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VARIABLE ANNUITY PROSPECTUS
T. Rowe Price No-Load Variable Annuity
An Individual Flexible Premium
Deferred Variable Annuity Contract
May 1, 1998
Issued By: Mailing Address:
Security Benefit T. Rowe Price Variable
Life Insurance Company Annuity Service Center
700 SW Harrison Street P.O. Box 750440
Topeka, Kansas 66636-0001 Topeka, Kansas 66675-0440
1-800-888-2461 1-800-469-6587
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Variable Annuity Prospectus 2
INTRODUCTION
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 A CURRENT PROSPECTUS FOR THE T.
ROWE PRICE EQUITY SERIES, INC., THE T. ROWE PRICE FIXED INCOME
SERIES, INC., AND THE T. ROWE PRICE INTERNATIONAL SERIES, INC. THE
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
This Prospectus describes the T. Rowe Price No-Load Variable Annuity - an
individual flexible premium deferred variable annuity contract (the
"Contract") issued by Security Benefit Life Insurance Company (the
"Company"). The Contract is available for individuals as a non-tax
qualified retirement plan ("Non-Qualified Plan") or in connection with an
individual retirement annuity ("IRA") qualified under Section 408 of the
Internal Revenue Code ("Qualified Plan"). 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 the Annuity Payout Date. The minimum initial purchase payment
is $10,000 ($5,000 if made pursuant to an Automatic Investment Program)
to purchase a Contract in connection with a Non-Qualified Plan and $2,000
($25 if made pursuant to an Automatic Investment Program) to purchase a
Contract in connection with a Qualified Plan. Subsequent purchase
payments are flexible, though they must be for at least $1,000 ($200 if
made pursuant to an Automatic Investment Program) for a Contract funding
a Non-Qualified Plan or $500 ($25 if made pursuant to an Automatic
Investment Program) for a Contract funding a Qualified Plan. Purchase
payments may be allocated at the Contractowner's discretion to one or
more of the Subaccounts that comprise a separate account of the Company
called the T. Rowe Price Variable Annuity Account (the "Separate
Account"), or to the Fixed Interest Account of the Company. Each
Subaccount of the Separate Account invests in a corresponding portfolio
("Portfolio") of the T. Rowe Price Equity Series, Inc., the T. Rowe Price
Fixed Income Series, Inc., or the T. Rowe Price International Series,
Inc. (the "Funds"). Each Portfolio is listed under its respective Fund
below.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price New America Growth Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
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Variable Annuity Prospectus 3
Prospective purchasers should be aware that the investments made by the
Funds at any given time are not expected to be the same as the
investments made by other mutual funds T. Rowe Price Associates, Inc.
("T. Rowe Price") sponsors, including other mutual funds with investment
objectives and policies similar to those of the Funds.
The Contract Value in the Fixed Interest Account will accrue interest at
rates that are paid by the Company as described in "The Fixed Interest
Account" on page 27. Contract Value in the Fixed Interest Account is
guaranteed by the Company.
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 in the Subaccounts is
guaranteed.
A Contract may be returned according to the terms of its Free-Look Right
(see "Free-Look Right," page 22). This Prospectus concisely sets forth
information about the Contract and the Separate Account that a
prospective investor should know before purchasing the Contract. Certain
additional information is contained in a "Statement of Additional
Information," dated May 1, 1998, 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 the T. Rowe Price Variable Annuity Service Center, P.O. Box
750440, Topeka, Kansas 66675-0440, or by calling 1-800-469-6587. The
table of contents of the Statement of Additional Information is set forth
on page 41 of this Prospectus.
Date: May 1, 1998
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Variable Annuity Prospectus 4
CONTENTS
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 FUNDS' PROSPECTUS OR
STATEMENT OF ADDITIONAL INFORMATION, OR ANY SUPPLEMENT THERETO.
Definitions 5
Summary 7
Expense Table 9
Condensed Financial Information 11
Information About the Company, the Separate Account,
and the Funds 12
The Contract 15
Charges and Deductions 23
Annuity Period 25
The Fixed Interest Account 27
More About the Contract 29
Federal Tax Matters 30
Other Information 37
Performance Information 39
Additional Information 40
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Variable Annuity Prospectus 5
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 Payout Date or, if earlier, when the Contract is
terminated 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 the Company 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 PAYOUT DATE The date when annuity payments are scheduled to
begin.
AUTOMATIC INVESTMENT PROGRAM A program pursuant to which purchase
payments are automatically paid from the owner's checking account on a
specified day of the month, on a monthly, quarterly, semiannual or annual
basis, 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.
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 Interest Account as
of any Valuation Date.
CONTRACT YEAR Each 12-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 or the Joint Owner during the
Accumulation Period. The Designated Beneficiary is the first person on
the following list who is alive on the date of death of the Owner or the
Joint Owner: the Owner; the Joint Owner; the Primary Beneficiary; the
Secondary Beneficiary; the Annuitant; or if none of the above is alive,
the Owner's Estate.
FIXED INTEREST ACCOUNT An account that is part of the Company'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%)
declared by the Company periodically at its discretion.
FUNDS T.Rowe Price Equity Series, Inc., T.Rowe Price Fixed Income Series,
Inc., and T.Rowe Price International Series, Inc. The Funds are
diversified, open-end management investment companies commonly referred
to as mutual funds.
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Variable Annuity Prospectus 6
GENERAL ACCOUNT All assets of the Company other than those allocated to
the Separate Account or to any other separate account of the Company.
PURCHASE PAYMENT The amounts paid to the Company as consideration for the
Contract.
SEPARATE ACCOUNT The T. Rowe Price Variable Annuity Account is a separate
account of the Company. Contract Value under the Contract may be
allocated to Subaccounts of the Separate Account for variable
accumulation.
SUBACCOUNT A division of the Separate Account of the Company which
invests in a separate Portfolio of one of the Funds. Currently, seven
Subaccounts are available under the Contract.
T. ROWE PRICE VARIABLE ANNUITY SERVICE CENTER P.O. Box 750440, Topeka,
Kansas 66675-0440, 1-800-469-6587.
VALUATION DATE Each date on which the Separate Account is valued, which
currently includes each day that the T. Rowe Price Variable Annuity
Service Center and the New York Stock Exchange are both open for trading.
The T. Rowe Price Variable Annuity Service Center and the New York Stock
Exchange are closed on weekends and on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
VALUATION PERIOD A period used in measuring the investment experience of
each Subaccount of the Separate Account. The Valuation Period begins at
the close of one Valuation Date and ends at the close of the next
succeeding Valuation Date.
WITHDRAWAL VALUE The amount a Contractowner receives upon full withdrawal
of the Contract, which is equal to Contract Value less any premium taxes
due and paid by the Company.
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Variable Annuity Prospectus 7
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 relate to the portion of the Contract
involving the Separate Account. The Fixed Interest Account is briefly
described under "The Fixed Interest Account" on page 27 and in the
Contract.
PURPOSE OF THE CONTRACT
The individual flexible premium 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 Interest Account. See
"The Contract," page 15.
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 purchase as an individual retirement annuity ("IRA")
qualified under Section 408 of the Internal Revenue Code of 1986, as
amended ("Qualified Plan").
THE SEPARATE ACCOUNT AND THE FUNDS
Purchase payments designated to accumulate on a variable basis are
allocated to the Separate Account. See "Separate Account," page 13. The
Separate Account is currently divided into seven accounts referred to as
Subaccounts. Each Subaccount invests exclusively in shares of a specific
Portfolio of one of the Funds. Each of the Funds' Portfolios has a
different investment objective or objectives. Each Portfolio is listed
under its respective Fund below.
T. ROWE PRICE EQUITY SERIES, INC.
T. Rowe Price New America Growth Portfolio
T. Rowe Price Mid-Cap Growth Portfolio
T. Rowe Price Equity Income Portfolio
T. Rowe Price Personal Strategy Balanced Portfolio
T. ROWE PRICE FIXED INCOME SERIES, INC.
T. Rowe Price Limited-Term Bond Portfolio
T. Rowe Price Prime Reserve Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Stock Portfolio
Amounts held in a Subaccount will increase or decrease in dollar value
depending on the investment performance of the corresponding Portfolio in
which such Subaccount invests. The Contractowner bears the investment
risk for amounts allocated to a Subaccount of the Separate Account.
FIXED INTEREST ACCOUNT
Purchase payments designated to accumulate on a fixed basis may be
allocated to the Fixed Interest Account, which is part of the Company's
General Account. Amounts allocated to the Fixed Interest Account earn
interest at rates determined at the discretion of the Company and that
are guaranteed to be at least an effective annual rate of 3%. See "The
Fixed Interest Account" on page 27.
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Variable Annuity Prospectus 8
PURCHASE PAYMENTS
The minimum initial purchase payment is $10,000 ($5,000 if made pursuant
to an Automatic Investment Program) for a Contract issued in connection
with a Non-Qualified Plan and $2,000 ($25 if made pursuant to an
Automatic Investment Program) for a Contract issued in connection with a
Qualified Plan. Thereafter, the Contractowner may choose the amount and
frequency of purchase payments, except that the minimum subsequent
purchase payment is $1,000 ($200 if made pursuant to an Automatic
Investment Program) for a Contract funding a Non-Qualified Plan or $500
($25 if made pursuant to an Automatic Investment Program) for a Contract
funding a Qualified Plan. See "Purchase Payments" on page 16.
CONTRACT BENEFITS
During the Accumulation Period, Contract Value may be exchanged by the
Contractowner among the Subaccounts of the Separate Account and to and
from the Fixed Interest Account, subject to certain restrictions as
described in "The Contract" on page 15 and "The Fixed Interest Account"
on page 27.
At any time before the Annuity Payout Date, a Contract may be surrendered
for its Withdrawal Value, and partial withdrawals, including systematic
withdrawals, may be taken from the Contract Value, subject to certain
restrictions described in "The Fixed Interest Account" on page 27. See
"Full and Partial Withdrawals," page 20 and "Federal Tax Matters," page
30 for more information about withdrawals, including the 10% penalty tax
that may be imposed upon full and partial withdrawals (including
systematic withdrawals) made prior to the Owner attaining age 59 1/2.
The Contract provides for a death benefit upon the death of the Owner
during the Accumulation Period. See "Death Benefit," on page 22 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 the Company. See "Annuity Period"
on page 25.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a 10-day period beginning when the Owner receives the Contract.
In this event, the Company will refund to the Owner purchase payments
allocated to the Fixed Interest Account plus the Contract Value in the
Subaccounts increased by any fees or other charges paid. The Company will
refund purchase payments allocated to the Subaccounts rather than the
Contract Value in those states and circumstances in which it is required
to do so. See "Free-Look Right" on page 22.
CHARGES AND DEDUCTIONS
The Company does not make any deductions for sales loads from purchase
payments. Certain charges will be deducted in connection with the
Contract as described below.
Mortality and Expense Risk Charge The Company deducts a daily charge
from the assets of each Subaccount for mortality and expense risks equal
to an annual rate of .55% of each Subaccount's average daily net assets.
See "Mortality and Expense Risk Charge" on page 23.
Premium Tax Charge The Company assesses a premium tax charge to
reimburse itself for any premium taxes that it incurs with respect to
this Contract. This charge will usually be deducted on annuitization or
upon full withdrawal if a premium tax was incurred by the Company 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 the Company and is not refundable. The Company
reserves the right to deduct such taxes when due or anytime thereafter.
Premium tax rates currently range from 0% to 3.5%. See "Premium Tax
Charge" on page 24.
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Variable Annuity Prospectus 9
Other Expenses The operating expenses of the Separate Account are paid
by the Company. Investment management fees and operating expenses of the
Funds are paid by the Funds and are reflected in the net asset value of
Fund shares. For a description of these charges and expenses, see the
Prospectus for the Funds.
CONTACTING THE COMPANY
All written requests, notices, and forms required by the Contract, and
any questions or inquiries should be directed to the T. Rowe Price
Variable Annuity Service Center, at P.O. Box 750440, Topeka, Kansas
66675-0440, 1-800-469-6587.
EXPENSE TABLE
The purpose of this table is to assist investors in understanding the
various costs and expenses borne directly and indirectly by Owners
allocating Contract Value to the Subaccounts. The table reflects any
contractual charges, expenses of the Separate Account, and charges and
expenses of the Funds. The table does not reflect premium taxes that may
be imposed by various jurisdictions. See "Premium Tax Charge," page 24.
The information contained in the table is not applicable to amounts
allocated to the Fixed Interest Account.
For a complete description of a Contract's costs and expenses, see
"Charges and Deductions," page 23. For a more complete description of
each Fund's costs and expenses, see the Funds' prospectus, which
accompanies this Prospectus.
Table 1
CONTRACTUAL EXPENSES
Sales Load on Purchase Payments None
Annual Maintenance Fee None
ANNUAL SEPARATE ACCOUNT EXPENSES
Annual Mortality and Expense Risk Charge (as a percentage of each
Subaccount's average daily net assets) .55%
Total Annual Separate Account Expenses .55%
ANNUAL PORTFOLIO EXPENSES (AS A PERCENTAGE OF EACH PORTFOLIO'S AVERAGE DAILY
NET ASSETS)
Total
Management Other Portfolio
Fee* Expenses Expenses
T. Rowe Price New America Growth Portfolio ........... .85% 0% .85%
T. Rowe Price International Stock Portfolio .......... 1.05% 0% 1.05%
T. Rowe Price Mid-Cap Growth Portfolio ............... .85% 0% .85%
T. Rowe Price Equity Income Portfolio ................ .85% 0% .85%
T. Rowe Price Personal Strategy Balanced Portfolio ... .90% 0% .90%
T. Rowe Price Limited-Term Bond Portfolio ............ .70% 0% .70%
T. Rowe Price Prime Reserve Portfolio ................ .55% 0% .55%
*The management fee includes the ordinary expenses of operating the Funds.
Example
The example presented below shows expenses that a Contractowner would pay at the
end of one, three, five, or ten years. The information presented applies if, at
the end of those time periods, the Contract is (1) surrendered, (2) annuitized,
or (3) not surrendered or annuitized. The example shows expenses based upon an
allocation of $1,000 to each of the Subaccounts.
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Variable Annuity Prospectus 10
The example below should not be considered a representation of past or
future expenses. Actual expenses may be greater or lesser than those
shown. The 5% 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.
EXAMPLE - The Owner would pay the expenses shown below on a $1,000
investment, assuming 5% annual return on assets:
1 Year 3 Years 5 Years 10 Years
New America Growth Subaccount ................. $14 $44 $77 $168
International Stock Subaccount ................ $16 $50 $87 $190
Mid-Cap Growth Subaccount ..................... $14 $44 $77 $168
Equity Income Subaccount ...................... $14 $44 $77 $168
Personal Strategy Balanced Subaccount ......... $15 $46 $79 $174
Limited-Term Bond Subaccount .................. $13 $40 $69 $151
Prime Reserve Subaccount ...................... $11 $35 $61 $134
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Variable Annuity Prospectus 11
CONDENSED FINANCIAL INFORMATION
The following condensed financial information presents accumulation unit
values for the years ended December 31, 1997 and 1996, and the period
April 1, 1995 (date of inception), through December 31, 1995, as well as
ending accumulation units outstanding under each Subaccount.
1995 1996 1997
NEW AMERICA GROWTH SUBACCOUNT
Accumulation unit value:
Beginning of period .............. $ 10.00 $ 13.40 $ 16.00
End of period .................... $ 13.40 $ 16.00 $ 19.28
Accumulation units:
Outstanding at the end of period . 333,934 1,596,903 2,030,514
INTERNATIONAL STOCK SUBACCOUNT
Accumulation unit value:
Beginning of period .............. $ 10.00 $ 11.19 $ 12.77
End of period .................... $ 11.19 $ 12.77 $ 13.09
Accumulation units:
Outstanding at the end of period . 218,427 1,124,821 1,562,428
EQUITY INCOME SUBACCOUNT
Accumulation unit value:
Beginning of period .............. $ 10.00 $ 12.37 $ 14.70
End of period .................... $ 12.37 $ 14.70 $ 18.84
Accumulation units:
Outstanding at the end of period . 365,712 1,902,935 3,450,047
PERSONAL STRATEGY BALANCED SUBACCOUNT
Accumulation unit value:
Beginning of period .............. $ 10.00 $ 11.90 $ 13.51
End of period .................... $ 11.90 $ 13.51 $ 15.86
Accumulation units:
Outstanding at the end of period . 148,349 599,843 983,602
LIMITED-TERM BOND SUBACCOUNT
Accumulation unit value:
Beginning of period .............. $ 10.00 $ 10.64 $ 10.93
End of period .................... $ 10.64 $ 10.93 $ 11.60
Accumulation units:
Outstanding at the end of period . 86,891 445,079 626,694
MID-CAP GROWTH SUBACCOUNT*
Accumulation unit value:
Beginning of period .............. $ 10.00
End of period .................... $ 11.82
Accumulation units:
Outstanding at the end of period . 1,100,979
PRIME RESERVE SUBACCOUNT*
Accumulation unit value:
Beginning of period .............. $ 10.00
End of period .................... $ 10.48
Accumulation units:
Outstanding at the end of period . 769,829
*The Mid-Cap Growth and Prime Reserve Subaccounts commenced operations on
January 2, 1997.
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Variable Annuity Prospectus 12
INFORMATION ABOUT THE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS
SECURITY BENEFIT LIFE INSURANCE COMPANY
The Company is a 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.
The Company 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 1997, Security Benefit had total assets of
approximately $6.4 billion. Together with its subsidiaries, Security
Benefit has total funds under management of approximately $7.5 billion.
The Company's Board of Directors has approved a Plan of Conversion
("Plan") under which the Company would convert from a mutual life
insurance company to a stock life insurance company ultimately controlled
by a newly formed mutual holding company to be na med Security Benefit
Mutual Holding Company. Under the Plan, membership interests of current
Contractowners would become membership interests in Security Benefit
Mutual Holding Company upon conversion. After the conversion, persons who
acquire policies from the Company would automatically be members in the
mutual holding company. The conversion will not increase premiums or
reduce Contract benefits, values, guarantees, or other obligations to
Contractowners. The Plan is subject to approval by the Insurance
Commissioner of the State of Kansas and the Company's policyholders,
among other approvals and conditions. If the necessary approvals are
obtained and conditions met, the conversion could occur in the second
quarter of 1998.
YEAR 2000 COMPLIANCE
Like other insurance companies, as well as other financial and business
organizations around the world, the Company could be adversely affected
if the computer systems used by the Company in performing its
administrative functions do not properly process and calculate
date-related information and data before, during, and after January 1,
2000. Some computer software and hardware systems currently cannot
distinguish between the year 2000 and the year 1900 or some other date
because of the way date fields were encoded. This is commonly known as
the "Year 2000 Problem." If not addressed, the Year 2000 Problem could
impact (i) the administrative services provided by the Company with
respect to the Contract, and (ii) the management services provided to the
Funds by T. Rowe Price, as well as transfer agency, accounting, custody,
distribution, and other services provided to the Funds. For more
information on T. Rowe Price Year 2000 compliance efforts, see the Funds'
prospectus, which accompanies this Prospectus.
The Company has adopted a plan to be "Year 2000 Compliant" with respect
to both its internally built systems as well as systems provided by
external vendors. "Year 2000 Compliant" means that systems and programs
which require modification will have the date fields expanded to include
the century information and that for interfaces to external organizations
as well as new systems development the year portion of the date field
will be expanded to four digits using the format YYYYMMDD. The Company's
overall approach to addressing the Year 2000 issue is as follows: (1) to
inventory its internal and external hardware, software,
telecommunications and data transmissions to customers, and conduct a
risk assessment with respect to the impact that a failure on any such
system would have on its business operations; (2) to modify or replace
its internal systems and obtain vendor certifications of Year 2000
compliance for systems provided by vendors or replace such systems that
are not Year 2000 Compliant; and (3) to implement and test its systems
for Year 2000 compliance. The Company has completed the inventory of its
internal and external systems and has made substantial
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Variable Annuity Prospectus 13
progress toward completing the modification/replacement of its internal
systems as well as towards obtaining Year 2000 Compliant certifications
from its external vendors. Overall systems testing is scheduled to
commence in December 1998 and extend into the first six months of 1999.
Although the Company has taken steps to ensure that its systems will
function properly before, during, and after the Year 2000, its key
operating systems and information sources are provided by or through
external vendors, which creates uncertainty to the extent the Company is
relying on the assurance of such vendors as to whether its systems will
be Year 2000 Compliant. The costs or consequences of incomplete or
untimely resolution of the Year 2000 issue are unknown to the Company at
this time but could have a material adverse impact on the operations of
the Separate Account and administration of the Contract.
The Year 2000 Problem is also expected to impact companies, which may
include issuers of portfolio securities held by the Funds, to varying
degrees based upon various factors, including, but not limited to, the
company's industry sector and degree of technological sophistication. The
Company is unable to predict what impact, if any, the Year 2000 Problem
will have on issuers of the portfolio securities held by the Funds.
PUBLISHED RATINGS
The Company may from time to time publish in advertisements, sales
literature, and reports to Owners, the ratings and other information
assigned to it by one or more independent rating organizations such as
A.M. Best Company and Standard & Poor's. The purpose of the ratings is to
reflect the financial strength and/or claims-paying ability of the
Company and should not be considered as bearing on the investment
performance of assets held in the Separate Account. Each year the A.M.
Best Company reviews the financial status of thousands of insurers,
culminating in the assignment of Best's Ratings. These ratings reflect
their current opinion of the relative financial strength and operating
performance of an insurance company in comparison to the norms of the
life/health insurance industry. In addition, the claims-paying ability of
the Company as measured by Standard & Poor's Insurance Ratings Services
may be referred to in advertisements or sales literature or in reports to
Owners. These ratings are opinions of an operating insurance company's
financial capacity to meet the obligations of its insurance and annuity
policies in accordance with their terms. Such ratings do not reflect the
investment performance of the Separate Account or the degree of risk as
sociated with an investment in the Separate Account.
SEPARATE ACCOUNT
T. ROWE PRICE VARIABLE ANNUITY ACCOUNT
The T. Rowe Price Variable Annuity Account was established by the Company
as a separate account on March 28, 1994, pursuant to procedures
established under Kansas law. The income, gains, or losses of the
Separate Account, whether or not realized, are, in accordance with the
Contracts, credited to or charged against the assets of the Separate
Account without regard to other income, gains, or losses of the Company.
K.S.A. 40-436 provides that assets in a separate account attributable to
the reserves and other liabilities under the contracts are not chargeable
with liabilities arising from any other business tha t the insurance
company conducts if, and to the extent the contracts so provide, and the
Contract contains such a provision. The Company 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. The Company 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 the
Company. The Company 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.
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Variable Annuity Prospectus 14
The Separate Account is currently divided into seven Subaccounts. Income,
gains and losses, whether or not realized, are, in accordance with the
Contracts, credited to, or charged against, the assets of each Subaccount
without regard to the income, gains, or losses in the other Subaccounts.
Each Subaccount invests exclusively in shares of a specific Portfolio of
one of the Funds. The Company may in the future establish additional
Subaccounts of the Separate Account, which may invest in other Portfolios
of the Funds or in other securities, mutual funds, or investment
vehicles. Under current contractual arrangements with the underwriter, T.
Rowe Price Investment Services, Inc. ("Investment Services"), the Company
cannot add new Subaccounts, or substitute shares of another portfolio,
without the consent of Investment Services, unless such change is
necessary to comply with applicable laws, shares of any or all of the
Portfolios should no longer be available for investment, or, if the
Company receives an opinion from counsel acceptable to Investment
Services that substitution is in the best interest of Contractowners and
that further investment in shares of the Portfolio(s) would cause undue
risk to the Company. For more information about the underwriter, see
"Distribution of the Contract," page 39.
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 the
Company.
The Funds
The T. Rowe Price Equity Series, Inc., the T. Rowe Price Fixed Income
Series, Inc., and the T. Rowe Price International Series, Inc. (the
"Funds") are diversified, open-end management investment companies of the
series type. The Funds are 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 Funds. Together, the Funds
currently have seven separate portfolios ("Portfolios"), each of which
pursues different investment objectives and policies.
In addition to the Separate Account, shares of the Funds are being sold
to variable life insurance and variable annuity separate accounts of
other insurance companies, including insurance companies affiliated with
the Company. In the future, it may be disadvantageous for variable
annuity separate accounts of other life insurance companies, or for both
variable life insurance separate accounts and variable annuity separate
accounts, to invest simultaneously in the Funds, although currently
neither the Company nor the Funds foresee any such disadvantages to
either variable annuity owners or variable life insurance owners. The
management of the Funds intends to monitor events in order to identify
any material conflicts between or among variable annuity owners and
variable life insurance owners and to determine what action, if any,
should be taken in response. In addition, if the Company believes that
any Fund's response to any of those events or conflicts insufficiently
protects Owners, it will take appropriate action on its own. For more
information see the Funds' prospectus.
A summary of the investment objective of each Portfolio of the Funds is
described below. There can be no assurance that any Portfolio will
achieve its objective. More detailed information is contained in the
accompanying prospectus of the Funds, including information on the risks
associated with the investments and investment techniques of each
Portfolio.
THE FUNDS' PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
T. ROWE PRICE NEW AMERICA GROWTH PORTFOLIO
The investment objective of the New America Growth Portfolio is long-term
growth of capital through investments primarily in the common stocks of
U.S. growth companies which operate in service industries.
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Variable Annuity Prospectus 11
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
The investment objective of the International Stock Portfolio is to seek
long-term growth of capital through investments primarily in common
stocks of established, non-U.S. companies.
T. ROWE PRICE MID-CAP GROWTH PORTFOLIO
The investment objective of the Mid-Cap Growth Portfolio is to provide
long-term capital appreciation by investing primarily in companies that
offer proven products or services.
T. ROWE PRICE EQUITY INCOME PORTFOLIO
The investment objective of the Equity Income Portfolio is to provide
substantial dividend income and also capital appreciation by investing
primarily in dividend-paying common stocks of established companies.
T. ROWE PRICE PERSONAL STRATEGY BALANCED PORTFOLIO
The investment objective of the Personal Strategy Balanced Portfolio is
to seek the highest total return over time consistent with an emphasis on
both capital appreciation and income.
T. ROWE PRICE LIMITED-TERM BOND PORTFOLIO
The investment objective of the Limited-Term Bond Portfolio is to seek a
high level of income consistent with moderate price fluctuation by
investing primarily in short- and intermediate-term investment grade debt
securities.
T. Rowe Price Prime Reserve Portfolio
The investment objectives of the Prime Reserve Portfolio are preservation
of capital, liquidity, and, consistent with these, the highest possible
current income, by investing primarily in high-quality money market
securities.
THE INVESTMENT ADVISERS
T. Rowe Price, located at 100 East Pratt Street, Baltimore, Maryland
21202, serves as Investment Adviser to each Portfolio, except the T. Rowe
Price International Stock Portfolio. Rowe Price-Fleming International,
Inc. ("Price-Fleming"), an affiliate of T. Rowe Price, serves as
Investment Adviser to the T. Rowe Price International Stock Portfolio.
Price-Fleming's U.S. office is located at 100 East Pratt Street,
Baltimore, Maryland 21202. As Investment Adviser to each of the
Portfolios, except the T. Rowe Price International Stock Portfolio, T.
Rowe Price is responsible for selection and management of portfolio
investments. As Investment Adviser to the T. Rowe Price International
Stock Portfolio, Price-Fleming is responsible for selection and
management of its portfolio investments. T. Rowe Price and Price-Fleming
are registered with the SEC as investment advisers.
T. Rowe Price and Price-Fleming are not affiliated with the Company, and
the Company has no responsibility for the management or operations of the
Portfolios.
THE CONTRACT
GENERAL
The Contract offered by this Prospectus is an individual flexible premium
deferred variable annuity that is issued by the Company. 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 the Company. During the Accumulation
Period, a Contractowner's value accumulates on either a variable basis, a
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Variable Annuity Prospectus 16
fixed basis, or both, depending on the Owner's allocation of Contract
Value to the Subaccounts and the Fixed Interest Account. The Contract
also provides several Annuity Options under which the Company will pay
periodic annuity payments on a variable basis, a fixed basis, or both,
beginning on the Annuity Payout Date. The amount that will be available
for annuity payments will depend on the investment performance of the
Subaccounts to which Contract Value has been allocated and the amount of
interest credited on Contract Value that has been allocated to the Fixed
Interest Account.
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 purchase as an individual retirement annuity ("IRA")
qualified under Section 408 of the Internal Revenue Code ("Qualified
Plan"). 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 the Company, as well as any other form or
information that the Company may require. The initial purchase payment
may be made by check or, if an applicant owns shares of one or more Funds
distributed by Investment Services ("T. Rowe Price Funds"), by electing
on the application to redeem shares of that fund(s) and forward the
redemption proceeds to the Company. Any such transaction shall be
effected by Investment Services, the distributor of the T. Rowe Price
Funds and the Contract. The redemption of fund shares is a sale of shares
for tax purposes, which may result in a taxable gain or loss. The
application may be obtained by contacting the T. Rowe Price Variable
Annuity Service Center. The Company reserves the right to reject an
application or purchase payment for any reason, subject to the Company's
underwriting standards and guidelines and any applicable state or federal
law relating to nondiscrimination.
The maximum age of an Owner or Annuitant for which a Contract will be
issued is 85. If there are Joint Owners or Annuitants, the maximum issue
age will be determined by reference to the older Owner or Annuitant.
PURCHASE PAYMENTS
The minimum initial purchase payment for the purchase of a Contract is
$10,000 ($5,000 if made pursuant to an Automatic Investment Program) in
connection with a Non-Qualified Plan and $2,000 ($25 if made pursuant to
an Automatic Investment Program) in connection with a Qualified Plan.
Thereafter, the Contractowner may choose the amount and frequency of
purchase payments, except that the minimum subsequent purchase payment is
$1,000 ($200 if made pursuant to an Automatic Investment Program) for
Non-Qualified Plans and $500 ($25 if made pursuant to an Automatic
Investment Program) for Qualified Plans. The Company may reduce the
minimum purchase payment requirements under certain circumstances, such
as for group or sponsored arrangements. Cumulative purchase payments
exceeding $1 million will not be accepted under a Contract without prior
approval of the Company.
An initial purchase payment will be applied not later than the end of the
second Valuation Date after the Valuation Date is received by the Company
at the T. Rowe Price Variable Annuity Service Center 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. If the Company does not receive a complete
application, the Company will notify the applicant that it does not have
the necessary information to issue a Contract. If the necessary
information is not provided to the Company within five Valuation Dates
after the Valuation Date on which the Company first receives the initial
purchase payment or if the Company determines it cannot otherwise issue
the Contract, the Company will return the initial purchase payment to the
applicant unless the applicant consents to the Company retaining the
purchase payment until the application is made complete.
<PAGE>
Variable Annuity Prospectus 17
Subsequent purchase payments will be credited as of the end of the
Valuation Period in which they are received by the Company at the T. Rowe
Price Variable Annuity Service Center. Purchase payments after the
initial purchase payment may be made at any time prior to the Annuity
Payout 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 under an Automatic Investment Program or, if an Owner owns shares
of one or more T. Rowe Price Funds, by directing Investment Services to
redeem shares of that fund(s) and forw ard the redemption proceeds to the
Company as a subsequent purchase payment. The minimum initial purchase
payment required must be paid before the Automatic Investment Program
will be accepted by the Company. The redemption of fund shares is a sale
of shares for tax purposes, which may result in a taxable gain or loss.
ALLOCATION OF PURCHASE PAYMENTS
In an application for a Contract, the Contractowner selects the
Subaccounts or the Fixed Interest 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 Interest Account. Available
allocation alternatives include the seven Subaccounts and the Fixed
Interest Account.
A Contractowner may change the purchase payment allocation instructions
by submitting a proper written request to the T. Rowe Price Variable
Annuity Service Center. A proper change in allocation instructions will
be effective upon receipt by the Company at the T. Rowe Price Variable
Annuity Service Center and will continue in effect until subsequently
changed. Changes in purchase payment allocation instructions may be made
by telephone or by sending a request in writing to the T. Rowe Price
Variable Annuity Service Center. Changes in the allocation of future
purchase payments have no effect on existing Contract Value. Such
Contract Value, however, may be exchanged among the Subaccounts of the
Separate Account and the Fixed Interest Account in the manner described
in "Exchanges of Contract Value," page 19.
DOLLAR COST AVERAGING OPTION
The Company currently offers an option under which Contractowners may
dollar cost average their allocations in the Subaccounts under the
Contract by authorizing the Company 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 exchanges 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 exchanged from a
Subaccount will result in a debiting of a greater number of units when
the Subaccount's 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 from the T. Rowe Price
Variable Annuity Service Center upon request. On the form, the
Contractowner must designate whether Contract Value is to be exchanged on
the basis of a specific dollar amount, a fixed period or earnings only,
the Subaccount or Subaccounts to and from which the exchanges will be
made, the desired frequency of the exchanges, which may be on a monthly,
quarterly, semiannual, or annual basis, and the length of time during
which the exchanges shall continue or the total amount to be exchanged
over time.
<PAGE>
Variable Annuity Prospectus 18
To elect the Dollar Cost Averaging Option, the Owner's Contract Value
must be at least $5,000, ($2,000 for a Contract funding a Qualified
Plan), and a Dollar Cost Averaging Request in proper form must be
received by the Company at the T. Rowe Price Variable Annuity Service
Center. The Dollar Cost Averaging Request form will not be considered
complete until the Contractowner's Contract Value is at least the
required amount. A Contractowner may not have in effect at the same time
Dollar Cost Averaging and Asset Rebalancing Options.
After the Company has received a Dollar Cost Averaging Request in proper
form at the T. Rowe Price Variable Annuity Service Center, the Company
will exchange Contract Value in amounts designated by the Contractowner
from the Subaccount from which exchanges are to be made to the Subaccount
or Subaccounts chosen by the Contractowner. The minim um amount that may
be exchanged is $200 and the minimum amount that may be allocated to any
one Subaccount is $25. Each exchange will be effected on the date
specified by the Owner or if no date is specified, on the monthly,
quarterly, semiannual, or annual anniversary, whichever corresponds to
the period selected by the Contractowner, of the date of receipt at the
T. Rowe Price Variable Annuity Service Center of a Dollar Cost Averaging
Request in proper form. Exchanges will be made until the total amount
elected has been exchanged, or until Contract Value in the Subaccount
from which exchanges are made has been depleted. Amounts periodically
exchanged under this option are not included in the six exchanges per
Contract Year that are allowed as discussed in "Exchanges of Contract
Value" on page 19.
A Contractowner may instruct the Company at any time to terminate the
option by written request to the T. Rowe Price Variable Annuity Service
Center. In that event, the Contract Value in the Subaccount from which
exchanges were being made that has not been exchanged will remain in that
Subaccount unless the Contractowner instructs otherwise. If a
Contractowner wishes to continue exchanging on a dollar cost averaging
basis after the expiration of the applicable period, the total amount
elected has been exchanged, 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 the T. Rowe Price
Variable Annuity Service Center, and the Contract must meet the $5,000
($2,000 for a Contract funding a Qualified Plan) minimum required amount
of Contract Value at that time. The Company may discontinue, modify, or
suspend the Dollar Cost Averaging Option at any time provided that, as
required by its current contractual arrangements with Investment
Services, the Company first obtains the consent of Investment Services,
which consent shall not be unreasonably withheld.
Contract Value may also be dollar cost averaged to or from the Fixed
Interest Account, subject to certain restrictions described under "The
Fixed Interest Account," page 27.
ASSET REBALANCING OPTION
The Company currently offers an option under which Contractowners may
authorize the Company to automatically exchange 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 Rebalancing auto matically
reallocates the Contract Value in the Subaccounts each quarter to the
allocation selected by the Contractowner. Asset Rebalancing is intended
to exchange 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,
although there can be no assurance of this. This investment method does
not guarantee profits, nor does it assure that a Contractowner will not
have losses.
To elect the Asset Rebalancing Option, the Contract Value in the Contract
must be at least $10,000 ($2,000 for a Contract funding a Qualified Plan)
and an Asset Rebalancing Request in proper form must be received by the
Company at the T. Rowe Price Variable Annuity Service Center. A
Contractowner may
<PAGE>
Variable Annuity Prospectus 19
not have in effect at the same time Dollar Cost Averaging and Asset
Rebalancing Options. An Asset Rebalancing Request form is available upon
request. On the form, the Contractowner must indicate the applicable
Subaccounts and the percentage of Contract Value which should be
allocated to each of the applicable Subaccounts each quarter under the
Asset Rebalancing Option. If the Asset Rebalancing Option is elected, all
Contract Value allocated to the Subaccounts must be included in the Asset
Rebalancing Option.
This option will result in the exchange of Contract Value to one or more
of the Subaccounts on the date specified by the Contractowner or, if no
date is specified, on the date of the Company's receipt of the Asset
Rebalancing Request in proper form and on each quarterly anniversary of
the applicable date thereafter. The amounts exchanged will be credited at
the Accumulation Unit value as of the end of the Valuation Dates on which
the exchanges are effected. Amounts periodically exchanged under this
option are not included in the six exchanges per Contract Year that are
allowed as discussed below.
A Contractowner may instruct the Company at any time to terminate this
option by written request to the T. Rowe Price Variable Annuity Service
Center and, in the event of an exchange of Contract Value by written
request or telephone instructions, this option will terminate
automatically. In either event, the Contract Value in the Subaccounts
that has not been exchanged will remain in those Subaccounts regardless
of the percentage allocation unless the Contractowner instructs
otherwise. If a Contractowner wishes to resume Asset Rebalancing after it
has been canceled, a new Asset Rebalancing Request form must be completed
and sent to the T. Rowe Price Variable Annuity Service Center, and the
Contract Value at the time the request is made must be at least $10,000
($2,000 for a Contract funding a Qualified Plan). The Company may
discontinue, modify, or suspend the Asset Rebalancing Option at any time
provided that, as required by its current contractual arrangements with
Investment Services, the Company first obtains the consent of Investment
Services, which consent shall not be unreasonably withheld.
Contract Value allocated to the Fixed Interest Account may be included in
the Asset Rebalancing Program, subject to certain restrictions described
under "The Fixed Interest Account," page 27.
EXCHANGES OF CONTRACT VALUE
During the Accumulation Period, Contract Value may be exchanged among the
Subaccounts by the Contractowner upon proper written request to the T.
Rowe Price Variable Annuity Service Center. Exchanges (other than
exchanges in connection with the Dollar Cost Averaging or Asset
Rebalancing Options) may be made by telephone if an Authorization for
Telephone Requests form has been properly completed, signed, and filed at
the T. Rowe Price Variable Annuity Service Center. Up to six exchanges
are allowed in any Contract Year. The minimum exchange amount is $500
($200 under the Dollar Cost Averaging Option), or the amount remaining in
a given Subaccount.
Contract Value may also be exchanged between the Subaccounts and the
Fixed Interest Account; however, exchanges from the Fixed Interest
Account to the Subaccounts are restricted as described in "The Fixed
Interest Account," page 27.
The Company reserves the right at a future date, to waive or limit the
number of exchanges permitted each Contract Year, to suspend exchanges,
to limit the amount that may be subject to exchanges and the amount
remaining in an account after an exchange, to impose conditions on the
right to exchange and to discontinue telephone exchanges provided that,
as required by its current contractual arrangements with Investment
Services, the Company first obtains the consent of Investment Services,
which consent shall not be unreasonably withheld.
<PAGE>
Variable Annuity Prospectus 20
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 Interest Account
as of any Valuation Date.
On each Valuation Date, the portion of the Contract Value allocated to
any particular Subaccount will be adjusted to reflect the investment
experience of that Subaccount for that date. 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 subsequent purchase
payments, 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 Portfolios of the Funds. The
investment performance of the Subaccounts will reflect increases or
decreases in the net asset value per share of the corresponding
Portfolios and any dividends or distributions declared by the
corresponding Portfolios. Any dividends or distributions from any
Portfolio of the Funds will be automatically reinvested in shares of the
same Portfolio, unless the Company, 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 full or partial
withdrawals, exchanges, and assessment of premium taxes 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
will 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 units 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 Portfolio of
the Funds, (2) any dividends or distributions paid by the corresponding
Portfolio, (3) the charges, if any, that may be assessed by the Company
for taxes attributable to the operation of the Subaccount, and (4) the
mortality and expense risk charge under the Contract.
FULL AND PARTIAL WITHDRAWALS
A Contractowner may obtain proceeds from a Contract by surrendering the
Contract for its 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 Payout Date, subject to restrictions on partial
withdrawals of Contract Value from the Fixed
<PAGE>
Variable Annuity Prospectus 21
Interest Account and limitations under 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 the Company at the T.
Rowe Price Variable Annuity Service Center. A proper written request must
include the written consent of any effective assignee or irrevocable
Beneficiary, if applicable. A Contractowner may direct Investment
Services to apply the proceeds of a full or partial withdrawal to the
purchase of shares of one or more of the T. Rowe Price Funds by so
indicating in their written withdrawal request.
The proceeds received upon a full withdrawal will be the Contract's
Withdrawal Value. The 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 the Company at the T. Rowe Price Variable Annuity
Service Center, less any premium taxes due and paid by the Company. 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 on the next page. A request
for a partial withdrawal will result in a payment by the Company 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 premium tax. If a partial withdrawal is
requested that would leave the Withdrawal Value in the Contract less than
$2,000, then the Company reserves the right to treat the partial
withdrawal as a request for a full withdrawal.
The amount of a partial withdrawal will be deducted from the Contract
Value in the Subaccounts and the Fixed Interest Account, according to the
Contractowner's instructions to the Company, subject to the restrictions
on partial withdrawals from the Fixed Interest Account. See "The Fixed
Interest Account" on page 27. If a Contractowner does not specify the
allocation, the Company will contact the Contractowner for instructions,
and the withdrawal will be effected as of the end of the Valuation Period
in which such instructions are obtained. A full or partial withdrawal,
including a systematic withdrawal, may be subject to a premium tax charge
to reimburse the Company for any tax on premiums on a Contract that may
be imposed by various states and municipalities. See "Premium Tax Charge"
on page 24.
A full or partial withdrawal, including a systematic withdrawal, may
result in receipt of taxable income to the Owner and, if made prior to
the Owner's attaining age 59 1/2, may be subject to a 10% penalty tax.
The tax consequences of a withdrawal under the Contract should be
carefully considered. See "Federal Tax Matters" on page 30.
SYSTEMATIC WITHDRAWALS
The Company 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 Payout Date by sending a
properly completed Systematic Withdrawal Request form to the Company at
the T. Rowe Price Variable Annuity Service Center. A Contractowner may
direct Investment Services to apply the proceeds of a systematic
withdrawal to the purchase of shares of one or more of the T. Rowe Price
Funds by so indicating on the Systematic Withdrawal Request form. A
proper request must include the written consent of any effective assignee
or irrevocable Beneficiary, if applicable. A Contractowner may designate
the systematic withdrawal amount as a percentage of Contract Value
allocated to the Subaccounts and/or Fixed Interest 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 the Company at the T. Rowe Price Variable Annuity Service
Center at least 30 days in advance of the requested date of termination
or modification.
Each systematic withdrawal must be at least $100. Upon payment, the
Contractowner's Contract Value will be reduced by an amount equal to the
payment proceeds plus any applicable premium
<PAGE>
Variable Annuity Prospectus 22
taxes. Any systematic withdrawal that equals or exceeds the Withdrawal
Value will be treated as a full withdrawal. In no event will payment of a
systematic withdrawal exceed the Withdrawal Value. The Contract will
automatically terminate if a systematic withdrawal causes the Contract's
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 to the
Contractowner's Contract Value in the Subaccounts and the Fixed Interest
Account as directed by the Contractowner.
The Company may, at any time, discontinue, modify, or suspend systematic
withdrawals provided that, as required by its current contractual
arrangements with Investment Services, the Company first obtains the
consent of Investment Services, which consent shall not be unreasonably
withheld. Systematic withdrawals from Contract Value allocated to the
Fixed Interest Account must provide for payments over a period of not
less than 36 months as described under "The Fixed Interest Account" on
page 27. The tax consequences of a systematic withdrawal, including the
10% penalty tax imposed on withdrawals made prior to the Owner's
attaining age 59 1/2, should be carefully considered. See "Federal Tax
Matters" on page 30.
FREE-LOOK RIGHT
An Owner may return a Contract within the Free-Look Period, which is
generally a 10-day period beginning when the Owner receives the Contract.
The returned Contract will then be deemed void and the Company will
refund any purchase payments allocated to the Fixed Interest Account plus
the Contract Value in the Subaccounts as of the end of the Valuation
Period during which the returned Contract is received by the Company. The
Company will return purchase payments allocated to the Subaccounts rather
than Contract Value in those states and circumstances in which it is
required to do so.
DEATH BENEFIT
If the Owner dies during the Accumulation Period, the Company will pay
the death benefit proceeds to the Designated Beneficiary upon receipt 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 surviving
spouse of the deceased Owner is the sole Designated Beneficiary, such
spouse may elect to continue the Contract in force, subject to certain
limitations. See "Distribution Requirements" on the next page. 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, and the amount of
the death benefit is based on the age of the oldest Annuitant on the date
the Contract was issued. If the death of an Owner occurs on or after the
Annuity Payout Date, no death benefit proceeds will be payable under the
Contract, except that any guaranteed annuity payments remaining unpaid
will continue to be paid to the Annuitant pursuant to the Annuity Option
in force at the date of death.
The death benefit proceeds will be the death benefit reduced by any
premium taxes due or paid by the Company. If an Owner dies during the
Accumulation Period and the age of each Owner was 75 or younger on the
date the Contract was issued, the amount of the death benefit will be the
greatest of (1) the Contract Value as of the end of the Valuation Period
in which due proof of death and instructions regarding payment are
received by the Company at the T. Rowe Price Variable Annuity Service
Center, (2) the aggregate purchase payments received less any reductions
caused by previous withdrawals, or (3) the stepped-up death benefit. The
stepped-up death benefit is: (a) the highest death benefit on any annual
Contract anniversary that is both an exact multiple of five and occurs
<PAGE>
Variable Annuity Prospectus 23
prior to the oldest Owner attaining age 76, plus (b) any purchase
payments made since the applicable fifth annual Contract anniversary,
less (c) any withdrawals since the applicable anniversary.
If an Owner dies during the Accumulation Period and the Contract was
issued to the Owner after age 75, the amount of the death benefit will be
the Contract Value as of the end of the Valuation Perio d in which due
proof of death and instructions regarding payment are received by the
Company at the T. Rowe Price Variable Annuity Service Center.
Notwithstanding the foregoing, the death benefit for Contracts issued in
Florida, regardless of age at issue, is the greater of (1) the Contract
Value as of the end of the Valuation Period in which due proof of death
and instructions regarding payment are received at the T. Rowe Price
Variable Annuity Service Center, or (2) the aggregate purchase payments
received less any reductions caused by previous withdrawals.
The death benefit proceeds will be paid to the Designated Beneficiary in
a single sum or under one of the Annuity Options, 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. See
"Federal Tax Matters," on page 31 for a discussion of the tax
consequences in the event of death.
DISTRIBUTION REQUIREMENTS
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 elect to continue the Contract in force
until the earlier of the surviving spouse's death or the Annuity Payout
Date or to receive the death benefit proceeds. For any Designated
Beneficiary other than a surviving spouse, only those options may be
chosen that provide for complete distribution of the Owner's interest in
the Contract within five years of the death of the Owner. If the
Designated Beneficiary is a natural person, that person alternatively 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 any
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.
DEATH OF THE ANNUITANT
If the Annuitant dies prior to the Annuity Payout 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. If a new Annuitant is not named, the
Company will designate the Owner as Annuitant. On the death of the
Annuitant on or after the Annuity Payout Date, any guaranteed annuity
payments remaining unpaid will continue to be paid to the Designated
Beneficiary pursuant to the Annuity Option in force at the date of death.
CHARGES AND DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a daily charge from the assets of each Subaccount for
mortality and expense risks assumed by the Company under the Contracts.
The charge is equal to an annual rate of .55%
<PAGE>
Variable Annuity Prospectus 24
of each Subaccount's average daily net assets. This amount is intended to
compensate the Company for certain mortality and expense risks the
Company assumes in offering and administering the Contracts and in
operating the Subaccounts.
The expense risk borne by the Company is the risk that the Company's
actual expenses in issuing and administering the Contracts and operating
the Subaccounts will be more than the profit realized from the mortality
and expense risk charge. The mortality risk borne by the Company is the
risk that Annuitants, as a group, will live longer than the Company's
actuarial tables predict. In this event, the Company 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. The Company also assumes a mortality
risk in connection with the death benefit under the Contract.
The Company may ultimately realize a profit from this charge to the
extent it is not needed to cover mortality and administrative expenses,
but the Company may realize a loss to the extent the charge is not
sufficient. The Company may use any profit derived from this charge for
any lawful purpose, including any promotional and administrative
expenses, including compensation paid by the Company to T. Rowe Price
Insurance Agency, Inc., at the annual rate of .10% of each Subaccount's
average daily net assets for administrative services.
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 the Company's status in a particular state. The Company 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. The Company reserves the right to deduct premium taxes when
due or anytime thereafter. Premium tax rates currently range from 0% to
3.5%, but are subject to change by a governmental entity.
OTHER CHARGES
The Company may charge the Separate Account or the Subaccounts for the
federal, state, or local taxes incurred by the Company that are
attributable to the Separate Account or the Subaccounts, or to the
operations of the Company 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 the
Company and the Separate Account" and "Charge for the Company's Taxes,"
page 31.
GUARANTEE OF CERTAIN CHARGES
The Company guarantees that the charge for mortality and expense risks
will not exceed an annual rate of .55% of each Subaccount's average daily
net assets.
FUND EXPENSES
Each Subaccount of the Separate Account purchases shares at the net asset
value of the corresponding Portfolio of the Funds. Each Portfolio's net
asset value reflects the investment management fee and any other expenses
that are deducted from the assets of the Fund. These fees and expenses
are not deducted from the Subaccount, but are paid from the assets of the
corresponding Portfolio. As a result, the Owner indirectly bears a pro
rata portion of such fees and expenses. The management fees and other
expenses, if any, which are more fully described in the Funds'
prospectus, are not specified or fixed under the terms of the Contract,
and the Company bears no responsibility for such fees and expenses.
<PAGE>
Variable Annuity Prospectus 25
ANNUITY PERIOD
GENERAL
The Contractowner may select the Annuity Payout Date at the time of
application. The Annuity Payout Date may not be deferred beyond the
Annuitant's 90th birthday, although the terms of a Qualified Plan and the
laws of certain states may require annuitization at an earlier age. If
the Contractowner does not select an Annuity Payout Date, the Annuity
Payout Date will be the later of the Annuitant's 70th birthday or the
tenth annual Contract Anniversary. See "Selection of an Option," on page
27. If there are Joint Annuitants, the birth date of the older Annuitant
will be used to determine the latest Annuity Payout Date.
On the Annuity Payout Date, the proceeds under the Contract will be
applied to provide an annuity under one of the options described on page
26. Each option is available in two formseith er as a variable annuity
supported by the Subaccounts or as a fixed annuity supported by the Fixed
Interest 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 Interest 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 Interest Account as of
the Annuity Payout Date, reduced by any applicable premium taxes.
The Contract provides for seven Annuity Options. Other Annuity Options
may be available upon request at the discretion of the Company. Annuity
payments under Annuity Options 1 through 4 are based upon annuity rates
that vary with the Annuity Option selected. In the case of Options 1
through 4, the annuity rates will vary based on the age and sex of the
Annuitant, except that unisex rates are used where required by law. In
the case of Options 5, 6, and 7 as described on page 26, annuity rates
based on age and sex are not used to calculate annuity payments. The
annuity rates are based upon an 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 Option 2 which shall be an
annuity payable monthly during the lifetime of the Annuitant with
payments guaranteed to be made for 120 months.
Annuity payments can be made on a monthly, quarterly, semiannual, or
annual basis, although no payments will be made for less than $100. A
Contractowner may direct Investment Services to apply the proceeds of an
annuity payment to shares of one or more of the T. Rowe Price Funds by
submitting a written request to the T. Rowe Price Variable Annuity
Service Center. If the frequency of payments selected would result in
payments of less than $100, the Company reserves the right to change the
frequency.
An Owner may designate or change an Annuity Payout Date, Annuity Option,
and Annuitant, provided proper written notice is received by the Company
at the T. Rowe Price Variable Annuity Service Center at least 30 days
prior to the Annuity Payout Date set forth in the Contract. The date
selected as the new Annuity Payout Date must be at least 30 days after
the date written notice requesting a change of Annuity Payout Date is
received at the T. Rowe Price Variable Annuity Service Center.
During the Annuity Period, Contract Value may be exchanged among the
Subaccounts by the Contractowner upon proper written request to the T.
Rowe Price Variable Annuity Service Center. Up to six exchanges are
allowed in any Contract Year. Exchanges are not allowed within 30 days of
the Annuity Payout Date. If one of Annuity Options 5 through 7 is
selected, Contract Value also may be exchanged between the Subaccounts
and the Fixed Interest Account, subject to the restrictions on exchanges
from the Fixed Interest Account described under "The Fixed Interest
Account," page 27.
<PAGE>
Variable Annuity Prospectus 26
The minimum exchange amount is $500 or, if less, the amount remaining in
the Fixed Interest Account or Subaccount.
Once annuity payments have commenced under Annuity Options 1, 2, 3, or 4,
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 specifies annuity tables for Annuity Options 1
through 4 described below which contain the guaranteed minimum dollar
amount of periodic annuity payments for each $1,000 applied to an Annuity
Option for a fixed annuity.
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 5,
10, 15, or 20 years, as elected, annuity payments will be continued
during the remainder of such period to the Designated Beneficiary.
OPTION 3 - LIFE WITH INSTALLMENT OR UNIT 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 SPECIFIED PERIOD Periodic annuity payments will
be made for a fixed period, which may be from 5 to 20 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.
OPTION 7 - AGE RECALCULATION Periodic annuity payments will be made based
upon the Annuitant's life expectancy, or the joint life expectancies of
the Annuitant and a beneficiary, at the Annuitant's attained age (and the
beneficiary's attained or adjusted age, if applicable) each year. The
payments are computed by reference to actuarial tables prescribed by the
Treasury Secretary, until the amount applied is exhausted. This option
should be elected only under Contracts funding Qualified Plans.
<PAGE>
Variable Annuity Prospectus 27
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
(other than life income) 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 10 years younger than the Annuitant. For Non-Qualified Plans, the
Company does not allow annuity payments to be deferred beyond the
Annuitant's 90th birthday.
THE FIXED INTEREST ACCOUNT
Contractowners may allocate all or a portion of their purchase payments
and exchange Contract Value to the Fixed Interest Account. Amounts
allocated to the Fixed Interest Account become part of the Company's
General Account, which supports the Company's insurance and annuity
obligations. The Company's General Account is subject to regulation and
supervision by the Kansas Department of Insurance and is also subject to
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 Interest Account have not
been registered as securities under the Securities Act of 1933 (the "1933
Act") and the Fixed Interest Account has not been registered as an
investment company under the Investment Company Act of 1940 (the "1940
Act"). Accordingly, neither the Fixed Interest Account nor any interests
therein are generally subject to the provisions of the 1933 Act or the
1940 Act. The Company has been ad vised that the staff of the SEC has not
reviewed the disclosure in this Prospectus relating to the Fixed Interest
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 Interest Account. For more
information regarding the Fixed Interest Account, see "The Contract" on
page 15.
Amounts allocated to the Fixed Interest Account become part of the
General Account of the Company, which consists of all assets owned by the
Company other than those in the Separate Account and other separate
accounts of the Company. Subject to applicable law, the Company has sole
discretion over the investment of the assets of its General Account.
INTEREST
Amounts allocated to the Fixed Interest Account earn interest at a fixed
rate or rates that are paid by the Company. The Contract Value in the
Fixed Interest Account earns interest at an interest rate that is
guaranteed to be at least an annual effective rate of 3% which will
accrue daily ("Guaranteed Rate"). Such interest will be paid regardless
of the actual investment experience of the Company's General Account. In
addition, the Company may in its discretion pay interest at a rate
("Current Rate") that exceeds the Guaranteed Rate. The Company will
determine the Current Rate, if any, from time to time.
Contract Value allocated or exchanged to the Fixed Interest Account will
earn interest at the Current Rate, if any, in effect on the date such
portion of Contract Value is allocated or exchanged to the Fixed Interest
Account. The Current Rate paid on any such portion of Contract Value
allocated or
<PAGE>
Variable Annuity Prospectus 28
exchanged to the Fixed Interest Account will be guaranteed for rolling
periods of one or more years (each a "Guarantee Period"). The Company
currently offers only Guarantee Periods of one year. Upon expiration of
any Guarantee Period, a new Guarantee Period of the same duration begins
with respect to that portion of Contract Value, which will earn interest
at the Current Rate, if any, declared by the Company on the first day of
the new Guarantee Period.
Contract Value allocated or exchanged to the Fixed Interest Account at
one point in time may be credited with a different Current Rate than
amounts allocated or exchanged to the Fixed Interest Account at another
point in time. For example, amounts allocated to the Fixed Interest
Account in June may be credited with a different current rate than
amounts allocated to the Fixed Interest Account in July. In addition, if
Guarantee Periods of different durations are offered, Contract Value
allocated or exchanged to the Fixed Interest Account for a Guarantee
Period of one duration may be credited with a different Current Rate than
amounts allocated or exchanged to the Fixed Interest Account for a
Guarantee Period of a different duration. Therefore, at any time, various
portions of a Contractowner's Contract Value in the Fixed Interest
Account may be earning interest at different Current Rates depending upon
the point in time such portions were allocated or exchanged to the Fixed
Interest Account and the duration of the Guarantee Period. The Company
bears the investment risk for the Contract Value allocated to the Fixed
Interest Account and for paying interest at the Guaranteed Rate on
amounts allocated to the Fixed Interest Account.
For purposes of determining the interest rates to be credited on Contract
Value in the Fixed Interest Account, withdrawals or exchanges from the
Fixed Interest Account will be deemed to be taken first from any portion
of Contract Value allocated to the Fixed Interest Account for which the
Guarantee Period expires during the calendar month in which the
withdrawal, loan, or exchange is effected, then in the order beginning
with that portion of such Contract Value which has the longest amount of
time remaining before the end of its Guarantee Period and ending with
that portion which has the least amount of time remaining before the end
of its Guarantee Period. For more information about exchanges and
withdrawals from the Fixed Interest Account, see "Exchanges and
Withdrawals" below.
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 Interest
Account as for a Contract that has Contract Value allocated to the
Subaccounts. See "Death Benefit," page 22.
CONTRACT CHARGES
Premium taxes will be the same for Contractowners who allocate purchase
payments or exchange Contract Value to the Fixed Interest Account as for
those who allocate purchase payments to the Subaccounts. The charge for
mortality and expense risks will not be assessed against the Fixed
Interest Account, and any amounts that the Company pays for income taxes
allocable to the Subaccounts will not be charged against the Fixed
Interest Account. In addition, the investment management fees and any
other expenses paid by the Funds will not be paid directly or indirectly
by Contractowners to the extent the Contract Value is allocated to the
Fixed Interest Account; however, such Contractowners will not participate
in the investment experience of the Subaccounts.
EXCHANGES AND WITHDRAWALS
Amounts may be exchanged from the Subaccounts to the Fixed Interest
Account and from the Fixed Interest Account to the Subaccounts, subject
to the following limitations. Exchanges from the Fixed Interest Account
are allowed only (1) from Contract Value, the Guarantee Period of which
expires during the calendar month in which the exchange is effected, (2)
pursuant to the Dollar Cost Averaging Option provided that such exchanges
are scheduled to be made over a period of not less
<PAGE>
Variable Annuity Prospectus 29
than one year, and (3) pursuant to the Asset Rebalancing Option, provided
that upon receipt of the Asset Rebalancing Request, Contract Value is
allocated among the Fixed Interest Account and the Subaccounts in the
percentages selected by the Contractowner without violating the
restrictions on exchanges from the Fixed Interest Account set forth in
(1) above. Accordingly, a Contractowner who desires to implement the
Asset Rebalancing Option should do so at a time when Contract Value may
be exchanged from the Fixed Interest Account to the Subaccounts in the
percentages selected by the Contractowner without violating the
restrictions on exchanges from the Fixed Interest Account. Once an Asset
Rebalancing Option is implemented, the restrictions on exchanges will not
apply to exchanges made pursuant to the Option. Up to six exchanges are
allowed in any Contract Year and exchanges pursuant to the Dollar Cost
Averaging and Asset Rebalancing Options are not included in the six
exchanges allowed per Contract Year. The minimum exchange amount is $500
($200 under the Dollar Cost Averaging Option) or the amount remaining in
the Fixed Interest Account. The Company reserves the right to waive or
limit the number of exchanges permitted each Contract Year, to suspend
exchanges, to limit the amount that may be subject to exchanges and the
amount remaining in an account after an exchange, and to impose
conditions on the right to exchange.
If Contract Value is being exchanged from the Fixed Interest Account
pursuant to the Dollar Cost Averaging or Asset Rebalancing Option or
withdrawn from the Fixed Interest Account pursuant to systematic
withdrawals, any purchase payment allocated to, or Contract Value
exchanged to or from, the Fixed Interest Account will automatically
terminate such Dollar Cost Averaging or Asset Rebalancing Option or
systematic withdrawals, and any withdrawal from the Fixed Interest
Account or the Subaccounts will automatically terminate the Asset
Rebalancing Option. In the event of automatic termination of any of the
foregoing options, the Company shall so notify the Contractowner, and the
Contractowner may reestablish Dollar Cost Averaging, Asset Rebalancing,
or systematic withdrawals by sending a written request to the Company,
provided that the Owner's Contract Value at that time meets any minimum
amount required for the Dollar Cost Averaging or Asset Rebalancing
Option.
The Contractowner may also make full withdrawals to the same extent as a
Contractowner who has allocated Contract Value to the Subaccounts. A
Contractowner may make a partial withdrawal from the Fixed Interest
Account only (1) from Contract Value, the Guarantee Period of which
expires during the calendar month in which the partial withdrawal is
effected, (2) pursuant to systematic withdrawals, and (3) once per
Contract Year in an amount up to the greater of $5,000 or 10 percent of
Contract Value allocated to the Fixed Interest Account at the time of the
partial withdrawal. Systematic withdrawals from Contract Value allocated
to the Fixed Interest Account must provide for payments over a period of
not less than 36 months. See "Full and Partial Withdrawals," page 20 and
"Systematic Withdrawals," page 21.
PAYMENTS FROM THE FIXED INTEREST ACCOUNT
As required by most states, the Company reserves the right to delay for
up to six months after a written request in proper form is received by
the Company at the T. Rowe Price Variable Annuity Service Center, full
and partial withdrawals and exchanges from the Fixed Interest Account.
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 Interest Account. The Company does not expect to delay payments
from the Fixed Interest Account and will notify the Contractowner if
there will be a delay.
MORE ABOUT THE CONTRACT
OWNERSHIP
The Contractowner is the person named as such in the application or in
any later change shown in the Company's records. While living, the
Contractowner alone has the right to receive all benefits
<PAGE>
Variable Annuity Prospectus 30
and exercise all rights that the Contract grants or the Compan y allows.
The Owner may be an entity that is not a living person, such as a trust
or corporation, referred to herein as "Non-Natural Persons." See "Federal
Tax Matters," below.
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. 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 the Company's records. The Contractowner may change
the Beneficiary at any time while the Contract is in force by written
request on a form provided by the Company and received by the Company at
the T. Rowe Price Variable Annuity Service Center. The change will not be
binding on the Company until it is received and recorded at the T. Rowe
Price Variable Annuity Service Center. The change will be effective as of
the date this form is signed subject to any payments made or other
actions taken by the Company before the change is received and recorded.
A Secondary Beneficiary may be designated. The Owner may designate a
permanent Beneficiary whose rights under the Contract cannot be changed
without the Beneficiary's consent.
PARTICIPATING
The Contract is participating and will share in the surplus earnings of
the Company. However, the current dividend scale is zero, and the Company
does not anticipate that dividends will be paid.
PAYMENTS FROM THE SEPARATE ACCOUNT
The Company will pay any full or partial withdrawal benefit or death
benefit proceeds from Contract Value allocated to the Subaccounts, and
will effect an exchange between Subaccounts or from a Subaccount to the
Fixed Interest Account within seven days from the Valuation Date a proper
request is received at the T. Rowe Price Variable Annuity Service Center.
However, the Company can postpone the calculation or payment of such a
payment or exchange of amounts from the Subaccounts to the extent
permitted under applicable law, 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, or (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.
PROOF OF AGE AND SURVIVAL
The Company 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 the Company under the Contract
shall be such as the Contract Value would have provided for the correct
age or sex (unless unisex rates apply).
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").
<PAGE>
Variable Annuity Prospectus 31
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 for which the Contract is purchased, the tax and
employment status of the individuals involved, and a number of other
factors. The discussion of the federal income tax considerations relating
to a contract contained herein and in the Statement of Additional
Information is general in nature and is not intended to be an exhaustive
discussion of all questions that might arise in connection with a
Contract. It is based upon the Company'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 the tax laws and the
fact that tax results will vary according to the particular circumstances
of the individual involved and, if applicable, the Qualified Plan, a
person should consult a qualified tax adviser regarding the purchase of a
Contract, the selection of an Annuity Option under a Contract, the
receipt of annuity payments under a Contract, or any other transaction
involving a Contract (including an exchange). THE COMPANY DOES NOT MAKE
ANY GUARANTEE REGARDING THE TAX STATUS OF, OR TAX CONSEQUENCES ARISING
FROM, ANY CONTRACT OR ANY TRANSACTION INVOLVING THE CONTRACT.
TAX STATUS OF THE COMPANY AND THE SEPARATE ACCOUNT
GENERAL
The Company intends to be taxed as a life insurance company under Part I,
Subchapter L of the Code. Because the operations of the Separate Account
form a part of the Company, the Company will be responsible for any
federal income taxes that become payable with respect to the income of
the Separate Account and its Subaccounts.
CHARGE FOR THE COMPANY'S TAXES
A charge may be made against the Separate Account for any federal taxes
incurred by the Company that are attributable to the Separate Account,
the Subaccounts, or to the operations of the Company with respect to the
Contracts or attributable to payments, premiums, or acquisition costs
under the Contracts. The Company will review the question of a charge to
the Separate Account, the Subaccounts, or the Contracts for the Company's
federal taxes periodically. Charges may become necessary if, among other
reasons, the tax treatment of the Company or of income and expenses under
the Contracts is ultimately determined to be other than what the Company
currently believes it to be, if there are changes made in the federal
income tax treatment of variable annuities at the insurance company
level, or if there is a change in the Company's tax status.
Under current laws, the Company 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, the Company 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 of the Portfolios 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 (or on any day within 30 days thereafter), no more
than 55% of the total assets of a Portfolio may be represented by any one
investment, no more than 70% may be represented by any two investments,
no more than 80% may be represented by any three investments, and no more
than 90% may be represented by any
<PAGE>
Variable Annuity Prospectus 32
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. The Separate
Account, through the Portfolios, intends to comply with the
diversification requirements of Section 817(h).
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of
the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the variable contractowner's gross income. The IRS has
stated in published rulings that a variable contractowner will be
considered the owner of separate account assets if the contractowner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments
of a segregated asset account may cause the investor (i.e., the
policyowner), rather than the insurance company, to be treated as the
owner of the assets in the account." This announce ment also stated that
guidance would be issued by way of regulations or rulings on the "extent
to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As
of the date of this Prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it
was determined that policyowners were not owners of separate account
assets. For example, the Contractowner has additional flexibility in
allocating purchase payments and Contract Values. These differences could
result in a Contractowner being treated as the owner of a pro rata
portion of the assets of the Separate Account. In addition, the Company
does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it
expects to issue. The Company therefore reserves the right to modify the
Contract, as deemed appropriate by the Company, to attempt to prevent a
Contractowner from being considered the owner of a pro rata share of the
assets of the Separate Account. Moreover, in the event that regulations
or rulings are adopted, there can be no assurance that the Portfolios
will be able to operate as currently described in the Prospectus, or that
the Funds will not have to change any Portfolio's investment objective or
investment policies.
INCOME TAXATION OF ANNUITIES IN GENERAL-NON-QUALIFIED PLANS
Section 72 of the Code governs the 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 34 and "Diversification Standards" on page 31. 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 the Company of that election.
* Surrenders or Withdrawals Prior to the Annuity Payout Date Code Section
72 provides that amounts received upon a total or partial withdrawal
(including systematic withdrawals) from a Contract prior to the Annuity
Payout 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 are
generally treated as distributions under the Contract.
<PAGE>
Variable Annuity Prospectus 33
* Surrenders or Withdrawals on or after the Annuity Payout Date Upon a
complete surrender, the receipt is taxable to the extent that the cash
value of the Contract exceeds the investment in the Contract. The taxable
portion of such payments will be taxed at ordinary income tax rates. For
fixed annuity payments, the taxable portion of each payment generally 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. The remaining portion of each payment is taxed at
ordinary income rates. For variable annuity payments, the taxable portion
of each payment is determined by using a formula known as the "excludable
amount," which establishes the non-taxable portion of each payment. The
non-taxable portion is a fixed dollar amount for each payment, determined
by dividing the investment in the Contract by the number of payments to
be made. The remainder of each variable annuity payment is taxable. 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.
* 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 generally imposed equal to 10% of the portion of such
amount which is includible in gross income. However, the penalty 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
* Distribution-at-Death Rules In order to be treated as an annuity
contract, a Contract must provide the following two distribution rules:
(a) if any owner dies on or after the Annuity Payout 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 any owner dies before
the Annuity Payout 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 sole designated beneficiary is the
spouse of the deceased 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.
<PAGE>
Variable Annuity Prospectus 34
Generally, for purposes of determining when distributions must begin
under the foregoing rules, where an 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 Beneficiary is the deceased owner's spouse.
* Gift of Annuity Contracts Generally, gifts of Non-Qualified Plan
Contracts prior to the Annuity Payout 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% penalty tax and gift tax also may
be applicable. This provision does not apply to transfers between spouses
or incident to a divorce.
* Contracts Owned by Non-Natural Persons 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 includible 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.
* Multiple Contract Rule For purposes of determining the amount of any
distribution under Code Section 72(e) (amounts not received as annuities)
that is includible in gross income, all Non-Qualified annuit y 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 Payout
Date, such as a partial withdrawal, dividend, or loan, will be taxable
(and possibly subject to the 10% 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 Payout 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% penalty
tax) to the extent 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.
* Possible Tax Changes In recent years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities,
and President Clinton's fiscal-year 1999 Budget proposal includes a
provision that, if adopted, would impose new taxes on owners of variable
annuities. There is always the possibility that the tax treatment of
annuities could change by legislation or other means (such as IRS
regulations, revenue rulings, and judicial decisions). Moreover, although
unlikely, it is also possible that any legislative change could be
retroactive (that is, effective prior to the date of such change).
* Transfers, Assignments, or Exchanges of a Contract A transfer of
ownership of a Contract, the designation of an Annuitant, Payee, or other
Beneficiary who is not also the Owner, the selection of certain Annuity
Payout Dates or the exchange of a Contract may result in certain tax
consequences to the Owner that are not discussed herein. An Owner
contemplating any such transfer, assignment, selection, or exchange
should contact a qualified tax adviser with respect to the potential
effects of such a transaction.
<PAGE>
Variable Annuity Prospectus 35
QUALIFIED PLANS
The Contract may be used as a Qualified Plan that meets the requirements
of an individual retirement annuity ("IRA") under Section 408 of the
Code. No attempt is made herein to provide more than general information
about the use of the Contract as a Qualified Plan. Contractowners,
Annuitants, and Beneficiaries are cautioned that the rights of any person
to any benefits under such Qualified Plans may be limited by applicable
law, regardless of the terms and conditions of the Contract issued in
connection therewith.
The amount that may be contributed to a Qualified Plan is subject to
limitations under the Code. In addition, early distributions from
Qualified Plans may be subject to penalty taxes. 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. These rules and requirements may not be incorporated into
our Contract administration procedures. Therefore, Contractowners,
Annuitants, and Beneficiaries are responsible for determining that
contributions, distributions, and other transactions with respect to the
Contracts comply with applicable law.
THE FOLLOWING IS A BRIEF DESCRIPTION OF QUALIFIED PLANS AND THE USE OF THE
CONTRACT THEREWITH:
* SECTION 408
Section 408 of the Code permits eligible individuals to establish
individual retirement programs through the purchase of Individual
Retirement Annuities ("traditional IRAs"). The Contract may be purchased
as an IRA. The IRAs described in this paragraph are called "traditional
IRAs" to distinguish them from "Roth IRAs" which became available in
1998.
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 a traditional IRA may be made on a deductible or
nondeductible 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 and will
have the right to revoke the Contract under certain circumstances. See
the IRA Disclosure Statement which accompanies this Prospectus.
An individual's interest in a traditional IRA must generally be
distributed or begin to be distributed not later than April 1 of the
calendar year following the calendar year in which the individual reaches
age 70 1/2 ("required beginning date"). The Contractowner's retirement
date, if any, will not affect his or her required beginning date.
Periodic distributions must not extend beyond the life of the individual
or the lives of the individual and a designated beneficiary (or over a
period extending beyond the life expectancy of the individual or the
joint life expectancy of the individual and a designated beneficiary).
If an individual dies before reaching his or her required beginning date,
the individual's entire interest must generally be distributed within
five years of the individual's death. However, the five-year rule will be
deemed satisfied if distributions begin before the close of the calendar
year following the individual'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
<PAGE>
Variable Annuity Prospectus 36
the individual's surviving spouse, distributions may be delayed until the
individual would have reached age 70 1/2.
If an individual dies after reaching his or her required beginning date,
the individual's interest must generally be distributed at least as
rapidly as under the method of distribution in effect at the time of the
individual's death.
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 bear to the expected return under the IRA.
The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the provision in
the Contract comports with IRA qualification requirements.
* Tax Penalties
PREMATURE DISTRIBUTION TAX. Distributions from a Qualified Plan before
the owner reaches age 59 1/2 are generally subject to an additional tax
equal to 10% of the taxable portion of the distribution. The 10% penalty
tax does not apply to distributions: (i) made on or after the death of
the Owner; (ii) attributable to the Owner'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 Owner or the joint
lives (or joint life expectancies) of the Owner and a designated
beneficiary; (iv) made to pay for certain medical expenses; (v) that are
exempt withdrawals of an excess contribution; (vi) that are rolled over
or transferred in accordance with Code requirements; or (vii) which,
subject to certain restrictions, do not exceed the health insurance
premiums paid by unemployed individuals in certain cases. Starting
January 1, 1998, there are two additional exceptions to the 10% penalty
tax on withdrawals from IRAs before age 59 1/2: withdrawals made to pay
"qualified higher education expenses" and certain "qualified first-time
homebuyer distributions."
MINIMUM DISTRIBUTION TAX. If the amount distributed from a Qualified Plan
is less than the minimum required distribution for the year, the Owner is
subject to a 50% tax on the amount that was not properly distributed.
EXCESS DISTRIBUTION/ACCUMULATION TAX. The penalty tax of 15% which was
imposed (in addition to any ordinary income tax) on large plan
distributions and the "excess retirement accumulations" of an individual
has been repealed, effective January 1, 1997.
* Withholding
Periodic distributions (e.g., annuities and installment payments) from a
Qualified Plan that will last for a period of 10 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 10 years) 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 applicable
to 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
<PAGE>
Variable Annuity Prospectus 37
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 FUND SHARES
The Company is the legal owner of the shares of the Funds held by the
Subaccounts of the Separate Account. The Company will exercise voting
rights attributable to the shares of each Portfolio of the Funds held in
the Subaccounts at any regular and special meetings of the shareholders
of the Funds on matters requiring shareholder voting under the 1940 Act.
In accordance with its view of presently applicable law, the Company 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 the Company determines that it is permitted to vote the shares of
the Funds 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 Portfolio as to which voting instructions may be given to the
Company 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
Portfolio 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
Fund for determining shareholders eligible to vote at the meeting of the
Fund. If required by the SEC, the Company reserves the right to determine
in a different fashion the voting rights attributable to the shares of
the Funds. Voting instructions may be cast in person or by proxy.
Voting rights attributable to the Contractowner's Contract Value in a
Subaccount for which no timely voting instructions are received will be
voted by the Company in the same proportion as the voting instructions
that are received in a timely manner for all Contracts participating in
that Subaccount. The Company 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.
SUBSTITUTION OF INVESTMENTS
The Company 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 Portfolios of the Funds should
no longer be available for investment, or if the Company receives an
opinion from counsel acceptable to Investment Services that substitution
is in the best interest of Contractowners and that further investment in
shares of the Portfolio(s) would cause undue risk to the Company, the
Company may substitute shares of another Portfolio of the Funds or of a
different fund for shares already purchased, or to be purchased in the
future under the Contract. The Company may also purchase, through the
Subaccount, other securities for other classes of 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, the Company
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.
<PAGE>
Variable Annuity Prospectus 38
The Company also reserves the right to establish additional Subaccounts
of the Separate Account that would invest in a new Portfolio of one of
the Funds or in shares of another investment company, a series thereof,
or other suitable investment vehicle. New Subaccounts may be established
by the Company with the consent of Investment Services, and any new
Subaccount will be made available to existing Owners on a basis to be
determined by the Company and Investment Services. The Company may also
eliminate or combine one or more Subaccounts if marketing, tax, or
investment conditions so warrant.
Subject to compliance with applicable law, the Company may transfer
assets to the General Account with the consent of Investment Services.
The Company 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 with the consent of Investment
Services.
In the event of any such substitution or change, the Company 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 the Company 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 the Company or an affiliate thereof. Subject
to compliance with applicable law, the Company 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
The Company 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. The Company 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 Interest
Account and the Subaccounts and any other information required by law.
Confirmations will also be sent out upon purchase payments, exchanges,
loans, loan repayments, and full and partial withdrawals. Certain
transactions will be confirmed quarterly. These transactions include
exchanges under the Dollar Cost Averaging and Asset Rebalancing Options,
purchase payments made under an Automatic Investment Program, systematic
withdrawals, and annuity payments.
Each Contractowner will also receive an annual and semiannual report
containing financial statements for the Portfolios, which will include a
list of the portfolio securities of the Portfolios, as required by the
1940 Act, and/or such other reports as may be required by federal
securities laws.
TELEPHONE EXCHANGE PRIVILEGES
A Contractowner may request an exchange of Contract Value by telephone if
an Authorization for Telephone Requests form ("Telephone Authorization")
has been completed, signed, and filed at the T. Rowe Price Variable
Annuity Service Center. The Company has established procedures to confirm
that instructions communicated by telephone are genuine and will not be
liable for any losses due to fraudulent or unauthorized instructions,
provided that it complies with its procedures. The Company's
<PAGE>
Variable Annuity Prospectus 39
procedures require that any person requesting an exchange by telephone
provide the account number and the Owner's tax identification number and
such instructions must be received on a recorded line. The Company
reserves the right to deny any telephone exchange 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 exchanges by telephone and would have to submit written requests.
By authorizing telephone exchanges, a Contractowner authorizes the
Company to accept and act upon telephonic instructions for exchanges
involving the Contractowner's Contract, and agrees that neither the
Company, nor any of its affiliates, nor the Funds, nor any of their
directors, trustees, officers, employees, or agents, will be liable for
any loss, damages, cost, or expense (including attorney's fe es) arising
out of any requests effected in accordance with the Telephone
Authorization and believed by the Company to be genuine, provided that
the Company has complied with its procedures. As a result of this policy
on telephone requests, the Contractowner will bear the risk of loss
arising from the telephone exchange privileges. The Company may
discontinue, modify, or suspend telephone exchange privileges at any
time.
DISTRIBUTION OF THE CONTRACT
T. Rowe Price Investment Services, Inc. ("Investment Services"), is the
distributor of the Contracts. Investment Services also acts as the
distributor of certain mutual funds advised by T. Rowe Price and
Price-Fleming. Investment Services is registered with the SEC as a
broker-dealer under the Securities Exchange Act of 1934, and in all 50
states, the District of Columbia, and Puerto Rico. Investment Services is
a member of the National Association of Securities Dealers, Inc.
Investment Services is a wholly owned subsidiary of T. Rowe Price and is
an affiliate of the Funds.
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, the Company'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., the
Company's Associate General Counsel.
Legal matters relating to the federal securities and federal income tax
laws have been passed upon by Dechert Price & Rhoads, Washington, D.C.
PERFORMANCE INFORMATION
Performance information for the Subaccounts of the Separate Account,
including the yield and total return of all Subaccounts may appear in
advertisements, reports, and promotional literature to current or
prospective Owners.
Current yield for the Prime Reserve Subaccount will be based on
investment income received by a hypothetical investment over a given
seven-day period (less expenses accrued during the period), and then
"annualized" (i.e., assuming that the seven-day yield would be received
for 52 weeks, stated in terms of an annual percentage return on the
investment). "Effective yield" for the Prime Reserve Subaccount is
calculated in a manner similar to that used to calculate yield but
reflects the compounding effect of earnings.
<PAGE>
Variable Annuity Prospectus 40
For the other 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 1, 5, and 10 years (or, if
less, up to the life of the Subaccount), and will reflect the deduction
of the mortality and expense risk charge and may simultaneously be shown
for other periods. Where the Portfolio in which a Subaccount invests was
established prior to inception of the Subaccount, quotations of total
return may include quotations for periods beginning prior to the
Subaccount's date of inception. Such quotations of total return are based
upon the performance of the Subaccount's corresponding Portfolio adjusted
to reflect deduction of the mortality and expense risk charge.
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 the
investment objectives and policies, characteristics, and quality of the
Portfolio 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 and the usage of other performance related information, see
the Statement of Additional Information.
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
has been filed as a part of the Registration Statement and does not
contain all of the information set forth in the Registration Statement
and exhibits thereto, and reference is made to such Registration
Statement and exhibits for further information relating to the Company
and the Contract. Statements contained in this Prospectus, as to the
content of the Contract and other legal instruments, are summaries. For a
complete statement of the terms thereof, reference is made to the
instruments filed as exhibits to the Registration Statement. The
Registration Statement and the exhibits thereto may be inspected and
copied at the SEC's office, located at 450 Fifth Street, N.W.,
Washington, D.C.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company at December 31, 1997
and 1996, and for each of the three years in the period ended December
31, 1997, and the financial statements of the Separate Account as of
December 31, 1997, and for the years ended December 31, 1997 and 1996,
are included in the Statement of Additional Information.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific
information and financial statements relating to the Company and the
Separate Account. The Table of Contents of the Statement of Additional
Information is set forth on page 41.
<PAGE>
Variable Annuity Prospectus 41
TABLE OF CONTENTS
General Information and History 1
Distribution of the Contract 1
Limits on Premiums Paid Under Tax-Qualified Retirement Plans 1
Experts 2
Performance Information 2
Financial Statements 4
<PAGE>
IRA DISCLOSURE STATEMENT
IRA DISCLOSURE STATEMENT
This Disclosure Statement describes the statutory and regulatory
provisions applicable to the operation of Individual Retirement
Annuities. Internal Revenue Service regulations require that this be
given to each person desiring to establish an Individual Retirement
Annuity. Further information can be obtained from any district office of
the Internal Revenue Service.
RIGHT TO REVOKE
You may revoke your Individual Retirement Annuity within seven days of
the date your first purchase payment is received by Security Benefit Life
Insurance Company. To revoke your Individual Retirement Annuity and
receive a refund of the entire amount you paid, you must mail or deliver
a written notice of revocation, signed exactly as your signature appears
on your variable annuity application to: T. Rowe Price Variable Annuity
Service Center, P.O. Box 750440, Topeka, KS 66675-0440, 1-800-888-2461.
If you send your revocation notice by First Class Mail, we will consider
that you have notified us as of the date of the postmark on the envelope.
If you send it by Certified or Registered Mail, you will have notified us
as of the certification or registration date on the label. In either
case, the revocation notice must be properly addressed and mailed, with
postage prepaid. Upon receipt of a timely revocation notice, the entire
amount of your contribution will be returned to you without adjustment
for sales commissions, administrative fees, or market value fluctuation.
WHAT ARE THE STATUTORY REQUIREMENTS?
An Individual Retirement Annuity contract must meet the following
requirements:
1. The amount in your Individual Retirement Annuity must be fully vested
at all times.
2. The contract must provide that you cannot transfer it to someone else.
3. The contract must have flexible premiums.
4. You must start receiving distributions by April 1 of the year
following the year in which you reach age 70 1/2 (see "Required Minimum
Distributions").
5. The contract must provide that you cannot contribute more than $2,000
for any year. (This requirement does not apply to rollovers. See
"Rollovers and Direct Transfers.")
6. The contract must provide that any refund of premium will be applied
before the close of the calendar year following the year of refund toward
the payment of future premiums or the purchase of additional benefits.
The Individual Retirement Annuity contract contains the provisions
described above. The contract has not, however, been approved as to form
by the Internal Revenue Service.
ROLLOVERS AND DIRECT TRANSFERS
1. A rollover is a tax-free transfer of cash or other assets from one
retirement program to another. There are two kinds of rollover payments.
In one, you transfer amounts from one Individual Retirement Annuity or
Individual Retirement Account (collectively referred to herein as an
"IRA") to another. With the other, you transfer amounts from a qualified
employee benefit plan or tax-sheltered annuity to an IRA. While you may
make rollover contributions to the Individual Retirement Annuity, you
cannot deduct them on your tax return.
<PAGE>
IRA DISCLOSURE STATEMENT 2
2. You must complete a tax-free rollover by the 60th day after the date you
receive the distribution from your IRA or other qualified employee
benefit plan.
3. A rollover distribution from an IRA may be made to you only once a year.
The one-year period begins on the date you receive the IRA distribution,
not on the date you roll it over (reinvest it) into another IRA.
4. A direct transfer of funds in an IRA from one trustee or insurance
company to another is not a rollover. It is a transfer that is not
affected by the one-year waiting period.
5. All or part of the premium for the contract may be paid from an IRA
rollover, qualified pension or profit-sharing plan or tax-sheltered
annuity rollover, or from a direct transfer from another IRA. The
proceeds from this contract may be used as a rollover contribution to
another IRA.
ALLOWANCE OF DEDUCTION
1. In general, the amount you can contribute each year to the Annuity
contract is the lesser of $2,000 or your taxable compensation for the
year. If you have more than one IRA, the limit applies to the total
contributions made to your IRAs for the year. Wages, salaries, tips,
professional fees, bonuses, and other amounts you receive for providing
personal services are compensation. If you own and operate your own
business as a sole proprietor, your net earnings reduced by your
deductible contributions on your behalf to self-employed retirement plans
is compensation. If you are an active partner in a partnership and
provide services to the partnership, your share of partnership income
reduced by deductible contributions made on your behalf to qualified
retirement plans is compensation. All taxable alimony and separate
maintenance payments received under a decree of divorce or separate
maintenance are compensation.
2. Generally, if you are not covered by a qualified retirement plan, the
amount you can deduct in a year for contributions to your IRA is the
lesser of $2,000 or your taxable compensation for the year. However, if
you are not covered by a qualified retirement plan, but your spouse is,
the amount you may deduct for IRA contributions will be phased out if
your joint adjusted gross income ("AGI") is between $150,000 and
$160,000.
3. If you are covered by a qualified retirement plan, the amount of IRA
contributions you may deduct in a year may be reduced or eliminated based
on your AGI for the year. The AGI level at which a single taxpayer's
deduction for 1998 is affected, $30,000, will increase annually to
$50,000 in 2005. The AGI level at which a married taxpayer's deduction
for 1998 is affected, $50,000, will increase annually to $80,000 in 2007.
4. Contributions to your IRA can be made at any time. If you make a
contribution between January 1 and April 15, however, you may elect to
treat the contribution as made either in that year or in the preceding
year. You may file a tax return claiming a deduction for your IRA
contribution before the contribution is actually made. You must, however,
make the contribution by the due date of your return not including
extensions.
5. You cannot make a contribution other than a rollover contribution to your
IRA for the year in which you reach age 70 1/2 or thereafter.
6. If both you and your spouse have compensation, you can each set up your
own IRA. The contribution for each of you is figured separately and
depends on how much each earns. Both of you cannot participate in the
same IRA account or contract.
7. If you and your spouse file a joint federal income tax return, each of
you may contribute up to $2,000 to your own IRA annually if your joint
income is $4,000 or more. The maximum amount
<PAGE>
IRA DISCLOSURE STATEMENT 3
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.
SEP-IRAs
If you are participating in a Simplified Employee Pension Plan (SEP), the
contributions made by your employer into your IRA after 1986 are excluded
from your income. If the SEP contains a salary reduction arrangement, you
may elect to reduce your salary by up to the lesser of 15% of
compensation or $9,500 (indexed annually) and have that amount
contributed to your SEP-IRA. The maximum SEP contributions, including
salary reduction amounts and employer contributions to your account in
any year is generally limited to the lesser of $30,000 (indexed) or 15%
of your total compensation from such employer for that year. Employers
that have established salary reduction SEPs before 1997 may continue to
maintain and contribute to them. However, no new salary reduction SEPs
may be established after 1996. Instead, eligible employers may establish
SIMPLE IRA programs for years after 1996, which permit salary reduction
contributions. This IRA may not be used in connection with a SIMPLE plan.
If an IRA is being used in connection with a SEP, contributions must bear
a uniform relationship to the total compensation (not in excess of the
first $160,000 indexed) of each employee participating under the SEP. If
you are a participant in a SEP, you will be considered to be an active
participant in an employee pension plan for purposes of your deductible
contribution limits for your IRA (see "Allowance of Deduction" section).
For further information concerning participation and contributions,
please refer to IRS Form 5305-SEP (which must be completed and executed
by your employer in order to establish a SEP).
TAX STATUS OF THE CONTRACT AND DISTRIBUTIONS
1. Earnings of your Individual Retirement Annuity contract are not taxed
until they are distributed to you.
2. In general, taxable distributions are included in your gross income
in the year you receive them.
3. Distributions are non-taxable to the extent they represent a return
of non-deductible contributions. The non-taxable percentage of a
distribution is determined by dividing your total undistributed,
non-deductible IRA contributions by the value of all your IRAs
(including SEPs and rollovers).
4. You cannot choose the special five-year or ten-year averaging that
may apply to lump sum distributions from qualified employer plans.
Amounts held in IRAs are generally subject to the imposition of federal
estate taxes. In addition, if you elect to have all or any part of your
account payable to a beneficiary (or beneficiaries) upon your death, the
election generally will not subject you to any gift tax liability.
REQUIRED MINIMUM DISTRIBUTIONS
You must start receiving minimum distributions from your Individual
Retirement Annuity starting with the year you reach age 70 1/2 .
Ordinarily, the required minimum distribution for a particular year must
be received by December 31 of that year. However, you may delay the
required minimum distribution for the year you reach age 70 1/2 until
April 1 of the following year (your "required beginning date").
<PAGE>
IRA DISCLOSURE STATEMENT 4
Figure your required minimum distribution for each year by dividing the
value of your Individual Retirement Annuity on December 31 of the
preceding year by the applicable life expectancy. The applicable life
expectancy is your remaining life expectancy or the remaining joint life
and last survivor expectancy of you and your designated beneficiary. If a
designated beneficiary is more than 10 years younger than you, that
beneficiary is assumed to be exactly 10 years younger. Life expectancies
are determined using the expected return multiple tables shown in IRS
Publication 590 "Individual Retirement Arrangements." To obtain a free
copy of IRS Publication 590 and other IRA forms, write the IRS Forms
Distribution Center for your area as shown in your income tax return
instructions.
Annuity payments which begin by April 1 of the year following the year
you reach age 70 1/2 satisfy the minimum distribution requirement if they
provide for non-increasing payments over your life or the lives of you
and your spouse, provided that, if installments are guaranteed, the
maximum guaranty period may be less than the applicable life expectancy.
If you have more than one IRA, you must determine the required minimum
distribution separately for each IRA; however, you can take the actual
distribution of these amounts from any one or more of your IRAs.
If the actual distribution from your IRA is less than the minimum amount
that should be distributed in accordance with the rules set forth above,
the difference is an excess accumulation. There is a 50% excise tax on
any excess accumulations.
If you die after your required beginning date, your entire remaining
account balance must be distributed to your designated beneficiary at
least as rapidly as under the method of distribution in effect on your
date of death.
If you die before your required beginning date, the general rule is that
your entire balance must be distributed within five (5) years of your
death. However, if the balance of your IRA account is payable to your
designated beneficiary, your designated beneficiary may elect that the
amount be paid in substantially equal installments over a fixed period
not exceeding the designated beneficiary's life expectancy, beginning no
later than December 31 of the year following the year in which you died.
If your spouse is your designated beneficiary, such distribution need not
commence until December 31 of the year during which you would have
attained 70 1/2 had you survived. Alternatively, if your designated
beneficiary is your spouse, he or she may elect to treat your IRA as his
or her own IRA.
WHAT HAPPENS IF EXCESS CONTRIBUTIONS ARE MADE TO MY INDIVIDUAL RETIREMENT
ANNUITY?
1. You must pay a 6% excise tax each year on excess contributions that
remain in your Individual Retirement Annuity. Generally, an excess
contribution is the amount contributed to your Individual Retirement
Annuity that is above the maximum amount you can contribute for the
year. The excess is taxed in the year contributed and each year after
that until you correct it.
2. You will not have to pay the 6% excise tax if you withdraw the excess
amount by the date your tax return is due, including extensions, for
the year of the contribution. You do not have to include in your
gross income an excess contribution that you wi thdraw from your
Individual Retirement Annuity before your tax return is due if the
income earned on the excess was also withdrawn and no deduction was
allowed for the excess contribution.
ARE THERE ANY PENALTIES FOR PREMATURE DISTRIBUTIONS?
There is an additional tax on premature distributions equal to 10% of the
amount of the premature distribution that you must include in your gross
income. Premature distributions are generally amounts you withdraw from
your IRA before you are age 59 1/2. However, the tax on premature
distributions does not apply:
<PAGE>
IRA DISCLOSURE STATEMENT 5
1. To distributions that are rolled over tax free to another IRA, a
qualified employee benefit plan, or a tax-sheltered annuity.
2. To a series of substantially equal periodic payments made over your
life or life expectancy, or the joint life or life expectancy of you
and your beneficiary.
3. To amounts distributed to a beneficiary, or the individual's estate,
on or after the death of the individual.
4. If you are permanently disabled. You are considered disabled if you
cannot do any substantial gainful activity because of your physical
or mental condition. A physician must determine that the condition
has lasted or can be expected to last continuously for 12 months or
more or that the condition can be expected to lead to death.
5. To a distribution which does not exceed the amount of your medical
expenses that could be deducted for the year (generally speaking,
medical expenses paid during a year are deductible to the extent they
exceed 7 1/2% of your adjusted gross income for the year).
6. To a distribution (subject to certain restrictions) that does not
exceed the premiums you paid for health insurance coverage for
yourself, your spouse, and dependents if you have been unemployed and
received unemployment compensation for at least 12 weeks.
7. To a "qualified first-time homebuyer distribution," within the
meaning of Code 72(t)(8), up to a $10,000 lifetime limit.
8. To a distribution for post-secondary education costs for you, your
spouse, or any child or grandchild of you or your spouse (i.e.,
"qualified higher education expenses").
IRA EXCISE TAX REPORTING
Use Form 5329, Return for Individual Retirement Arrangement Taxes, to
report the excise taxes on excess contributions, premature distributions,
and excess accumulations. If you do not owe any IRA excise taxes, you do
not need Form 5329. Further information can be obtained from any district
office of the Internal Revenue Service.
BORROWING
If you borrow money under your Individual Retirement Annuity contract or
use it as security for a loan, you must include in gross income the fair
market value of the Individual Retirement Annuity contr act as of the
first day of your tax year, and the penalty tax on premature
distributions may apply. (Note: This contract does not allow borrowings
under it, nor may it be assigned or pledged as collateral for a loan.)
FINANCIAL INFORMATION
Contributions to your Individual Retirement Annuity contract are not
subject to sales charges. A mortality and expense risk charge of .55% on
an annual basis is deducted as described in the attached variable annuity
prospectus. (This charge is not deducted with respect to contract value
allocated to the fixed interest account option.) See the accompanying
prospectus for the underlying mutual funds for information about the
charges associated with the funds. Contractowners who allocate contract
value to the Subaccounts bear a pro rata share of the fees and expenses
of the underlying funds. The growth in value of the Individual Retirement
Annuity contract is neither guaranteed, nor projected, but is based upon
the investment experience of the underlying mutual fund portfolios that
correspond to the Subaccounts to which you have allocated contract value.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
T. ROWE PRICE VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 1998
Individual Flexible Premium Deferred Variable Annuity Contract
ISSUED BY: MAILING ADDRESS:
Security Benefit T. Rowe Price Variable
Life Insurance Company Annuity Service Center
700 SW Harrison Street PO Box 750440
Topeka, Kansas 66636-0001 Topeka, Kansas 66675-0440
1-800-888-2461 1-800-469-6587
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectus for the T. Rowe Price Variable
Annuity dated May 1, 1998. A copy of the Prospectus may be obtained from the T.
Rowe Price Variable Annuity Service Center by calling 1-800-469-6587 or by
writing P.O. Box 750440, Topeka, Kansas 66675-0440.
CONTENTS
General Information and History ............................................ 1
Distribution of the Contract ............................................... 1
Limits on Premiums Paid Under Tax-Qualified Retirement Plans ............... 1
Experts .................................................................... 2
Performance Information .................................................... 2
Financial Statements ....................................................... 4
GENERAL INFORMATION AND HISTORY
For a description of the Individual Flexible Premium Deferred Variable
Annuity Contract (the "Contract"), Security Benefit Life Insurance Company
(the "Company"), and the T. Rowe Price Variable Annuity 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
The Company is responsible for the safekeeping of the assets of the
Subaccounts. These assets, which consist of shares of the Portfolios of the
Funds in non-certificated form, are held separate and apart from the assets
of the Company's General Account and its other separate accounts.
DISTRIBUTION OF THE CONTRACT
T. Rowe Price Investment Services, Inc. ("Investment Services"), a Maryland
corporation formed in 1980 as a wholly owned subsidiary of T. Rowe Price
Associates, Inc., is Principal Underwriter of the Contract. Investment
Services is registered as a broker/dealer with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. ("NASD"). The
offering of the Contracts is continuous.
Investment Services serves as Principal Underwriter under a Distribution
Agreement with the Company. Investment Services' registered representatives
are required to be authorized under applicable state regulations to make the
Contract available to its customers. Investment Services is not compensated
under its Distribution Agreement with the Company. Investment Services,
however, may receive compensation for the administrative services it
provides to the Company under other agreements.
LIMITS ON PREMIUMS PAID UNDER TAX-QUALIFIED RETIREMENT PLANS
SECTION 408
Premiums (other than rollover contributions) 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 (other than rollover
contributions) to an IRA are limited to the lesser of $2,000 per year or the
Owner's annual compensation. An additional $2,000 may be contributed if the
Owner has a spouse with little or no compensation for the year, provided
distinct accounts are maintained for the Owner and his or her spouse, and no
more than $2,000 is contributed to either account in any one year. 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. Salary reduction simplified employee pensions ("SARSEPs")
have been repealed; however, SARSEPs established prior to January 1, 1997
may continue to receive contributions.
EXPERTS
Ernst & Young LLP, independent auditors, perform certain auditing services
for the Company and the Separate Account. The financial statements for the
Company at December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, are contained in this Statement of
Additional Information. Financial statements of the Separate Account as of
December 31, 1997 and for the years ended December 31, 1997 and 1996, are
also included in this Statement of Additional Information. The financial
statements have been audited by Ernst & Young LLP, 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 total return of all Subaccounts, may appear in
advertisements, reports, and promotional literature provided to current or
prospective Owners.
Quotations of yield for the Prime Reserve Subaccount will be based on the
change in the value, exclusive of capital changes, of a hypothetical
investment in a Contract over a particular seven day period, less a
hypothetical charge reflecting deductions from the Contract during the
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
figure carried to at least the nearest one hundredth of one percent. Any
quotations of effective yield for the Prime Reserve Subaccount assume that
all dividends received during an annual period have been reinvested.
Calculation of "effective yield" begins with the same "base period return"
used in the yield calculation, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1
For the seven-day period ended December 31, 1997, the yield of the Prime
Reserve Subaccount was 4.87% and the effective yield of the Subaccount was
4.99%.
Quotations of yield for the Subaccounts, other than the Prime Reserve
Subaccount, 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:
a - b
YIELD = 2[(----- + 1)^6 - 1]
cd
where a = net investment income earned during the period by the
Portfolio attributable to shares owned by the Subaccount,
b = expenses accrued for the period (net of any 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.
For the 30-day period ended December 31, 1997, the yield of the Limited-Term
Bond Subaccount was 5.91%.
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 total return figures
reflect the deduction of the mortality and expense risk charge. Quotations
of total return may simultaneously be shown for other periods.
Where the Portfolio in which a Subaccount invests was established prior to
inception of the Subaccount, quotations of total return will include
quotations for periods beginning prior to the Subaccount's date of
inception. Such quotations of total return are based upon the performance of
the Subaccount's corresponding Portfolio adjusted to reflect deduction of
the mortality and expense risk charge.
For the one-year period ended December 31, 1997, the average annual total
return of New America Growth Subaccount, International Stock Subaccount,
Equity Income Subaccount, Personal Strategy Balanced Subaccount, and the
Limited-Term Bond Subaccount was 20.50%, 2.51%, 28.16%, 17.39%, and 6.13%,
respectively. For the period from March 31, 1994 (Portfolio date of
inception) to December 31, 1997, the average annual total return for the New
America Growth Subaccount, International Stock Subaccount, and Equity Income
Subaccount was 22.48%, 7.49%, and 22.26%, respectively. For the period from
December 30, 1994 (Portfolio date of inception) to December 31, 1997, the
average annual total return for the Personal Strategy Balanced Subaccount
was 19.47%. For the period from May 13, 1994 (Portfolio date of inception)
to December 31, 1997, the average annual total return for the Limited-Term
Bond Subaccount was 5.58%. For the period from December 31, 1996, (Portfolio
date of inception) to December 31, 1997, the average annual total return for
the Mid-Cap Growth Subaccount was 18.81%.
Performance information for a Subaccount may be compared, in reports and
promo tional 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 variable
annuity separate accounts, mutual funds, 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 Morningstar, Inc., a
widely used independent research firm which rates mutual funds and variable
annuities by overall performance, investment objectives and assets, 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
Portfolio of the Funds 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, insurance products funds, or other
investment products tracked by Lipper Analytical Services, Morningstar,
Inc., 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 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, and (iii)
personal hypothetical illustrations of accumulation and payout period
Contract Values and annuity payments.
<PAGE>
FINANCIAL STATEMENTS
The consolidated financial statements of the Company at December 31, 1997
and 1996 and for each of the three years in the period ended December 31,
1997, and the financial statements of the Separate Account as of December
31, 1997 and for the years ended December 31, 1997 and 1996, are set forth
herein, starting on page 6.
The financial statements of the Company, which are included in this
Statement of Additional Information, should be considered only as bearing on
the ability of the Company 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.
CONTENTS
Report of Independent Auditors ............................................. 6
AUDITED FINANCIAL STATEMENTS
Balance Sheet .............................................................. 6
Statements of Operations and Changes in Net Assets ......................... 7
Notes to Financial Statements .............................................. 9
