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PARKSTONE VARIABLE ANNUITY
PROSPECTUS
APRIL 30, 1997
[SBG LOGO]
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PARKSTONE VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY:
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
1-800-355-4555
MAILING ADDRESS:
PARKSTONE CUSTOMER SERVICE DEPARTMENT
157 S. KALAMAZOO MALL
P.O. BOX 50551
KALAMAZOO, MICHIGAN 49005-0551
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This Prospectus describes Parkstone Variable Annuity -- an individual
flexible purchase payment deferred variable annuity contract (the "Contract")
offered by Security Benefit Life Insurance Company ("Security Benefit"). The
Contract is available for individuals as a non-tax qualified retirement plan
("Non-Qualified Plan") or in connection with a retirement plan qualified under
Section 401, 403(b), 408, or 457 of the Internal Revenue Code ("Qualified
Plan"). Two types of the Contract are offered: one for individuals (the
"Individual Contracts") and one for trusts and customers of financial
institutions' trust departments (the "Trust Contracts"). The Contract is
designed to give Contractowners flexibility in planning for retirement and other
financial goals.
During the Accumulation Period, the Contract provides for the accumulation
of a Contractowner's value on either a variable basis, a fixed basis, or both.
The Contract also provides several options for annuity payments on either a
variable basis, a fixed basis, or both to begin on a future date. The minimum
initial purchase payment is $5,000 ($50 if made pursuant to an Automatic
Investment Program) to purchase an Individual Contract in connection with a
Non-Qualified Plan, $2,000 ($50 if made pursuant to an Automatic Investment
Program) to purchase an Individual Contract in connection with a Qualified Plan
and $50,000 to purchase a Trust Contract. Subsequent purchase payments are
flexible, though they must be for at least $2,000 ($50 if made pursuant to an
Automatic Investment Program) for an Individual Contract or $5,000 for a Trust
Contract. Purchase payments may be allocated at the Contractowner's discretion
to one or more of the Subaccounts that comprise a separate account of Security
Benefit called the Parkstone Variable Annuity Account (the "Separate Account"),
or to the Fixed Account of Security Benefit. The Subaccounts invest in one or
more of the corresponding portfolios ("Funds") of the Parkstone Advantage Fund
(the "Mutual Fund"), which currently consists of five Funds: (1) Prime
Obligations Fund, (2) Bond Fund, (3) Mid Capitalization Fund (formerly known as
the Equity Fund), (4) Small Capitalization Fund, and (5) International Discovery
Fund. The Contract Value in the Fixed Account will accrue interest at rates that
are paid by Security Benefit as described in "The Fixed Account" on page 22.
The Contract Value in the Subaccounts under a Contract will vary based on
investment performance of the Subaccounts to which the Contract Value is
allocated. No minimum amount of Contract Value is guaranteed.
A Contract may be returned according to the terms of its Free-Look Right
(see "Free-Look Right," page 17).
This Prospectus concisely sets forth information about the Contract and the
Separate Account that a prospective investor should know before investing.
Certain additional information is contained in a "Statement of Additional
Information," dated April 30, 1997, which has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional Information, as it
may be supplemented from time to time, is incorporated by reference into this
Prospectus and is available at no charge, by writing Security Benefit at 700 SW
Harrison Street, Topeka, Kansas 66636-0001 or by calling 1-800-355-4555. The
table of contents of the Statement of Additional Information is set forth on
page 33 of this Prospectus.
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 PARKSTONE
ADVANTAGE FUND. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
THE CONTRACT INVOLVES RISK, INCLUDING LOSS OF PRINCIPAL, AND IS NOT A
DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED BY, ANY BANK. THE CONTRACT
IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
DATE: APRIL 30, 1997
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TABLE OF CONTENTS
Page
DEFINITIONS................................................................ 5
SUMMARY.................................................................... 6
Purpose of the Contract.................................................. 6
The Separate Account and the Mutual Fund................................. 6
Fixed Account............................................................ 6
Purchase Payments........................................................ 6
Contract Benefits........................................................ 6
Free-Look Right.......................................................... 6
Charges and Deductions................................................... 6
Contingent Deferred Sales Charge....................................... 7
Mortality and Expense Risk Charge...................................... 7
Administrative Charge.................................................. 7
Maintenance Fee........................................................ 7
Premium Tax Charge..................................................... 7
Other Expenses......................................................... 7
Contacting Security Benefit.............................................. 7
EXPENSE TABLE.............................................................. 8
Contractual Expenses..................................................... 8
Separate Account Annual Expenses......................................... 8
Annual Mutual Fund Expenses After Expense Limitation..................... 8
CONDENSED FINANCIAL INFORMATION............................................ 9
INFORMATION ABOUT SECURITY BENEFIT, THE SEPARATE ACCOUNT,
AND THE MUTUAL FUND................................................... 12
Security Benefit Life Insurance Company.................................. 12
Separate Account......................................................... 12
The Parkstone Advantage Fund............................................. 12
Prime Obligations Fund................................................. 12
Bond Fund.............................................................. 12
Mid Capitalization Fund................................................ 12
International Discovery Fund........................................... 12
Small Capitalization Fund.............................................. 13
The Investment Adviser................................................... 13
THE CONTRACT............................................................... 13
General.................................................................. 13
Application for a Contract............................................... 13
Purchase Payments........................................................ 13
Allocation of Purchase Payments.......................................... 14
Dollar Cost Averaging Option............................................. 14
Asset Reallocation Option................................................ 15
Transfers of Contract Value.............................................. 15
Contract Value........................................................... 15
Determination of Contract Value.......................................... 16
Full and Partial Withdrawals............................................. 16
Systematic Withdrawals................................................... 17
Free-Look Right.......................................................... 17
Death Benefit............................................................ 17
CHARGES AND DEDUCTIONS..................................................... 18
Contingent Deferred Sales Charge......................................... 18
Mortality and Expense Risk Charge........................................ 19
Administrative Charge.................................................... 19
Maintenance Fee.......................................................... 19
Premium Tax Charge....................................................... 20
Other Charges............................................................ 20
Variations in Charges.................................................... 20
Guarantee of Certain Charges............................................. 20
Mutual Fund Expenses..................................................... 20
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Page
ANNUITY PERIOD............................................................. 20
General.................................................................. 20
Annuity Options.......................................................... 21
Option 1--Life Income.................................................. 21
Option 2--Life Income with Guaranteed Payments of 5, 10, 15 or 20 Years 21
Option 3--Life with Installment Refund Option.......................... 21
Option 4--Joint and Last Survivor...................................... 21
Option 5--Payments for a Specified Period.............................. 21
Option 6--Payments of a Specified Amount............................... 21
Selection of an Option................................................. 21
THE FIXED ACCOUNT.......................................................... 22
Interest................................................................. 22
Death Benefit............................................................ 22
Contract Charges......................................................... 22
Transfers and Withdrawals................................................ 22
Payments from the Fixed Account.......................................... 23
MORE ABOUT THE CONTRACT.................................................... 23
Ownership................................................................ 23
Joint Owners........................................................... 23
Designation and Change of Beneficiary.................................... 23
Participating............................................................ 23
Payments from the Separate Account....................................... 23
Proof of Age and Survival................................................ 23
Misstatements............................................................ 23
Loans.................................................................... 23
Restrictions on Withdrawals from Qualified Plans......................... 24
Restrictions on Withdrawals from 403(b) Programs......................... 24
FEDERAL TAX MATTERS........................................................ 25
Introduction............................................................. 25
Tax Status of Security Benefit and the Separate Account.................. 25
General................................................................ 25
Charge for Security Benefit Taxes...................................... 25
Diversification Standards.............................................. 26
Taxation of Annuities in General--Non-Qualified Plans.................... 26
Surrenders or Withdrawals Prior to the Annuity Start Date.............. 26
Surrenders or Withdrawals on or after Annuity Start Date............... 26
Penalty Tax on Certain Surrenders and Withdrawals...................... 26
Additional Considerations................................................ 27
Distribution-at-Death Rules............................................ 27
Gift of Annuity Contracts.............................................. 27
Contracts Owned by Non-Natural Persons................................. 27
Multiple Contract Rule................................................. 27
Qualified Plans.......................................................... 28
Section 401............................................................ 28
Section 403(b)......................................................... 29
Section 408............................................................ 29
Section 457............................................................ 29
Tax Penalties.......................................................... 30
Withholding............................................................ 30
OTHER INFORMATION.......................................................... 30
Voting of Mutual Fund Shares............................................. 30
Substitution of Investments.............................................. 31
Changes to Comply with Law and Amendments................................ 31
Reports to Owners........................................................ 31
Telephone Transfer Privileges............................................ 32
Legal Proceedings........................................................ 32
Legal Matters............................................................ 32
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Page
PERFORMANCE INFORMATION.................................................... 32
ADDITIONAL INFORMATION..................................................... 33
Registration Statement................................................... 33
Financial Statements..................................................... 33
STATEMENT OF ADDITIONAL INFORMATION........................................ 33
THE CONTRACT 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 OR THE STATEMENT OF
ADDITIONAL INFORMATION, THE MUTUAL FUND'S PROSPECTUS OR THE STATEMENT OF
ADDITIONAL INFORMATION OF THE MUTUAL FUND, OR ANY SUPPLEMENT THERETO.
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DEFINITIONS
Various terms commonly used in this Prospectus are defined as follows:
ACCUMULATION PERIOD -- The period commencing on the Contract Date and
ending on the Annuity Start Date or, if earlier, when the Contract is
terminated, either through a full withdrawal, payment of charges, or payment of
the death benefit proceeds.
ACCUMULATION UNIT -- A unit of measure used to calculate the value of a
Contractowner's interest in a Subaccount during the Accumulation Period.
ANNUITANT -- The person or persons on whose life annuity payments depend.
If Joint Annuitants are named in the Contract, "Annuitant" means both Annuitants
unless otherwise stated.
ANNUITY -- A series of periodic income payments made by Security Benefit to
an Annuitant, Joint Annuitant, or Beneficiary during the period specified in the
Annuity Option.
ANNUITY OPTIONS -- Options under the Contract that prescribe the provisions
under which a series of annuity payments are made.
ANNUITY PERIOD -- The period during which annuity payments are made.
ANNUITY START DATE -- The date when annuity payments are to begin.
AUTOMATIC INVESTMENT PROGRAM -- A program pursuant to which purchase
payments are automatically paid from the owner's checking account on the 7th,
14th, 21st or 28th day of each month, or a salary reduction arrangement.
CONTRACT DATE -- The date shown as the Contract Date in a Contract. Annual
Contract anniversaries are measured from the Contract Date. It is usually the
date that the initial purchase payment is credited to the Contract.
CONTRACT DEBT -- The unpaid loan balance including accrued loan interest.
CONTRACTOWNER OR OWNER -- The person entitled to the ownership rights under
the Contract and in whose name the Contract is issued.
CONTRACT VALUE -- The total value of the amounts in a Contract allocated to
the Subaccounts of the Separate Account and the Fixed Account as well as any
amount set aside in the Fixed Account to secure loans as of any Valuation Date.
CONTRACT YEAR -- Each twelve-month period measured from the Contract Date.
DESIGNATED BENEFICIARY -- The person having the right to the death benefit,
if any, payable upon the death of the Owner during the Accumulation Period is
the first person on the following list who is alive on the date of the Owner's
death: the Beneficiary; the Contingent Beneficiary; the Joint Owner; the
Annuitant; or if none of the above are alive, the Owner's Estate.
FIXED ACCOUNT -- An account that is part of Security Benefit's General
Account in which all or a portion of the Contract Value may be held for
accumulation at fixed rates of interest (which may not be less than 3.5 percent)
declared by Security Benefit periodically at its discretion.
GENERAL ACCOUNT -- All assets of Security Benefit other than those
allocated to the Separate Account or to any other separate account of Security
Benefit.
FULL WITHDRAWAL VALUE -- The amount a Contractowner may receive upon full
withdrawal of the Contract, which is equal to Contract Value less any unpaid
maintenance fee, any applicable contingent deferred sales charge, and any
Contract Debt.
HOME OFFICE -- The Annuity Administration Department at Security Benefit's
office at 700 Harrison Street, Topeka, Kansas 66636.
MUTUAL FUND -- The Parkstone Advantage Fund. The Mutual Fund is a
diversified, open-end management investment company commonly referred to as a
mutual fund.
PURCHASE PAYMENT -- The amounts paid to Security Benefit as consideration
for the Contract.
SEPARATE ACCOUNT -- The Parkstone Variable Annuity Account. A separate
account of Security Benefit that consists of accounts, referred to as
Subaccounts, each of which invests in a separate Fund of the Parkstone Advantage
Fund.
SUBACCOUNT -- A Subaccount of the Separate Account of Security Benefit to
which the Contract Value under the Contract may be allocated for variable
accumulation. Currently, five Subaccounts are available under the Contract.
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, Presidents' Day, Good Friday, Memorial Day, July
Fourth, Labor Day, Thanksgiving Day, and Christmas Day.
VALUATION PERIOD -- A period used in measuring the investment experience of
each Subaccount of the Separate Account. A Valuation Period begins at the close
of one Valuation Date and ends at the close of the next succeeding Valuation
Date.
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SUMMARY
This summary is intended to provide a brief overview of the more
significant aspects of the Contract. Further detail is provided in this
Prospectus, the Statement of Additional Information, and the Contract. Unless
the context indicates otherwise, the discussion in this summary and the
remainder of the Prospectus relates to the portion of the Contract involving the
Separate Account. The Fixed Account is briefly described under "The Fixed
Account," page 22 and in the Contract.
PURPOSE OF THE CONTRACT
The individual flexible purchase payment deferred variable annuity contract
("Contract") described in this Prospectus is designed to give Contractowners
flexibility in planning for retirement and other financial goals. The Contract
provides for the accumulation of values on a variable basis, a fixed basis, or
both, during the Accumulation Period and provides several options for annuity
payments on a variable basis, a fixed basis, or both. During the Accumulation
Period, an Owner can pursue various allocation options by allocating purchase
payments to the Subaccounts of the Separate Account or to the Fixed Account. See
"The Contract," page 13. The Contract is eligible for purchase as a non-tax
qualified retirement plan for an individual ("Non-Qualified Plan"). The Contract
is also eligible for an individual in connection with a retirement plan
qualified under Section 401, 403(b), 408, or 457 of the Internal Revenue Code of
1986, as amended. These plans are sometimes referred to in this Prospectus as
"Qualified Plans."
THE SEPARATE ACCOUNT AND THE MUTUAL FUND
Purchase payments designated to accumulate on a variable basis are
allocated to the Separate Account. See "Separate Account," page 12. The Separate
Account is currently divided into five accounts referred to as Subaccounts. Each
Subaccount invests exclusively in shares of a specific Fund of the Mutual Fund.
The Funds of the Mutual Fund, each of which has a different investment objective
or objectives, are as follows: Prime Obligations Fund, Bond Fund, Mid
Capitalization Fund (formerly known as the Equity Fund), Small Capitalization
Fund, and International Discovery Fund. See "The Parkstone Advantage Fund," page
12. Amounts held in a Subaccount will increase or decrease in dollar value
depending on the investment performance of the corresponding Fund of the Mutual
Fund in which such Subaccount invests. The Contractowner bears the investment
risk for amounts allocated to a Subaccount of the Separate Account.
FIXED ACCOUNT
Purchase payments designated to accumulate on a fixed basis may be
allocated to the Fixed Account, which is part of Security Benefit's General
Account. Amounts allocated to the Fixed Account earn interest at rates
determined at the discretion of Security Benefit and that are guaranteed to be
at least an effective annual rate of 3.5 percent. See "The Fixed Account," page
22.
PURCHASE PAYMENTS
The minimum initial purchase payment is $5,000 ($50 if made pursuant to an
Automatic Investment Program) for an Individual Contract issued in connection
with a Non-Qualified Plan, $2,000 ($50 if made pursuant to an Automatic
Investment Program) for an Individual Contract issued in connection with a
Qualified Plan and $50,000 for a Trust Contract. Thereafter, the Contractowner
may choose the amount and frequency of purchase payments, except that the
minimum subsequent purchase payment is $2,000 ($50 if made pursuant to an
Automatic Investment Program) for an Individual Contract or $5,000 for a Trust
Contract.
CONTRACT BENEFITS
During the Accumulation Period, Contract Value may be transferred by the
Contractowner among the Subaccounts of the Separate Account and to and from the
Fixed Account, subject to certain restrictions as described in "Transfers of
Contract Value,"on page 15. At any time before the Annuit Start Date, a Contract
may be surrendered for its Full Withdrawal Value, and partial withdrawals,
including systematic withdrawals, may be taken from the Contract Value. Full and
partial withdrawals, including systematic withdrawals, from Individual Contracts
may result in the deduction of a contingent deferred sales charge. See "Full and
Partial Withdrawals,"on page 16 and "Systematic Withdrawals,"on page 17 for more
information, including the possible charges and tax consequences associated with
full and partial withdrawals.
The Contract provides for a death benefit upon the death of the Owner
during the Accumulation Period. See "Death Benefit," on page 17 for more
information. The Contract provides for several Annuity Options on either a
variable basis, a fixed basis, or both. Payments under the fixed Annuity Options
will be guaranteed by Securit Benefit. See "Annuity Period," on page 20.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a ten-day period beginning when the Owner receives th Contract. In
this event, Security Benefit will refund to the Owner purchase payments
allocated to the Fixed Account plus the Contract Value in the Subaccounts plus
any charges deducted from the Subaccounts. Security Benefit will refund purchase
payments allocated to the Subaccounts rather than the Contract Value in those
states and circumstances where it is required to do so.
CHARGES AND DEDUCTIONS
Security Benefit does not make any deductions for sales load from purchase
payments before allocating them to the
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Contract Value. Certain charges will be deducted in connection with the
Contract.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge (which may also be referred to as a
withdrawal charge) may be assessed by Security Benefit on a full or partial
withdrawal, including a systematic withdrawal, from an Individual Contract
during the Accumulation Period to the extent the amount withdrawn is
attributable to purchase payments made. During the first Contract Year, the
withdrawal charge applies against any withdrawal, to the extent the amount
withdrawn is attributable to purchase payments made. After the first Contract
Year, the withdrawal charge will be waived on the first withdrawal in a Contract
Year to the extent that such withdrawal does not exceed 10 percent of the
Contract Value, less any Contract Debt, on the date of the withdrawal ("Free
Withdrawal Privilege"). If a second or subsequent withdrawal in the same
Contract Year is made, a withdrawal charge may be assessed on the entire amount
withdrawn. The withdrawal charge will be waived on systematic withdrawals to the
extent that systematic withdrawals during the Contract Year do not exceed 10
percent of the Contract Value, less any Contract Debt, on the date of the first
systematic withdrawal in any Contract Year. If a partial withdrawal and a
systematic withdrawal are taken in the same Contract Year, the Free Withdrawal
Privilege will apply to the partial withdrawal only if it occurs earlier than
the first systematic withdrawal in that Contract Year. The amount of the
withdrawal charge will depend upon the number of years that a purchase payment
has remained credited under the Contract, as follows:
AGE OF PURCHASE WITHDRAWAL
PAYMENT IN YEARS CHARGE
1 5%
2 5%
3 5%
4 5%
5 4%
6 3%
7 2%
8 0%
In no event will the amount of any withdrawal charge, when added to any
such charge previously assessed against any amount withdrawn from the Contract,
exceed 5 percent of the purchase payments paid under a Contract. This charge is
not assessed upon a full or partial withdrawal from a Trust Contract. See
"Contingent Deferred Sales Charge," on page 18.
MORTALITY AND EXPENSE RISK CHARGE
Security Benefit deducts a daily charge from the assets of each Subaccount
for mortality and expense risks equal to an annual rate of 1.25 percent of each
Subaccount's average daily net assets that fund the Individual Contracts and
0.65 percent of each Subaccount's average daily net assets that fund the Trust
Contracts. See "Mortality and Expense Risk Charge," on page 19.
ADMINISTRATIVE CHARGE
Security Benefit deducts a daily administrative charge equal to an annual
rate of 0.15 percent of each Subaccount's average daily net assets that fund the
Individual Contracts and 0.05 percent of each Subaccount's average daily net
assets that fund the Trust Contracts. See "Administrative Charge," on page 19.
MAINTENANCE FEE
An annual fee of $30 is deducted on each Contract Anniversary to cover the
costs of maintaining records for the Individual Contracts. This charge is not
deducted after the Annuity Start Date if one of Annuity Options 1 through 4 is
selected, nor in connection with the Trust Contracts. This charge is prorated
upon annuitization under one of the Annuity Options 1 through 4 or a full
withdrawal. See "Maintenance Fee," on page 19.
PREMIUM TAX CHARGE
Security Benefit assesses a premium tax charge to reimburse itself for any
premium taxes that it incurs. This charge will usually be deducted on
annuitization or upon full withdrawal if a premium tax was incurred by Security
Benefit and is not refundable. Partial withdrawals, including systematic
withdrawals, may be subject to a premium tax charge if a premium tax is incurred
on the withdrawal by Security Benefit and is not refundable. Security Benefit
reserves the right to deduct such taxes when due or anytime thereafter. Premium
tax rates currently range from 0 percent to 3.5 percent. See "Premium Tax
Charge," on page 20.
OTHER EXPENSES
The operating expenses of the Separate Account are paid by Security
Benefit. Investment advisory fees and operating expenses of the Mutual Fund are
paid by the Mutual Fund. For a description of these charges and expenses, see
the Prospectus for the Mutual Fund.
CONTACTING SECURITY BENEFIT
All written requests, notices, and forms required by the Contract, and any
questions or inquiries should be directed to Parkstone Customer Service
Department, 157 S. Kalamazoo Mall, P.O. Box 50551, Kalamazoo, Michigan
49005-0551.
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EXPENSE TABLE
The purpose of this table is to assist investors in understanding the
various costs and expenses borne directly and indirectly by Owners of the
Contracts with Contract Value allocated to the Subaccounts. The table reflects
contractual charges, expenses of the Separate Account, and charges and expenses
of the Mutual Fund. The table does not reflect premium taxes that may be imposed
by various jurisdictions. See "Premium Tax Charge," on page 20. The information
contained in the table is not generally applicable to amounts allocated to the
Fixed Account (although certain contractual charges also apply to this Account).
For a complete description of a Contract's costs and expenses, see "Charges and
Deductions," on page 18. For a more complete description of the Mutual Fund's
costs and expenses, see the Parkstone Advantage Fund Prospectus, which
accompanies this Prospectus.
CONTRACTUAL EXPENSES
Sales load on purchase payments................................... None
Contingent deferred sales charge (as a percentage of amounts withdrawn
attributable to purchase payments that have remained credited under the Contract
for the following number of years).(1)
Age of Purchase Payment Charge
Year 1......................................................... 5%
Year 2......................................................... 5%
Year 3......................................................... 5%
Year 4......................................................... 5%
Year 5......................................................... 4%
Year 6......................................................... 3%
Year 7......................................................... 2%
Year 8 and over................................................ None
Transfer Fee (per transfer)(2)....................................... None
Maintenance Fee (per year)(3)........................................ $30
SEPARATE ACCOUNT ANNUAL EXPENSES
Annual Mortality and Expense Risk Charge (as a percentage of each
Subaccount's average daily net assets)
Individual Contracts............................................ 1.25%
Trust Contracts................................................. 0.65%
Annual Administrative Charge (as a percentage of each Subaccount's
average daily net assets)
Individual Contracts............................................ 0.15%
Trust Contracts................................................. 0.05%
Total Separate Account Annual Expenses
Individual Contracts............................................ 1.40%
Trust Contracts................................................. 0.70%
ANNUAL MUTUAL FUND EXPENSES AFTER EXPENSE LIMITATION (AS A PERCENTAGE OF EACH
FUND'S AVERAGE DAILY NET ASSETS)
ADVISORY OTHER MUTUAL FUND
FEE EXPENSES TOTAL EXPENSES
Prime Obligations Fund 0.40% 0.61% 1.01%
Bond Fund 0.74% 0.55% 1.29%
Mid Capitalization Fund 1.00% 0.42% 1.42%
Small Capitalization Fund 1.00% 0.40% 1.40%
International Discovery Fund 1.25% 0.75% 2.00%
1. The withdrawal charge will be waived after the first Contract Year, on the
first withdrawal in a Contract Year to the extent that such withdrawal does
not exceed 10 percent of the Contract Value, less any Contract Debt, on the
date of the withdrawal. The withdrawal charge will also be waived on
systematic withdrawals that do not in any Contract Year exceed 10 percent of
the Contract Value, less any Contract Debt, on the date of the first
systematic withdrawal in such Contract Year. If a partial withdrawal and a
systematic withdrawal are taken in the same Contract Year, the Free
Withdrawal Privilege will apply to the partial withdrawal only if it occurs
earlier than the first systematic withdrawal in that Contract Year. The
withdrawal charge is not assessed by Security Benefit on withdrawals from a
Trust Contract. When added to the withdrawal charges assessed on prior
withdrawals, the total withdrawal charge will never exceed 5 percent of
total purchase payments.
2. The first 12 transfers in a calendar year are without charge; for any
additional transfers in a calendar year, a charge of $25 is imposed.
3. The maintenance fee is not deducted from the Trust Contracts.
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EXAMPLES
Different examples are presented below that show expenses that a
Contractowner would pay at the end of one, three, five or ten years if, at the
end of those time periods, the Contract is (1) surrendered, (2) annuitized, or
(3) not surrendered or annuitized. Each example shows expenses based upon
allocation to each of the Subaccounts, and different expense figures are
presented to reflect the different expenses imposed under the Individual and the
Trust Contracts.
The examples below should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those shown. The
5 percent return assumed in the examples is hypothetical and should not be
considered a representation of past or future actual returns, which may be
greater or lesser than the assumed amount.
INDIVIDUAL CONTRACTS
Example One -- The Owner would pay the expenses shown below on a $1,000
investment, assuming 5 percent annual return on assets, if an individual
Contract is SURRENDERED at the end of one, three, five or ten years:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Prime Obligations Subaccount........ $75 $125 $172 $281
Bond Subaccount..................... 78 133 185 308
Equity Subaccount................... 79 137 192 320
Small Capitalization Subaccount..... 79 137 191 319
International Discovery Subaccount.. 85 153 219 374
Example Two -- The Owner would pay the expenses shown below on a $1,000
investment, assuming 5 percent annual return on assets, if an individual
Contract is ANNUITIZED OR NOT SURRENDERED OR ANNUITIZED at the end of one,
three, five or ten years:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Prime Obligations Subaccount........ $25 $ 77 $132 $281
Bond Subaccount..................... 28 85 145 308
Equity Subaccount................... 29 89 152 320
Small Capitalization Subaccount..... 29 89 151 319
International Discovery Subaccount.. 35 106 180 374
TRUST CONTRACTS
Example One -- The Owner would pay the expenses shown below on a $1,000
investment, assuming 5 percent annual return on assets, if a Trust Contract is
SURRENDERED, ANNUITIZED OR NOT SURRENDERED OR ANNUITIZED at the end of one,
three, five or ten years:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Prime Obligations Subaccount........ $17 $ 54 $ 93 $202
Bond Subaccount..................... 20 62 107 232
Equity Subaccount................... 22 66 114 245
Small Capitalization Subaccount..... 21 66 113 243
International Discovery Subaccount.. 27 84 143 303
CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit values
for the period of September 24, 1993 through December 31, 1993, and for the
years ended December 31, 1994, 1995 and 1996, as well as ending accumulation
units outstanding for Qualified and Non-Qualified Contracts under each of the
Parkstone Subaccounts.
SMALL INTER-
PRIME CAPITAL- NATIONAL
QUALIFIED INDIVIDUAL OBLIGATIONS BOND EQUITY IZATION DISCOVERY
CONTRACTS 1993 SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
Accumulation
unit value:
Beginning of period...$10.00 $10.00 $10.00 $10.00 $10.00
End of period.........$10.06 $ 9.93 $10.14 $10.96 $10.31
Accumulation units:
Outstanding at the
end of period........ 1,803 59,497 82,266 29,606 42,792
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CONDENSED FINANCIAL INFORMATION (CONTINUED)
SMALL INTER-
PRIME CAPITAL- NATIONAL
NON-QUALIFIED OBLIGATIONS BOND EQUITY IZATION DISCOVERY
INDIVIDUAL SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
CONTRACTS 1993
Accumulation unit value:
Beginning of period...$10.00 $10.00 $10.00 $10.00 $10.00
End of period.........$10.06 $ 9.93 $10.14 $10.97 $10.32
Accumulation units:
Outstanding at the
end of period......... 249 63,777 100,971 39,841 69,637
QUALIFIED INDIVIDUAL
CONTRACTS 1994
Accumulation unit value:
Beginning of period...$10.06 $9.93 $10.14 $10.96 $10.31
End of period.........$10.15 $9.27 $ 9.48 $11.38 $ 9.48
Accumulation units:
Outstanding at the
end of period.........10,179 142,399 349,421 197,216 212,431
NON-QUALIFIED
INDIVIDUAL
CONTRACTS 1994
Accumulation unit value:
Beginning of period...$10.06 $9.93 $10.14 $10.97 $10.32
End of period.........$10.15 $9.27 $ 9.48 $11.39 $ 9.49
Accumulation units:
Outstanding at the
end of period.........7,394 150,102 401,802 241,214 274,880
NON-QUALIFIED TRUST
CONTRACTS 1994
Accumulation unit value:
Beginning of period1... -- $9.56 $9.53 $ 9.87 $10.26
End of period.......... -- $9.40 $9.62 $11.55 $ 9.61
Accumulation units:
Outstanding at the
end of period.......... -- 5,230 5,247 5,066 9,622
QUALIFIED INDIVIDUAL
CONTRACTS 1995
Accumulation unit value:
Beginning of period...$10.15 $ 9.27 $ 9.48 $11.38 $ 9.48
End of period.........$10.43 $10.69 $12.07 $15.23 $10.26
Accumulation units:
Outstanding at the
end of period.........30,458 180,100 463,460 279,611 266,963
NON-QUALIFIED
INDIVIDUAL
CONTRACTS 1995
Accumulation unit value:
Beginning of period...$10.15 $ 9.27 $ 9.48 $11.39 $ 9.49
End of period.........$10.44 $10.69 $12.06 $15.24 $10.27
Accumulation units:
Outstanding at the
end of period.........33,310 189,674 528,394 350,469 333,873
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CONDENSED FINANCIAL INFORMATION (CONTINUED)
SMALL INTER-
PRIME CAPITAL- NATIONAL
OBLIGATIONS BOND EQUITY IZATION DISCOVERY
NON-QUALIFIED TRUST SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
CONTRACTS 1995
Accumulation unit value:
Beginning of period1..$10.00 $ 9.40 $ 9.62 $11.55 $ 9.61
End of period.........$10.17 $10.92 $12.32 $15.57 $10.47
Accumulation units:
Outstanding at the
end of period.........13,728 55,111 42,810 24,824 17,264
QUALIFIED INDIVIDUAL
CONTRACTS 1996
Accumulation unit value:
Beginning of period...$10.43 $10.69 $12.07 $15.23 $10.26
End of period.........$10.75 $10.73 $13.96 $19.47 $11.68
Accumulation units:
Outstanding at the
end of period.........28,738 256,081 599,163 395,660 328,773
NON-QUALIFIED
INDIVIDUAL
CONTRACTS 1996
Accumulation unit value:
Beginning of period...$10.44 $10.69 $12.06 $15.24 $10.27
End of period.........$10.75 $10.73 $13.96 $19.47 $11.68
Accumulation units:
Outstanding at the
end of period.........69,773 359,239 792,396 566,484 520,466
NON-QUALIFIED TRUST
CONTRACTS 1996
Accumulation unit value:
Beginning of period...$10.17 $10.92 $12.32 $15.57 $10.47
End of period.........$10.54 $11.04 $14.36 $20.05 $12.00
Accumulation units:
Outstanding at the
end of period.........26,074 68,266 51,044 22,763 28,057
QUALIFIED TRUST
CONTRACTS 1996
Accumulation unit value:
Beginning of period...$10.00 $10.06 $14.44 $20.55 $11.48
End of period.........$10.18 $10.31 $14.54 $20.28 $12.17
Accumulation units:
Outstanding at the
end of period......... 2,306 16,153 66,424 52,123 51,774
1. The International Discovery Subaccount under the Non-Qualified Trust
Contracts did not begin operations until May 17, 1994; the Bond, Equity and
Small Capitalization Subaccounts under the Non-Qualified Trust Contracts did
not begin operations until August 18, 1994; and the Prime Obligations
Subaccount under the Non-Qualified Trust Contracts did not begin operations
until July 11, 1995.
2. The Prime Obligations Subaccount under the Qualified Trust Contracts did not
begin operations until May 22, 1996; the Equity, Small Capitalization and
International Discovery Subaccounts under the Qualified Trust Contracts did
not begin operations until May 29, 1996; and the Bond Subaccount under the
Qualified Trust Contracts did not begin operations until September 25, 1996.
11
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INFORMATION ABOUT SECURITY BENEFIT,
THE SEPARATE ACCOUNT, AND THE MUTUAL FUND
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 a complete line of life insurance policies and
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 over $6.6
billion.
The Principal Underwriter for the Contracts 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.
SEPARATE ACCOUNT
The Separate Account was established by Security Benefit on February 22,
1993, under procedures established under Kansas law. The income, gains, or
losses of the Separate Account are credited to or charged against the assets of
the Separate Account without regard to other income, gains, or losses of
Security Benefit. Assets in the Separate Account attributable to the reserves
and other liabilities under the Contracts are not chargeable with liabilities
arising from any other business that Security Benefit conducts. Security Benefit
owns the assets in the Separate Account and is required to maintain sufficient
assets in the Separate Account to meet all Separate Account obligations under
the Contracts. Security Benefit may transfer to its General Account assets that
exceed anticipated obligations of the Separate Account. All obligations arising
under the Contracts 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 contracts other than variable annuity contracts,
and may accumulate in the Separate Account proceeds from Contract charges and
investment results applicable to those assets.
The Separate Account is currently divided into five Subaccounts. Each
Subaccount invests exclusively in shares of a specific Fund of the Mutual Fund.
Security Benefit may in the future establish additional Subaccounts of the
Separate Account, which may invest in other Funds of the Mutual Fund or in other
securities, mutual funds, or investment vehicles.
The Separate Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"). Registration with the
SEC does not involve supervision by the SEC of the administration or investment
practices of the Separate Account or of Security Benefit.
THE PARKSTONE ADVANTAGE FUND
The Parkstone Advantage Fund (the "Mutual Fund") is a diversified, open-end
management investment company of the series type. The Mutual Fund is registered
with the SEC under the 1940 Act. Such registration does not involve supervision
by the SEC of the investments or investment policy of the Mutual Fund. The
Mutual Fund currently has five separate portfolios ("Funds"), each of which
pursues different investment objectives and policies. Shares of the Mutual Fund
are currently offered only for purchase by Subaccounts of Security Benefit to
serve as an investment medium for the Contracts.
A summary of the investment objective of each Fund of the Mutual Fund is
described below. There can be no assurance that any Fund will achieve its
objective. More detailed information is contained in the accompanying prospectus
of the Mutual Fund, including information on the risks associated with the
investments and investment techniques of each Fund.
THE MUTUAL FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
PRIME OBLIGATIONS FUND
The investment objective of the Prime Obligations Fund is to seek current
income with liquidity and stability of principal. The Prime Obligations Fund
attempts to achieve this objective by investing at least 95 percent of its total
assets, measured at the time of investment, in the highest quality money market
instruments.
BOND FUND
The investment objective of the Bond Fund is to seek current income as well
as preservation of capital. The Bond Fund seeks this objective by investing in a
portfolio of high and medium quality fixed income securities.
MID CAPITALIZATION FUND
The investment objective of the Mid Capitalization Fund is to seek growth
of capital by investing primarily in a diversified portfolio of common stocks
and securities convertible into common stocks. Under normal market conditions,
the Mid Capitalization Fund will invest at least 65 percent of the value of its
total assets in common stocks and securities convertible into common stocks of
companies believed by its investment adviser to have a market capitalization of
between $1 and $5 billion.
INTERNATIONAL DISCOVERY FUND
The investment objective of the International Discovery Fund is to seek
long-term growth of capital. The International Discovery Fund seeks to achieve
this objective
12
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primarily through investment in an internationally diversified portfolio of
equity securities.
SMALL CAPITALIZATION FUND
The investment objective of the Small Capitalization Fund is to seek growth
of capital by investing primarily in a diversified portfolio of common stocks
and securities convertible into common stocks of small- to medium-sized
companies. Under normal market conditions, the Small Capitalization Fund will
invest at least 65 percent of the value of its total assets in common stocks and
securities convertible into common stocks of companies believed by its
investment adviser to have a market capitalization of less than $1 billion.
THE INVESTMENT ADVISER
First of America Investment Corporation ("First of America"), located at
303 North Rose Street, Suite 500, Kalamazoo, Michigan 49007, serves as
Investment Adviser to each Fund of the Mutual Fund. First of America is
registered with the SEC as an investment adviser. First of America formulates
and implements continuing programs for the purchase and sale of securities in
compliance with the investment objective, policies, and restrictions of each
Fund. First of America is responsible for the day-to-day decisions to buy and
sell securities for these Funds, except with respect to the International
Discovery Fund. For the International Discovery Fund, the Investment Adviser has
entered into a subinvestment advisory agreement with Gulfstream Global
Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas, Texas 75201
("Gulfstream") to serve as Sub-Adviser subject to the direction and control of
the Mutual Fund's Board of Trustees. First of America holds a 72 percent
interest in Gulfstream.
THE CONTRACT
GENERAL
The Contract offered by this Prospectus is an individual flexible purchase
payment deferred variable annuity that is issued by Security Benefit. To the
extent that all or a portion of purchase payments are allocated to the
Subaccounts, the Contract is significantly different from a fixed annuity
contract in that it is the Owner under a Contract who assumes the risk of
investment gain or loss rather than Security Benefit. Upon the maturity of a
Contract, the Contract provides several Annuity Options on a variable basis, a
fixed basis or both, under which Security Benefit will pay periodic annuity
payments beginning on the Annuity Start Date. The amount that will be available
for annuity payments will depend on the investment performance of the
Subaccounts to which purchase payments have been allocated.
The Contract is available for purchase as a non-tax qualified retirement
plan ("Non-Qualified Plan") by an individual. The Contract is also eligible for
use in connection with certain tax qualified retirement plans that meet the
requirements of Section 401, 403(b), 408, or 457 of the Internal Revenue Code
("Qualified Plan"). Certain federal tax advantages are currently available to
retirement plans that qualify as (1) self-employed individuals' retirement plans
under Section 401, such as HR-10 and Keogh plans, (2) pension or profit-sharing
plans established by an employer for the benefit of its employees under Section
401, (3) individual retirement accounts or annuities, including those
established by an employer as a simplified employee pension plan, under Section
408, (4) annuity purchase plans of public school systems and certain tax-exempt
organizations under Section 403(b) or (5) deferred compensation plans for
employees established by a unit of a state or local government or by a
tax-exempt organization under Section 457. Joint Owners are permitted only on a
Contract issued pursuant to a Non-Qualified Plan.
APPLICATION FOR A CONTRACT
Any person wishing to purchase a Contract may submit an application and an
initial purchase payment to Security Benefit, as well as any other form or
information that Security Benefit may require. Security Benefit reserves the
right to reject an application or purchase payment for any reason, subject to
Security Benefit's underwriting standards and guidelines and any applicable
state or federal law relating to nondiscrimination.
The maximum age of an Owner for which a Contract will be issued is 80 (in
Florida, 75). If there are Joint Owners, the maximum issue age will be
determined by reference to the older Owner.
PURCHASE PAYMENTS
The minimum initial purchase payment for the purchase of an Individual
Contract is $5,000 ($50 if made pursuant to an Automatic Investment Program) in
connection with a Non-Qualified Plan or $2,000 ($50 if made pursuant to an
Automatic Investment Program) in connection with a Qualified Plan and for the
purchase of a Trust Contract is $50,000. Thereafter, the Contractowner may
choose the amount and frequency of purchase payments, except that the minimum
subsequent purchase payment for an Individual Contract is $2,000 ($50 if made
pursuant to an Automatic Investment Program) for both Non-Qualified and
Qualified Plans or $5,000 for a Trust Contract. Security Benefit may reduce the
minimum purchase payment requirements under certain circumstances, such as for
group or sponsored arrangements. Any purchase payment exceeding $1 million will
not be accepted without prior approval of Security Benefit.
An initial purchase payment will be applied not later than the end of the
second Valuation Date after the Valuation Date it is received by Security
Benefit at its Home Office if the purchase payment is preceded or accompanied by
an application that contains sufficient information necessary to establish an
account and properly credit such purchase payment. The application form will be
provided by Security Benefit. If Security Benefit does not receive a
13
<PAGE>
complete application, Security Benefit will notify the applicant that Security
Benefit does not have the necessary information to issue a Contract. If the
necessary information is not provided to Security Benefit within five Valuation
Dates after the Valuation Date on which Security Benefit first receives the
initial purchase payment or if Security Benefit determines it cannot otherwise
issue the Contract, Security Benefit will return the initial purchase payment to
the applicant unless the applicant consents to Security Benefit retaining the
purchase payment until the application is made complete.
Subsequent purchase payments will be credited as of the end of the
Valuation Period in which they are received by Security Benefit at its Home
Office. Purchase payments after the initial purchase payment may be made at any
time prior to the Annuity Start Date, so long as the Owner is living. Subsequent
purchase payments under a Qualified Plan may be limited by the terms of the plan
and provisions of the Internal Revenue Code. Subsequent purchase payments may be
paid monthly under an Automatic Investment Program.
ALLOCATION OF PURCHASE PAYMENTS
In an application for a Contract, the Contractowner selects the Subaccounts
or the Fixed Account to which purchase payments will be allocated. Purchase
payments will be allocated according to the Contractowner's instructions
contained in the application or more recent instructions received, if any,
except that no purchase payment allocation is permitted that would result in
less than $25 per payment being allocated to any one Subaccount or the Fixed
Account. Available allocation alternatives include the five Subaccounts and the
Fixed Account.
A Contractowner may change the purchase payment allocation instructions by
submitting a proper written request to Security Benefit's Home Office. A proper
change in allocation instructions will be effective upon receipt by Security
Benefit at its Home Office and will continue in effect until subsequently
changed. Changes in purchase payment allocation instructions may be made by
telephone provided the Telephone Transfer section of the application or an
Authorization for Telephone Transfers form is properly completed, signed, and
filed at Security Benefit's Home Office. Changes in the allocation of future
purchase payments have no effect on existing Contract Value. Such Contract
Value, however, may be transferred among the Subaccounts of the Separate Account
or the Fixed Account in the manner described in "Transfers of Contract Value,"
on page 15.
DOLLAR COST AVERAGING OPTION
Security Benefit currently offers an option under which Contractowners may
dollar cost average their allocations in the Subaccounts under the Contract by
authorizing Security Benefit to make periodic allocations of Contract Value from
any one Subaccount to one or more of the other Subaccounts. 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 cycles. The option will
result in the allocation of Contract Value to one or more Subaccounts, and these
amounts will be credited at the Accumulation Unit value 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 Subaccount 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 Subaccount 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 Contractowner
will not have losses.
A Dollar Cost Averaging Request form is available upon request. On the
form, the Contractowner must designate whether a specific dollar amount,
percentage of Contract Value or earnings only are to be transferred, the
Subaccount or Subaccounts 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 Contract Value in the
Subaccount from which the Dollar Cost Averaging transfers will be made must be
at least $10,000. The Dollar Cost Averaging Request form will not be considered
complete until the Contractowner's Contract Value in the Subaccount from which
the transfers will be made is at least $10,000. After Security Benefit has
received a Dollar Cost Averaging Request in proper form at its Home Office,
Security Benefit will transfer Contract Value in amounts designated by the
Contractowner from the Subaccount from which transfers are to be made to the
Subaccount or Subaccounts chosen by the Contractowner. The minimum amount that
may be transferred to any one Subaccount is $25. Each transfer will be effected
on the monthly or quarterly anniversary, whichever corresponds to the period
selected by the Contractowner, 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, or until Contract Value in the Subaccount from
which transfers are made has been depleted. Amounts periodically transferred
under this option are not currently subject to any transfer charges that are
imposed by Security Benefit on transfers, and such transfers are not currently
included in the 12 transfers per year that are allowed free of charge as
discussed below.
A Contractowner may instruct Security Benefit at any time to terminate the
option by written request to Security Benefit's Home Office. In that event, the
Contract Value in the Subaccount from which transfers were being made that
14
<PAGE>
has not been transferred will remain in that Subaccount unless the Contractowner
instructs otherwise. If a Contractowner 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 Subaccount 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.
The Subaccount from which transfers are to be made must meet the $10,000 minimum
amount of Contract Value. Security Benefit may discontinue, modify, or suspend
the Dollar Cost Averaging Option at any time.
Contract Value may also be dollar cost averaged to or from the Fixed
Account, provided that for transfers from the Fixed Account, the Fixed Account
meets the minimum Contract Value of $10,000 and such transfers do not violate
the restrictions on transfers as described in "The Fixed Account," on page 22
and "Loans" on page 23.
ASSET REALLOCATION OPTION
Security Benefit currently offers an option under which Contractowners
authorize Security Benefit to automatically transfer their Contract Value each
quarter to maintain a particular percentage allocation among the Subaccounts as
selected by the Contractowner. The Contract Value allocated to each Subaccount
will grow or decline in value at different rates during the quarter, and Asset
Reallocation automatically reallocates the Contract Value in the Subaccounts
each quarter to the allocation selected by the Contractowner. Asset Reallocation
is intended to transfer Contract Value from those Subaccounts that have
increased in value to those Subaccounts that have declined in value. Over time,
this method of investing may help a Contractowner buy low and sell high. This
investment method does not guarantee profits, nor does it assure that a
Contractowner will not have losses.
To elect the Asset Reallocation Option, the Contract Value in the Contract
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 Contractowner must
indicate the applicable Subaccounts and the percentage of Contract Value to be
reallocated on a quarterly basis to each Subaccount ("Asset Reallocation
Program"). If the Asset Reallocation Option is elected, all Contract Value
invested in the Subaccounts must be included in the Asset Reallocation Program.
This option will result in the transfer of Contract Value to one or more of
the Subaccounts on the date of Security Benefit's receipt of the Asset
Reallocation Request in proper form and 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 are imposed by Security Benefit on transfers, and such
transfers are not currently included in the 12 transfers per year that are
allowed free of charge as discussed below.
A Contractowner may instruct Security Benefit at any time to terminate this
option by written request to Security Benefit's Home Office. In that event, the
Contract Value in the Subaccounts that has not been transferred will remain in
those Subaccounts 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 Contract
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.
Contract 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 as described in "The Fixed Account" on
page 22 and "Loans" on page 23.
TRANSFERS OF CONTRACT VALUE
During the Accumulation Period, Contract Value may be transferred among the
Subaccounts by the Contractowner 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, signed and filed at
Security Benefit's Home Office. The first 12 transfers in any calendar year are
without charge; for any additional transfers in a calendar year, a charge of $25
is imposed. The charge will be deducted from the Contract Value in the
Subaccounts and the Fixed Account in the following order: Prime Obligations
Subaccount, Bond Subaccount, Equity Subaccount, International Discovery
Subaccount and Small Capitalization Subaccount and then from the Fixed Account.
The Contract Value of each Account will be depleted before the next is charged.
The minimum transfer amount is $500 ($50 under the Dollar Cost Averaging and
Asset Reallocation Options), or the amount remaining in a given Subaccount.
Contract Value may also be transferred from the Subaccounts to the Fixed
Account; however, transfers from the Fixed Account to the Subaccounts are
restricted as described in "The Fixed Account" on page 22 and "Loans" on page
23.
Security Benefit reserves the right at a future date to limit the number,
size and frequency of transfers, and to discontinue telephone transfers.
CONTRACT VALUE
The Contract Value is the sum of the amounts under the Contract held in
each Subaccount of the Separate Account and in the Fixed Account. On each
Valuation Date, the portion of the Contract Value allocated to any particular
15
<PAGE>
Subaccount will be adjusted to reflect the investment experience of that
Subaccount. See "Determination of Contract Value," below. No minimum amount of
Contract Value is guaranteed. A Contractowner bears the entire investment risk
relating to the investment performance of Contract Value allocated to the
Subaccounts.
DETERMINATION OF CONTRACT VALUE
The Contract Value will vary to a degree that depends upon several factors,
including investment performance of the Subaccounts to which Contract Value has
been allocated, payment of purchase payments, the amount of any outstanding
Contract Debt, partial withdrawals, and the charges assessed in connection with
the Contract. The amounts allocated to the Subaccounts will be invested in
shares of the corresponding Funds of the Mutual Fund. The investment performance
of the Subaccounts will reflect increases or decreases in the net asset value
per share of the corresponding Funds and any dividends or distributions declared
by a Fund. Any dividends or distributions from any Fund of the Mutual Fund will
be automatically reinvested in shares of the same Fund, unless Security Benefit,
on behalf of the Separate Account, elects otherwise.
Assets in the Subaccounts are divided into Accumulation Units, which are
accounting units of measure used to calculate the value of a Contractowner's
interest in a Subaccount. When a Contractowner allocates purchase payments to a
Subaccount, the Contract is credited with Accumulation Units. The number of
Accumulation Units to be credited is determined by dividing the dollar amount
allocated to the particular Subaccount by the Accumulation Unit value for the
particular Subaccount at the end of the Valuation Period in which the purchase
payment is credited. In addition, other transactions including loans, full or
partial withdrawals, transfers, and assessment of certain charges against the
Contract affect the number of Accumulation Units credited to a Contract. The
number of units credited or debited in connection with any such transaction is
determined by dividing the dollar amount of such transaction by the unit value
of the affected Subaccount. The Accumulation Unit value of each Subaccount is
determined on each Valuation Date. The number of Accumulation Units credited to
a Contract shall not be changed by any subsequent change in the value of an
Accumulation Unit, but the dollar value of an Accumulation Unit may vary from
Valuation Date to Valuation Date depending upon the investment experience of the
Subaccount and charges against the Subaccount.
The Accumulation Unit value of each Subaccount's unit initially was $10.
The unit value of a Subaccount on any Valuation Date is calculated by dividing
the value of each Subaccount's net assets by the number of Accumulation Units
credited to the Subaccount on that date. Determination of the value of the net
assets of a Subaccount takes into account the following: (1) the investment
performance of the Subaccount, which is based upon the investment performance of
the corresponding Fund of the Mutual Fund, (2) any dividends or distributions
paid by the corresponding Fund, (3) the charges, if any, that may be assessed by
Security Benefit for taxes attributable to the operation of the Subaccount, (4)
the mortality and expense risk charge under the Contract, and (5) the
administrative charge under the Contract.
FULL AND PARTIAL WITHDRAWALS
A Contractowner may obtain proceeds from a Contract by surrendering the
Contract for its Full Withdrawal Value or by making a partial withdrawal. A full
or partial withdrawal, including a systematic withdrawal, may be taken from the
Contract Value at any time while the Owner is living and before the Annuity
Start Date, subject to the limitations under the applicable plan for Qualified
Plans and applicable law. A full or partial withdrawal request will be effective
as of the end of the Valuation Period that a proper written request is received
by Security Benefit at its Home Office. A proper written request must include
the written consent of any effective assignee or irrevocable Beneficiary, if
applicable.
The proceeds received upon a full withdrawal will be the Contract's Full
Withdrawal Value. The Full Withdrawal Value is equal to the Contract Value as of
the end of the Valuation Period during which a proper withdrawal request is
received by Security Benefit at its Home Office, less any maintenance fee, any
applicable contingent deferred sales charge, and any outstanding Contract Debt.
A partial withdrawal may be requested for a specified percentage or dollar
amount of Contract Value. Each partial withdrawal must be for at least $500
except systematic withdrawals discussed below. A request for a partial
withdrawal will result in a payment by Security Benefit in accordance with the
amount specified in the partial withdrawal request. Upon payment, the Contract
Value will be reduced by an amount equal to the payment and any applicable
contingent deferred sales charge, and any applicable premium tax. If a partial
withdrawal is requested that would leave the Full Withdrawal Value in the
Contract less than $2,000, then Security Benefit reserves the right to treat the
partial withdrawal as a request for a full withdrawal.
The amount of a partial withdrawal will be allocated from the Contract
Value in the Subaccounts and the Fixed Account, according to the Contractowner's
instructions to Security Benefit. If a Contractowner does not specify the
allocation, the withdrawal will be allocated from the Contract Value in the
Subaccounts and the Fixed Account in the following order: Prime Obligations
Subaccount, Bond Subaccount, Equity Subaccount, International Discovery
Subaccount and Small Capitalization Subaccount and then from the Fixed Account.
The value of each Account will be depleted before the next account is charged. A
full or partial withdrawal from an Individual Contract, including a systematic
withdrawal, may result in the deduction of a contingent deferred sales charge.
See "Contingent Deferred Sales Charge," on page 18.
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A full or partial withdrawal, including a systematic withdrawal, may be
subject to a premium tax charge to reimburse Security Benefit for any tax on
premiums on a Contract that may be imposed by various states and municipalities.
See "Premium Tax Charge," on page 20.
A full or partial withdrawal, including a systematic withdrawal, may result
in receipt of taxable income to the Owner and, in some instances, in a penalty
tax. In the case of Contracts issued in connection with retirement plans that
meet the requirements of Section 401(a), 403(b), 408 or 457 of the Internal
Revenue Code, reference should be made to the terms of the particular Qualified
Plan for any limitations or restrictions on withdrawals. For more information,
see "Restrictions on Withdrawals from Qualified Plans" and "Restrictions on
Withdrawals from 403(b) Programs" on page 24. The tax consequences of a
withdrawal under the Contract should be carefully considered, including the 10
percent penalty tax that may be imposed on withdrawals (including systematic
withdrawals) made prior to the Owner attaining age 59 1/2. See "Federal Tax
Matters" on page 25.
SYSTEMATIC WITHDRAWALS
Security Benefit currently offers a feature under which systematic
withdrawals may be elected. Under this feature, a Contractowner may elect to
receive systematic withdrawals before the Annuity Start Date by sending a
properly completed Systematic Withdrawal Request form to Security Benefit at its
Home Office. If a Contractowner so elects in the application, systematic
withdrawals may be started immediately. If not so elected, systematic
withdrawals will be available after the third annual Contract anniversary. A
Contractowner may designate the systematic withdrawal amount as a percentage of
Contract Value allocated to the Subaccounts and/or Fixed Account, as a specified
dollar amount, as all earnings in the Contract, or as based upon the life
expectancy of the Owner or the Owner and a Beneficiary, and the desired
frequency of the systematic withdrawals, which may be monthly, quarterly,
semiannually or annually. Systematic withdrawals may be stopped or modified upon
proper written request by the Contractowner received by Security Benefit at its
Home Office at least 30 days in advance. A proper request must include the
written consent of any effective assignee or irrevocable Beneficiary, if
applicable.
Each systematic withdrawal must be at least $50. Upon payment, the
Contractowner's Contract Value will be reduced by an amount equal to the payment
proceeds plus any applicable contingent deferred sales charge and any applicable
premium tax. Systematic withdrawals may be made without the imposition of a
contingent deferred sales charge to the extent that the total amount of such
withdrawals during any Contract Year does not exceed 10 percent of the Contract
Value, less any Contract Debt, on the date of the first such withdrawal in that
Contract Year. Systematic withdrawals in excess of this amount will be subject
to the contingent deferred sales charge. Systematic withdrawals without the
imposition of a contingent deferred sales charge are not available in any
Contract Year in which the Free Withdrawal Privilege, discussed below, is
exercised. Any systematic withdrawal that equals or exceeds the Full Withdrawal
Value will be treated as a full withdrawal. In no event will payment of a
systematic withdrawal exceed the Full Withdrawal Value less any applicable
premium tax. The Contract will automatically terminate if a systematic
withdrawal causes the Contract's Full Withdrawal Value to equal zero.
Each systematic withdrawal will be effected as of the end of the Valuation
Period during which the withdrawal is scheduled. The deduction caused by the
systematic withdrawal will be allocated from the Contractowner's Contract Value
in the Subaccounts and the Fixed Account, as directed by the Contractowner.
Security Benefit may, at any time, change the minimum amount for any
systematic withdrawals, impose or increase minimum remaining balances, limit the
number and frequency of requests for modifying systematic withdrawals and impose
a charge on systematic withdrawals.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a ten-day period beginning when the Owner receives the Contract. The
returned Contract will then be deemed void and Security Benefit will refund any
purchase payments allocated to the Fixed Account plus the Contract Value in the
Subaccounts plus any charges deducted from the Subaccounts and premium taxes, if
any. Security Benefit will refund purchase payments allocated to the Subaccounts
rather than Contract Value in those states that require it to do so.
DEATH BENEFIT
If the Owner dies during the Accumulation Period, Security Benefit will pay
the death benefit proceeds to the Designated Beneficiary upon receipt, within
six months of the date of the Owner's death, of due proof of death and
instructions regarding payment to the Designated Beneficiary. If there are Joint
Owners, the death benefit proceeds will be payable upon receipt of due proof of
death of either Owner during the Accumulation Period and instructions regarding
payment. If the Owner is not a natural person, the death benefit proceeds will
be payable upon receipt of due proof of death of the Annuitant during the
Accumulation Period and instructions regarding payment. If the death of the
Owner occurs on or after the Annuity Start Date, no death benefit proceeds will
be payable under the Contract, except that any guaranteed payments remaining
unpaid will continue to be paid to the Annuitant pursuant to the Annuity Option
in force at the date of death.
If the age of each Owner was 75 or younger on the date the Contract was
issued, the death benefit will be the greater of (a) the aggregate purchase
payments, less any reductions caused by previous withdrawals and any premium
tax, (b) the Contract Value on the date due proof of death is received by
Security Benefit at its Home Office, less any
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premium tax, or (c) the stepped-up death benefit. The stepped-up death
benefit is: (a) the largest death benefit on any Contract anniversary that is
both an exact multiple of seven and occurs prior to the oldest Owner attaining
age 76, plus (b) any purchase payments made since the applicable seventh year
anniversary, and (c) less any reductions caused by previous withdrawals since
the applicable seventh year anniversary and less premium taxes.
If the age of any Owner was 76 or greater on the date the Contract was
issued, or if due proof of death and instructions regarding payment are not
received by Security Benefit at its Home Office within six months of the date of
the Owner's death, the death benefit will be the full withdrawal value. In
Florida, the Contract is not available for issue if any Owner would be 76 or
greater on the date of issue.
The death benefit proceeds will be paid to the Designated Beneficiary in a
single sum or under one of the Annuity Options, as directed by the Owner or as
elected by the Designated Beneficiary. If the Designated Beneficiary is to
receive annuity payments under an Annuity Option, there may be limits under
applicable law on the amount and duration of payments that the Beneficiary may
receive, and requirements respecting timing of payments. A tax adviser should be
consulted in considering Annuity Options.
For Contracts issued in connection with Non-Qualified Plans, if the
surviving spouse of the deceased Owner is the sole Designated Beneficiary, such
spouse may continue this Contract in force until the earliest of the spouse's
death or the Annuity Start Date. For any Designated Beneficiary other than a
surviving spouse, only those options may be chosen that provide for complete
distribution of such Owner's interest in the Contract within five years of the
death of the Owner, or if the Designated Beneficiary is a natural person, that
person can elect to begin receiving annuity payments within one year of the
Owner's death over a period not extending beyond his or her life or life
expectancy. If the Owner of the Contract is not a natural person, these
distribution rules are applicable upon the death of or a change in the primary
Annuitant.
For Contracts issued in connection with Qualified Plans, the terms of the
particular Qualified Plan and the Internal Revenue Code should be reviewed with
respect to limitations or restrictions on distributions following the death of
the Owner or Annuitant. Because the rules applicable to Qualified Plans are
extremely complex, a competent tax adviser should be consulted.
If the Annuitant dies prior to the Annuity Start Date, and the Owner is a
natural person and is not the Annuitant, no death benefit proceeds will be
payable under the Contract. The Owner may name a new Annuitant within 30 days of
the Annuitant's death or if a new Annuitant is not named, Security Benefit will
designate the Owner as Annuitant. On the death of the Annuitant after the
Annuity Start Date, any guaranteed payments remaining unpaid will continue to be
paid to the Designated Beneficiary pursuant to the Annuity Option in force at
the date of death. See "Federal Tax Matters," on page 25 for a discussion of the
tax consequences in the event of death.
CHARGES AND DEDUCTIONS
CONTINGENT DEFERRED SALES CHARGE
Security Benefit does not make any deduction for sales charges from
purchase payments paid for an Individual Contract before allocating them to a
Contractowner's Contract Value. However, except as set forth below, a contingent
deferred sales charge (which may also be referred to as a withdrawal charge),
may be assessed by Security Benefit on a full or partial withdrawal from an
Individual Contract, to the extent the amount withdrawn is attributable to
purchase payments made, depending upon the amount of time such withdrawal
amounts have been held under the Individual Contract. During the first Contract
Year, the withdrawal charge applies against the total amount withdrawn
attributable to total purchase payments made. Each Contract Year thereafter, a
withdrawal charge will not be assessed upon the first withdrawal in the Contract
Year of up to 10 percent of the Contract Value, less any Contract Debt, as of
the date of the withdrawal (the "Free Withdrawal Privilege"). If a full or
partial withdrawal in excess of this 10 percent allowable amount is made, a
withdrawal charge may be assessed on the amount withdrawn in excess of the 10
percent allowable amount. If a second or subsequent withdrawal, including a
systematic withdrawal, is made in the same Contract Year, a withdrawal charge
may be assessed on the entire amount withdrawn.
For purposes of the charge, a withdrawal will be attributed first to
purchase payments in the order they were received by Security Benefit and then
will be attributed to earnings, even if the Contractowner elects to redeem
amounts allocated to an Account (including the Fixed Account) other than an
Account to which purchase payments were allocated. The amount of the charge will
depend upon the number of years that the purchase payments to which the
withdrawal is attributed have remained credited under the Contract, as follows:
AGE OF PURCHASE WITHDRAWAL
PAYMENT IN YEARS CHARGE
1.................................. 5%
2.................................. 5%
3.................................. 5%
4.................................. 5%
5.................................. 4%
6.................................. 3%
7.................................. 2%
8.................................. 0%
For purposes of determining the age of the purchase payment, the purchase
payment is considered age 1 in the year beginning on the date the purchase
payment is received by Security Benefit and increases in age each year
thereafter. In no event will the amount of any withdrawal
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charge, when added to any such charge previously assessed against any amount
withdrawn from the Contract, exceed 5 percent of the purchase payments paid
under a Contract. In addition, no charge will be imposed (1) upon payment of
death benefit proceeds under the Contract (except Contracts for which the issue
age of any Owner is older than age 75 or for which due proof of death and
instructions regarding payment are not received within six months of the date of
death), (2) upon total and permanent disability prior to age 65, or (3) upon
annuitization. In addition, systematic withdrawals from the Contracts may be
made without the imposition of the withdrawal charge, to the extent that the
total amount of such systematic withdrawals during any Contract Year does not
exceed 10 percent of the Contract Value, less any Contract Debt, on the date of
the first such withdrawal in that Contract Year. If a partial withdrawal and a
systematic withdrawal are taken in the same Contract Year, the Free Withdrawal
Privilege will apply to the partial withdrawal only if it occurs earlier than
the first systematic withdrawal in that Contract Year. The withdrawal charge
will be assessed against the Subaccounts and Fixed Account in the same
proportion as the withdrawal proceeds are allocated.
The contingent deferred sales charge will be used to recover certain
expenses relating to sales of the Contracts, including commissions and other
promotional costs. The amount derived by Security Benefit from the contingent
deferred sales charge is not expected to be sufficient to cover the promotional
expenses in connection with the Contracts. To the extent that all promotional
expenses are not recovered from the charge, such expenses may be recovered from
other charges, including amounts derived indirectly from the charge for
mortality and expense risks.
Security Benefit does not make any deduction for sales charges from
purchase payments paid for a Trust Contract before allocating them under such a
Contract, and no contingent deferred sales charge is assessed by Security
Benefit on a full or partial withdrawal from a Trust Contract.
MORTALITY AND EXPENSE RISK CHARGE
Security Benefit deducts a daily charge from the assets of each Subaccount
for mortality and expense risks assumed by Security Benefit under the Contracts.
The charge under the Individual Contracts is equal to an annual rate of 1.25
percent of each Subaccount's average daily net assets that fund the Individual
Contracts. This amount is intended to compensate Security Benefit for certain
mortality and expense risks Security Benefit assumes in offering and
administering the Individual Contracts and in operating the Subaccounts. The
1.25 percent charge consists of approximately .65 percent for expense risk and
.60 percent for mortality risk.
The mortality and expense risk charge under the Trust Contracts is equal to
an annual rate of .65 percent of each Subaccount's average daily net assets that
fund the Trust Contracts. This amount is intended to compensate Security Benefit
for certain mortality and expense risks Security Benefit assumes in offering and
administering the Trust Contracts and in operating the Separate Account. The .65
percent charge consists of approximately .05 percent for expense risk and .60
percent for mortality risk.
The expense risk is the risk that Security Benefit's actual expenses in
issuing and administering the Contracts and operating the Subaccounts will be
more than the charges assessed for such expenses. The mortality risk borne by
Security Benefit is the risk that Annuitants, as a group, will live longer than
Security Benefit's actuarial tables predict. In this event, Security Benefit
guarantees that annuity payments will not be affected by a change in mortality
experience that results in the payment of greater annuity income than assumed
under the Annuity Options in the Contract. Security Benefit also assumes a
mortality risk in connection with the death benefit under the Contract.
Security Benefit may ultimately realize a profit from this charge to the
extent it is not needed to cover mortality and administrative expenses, but
Security Benefit may 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 any promotional expenses not covered by the contingent
deferred sales charge.
ADMINISTRATIVE CHARGE
Security Benefit deducts a daily administrative charge equal to an annual
rate of .15 percent of each Subaccount's average daily net assets that fund the
Individual Contracts. For the Trust Contracts, the charge is equal to an annual
rate of .05 percent of each Subaccount's average daily net assets that fund the
Trust Contracts. The purpose of this charge is to reimburse Security Benefit for
the expenses associated with administration of the Contracts and operation of
the Subaccounts. Security Benefit does not expect to profit from this charge.
MAINTENANCE FEE
An annual fee of $30 is deducted on each Contract anniversary to cover the
costs of maintaining records for the Individual Contracts. The fee will be
deducted from the Contract Value in the Subaccounts and the Fixed Account in the
following order: Prime Obligations Subaccount, Bond Subaccount, Equity
Subaccount, International Discovery Subaccount and Small Capitalization
Subaccount and then from the Fixed Account. The Contract Value of each Account
will be depleted before the next is charged. This charge is not deducted after
the Annuity Start Date if one of the first four Annuity Options is elected, nor
in connection with the Trust Contracts. Upon annuitization under one of Annuity
Options 1 through 4 or a full withdrawal, the charge will be prorated for the
portion of the Contract Year prior to the Annuity Start Date or during which the
Contract was in force. Security Benefit does not expect to profit from this
charge.
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PREMIUM TAX CHARGE
Various states and municipalities impose a tax on premiums on annuity
contracts received by insurance companies. Whether or not a premium tax is
imposed will depend upon, among other things, the Owner's state of residence,
the Annuitant's state of residence, and the insurance tax laws and Security
Benefit's status in a particular state. Security Benefit assesses a premium tax
charge to reimburse itself for premium taxes that it incurs in connection with a
Contract. This charge will be deducted upon annuitization, upon full or partial
withdrawal, or upon payment of the death benefit, if premium taxes are incurred
at that time and are not refundable. Security Benefit reserves the right to
deduct premium taxes when due or any time thereafter. Premium tax rates
currently range from 0 percent to 3.5 percent, but are subject to change by a
governmental entity.
OTHER CHARGES
Security Benefit may charge the Separate Account or the Subaccounts for the
federal, state, or local taxes incurred by Security Benefit that are
attributable to the Separate Account or the Subaccounts, or to the operations of
Security Benefit with respect to the Contracts, or that are attributable to
payment of premiums or acquisition costs under the Contracts. No such charge is
currently assessed. See "Tax Status of Security Benefit and the Separate
Account" and "Charge for Security Benefit Taxes," page 25.
VARIATIONS IN CHARGES
Security Benefit may reduce or waive the amount of the contingent deferred
sales charge, administrative charge, and Contract maintenance fee for a Contract
where the expenses associated with the sale of the Contract or the
administrative and maintenance costs associated with the Contract are reduced
for reasons such as the amount of the initial purchase payment, the amounts of
projected purchase payments, or that the Contract is sold in connection with a
group or sponsored arrangement. Security Benefit may also reduce or waive the
contingent deferred sales charge, administrative charge, and maintenance fee on
Contracts sold to the directors or employees (and certain members of their
families) of Security Benefit, First of America, or any of their respective
affiliates or to trustees of the Mutual Fund. Security Benefit will only reduce
or waive such charges and fees where expenses associated with the sale of the
Contract or the costs associated with administering and maintaining the Contract
are reduced.
GUARANTEE OF CERTAIN CHARGES
Security Benefit guarantees that the charge for mortality and expense risks
will not exceed an annual rate of 1.25 percent under the Individual Contracts
and .65 percent under the Trust Contracts, the annual maintenance fee deducted
from the Individual Contracts shall not exceed $30, and the administrative
charge shall not exceed an annual rate of .15 percent under the Individual
Contracts or .05 percent under the Trust Contracts.
MUTUAL FUND EXPENSES
Each Subaccount of the Separate Account purchases shares at the net asset
value of the corresponding Fund of the Mutual Fund. Each Fund's net asset value
reflects the investment advisory fee and other expenses that are deducted from
the assets of the Fund. The advisory fees and other expenses are more fully
described in the Mutual Fund's prospectus.
ANNUITY PERIOD
GENERAL
The Contractowner selects the Annuity Start Date at the time of
application. The Annuity Start Date may not be prior to the third annual
Contract anniversary and may not be deferred beyond the later of the Annuitant's
85th birthday or the tenth annual Contract anniversary, although the terms of a
Qualified Plan may require annuitization at an earlier age. If the Contractowner
does not select an Annuity Start Date, the Annuity Start Date will be the
Annuitant's 65th birthday. See "Selection of an Option," on page 21. If there
are Joint Annuitants, the birthdate of the older Annuitant will be used to
determine the latest Annuity Start Date.
On the Annuity Start Date, the proceeds under the Contract will be applied
to provide an annuity under one of the options described below. Each option is
available in two forms--either as a variable annuity for use with the
Subaccounts or as a fixed annuity for use with the Fixed Account. A combination
variable and fixed annuity is also available. Variable annuity payments will
fluctuate with the investment performance of the applicable Subaccounts while
fixed annuity payments will not. Unless the Owner directs otherwise, proceeds
derived from Contract Value allocated to the Subaccounts will be applied to
purchase a variable annuity and proceeds derived from Contract Value allocated
to the Fixed Account will be applied to purchase a fixed annuity. The proceeds
under the Contract will be equal to the Contractowner's Contract Value in the
Subaccounts and the Fixed Account as of the Annuity Start Date, reduced by any
applicable premium taxes, any prorated portion of maintenance fee due, and any
outstanding Contract Debt. If at the time an Annuity Option is elected, any
withdrawals from the Contract would be subject to a withdrawal charge, then the
Annuity Option elected must be for a period of seven years or longer.
The Contracts provide for six optional annuity forms. Other Annuity Options
may be available upon request at the discretion of Security Benefit. Annuity
payments are based upon annuity rates that vary with the Annuity Option
selected. In the case of Options 1, 2, 3, and 4, the rates will vary based on
the age and sex of the Annuitant, except that unisex rates are available where
required by law. In the case of Options 5 and 6 as described below, age and sex
are not considerations. The annuity rates are based upon an
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assumed interest rate of 3.5 percent, compounded annually. If no Annuity Option
has been selected, annuity payments will be made to the Annuitant under an
automatic option which shall be an annuity payable during the lifetime of the
Annuitant with payments guaranteed to be made for 120 months under Option 2.
Annuity payments can be made on a monthly, quarterly, semiannual, or annual
basis, although no payments will be made for less than $50. If the frequency of
payments selected would result in payments of less than $50, Security Benefit
reserves the right to change the frequency.
An Owner may designate or change an Annuity Start Date, Annuity Option, and
Annuitant, provided proper written notice is received by Security Benefit at its
Home Office at least 30 days prior to the Annuity Start Date set forth in the
Contract. The date selected as the new Annuity Start Date must be at least 30
days after the date written notice requesting a change of Annuity Start Date is
received at Security Benefit's Home Office.
Once annuity payments have commenced, an Annuitant or Owner cannot change
the Annuity Option and cannot surrender his or her annuity and receive a
lump-sum settlement in lieu thereof. The Contract contains annuity tables for
Annuity Options 1 through 4 described below. The tables show the dollar amount
of periodic annuity payments for each $1,000 applied to an Annuity Option.
ANNUITY OPTIONS
OPTION 1 - LIFE INCOME
Periodic annuity payments will be made during the lifetime of the
Annuitant. It is possible under this Option for any Annuitant to receive only
one annuity payment if the Annuitant's death occurred prior to the due date of
the second annuity payment, two if death occurred prior to the third annuity
payment due date, etc. THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER
THIS OPTION. PAYMENTS CEASE UPON THE DEATH OF THE ANNUITANT, REGARDLESS OF THE
NUMBER OF PAYMENTS RECEIVED.
OPTION 2 - LIFE INCOME WITH GUARANTEED PAYMENTS OF 5, 10, 15 OR 20 YEARS
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that if, at the death of the Annuitant, payments have been made
for less than a stated period, which may be five, ten, fifteen or twenty years,
as elected, annuity payments will be continued during the remainder of such
period to the Designated Beneficiary.
OPTION 3 - LIFE WITH INSTALLMENT REFUND OPTION
Periodic annuity payments will be made during the lifetime of the Annuitant
with the promise that, if at the death of the Annuitant, the number of payments
that has been made is less than the number determined by dividing the amount
applied under this Option by the amount of the first payment, annuity payments
will be continued to the Designated Beneficiary until that number of payments
has been made.
OPTION 4 - JOINT AND LAST SURVIVOR
Periodic annuity payments will be made during the lifetime of either
Annuitant. It is possible under this Option for only one annuity payment to be
made if both Annuitants died prior to the second annuity payment due date, two
if both died prior to the third annuity payment due date, etc. AS IN THE CASE OF
OPTION 1, THERE IS NO MINIMUM NUMBER OF PAYMENTS GUARANTEED UNDER THIS OPTION.
PAYMENTS CEASE UPON THE DEATH OF THE LAST SURVIVING ANNUITANT, REGARDLESS OF THE
NUMBER OF PAYMENTS RECEIVED.
OPTION 5 - PAYMENTS FOR A SPECIFIED PERIOD
Periodic annuity payments will be made for a fixed period, which may be
from five to twenty years, as elected, with the guarantee that, if, at the death
of all Annuitants, payments have been made for less than the selected fixed
period, the remaining unpaid payments will be paid to the Designated
Beneficiary.
OPTION 6 - PAYMENTS OF A SPECIFIED AMOUNT
Periodic payments of the amount elected will be made until the amount
applied and interest thereon are exhausted, with the guarantee that, if, at the
death of all Annuitants, all guaranteed payments have not yet been made, the
remaining unpaid payments will be paid to the Designated Beneficiary.
SELECTION OF AN OPTION
Contractowners should carefully review the Annuity Options with their
financial or tax advisers, and, for Contracts used in connection with a
Qualified Plan, reference should be made to the terms of the particular plan and
the requirements of the Internal Revenue Code for pertinent limitations
respecting annuity payments and other matters. For instance, Qualified Plans
generally require that annuity payments begin no later than April 1 of the
calendar year following the year in which the Annuitant reaches age 70 1/2. In
addition, under Qualified Plans, the period elected for receipt of annuity
payments under Annuity Options generally may be no longer than the joint life
expectancy of the Annuitant and Beneficiary in the year that the Annuitant
reaches age 70 1/2, and must be shorter than such joint life expectancy if the
Beneficiary is not the Annuitant's spouse and is more than ten years younger
than the Annuitant. For Non-Qualified Plans, SBL does not allow annuity payments
to be deferred beyond the later of the Annuitant's 85th birthday or the tenth
annual Contract anniversary.
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THE FIXED ACCOUNT
Contractowners may allocate all or a portion of their purchase payments and
transfer Contract Value to the Fixed Account. Amounts allocated to the Fixed
Account become part of Security Benefit's General Account, which supports
Security Benefit's insurance and annuity obligations. The General Account is
subject to regulation and supervision by the Kansas Department of Insurance as
well as the insurance laws and regulations of other jurisdictions in which the
Contract is distributed. In reliance on certain exemptive and exclusionary
provisions, interests in the Fixed Account have not been registered as
securities under the Securities Act of 1933 (the "1933 Act") and the Fixed
Account has not been registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act"). Accordingly, neither the Fixed Account nor
any interests therein are generally subject to the provisions of the 1933 Act or
the 1940 Act. Security Benefit has been advised that the staff of the SEC has
not reviewed the disclosure in this Prospectus relating to the Fixed Account.
This disclosure, however, may be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in the Prospectus. This Prospectus is generally
intended to serve as a disclosure document only for aspects of a Contract
involving the Separate Account and contains only selected information regarding
the Fixed Account. For more information regarding the Fixed Account, see "The
Contract" on page 13.
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.
INTEREST
Amounts allocated to the Fixed Account earn interest at a fixed rate or
rates that are paid by Security Benefit. The Contract Value in the Fixed Account
earns interest at an interest rate that is guaranteed to be at least an annual
effective rate of 3.5 percent which will accrue daily ("Guaranteed Rate"). Such
interest will be paid regardless of the actual investment experience of the
Fixed Account. In addition, Security Benefit may in its discretion pay interest
at a rate ("Current Rate") that exceeds the Guaranteed Rate. Security Benefit
will determine the Current Rate, if any, from time to time, and reserves the
right to change such rate at any time.
Contract Value that was 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 Contractowner's Contract 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 investment risk for
the Contract Value allocated to the Fixed Account and for paying interest at the
Guaranteed Rate on amounts allocated to the Fixed Account.
For purposes of determining the interest rates to be credited on Contract
Value in the Fixed Account, withdrawals, loans, or transfers from the Fixed
Account will be deemed to be taken from purchase payments or transfers in the
order in which they were credited to the Fixed Account, and interest
attributable to each such purchase payment or transfer shall be deemed taken
before the amount of each purchase payment or transfer.
DEATH BENEFIT
The death benefit under the Contract will be determined in the same fashion
for a Contract that has Contract Value in the Fixed Account as for a Contract
that has Contract Value allocated to the Subaccounts. See "Death Benefit," on
page 17.
CONTRACT CHARGES
The contingent deferred sales charge, the maintenance fee, and premium
taxes will be the same for Contractowners who allocate purchase payments or
transfer Contract Value to the Fixed Account as for those who allocate purchase
payments to the Subaccounts. The charges for mortality and expense risks and the
administrative charge will not be assessed against the Fixed Account, and any
amounts that Security Benefit pays for income taxes allocable to the Subaccounts
will not be charged against the Fixed Account. In addition, the investment
advisory fees and operating expenses paid by the Mutual Fund will not be paid
directly or indirectly by Contractowners to the extent the Contract Value is
allocated to the Fixed Account; however, such Contractowners will not
participate in the investment experience of the Subaccounts.
TRANSFERS AND WITHDRAWALS
Amounts may be transferred from the Subaccounts to the Fixed Account and
from the Fixed Account to the Subaccounts, subject to the following limitations.
During the Accumulation Period, a Contractowner may transfer from the Fixed
Account to the Subaccounts in any Contract Year not more than the greatest of
(1) $5,000, (2) one third of the amount invested in the Fixed Account at the
time of the first transfer in the Contract Year, or (3) 120 percent of the
amount transferred from the Fixed Account during the previous Contract Year.
Security Benefit reserves the right for a period of time to allow transfers from
the Fixed Account in amounts that exceed the limits set forth above ("Waiver
Period"). In any Contract Year following such a Waiver Period, the total dollar
amount that may be transferred from the Fixed Account is the greatest of: (1)
above; (2) above; or (3) 120 percent of the lesser of: (i) the dollar amount
transferred from the Fixed Account in the previous Contract Year; or (ii) the
maximum dollar
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amount that would have been allowed in the previous Contract year under the
transfer provisions above absent the Waiver Period.
The first 12 transfers in any calendar year are without charge; for any
additional transfers, a charge of $25 is imposed. The minimum transfer amount is
$500 or the amount remaining in the Fixed Account. Security Benefit reserves the
right to impose limitations on the number, amount and frequency of transfers in
the future.
The Contractowner may also make full and partial withdrawals to the same
extent as a Contractowner who has allocated Contract Value to the Subaccounts.
See "Full and Partial Withdrawals," page 16. In addition, to the same extent as
Contractowners with Contract Value in the Subaccounts, the Owner of a Contract
used in connection with a Qualified Plan may obtain a loan if so permitted under
the terms of such Qualified Plan. See "Loans," page 23.
PAYMENTS FROM THE FIXED ACCOUNT
Full and partial withdrawals, loans, and transfers from the Fixed Account
may be delayed for up to six months after a written request in proper form is
received by Security Benefit at its Home Office. During the period of deferral,
interest at the applicable interest rate or rates will continue to be credited
to the amounts allocated to the Fixed Account. However, payment of any amounts
will not be deferred if they are to be used to pay premiums on any policies or
contracts issued by Security Benefit.
MORE ABOUT THE CONTRACT
OWNERSHIP
The Contractowner is the individual named as such in the application or in
any later change shown in Security Benefit's records. While living, the
Contractowner alone has the right to receive all benefits and exercise all
rights that the Contract grants or Security Benefit allows.
JOINT OWNERS. The Joint Owners will be joint tenants with rights of
survivorship and upon the death of an Owner, the surviving Owner shall be the
sole Owner; however, the Designated Beneficiary shall have the right to the
death benefit payable upon the death of the Owner during the Accumulation
Period. Any Contract transaction requires the signature of all persons named
jointly.
DESIGNATION AND CHANGE OF BENEFICIARY
The Beneficiary is the individual named as such in the application or any
later change shown in Security Benefit's records. The Contractowner may change
the Beneficiary at any time while the Contract is in force by written request on
forms provided by Security Benefit and received by Security Benefit at its Home
Office. The change will not be binding on Security Benefit until it is received
and recorded at its Home Office. The change will be effective as of the date
this form is signed subject to any payments made or other actions taken by
Security Benefit before the change is received and recorded. A Contingent
Beneficiary may be designated. The Owner may designate a permanent Beneficiary
whose rights under the Contract cannot be changed without his or her consent.
Reference should be made to the terms of a particular Qualified Plan and
any applicable law for any restrictions or limitations on the designation of a
Beneficiary.
PARTICIPATING
The Contract 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.
PAYMENTS FROM THE SEPARATE ACCOUNT
Security Benefit will pay any full or partial withdrawal benefit or death
benefit proceeds from Contract Value allocated to the Subaccounts, and will
effect a transfer between Subaccounts or from a Subaccount to the Fixed Account
within seven days from the Valuation Date a proper request is received at
Security Benefit's Home Office. However, Security Benefit can postpone the
calculation or payment of such a payment or transfer of amounts from the
Subaccounts to the extent permitted under applicable law, which is currently
permissible only for any period: (a) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings, (b) during which
trading on the New York Stock Exchange is restricted as determined by the SEC,
(c) during which an emergency, as determined by the SEC, exists as a result of
which (i) disposal of securities held by the Separate Account is not reasonably
practicable, or (ii) it is not reasonably practicable to determine the value of
the assets of the Separate Account, or (d) for such other periods as the SEC may
by order permit for the protection of investors.
PROOF OF AGE AND SURVIVAL
Security Benefit may require proof of age or survival of any person on
whose life annuity payments depend.
MISSTATEMENTS
If the age or sex of an Annuitant or age of an Owner has been misstated,
the correct amount paid or payable by Security Benefit under the Contract shall
be such as the Contract Value would have provided for the correct age or sex
(unless unisex rates apply).
LOANS
An Owner of a Contract issued in connection with a retirement plan that is
qualified under Section 403(b) of the Internal Revenue Code may borrow money
from Security Benefit using his or her Contract Value as the only security for
the loan by submitting a proper written request to Security Benefit. A loan may
be taken while the Owner is living and prior to the Annuity Start Date. The
minimum loan that may be taken is $1,000. The maximum loan that can be taken is
generally equal to the lesser of: (1) $50,000
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reduced by the excess of: (a) the highest outstanding loan balance within the
preceding 12-month period ending on the day before the date the loan is made;
over (b) the outstanding loan balance on the date the loan is made; or (2)
50 percent of the Contract Value or $10,000, whichever is greater. However, an
amount may not be borrowed which exceeds the annuity's total value minus the
amount needed as security for the loan as described below. The Internal Revenue
Code requires aggregation of all loans made to an individual employee under a
single employer plan. However, since Security Benefit has no information
concerning outstanding loans with other providers, we will only use information
available under annuity contracts issued by us. In addition, reference should be
made to the terms of the particular Qualified Plan for any additional loan
restrictions.
When an eligible Contractowner takes a loan, Contract Value in an amount
equal to the loan amount is transferred from the Subaccounts and/or the Fixed
Account into an account called the "Loan Account." In addition, 10 percent of
the loaned amount will be held in the Fixed Account as security for the loan.
Amounts allocated to the Loan Account earn 3.5 percent, the minimum rate of
interest guaranteed under the Fixed Account. Amounts acting as security for the
loan in the Fixed Account will earn the Current Rate.
Interest will be charged for the loan and will accrue on the loan balance
from the effective date of any loan. The loan interest rate will be 5.50
percent. Because the Contract Value maintained in the Loan Account will always
be equal in amount to the outstanding loan balance, the net cost of a loan is 2
percent.
Loans must be repaid within five years, unless Security Benefit determines
that the loan is to be used to acquire a principal residence of the Owner, in
which case the loan must be repaid within 30 years. Loan payments must be made
at least quarterly and may be prepaid at any time. Upon receipt of a loan
payment, Security Benefit will transfer Contract Value from the Loan Account to
the Fixed Account and/or the Subaccounts according to the Contractowner's
current instructions with respect to purchase payments in an amount equal to the
amount by which the payment reduces the amount of the loan outstanding. The
amount held as security for the loan will also be reduced by each loan payment
so that the security is again equal to 10 percent of the outstanding loan
balance immediately after the loan payment is made. However, amounts which are
no longer needed as security for the loan will not automatically be allocated
back among the Fixed Account and/or Subaccounts in accordance with the
Contractowner's purchase payment instructions.
If any required loan payment is not made, within 30 days of the due date
for loans with a monthly repayment schedule or within 90 days of the due date
for loans with a quarterly repayment schedule, the TOTAL OUTSTANDING LOAN
BALANCE will be deemed to be in default, and the entire loan balance, with any
accrued interest, will be reported as income to the Internal Revenue Service
("IRS"). Once a loan has gone into default, regularly scheduled payments will
not be accepted, and no new loans will be allowed while a loan is in default.
Interest will continue to accrue on a loan in default and if such interest is
not paid by December 31st of each year, it will be added to the outstanding
balance of the loan and will be reported to the IRS. Contract Value equal to the
amount of the accrued interest will be transferred to the Loan Account. If a
loan continues to be in default, the total outstanding balance will be deducted
from Contract Value upon the Contractowner's attaining age 59 1/2. The Contract
will be automatically terminated if the outstanding loan balance on a loan in
default equals or exceeds the amount for which the Contract may be surrendered,
plus any withdrawal charge. The proceeds from the Contract will be used to repay
the debt and any applicable withdrawal charge. Because of the adverse tax
consequences associated with defaulting on a loan, a Contractowner should
carefully consider his or her ability to repay the loan and should consult with
a tax adviser before requesting a loan.
RESTRICTIONS ON WITHDRAWALS FROM QUALIFIED PLANS
Generally, a Qualified Plan may not provide for the distribution or
withdrawal of amounts accumulated under such Qualified Plan until after a fixed
number of years, the attainment of a stated age or upon the occurrence of a
specific event such as hardship, disability, retirement, death or termination of
employment. Therefore, the Owner of a Contract purchased in connection with a
Qualified Plan may not be entitled to make a full or partial withdrawal, as
described in this Prospectus, unless one of the above-described conditions has
been satisfied. For this reason reference should be made to the terms of the
particular Qualified Plan, the Internal Revenue Code and other applicable law
for any limitation or restriction on distributions and withdrawals, including
the 10 percent penalty tax that may be imposed in the event of a distribution
from a Qualified Plan before the participant reaches age 59 1/2. See the
discussion under "Tax Penalties" on page 30.
The distribution or withdrawal of amounts under a Contract purchased in
connection with a Qualified Plan may result in the receipt of taxable income to
the Owner or Annuitant and in some instances may also result in a penalty tax.
Therefore, the tax consequences of a distribution or withdrawal under a Contract
should be carefully considered and a competent tax adviser should be consulted.
See "Federal Tax Matters" below.
RESTRICTIONS ON WITHDRAWALS FROM 403(B) PROGRAMS
Section 403(b) of the Internal Revenue Code permits public school employees
and employees of certain types of charitable, educational, and scientific
organizations specified in Section 501(c)(3) of the Internal Revenue Code to
purchase annuity contracts, and, subject to certain limitations, to exclude the
amount of purchase payments from gross income for tax purposes. Section 403(b)
imposes
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restrictions on certain distributions from tax-sheltered annuity contracts
meeting the requirements of Section 403(b) that apply to tax years beginning on
or after January 1, 1989.
Section 403(b) requires that distributions from Section 403(b)
tax-sheltered annuities that are attributable to employee contributions made
after December 31, 1988 under a salary reduction agreement begin only after the
employee reaches age 59 1/2, separates from service, dies, becomes disabled, or
incurs a hardship. Furthermore, distributions of gains attributable to such
contributions accrued after December 31, 1988 may not be made on account of
hardship. Hardship, for this purpose, is generally defined as an immediate and
heavy financial need, such as paying for medical expenses, the purchase of a
residence, or paying certain tuition expenses, that may only be met by the
distribution.
An Owner of a Contract purchased as a tax-sheltered Section 403(b) annuity
contract will not, therefore, be entitled to make a full or partial withdrawal,
as described in this Prospectus, in order to receive proceeds from the Contract
attributable to contributions under a salary reduction agreement or any gains
credited to such Contract after December 31, 1988 unless one of the
above-described conditions has been satisfied. In the case of transfers of
amounts accumulated in a different Section 403(b) contract to this Contract
under a Section 403(b) program, the withdrawal constraints described above would
not apply to the amount transferred to the Contract attributable to the Owner's
December 31, 1988 account balance under the old contract, provided the amounts
transferred between contracts qualified as a tax-free exchange under the
Internal Revenue Code. An Owner of a Contract may be able to transfer the
Contract's Full Withdrawal Value to certain other investment alternatives
meeting the requirements of Section 403(b) that are available under an
employer's Section 403(b) arrangement.
Pursuant to Revenue Ruling 90-24, a direct transfer between issuers of an
amount representing all or part of an individual's interest in a Section 403(b)
annuity or custodial account is not a distribution subject to tax or to
premature distribution penalty, provided the funds transferred continue after
the transfer to be subject to distribution requirements at least as strict as
those applicable to them before the transfer.
FEDERAL TAX MATTERS
INTRODUCTION
The Contract described in this Prospectus is designed for use by
individuals in retirement plans which may or may not be Qualified Plans under
the provisions of the Internal Revenue Code ("Code"). The ultimate effect of
federal income taxes on the amounts held under a Contract, on annuity payments,
and on the economic benefits to the Owner, the Annuitant, and the Beneficiary or
other payee will depend upon the type of retirement plan, if any, for which the
Contract is purchased, the tax and employment status of the individuals involved
and a number of other factors. The discussion contained herein and in the
Statement of Additional Information is general in nature. It is based upon
Security Benefit's understanding of the present federal income tax laws as
currently interpreted by the Internal Revenue Service ("IRS"), and is not
intended as tax advice. No representation is made regarding the likelihood of
continuation of the present federal income tax laws or of the current
interpretations by the IRS or the courts. Future legislation may affect annuity
contracts adversely. Moreover, no attempt has been made to consider any
applicable state or other laws. 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 and, if applicable, the Qualified Plan,
any person contemplating the purchase of a Contract, contemplating selection of
an Annuity Option under a Contract, or receiving annuity payments under a
Contract should consult a qualified tax adviser. SECURITY BENEFIT DOES NOT MAKE
ANY GUARANTEE REGARDING THE TAX STATUS OF, OR TAX CONSEQUENCES ARISING FROM, ANY
CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACTS.
TAX STATUS OF SECURITY BENEFIT AND THE SEPARATE ACCOUNT
GENERAL
Security Benefit is taxed as a life insurance company under Part I,
Subchapter L of the Code. Because the Separate Account is not taxed as a
separate entity and its operations form a part of Security Benefit, Security
Benefit will be responsible for any federal income taxes that become payable
with respect to the income of the Separate Account. However, each Subaccount
will bear its allocable share of such liabilities. Under current law, no item of
dividend income, interest income, or realized capital gain of the Subaccounts
will be taxed to Security Benefit to the extent it is applied to increase
reserves under the Contracts.
Under the principles set forth in I.R.S. Revenue Ruling 81-225 and Section
817(h) of the Code and regulations thereunder, Security Benefit believes that
Security Benefit will be treated as the owner of the assets in the Separate
Account for federal income tax purposes.
The Separate Account will invest its assets in a mutual fund that is
intended to qualify as a regulated investment company under Part I, Subchapter M
of the Code. If the requirements of the Code are met, the Mutual Fund will not
be taxed on amounts distributed on a timely basis to the Separate Account.
CHARGE FOR SECURITY BENEFIT TAXES
A charge may be made for any federal taxes incurred by Security Benefit
that are attributable to the Separate Account, the Subaccounts or to the
operations of Security Benefit with respect to the Contract or attributable to
payments, premiums, or acquisition costs under the Contracts. Security Benefit
will review the question of a
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charge to the Separate Account, the Subaccounts or the Contracts for Security
Benefit's federal taxes periodically. Charges may become necessary if, among
other reasons, the tax treatment of Security Benefit or of income and expenses
under the Contracts 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 annuities 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 Separate Account or the
Subaccounts for such taxes, if any, attributable to the Separate Account or
Subaccounts.
DIVERSIFICATION STANDARDS
Each Fund of the Mutual Fund will be required to adhere to regulations
adopted by the Treasury Department pursuant to Section 817(h) of the Code
prescribing asset diversification requirements for investment companies whose
shares are sold to insurance company separate accounts funding variable
contracts. Pursuant to these regulations, on the last day of each calendar
quarter, no more than 55 percent of the total assets of a Fund may be
represented by any one investment, no more than 70 percent may be represented by
any two investments, no more than 80 percent may be represented by any three
investments, and no more than 90 percent may be represented by any four
investments. For purposes of Section 817(h), securities of a single issuer
generally are treated as one investment but obligations of the U.S. Treasury and
each U.S. Governmental agency or instrumentality generally are treated as
securities of separate issuers.
In connection with the issuance of the regulations governing
diversification under Section 817(h) of the Code, the Treasury Department
announced that it would issue future regulations or rulings addressing the
circumstances in which a variable Contractowner's control of the investment of a
separate account may cause the contractowner, rather than the insurance company,
to be treated as the owner of the assets held by the separate account. If the
variable contractowner is considered the owner of the securities underlying the
separate account, income and gains produced by those securities would be
included currently in the Contractowner's gross income.
It is not clear, at present, what these regulations or rulings would
provide. It is possible that when the regulations or rulings are issued, the
Contract may need to be modified in order to remain in compliance. Security
Benefit intends to make reasonable efforts to comply with any such regulations
or rulings to assure that the Contract continues to be treated as an annuity
contract for federal income tax purposes and reserves the right to make such
changes as it deems appropriate for that purpose.
TAXATION OF ANNUITIES IN GENERAL - NON-QUALIFIED PLANS
Section 72 of the Code governs taxation of annuities. In general, a
contractowner is not taxed on increases in value under an annuity contract until
some form of distribution is made under the contract. However, the increase in
value may be subject to tax currently under certain circumstances. See
"Contracts Owned by Non-Natural Persons" on page 27 and "Diversification
Standards" above.
1. Surrenders or Withdrawals Prior to the Annuity Start Date
Code Section 72 provides that amounts received upon a total or partial
withdrawal from a contract prior to the Annuity Start Date generally will be
treated as gross income to the extent that the cash value of the contract
(determined without regard to any surrender charge in the case of a partial
withdrawal) exceeds the "investment in the contract." The "investment in the
contract" is that portion, if any, of purchase payments paid under a contract
less any distributions received previously under the contract that are excluded
from the recipient's gross income. The taxable portion is taxed at ordinary
income tax rates. For purposes of this rule, a pledge or assignment of a
contract is treated as a payment received on account of a partial withdrawal of
a contract. Similarly, loans under a contract generally are treated as
distributions under the contract.
2. Surrenders or Withdrawals on or after the Annuity Start Date
Upon receipt of a lump-sum payment or an annuity payment under an annuity
contract, the receipt is taxed if the cash value of the contract exceeds the
investment in the contract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates.
For annuity payments, the taxable portion of each payment is determined by
using a formula known as the "exclusion ratio," which establishes the ratio that
the investment in the contract bears to the total expected amount of annuity
payments for the term of the contract. That ratio is then applied to each
payment to determine the non-taxable portion of the payment. That remaining
portion of each payment is taxed at ordinary income rates. Once the excludable
portion of annuity payments to date equals the investment in the contract, the
balance of the annuity payments will be fully taxable.
Withholding of federal income taxes on all distributions may be required
unless a recipient who is eligible elects not to have any amounts withheld and
properly notifies Security Benefit of that election.
3. Penalty Tax on Certain Surrenders and Withdrawals
With respect to amounts withdrawn or distributed before the taxpayer
reaches age 59 1/2, a penalty tax is imposed equal to 10 percent of the portion
of such amount which is includable in gross income. However, the penalty
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tax is not applicable to withdrawals: (i) made on or after the death of the
owner (or where the owner is not an individual, the death of the "primary
annuitant," who is defined as the individual the events in whose life are of
primary importance in affecting the timing and amount of the payout under the
contract); (ii) attributable to the taxpayer's becoming totally disabled within
the meaning of Code Section 72(m)(7); (iii) which are 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; (iv) from certain
qualified plans; (v) under a so-called qualified funding asset (as defined in
Code Section 130(d)); (vi) under an immediate annuity contract; or (vii) which
are purchased by an employer on termination of certain types of qualified plans
and which are held by the employer until the employee separates from service.
If the penalty tax does not apply to a surrender or withdrawal as a result
of the application of item (iii) above, and the series of payments are
subsequently modified (other than by reason of death or disability), the tax for
the first year in which the modification occurs will be increased by an amount
(determined by the regulations) equal to the tax that would have been imposed
but for item (iii) above, plus interest for the deferral period, if the
modification takes place (a) before the close of the period which is five years
from the date of the first payment and after the taxpayer attains age 59 1/2, or
(b) before the taxpayer reaches age 59 1/2.
ADDITIONAL CONSIDERATIONS
1. Distribution-at-Death Rules
In order to be treated as an annuity contract, a contract issued on or
after January 19, 1985, must provide the following two distribution rules: (a)
if the owner dies on or after the Annuity Start Date, and before the entire
interest in the contract has been distributed, the remainder of the owner's
interest will be distributed at least as quickly as the method in effect on the
owner's death; and (b) if the owner dies before the Annuity Start Date, the
entire interest in the contract must generally be distributed within five years
after the date of death, or, if payable to a designated beneficiary, must be
annuitized over the life of that designated beneficiary or over a period not
extending beyond the life expectancy of that beneficiary, commencing within one
year after the date of death of the owner. If the designated beneficiary is the
spouse of the owner, the contract (together with the deferral of tax on the
accrued and future income thereunder) may be continued in the name of the spouse
as owner.
Generally, for purposes of determining when distributions must begin under
the foregoing rules, where the owner is not an individual, the primary annuitant
is considered the owner. In that case, a change in the primary annuitant will be
treated as the death of the owner. Finally, in the case of joint owners, the
distribution-at-death rules will be applied by treating the death of the first
owner as the one to be taken into account in determining generally when
distributions must commence, unless the sole Designated Beneficiary is the
deceased owner's spouse.
2. Gift of Annuity Contracts
Generally, gifts of non-tax qualified contracts prior to the Annuity Start
Date will trigger tax on the gain on the contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10 percent
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
3. Contracts Owned by Non-Natural Persons
For contributions to annuity contracts after February 28, 1986, if the
contract is held by a non-natural person (for example, a corporation) the income
on that contract (generally the increase in net surrender value less the
purchase payments) is includable in taxable income each year. The rule does not
apply where the contract is acquired by the estate of a decedent, where the
contract is held by certain types of retirement plans, where the contract is a
qualified funding asset for structured settlements, where the contract is
purchased on behalf of an employee upon termination of a qualified plan, and in
the case of a so-called immediate annuity. An annuity contract held by a trust
or other entity as agent for a natural person is considered held by a natural
person.
4. Multiple Contract Rule
For contracts entered into on or after October 21, 1988, for purposes of
determining the amount of any distribution under Code Section 72(e) (amounts not
received as annuities) that is includable in gross income, all annuity contracts
issued by the same insurer to the same contractowner during any calendar year
are to be aggregated and treated as one contract. Thus, any amount received
under any such contract prior to the contract's Annuity Start Date, such as a
partial surrender, dividend, or loan, will be taxable (and possibly subject to
the 10 percent penalty tax) to the extent of the combined income in all such
contracts.
In addition, the Treasury Department has broad regulatory authority in
applying this provision to prevent avoidance of the purposes of this rule. It is
possible that, under this authority, the Treasury Department may apply this rule
to amounts that are paid as annuities (on and after the Annuity Start Date)
under annuity contracts issued by the same company to the same owner during any
calendar year. In this case, annuity payments could be fully taxable (and
possibly subject to the 10 percent penalty tax) to the extent
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of the combined income in all such contracts and regardless of whether any
amount would otherwise have been excluded from income because of the "exclusion
ratio" under the contract.
QUALIFIED PLANS
The Contract may be used with Qualified Plans that meet the requirements of
Section 401, 403(b), 408 or 457 of the Code. The tax rules applicable to
participants in such Qualified Plans vary according to the type of plan and the
terms and conditions of the plan itself. No attempt is made herein to provide
more than general information about the use of the Contract with the various
types of Qualified Plans. Contractowners, Annuitants, and Beneficiaries, are
cautioned that the rights of any person to any benefits under such Qualified
Plans may be subject to the terms and conditions of the plans themselves or
limited by applicable law, regardless of the terms and conditions of the
Contract issued in connection therewith. For example, Security Benefit may
accept beneficiary designations and payment instructions under the terms of the
Contract without regard to any spousal consents that may be required under the
Employee Retirement Income Security Act of 1974 (ERISA). Consequently, a
Contractowner's Beneficiary designation or elected payment option may not be
enforceable.
The amounts that may be contributed to Qualified Plans are subject to
limitations that vary depending on the type of Plan. In addition, early
distributions from most Qualified Plans may be subject to penalty taxes, or in
the case of distributions of amounts contributed under salary reduction
agreements, could cause the Plan to be disqualified. Furthermore, distributions
from most Qualified Plans are subject to certain minimum distribution rules.
Failure to comply with these rules could result in disqualification of the Plan
or subject the Owner or Annuitant to penalty taxes. As a result, the minimum
distribution rules may limit the availability of certain Annuity Options to
certain Annuitants and their beneficiaries.
The following are brief descriptions of the various types of Qualified
Plans and the use of the Contract therewith:
1. Section 401
Code Section 401 permits employers to establish various types of retirement
plans (e.g., pension, profit sharing and 401(k) plans) for their employees. For
this purpose, self-employed individuals (proprietors or partners operating a
trade or business) are treated as employees and therefore eligible to
participate in such plans. Retirement plans established in accordance with
Section 401 may permit the purchase of Contracts to provide benefits thereunder.
In order for a retirement plan to be "qualified" under Code Section 401, it
must: (i) meet certain minimum standards with respect to participation, coverage
and vesting; (ii) not discriminate in favor of "highly compensated" employees;
(iii) provide contributions or benefits that do not exceed certain limitations;
(iv) prohibit the use of plan assets for purposes other than the exclusive
benefit of the employees and their beneficiaries covered by the plan; (v)
provide for distributions that comply with certain minimum distribution
requirements; (vi) provide for certain spousal survivor benefits; and (vii)
comply with numerous other qualification requirements.
A retirement plan qualified under Code Section 401 may be funded by
employer contributions, employee contributions or a combination of both. Plan
participants are not subject to tax on employer contributions until such amounts
are actually distributed from the plan. Depending upon the terms of the
particular plan, employee contributions may be made on a pre-tax or after-tax
basis. In addition, plan participants are not taxed on plan earnings derived
from either employer or employee contributions until such earnings are
distributed.
Each employee's interest in a retirement plan qualified under Code Section
401 must generally be distributed or begin to be distributed not later than
April 1 of the calendar year following the later of the calendar year in which
the employee reaches age 70 1/2 or retires ("required beginning date"). Periodic
distributions must not extend beyond the life of the employee or the lives of
the employee and a designated beneficiary (or over a period extending beyond the
life expectancy of the employee or the joint life expectancy of the employee and
a designated beneficiary).
If an employee dies before reaching his or her required beginning date, the
employee's entire interest in the plan must generally be distributed within five
years of the employee's death. However, the five-year rule will be deemed
satisfied, if distributions begin before the close of the calendar year
following the employee's death to a designated beneficiary and are made over the
life of the beneficiary (or over a period not extending beyond the life
expectancy of the beneficiary). If the designated beneficiary is the employee's
surviving spouse, distributions may be delayed until the employee would have
reached age 70 1/2.
If an employee dies after reaching his or her required beginning date, the
employee's interest in the plan must generally be distributed at least as
rapidly as under the method of distribution in effect at the time of the
employee's death.
Annuity payments distributed from a retirement plan qualified under Code
Section 401 are taxable under Section 72 of the Code. Section 72 provides that
the portion of each payment attributable to contributions that were taxable to
the employee in the year made, if any, is excluded from gross income as a return
of the employee's investment. The portion so excluded is determined by dividing
the employee's investment in the plan by (1) the number of anticipated payments
determined under a table set forth in Section 72 of the Code or (2) in the case
of a contract calling for installment payments, the number of monthly annuity
payments under such contract. The portion of each payment in excess of the
exclusion amount is taxable as ordinary income. Once the employee's investment
has been recovered, the full annuity payment
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will be taxable. If the employee should die prior to recovering his entire
investment, the unrecovered investment will be allowed as a deduction on his
final return. If the employee made no contributions that were taxable when made,
the full amount of each annuity payment is taxable to him as ordinary income.
A "lump-sum" distribution from a retirement plan qualified under Code
Section 401 is eligible for favorable tax treatment. A "lump-sum" distribution
means the distribution within one taxable year of the balance to the credit of
the employee which becomes payable: (i) on account of the employee's death, (ii)
after the employee attains age 59 1/2, (iii) on account of the employee's
termination or employment (in the case of a common law employee only) or (iv)
after the employee has become disabled (in the case of a self-employed person
only).
As a general rule, a lump-sum distribution is fully taxable as ordinary
income except for an amount equal to the employee's investment, if any, which is
recovered tax-free. However, special five-year averaging may be available,
provided the employee has reached age 59 1/2 and has not previously elected to
use income averaging. Five-year averaging has been repealed effective in the
year 2000. Special ten-year averaging and capital-gains treatment may be
available to an employee who reached age 50 before 1986.
2. Section 403(b)
Code Section 403(b) permits public school employees and employees of
certain types of charitable, educational and scientific organizations specified
in Section 501(c)(3) of the Code to purchase annuity contracts, and, subject to
certain limitations, to exclude the amount of purchase payments from gross
income for tax purposes. The Contract may be purchased in connection with a
Section 403(b) annuity program. Section 403(b) annuities must generally be
provided under a plan which meets certain minimum participation, coverage, and
nondiscrimination requirements. Section 403(b) annuities are generally subject
to minimum distribution requirements similar to those applicable to retirement
plans qualified under Section 401 of the Code. See "Section 401" on page 28.
Amounts used to purchase Section 403(b) annuities generally are excludable
from the taxable income of the employee. As a result, all distributions from
such annuities are normally taxable in full as ordinary income to the employee.
3. Section 408
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to establish individual retirement programs through the purchase of
Individual Retirement Annuities ("IRAs"). The Contract may be purchased as an
IRA.
IRAs are subject to limitations on the amount that may be contributed, the
persons who may be eligible and on the time when distributions must commence.
Depending upon the circumstances of the individual, contributions to an IRA may
be made on a deductible or non-deductible basis. IRAs may not be transferred,
sold, assigned, discounted or pledged as collateral for a loan or other
obligation. The annual premium for an IRA may not be fixed and may not exceed
$2,000. Any refund of premium must be applied to the payment of future premiums
or the purchase of additional benefits.
Sale of the Contracts for use with IRAs may be subject to special
requirements imposed by the Internal Revenue Service. Purchasers of the
Contracts for such purposes will be provided with such supplementary information
as may be required by the Internal Revenue Service or other appropriate agency,
and will have the right to revoke the Contract under certain circumstances.See
the IRA Disclosure Statement that accompanies this Prospectus.
In general, IRAs are subject to minimum distribution requirements similar
to those applicable to retirement plans qualified under Section 401 of the Code;
however, the required beginning date for IRAs is generally the date that the
Contractowner reaches age 70 1/2 -- the Contract-owner's retirement date, if
any, will not affect his or her required beginning date. See "Section 401" on
page 28. Distributions from IRAs are generally taxed under Code Section 72.
Under these rules, a portion of each distribution may be excludable from income.
The amount excludable from the individual's income is the amount of the
distribution which bears the same ratio as the individual's nondeductible
contributions bears to the expected return under the IRA.
4. Section 457
Section 457 of the Code permits employees of state and local governments
and units and agencies of state and local governments as well as tax-exempt
organizations described in Section 501(c)(3) of the Code to defer a portion of
their compensation without paying current taxes, if those employees are
participants in an eligible deferred compensation plan. A Section 457 plan may
permit the purchase of Contracts to provide benefits thereunder.
Although a participant under a Section 457 plan may be permitted to direct
or choose methods of investment, in the case of a tax-exempt employer sponsor
all amounts deferred under the plan, and any income thereon, remain solely the
property of the employer and subject to the claims of its general creditors,
until paid to the participant. The assets of a Section 457 plan maintained by a
state or local government employer must be held in trust (or custodial account
or an annuity contract) for the exclusive benefit of plan participants, who will
be responsible for taxes upon distribution.
Section 457 plans are generally subject to minimum distribution
requirements similar to those applicable to
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retirement plans qualified under Section 401 of the Code. See "Section 401" on
page 28. Since under a Section 457 plan, contributions are generally excludable
from the taxable income of the employee, the full amount received will usually
be taxable as ordinary income when annuity payments commence or other distribu-
tions are made.
5. Tax Penalties
PREMATURE DISTRIBUTION TAX. Distributions from a Qualified Plan before the
participant reaches age 59 1/2 are generally subject to an additional tax equal
to 10 percent of the taxable portion of the distribution. The 10 percent penalty
tax does not apply to distributions: (i) made on or after the death of the
employee; (ii) attributable to the employee's disability; (iii) which are part
of a series of substantially equal periodic payments made (at least annually)
for the life (or life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and a designated beneficiary and which begin
after the employee terminates employment; (iv) made to an employee after
termination of employment after reaching age 55; (v) made to pay for certain
medical expenses; (vi) that are exempt withdrawals of an excess contribution;
(vii) that is rolled over or transferred in accordance with Code requirements;
or (viii) that is transferred pursuant to a decree of divorce or separate
maintenance or written instrument incident to such a decree.
The exception to the 10 percent penalty tax described in item (iv) above is
not applicable to IRAs. However, distributions from an IRA to unemployed
individuals can be made without application of the 10 percent tax to pay health
insurance premiums in certain cases. In addition, the 10 percent penalty tax is
generally not applicable to distributions from a Section 457 plan.
MINIMUM DISTRIBUTION TAX. If the amount distributed from a Qualified Plan
is less than the minimum required distribution for the year, the participant is
subject to a 50 percent tax on the amount that was not properly distributed.
EXCESS DISTRIBUTION TAX. If the aggregate distributions from all Qualified
Plans (other than Section 457 plans) with respect to an individual in a calendar
year exceed the greater of (i) $150,000, or (ii) $112,500, as indexed for
inflation ($160,000 for 1997), a penalty tax of 15 percent is generally imposed
(in addition to any ordinary income tax) on the excess portion of the
distribution. The 15 percent excise tax on excess distributions will not apply
to withdrawals during calendar years 1997, 1998, and 1999.
6. Withholding
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of ten or more years are generally
subject to voluntary income tax withholding. The amount withheld on such
periodic distributions is determined at the rate applicable to wages. The
recipient of a periodic distribution may generally elect not to have withholding
apply.
Nonperiodic distributions (e.g., lump sums and annuities or installment
payments of less than ten years) from a Qualified Plan (other than IRAs and
Section 457 plans) are generally subject to mandatory 20 percent income tax
withholding. However, no withholding is imposed if the distribution is
transferred directly to another eligible Qualified Plan. Nonperiodic
distributions from an IRA are subject to income tax withholding at a flat 10
percent rate. The recipient of such a distribution may elect not to have
withholding apply.
The above description of the federal income tax consequences of the
different types of Qualified Plans which may be funded by the Contract offered
by this Prospectus is only a brief summary and is not intended as tax advice.
The rules governing the provisions of Qualified Plans are extremely complex and
often difficult to comprehend. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have adverse tax
consequences. A prospective Contractowner considering adoption of a Qualified
Plan and purchase of a Contract in connection therewith should first consult a
qualified and competent tax adviser, with regard to the suitability of the
Contract as an investment vehicle for the Qualified Plan.
OTHER INFORMATION
VOTING OF MUTUAL FUND SHARES
Security Benefit is the legal owner of the shares of the Mutual Fund held
by the Subaccounts of the Separate Account. In accordance with its view of
present applicable law, Security Benefit will exercise voting rights
attributable to the shares of each Fund of the Mutual Fund held in the
Subaccounts at any regular and special meetings of the shareholders of the
Mutual Fund on matters requiring shareholder voting under the 1940 Act. Security
Benefit will exercise these voting rights based on instructions received from
persons having the voting interest in corresponding Subaccounts of the Separate
Account. However, if the 1940 Act 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
Mutual Fund in its own right, it may elect to do so.
The person having the voting interest under a Contract is the Owner. Unless
otherwise required by applicable law, the number of shares of a particular Fund
as to which voting instructions may be given to Security Benefit is determined
by dividing a Contractowner's Contract Value in a Subaccount on a particular
date by the net asset value per share of that Fund as of the same date.
Fractional votes will be counted. The number of votes as to which voting
instructions may be given will be determined as of the date coincident with the
date established by the Mutual Fund for determining shareholders eligible to
vote at the meeting of the Mutual Fund. If required by the SEC, Security Benefit
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reserves the right to determine in a different fashion the voting rights
attributable to the shares of the Mutual Fund. Voting instructions may be cast
in person or by proxy.
Trust Contracts may be purchased through the trust department of First of
America Bank - Michigan, N.A. (the "Bank") and the Bank, as trustee, will be the
legal owner of, and have the voting rights with respect to, such Contracts.
First of America Investment Corporation, the Mutual Fund's investment adviser,
is a wholly-owned subsidiary of the Bank. In the event of a vote of the Mutual
Fund shareholders on an issue involving the investment adviser, as for all other
issues, the Bank is required to vote in accordance with its fiduciary duty as
trustee.
Voting rights attributable to the Contractowner's Contract Value in a
Subaccount for which no timely voting instructions are received will be voted by
Security Benefit in the same proportion as the voting instructions that are
received in a timely manner for all Contracts participating in that Subaccount.
Security Benefit will also exercise the voting rights from assets in each
Subaccount that are not otherwise attributable to Contractowners, if any, in the
same proportion as the voting instructions that are received in a timely manner
for all Contracts participating in that Subaccount and generally will exercise
voting rights attributable to shares of the Funds of the Mutual Fund held in its
General Account, if any, in the same proportion as votes cast with respect to
shares of the Funds of the Mutual Fund held by the Separate Account and other
separate accounts of Security Benefit, in the aggregate.
SUBSTITUTION OF INVESTMENTS
Security Benefit reserves the right, subject to compliance with the law as
then in effect, to make additions to, deletions from, substitutions for, or
combinations of the securities that are held by the Separate Account or any
Subaccount or that the Separate Account or any Subaccount may purchase. If
shares of any or all of the Funds of the Mutual Fund should no longer be
available for investment, or if, in the judgment of Security Benefit management,
further investment in shares of any or all of the Funds of the Mutual Fund
should become inappropriate in view of the purposes of the Contract, Security
Benefit may substitute shares of another Fund of the Mutual Fund or of a
different fund for shares already purchased, or to be purchased in the future
under the Contract. Security Benefit may also purchase, through the Subaccount,
other securities for other classes or contracts, or permit a conversion between
classes of contracts on the basis of requests made by Owners.
In connection with a substitution of any shares attributable to an Owner's
interest in a Subaccount or the Separate Account, Security Benefit will, to the
extent required under applicable law, provide notice, seek Owner approval, seek
prior approval of the SEC, and comply with the filing or other procedures
established by applicable state insurance regulators.
Security Benefit also reserves the right to establish additional
Subaccounts of the Separate Account that would invest in a new Fund of the
Mutual Fund or in shares of another investment company, a series thereof, or
other suitable investment vehicle. New Subaccounts may be established in the
sole discretion of Security Benefit, and any new Subaccount will be made
available to existing Owners on a basis to be determined by Security Benefit.
Security Benefit may also eliminate or combine one or more Subaccounts if, in
its sole discretion, marketing, tax, or investment conditions so warrant.
Subject to compliance with applicable law, Security Benefit may transfer
assets to the General Account. Security Benefit also reserves the right, subject
to any required regulatory approvals, to transfer assets of any Subaccount of
the Separate Account to another separate account or Subaccount.
In the event of any such substitution or change, Security Benefit may, by
appropriate endorsement, make such changes in these and other contracts 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 Contracts, the Separate Account may be operated as a management
investment company under the 1940 Act 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 Subaccounts 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 AND AMENDMENTS
Security Benefit reserves the right, without the consent of Owners, to
suspend sales of the Contract as presently offered and to make any change to the
provisions of the Contracts to comply with, or give Owners the benefit of, any
federal or state statute, rule, or regulation, including but not limited to
requirements for annuity contracts and retirement plans under the Internal
Revenue Code and regulations thereunder or any state statute or regulation.
Security Benefit also reserves the right to limit the amount and frequency of
subsequent purchase payments.
REPORTS TO OWNERS
A statement will be sent annually to each Contractowner setting forth a
summary of the transactions that occurred during the year, and indicating the
Contract Value as of the end of each year. In addition, the statement will
indicate the allocation of Contract Value among the Fixed Account and the
Subaccounts and any other information required by law. Confirmations will also
be sent out upon purchase payments, transfers, loans, loan repayments, and full
and partial withdrawals.
Each Contractowner will also receive an annual and semiannual report
containing financial statements for the Fund, which will include a list of the
portfolio securities of
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the Fund, as required by the 1940 Act, and/or such other reports as may be
required by federal securities laws.
TELEPHONE TRANSFER PRIVILEGES
A Contractowner may request a transfer of Contract Value 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 account number
and the Owner's tax identification number and such instructions must be received
on a recorded line. Security Benefit reserves the right to deny any telephone
transfer request. If all telephone lines are busy (which might occur, for
example, during periods of substantial market fluctuations), Contractowners
might not be able to request transfers by telephone and would have to submit
written requests.
By authorizing telephone transfers, a Contractowner authorizes Security
Benefit to accept and act upon telephonic instructions for transfers involving
the Contractowner's Contract, and agrees that neither Security Benefit, nor any
of its affiliates will be liable for any loss, damages, cost, or expense
(including attorneys' 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 Contractowner 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 Contracts
described in this Prospectus, Security Benefit's authority to issue the
Contracts under Kansas law, and the validity of the forms of the Contracts under
Kansas law have been passed upon by Amy J. Lee, Esq., Associate General Counsel,
Security Benefit.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and effective yield of the Subaccount investing in the Prime
Obligations Fund ("Prime Obligations Subaccount"), the yield of the remaining
Subaccounts, and the total return of all Subaccounts may appear in
advertisements, reports, and promotional literature to current or prospective
Owners.
Current yield for the Prime Obligations Subaccount will be based on income
received by a hypothetical investment over a given 7-day period (less expenses
accrued during the period), and then "annualized" (i.e., assuming that the 7-day
yield would be received for 52 weeks, stated in terms of an annual percentage
return on the investment). "Effective yield" for the Prime Obligations
Subaccount is calculated in a manner similar to that used to calculate yield,
but reflects the compounding effect of earnings.
For the remaining Subaccounts, quotations of yield will be based on all
investment income per Accumulation Unit earned during a given 30-day period,
less expenses accrued during the period ("net investment income"), and will be
computed by dividing net investment income by the value of an Accumulation Unit
on the last day of the period. Quotations of average annual total return for any
Subaccount will be expressed in terms of the average annual compounded rate of
return on a hypothetical investment in a Contract over a period of one, five,
and ten years (or, if less, up to the life of the Subaccount), and will reflect
the deduction of the applicable contingent deferred sales charge, the
administrative charge, the maintenance fee, and the mortality and expense risk
charge. Quotations of total return may simultaneously be shown that do not take
into account certain contractual charges such as the contingent deferred sales
charge, the administrative charge, and the maintenance fee and may
simultaneously be shown for other periods.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donaghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Morgan Stanley Capital International's EAFE Index or other indices measuring
performance of a pertinent group of securities so that investors may compare a
Subaccount's results with those of a group of securities widely regarded by
investors as representative of the securities markets in general or
representative of a particular type of security; (ii) other variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other ratings services, companies, publications, or
persons who rank separate accounts or other investment products on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the Contract.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which Contract Value is allocated to a Subaccount
during a particular time period on which the calculations are based. Performance
information should be considered in light of
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the investment objectives and policies, characteristics, and quality of the Fund
in which the Subaccount invests, and the market conditions during the given time
period, and should not be considered as a representation of what may be achieved
in the future. For a description of the methods used to determine yield and
total return for the Subaccounts, see the Statement of Additional Information.
Reports and promotional literature may also contain other information
including (i) the ranking of any Subaccount derived from rankings of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services or by other rating services, companies, publications, or
other persons who rank separate accounts or other investment products on overall
performance or other criteria, (ii) the effect of tax-deferred compounding on a
Subaccount's investment returns, or returns in general, which may be illustrated
by graphs, charts, or otherwise, and which may include a comparison, at various
points in time, of the return from an investment in a Contract (or returns in
general) on a tax-deferred basis (assuming one or more tax rates) with the
return on a taxable basis, and (iii) 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.
ADDITIONAL INFORMATION
REGISTRATION STATEMENT
A Registration Statement under the 1933 Act has been filed with the SEC
relating to the offering described in this Prospectus. This Prospectus does not
include all the information included in the Registration Statement, certain
portions of which, including the Statement of Additional Information, 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, DC,
upon payment of the SEC's prescribed fees.
FINANCIAL STATEMENTS
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, and the
financial statements of the Parkstone Variable Annuity Account for the two years
in the period ended December 31, 1996, are contained in the Statement of
Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information
and financial statements relating to Security Benefit. The Table of Contents of
the statement of Additional Information is set forth below:
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................... 1
DISTRIBUTION OF THE CONTRACT.............................................. 1
LIMITS ON PREMIUMS UNDER TAX QUALIFIED RETIREMENT PLANS................... 1
EXPERTS................................................................... 2
PERFORMANCE INFORMATION................................................... 3
FINANCIAL STATEMENTS...................................................... 4
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PARKSTONE VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
DATE: APRIL 30, 1997
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT DEFERRED VARIABLE
ANNUITY CONTRACT
ISSUED BY
SECURITY BENEFIT LIFE INSURANCE COMPANY
700 SW HARRISON STREET
TOPEKA, KANSAS 66636-0001
1-800-888-2461
MAILING ADDRESS:
ANNUITY ADMINISTRATION
700 SW HARRISON STREET
P.O. BOX 3536
TOPEKA, KANSAS 66601-3536
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current Prospectus for Parkstone Variable Annuity
dated April 30, 1997, as it may be supplemented from time to time. A copy of the
Prospectus may be obtained by calling Security Benefit at 1-800-355-4555 or by
writing to the address set forth above.
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY............................................ 1
DISTRIBUTION OF THE CONTRACT............................................... 1
LIMITS ON PREMIUMS PAID UNDER TAX-QUALIFIED RETIREMENT PLANS............... 1
EXPERTS.................................................................... 2
PERFORMANCE INFORMATION.................................................... 3
FINANCIAL STATEMENTS....................................................... 5
i
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GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Purchase Payment Deferred
Variable Annuity Contract (the "Contract"), Security Benefit Life Insurance
Company ("Security Benefit"), and the Parkstone Variable Annuity Separate
Account (the "Separate Account"), see the Prospectus. This Statement of
Additional Information contains information that supplements the information in
the Prospectus. Defined terms used in this Statement of Additional Information
have the same meaning as terms defined in the section entitled "Definitions" in
the Prospectus.
SAFEKEEPING OF ASSETS
Security Benefit is responsible for the safekeeping of the assets of the
Subaccounts. These assets, which consist of shares of the Funds of the Trust in
non-certificated form, are held separate and apart from the assets of Security
Benefit's General Account and its other separate accounts.
DISTRIBUTION OF THE CONTRACT
Security Distributors, Inc. ("SDI") is Principal Underwriter of the
Contract. SDI is registered as a broker/dealer with the SEC and is a member of
the National Association of Securities Dealers, Inc. ("NASD"). SDI serves as
Principal Underwriter under a Distribution Agreement with Security Benefit.
SDI has an agreement with First of America Brokerage Service, Inc. ("FOA
Brokerage") under which FOA Brokerage is authorized to make the Contract
available to its customers and to accept applications for the Contract on behalf
of Security Benefit. FOA Brokerage is registered as a broker/dealer with the SEC
and is a member of the NASD. Its registered representatives are required to be
authorized under applicable state regulations to make the Contract available to
its customers. SDI may also enter into agreements with other broker/dealers or
financial institutions under which the Contract will be made available to their
customers. The compensation payable by SDI under these agreements may vary, but
is not expected to exceed in the aggregate 4.5% of purchase payments and .25% on
an annualized basis of Contract Value less Contract Debt. In addition, SDI may
also pay bonuses and make override payments.
LIMITS ON PREMIUMS PAID UNDER TAX-QUALIFIED RETIREMENT PLANS
SECTION 401
The applicable annual limits on purchase payments for a Contract used in
connection with a retirement plan that is qualified under Section 401 of the
Internal Revenue Code depend upon the type of plan. Total purchase payments on
behalf of a participant to all defined contribution plans maintained by an
employer are limited under Section 415(c) of the Internal Revenue Code to the
lesser of (a) $30,000, or (b) 25% of the participant's annual compensation.
Salary reduction contributions to a cash-or-deferred arrangement under a profit
sharing plan are subject to additional annual limits. Contributions to a defined
benefit pension plan are actuarially determined based upon the amount of
benefits the participants will receive under the plan formula. The maximum
annual benefit any individual may receive under an employer's defined benefit
plan is limited under Section 415(b) of the Internal Revenue Code. The limits
determined under Section 415(b) and (c) of the Internal Revenue Code are further
reduced for an individual who participates in a defined contribution plan and a
defined benefit plan maintained by the same employer.
SECTION 403(B)
Contributions to 403(b) annuities are excludable from an employee's gross
income if they do not exceed the smallest of the limits calculated under
Sections 402(g), 403(b)(2), and 415 of the Code. The applicable limit will
depend upon whether the annuities are purchased with employer or employee
contributions.
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Section 402(g) generally limits an employee's salary reduction
contributions to a 403(b) annuity to $9,500 a year. The $9,500 limit will be
reduced by salary reduction contributions to other types of retirement plans. An
employee with at least 15 years of service for a "qualified employer" (i.e., an
educational organization, hospital, home health service agency, health and
welfare service agency, church or convention or association of churches)
generally may exceed the $9,500 limit by $3,000 per year, subject to an
aggregate limit of $15,000 for all years.
Section 403(b)(2) provides an overall limit on employer and employee salary
reduction contributions that may be made to a 403(b) annuity. Section 403(b)(2)
generally provides that the maximum amount of contributions an employee may
exclude from his or her gross income in any taxable year is equal to the excess,
if any, of:
(i) the amount determined by multiplying 20% of the employee's
includable compensation by the number of his or her years of
service with the employer, over
(ii) the total amount contributed to retirement plans sponsored by the
employer, that were excludable from his gross income in prior
years.
Section 415(c) also provides an overall limit on the amount of employer and
employee salary reduction contributions to a Section 403(b) annuity that will be
excludable from an employee's gross income in a given year. The Section 415(c)
limit is the lesser of (i) $30,000, or (ii) 25% of the employee's annual
compensation.
SECTION 408
Premiums paid under a Contract used in connection with an individual
retirement annuity (IRA) that is described in Section 408 of the Internal
Revenue Code are subject to the limits on contributions to IRA's under Section
219(b) of the Internal Revenue Code. Under Section 219(b) of the Code,
contributions to an IRA are limited to the lesser of $2,000 per year or the
Owner's annual compensation. Spousal IRAs allow an Owner and his or her spouse
to contribute up to $2,000 to their respective IRAs so long as a joint tax
return is filed and joint income is $4,000 or more. The maximum amount the
higher compensated spouse may contribute for the year is the lesser of $2,000 or
100% of that spouse's compensation. The maximum the lower compensated spouse may
contribute is the lesser of (i) $2,000 or (ii) 100% of that spouse's
compensation plus the amount by which the higher compensated spouse's
compensation exceeds the amount the higher compensated spouse contributes to his
or her IRA. The extent to which an Owner may deduct contributions to an IRA
depends on the gross income of the Owner and his or her spouse for the year and
whether either participates in another employer-sponsored retirement plan.
Premiums under a Contract used in connection with a simplified employee
pension plan described in Section 408 of the Internal Revenue Code are subject
to limits under Section 402(h) of the Internal Revenue Code. Section 402(h)
currently limits employer contributions and salary reduction contributions (if
permitted) under a simplified employee pension plan to the lesser of (a) 15% of
the compensation of the participant in the Plan, or (b) $30,000. Salary
reduction contributions, if any, are subject to additional annual limits.
SECTION 457
Contributions on behalf of an employee to a Section 457 plan generally are
limited to the lesser of (i) $7,500 or (ii) 33 1/3% of the employee's includable
compensation. If the employee participates in more than one Section 457 plan,
the $7,500 limit applies to contributions to all such programs. The $7,500 limit
is reduced by the amount of any salary reduction contribution the employee makes
to a 403(b) annuity, an IRA or a retirement plan qualified under Section 401.
The Section 457 limit is increased during the last three years ending before the
employee reaches his normal retirement age.
EXPERTS
The consolidated 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 the Separate Account for each of the two years in the
2
<PAGE>
period ended December 31, 1996, appearing in this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing herein, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and effective yield of the Subaccount investing in the
Trust's Prime Obligations Fund ("Prime Obligations Subaccount"), the yield of
the remaining Subaccounts, and the total return of all Subaccounts, may appear
in advertisements, reports, and promotional literature provided to current or
prospective Owners.
Current yield for the Prime Obligations Subaccount will be based on the
change in the value of a hypothetical investment (exclusive of capital changes)
over a particular 7-day period, less a pro-rata share of the Subaccount's
expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figures carried to at least the nearest hundredth of
one percent. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which is then annualized to reflect
weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] -1
For the 7-day period ended December 31, 1996, the yield of the Prime
Obligations Subaccount was 2.78% and the effective yield was 2.82%.
Quotations of yield for the remaining Subaccounts will be based on all
investment income per Accumulation Unit earned during a particular 30-day
period, less expenses accrued during the period ("net investment income"), and
will be computed by dividing net investment income by the value of the
Accumulation Unit on the last day of the period, according to the following
formula:
YIELD = 2[(A-B + 1)6 - 1]
---
cd
where a= net investment income earned during the period by the Series
attributable to shares owned by the Subaccount,
b= expenses accrued for the period (net of reimbursements),
c= the average daily number of Accumulation Units outstanding
during the period that were entitled to receive dividends, and
d= the maximum offering price per Accumulation Unit on the last day
of the period.
Quotations of average annual total return for any Subaccount will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Contract over a period of one, five and ten years
(or, if less, up to the life of the Subaccount), calculated pursuant to the
following formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of
$1,000, T = the average annual total return, n = the number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All average annual total return figures reflect the
deduction of the applicable contingent deferred sales charge, the administrative
charge, the maintenance fee, and the mortality and expense risk charge.
Quotations of average annual total return may simultaneously be shown for the
same or other periods that do not take into account certain contractual charges
such as the contingent deferred sales charge, the administrative charge, and the
maintenance fee and may simultaneously be shown for other periods.
3
<PAGE>
For the one-year period ended December 31, 1996, and the period of
September 24, 1993 (date of inception), to December 31, 1996, respectively the
average annual total return was -7.50% and -2.36% for the Bond Subaccount, 7.03%
and 6.33% for the Equity Subaccount, 5.30% and .37% for the International
Discovery Subaccount, and 18.60% and 18.36% for the Small Capitalization
Subaccount. For the one-year period ended December 31, 1996, and the period of
September 24, 1993 (date of inception), to December 31, 1996, respectively, the
average annual total return without deduction of the contingent deferred sales
charge or the maintenance fee was .37% and 2.18% for the Bond Subaccount, 15.66%
and 10.74% for the Equity Subaccount, 13.84% and 4.86% for the International
Discovery Subaccount, and 27.84% and 22.59% for the Small Capitalization
Subaccount.
Quotations of cumulative total return for any Subaccount will be based on a
hypothetical investment in a Contract over a certain period and will be computed
by subtracting the initial value of the investment from the ending value and
dividing the remainder by the initial value of the investment. Such quotations
of total return will reflect the deduction of all applicable charges to the
Contract and the Separate Account (on an annual basis) except the Maintenance
Fee and the applicable contingent deferred sales charge.
For the year ended December 31, 1996, and the period September 24, 1993
(date of inception), to December 31, 1996, respectively, the cumulative total
return was .37% and 7.30% for the Bond Subaccount, 15.66% and 39.60% for the
Equity Subaccount, 13.84% and 16.80% for the International Discovery Subaccount,
and 27.84% and 94.70% for the Small Capitalization Subaccount.
Performance information for a Subaccount may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, the Lehman Brothers Government Corporate Index, the
Morgan Stanley Capital International's EAFE Index or other indices that measure
performance of a pertinent group of securities so that investors may compare a
Subaccount's results with those of a group of securities widely regarded by
investors as representative of the securities markets in general or
representative of a particular type of security; (ii) other groups of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks mutual
funds and other investment companies by overall performance, investment
objectives, and assets, or tracked by The Variable Annuity Research and Data
Service ("VARDS"), an independent service which monitors and ranks the
performance of variable annuity issues by investment objectives on an
industry-wide basis or tracked by other services, companies, publications or
persons who rank such investment companies on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Contract. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of
a hypothetical Contract under which an Owner's Contract Value is allocated to a
Subaccount during a particular time period on which the calculations are based.
Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the Fund of the Trust in
which the Subaccount invests, and the market conditions during the given time
period, and should not be considered as a representation of what may be achieved
in the future.
Reports and promotional literature may also contain other information
including (i) the ranking of any Subaccount derived from rankings of variable
annuity separate accounts or other investment products tracked by Lipper
Analytical Services or by other rating services, companies, publications, or
other persons who rank separate accounts or other investment products on overall
performance or other criteria, and (ii) the effect of a tax-deferred compounding
on a Subaccount's investment returns, or returns in general, which may be
illustrated by graphs, charts, or otherwise, and which may include a comparison,
at various points in time, of the return from an investment in a Contract (or
returns in general) on a tax-deferred basis (assuming one or more tax rates)
with the return on a taxable basis.
4
<PAGE>
FINANCIAL STATEMENTS
The consolidated 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,
and the financial statements of the Parkstone Variable Annuity for each of the
two years in the period ended December 31, 1996, are set forth herein, starting
on the following page.
The financial statements of Security Benefit, which are included in this
Statement of Additional Information, should be considered only as bearing on the
ability of Security Benefit to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Separate Account.
5
<PAGE>
Parkstone Variable Annuity Account
Financial Statements
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors.............................................. 7
Audited Financial Statements
Balance Sheet............................................................. 8
Statements of Operations and Changes in Net Assets........................ 10
Notes to Financial Statements.............................................. 12
6
<PAGE>
Report of Independent Auditors
The Contract Owners of Parkstone Variable Annuity Account and
The Board of Directors of Security Benefit Life Insurance Company
We have audited the accompanying balance sheet of Parkstone Variable Annuity
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 Parkstone Variable Annuity
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
7
<PAGE>
Parkstone Variable Annuity Account
Balance Sheet
December 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Parkstone Advantage Fund:
Prime Obligations Fund - 1,357,148 shares at net asset value
of $1.00 per share (cost $1,357).................................. $ 1,357
Bond Fund - 728,511 shares at net asset value of $10.33 per share
(cost $7,328)..................................................... 7,526
Equity Fund - 1,446,828 shares at net asset value of $14.60 per
share (cost $17,084).............................................. 21,124
International Discovery Fund - 893,799 shares at net asset value
of $12.18 per share (cost $9,594)................................. 10,886
Small Capitalization Fund - 1,112,695 shares at net asset value
of $18.20 per share (cost $17,111)................................ 20,251
-------
Total assets.................................................... $61,144
=======
8
<PAGE>
NET ASSETS
Net assets are represented by (NOTE 3):
NUMBER UNIT
OF UNITS VALUE AMOUNT
-------------------------------
NON-TRUST CONTRACTS
Prime Obligations Subaccount:
Accumulation units........................... 98,511 $10.75 $ 1,059
Bond Subaccount:
Accumulation units........................... 615,320 10.73 6,605
Equity Subaccount:
Accumulation units........................... 1,391,560 13.96 19,425
International Discovery Subaccount:
Accumulation units........................... 849,239 11.68 9,919
Small Capitalization Subaccount:
Accumulation units........................... 962,144 19.47 18,737
TRUST CONTRACTS
Prime Obligations Subaccount:
Accumulation units........................... 28,380 10.51 298
Bond Subaccount:
Accumulation units........................... 84,419 10.90 921
Equity Subaccount:
Accumulation units........................... 117,468 14.46 1,699
International Discovery Subaccount:
Accumulation units........................... 79,831 12.11 967
Small Capitalization Subaccount:
Accumulation units........................... 74,886 20.21 1,514
-----
Total net assets $61,144
=======
SEE ACCOMPANYING NOTES.
9
<PAGE>
Parkstone Variable Annuity Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-TRUST CONTRACTS
--------------------------------------------------------------------------
PRIME INTERNATIONAL SMALL
OBLIGATIONS BOND EQUITY DISCOVERY CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions................................... $ 43 $ 189 $ - $ 30 $ -
Expenses (NOTE 2):
Mortality and expense risk fee........................ (12) (64) (205) (100) (180)
Administrative fee.................................... (3) (21) (51) (16) (23)
-------------------------------------------------------------------------
Net investment income (loss)............................. 28 104 (256) (86) (203)
Capital gains distributions.............................. - - - - 1,930
Realized gain on investments............................. - 25 474 47 624
Unrealized appreciation (depreciation) on investments.... - (66) 1,820 1,035 82
Net realized and unrealized gain (loss) on investments... - (41) 1,294 1,082 3,378
-------------------------------------------------------------------------
Net increase in net assets resulting from operations.... 28 63 2,038 996 3,175
Net assets at beginning of year......................... 665 3,953 11,965 6,167 9,597
Variable annuity deposits (NOTES 2 AND 3)............... 1,576 3,034 6,587 3,310 7,009
Terminations and withdrawals (NOTES 2 AND 3)............ (1,210) (445) (1,165) (554) (1,044)
--------------------------------------------------------------------------
Net assets at end of year............................... $1,059 $6,605 $19,425 $9,919 $18,737
==========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
TRUST CONTRACTS
--------------------------------------------------------------------------
PRIME INTERNATIONAL SMALL
OBLIGATIONS BOND EQUITY DISCOVERY CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions................................... $ 47 $ 23 $ - $ 3 $ -
Expenses (NOTE 2):
Mortality and expense risk fee......................... (7) (5) (7) (4) (5)
Administrative fee..................................... (1) - - - -
--------------------------------------------------------------------------
Net investment income (loss)............................. 39 18 (7) (1) (5)
Capital gains distributions.............................. - - - - 163
Realized gain on investments............................. - 1 56 2 77
Unrealized appreciation (depreciation) on investments.... - (4) 15 63 (144)
--------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments... - (3) 71 65 96
--------------------------------------------------------------------------
Net increase in net assets resulting from operations..... 39 15 64 64 91
Net assets at beginning of year......................... 140 602 527 181 386
Variable annuity deposits (NOTES 2 AND 3)............... 3,293 471 1,295 740 1,207
Terminations and withdrawals (NOTES 2 AND 3)............ (3,174) (167) (187) (18) (170)
---------------------------------------------------------------------------
Net assets at end of year............................... $ 298 $921 $1,699 $967 $1,514
===========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
Parkstone Variable Annuity Account
Statement of Operations and Changes in Net Assets
Year ended December 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-TRUST CONTRACTS
-------------------------------------------------------------------------
PRIME INTERNATIONAL SMALL
OBLIGATIONS BOND EQUITY DISCOVERY CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions.................................... $ 14 $ 141 $ - $ - $ -
Expenses (NOTE 2):
Mortality and expense risk fee......................... (4) (41) (119) (66) (88)
Administrative fee..................................... (1) (15) (33) (11) (11)
-------------------------------------------------------------------------
Net investment income (loss).............................. 9 85 (152) (77) (99)
Realized gain (loss) on investments....................... - (1) 104 (26) 190
Unrealized appreciation on investments.................... - 357 2,255 514 ,911
-------------------------------------------------------------------------
Net realized and unrealized gain on investments........... - 356 2,359 488 2,101
-------------------------------------------------------------------------
Net increase in net assets resulting from operations...... 9 441 2,207 411 2,002
Net assets at beginning of year........................... 178 2,716 7,121 4,622 4,991
Variable annuity deposits (NOTES 2 AND 3)................. 746 1,288 3,577 1,799 3,260
Terminations and withdrawals (NOTES 2 AND 3).............. (268) (492) (940) (665) (656)
-------------------------------------------------------------------------
Net assets at end of year................................. $665 $3,953 $11,965 $6,167 $9,597
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
TRUST CONTRACTS
-------------------------------------------------------------------------
PRIME INTERNATIONAL SMALL
OBLIGATIONS BOND EQUITY DISCOVERY CAPITALIZATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividend distributions................................... $ 2 $ 14 $ - $ - $ -
Mortality and expense risk fee........................ - (2) (2) (1) (1)
Administrative fee.................................... - - - - -
-------------------------------------------------------------------------
Net investment income (loss)............................. 2 12 (2) (1) (1)
Realized gain (loss) on investments...................... - - - - -
Unrealized appreciation on investments................... - 18 47 11 58
------------------------------------------------------------------------
Net realized and unrealized gain on investments.......... - 18 47 11 58
-------------------------------------------------------------------------
Net increase in net assets resulting from operations..... 2 30 45 10 57
Net assets at beginning of year.......................... - 49 50 92 9
Variable annuity deposits (NOTES 2 AND 3)................ 138 523 432 79 270
Terminations and withdrawals (NOTES 2 AND 3)............. - - - - -
-------------------------------------------------------------------------
Net assets at end of year................................ $140 $602 $527 $181 $386
=========================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
Parkstone Variable Annuity Account
Notes to Financial Statements
December 31, 1996 and 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Parkstone Variable Annuity 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.
Deposits received by the Account are invested in the Parkstone Advantage Fund, a
mutual fund not otherwise available to the public. As directed by the owners,
amounts deposited are invested in shares of Prime Obligations Fund - emphasis on
current income with liquidity and stability of principal, Bond Fund - emphasis
on current income as well as preservation of capital, Equity Fund - emphasis on
capital appreciation, International Discovery Fund - emphasis on long-term
capital growth through investment in foreign and domestic common stocks and
Small Capitalization Fund - emphasis on capital appreciation through investment
in small- to medium-sized companies.
Two types of investment contracts are offered--one for individuals (the
Non-Trust Contracts) and one for trusts and customers of financial institutions'
trust departments (the Trust Contracts).
Under the terms of the investment advisory contracts, portfolio investments of
the mutual fund are made by First of America Investment Corporation, a
wholly-owned subsidiary of First of America Bank - Michigan, N.A., which is a
wholly-owned subsidiary of First of America Bank Corporation.
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.
12
<PAGE>
Parkstone Variable Annuity 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:
<TABLE>
<CAPTION>
NON-TRUST CONTRACTS TRUST CONTRACTS
------------------------------------------------------------
COST OF PROCEEDS COST OF PROCEEDS
PURCHASES FROM SALES PURCHASES FROM SALES
-------------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Prime Obligations Fund.................. $1,805 $1,411 $3,773 $3,615
Bond Fund............................... 3,383 689 503 181
Equity Fund............................. 6,871 1,705 1,322 221
International Discovery Fund............ 3,512 842 1,109 388
Small Capitalization Fund............... 9,211 1,519 1,393 199
YEAR ENDED DECEMBER 31, 1995
Prime Obligations Fund.................. 764 277 140 -
Bond Fund............................... 1,495 614 537 2
Equity Fund............................. 3,824 1,339 432 2
International Discovery Fund............ 1,999 943 79 1
Small Capitalization Fund............... 3,542 1,036 270 1
</TABLE>
ANNUITY RESERVES
As of December 31, 1996, annuity reserves have not been established because
there are no contracts that have matured and are in the payout stage. Such
reserves would be computed on the basis of published mortality tables using
assumed interest rates that will provide reserves as prescribed by law. In cases
where the payout option selected is life contingent, SBL periodically
recalculates the required annuity reserves, and any resulting adjustment is
either charged or credited to SBL and not to the Account.
REINVESTMENT OF DIVIDENDS
Dividend and capital gains distributions paid by the mutual fund to the Account
are reinvested in additional shares of each respective Fund. Dividend income and
capital gains distributions are recorded as income on the ex-dividend date.
13
<PAGE>
Parkstone Variable Annuity Account
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. VARIABLE ANNUITY CONTRACT CHARGES
SBL deducts a maintenance fee of $30 per year for each individual contract. An
administrative fee is deducted equal to an annual rate of 0.15% and 0.05% of
each subaccount's average daily net assets which funds the Non-Trust and Trust
Contracts, respectively. Mortality and expense risks assumed by SBL are
compensated for by a fee equivalent to an annual rate of 1.25% and 0.65% of the
asset value of each Non-Trust and Trust Contract, respectively, of which 0.6% is
for assuming mortality risks and the remainder is for assuming expense risks.
A contingent deferred sales charge is assessed by SBL against certain
withdrawals during the first seven years of the contract, declining from 5% in
each of the first four years to 2% in the seventh year. Such surrender charges
and other contract charges totaled $43,278 and $27,915 during 1996 and 1995,
respectively.
When applicable, an amount for state premium taxes is deducted as provided by
pertinent state law, either from the purchase payments or from the amount
applied to effect an annuity at the time annuity payments commence.
14
<PAGE>
Parkstone Variable Annuity Account
Notes to Financial Statements (continued)
3. SUMMARY OF UNIT TRANSACTIONS
<TABLE>
<CAPTION>
NON-TRUST CONTRACTS TRUST CONTRACTS
-----------------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Prime Obligations Subaccount:
Variable annuity deposits....................... 149 72 327 14
Terminations and withdrawals.................... 115 26 313 -
Bond Subaccount:
Variable annuity deposits....................... 289 127 45 50
Terminations and withdrawals.................... 43 50 16 -
Equity Subaccount:
Variable annuity deposits....................... 487 332 88 38
Terminations and withdrawals.................... 87 91 14 -
International Discovery Subaccount:
Variable annuity deposits....................... 299 183 64 8
Terminations and withdrawals.................... 51 69 2 -
Small Capitalization Subaccount:
Variable annuity deposits....................... 390 243 59 20
Terminations and withdrawals.................... 57 51 9 -
</TABLE>
15
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
Report of Independent Auditors........................................... 17
Audited Consolidated Financial Statements
Consolidated Balance Sheets......................................... 18
Consolidated Statements of Income................................... 20
Consolidated Statements of Changes in Equity........................ 21
Consolidated Statements of Cash Flows............................... 22
Notes to Consolidated Financial Statements.......................... 24
16
<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
17
<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
===========================
18
<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.
19
<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.
20
<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.
21
<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>
22
<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.
23
<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
24
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
25
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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.
26
<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.
27
<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.
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
28
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
29
<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, 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.......... $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>
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
30
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
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.
31
<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%
========================= ====================
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
32
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED)
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."
33
<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
=========================
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
34
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
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
================================
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
35
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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
36
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REINSURANCE (CONTINUED)
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.
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.
37
<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.
38
<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> <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 policyholders of insolvent or
rehabilitated insurers. In some states, these assessments can be
39
<PAGE>
SECURITY BENEFIT LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
40
<PAGE>
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.
41
