIS ILLUSTRATION IS VALID ONLY AS PART OF THE PROSPECTUS
AND ONLY IF ALL PAGES ARE INCLUDED
Page 6 of 6
- --------------------------------------------------------------------------------
74
